512 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 Friday, June 16, 2000, 25 commencing at 0902 26 27 HEARING 28 VOLUME 4 Les Services StenoTran Services Inc. 613-521-0703 513 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 514 1 APPEARANCES (Cont'd) 2 MARK MATTSON/ Energy Probe 3 THOMAS ADAMS 4 5 GEORGE VEGH Duke Energy, Coalition for 6 Efficient Energy Distribution 7 (CEED), TransCanada Gas 8 Services, PanCanadian 9 Petroleum, Dynegy Canada, 10 Suncor/Sunoco, CanEnerco 11 Limited 12 13 ZIYAAD E. MIA Coalition for Efficient Energy 14 Distribution (CEED), 15 TransCanada Gas Services, 16 PanCanadian Petroleum, Dynegy 17 Canada, Suncor/Sunoco, 18 CanEnerco Limited 19 20 DAVID WAQU COMSATEC INC. 21 22 STANLEY RUTWIND TransCanada PipeLines Limited 23 24 RICHARD KING/ The Wholesale Group and the 25 CHARLES KEIZER/ Major Energy Consumers And 26 PETER BUDD Producers (MECAP) 27 28 Les Services StenoTran Services Inc. 613-521-0703 515 1 APPEARANCES (Cont'd) 2 PETER SCULLY Association of Municipalities 3 of Ontario 4 5 TANYA PERSAD Enbridge Consumers Gas 6 7 ANDREW DIAMOND/ Enron Capital Corp. 8 JOHN ROOK 9 10 DWAYNE QUINN/ City of Kitchener Utilities 11 ALICK RYDER 12 13 DAVID POCH Green Energy Coalition (GEC) 14 15 MICHAEL M. PETERSON Nova Chemicals 16 17 RANDY AIKEN London Property Management 18 Association 19 20 VALERIE YOUNG Ontario Association of Physical 21 Plant Administrators 22 23 MARY ANNE ALDRED HYDRO ONE NETWORKS 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 516 1 Toronto, Ontario 2 --- Upon resuming on Friday, June 16, 2000 at 0902 3 THE PRESIDING MEMBER: Good morning. 4 Any procedural matters? 5 PRELIMINARY MATTERS 6 MR. PENNY: Mr. Chairman, I have one or two. 7 First of all, on a slightly light note, when I 8 was in London a number of years ago it was hot, during 9 the summer. I went to visit the High Court of Justice 10 and, it being hot, the judges permitted the barristers 11 to remove their wigs. It did get rather -- I have 12 personally always been a proponent of the return to wigs 13 in the barrister's realm -- but it did get rather warm 14 and stuffy in here yesterday and I wonder if we could 15 have your indulgence if it might be permitted that 16 parties could remove their jackets. 17 THE PRESIDING MEMBER: Please do. I'm sorry, 18 I'm one of these people who doesn't seem to worry too 19 much, so because I keep my jacket on I'm afraid I don't 20 realize that other people aren't comfortable. 21 Please do. 22 MR. PENNY: Thank you very much, sir. 23 With respect to scheduling, I just thought we 24 should return to that briefly. 25 For next week, as I indicated at the outset, 26 we were proposing to fix the date for the evidence of 27 Christensen and Associates for Wednesday, June 21. I 28 realize, of course, the Board is not sitting on the Les Services StenoTran Services Inc. 613-521-0703 517 Preliminary Matters 1 Tuesday. 2 Mr. Birmingham and Ms Elliott cannot be 3 present on June 23, so depending on where we are on the 4 unbundling ADR Agreement, we would either propose, if we 5 are in a position to do so, to call the evidence of that 6 panel on Friday, the 23rd, or if we are not in a 7 position to do that by that time to have the DSM panel 8 available on that day. 9 THE PRESIDING MEMBER: One of the things I was 10 wondering, Mr. Penny -- and I haven't really formulated 11 it in my mind, but I had mentioned to Dr. Wightman -- 12 I'm sure you all agree that the unbundling agreement is 13 quite a complicated document and Dr. Jackson and I do 14 not have the benefit of what appears to be about a 15 years' discussion, negotiation and explanation. And I 16 had raised this morning with Dr. Wightman the 17 possibility of having a presentation on the agreement 18 just to explain some of it. 19 I mean, I have been reading it and I have been 20 trying to understand how it interconnects and whether -- 21 this is not a -- it is for the benefit of the panel. 22 MR. PENNY: Yes, I understand, sir. 23 THE PRESIDING MEMBER: That might be something 24 for possibly on the 23rd. Is that -- 25 MR. PENNY: Well, I think we would prefer to 26 do that. 27 First of all, let me say we did hear about 28 this a few minutes ago and we have just been talking Les Services StenoTran Services Inc. 613-521-0703 518 Preliminary Matters 1 about it a bit since then. 2 Obviously the company -- I'm sure the parties 3 want to be as helpful as possible to the Board in 4 understanding what the issues are and what the 5 underpinnings of the agreement are. 6 To the extent that the Board requires that 7 general information, so to speak, before it can really 8 come to grips with whether to approve the agreement or 9 not, we would want to do that as quickly as possible. 10 So rather than -- when I was talking about the 23rd I 11 was talking about actual evidence on the unsettled 12 issues. 13 So I think we -- the other parties may have 14 comments about this. To the extent that there are 15 generic background questions around the ADR Agreement, I 16 guess I wonder whether that is something that 17 necessarily needs to be done as part of the evidentiary 18 record in the case but rather more in the form of a 19 technical conference or something. 20 If resulting from that there were evidentiary 21 questions, we would then address them either through 22 some form of written answers or through some testimony, 23 but I'm not -- I propose that in part not fully 24 understanding the parameters of what the Board is 25 interested in at this stage. 26 And I would propose that we do that Monday, as 27 quickly as possible. 28 --- Pause Les Services StenoTran Services Inc. 613-521-0703 519 Preliminary Matters 1 THE PRESIDING MEMBER: Dr. Jackson and I were 2 just thinking that something like just an exposition, 3 technical consult or something, or briefing, whatever 4 you want to call it, would be helpful. I'm not sure 5 what the legal ramification of it is. 6 Can I leave it with the doctor and yourselves 7 to work something out? 8 MR. PENNY: Yes. 9 THE PRESIDING MEMBER: But I must admit that I 10 have spent some time reading the agreement and it would 11 be helpful, I think, to have a few of the things a 12 little bit more clearly defined. 13 MR. PENNY: Yes. 14 THE PRESIDING MEMBER: And that may be the 15 quickest and easiest way to do it than to try to 16 construct a number of evidentiary questions on our part. 17 MR. PENNY: Let's leave it, then, that the 18 form of it we will talk about today, but one way or 19 another we will do something on Monday. 20 THE PRESIDING MEMBER: Okay. Thank you. 21 Dr. Jackson. 22 MEMBER JACKSON: I think some of the questions 23 that come up in my mind relate to the relationship that 24 derive from delivery points and maybe some questions 25 arise because of my lack of full understanding of the 26 rates that are currently in place and how these things 27 might change. 28 So I'm thinking -- and perhaps if you can Les Services StenoTran Services Inc. 613-521-0703 520 Preliminary Matters 1 provide any guidance on this, sort of what I should read 2 in advance of any presentation on Monday. I may want to 3 look at rate schedules as well to try to understand some 4 of the relationships that exist. 5 I'm not sure exactly what it is, but I think 6 we need to understand some of the specifics of the Union 7 system in order to understand that agreement properly. 8 I just put that out to try to be helpful to 9 you in helping us. 10 Thank you. 11 THE PRESIDING MEMBER: Any other procedural 12 matters? 13 --- Pause 14 THE PRESIDING MEMBER: No? 15 MR. PENNY: No, thank you. 16 THE PRESIDING MEMBER: Is there anything else? 17 --- Pause 18 THE PRESIDING MEMBER: In which case I think 19 we will start with the next round of cross-examination 20 of the panel on the set of issues, No. 2, and I believe 21 it is Mr. Brett who will be up first because Mr. Warren 22 is not with us. 23 MR. BRETT: Mr. Chairman, with your 24 indulgence, I was away yesterday for medical reasons and 25 therefore I have asked to be stood down because I wasn't 26 sure when you would get to this issue. 27 I think Mr. Thompson is prepared to go first 28 and I could follow him. Les Services StenoTran Services Inc. 613-521-0703 521 Preliminary Matters 1 Thank you. 2 THE PRESIDING MEMBER: Are you ready to go, 3 Mr. Thompson? 4 MR. THOMPSON: Yes, thank you. 5 THE PRESIDING MEMBER: Thank you. 6 PREVIOUSLY SWORN: RICK BIRMINGHAM 7 PREVIOUSLY SWORN: PAT ELLIOTT 8 MR. THOMPSON: Excuse me one moment here, I am 9 just getting my stuff organized. 10 --- Pause 11 CROSS-EXAMINATION 12 MR. THOMPSON: Panel, the topic on the 13 schedule is "Pricing Formula" and "Term of the 14 Agreement". Then within the Issues List under "Pricing 15 Formula" there are a number of subtopics, "Inflation 16 Factor", "Productivity Factor", Non-Routine 17 Adjustments", "Pass-Through Items", "Monitoring and 18 Reflecting Changes in the Gas Supply Portfolio Under the 19 Quarterly Rate Adjustment Mechanism". 20 Just stopping there, is that last item, 21 Issue 2.2.2.5 settled as far as the company is 22 concerned, in the sense that it is part of the 23 arrangement reflected in the ADR Agreement pertaining to 24 a separate proceeding? 25 MR. BIRMINGHAM: No, I think it's a separate 26 issue, Mr. Thompson. 27 My understanding is the issue that is on the 28 Issues List is simply an understanding of how under PBR Les Services StenoTran Services Inc. 613-521-0703 522 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 changes in Union's system gas portfolio will be 2 reflected for the purpose of setting the commodity cost 3 of gas under the quarterly rate adjustment mechanism, 4 which is different than, I think, the issue that was 5 raised in the unbundling issue, which is what happens 6 ultimately with system gas. 7 MR. THOMPSON: Okay. So I will ask a couple 8 of just explanatory questions there. 9 Then we have "Term of the Agreement", 10 Issue 2.2.3. I understand from speaking to Mr. Penny 11 last night that there are two additional topics not 12 included in this list that I should speak to you about 13 on this panel if I want to ask questions about them. 14 One is the proposal, as I put it, to deprive 15 ratepayers of their share of revenues in the transaction 16 services deferral account and the long-term storage 17 premium account. 18 Then the second one is earnings sharing. 19 Subject to just some introductory questions 20 that I wish to put about the price cap proposal and this 21 proposal to deprive ratepayers of their share of 22 revenues in revenue deferral accounts, I plan in my 23 cross-examination just to follow the topics as they 24 appear in the list of issues. 25 So that's how I plan to proceed with this line 26 of questioning. 27 In terms of the introduction, I'm just trying 28 to get focused on the fixed price cap proposal and the Les Services StenoTran Services Inc. 613-521-0703 523 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 proposal to deprive ratepayers of their share of 2 revenues in deferral accounts. 3 My understanding is that the fixed price cap 4 plan is addressed in Appendix B of Tab 2. That's the 5 topic of all of that evidence, the fixed price cap plan. 6 MS ELLIOTT: That's Exhibit B, Tab 2? 7 MR. THOMPSON: Yes, I'm sorry. Exhibit B, I'm 8 sorry. 9 MS ELLIOTT: Yes. 10 MR. THOMPSON: Yes. 11 And the bottom line, in terms of your 12 company's presentation, is a fixed price proposal of 13 1.9 per cent, which is the result of inflation minus 14 productivity. That's the number you are seeking for the 15 fixed price cap. 16 MS ELLIOTT: Yes, we are proposing a fixed 17 price cap of 1.9 per cent per year, and that is arrived 18 at by looking at the inflation factor minus what is 19 referred to as the "X" factor, and the "X" factor is a 20 combination of Union's historic productivity and a 21 stretch factor. 22 MR. THOMPSON: All right. And that amount or 23 that number is applied to what you call the appropriate 24 revenues 25 MS ELLIOTT: It will be applied to the rates 26 charged for delivery service. 27 MR. THOMPSON: Yes. And the language that you 28 have used in that schedule we were discussing yesterday Les Services StenoTran Services Inc. 613-521-0703 524 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 to describe that number is "appropriate revenues", I 2 think? That's the phrase that I thought was in the 3 appendix that was discussed at length yesterday. 4 "Applicable". 5 MS ELLIOTT: "Applicable revenues". 6 MR. THOMPSON: "Applicable", yes. I'm sorry, 7 "applicable revenues". 8 MS ELLIOTT: The term on the schedule is 9 "applicable revenue". 10 Applicable revenue is the revenue that results 11 from the current rates charged for storage, 12 transportation and distribution. 13 MR. THOMPSON: Well, we have a dispute as to 14 what is the -- 15 I just want to get the buzzword right. 16 "Applicable revenue". 17 We have a dispute as to what is the 18 appropriate cap and we have a dispute as to what is the 19 appropriate applicable revenues. 20 But let me ask this: Your operative number, 21 if you will, for the cap is 1.9 per cent per year and 22 you have indicated that is the net of inflation and the 23 "X" factor. 24 From the company's perspective, does the Board 25 need to make specific findings as to inflation and "X" 26 factor or would it be sufficient for the purposes of 27 your proposal if the Board simply found, having 28 considered all the evidence on inflation and all the Les Services StenoTran Services Inc. 613-521-0703 525 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 evidence on "X" factor, that the cap should be a number? 2 Would that suffice? 3 MR. PENNY: Mr. Chairman, just for 4 clarification, I assume Mr. Thompson is not asking a 5 legal question, in other words, a jurisdictional 6 question, but rather a position-type of question from 7 the point of view of the company. 8 MR. THOMPSON: It's essentially a factual 9 question. 10 What is the finding that will suffice here? 11 MS ELLIOTT: In fact, our proposal is for a 12 fixed number. 13 The reason for the use of the formula, I 14 guess, is twofold: one to show the derivation of that 15 number to be able to provide evidence as to how the 16 number was arrived at. 17 The second is -- and it goes to the second 18 generation -- having the formula gives you a basis for 19 the second generation of the price cap. But a finding 20 of the amount of the price cap would be sufficient, yes. 21 MR. THOMPSON: All right. 22 So just putting that in context, if the Board, 23 after considering all of the evidence of inflation and 24 productivity, if the Board were to find that the price 25 cap should be, for the sake of argument, .5 per cent, 26 that is a finding that the company could take and apply 27 to its price cap proposal? 28 You don't need to know the ingredients that Les Services StenoTran Services Inc. 613-521-0703 526 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 have gone -- you don't need findings on the amounts that 2 have led to the .5 if you have the .5? 3 MS ELLIOTT: That's correct. 4 MR. THOMPSON: Now, in Exhibit B at Tab 2, at 5 page 64 -- if you would turn that up, please. 6 --- Pause 7 MR. THOMPSON: There you list, starting at 8 line 10 and turning over to the next page, the risks 9 that you say you are prepared to manage under the price 10 cap feature of the company's proposal. Is that correct? 11 MR. BIRMINGHAM: That's right. 12 MR. THOMPSON: Okay. And the price cap 13 feature of your claim is the 1.9 per cent, which, on 14 your numbers, translates into the almost $15 million 15 that is on the financial exhibits that were produced the 16 other day. 17 MR. BIRMINGHAM: That's part of it, 18 Mr. Thompson. 19 We refer to managing under the proposed price 20 cap proposal as more than just the 1.9 per cent, but 21 also the other parameters as they appear in the 22 evidence. So that would include things like the 23 disposition and elimination of the storage and 24 transportation deferral accounts as well as the 25 non-routine adjustments and the passthrough adjustments. 26 So it's the entire proposal. 27 MR. THOMPSON: Well, I'm trying to get this 28 clear, what you have said. Les Services StenoTran Services Inc. 613-521-0703 527 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 There is nothing in Exhibit B, Tab 2 that 2 talks about the elimination of the ratepayers' share of 3 deferral account revenues. There is not one word in 4 there that I could find that addresses that feature of 5 your claim in this case. What this evidence talks about 6 is the price cap and it says: 7 "Under the price cap, we will manage a 8 whole array of risks" (As read) 9 What I am trying to determine is this: The 10 evidence suggests to me that the price cap claim is what 11 it is, 1.9 per cent, and it wouldn't be more -- the 12 parameters of that proposal wouldn't be different if you 13 were not seeking to deprive ratepayers of their share 14 revenue deferral accounts. 15 Do I understand it correctly? 16 MS ELLIOTT: The price cap plan is in addition 17 to the price cap and the non-routine adjustments there 18 are the passthrough adjustments. All of those things 19 were considered in the context of the risks we were 20 managing, recognizing that the opportunity for 21 additional revenue from storage and transportation 22 transactional services existed. It is the entire 23 package that we looked at to assess whether or not the 24 price cap proposal would allow us to manage the risks. 25 In the absence of the S&T transactional 26 revenue we would have likely considered an additional 27 passthrough to the extent that the passthroughs were not 28 sufficient to manage the risks we were taking on for Les Services StenoTran Services Inc. 613-521-0703 528 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 things like expanding the system, the incremental 2 capital that was required for growth. Those things are 3 being offset in addition to using the price cap revenue 4 with the S&T transactional revenue. 5 So although the specific components of the 6 price cap calculation may not have been different, 7 although the stretch factor would have likely been 8 impacted as well by the absence of the S&T transactional 9 revenue, there may have also been additional passthrough 10 items. 11 MR. THOMPSON: Show me where that is in the 12 prefiled evidence. There's not one word in that 13 Exhibit B, Tab 2, about the fact that passthroughs would 14 be more if we didn't get our transactional -- if we 15 didn't take away the ratepayers' shares of transactional 16 services revenues and other deferral accounts. Show me 17 where there's one word to that effect in all of that 18 prefiled evidence. Or in any of the interrogatory 19 responses. 20 MS ELLIOTT: Well, the evidence is the 21 proposal that we have on the table, which includes the 22 elimination of the S&T deferral accounts, which is 23 included in Exhibit B, Tab 5, I believe. 24 MR. THOMPSON: Yes. And let's just turn that 25 up to see what you say about that. 26 The only prefiled evidence that I could find 27 about this aspect of your proposal is Exhibit B, Tab 5, 28 page 1, at line 16. Les Services StenoTran Services Inc. 613-521-0703 529 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: That's correct. And Exhibit B, 2 Tab 5, Appendix B, is a listing of all the deferral 3 accounts, with the proposed treatments. 4 MR. THOMPSON: But there's nothing in that 5 testimony that says, "This is linked to our price cap 6 plan proposal and if we don't get this, then we have to 7 have more passthroughs". There's absolutely nothing of 8 that nature in the testimony. The testimony suggests 9 that they are two stand-alone features of the proposal. 10 Would you agree that that's what the testimony 11 suggests? 12 MS ELLIOTT: Well, I think the evidence in 13 Exhibit B, Tab 5, indicates that, as part of the PBR 14 proposal, we are proposing to eliminate the S&T deferral 15 accounts. 16 MR. THOMPSON: Well, what it says: 17 "As part of its PBR proposal, Union is 18 proposing to manage certain forecast and 19 business risks under a price cap 20 mechanism." (As read) 21 That's the $15 million that you are claiming. 22 And then you just go on and say -- almost as 23 an afterthought, you propose to close a number of 24 existing deferral accounts. Parenthetically, that means 25 you get an additional $7 million, as we discussed the 26 other day. But there's nothing in the evidence, other 27 than that sentence -- and that sentence doesn't suggest 28 the proposals are linked; it suggests the opposite, to Les Services StenoTran Services Inc. 613-521-0703 530 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 me. And now you are telling us they are linked. Is 2 that right? 3 MS ELLIOTT: Well, the proposal is the 4 evidence package, in its entirety. The section on the 5 deferral accounts accompanies the Tab 2 evidence on the 6 price cap plan. That's the proposal, in its entirety, 7 that the deferral accounts be eliminated, as well as the 8 introduction of the price cap plan. 9 MR. THOMPSON: All right. Well, it's possible 10 the deferral accounts will not be eliminated. 11 Do you accept that as a possibility? 12 --- Pause 13 MR. THOMPSON: Do you accept that as a 14 possibility? 15 MS ELLIOTT: It's possible that the Board 16 decides that the deferral accounts will continue, yes. 17 MR. THOMPSON: All right. And just assume 18 that that happens. There's nothing in the evidence to 19 address the impact of that contingency on your price cap 20 proposal. There's nothing in the evidence that 21 addresses it, to this point. Would you agree? 22 MS ELLIOTT: That specifically deals with the 23 circumstance that the deferral accounts be continued? 24 No, there isn't. 25 MR. THOMPSON: All right. Do you have some 26 specific -- something specific that you wish to offer, 27 in terms of amendments to the price cap proposal, in the 28 event you do not get ratepayer revenues and revenue Les Services StenoTran Services Inc. 613-521-0703 531 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 deferral accounts? 2 Do you have anything specific, at this moment? 3 MS ELLIOTT: No, I don't have a plan that 4 deals with those combinations. 5 MR. THOMPSON: So that, as the record stands, 6 if the Board disallows your claim to deprive ratepayers 7 of their share of revenues in the deferral accounts and 8 turns its attention to the price cap plan, it deals with 9 the price cap plan as it stands in Exhibit B, Tab 2? 10 --- Pause 11 MR. THOMPSON: That's all the evidence we 12 have. 13 MS ELLIOTT: The price cap evidence in 14 Exhibit B, Tab 2, deals with the components of the price 15 cap plan and the risks that the utility is managing, 16 under the proposal. Combined with that is the 17 elimination of the existing deferral accounts for S&T 18 transactional revenues. 19 MR. THOMPSON: Just focusing on the 20 contingency that the deferral account aspect of the 21 request for relief is not allowed and the Board looks at 22 your claim for relief with respect to price cap, it has 23 to confine itself to what's in Appendix B and the 24 questions that arose out of that because there's nothing 25 else, at this moment. Correct? 26 MS ELLIOTT: That's right. 27 MR. THOMPSON: All right. Thanks. 28 And the 90 cents per month that you are -- I Les Services StenoTran Services Inc. 613-521-0703 532 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 think that you were talking about, Mr. Birmingham, 2 relates to the almost $15 million. Is that right? 3 MR. BIRMINGHAM: No, Mr. Thompson. The amount 4 that I was referring to would have been simply the 5 amount of the 1.9 per cent price cap after all of the 6 proposed Year 2000 adjustments have been made; so, that 7 would include the adjustments to the base rates, as well 8 as the passthrough adjustments -- and that calculation 9 can be done by referring to Exhibit C17.2, which is a 10 response to an interrogatory from John Fullerton. 11 MR. THOMPSON: Okay. But it does not 12 include -- I take your point; you are saying it includes 13 passthrough items, as well as the 15 million. 14 What I'm trying to say is it does not include 15 the claim to take $7 million from ratepayers out of the 16 deferral accounts. 17 MR. BIRMINGHAM: It includes maintaining the 18 impact of the $5.2 million of the S&T transactional 19 revenue that's currently in rates but because anything 20 beyond that is captured in deferral accounts they are 21 rate changes, and all I was referring to was the rate 22 change that came from applying the price cap to the 23 proposed rates, as they are found in the evidence, for 24 the Year 2000. 25 MR. THOMPSON: Okay. So it does not include 26 the $7 million that you are asking the Board to allow 27 you to take from ratepayers by just closing these 28 revenue deferral accounts? Les Services StenoTran Services Inc. 613-521-0703 533 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: It doesn't include any S&T 2 transactional business or long-term storage premiums for 3 the Year 2000 and beyond. 4 MR. THOMPSON: All right. Thanks. 5 And could you convert that -- well, just on 6 that issue of amount, in the financial information that 7 you provided the other day, you showed the -- 8 --- Pause 9 MR. THOMPSON: In G2.4, at line 6, under S&T 10 revenues. 11 MS ELLIOTT: Yes. 12 MR. THOMPSON: You show the amount there at 13 $7 million. Is that correct? 14 MS ELLIOTT: Yes. 15 MR. THOMPSON: And my understanding was that 16 was intended to include ratepayers' share of 17 transactional services deferral account for 2000, as 18 well as the long-term storage premium deferral account 19 revenues. 20 MS ELLIOTT: That's correct. 21 MR. THOMPSON: All right. And the long-term 22 storage premium deferral account revenues were 23 forecasted to be what in 2000? 24 MS ELLIOTT: They are approximately 25 $2 million. I don't have the specific number, but 26 it's -- 27 MR. THOMPSON: All right. Well, in 1999 the 28 amount cleared to ratepayers -- and I don't have my Les Services StenoTran Services Inc. 613-521-0703 534 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Decision with me, but it was in excess of $2 million, as 2 I recall it. 3 MS ELLIOTT: We are basically, for 2000, 4 forecasting the same level of activity as we saw in 5 1999. 6 MR. THOMPSON: Yes, but is that realistic? 7 Because GMI, for one, is a customer that has gone to -- 8 as I understand it, has either gone or will be going to 9 long-term storage at market prices. 10 MS ELLIOTT: That's our 2001 renewal. 11 MR. THOMPSON: I'm sorry, okay. 12 So the 2000 amount is $2 million. Perhaps you 13 could give me -- with the 2001 renewal that number 14 becomes what? 15 --- Pause 16 MR. BIRMINGHAM: The amount of the GMI renewal 17 in 2001 would generate roughly another $2.5 million of 18 market premium compared to the current cost-based rates. 19 MR. THOMPSON: So that in 2001 the long-term 20 storage market premium would be approximately 21 $4.5 million. Is that fair? 22 MR. BIRMINGHAM: That's right. 23 MR. THOMPSON: All right. 24 And then the transactional services deferral 25 account amount in the -- at Exhibit F2.1 at page 4 in 26 Note 2 -- you are showing the company portion of 27 deferral at $2 million? 28 MS ELLIOTT: That's correct. Les Services StenoTran Services Inc. 613-521-0703 535 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: And the company portion of the 2 amount of deferral account is 25 per cent? 3 MS ELLIOTT: It's 25 per cent of the margin -- 4 MR. THOMPSON: All right. 5 MS ELLIOTT: -- so the revenues less the 6 costs. 7 MR. THOMPSON: That's a fair qualification, 8 25 per cent of margin. 9 So you are forecasting 25 per cent of margin 10 to be $2 million? 11 MS ELLIOTT: No, that's the revenue to cover 12 the costs as well as the margin. 13 MR. THOMPSON: I see. Okay. 14 So when I grossed up the two to eight for the 15 shareholders -- sorry for the ratepayers' share, I was 16 overstating it because of costs. 17 MS ELLIOTT: That's correct. 18 MR. THOMPSON: So net of costs -- let's take 19 it in margin, the company's portion of margin in 2000 20 would be what, approximately? Is the total of the 21 account, excluding the costs, about $4 million, which 22 the company's share is one and the ratepayers' is three? 23 MS ELLIOTT: I think the total is five, the 24 company's share is one and the ratepayers' is four. 25 MR. THOMPSON: I see. So it's the five, then, 26 of ratepayers' share in that account, and the two of the 27 long-term storage premium in 2000 that produces the 28 $7 million that is shown on Exhibit G2.4. Les Services StenoTran Services Inc. 613-521-0703 536 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes, that's approximately 2 correct. I think one -- the storage may be more than 3 two, but the split is two in the storage premium and 4 five in the transactional revenue. 5 MR. THOMPSON: What do you mean, "the storage 6 may be more than two"? 7 MS ELLIOTT: The seven is a combination of the 8 long-term storage premium and the S&T transactional 9 revenue, and that is split, as you indicated, about 10 $5 million for the transactional revenue and $2 million 11 for the storage premium. 12 MR. THOMPSON: Thank you. 13 And the ratepayers' share of those two 14 accounts in 2000 is $7 million out of a total of about 15 $8 million. 16 MS ELLIOTT: Yes. 17 MR. THOMPSON: All right. And so the sharing 18 of those revenues, based on the 2000 amounts and the 19 sustaining of the existing regime, would be -- looking 20 at the total, would be about 12.5 per cent for Union and 21 87.5 per cent for the ratepayers. That's my math of one 22 over eight. 23 MS ELLIOTT: Yes. 24 MR. THOMPSON: All right. 25 Okay. Let's move, then, to the pricing 26 formula topics. I'm going to come back to talking about 27 why you say you should get that $7 million, but let's 28 start now the pricing formula and the inflation factors. Les Services StenoTran Services Inc. 613-521-0703 537 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Mr. Janigan put some questions to you 2 yesterday about adjusting inflation annually and moving 3 ROE under the cap. Do you recall that discussion? 4 MS ELLIOTT: Yes. 5 MR. THOMPSON: And the company, as I 6 understood its position in response to Mr. Janigan, 7 resisted that suggestion that inflation be adjusted 8 annually and you move ROE completely under the cap. 9 Did I understand that correctly? 10 MR. BIRMINGHAM: Just to be clear, 11 Mr. Thompson, the return on equity for any new rate base 12 during the PBR period is within the price cap 13 parameters. What we were talking about was only the 14 return on equity which is related to the existing 15 Board-approved rate base. We don't agree that adjusting 16 the annual -- adjusting the inflation factor annually 17 would capture the impacts on the existing rate base for 18 changes in the return on equity for that investment 19 level. 20 There are really two reasons for that. One 21 is, we have a heavier weighting of capital in the input 22 price index for the utility against the Canadian 23 economy, which is what I was talking to Mr. Janigan 24 about, and the second reason is that Union's current 25 rates do not compensate it for changes in the interest 26 rates as they relate to our return on equity. That's in 27 fact the very reason why the Board has the formula that 28 it does to change the return on equity. Les Services StenoTran Services Inc. 613-521-0703 538 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: I heard your explanation 2 yesterday, and Mr. Janigan was, in effect, giving you an 3 opportunity to move equity return, which you have sort 4 of partially under the cap, and then you have sort of a 5 cost of cost of service hangover with it, because you 6 want to have a passthrough on the equity component of 7 rate base as of the end of 1999. 8 He was giving you the opportunity to move 9 costs under the cap in consideration for what may well 10 be a higher rate of inflation. And the company, as I 11 understood it, for the reasons you just gave, said, "We 12 are not prepared to go there". 13 MR. BIRMINGHAM: We had considered moving the 14 return on equity pass-through adjustment within the 15 price cap parameters, and you can really do it two ways. 16 One is you can have an upfront adjustment that 17 compensates for the risk of those interest rate changes, 18 or you can have a somewhat higher price cap to deal with 19 that. When we approached customers during our 20 consultation process about that possibility, we were 21 told that that really wasn't something that they were 22 prepared to engage in, and beyond that they saw some 23 benefit to maintaining a Board-approved return on equity 24 for use in other jurisdictions. 25 MR. THOMPSON: I will come back to your theory 26 a little later. My understanding of your opening 27 testimony and answers that you have provided to others 28 is that you are putting forward your plan as one that Les Services StenoTran Services Inc. 613-521-0703 539 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 cuts the umbilical cord with cost-of-service regulation. 2 MR. BIRMINGHAM: With respect to our delivery 3 rates, given the past regulatory framework that we have 4 operated under, that's right. 5 MR. THOMPSON: Yet when one looks at it 6 carefully, it seems to me, and I will take you through 7 this in a moment, the reality is there are more 8 cost-of-service features in this price cap plan than 9 there are cap features. This persistence in keeping 10 equity partially outside of the cap with a pass-through 11 component is but one illustration. 12 Let me just take you through your 13 Board-approved revenue requirement in 1999 to find out 14 what is cost-of-service related and remaining 15 cost-of-service related and what is under the cap. 16 First of all, gas supply commodity, that's 17 cost-of-service regime and will continue as cost of 18 service. Correct? 19 MS ELLIOTT: The gas supply commodity charge 20 will continue to be passed through to customers using 21 the quarterly rate adjustment mechanism. 22 MR. THOMPSON: Yes. Upstream transportation 23 stays cost of service. Correct? 24 MS ELLIOTT: Yes. It continues to be a 25 passthrough of costs. 26 MR. THOMPSON: Gas supply load balancing stays 27 cost of service. 28 MS ELLIOTT: Yes, in that as part of the gas Les Services StenoTran Services Inc. 613-521-0703 540 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 supply portfolio and the transportation portfolio it 2 continues to be a pass-through. 3 MR. THOMPSON: Then within the going-in 4 applicable revenues of $776.2 million, which we 5 discussed the other day, we have the pass-through items 6 which are shown on the IGUA Exhibit F2.2 of compressor 7 fuel, inventory carrying costs, UFG, equity return on 8 taxes, and those I make total $208.4 million. Would you 9 take that, subject to check? 10 MS ELLIOTT: Those amounts, while they are 11 passthrough, only a portion of the cost variance is 12 passed through and that's the portion that is not 13 something that Union can control. 14 For compressor fuel, inventory carrying costs, 15 and UFG, it's the pass-through of the price variance on 16 the cost of gas only, not the volume variances to which 17 Union will be exposed under the price cap. 18 For return on equity and the taxes associated 19 with it, again it's the pass-through only with respect 20 to the interest rate component, and that is by virtue of 21 the existing formula which is used to set the equity 22 component. Any increases or decreases in the actual 23 equity during the term will be managed under the price 24 cap. 25 MR. THOMPSON: I will come to the volume 26 aspect of it in a moment when I get the passthroughs, 27 but my point is that $208.4 million of the going-in 28 applicable revenues you have not cut the cord with cost Les Services StenoTran Services Inc. 613-521-0703 541 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 of service. You want cost of service protection. 2 Whether it's partial or whole or more than whole, we 3 will come to that in a moment, but you have not cut the 4 cord with cost-of-service on those items. 5 MS ELLIOTT: We haven't taken the risk of 6 managing the cost-of-gas changes or interest rate 7 changes under the price cap because when we proposed to 8 do so, that would have required an upfront adjustment to 9 existing rates to allow us to manage that risk. 10 Customers were opposed to that kind of upfront 11 adjustment, so we propose to continue to pass through 12 those cost components for which the utility hasn't got 13 the ability to manage. 14 MR. THOMPSON: Whether an upfront adjustment 15 is the way to cut the cord or not is a matter of 16 dispute. I'm just trying to identify the amounts of the 17 going-in applicable revenues that are still tied, in 18 whole or in part, to cost of service. And I have the 19 amount correct, $208.4 million. Would you take that, 20 subject to check? That's the sum of compressor fuel 21 going in of 16.5, inventory carrying costs going in of 22 12.3, UFG of 17.6, equity return of 91, and taxes of 71. 23 MS ELLIOTT: I agree that that is the amount 24 of those components. I guess I don't agree that those 25 are not to be managed under the price cap. 26 MR. THOMPSON: Well, some of them, some 27 portion of them, are not. 28 MS ELLIOTT: Some portion of them are not. Les Services StenoTran Services Inc. 613-521-0703 542 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 That's right. 2 MR. THOMPSON: Okay. So there is still some 3 link to cost of service, so that the portion of the 4 going-in applicable revenues that has been cut from cost 5 of service completely is $567.8 million. Do you take 6 that number, subject to check? That's the 776.2 minus 7 the 208.4. 8 MS ELLIOTT: What was the number you -- 9 MR. THOMPSON: I came up with 567.8. 10 MS ELLIOTT: Yes. Okay. 11 MR. THOMPSON: All right. And in the big 12 picture, that's a little more than two times your O&M 13 expenses shown in the corporate document that you have 14 provided of going -- at normalized $274 million. Again, 15 that's just math. 16 MS ELLIOTT: Mathematically that's correct, 17 yes. 18 MR. THOMPSON: Right. So the notion that this 19 plan has this dramatic cut from cost of service really 20 is a bit of an overstatement, don't you think? 21 MS ELLIOTT: No. I think, as listed in the 22 evidence that we have submitted, the utility under this 23 price cap plan is managing a number of risks. Those 24 risks are more than just changes in the cost. Their 25 risks continue to be risks associated with revenue due 26 to weather, due to declining use, competition to 27 alternate fuels, continued capital expansion, interest 28 rates. All of those risks are being managed under the Les Services StenoTran Services Inc. 613-521-0703 543 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 price cap. 2 MR. THOMPSON: Well, we will get to -- risks, 3 I think, is on another panel. 4 A further cost-of-service feature of your 5 proposal is this non-routine adjustment category. You 6 want that as sort of a cost-of-service overlay to 7 everything under the cap, to the entire 567 and to the, 8 I guess, capped portion of those other items. So you 9 haven't cut the cord to cost of service there. 10 MS ELLIOTT: The proposed non-routine 11 adjustments to deal with issues were circumstances that 12 are beyond management's controlled that can't be managed 13 under the price cap to provide a way of reflecting those 14 in the prices. 15 MR. THOMPSON: I understand its purpose, but 16 again if costs go up more than $1.5 million per item or 17 $3 million per item, you want to be able to come back 18 and get those costs. That's a cost-of-service type of 19 protection. 20 MS ELLIOTT: If those costs go up or down for 21 the pre-defined circumstances in the non-routine 22 adjustment category, yes. 23 MR. THOMPSON: My point is, it's a feature of 24 cost-of-service type regulation as opposed to operating 25 under a ceiling and taking your lumps or gains as they 26 come. 27 MS. ELLIOTT: If there continue to be 28 adjustments in the price cap formula to deal with costs Les Services StenoTran Services Inc. 613-521-0703 544 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that are outside management's control, yes. 2 MR. THOMPSON: Now, with all of these cost of 3 service elements in your plan, and this attitude to 4 inflation where you are reluctant to take the equity 5 component that has, under your proposal, cost of service 6 protection and move it under the cap where you will get 7 no cost of service passthrough protection in 8 consideration for a possible higher rate of inflation, 9 your attitude to that aspect of the proposals of others 10 suggests to me -- and I would ask you to comment on 11 this -- that the attitude of the company is still one of 12 averse -- being risk-averse as opposed to taking risks. 13 Could you comment on that, please? 14 MR. BIRMINGHAM: Yes. I completely disagree 15 with that, Mr. Thompson. The company is not resistant 16 to taking the existing return on equity investment and 17 putting it under the price cap parameters. But there 18 has to be a balance between what those parameters are 19 and the risk that the utility takes. 20 So it is not a question of whether we are risk 21 averse or not, it is a question of whether the 22 parameters are properly balanced. All we have been 23 saying is, based on our discussions with customers we 24 would need something additional in the price cap 25 parameters if we were to manage that risk and customers 26 told us that they were not prepared to give us that. 27 MR. THOMPSON: Dr. Bauer, as I understand it, 28 says, by assessing inflation annually, that provides the Les Services StenoTran Services Inc. 613-521-0703 545 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 balance. And you are saying, as I understand you, not 2 without some bump-up in the rate of inflation for our 3 disproportionate capital component compared to industry 4 at large. 5 MR. BIRMINGHAM: Dr. Bauer's premise is that 6 our current rates would either reimburse us for the 7 exposure to manage the interest rate risk with respect 8 to the return on equity or that changes in the inflation 9 rate would fully capture the impact on Union as it 10 relates to its existing investment level and we disagree 11 with that premise. 12 MR. THOMPSON: But you are prepared to accept 13 a rate of inflation for 1.6 per cent per year for the 14 next -- well, this year and for the next four years, 15 provided, as I understand it, you have your ROE 16 passthrough. 17 Those two are linked, as I understand it, in 18 your proposal. 19 MR. BIRMINGHAM: That's right, the return 20 equity passthrough for the existing investment level, 21 yes. 22 MR. THOMPSON: And you have seen Mr. Johnson's 23 evidence that IGUA can accept the 1.6 per cent per year 24 and we may be able to accept your position on the equity 25 passthrough. I don't know, because I'm not so sure we 26 appreciated the full implications of that. 27 But let's move on to productivity factor. 28 Dr. Bauer, in his testimony -- and I think I Les Services StenoTran Services Inc. 613-521-0703 546 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 discussed this with you the other day -- indicated, as I 2 understood him, that the objective of a PBR plan is to 3 incent performance based on a benchmark which is 4 external to the organization that you are trying to 5 incent. 6 As a principle, do you accept the validity of 7 that, that we should be looking to a benchmark 8 productivity that is external to Union, ideally? 9 MS ELLIOTT: Yes, Mr. Thompson, we do agree 10 with that. That is, in fact, what we are committed to 11 in the second generation of the price cap, to work to 12 develop an external benchmark. 13 MR. THOMPSON: But you are saying -- is it 14 lack of data that prevented you from deriving 15 productivity from an external source this time or lack 16 of comparable data that concerns you? 17 MS ELLIOTT: At this point in time I think 18 there is a reliable external benchmark out there which 19 is what we are committed to achieving through the second 20 generation, through this term for the second generation. 21 MR. THOMPSON: So the external data that you 22 used was the -- well, let me put it this way. 23 My understanding was that you used your own 24 productivity and then you looked at, I thought, 25 productivity of the Canadian economy as a whole, and 26 then you struck your productivity before stretch factors 27 somewhere between the two. 28 MS ELLIOTT: No. Les Services StenoTran Services Inc. 613-521-0703 547 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: No? 2 MS ELLIOTT: The company's historic 3 productivity is compared to the productivity in the 4 Canadian economy. Because we are using the Canadian 5 economy measure for inflation, we had to put our 6 historic productivity in terms of the Canadian economy 7 productivity. So it is the difference between the 8 Canadian economy productivity which was, over the 9 ten-year period, an average of .3 per cent. 10 MR. THOMPSON: That's positive .3? 11 MS ELLIOTT: Yes. 12 MR. THOMPSON: All right. 13 MS ELLIOTT: Compared to Union's historic -- 14 MR. THOMPSON: Yes. Which was negative .8? 15 MS ELLIOTT: It's negative .8 based on volume. 16 It is .1 measured based on customers. So the weighted 17 average weighting of Union's historic TSP is a 18 negative .4. 19 MR. THOMPSON: Right. 20 MS ELLIOTT: Comparing that to the Canadian 21 economy, that gives you a negative .7. 22 MR. THOMPSON: So that's the .7 in the 23 evidence that you have discussed in opening as you have 24 discussed with others? 25 MS ELLIOTT: Yes, that's correct. 26 MR. THOMPSON: So you are, in effect, 27 .7 points below the Canadian economy at large. That's 28 your contention. Les Services StenoTran Services Inc. 613-521-0703 548 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes. 2 MR. THOMPSON: And if the Board felt that, for 3 whatever reason, you shouldn't be there, you should be 4 at least where the Canadian economy is, rather than .7 5 we would have plus .3? I'm just trying to get the 6 numbers clear in my mind. 7 MS ELLIOTT: Union's historic productivity on 8 a weighted average basis has been minus .4. The 9 Canadian economy's has been positive .3. For Union in 10 the future to be at the rate of the historic 11 productivity of the Canadian economy, we would have to 12 add a stretch factor of .7. 13 MR. THOMPSON: Well, this becomes a bit of a 14 shell game, but if the external data is used to 15 establish -- well, let me put it this way. 16 Is the external data used to develop the 17 stretch factor or is the external data used to establish 18 Union's productivity? It's coming back to the principle 19 again. Maybe we are not on the same page on the 20 principle. 21 MS. ELLIOTT: The historic data is used in the 22 calculation of the price cap. So currently we are using 23 an external factor for the inflation escalator, but it's 24 an economic-wide escalator. 25 We are using company specific productivity 26 information. It would be our proposal that in the 27 second generation in this term we would work to develop 28 an industry-wide productivity factor that would be used Les Services StenoTran Services Inc. 613-521-0703 549 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 in the second generation, so that both the factor used 2 to escalate and the factor used for productivity would 3 be based on external factors. 4 MR. THOMPSON: Let's just assume we are in the 5 second generation. We are using external data and the 6 data that is deemed to be appropriate is Canadian 7 industry, just for the sake of argument. Then our 8 starting numbers would be for Union .3, to which we 9 would then consider the addition of a stretch factor. 10 When we get to this external data state is 11 that where we end up? 12 MS ELLIOTT: Using external data we would not 13 be using Union's productivity specifically. That would 14 go into measuring or into the industry calculation and 15 what we would be using is an industry-wide escalator, 16 less than industry-wide productivity factor. There is 17 no stretch factor in that. It's simply a calculation of 18 factors that are industry-wide. 19 MR. THOMPSON: So when we get to the pure 20 external data state the stretch factor disappears. Is 21 that where we are on this matter of principle? 22 MS ELLIOTT: Using the industry average, to 23 the extent that the company is different from the 24 average, there will be an implicit stretch factor, but 25 it's the industry average that would be used in the 26 formula. 27 MR. THOMPSON: So it disappears? 28 MS ELLIOTT: Yes. Les Services StenoTran Services Inc. 613-521-0703 550 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Thanks. 2 Now, in this case and for the next four years 3 you are in effect asking the Board to approve a negative 4 productivity factor for Union Gas. That's the bottom 5 line, isn't it? 6 MS ELLIOTT: The formula is based on Union 7 improving its historic activity and our negative 8 productivity essentially arises as a result of the 9 declining use per customer and the decline in the volume 10 that we are moving through our system. But we are 11 committed to improving that productivity going forward. 12 The next result is that it continues to be a 13 negative number, but it's a much smaller negative number 14 than it has been. 15 MR. THOMPSON: Thank you. 16 I guess the trouble I have with it, just again 17 at a high level conceptually, you are asking a regulator 18 in conjunction with an introduction of a plan that is 19 supposed to incent performance to approve a negative 20 productivity factor which is evidence of inefficiency, 21 or perpetuates inefficiency. 22 What regulator in his right mind is going to 23 approve a negative productivity factor as part of a 24 performance based plan? 25 MS ELLIOTT: I don't agree that it is evidence 26 of inefficiency. If you look at the difference between 27 the productivity factor we have when we measure output 28 based on customers and when we measure output based on Les Services StenoTran Services Inc. 613-521-0703 551 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 volume, what you see is the increases -- well, there 2 will be decreases in productivity, if you will, and are 3 due to the decreases in the volume throughput on our 4 system. I don't view that as a measure of the company's 5 inefficiency. 6 MR. THOMPSON: Well, whether you do or you 7 don't, asking a regulator to approve as part of a 8 performance-based plan a negative productivity factor I 9 think is a pretty tough pill for any regulator to 10 swallow. It is certainly a tough pill for any customer 11 to swallow. 12 Do you really believe you are going to come 13 out of this with a negative productivity factor after 14 stretch? 15 MR. BIRMINGHAM: Again, Mr. Thompson, we 16 disagree with the premise in the question. We do agree 17 that what the Board should do is use the proper 18 framework, that they shouldn't simply try to make it up. 19 The Board has never done that. They have to use it 20 based on the evidence. 21 The analytical framework that we have put 22 forward here is a widely accepted one. So the Board can 23 take confidence from that. There is a stretch factor in 24 there and the whole Canadian economy over the study 25 period was only 0.3 per cent. What that implies is that 26 there are a number of industries within the economy that 27 were higher and lower than that. Clearly, the Canadian 28 natural gas industry was one of the ones that was lower. Les Services StenoTran Services Inc. 613-521-0703 552 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 There is a number of reasons for that. One of 2 the main reasons is that it is an industry that has 3 demand which is declining on a use per customer basis. 4 MR. THOMPSON: Well, another reason is 5 somewhere in the interrogatory responses is that it is 6 an industry that is regulated and the expansion 7 parameters enable you to attach the projects that had a 8 PI of less than one. In other words, cost of service 9 regulation, as I understand the responses to 10 interrogatories, is one of the features that have 11 contributed to negative productivity. Do you accept 12 that? 13 MR. BIRMINGHAM: The aspect of having some 14 projects which over the life of those projects will 15 never recover those costs, obviously, would result in a 16 negative productivity for that project and wouldn't make 17 a contribution to the overall productivity differential 18 for Union. 19 MR. THOMPSON: That result is in part as a 20 result of cost of service regulation. Correct? 21 MR. BIRMINGHAM: That has been an approach 22 that has been taken under cost of service regulation. I 23 also agree that generally cost of service regulation 24 doesn't provide the type of productivity incentives or 25 has the productivity achievements that would be possible 26 under a different framework, which is the whole theory 27 behind adding a stretch factor to the present formula. 28 MR. THOMPSON: So you come forward, you tell Les Services StenoTran Services Inc. 613-521-0703 553 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 us you are cutting the cord with cost of service, yet 2 your point of departure for developing a productivity 3 factor is a negative productivity that is contributed in 4 part by cost of service regulation. Again, you are not 5 cutting the cord with cost of service at all. You are 6 hanging onto it and it shows up in this productivity 7 factor calculation. Do you agree? 8 MR. BIRMINGHAM: No. 9 MR. THOMPSON: In driving your productivity 10 factor for Union, there are a lot of numbers in this 11 exercise which I don't intend to get into, but it was 12 done for a period, as I understand it, from 1987 to 13 1996, a 10-year period. 14 MS ELLIOTT: That's correct. 15 MR. THOMPSON: And it was done for Union only 16 and not Centra. That appears, I believe, at Exhibit B, 17 Tab 2, page 31. 18 MS ELLIOTT: Yes. It was done for the 19 southern operations area only. 20 MR. THOMPSON: Would you just explain why 21 Centra was not included? 22 MS ELLIOTT: It's a question of available 23 information for the northern and eastern operations to 24 go back and get all the comparable data for a 10-year 25 period was not something that we had readily available 26 to be able to do the study. 27 When we looked at the northern operations area 28 it was our belief that the nature of the costs in that Les Services StenoTran Services Inc. 613-521-0703 554 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 area would have, if anything, contributed to an increase 2 in the -- or a decrease in the productivity factor. So 3 by excluding it we felt we were being somewhat I 4 guess -- 5 MR. THOMPSON: You thought you were being kind 6 to us? 7 MS ELLIOTT: We didn't think we were going to 8 produce results that would be more favourable, more 9 productive if we included the Centra data if we spent 10 the time to acquire the data. 11 MR. THOMPSON: And the big picture, what's the 12 rationale for that high-level conclusion, Centra has got 13 more remote communities and that kind of thing? 14 MS ELLIOTT: It's a question of the 15 geographics of the Centra area and the distribution of 16 the customers, fewer customers in a wider area. 17 MR. THOMPSON: Now, the study of Union in the 18 period 1987 to 1996, that's at a time when Union was an 19 integrated utility with all of these ancillary 20 businesses. Is that right? 21 MS ELLIOTT: Yes, it is. 22 MR. THOMPSON: Was any attempt made to excise 23 the ancillary businesses from the exercise? 24 MS ELLIOTT: No; we didn't go back into the 10 25 years' worth of history and attempt to remove the costs 26 of the ancillary programs for those periods. That 27 wasn't an exercise that we felt would produce any more 28 reliable results. The best option here was to leave the Les Services StenoTran Services Inc. 613-521-0703 555 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 costs in and leave the revenues and the output in. 2 MR. THOMPSON: And why did you stop at 1996? 3 Why wasn't it taken to 1998 or 1999? 4 MS ELLIOTT: Once you get past 1996, you get 5 into an area where we started, in 1997, to get into 6 shared services with the Centra operations, so the data 7 that we have for 1997 is a combination of southern and 8 northern operations; 1998, we were under a complete 9 merger; and 1999, we get into separation. So you get 10 three years where the data is not consistent with the 11 previous 10. 12 Now, the impacts of those changes are, in 13 fact, built into the base rates. But the impact on the 14 productivity calculation was something that we thought 15 would provide a distortion, given the changes in our 16 operation. 17 MR. THOMPSON: Did you take a look at the 10 18 years ending 1998 and the 10 years ending 1999 to see 19 what those numbers produced? 20 MS ELLIOTT: I have not, no. 21 MR. THOMPSON: Did the experts? 22 MS ELLIOTT: I think we started to look at how 23 we would compare or get the information on a comparable 24 basis for those three years. I'm not sure what the 25 status or the results of that review were. 26 MR. THOMPSON: Intuitively, did you think 27 those three years would reduce negative productivity if 28 they were included? Les Services StenoTran Services Inc. 613-521-0703 556 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: If I was just looking at those 2 three years on their own, certainly, the initiatives 3 that were undertaken in those years were initiatives 4 designed to increase productivity. The shared services, 5 the merger and the separation all resulted in costs 6 reductions and rate reductions for the customers. What 7 I don't know is what happens when you line those three 8 years as a combined utility up against the 10 years of 9 data for Union only. 10 MR. THOMPSON: Going forward, Union will be a 11 purer utility than it was in the years 1987 to 1996, in 12 the sense that ancillary businesses are out? 13 MS ELLIOTT: The ancillary business are out 14 going forward, yes. 15 MR. THOMPSON: Yes. And was there any attempt 16 made to identify another utility, or perhaps group of 17 utilities, that had operated in that purer state for 10 18 years, and derive their productivity? 19 MS ELLIOTT: No. 20 MR. THOMPSON: Is there any reason why that 21 wasn't examined, to your knowledge? 22 MS ELLIOTT: Traditionally, as we go and look 23 for a utility that looks like Union Gas, one that 24 operates storage, transmission and distribution assets, 25 we have not been able to find one that's comparable, and 26 then to go and look for one that isn't in the ancillary 27 programs, I guess, were -- we don't know of any 28 utilities that we could go to that looked like what we Les Services StenoTran Services Inc. 613-521-0703 557 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 think we will look like in the future. 2 MR. THOMPSON: Were the experts asked to 3 consider this? Or was it ruled out, at the outset? 4 Union is unique; therefore, don't even bother 5 looking. 6 MS ELLIOTT: Well, the experts looked at other 7 utilities. They didn't -- they weren't specifically 8 directed to go out and look for one that looks like us. 9 MR. THOMPSON: All right. Well, did you give 10 them any mandate, in that respect? Or did they use 11 their own experience and expertise in considering the 12 issue of the productivity of a purer utility? 13 Or is that a question I should ask them? 14 MS ELLIOTT: It's a question you should ask 15 them. 16 MR. THOMPSON: All right. Now, I have 17 suggested to you negative productivity is a non-starter, 18 and you disagree with that. 19 A stretch factor, again, that's another -- 20 that's an issue of judgment and different people will 21 exercise their judgment differently. 22 You are aware of Mr. Johnson's evidence that 23 suggests productivity -- that suggests the "X" factor 24 should be 2 per cent and then Dr. Bauer's evidence that 25 suggests it should be 1.4 to 1.8 per cent and 26 Dr. Noseworthy's evidence, as I understand it, that 27 suggests the productivity factor should be 2.3 per cent. 28 Are you aware of that evidence? Les Services StenoTran Services Inc. 613-521-0703 558 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: We are. 2 MR. THOMPSON: So, would you agree with me 3 that there is a scenario here that if the Board accepts 4 your inflation factor and an "X" factor that's positive, 5 there is a scenario where you are looking at a price cap 6 of zero or less? 7 That's within the range of alternatives that 8 the evidence supports. 9 MR. BIRMINGHAM: I don't believe that the 10 evidence supports that, Mr. Thompson -- and I have based 11 that on the fact that our analysis follows a 12 generally-accepted approach with respect to setting the 13 pricing formula and deals with the additional exposures 14 that the utility is going to manage under the price cap. 15 And to give you a further example, Mr. Johnson uses his 16 2 per cent as a direct extract from the Boston Gas 17 situation, where he includes a 1 per cent factor 18 accumulated inefficiencies. 19 Not only do we disagree with that approach, 20 primarily on the basis that it is retroactive rate 21 making and, in this respect, I use retroactive rate 22 making in the term of using historical results to be 23 able to set rates going forward, but more than that, 24 Boston Gas, and the Massachusetts Commission, in that 25 proceeding, is the only commission in North America to 26 make that finding. 27 MR. THOMPSON: Well, it's clear you disagree 28 with Mr. Johnson. Les Services StenoTran Services Inc. 613-521-0703 559 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Dr. Bauer has 1.4 to 1.8, so he's not too far 2 off from Mr. Johnson. And Dr. Noseworthy is even 3 higher. So, I suggest to you, based on the evidence 4 that's before the Board and your inflation factor of 5 1.6 per cent and your willingness a finding that a cap 6 should be the difference between inflation and the "X" 7 factor, that a number of zero or less is in the range of 8 alternatives. 9 MR. BIRMINGHAM: Those individuals will have 10 to support their own productivity evidence. We don't 11 believe that they can. And we don't believe that a zero 12 per cent net price cap is in the range of reasonable 13 outcomes from the Board's decision. 14 MR. THOMPSON: Let's turn to non-routine 15 adjustments, please. 16 The text that you use describe this adjustment 17 at Exhibit B, Tab 2, page 34, line 12: 18 "`Non-routine adjustments' are 19 adjustments to prices over and above the 20 application of the price cap index that 21 will be made as a result of circumstances 22 [that are] currently unforeseen and 23 therefore not contemplated within the 24 proposed price cap. Should such a 25 circumstance occur [then there's the need 26 of a process to address it]..." 27 And I believe in supplemental evidence at 28 Exhibit B, Tab 2, page 1, you say that your plan is Les Services StenoTran Services Inc. 613-521-0703 560 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 to -- if something of this nature occurs, you are going 2 to record the dollars in a deferral account and then 3 bring that account forward to the customer review 4 process. 5 Is that the process you envisage? 6 MS ELLIOTT: That's the process that we 7 envision for managing the impacts of the non-routine 8 adjustments, yes. 9 MR. THOMPSON: And just as an aside, the 10 practice now, when you record amounts in a deferral 11 account and then you bring them forward for future 12 disposition, they are charged, as I understand it, to 13 the volumes that have flowed in the period when the 14 costs have been incurred. 15 You clear them out against current year 16 volumes. 17 MS ELLIOTT: The normal disposition for a 18 deferral account would be to capture the costs as they 19 are being incurred and then dispose of those costs or 20 refund those benefits to the customers and normally that 21 takes place through a retroactive charge. The 22 non-routine adjustment is really to deal prospectively 23 with those, but to the extent that they aren't 24 identified in advance of a year the deferral account 25 would allow us to capture the costs or the benefits and 26 deal with them on a prospective basis in the following 27 year. 28 MR. THOMPSON: All right. But I'm trying to Les Services StenoTran Services Inc. 613-521-0703 561 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 get to -- I'm sort of leading into these volume games 2 that we touched on the other day and are more 3 significant in this area. If you record $100 in a 4 deferral account in the year 2000, and it sits there 5 until let's say September when we have a customer review 6 process and people say, fine, you should recover that 7 from customers, ordinarily that would be charged out -- 8 if you do it prospectively, to recover the cost you 9 would charge it out over the forecast volumes; or if you 10 are going to charge it against the volumes that flowed 11 in the year the costs were incurred, you would use 2000 12 volumes. Correct? 13 MS ELLIOTT: That has been the practice for 14 disposing of deferral accounts. Yes. 15 MR. THOMPSON: You would not go back to some 16 prior year, take the dollars, divide them into volumes, 17 lower volumes in a prior year, develop a unit charge, 18 and then flow that through in a future year where the 19 throughput might be much higher, because that would 20 over-recover the costs, wouldn't it? 21 MS ELLIOTT: There is the potential to 22 over-recover it or under-recover it depending on what 23 the actual volumes for the year were, yes. 24 MR. THOMPSON: But cost-of-service regulation 25 and the cost-of-service futures of regulation are 26 intended to recover the costs. They are not to be 27 skewed to achieve the potential of over-recovery or, as 28 you have put it, under-recovery. Les Services StenoTran Services Inc. 613-521-0703 562 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: The rates designed under 2 cost-of-service regulation are designed to recover 3 costs, yes. 4 MR. THOMPSON: Now, let's then, just on these 5 adjustments, non-routine adjustments -- you have defined 6 them in the text, you have given us your definition of 7 the various categories. That starts at pages 36 and 37. 8 The description of the categories may be too 9 broad. A concern that Mr. Johnson raised and you 10 addressed in your evidence yesterday was this question 11 of materiality. As I understand it, if an item of cost 12 individually does not exceed $1.5 million, you will not 13 be seeking any non-routine adjustment relief. Is that 14 right? 15 MR. BIRMINGHAM: That's right. 16 MR. THOMPSON: Even if the amounts are lower 17 than 1.5, if cumulatively items of cost that you say are 18 non-routine exceed $3 million, then you will come in 19 seeking -- that's a threshold that needs to be met 20 before you will come in seeking non-routine adjustment 21 relief. 22 MR. BIRMINGHAM: Positive or negative. That's 23 right. 24 THE PRESIDING MEMBER: Mr. Thompson, can I ask 25 a quick question of clarification as to what that 26 $1.5 million and $3 million -- is the $1.5 million in a 27 year? 28 MR. BIRMINGHAM: That's correct, Mr. Chairman. Les Services StenoTran Services Inc. 613-521-0703 563 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 THE PRESIDING MEMBER: And $3 million over a 2 group of items in a year. 3 MR. BIRMINGHAM: That's correct. 4 THE PRESIDING MEMBER: Thank you. 5 Sorry, Mr. Thompson. 6 MR. THOMPSON: Now, just then coming back to 7 what might or might not qualify as a non-routine 8 adjustment, at page 34, at line 13, you have classified 9 non-routine -- you define non-routine adjustments in 10 terms of foreseeability. If the costs are 11 unforeseeable, then they will qualify, under your 12 proposal, for some sort of non-routine adjustment 13 protection. Have I got that right? 14 MS ELLIOTT: We are defining "non-routine 15 adjustments" to be those items that we haven't currently 16 foreseen and therefore we haven't built any ability to 17 manage those items within the price cap, yes. 18 MR. THOMPSON: This is what I want to nail 19 down because foreseeability is a broad concept. For 20 example, it is foreseeable that inflation will be higher 21 than 1.6 per cent. Right? 22 MS ELLIOTT: It will be different than 1.6 per 23 cent. Yes. 24 MR. THOMPSON: Okay. Good. 25 MS ELLIOTT: And within that range of 26 foreseeable possibilities, there is an inflation rate 27 of, let's say, 4 per cent. Correct? That's 28 foreseeable. It might happen. Les Services StenoTran Services Inc. 613-521-0703 564 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: You are asking me if there might 2 be an inflation rate of 4 per cent? 3 MR. THOMPSON: Yes. I'm suggesting very 4 strongly that it is foreseeable that inflation could be 5 higher than 1.6 per cent. What I'm trying to find out 6 is, do you have any protection for the contingency that 7 inflation is 4 per cent under this non-routine 8 adjustment proposal? 9 MS ELLIOTT: No. 10 MR. THOMPSON: Okay. So that all items of 11 cost that are foreseeably higher are not subject to the 12 non-routine adjustment provision. 13 MS ELLIOTT: No. The non-routine adjustment, 14 what you have read is the broad definition. We have 15 listed specific non-routine adjustment so it's not our 16 proposal that everything that is unforeseen today would 17 qualify as a non-routine adjustment. What we have done 18 is define the non-routine adjustments more specifically, 19 and they do deal with those things that we cannot 20 predict the outcome and have not built any ability to 21 manage the outcome into our price cap formula. 22 MR. THOMPSON: Yes. I agree with that. As I 23 say, the types of factors you have listed did not 24 include inflation, for example and did not include 25 interest rates on debt. But I thought I heard 26 Mr. Birmingham say yesterday that if there are some 27 changes in the general economy, we may need to seek some 28 relief under this non-routine adjustment clause. Did I Les Services StenoTran Services Inc. 613-521-0703 565 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 hear that? 2 MR. BIRMINGHAM: I don't think so, 3 Mr. Thompson. 4 What I had said was because we have a fixed 5 price cap and therefore a fixed inflation rate which is 6 an economy-wide factor, what we have done is defined the 7 cost impacts under non-routine adjustment number two 8 also on an economy-wide basis. The discussion I was 9 having with Mr. Janigan was that to the extent that the 10 Board was to entertain an annual setting of that 11 inflation rate, the annual inflation rate captures some 12 of the economy-wide impact of the types of changes that 13 are listed in non-routine adjustment number two, which 14 means that for the purpose of setting a non-routine 15 adjustment you would want to more narrowly define that 16 as significant cost impacts that affect the natural gas 17 industry only. 18 So there is a relationship between how the 19 inflation factor is set and how the non-routine 20 adjustment under number two is defined. 21 MR. THOMPSON: Thank you. I misunderstood 22 your testimony yesterday. 23 So you won't be rushing in for non-routine 24 adjustment protection if an increase in the rate of 25 inflation, for example, leads to increase costs 26 exceeding $1.5 million? 27 MR. BIRMINGHAM: Absolutely not. 28 MR. THOMPSON: Or if increased interest rates Les Services StenoTran Services Inc. 613-521-0703 566 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 and debt leads to $1.5 million. 2 MR. BIRMINGHAM: That's right. 3 MR. THOMPSON: All right. 4 Now, the manner of recovery of these cost of 5 service features of regulation, whether they are 6 non-routine adjustments or passthroughs, as we discussed 7 a moment ago under cost of service the goal is to 8 recover the cost essentially, no more and no less. 9 That's the goal. 10 Do you agree, Ms Elliott? 11 MS ELLIOTT: Yes. 12 MR. THOMPSON: And so logically, I suggest, 13 these items should be outside the cap. You shouldn't 14 get a commission of 2 per cent just because a 15 non-routine adjustment cost incurs. You have done 16 nothing to deserve that. No performance related to 17 that. It's just an item of cost that has surfaced that 18 falls within your non-routine adjustment provision. Why 19 should you get 2 per cent per year on that type of 20 item -- or 1.9 per cent, excuse me. 21 MS ELLIOTT: The price cap plan is not cost of 22 service regulation and the price cap formula is applied 23 to prices, not to costs. So the prices that are charged 24 to customers will be increased or changed by no more 25 than 1.9 per cent per year on average. There is no 26 attempt to identify the costs that are being -- 27 This is not a cost of service escalation 28 model. This is a model that increases or escalates Les Services StenoTran Services Inc. 613-521-0703 567 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 prices by no more than 1.9 per cent per year. 2 MR. THOMPSON: Yes, but that's sort of a 3 myopic view of a price cap plan which is supposed to 4 incent performance. What you are doing is moving -- 5 trying to get the benefit of cost of service and price 6 cap. You want to have a non-routine adjustment based on 7 costs, and then you want to move that under the cap to 8 take 2 per cent and you have done nothing by way of 9 performance to justify that. It would seem to be 10 conceptually on a different footing as to what PBR is 11 all about. 12 Is PBR to incent performance? 13 MS ELLIOTT: It's performance based 14 regulation, and under the price cap plan the utility is 15 managing its costs and its revenues under the price cap. 16 There are, in looking at the risks the utility is 17 managing, a number of items that the current rates and 18 the price cap formula do not provide the capacity to 19 manage those risks and they have been identified as 20 non-routine adjustments. 21 The alternative was to provide the ability to 22 manage those risks by an upfront adjustment in the rates 23 to start with. 24 MR. THOMPSON: But you are going to get 25 non-routine adjustment cost protection when it exceeds 26 certain thresholds. And the issue to me is: Should 27 that fall inside the cap when it occurs or stay outside 28 the cap, like gas costs and upstream transportation. Les Services StenoTran Services Inc. 613-521-0703 568 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Our position, logically, is it should stay 2 outside the cap because it's a cost of service feature 3 of your plan, and you want to put it under the cap. I'm 4 just trying to understand what performance aspect -- 5 what is the performance feature that justifies moving it 6 inside the cap. 7 --- Pause 8 MR. THOMPSON: There isn't one, can't possibly 9 be one, because they are unforeseeable by definition. 10 MR. BIRMINGHAM: I agree, Mr. Thompson, that 11 we are conceptually on different planes with respect to 12 our approach to the changes here. 13 With respect to the non-routine adjustments, 14 they go in to effecting our unit prices and it's those 15 unit prices that are the subject of the pricing formula. 16 And it cuts both ways. To the extent that the 17 non-routine adjustment reduces our rates and then our 18 pricing formula is then applied to those lower rates, it 19 goes both ways. 20 But it goes into our prices, and once those 21 prices are adjusted it is to those amounts that our 22 pricing formula is applied. 23 MR. THOMPSON: All right. Let's just talk 24 about the volume aspect of this again. 25 Taking, for example, the amount that was 26 agreed upon as the system -- the amount to be recovered 27 system-wide for increasing delivery point flexibility. 28 In your prefiled evidence, in unbundling, Les Services StenoTran Services Inc. 613-521-0703 569 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 there's a supplementary piece. 2 MR. BIRMINGHAM: Is it the schedule in the 3 Settlement Agreement, Mr. Thompson? 4 MR. THOMPSON: Yes. What's the amount of 5 dollars there, $5 million or something, thereabouts? 6 MR. BIRMINGHAM: About $5.5 million. 7 MR. THOMPSON: That's the amount I'm talking 8 about. 9 Mr. Janigan was asking you some question about 10 that yesterday, and the thrust of the examination was to 11 this effect. In your supplementary evidence you said 12 that those kinds of things, when they occur, will 13 ordinarily go into a deferral account and then they will 14 be brought forward for disposition as non-routine 15 adjustments. 16 There was language to the same effect in 17 Exhibit B, Tab 1, at page 7 supplemental, pages 7 and 8, 18 lines 17 and 18. You were talking about these kinds of 19 costs. This is before -- this evidence was filed before 20 you had your deal with TransCanada. 21 MR. BIRMINGHAM: Mr. Thompson, could we get 22 the evidence reference again? 23 MR. THOMPSON: Yes. B, Tab 1, page 7 24 supplemental. 25 MR. BIRMINGHAM: Okay, we have it where the -- 26 MR. THOMPSON: Line 17. 27 MR. BIRMINGHAM: -- the example. 28 MR. THOMPSON: Yes. Les Services StenoTran Services Inc. 613-521-0703 570 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 "These costs will be treated similarly as 2 to the one-time and non-routine 3 adjustments for the purposes of the PBR 4 price cap revenue proof..." (As read) 5 I think they mean "plan". 6 "Once additional costs related to 7 delivery point flexibility have been 8 added, they will form part of the base to 9 which the PBR price cap escalator is 10 applied." (As read) 11 So you were proposing that these items be 12 treated as non-routine adjustment type of items. They 13 should be, in order to prevent an over-recovery, be 14 based on the volumes that are flowing when the costs are 15 incurred. 16 So let's take the $5 million as an example. 17 The payment of that money will not start until 18 November 1 of 2000. Do we agree? 19 MS ELLIOTT: Yes. 20 MR. THOMPSON: Okay. So it's not starting at 21 the beginning of 2000, it's starting right at the end of 22 2000 and then it will continue on an annual basis into 23 2001 and beyond. 24 Your proposal, as I understand it, is to take 25 the $5 million, divide it by the 1999 volumes, which are 26 less than what is likely to be flowing in 2001, and then 27 passthrough the unit increase derived from that approach 28 to the volumes flowing in 2001 so with the result you Les Services StenoTran Services Inc. 613-521-0703 571 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 will likely recover more than $5 million. 2 First of all, is that the approach you are 3 proposing? 4 MS ELLIOTT: Well, as I understand it, it is 5 the cost or the amount of $5 million is built into the 6 current pricing which is then divided by the approved 7 volumes to come up with a rate. That rate is charged 8 into the future on the volumes that are moved in the 9 future. 10 MR. THOMPSON: Is there anything different 11 between what you said and I said? 12 MS ELLIOTT: If the volumes are more or less 13 in the future, the amount of the revenue will be more or 14 less than the cost. 15 MR. THOMPSON: So if the volumes are more 16 commencing November 1, 2000 than they were in the 17 year -- the Board approved in the year ending December 18 31, 1999, you will recover in the year 2000 more than 19 the $5 million -- the year 2001 more than $5 million? 20 MS ELLIOTT: The revenue will be greater than 21 $5 million if the volumes are greater and the charges 22 completely volumetric, yes. 23 MR. THOMPSON: And then you propose to add 2 24 per cent on that and run it through again in 2002 and so 25 on? 26 MS ELLIOTT: Once the charge is built into the 27 pricing, the pricing is then escalated in the following 28 year and Union will manage all of its costs to serve Les Services StenoTran Services Inc. 613-521-0703 572 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that new volume and the existing volume under the price 2 cap. 3 MR. THOMPSON: Now, with gas costs you don't 4 do it that way. With gas costs what you do is you 5 determine the costs that are incurred in the current 6 year or prospective year and then you divide those 7 dollars by the current or prospective year volumes. 8 Right? 9 MS ELLIOTT: Gas costs continue to operate 10 under a cost passthrough where the costs are projected 11 and recovered over the volumes that are projected, yes. 12 MR. THOMPSON: Either forecast for the current 13 year, for a prospective year or based on some 14 combination of actuals and forecasts? 15 MS ELLIOTT: For gas costs it will be the 16 volumes purchased will form the basis for the volumes 17 that will be sold and the prices that will be charged. 18 MR. THOMPSON: Let's just take the gas cost 19 increase that occurred in June of 2000. That increased 20 your total gas costs by an amount of "x". Correct? 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: And those increased dollars 23 were to be recovered over what volumes, some estimate of 24 2000 volumes, either a combination of actual and 25 forecast? What volumes were used? 26 MS ELLIOTT: I am not sure that I can answer 27 those questions. I haven't been involved in gas cost 28 passthroughs for a number of years now. My Les Services StenoTran Services Inc. 613-521-0703 573 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 understanding is the cost of gas increases under the 2 current QRAM are based on the 1999 approved volumes. 3 THE PRESIDING MEMBER: Mr. Thompson, is it 4 correct that in gas costs there are a series of deferral 5 accounts that try to balance these out? 6 MR. THOMPSON: Yes, that's correct. 7 THE PRESIDING MEMBER: I just want to clarify 8 it in my own mind. 9 MR. THOMPSON: I am going to be a little bit 10 longer, Mr. Chairman, maybe a half an hour. Would it be 11 convenient to break? 12 THE PRESIDING MEMBER: Shall we break now? 13 Thank you. We will come back at a quarter past eleven. 14 --- Upon recessing at 1048 15 --- Upon resuming at 1117 16 THE PRESIDING MEMBER: Before we start, there 17 was a question someone asked me about how long we are 18 sitting today. Yesterday at the end of business I asked 19 Dr. Wightman to talk with the parties to see how long 20 they were prepared to sit. Obviously, the last would be 21 five o'clock, but I wasn't sure what the message back is 22 on that. 23 Before I get your response, the second thing 24 is I want to remind people that next week, the 20th, we 25 had said we couldn't be available and the 22nd in the 26 morning there is nobody from the Board staff or Board 27 members that would be available on the morning of the 28 22nd. So that was the second item. Les Services StenoTran Services Inc. 613-521-0703 574 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 The third one, obviously, there was some 2 comment with regard to that. It sounds funny to say a 3 Board panel briefing, if I can call it that way, would 4 be welcome. I am interested in hearing the response. 5 MR. PENNY: I think with respect to the 6 sitting, Mr. Chairman, because there is a lot to do, the 7 company is interested in sitting as long as possible. 8 We are certainly prepared to be reasonable on that, it 9 being Friday. Mr. Thompson was suggesting that we at 10 least finish this group of issues and I agree with that. 11 I think it depends on when we do that. If we 12 were finished this group of issues at lunch, I wouldn't 13 be suggesting that we break for the day because I think 14 we should proceed. I have heard four o'clock mentioned 15 as a reasonable estimate or compromise and that's 16 certainly okay with us. 17 THE PRESIDING MEMBER: That's fine. The panel 18 was prepared to sit all day, but I wanted to know 19 whether the parties were available. Thank you. 20 MS LEA: There was no consensus among the 21 parties, sir. If you are suggesting four o'clock is 22 reasonable we will compromise. 23 THE PRESIDING MEMBER: Fair enough. 24 MS LEA: With respect to the other issue that 25 you mentioned, the information about the unbundling, I 26 think Mr. Penny's suggestion is a good one, that we do 27 that as soon as possible on the Monday morning, starting 28 at 9:00. Les Services StenoTran Services Inc. 613-521-0703 575 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 It would be, of course, an open session, but 2 it would involve cross-examination by parties. It might 3 involve questions from the Board for clarification. It 4 would not be under oath. I shouldn't think it would 5 need to be anyway. Anything that does need to be put on 6 the record can be put on later. 7 The only open question still, as to whether it 8 needs to be transcribed. I don't know for the Board's 9 purpose, since it is not under oath, it needs to be 10 transcribed. Parties are certainly welcome to attend, 11 of course, on Monday morning if they want to. Would it 12 be of assistance to have a transcript for people? I 13 don't know whether they would be interested in reading 14 it or not. It's not evidence in this proceeding. It's 15 merely a time taken to assist the Board in understanding 16 the background, so that they can understand the 17 unbundling agreement. 18 So, we weren't planning to necessarily 19 recommend that it be transcribed. Anything that needs 20 to go on evidence can be brought into the hearing at a 21 later time. 22 If anybody, however, thinks they are going to 23 want a transcript let us know. 24 THE PRESIDING MEMBER: I think the court 25 reporter would probably be here in any case, so we could 26 have it transcribed. 27 MS LEA: All right. We will have it 28 transcribed I think. Les Services StenoTran Services Inc. 613-521-0703 576 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. PENNY: Mr. Chairman, the only thing that 2 we need, I don't disagree with anything Ms Lea has said 3 and I did say earlier that we would deal with it Monday 4 morning. The only qualification is that we haven't yet 5 been able to confirm the availability of the people 6 involved. I expect that won't be a problem and we will 7 do that by the end of lunch, so we will be able to 8 absolutely confirm that time for Monday before the day 9 is out. 10 THE PRESIDING MEMBER: It would also be 11 important to have it on the hot line. 12 Thank you. 13 Mr. Thompson, unless there is anything else, 14 would you carry on. 15 MR. THOMPSON: Thank you, Mr. Chairman. 16 I had estimated a half an hour. I think it is 17 going to be probably more likely an hour. I want to 18 finish up on these non-routine adjustment passthrough 19 items and then I have to come back to this ratepayers 20 share of deferral accounts. I am to touch on earning 21 sharing here with this panel and then I have a few 22 questions on the terms of the PBR regime, so that's 23 what's left in my examination. 24 Panel, I apologize, but there are just a 25 couple of items of evidence I wanted to refer you to 26 when we were having this discussion on productivity. 27 Perhaps if you would be good enough to look at your 28 prefiled Exhibit B, Tab 2, page 32 and you will also Les Services StenoTran Services Inc. 613-521-0703 577 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 need Exhibit C1.130. 2 MEMBER JACKSON: Mr. Thompson, the first 3 reference to Exhibit B, tab 2. 4 MR. THOMPSON: Exhibit B, Tab 2, page 32. It 5 has the historical TFP calculation based on volume, the 6 table, and then C1.130 is the common equity returns for 7 both Union and Centra for the periods fiscal 1987 to 8 calendar 1997. 9 MS ELLIOTT: I have that. 10 MR. THOMPSON: Okay. My concern is this: if 11 productivity is negative, I guess my expectations would 12 be that the normalized return that the company earned 13 should tend to be less than the Board approved. And 14 yet, when I look at -- we see in your historical table 15 your negative productivity starts in 1989 and merely 16 continues over to 1994, you have got a switch in 1995 17 and a negative in 1996. And if look at Union Gas 18 Limited's returns, though, we have the approved return 19 in Column B of Exhibit C1.130 and the normalized return 20 in Column D and in every year exception 1991 and 1992, 21 Union has exceeded the allowed return. 22 Is there some inconsistency here? 23 MS ELLIOTT: I guess I haven't -- I mean you 24 are comparing two different things; one is the measure 25 of total factor productivity, which is the rate of 26 growth of input compared to the total growth of output 27 and I'm not sure how that compares to the rates of 28 return over the same period of time. Les Services StenoTran Services Inc. 613-521-0703 578 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Well, again, it's a high-level, 2 I guess, concern that I had, that if, as your 3 productivity calculations are suggesting, you had been 4 in a negative productivity realm for, substantially, 5 that time period, I guess -- and I appreciate there are 6 different things being calculated -- but if an 7 organization is in a negative productivity condition, 8 intuitively, I would expect they couldn't possibly be 9 achieving the returns that they were allowed to achieve, 10 but when I look at the returns numbers, they show quite 11 a different situation. 12 Is there anything -- 13 MS ELLIOTT: I'm not sure how you are linking 14 the productivity to the rate of return. 15 One of the best things that happens under cost 16 of service regulation, as you go through and you see 17 your volumes decline, there is a rate increase to pick 18 up the revenue that's being lost as the volumes 19 decrease. So the revenues are kept whole, under cost of 20 service regulation, even though the productivity factor 21 will declining. 22 MR. THOMPSON: Okay. Well, it was a 23 high-level concern and I can't make any more of it than 24 that, at this point. 25 The other document that I just wanted to draw 26 your attention that's relevant to -- and I should have 27 done it earlier -- that's relevant to this discussion 28 that we were having about whether your plan is PBR or Les Services StenoTran Services Inc. 613-521-0703 579 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 cost of service, or both, is Dr. Bauer's response to 2 Ontario Hydro Networks Company Interrogatory No. 1. 3 The question that Dr. Bauer was asked -- there 4 were two parts to it. First was: 5 "Did Dr. Bauer accept the general 6 proposition that when viewed from both a 7 customer and utility perspective and 8 relative to traditional cost of service 9 regulation PBR has a number of advantages 10 which contribute to superior outcomes? 11 If not, please explain why 12 not." (As read) 13 And then, in his answer to this question, he 14 points out that it's misleading to look at cost of 15 service and performance-based regulation as two opposite 16 alternatives. 17 Is that the way Union looks at them? As two 18 opposite alternatives? 19 MR. BIRMINGHAM: No, Mr. Thompson. I think 20 the earlier testimony was that when it comes to looking 21 at regulation, there's a broad spectrum, which would 22 include, I think, pure cost of service and pure price 23 cap and hybrids of the two, so I don't think that 24 there's -- we don't see them as opposites, no. 25 MR. THOMPSON: All right. So you would -- 26 would you agree with what Dr. Bauer says in this 27 interrogatory response? 28 He basically says, you look at them and pure Les Services StenoTran Services Inc. 613-521-0703 580 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 cost of service is at one end of the spectrum and then 2 you have pure PBR at the other end of the spectrum and, 3 in a nutshell, he said, most plans fall somewhere in 4 between the two. 5 MR. BIRMINGHAM: I think his conclusion was 6 that pure cost of service and pure price cap were 7 probably conceptual, at best; he hadn't see any plans 8 that were purely one or the other -- and that would be 9 the same conclusion that we would draw from our review 10 of the precedents, as they currently exist. 11 MR. THOMPSON: Okay. That was sort of context 12 for my discussion of how many features of your plan of 13 cost of service implications and the portion of it that 14 was really pure price cap, which was that number of 15 500 million and some odd that we discussed. 16 Okay, let's get back to the non-routine 17 adjustment topic, the volume issue, and then I want to 18 move into the passthrough items on this volume issue, as 19 well. 20 I think Mr. Dominy put has finger on it, 21 really. If the Board wishes to assure that non-routine 22 adjustments and those categories of expense that it 23 classifies as pure passthrough remain 24 cost-of-service-oriented -- and so that we avoid this 25 volume gaming that we have discussed -- would you agree 26 that the best way to do that is just with a deferral 27 account? To capture the overs and unders of any 28 non-routine adjustments and passthrough items. Les Services StenoTran Services Inc. 613-521-0703 581 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: I mean our proposal is, in fact, 2 to start the process with a deferral account, but once 3 the adjustment is built into rates, the deferral account 4 would be eliminated. To the extent that there is a 5 volume increase, a number of these items would also be 6 subject to a cost increase that's associated with that 7 greater volume. So it isn't necessary that the volume 8 increase contribute incremental revenue with no 9 incremental costs. 10 MR. THOMPSON: Well, I accept that. This 11 could cut both ways. All I'm -- you are saying, "Do it 12 our way and we will take the risk", and some customers 13 may say, "Well, we prefer to have it risk-free either 14 way and is the mechanism to achieve -- we don't want to 15 pay you an insurance premium; we will pay into the 16 deferral account or take out of the deferral account". 17 Is that the best way to achieve that 18 objective? 19 MS ELLIOTT: Could you repeat your question, 20 please. 21 MR. THOMPSON: Yes. We have these non-routine 22 adjustments, and then we have passthrough items, other 23 than gas costs, which already have deferral account 24 protection, as Mr. Dominy pointed out. 25 I'm asking you to assume that the Board wishes 26 to assure that there's no addition of the price cap, 1.9 27 per cent, to passthrough items and to assure that they 28 are passthrough items; i.e. cost recovery, no more, no Les Services StenoTran Services Inc. 613-521-0703 582 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 less. 2 Is the best way to achieve that objective 3 with -- is it by means of a deferral account? 4 MS ELLIOTT: The difficulty I have with 5 deferral accounts is their current -- the current way we 6 deal with deferral accounts is retroactive adjustments 7 and to avoid retroactive adjustments on customers' 8 prices, we are proposing that these things be built 9 prospectively. 10 If you wanted to maintain deferral account 11 treatment similar to the Y2K treatment that we have in 12 operation right now where the charge is built into 13 rates, the costs are charged to the deferral account and 14 the revenues go against those costs. What you would be 15 doing for each and every one of these adjustments is 16 maintaining a cost treatment that dealt with the revenue 17 stream and the actual costs that are incurred on an 18 ongoing basis. 19 MR. THOMPSON: Rather than having one account 20 for each item, I thought maybe one would do overall. 21 But you seem to be saying that, no, deferral account 22 treatment wouldn't achieve the objective. Is that what 23 you are telling me? 24 --- Pause 25 MS ELLIOTT: I think if you are looking to 26 recover exactly the amount of costs that were incurred, 27 the only way you can guarantee that is to take the exact 28 amount of the costs and divide into or by a number of Les Services StenoTran Services Inc. 613-521-0703 583 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 customers or volumes at a point in time and recover it 2 though a one-time charge so that there is no variance 3 due to volumes or customers. 4 MR. THOMPSON: Let's go to passthrough items 5 and at least try an illustrate this point by reference 6 to your evidence. Exhibit B2, Tab 2, page 38, starting 7 with gas costs. 8 --- Pause 9 MR. THOMPSON: These, as we discussed earlier, 10 are outside the cap and the text says: 11 "The actual cost to purchase gas and have 12 it delivered to Union's franchise area 13 will continue to be subject to the 14 existing accounting and OEB practices. 15 Deferral accounts will continue to be 16 required for gas supply-related costs. 17 Still, at times, the methodology used to 18 recover these costs is changed." 19 So we have ongoing deferral account 20 methodology for this item of cost that is outside the 21 cap. Correct? 22 MS ELLIOTT: Yes, that's correct. 23 MR. THOMPSON: The object of that account, as 24 I understand it, is to ensure that the credits or debits 25 of the items of cost that are collected from ratepayers 26 are no more or no less than cost, may not achieve that 27 purely but that's the objective of the deferral account. 28 Am I right? Les Services StenoTran Services Inc. 613-521-0703 584 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: The deferral accounts recover the 2 price variances in the cost-of-gas component, yes. 3 MR. THOMPSON: And so those are going to 4 continue to operate under your plan? 5 MS ELLIOTT: Yes. 6 MR. THOMPSON: The question I was posing 7 before was: Can we not have the same kind of mechanism 8 for the other types of proposed passthrough charges? If 9 the Board felt that your proposal of determining the 10 amount to be recovered on the basis of 1999 volumes -- 11 rolling that into applicable revenues and adding 1.9 per 12 cent in subsequent years, if the Board felt that that 13 was inappropriate, how can we avoid that result 14 reasonably? Is it through a deferral account? Is it 15 using current year volumes when those types of things 16 occur? Help me. 17 MS ELLIOTT: The difficulty I'm having is the 18 non-routine adjustments and the passthrough items are 19 all part of the delivery price and we don't identify 20 separately in that price the component that is related 21 to these costs. So when the price is escalated it is 22 the entire price. 23 With respect to gas costs, it is a separate 24 charge for a service and that service is outside the 25 cap. What you are introducing is the separation out of 26 the delivery price for costs that are related to the 27 delivery service and to keep them outside of the price 28 cap would -- mathematically it's possible but it really Les Services StenoTran Services Inc. 613-521-0703 585 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 sets up a separate charge that deals with these 2 particular cost components and that's why I'm having 3 difficulty with the deferral account treatment. 4 MR. THOMPSON: I don't know that I'm that 5 complicated. I know I'm not that complicated. 6 Let's just take the $5 million that we were 7 discussing as an example, and let's assume your volumes 8 in 1999 are 10 per cent less than the volumes that 9 actually flow in 2001. So you will recover, for the 10 sake of argument -- on account of that $5 million cost, 11 you actually recover in 2001, $5.5 million. 12 All I'm suggesting is that somewhere we record 13 the $500,000 so that it's, if you will, flowed back to 14 ratepayers in some sort of reasonable method. I don't 15 think it needs a terribly complicated account, does it? 16 MS ELLIOTT: I agree that if we move more 17 volumes in 2001 than 1999 we will recover the additional 18 revenues. I don't know, however, whether those revenues 19 will be earned with no cost. We are continuing to 20 commit to flexibility for all the new volumes on the 21 system as well as the existing volumes, so the 10 per 22 cent increase in volumes would have, associated with it, 23 an increase or an increased flexibility at Parkway and 24 costs associated with that. We are managing those 25 costs, so they are not the subject of any additional 26 charge. Whether they are more or less than the revenue 27 that we generate, I don't know. 28 MR. THOMPSON: Let's just take the $5 million. Les Services StenoTran Services Inc. 613-521-0703 586 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 What kind of costs could there possibly be? 2 I thought if you have to increase your 3 delivery point flexibility above -- on a system-wide 4 basis, above 20 per cent, that the costs that you incur 5 to do that, you have told us will be brought back in as 6 non-routine adjustments. 7 MS ELLIOTT: This isn't an increase above the 8 20 per cent. This is 20 per cent for the new volumes 9 that are being moved. 10 MR. THOMPSON: Are there any costs today? Can 11 you tell me of any costs that are associated with that 12 $5 million? I wasn't aware of them? 13 MS ELLIOTT: I don't know what the costs would 14 be to maintain the 20 per cent delivery for the growth 15 on our system. 16 MR. THOMPSON: But my question is: Would 17 there be any? You can't identify any categories of cost 18 at the moment. 19 MS ELLIOTT: I don't know. 20 MR. THOMPSON: All right. If that approach is 21 inappropriate, would using current year volumes in the 22 year that the charges are incurred be another possible 23 way of reducing the impact of these volume concerns? 24 MS ELLIOTT: Using a forecast volume for the 25 year in which the prices are being set is one approach 26 to recovering these costs, yes. 27 MR. THOMPSON: Could the company live with 28 that approach? Les Services StenoTran Services Inc. 613-521-0703 587 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 That would have them distributed in the year 2 in which they occurred -- well, it would reduce the 3 potential for recovering this $500,000 that we have been 4 discussing but not for future years. So it would have 5 some mitigating impact. Could the company live with the 6 current year volume approach? 7 MS ELLIOTT: Our proposal is to use the 1999 8 approved volumes for all of our pricing. Those are 9 volumes that exist and have been tested. Getting into a 10 volume forecast, the volumes for the future year really 11 involves a forecast and I suspect a review of that 12 forecast during the proceeding for calculating what the 13 prices are for the upcoming year and that's not our 14 proposal. 15 MR. THOMPSON: I know it's not your proposal. 16 I asked you could you live with it. 17 You are going to be bringing forward the costs 18 in the review process. I guess all I'm asking you is 19 bring forward current year volumes. 20 --- Pause 21 MS ELLIOTT: The volumes could be brought 22 forward for determining the prices, but I guess the 23 question would be under what kind of review would those 24 volumes be subject to. And the price cap proposal, once 25 again, is not a cost of service review and it isn't a 26 review of our forecast. So there will be that issue to 27 deal with. 28 Our proposal is to use existing volumes that Les Services StenoTran Services Inc. 613-521-0703 588 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 have already been approved. Another set of volumes that 2 could be used are the most recent years actuals. 3 MR. THOMPSON: Well, could you live with that? 4 My client probably could live with that, recent years 5 actuals. 6 We are talking about cost-of-service type 7 items, passthrough items. 8 MR. BIRMINGHAM: Do you want those actuals 9 normalized for weather, Mr. Thompson? 10 MR. THOMPSON: Yes. Did I guess right? 11 --- Laughter 12 MR. BIRMINGHAM: I will tell you in a month or 13 two. 14 MS ELLIOTT: I guess my preference would be to 15 deal with the last year's actuals normalized for 16 weather. 17 MR. THOMPSON: If you had to deal with 18 anything other than -- 19 MS ELLIOTT: If I had to deal with anything, 20 because there is no judgment involved in determining 21 those amounts. When we get into a forecast, we 22 introduce the review of the forecast which goes back to 23 cost of service regulation. 24 MR. THOMPSON: Okay, let's leave it there. 25 That's your preference and, speaking for myself, not 26 IGUA, I think we could -- I think I could live with it. 27 I will have to find out if they can. 28 Now, just moving on to -- Les Services StenoTran Services Inc. 613-521-0703 589 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. PENNY: I think there is a question of 2 relevance here, Mr. Chairman. 3 MR. THOMPSON: Moving on to some gas cost 4 items and delivery revenues. It's inventory carrying 5 charges. 6 I just want to understand how it will work 7 under your proposal and see if I understand that 8 correctly. 9 Your plan, as I understand it, is to basically 10 freeze inventory volume at its 1999 level. 11 MS ELLIOTT: That's correct. 12 MR. THOMPSON: What is that volume? 13 MS ELLIOTT: The volume of gas and inventory 14 can be found at Exhibit B, Tab 2, Schedule 5 on line 9. 15 It's 1,022,985 cubic meters. 16 MR. THOMPSON: All right. And so, that's the 17 number that will be used for five years to determine the 18 flowthrough of inventory carrying costs. 19 MS ELLIOTT: That's correct. And the company 20 will be managing the variances between that number and 21 the actual average inventory. 22 MR. THOMPSON: Now, let me ask this: Under 23 T service in the south, do the customers have to put up 24 their own inventory? 25 MS ELLIOTT: T1 service, which is the existing 26 storage and transportation services, those customers 27 carry their own inventory. 28 MR. THOMPSON: And M7 service doesn't? M7 is Les Services StenoTran Services Inc. 613-521-0703 590 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 bundled in -- 2 MS ELLIOTT: Bundled transportation services 3 use both the company's inventory as well as their own 4 inventories. So there is a component of inventory that 5 they use that is carried by the company. 6 MR. THOMPSON: Roughly how much, 7 percentage-wise? 8 MS ELLIOTT: I don't know. It will depend on 9 the individual customer's profile to how much of the 10 inventory carried by the company they will use. 11 Generally bundled customers consume gas and then 12 deliver it. 13 MR. THOMPSON: So there is a timing difference 14 in terms of inventory balances? 15 MS ELLIOTT: Yes. 16 MR. THOMPSON: This comes back to Mr. Vegh's 17 point about unbundling and the impact of unbundling. 18 If people unbundle, then they will have to put 19 up all of their inventory. Right? 20 MS ELLIOTT: The unbundled service requires 21 that a customer carry his own inventory, yes. 22 MR. THOMPSON: So that with an unbundling 23 proposal on the table -- I'm assuming it's structured to 24 be attractive -- the probability is that the amount of 25 inventory that Union holds on its own account over the 26 term of the PBR will reduce. That's the probability. 27 MS ELLIOTT: There is already sort of an 28 element of direct purchase in this number. So to the Les Services StenoTran Services Inc. 613-521-0703 591 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 extent that the customers are already direct purchase 2 and go to unbundled service, there will be an impact on 3 both Union's inventory as well as the customers. If 4 it's a system customer unbundling, then the carrying 5 cost -- or the inventory that is being carried now will 6 be carried by the customer. The rates for service will 7 not include this component for unbundled services. 8 MR. THOMPSON: But the price cap will. 9 Let me give you an example. Suppose the costs 10 of gas go up in 2001, you are going to take that cost, 11 divide it by 1999 volumes and flow it through to 12 everybody. So if the flow is greater in 2001, you will 13 over-recover the increased costs. 14 Stopping there, do I have that right? 15 MS ELLIOTT: The inventory carrying costs, the 16 calculation will be based on the 1999 inventory levels, 17 will be divided by the 1999 volumes and then charged to 18 the volumes in effect at that time. 19 If no one has moved to bundled service and the 20 volumes have increased, the revenue will be higher than 21 it would have been in 1999. 22 Customers who transfer to an unbundled service 23 will not be in the billing units in 2000 or 2001. So 24 there is no recovery from those customers of these 25 costs. 26 MR. THOMPSON: Dollars. The dollars 27 applicable to an inventory base that is actually much 28 smaller will be recovered from somebody. Les Services StenoTran Services Inc. 613-521-0703 592 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: No. No, the dollars will be 2 recovered from the customers who we carry inventory for 3 and those volumes will be less. 4 The rate is calculated using the 1999 5 information and charged in 2001 to those customers who 6 are buying bundled service. It is not charged to 7 customers who have acquired an unbundled service. 8 MR. THOMPSON: So there's no windfall here. 9 MS ELLIOTT: No. 10 MR. THOMPSON: So if inventory levels are half 11 of what they are right in 1999, you are telling me that 12 the recovery of the unit cost from the people who are 13 still bundled will only produce half of what it would 14 produce otherwise. 15 MS ELLIOTT: If my inventories are half what 16 they were in 1999 because half of my customers have 17 unbundled? 18 MR. THOMPSON: Yes. 19 MS ELLIOTT: Then I will calculate the unit 20 rate and bill it to half the volumes. 21 MR. THOMPSON: Could you provide just an 22 illustration of a situation where inventory levels drop 23 by 50 per cent based on a move from bundled to unbundled 24 service and assume some reasonable gas cost increase and 25 show how this works? 26 THE PRESIDING MEMBER: This is an illustrative 27 calculation. 28 MR. THOMPSON: Yes. Les Services StenoTran Services Inc. 613-521-0703 593 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 THE PRESIDING MEMBER: Yes, okay. 2 MS ELLIOTT: I can do that. 3 THE PRESIDING MEMBER: Thank you. 4 G4.1 5 UNDERTAKING NO. G4.1: Ms Elliott 6 undertakes to provide an illustration of 7 a situation where inventory levels drop 8 by 50 per cent based on a move from 9 bundled to unbundled service and to 10 assume some reasonable gas cost increase 11 and show how this works 12 MR. THOMPSON: Now, we were discussing the UFG 13 WACOG component earlier and we understand that your 14 ratio will increase. The ratio will be determined on a 15 going-forward basis. It's not frozen as of 1999. 16 MS ELLIOTT: That's correct. The ratio will 17 be the weighted average of the most recent three years' 18 actuals. 19 MR. THOMPSON: And the ratio could go up or 20 down -- 21 MS ELLIOTT: Yes. 22 MR. THOMPSON: -- depending on an unaccounted 23 for losses in future years. 24 So it is the ratio that is influenced by, if 25 you will, current -- more current volumes during the PBR 26 regime. And your plan is to then apply that ratio to 27 the 1999 volumes to determine the costs and then to 28 recover the amount of the costs based on 1999 volumes. Les Services StenoTran Services Inc. 613-521-0703 594 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Yes, but the price will be 2 determined based on the 1999 volumes. 3 MR. THOMPSON: There again we run into the 4 potential over-recovery in the event of increased 5 throughput. 6 MS ELLIOTT: If my throughput increases, my 7 recovery will increase, but so will my costs. 8 MR. THOMPSON: Would you have any -- in terms 9 of using a more current denominator, would you have any 10 objection to using the prior year's actuals normalized 11 in determining the unit cost increase for WACOG-related 12 UFG? 13 MS ELLIOTT: In this case, the calculation 14 would then be the new ratio times the most recent level 15 of throughput, divided by the most recent level of 16 throughput to get the price. 17 MR. THOMPSON: Is that the way it should be? 18 MS ELLIOTT: I mean, it comes out to -- I 19 mean, the ratio is the basis for the rate. Whether I 20 use approved throughput or the most recent throughput, 21 it is the ratio that forms the basis for the rate. 22 MR. THOMPSON: I take your point. 23 If we are going to make the denominator more 24 current, we should make the throughput against which we 25 are applying the ratio more current. 26 MS ELLIOTT: Yes. 27 MR. THOMPSON: So it's either one way or the 28 other or do you prefer your former -- Les Services StenoTran Services Inc. 613-521-0703 595 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MS ELLIOTT: Both ways will come out with the 2 same answer. 3 MR. THOMPSON: Both, okay. 4 Compressor volumes. If we went the way we 5 were just discussing for UFG, would both ways come out 6 the same? 7 The compressor fuel requirements are 8 determined what, as a percentage of throughput? 9 MS ELLIOTT: The volume of compressor fuel is 10 determined based on the throughput, obviously the 11 location of the volume, and the time of year which the 12 volume is moved. 13 So the fuel volume is a factor of the activity 14 on our system. The passthrough item deals only with the 15 price variance. It doesn't deal with the volume 16 variance. 17 Again if I am moving more gas on the system, I 18 will be incurring more costs for fuel. The passthrough 19 will only recover the price variance. 20 But as you indicated, if I am moving more 21 volume the new price will generate more revenue to 22 offset the higher cost. 23 MR. THOMPSON: Right. But my question was if 24 we moved forward in effect the denominator, we should in 25 fairness, I think you are saying, move forward the 26 throughput calculation on which we are determining our 27 compressor fuel volume requirement and therefore the 28 dollars. Les Services StenoTran Services Inc. 613-521-0703 596 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 If we go that way compared to your way, do we 2 end up at about the same point? 3 Am I making myself clear? 4 MS ELLIOTT: What you are suggesting is that I 5 take the 1999 volume, calculate the new price, divide it 6 by the most recent year's actual throughput to get the 7 price I am going to charge. I would need to use the 8 most recent year's throughput in determining what the 9 fuel cost would be. So it is the same as unaccounted 10 for. I would have to use the new volume in both cases. 11 MR. THOMPSON: Turning to the non-gas cost 12 passthrough items in delivery applicable revenue, this 13 is the equity return component. It is pretty clear how 14 you derive that passthrough item. It is linked to the 15 equity component in the applicable revenues derived from 16 the 1999 Board approved revenue requirement. 17 MR. BIRMINGHAM: That's right, in using the 18 Board approved formula. 19 MR. THOMPSON: You have said several times 20 that this does not -- you said this is in effect only 21 partial passthrough of equity return consequences under 22 our plan and that we are managing the costs of equity of 23 expansion capacity under the cap. 24 What I would like you to do is give us an 25 illustrative example of what you are talking about so 26 the Board can understand the amount of dollars that you 27 are in fact managing under the cap. 28 Could you describe something on the record and Les Services StenoTran Services Inc. 613-521-0703 597 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 then perhaps undertake to give us an exhibit that 2 illustrates what it is that you are talking about? 3 MR. BIRMINGHAM: I want to make sure we have a 4 common understanding of what it is we are talking about, 5 Mr. Thompson. As I hear you, what you want to 6 understand is what happens under a return on equity 7 adjustment, using the Board's approved formula, to the 8 1999 rate base level. 9 We would have to assume an interest rate 10 change that would generate that. That would be a 11 comparison then to what would happen under the price cap 12 where Union is managing all of the equity with respect 13 to new investment. 14 Is that what you are looking for? 15 MR. THOMPSON: I know how it works, but the 16 Board has not seen how it works. 17 Basically, you are proposing to flow through 18 about 5.6, I think it is, or $5.7 million of return on 19 equity. If there is a throughput increase in 2000 and 20 2001, you will recover more than that particular amount 21 of money; right? 22 MR. BIRMINGHAM: Right. 23 MR. THOMPSON: Some people say that is a 24 windfall benefit, and your answer says: No, we are 25 managing under the cap the equity costs of any expansion 26 that is taking place in 2000 and beyond. 27 What I am trying to have you illustrate for me 28 is assume a 20 per cent increase in throughput, show Les Services StenoTran Services Inc. 613-521-0703 598 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 what that would mean in over-recovery of the $5.7 2 million, and then assume some sort of expansion scenario 3 that would produce that level of throughput, show what 4 that would cost in equity dollars to illustrate what it 5 is you are managing under the cap compared to this 6 over-recovery. 7 Can you do that? 8 MR. BIRMINGHAM: I can do that in an example, 9 as long as parties appreciate that what this example 10 will show is a comparison between a revenue stream 11 generated by unit prices and some costs. 12 That is not how the price cap regulation 13 works, but certainly I can show it for those individual 14 components. 15 MR. THOMPSON: Is that not your rationale for 16 having equity partially flow through and partially 17 capped, is that you are managing these increased costs? 18 MR. BIRMINGHAM: We are managing the cost of 19 equity on any new rate base investment during that PBR 20 period. But our rationale for using the return on 21 equity passthrough for the existing level does not 22 relate to that. 23 But I can certainly do the example you are 24 looking for. 25 MR. THOMPSON: Do you want to describe its 26 impact first and then follow it up with an example, or 27 just leave it for an undertaking response? 28 MR. BIRMINGHAM: I can just do the Les Services StenoTran Services Inc. 613-521-0703 599 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 undertaking; that's fine. 2 MR. WIGHTMAN: Undertaking G4.2. 3 UNDERTAKING NO. G4.2: Mr. Birmingham to 4 assume a 20 per cent increase in 5 throughput and show what that would mean 6 in over-recovery of the $5.7 million; and 7 then assume some sort of expansion 8 scenario that would produce that level of 9 throughput, and show what that would cost 10 in equity dollars to illustrate what it 11 is they are managing under the cap 12 compared to the over-recovery 13 MR. THOMPSON: There is another non-gas item 14 that may be necessary for flowthrough treatment. This 15 is revenues from new services. Mr. Johnson makes 16 reference to that in his testimony, at question 26, 17 where he talks about these new services, and then he 18 says at the top of page 20: 19 "To prevent Union from circumventing the 20 constraints of the price cap all revenues 21 realized from Union from its so-called 22 new services should be passed through the 23 credit adjustment to the revenue 24 requirement base." (As read) 25 You were having a discussion with Mr. Vegh 26 about these new revenues the other day. 27 If the transactional services deferral account 28 remains, will these new revenues be recorded in that Les Services StenoTran Services Inc. 613-521-0703 600 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 account? 2 MR. BIRMINGHAM: It depends on what they are, 3 Mr. Thompson. They may or they may not. If they meet 4 the definition of what is the storage and transportation 5 transactional revenues, then they would. 6 MR. THOMPSON: So what you were describing to 7 Mr. Vegh as sort of the regulated subset of those 8 revenues would flow into that account? 9 MR. BIRMINGHAM: As well as the unregulated 10 ones which are currently recorded there. As an example, 11 gas loans, even though they are an unregulated service, 12 the revenue is recorded in that deferral account. 13 MR. THOMPSON: So what would stay out of that 14 account, if anything? 15 MR. BIRMINGHAM: I don't know. At this point 16 I don't know what the new services might be. 17 MR. THOMPSON: Based on your vision of what 18 you think they would be, is it your expectation that 19 most, if not all, of the revenues would go into this 20 account if the account remains? 21 MR. BIRMINGHAM: If the account was to remain, 22 it would be my expectation that most of them would go 23 into the account, yes. 24 MR. THOMPSON: If the account doesn't remain, 25 what is your reaction to Mr. Johnson's suggestion that 26 they should be passed through? 27 MR. BIRMINGHAM: Mr. Johnson's comment seems 28 to deal with some type of revenue cap approach. Our Les Services StenoTran Services Inc. 613-521-0703 601 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 approach is with respect to unit prices. So the 2 regulated prices would be escalated in accordance with 3 the pricing formula, and any unregulated services would 4 be charged fees based on what we could charge for those 5 services, and our revenue stream would accrue to the 6 company. 7 MR. THOMPSON: Well, your proposal is this 8 stream of revenue, if you have it your way, is outside 9 the cap. 10 MR. BIRMINGHAM: Well, we are talking about a 11 revenue stream. Our price cap applies to unit prices. 12 To the extent that those unit prices are regulated 13 services -- and I think the example I was using 14 yesterday was C1 off-peak storage -- that would be a 15 regulated service that would be subject to the price cap 16 parameters. To the extent that it was an administration 17 fee or some other type of fee for something like gas 18 loans, then the price itself would be outside the cap. 19 MR. THOMPSON: Revenues you recover, will they 20 be taken into account in some way in determining how 21 many dollars you can recover under your 1.9 per cent? 22 You seem to be suggesting some of this money may be a 23 deduction from our price cap amount of about 24 $15 million, but we don't know how much yet. I 25 understood that this money, if you got it, was not going 26 to affect your $15 million. 27 MR. BIRMINGHAM: When we apply the price cap 28 parameters to the unit prices for regulated services, Les Services StenoTran Services Inc. 613-521-0703 602 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 that generates two revenue streams. One of them would 2 be the $14.7 million underneath the price cap, and that 3 comes directly from the price cap. The other one would 4 be a combination of services that are either escalated 5 by the price cap because they are regulated services or 6 unregulated services which are administration-type fees, 7 and that's what generates the $5 million. 8 I'm not trying to be difficult here, 9 Mr. Thompson, I am just trying to illustrate the fact 10 that our price cap parameters apply to the regulated 11 services and that it is just a question of where those 12 revenue streams are accounted for. 13 MR. THOMPSON: But in terms of who gets the 14 credit for the other revenues, it is going to go into a 15 pot, whether it is regulated or unregulated, for which 16 ratepayers will get no credit. 17 MR. BIRMINGHAM: It will be a revenue stream 18 like the other revenue streams to the company, that's 19 right. 20 MR. THOMPSON: So it's not -- there is no 21 passthrough of any of those revenues, either as an 22 adjustment to the base or some sort of credit to the 23 price cap component of your claim. They are outside 24 that feature of your claim. I'm just understanding the 25 facts. None of that money will benefit ratepayers. 26 MR. BIRMINGHAM: Well, they will receive the 27 benefit of the stretch factor in the productivity 28 component of the pricing formula with respect to the Les Services StenoTran Services Inc. 613-521-0703 603 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 regulated services, but there won't be any further 2 accounting of the revenue stream. 3 MR. THOMPSON: Just on this point about 4 monitoring and reflecting changes in the gas supply 5 portfolio under the quarterly rate adjustment mechanism 6 in the PBR regime, could you just explain how that is 7 going to work? 8 --- Pause 9 MS ELLIOTT: There was a section of 10 supplemental evidence filed dated May 3rd, which is 11 Exhibit B, Tab 2. There are six pages of written and 12 Appendix I is a package of schedules. 13 It's our proposal that changes to gas costs in 14 the gas supply portfolio be dealt with through the 15 customer review process, and that would involve filing a 16 package of materials which consists of the schedules 17 that are in Appendix I. That would be the forecast cost 18 of gas. 19 On the basis that the cost of gas that we are 20 currently incurring is generating charges in the 21 deferral accounts that will impact residential customers 22 by more than $20 a year, we would file for changes in 23 our cost of gas, and when we do so we will file a 24 forecast of those costs and the new pricing that results 25 from the new portfolio. 26 Impact of less than $20 would continue -- we 27 would continue to maintain the deferral account 28 treatment for those costs. Les Services StenoTran Services Inc. 613-521-0703 604 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: So QRAM stays in place, is 2 that -- 3 MS ELLIOTT: QRAM stays in place, yes. 4 MR. THOMPSON: And it only kicks in if there 5 is this trigger mechanism, threshold level hit? 6 MS ELLIOTT: The existing QRAM stays in place. 7 The threshold measure really deals with the total 8 portfolio, so the upstream transportation and load 9 balancing costs. The QRAM today only deals with the 10 commodity. 11 MR. THOMPSON: Only deals with commodity. 12 All right. 13 So it's quite similar to the cost of service 14 regime, except it is going to be presented in the 15 customer review process rather than in a normal rate 16 application. 17 MS ELLIOTT: Yes. 18 MR. THOMPSON: Could I come back to, then, 19 this ratepayers' share of the deferral account revenues? 20 Would you agree with me, these ratepayer -- 21 I'm going to call them ratepayer revenues for 2000 -- 22 and we discussed earlier it is 87.5 per cent of the 23 revenues are ratepayer revenues under the current 24 regime. Would you agree with me this regime has been in 25 place for some time? 26 --- Pause 27 MS ELLIOTT: I think the treatment of the 28 market premium on storage is a new concept that was Les Services StenoTran Services Inc. 613-521-0703 605 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 introduced last year. The S&T deferral accounts have 2 been around for some time. 3 Until recently, the treatment was the subject 4 of an annual review by the Board as to how they were 5 disposed of. Most recently, Union has the approval to 6 take 10 per cent of the forecast amount, leaving 90 per 7 cent of the forecast affecting customers' rates, and 8 then the existing methodology is a 75 per cent 9 ratepayer, 25 per cent shareholder sharing on revenues 10 above the forecast amount. 11 MR. THOMPSON: All right. Yes, you are right 12 that long-term market -- long-term storage at market 13 premium account only commenced -- I think it was part of 14 E.B.R.O. 499 because that's the first time long-term 15 storage had shifted to market prices. Correct? 16 MS. ELLIOTT: That's correct. 17 MR. THOMPSON: And Union agreed, as part of 18 the ADR, to have that money go to the customers. Right? 19 MS ELLIOTT: Yes. 20 MR. THOMPSON: And my recollection is that 21 Union's position throughout this market review process 22 that dates back to before I was born, you didn't want 23 brokers or somebody capturing the economic rents 24 associated with market price storage, but it was the 25 company's position, as I recall it, that the difference 26 between cost-based and economic rents should flow back 27 to your ratepayers. 28 Was that the company's position? Les Services StenoTran Services Inc. 613-521-0703 606 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: No, it wasn't, Mr. Thompson. 2 During those discussions, it was the company's 3 position that we would like to try to move storage to 4 the market price. There remain two significant 5 questions. One is how you got from here to there, and 6 then what happened to the differential. 7 I think those two issues were the subject of 8 some discussions in the different task forces and 9 ultimately in the consensus that couldn't be reached 10 through those reports. 11 So beyond that our concern is that to the 12 extent that we continue to offer cost based storage to 13 our infranchise customers, that one of the reasons that 14 we have proposed the allocation methodology in the 15 unbundled service agreement is that we wouldn't want to 16 simply offer an unlimited amount of cost-based storage 17 to infranchised customers where they didn't really need 18 it that would then give other parties the opportunity to 19 simply go out and market it. 20 MR. THOMPSON: The storage assets that are in 21 place, as we sit here at the moment, if not entirely, 22 have been almost entirely paid for by your ratepayers. 23 Would you agree with that? 24 MR. BIRMINGHAM: They have been included in 25 our cost of service and ratepayers have paid for the 26 service which they have received. 27 MR. THOMPSON: Yes. And that's the rationale 28 I suggest for the treatment that the Board has approved Les Services StenoTran Services Inc. 613-521-0703 607 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 for the allocation of the substantial portion of these 2 revenues to ratepayers. 3 MR. BIRMINGHAM: What rationale is that, 4 Mr. Thompson? 5 MR. THOMPSON: The fact that ratepayers have 6 paid for the assets that are producing these premiums or 7 these discretionary revenues in the case of 8 transactional services. 9 MR. BIRMINGHAM: The customers pay for the 10 service that they receive. I don't see necessarily any 11 link to what should then happen to some sort of 12 incremental revenue or detrimental revenue, for that 13 matter, to the extent that storage is sold at a 14 different price. 15 In addition, with respect to the storage and 16 transportation transactional revenues, a number of those 17 revenues are generated because the utility is trying to 18 manage some of the risks that it is responsible for. I 19 think the example I was giving yesterday was the 20 situation where under gas loans I was having a 21 discussion with Dr. Jackson. That was with respect to 22 the fact that we were loaning gas because we were in a 23 position where our inventory was significantly higher 24 than we had originally contemplated under a normalized 25 weather forecast. 26 MR. THOMPSON: There is no doubt about it, the 27 transactional services deferral account, TSDA, was a 28 performance-based feature of your cost of service Les Services StenoTran Services Inc. 613-521-0703 608 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 regulation and it was working well. With 25 per cent 2 you guys are out there marketing this stuff to beat the 3 band. Every year the returns have gone up. 4 Ironically, this is the only feature of your 5 cost of service regime that you propose to take away in 6 the context of coming forward with a performance based 7 regulation proposal. Do you see the irony? 8 MR. BIRMINGHAM: No. The storage and 9 transportation deferral account was put in place at a 10 time where we were under cost of service regulation and 11 the ability to forecast those revenues was very 12 difficult because of the very circumstances I was 13 describing before. 14 Under price cap regulation there is no 15 necessity to do the forecast. The prices, the uniprices 16 for the services are determined by the pricing formula. 17 MR. THOMPSON: But these ratepayer revenues, I 18 suggest to you, Mr. Birmingham, are part of the board 19 approved 499 revenue requirement regime which is your 20 point of departure for PBR. Nothing has changed to 21 justify all of that revenue going to the company. 22 If we are to use, as you say, the 499 revenue 23 requirement or the Board approval as the point of 24 departure, at the very least we should get credit for $7 25 million after tax. 26 You have done nothing by way of performance to 27 justify taking that money. Would you agree? 28 MR. BIRMINGHAM: No. Les Services StenoTran Services Inc. 613-521-0703 609 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: What have you done in the year 2 2000 by way of performance to justify taking the 3 ratepayers' $7 million share of deferral account 4 revenues? 5 MR. BIRMINGHAM: The ratepayers will continue 6 to receive the amount of the storage and transactional 7 revenue that has been included in the rates. That's 8 $5.5 million. 9 Beyond that, the pricing formula with respect 10 to the regulated services provides ratepayers with an 11 up-front benefit in terms of productivity. What we have 12 done is set out price cap parameters, the overall 13 contacts of our proposal that deals with a five-year 14 term. It isn't appropriate to try to match what happens 15 in a single year under some estimate of cost of service 16 to what might happen in the price cap parameters. 17 The price cap parameters by their very nature 18 are going to mean greater variability and earnings and 19 you are going to get a mismatch in any given year. 20 MR. THOMPSON: But I am still struggling to 21 find the justification in the context of 22 performance-based regulation for your proposal to take 23 $7 million from ratepayers in the year 2000. Forget 24 about what it is down the road. We know it is going to 25 be more because Ms Elliott told me the storage premium 26 is going up to $4.5 million from $2 million. What's the 27 performance that warrants taking that money from 28 ratepayers? Les Services StenoTran Services Inc. 613-521-0703 610 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: The performance or the 2 incentive is found in the pricing formula itself. What 3 you are suggesting is that there should be something 4 additional layered on, which is how the revenues be 5 accounted for. 6 We are suggesting that under price cap 7 regulation that isn't appropriate. 8 MR. THOMPSON: Well, would you agree with me 9 that this $7 million at the moment that is ratepayer 10 revenues, because it is recorded in the deferral 11 accounts they get the benefit of the full $7 million? 12 MR. BIRMINGHAM: They are recorded in the 1999 13 deferral accounts and to the extent that the sharing 14 ratios are followed, as they have been in the past, yes. 15 MR. THOMPSON: And if you end up taking that 16 money from them it will be subject to income tax? 17 MR. BIRMINGHAM: To the extent that that 18 revenue stream flows to the company, it would then have 19 to be tax affected. Right. 20 MR. THOMPSON: And the tax on it would be 21 what, 43 per cent? 22 MR. BIRMINGHAM: Forty-three and a half is 23 what we have been using. That's right. 24 MR. THOMPSON: So you are going to take the $7 25 million which ratepayers are getting the benefit of now 26 and you are going to divert 43 per cent of it to the 27 government. How does that benefit the ratepayers -- and 28 put the rest in your pocket. Les Services StenoTran Services Inc. 613-521-0703 611 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. PENNY: I think we are hearing the same 2 question over and over again. 3 MR. THOMPSON: Let me ask it this way: If the 4 Board felt that your proposal to close these accounts 5 was worthy of consideration, but decided we will adjust 6 the base for the benefit that the ratepayers have been 7 deprived of, would you agree with me it's $7 million 8 grossed up for taxes? 9 MR. BIRMINGHAM: The $7 million is a pre-tax 10 number, Mr. Thompson. 11 MR. THOMPSON: And $7 million grossed up for 12 taxes would be what? 13 MR. BIRMINGHAM: The $7 million is already the 14 pre-tax number. 15 If you take a look at Exhibit G2.4 you can see 16 in column E that the S&T revenues that we have been 17 speaking about on line 6 is the pre-tax number. If you 18 look further on line 17 you will see the income tax 19 expense and then the after-tax number of four. 20 MR. THOMPSON: I understand that, but the $7 21 million as currently through a deferral account, the 22 ratepayers get the benefit of the full seven. 23 MR. BIRMINGHAM: That's right. 24 MR. THOMPSON: And if you are going to deprive 25 them of that benefit and we are going to adjust the 26 applicable revenues to account for the deprivation of 27 that benefit, what I am suggesting to you is the 28 appropriate adjustment is not $7 million, a further Les Services StenoTran Services Inc. 613-521-0703 612 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 reduction of seven, it's seven grossed up for taxes 2 because we should get a net after tax benefit of seven. 3 Am I making myself clear? 4 MR. BIRMINGHAM: No. The after-tax benefit of 5 that revenue stream, whoever it goes to, is $4 million. 6 The pre-tax amount is $7 million regardless of who it 7 goes to. 8 MR. THOMPSON: Run that by me again. I 9 thought if you had $7 million in your deferral account 10 for the benefit of ratepayers and you credit that back 11 to ratepayers, they get credit for $7 million. They 12 don't have to pay tax on it. 13 MR. BIRMINGHAM: The pre-tax number is 14 $7 million, right. 15 MR. THOMPSON: So again coming back to -- so 16 after taxes, the ratepayers are losing a benefit of 17 $7 million. If we were to adjust the applicable 18 revenues for the loss to the ratepayers of an after-tax 19 benefit of $7 million, isn't the adjustment like 20 $10.5 million? 21 MR. BIRMINGHAM: We are coming apart, here, 22 Mr. Thompson. I don't understand the comment, the 23 after-tax number of $7 million. The $7 million is a 24 pre-tax number no matter who it is attributed to. 25 MR. THOMPSON: But we don't have to pay taxes 26 on it, we get the full benefit of seven -- 27 Anyway. I will argue it. I think I'm right, 28 but I'm sure I will find out I'm not. Les Services StenoTran Services Inc. 613-521-0703 613 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 THE PRESIDING MEMBER: Can I ask just a point 2 of clarification, Mr. Thompson, before we go -- 3 These revenues in the deferral account, these 4 are, then, cleared subsequent. They are not included in 5 the rates, are they? The $5 million in the transaction 6 services is already reflected in the rates. That was an 7 assumption that that's what the revenues would be and 8 it's reflected in rates. Any extra earning above that 9 is in a deferral account and is cleared by -- I suppose 10 it's positive by giving a credit to the ratepayers in a 11 one-time payment or something like that. It isn't 12 reflected in the rates, is that correct? 13 MR. BIRMINGHAM: That's right, Mr. Chairman. 14 THE PRESIDING MEMBER: I just wanted to make 15 sure I understood that. Thank you. 16 MEMBER JACKSON: Could I just ask a couple of 17 questions for clarification as well just so that I 18 understand these storage revenues? 19 There is one basic question: Are you now 20 building storage which is outside of the ratemaking 21 regulation of the Board? Is that happening as well? I 22 suppose you may have to come to the Board for some 23 approvals with respect to development of the storage 24 area. But are you developing some storage that is not 25 to be treated under this price regulation by the Board? 26 I was just wondering, are there new storage 27 pools being developed that, for example, might be in 28 that $4 million worth of revenue that has been referred Les Services StenoTran Services Inc. 613-521-0703 614 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 to? Was it for the year 2000, Mr. Thompson? 2 And yet, it is revenue from services from new 3 storage which is outside of this 1999 price regulation 4 data that we have been talking about and probably will 5 be outside of the price regulation of the Board and 6 going forward. Is that happening or am I 7 misunderstanding what's happening in the storage area? 8 MR. BIRMINGHAM: I think I understand your 9 question, Dr. Jackson. We do have some storage pools 10 that have been developed and sold long-term at market 11 prices. To that extent, while the Board has approved 12 that approach, the market price hasn't been set by the 13 Board. We do continue to have storage prices that are 14 regulated by the Board. 15 The new pools that we have developed that have 16 been sold under market prices, as I say, are long-term 17 and generally don't contribute to the use of the 18 transactional revenues. 19 MEMBER JACKSON: And would it be safe to say 20 they have never appeared in your rate base that you 21 brought before this Board too, or have they in the past 22 perhaps, if they were pre-1999? Are there some in that 23 category that are pre-1999 and would have been in the 24 rate base that was approved by the Board for ratemaking 25 in the 1999 test year? 26 MR. BIRMINGHAM: They have all been included 27 in the rate base, and the revenue stream has included 28 the imbedded cost based rate for those pools. What we Les Services StenoTran Services Inc. 613-521-0703 615 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 are talking about is the differential between the 2 imbedded cost based rate and the market price that has 3 been accounted for differently. 4 THE PRESIDING MEMBER: That difference is in 5 the long-term market based deferral account that Mr. 6 Thompson is referring to? 7 MR. BIRMINGHAM: That's correct. 8 MEMBER JACKSON: That's very interesting 9 because that comes back to Mr. Thompson's questions 10 about whether or not those are to be considered within 11 the regulated ratemaking framework, sort of under the 12 concept of its being regulated because it's a monopoly, 13 or whether there is some storage that is now being 14 developed outside of that framework. 15 So I think you are saying it's being developed 16 within that framework. There's a chance to get market 17 based rates which are at a premium to the traditional 18 cost of service methodology rates. Up until now, that 19 premium has been shared. In the future, it would not be 20 shared, is that correct? 21 MR. BIRMINGHAM: Up until now, the premium, 22 which is brand new, has not been shared. It has been 23 attributed 100 per cent to the ratepayers. 24 Under our proposal -- this is just for the 25 market premium -- 26 MEMBER JACKSON: Yes. 27 MR. BIRMINGHAM: So this is the amount of the 28 market price in excess of the imbedded cost based rate. Les Services StenoTran Services Inc. 613-521-0703 616 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Under our PBR proposal, what would happen is 2 we are committed to offering in-franchise storage -- 3 sorry, storage to in-franchise customers at the cost 4 based rate, and those rates would continue to be 5 regulated by the Board and would be priced in accordance 6 with the pricing formula. To the extent that we were 7 offering ex-franchise storage -- so this would be either 8 new storage pools or the renewal of storage contracts 9 for ex-franchise customers -- we would be setting those 10 at whatever the market price was at the time. 11 MEMBER JACKSON: And that premium would go 12 entirely to the company. 13 MR. BIRMINGHAM: That revenue stream would go 14 to the company, whether it was higher or lower than the 15 cost based rate. And that would include the revenue 16 stream from any new pools, which is fairly important to 17 us, because at this point, the incremental cost of 18 developing any new pools is well above our current 19 embedded cost based rate. 20 MEMBER JACKSON: Yes, I see the problem there. 21 If a customer wants to move from a bundled 22 rate to an unbundled rate and he is in-franchise, he is 23 entitled to pricing it under the prices that were 24 developed under the traditional methodology or storage. 25 Is that correct? 26 MR. BIRMINGHAM: That's correct. 27 MEMBER JACKSON: Inflated by the PBR increase 28 which may apply from year to year, though? Les Services StenoTran Services Inc. 613-521-0703 617 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: That's right. 2 MEMBER JACKSON: Okay. I think I understand 3 it. Thank you very much. 4 Thank you, Mr. Thompson, for permitting me 5 that interlude. 6 MR. THOMPSON: Thank you, Dr. Jackson. 7 Just before I leave this topic and move on to 8 earnings sharing, I have a few questions, and, then, 9 term of the plan. 10 You were talking to Dr. Vegh -- Mr. Vegh -- 11 --- Laughter 12 MR. THOMPSON: Dr. Zhivago. 13 --- Laughter 14 MR. THOMPSON: -- yesterday about the risks 15 that Union faces with respect to the inability to earn 16 transactional services amounts if someone unbundles and 17 they take, as you pointed out, their entitlement to the 18 storage with them, manage it themselves. Do you recall 19 that discussion? 20 MR. BIRMINGHAM: Yes, I do. 21 We were talking about the fact that the 22 transactional services are generated by the use of 23 assets which underlie the bundled services. 24 To the extent that a customer elected the 25 unbundled service, they would have that asset capability 26 themselves. That put Union at risk of not being able to 27 generate, potentially, even the $5.5 million that is 28 currently committed to ratepayers' end rates. Les Services StenoTran Services Inc. 613-521-0703 618 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: Right. Well, that $5.5 million 2 is, on your evidence, in 2000 going to be $9.5 million, 3 right? The total being generated for transactional 4 services in your 2000 forecast is $9.5 million? 5 MR. BIRMINGHAM: That's right. I think the 6 only distinction we were making there, Mr. Thompson, is 7 one amount is in rates and the other amount gets 8 recorded into a deferral and is disposed of on a 9 one-time basis. 10 MR. THOMPSON: I understand that. But the 11 risk, the person that takes the hit, if somebody 12 unbundles, isn't Union Gas, it's the ratepayers. The 13 75 per cent of the amount over the base is theirs. So 14 the notion that you are going to suffer pales in 15 comparison by the amount that we suffer. 16 MR. BIRMINGHAM: I don't understand that 17 comment, Mr. Thompson. There's $4 million which -- 18 MR. THOMPSON: Of which you have had one. 19 MR. PENNY: Let him finish, would you, 20 Mr. Thompson. 21 MR. BIRMINGHAM: If that is sustainable, would 22 not be recorded in a deferral account. So there 23 wouldn't be any impact on customers' rates to the extent 24 that that now wasn't there, and the S&T transactional 25 deferral account was maintained, ratepayers would not 26 receive that credit. I agree with that. 27 My comment to Mr. Vegh yesterday was that the 28 $5.5 million which is currently in rates, Union is Les Services StenoTran Services Inc. 613-521-0703 619 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 committing to during the term of the PBR, regardless of 2 whether we can generate that revenue or not. 3 MR. THOMPSON: I guess what I'm trying to -- 4 Big deal! When the forecast is $9.5 million, 5 we don't know if anybody is going to unbundle or not, in 6 which case nobody suffers anything. But as we move down 7 from $9.5 million to $5.5 million, the person that is at 8 risk, primarily, are the ratepayers; 75 cents on every 9 dollar lost. 10 The point I'm trying to make is your statement 11 that you are going to suffer here is a bit of an 12 over-statement when you look at it in the context of the 13 activity in that account currently. 14 MR. BIRMINGHAM: And I disagree with that, 15 Mr. Thompson. Union has designed its price cap 16 parameters, which includes a revenue stream, as an 17 integrated proposal. If that is going to be removed, 18 then we haven't designed our other parameters to deal 19 with that, so I would -- it's position that there is, in 20 fact, additional risk on the price cap proposal if the 21 S&T deferral account is going to be maintained. 22 MR. THOMPSON: This is back to where we 23 started. 24 You say you designed your price cap parameters 25 on the theory you are going to get this money. When I 26 asked Ms Elliott, "Well, where's the evidence as to how 27 they would change if you don't get this money?", "There 28 isn't any". Les Services StenoTran Services Inc. 613-521-0703 620 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 So you haven't designed your price cap 2 parameters on the basis you would get this money. 3 That's what the evidence tell us. 4 Anyway, I'm arguing. 5 Let's move to earnings sharing. You discussed 6 this yesterday -- I have forgotten with whom; it might 7 have been Mr. Janigan -- and I wasn't clear on -- you 8 seemed to acknowledge that earnings sharing is a risk 9 mitigation measure, but I wasn't clear whether Union 10 currently accepts an earnings sharing mechanism of some 11 sort or still maintains the position that there should 12 be no earnings sharing. 13 MR. BIRMINGHAM: I thought I was very clear 14 with Mr. Janigan that we do not support any form of 15 earnings sharing. 16 The discussion that I had with Mr. Janigan was 17 that earnings sharing, in the context of certain plans, 18 can be put in place as a protection measure when there's 19 an assessment made that the price cap parameters can 20 generate some range or some individual outcomes which 21 are unfavourable, from the regulatory standpoint. 22 It's Union's view that because our parameters 23 are properly specified, which includes the use of the 24 Board's approved rates for 4/99, a well-accepted 25 inflation factor, a widely-accepted productivity 26 differential analytical framework known as the "total 27 factor productivity", we have given the upfront 28 commitment to productivity in our pricing formula, we Les Services StenoTran Services Inc. 613-521-0703 621 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 have reduced regulatory costs and we have taken on 2 additional risks, that there is no necessity for any 3 form of earnings sharing. 4 MR. THOMPSON: All right. Well, let me 5 just -- 6 There's evidence, from a number of sources, as 7 to the need for earnings sharing -- and I take your 8 point that it is a risk mitigation measure and the 9 parameters of the sharing will depend on the tightness 10 or looseness, if you will, of the PBR plan parameters. 11 One concept which I wanted to put on the record and get 12 your reaction to it is a sharing approach which I, 13 personally, believe is fair to the company and the 14 ratepayers, and this proposal assumes that we adjust for 15 actuals and that we keep the revenue deferral accounts 16 for transactional services and market storage premium. 17 The sharing that I suggest that is fair is 18 this, that if your actual earnings in any year exceeds 19 Board-approved, then that level would be adjusted for 20 colder than normal weather and if the actual -- if the 21 weather normalized is still above Board-approved, then 22 there would be sharing; if your actual is below 23 Board-approved, there would be no sharing. 24 This would allow you to keep the 25 weather-related component of earnings for the 26 shareholder but share in the non-weather-related 27 component of earnings, provided your actuals have 28 exceeded the Board-approved. Les Services StenoTran Services Inc. 613-521-0703 622 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Now, I know this doesn't come as any surprise 2 to you, but do you have any comments on that proposal? 3 MR. PENNY: Before we get Mr. Birmingham's 4 reaction, which I'm happy to have, can Mr. Thompson 5 advise us whether this proposal he has is based on any 6 evidence or whether this is just his personal view? 7 MR. THOMPSON: This is a -- well, it's not 8 based on evidence. The evidence we have from the IGUA 9 policy panel is there should be sharing, Mr. Johnson has 10 testified as to an asymmetric type of band, so this is a 11 view that I believe is subscribed to by IGUA, but I will 12 have to confirm that. So it's a personal view, at this 13 stage. 14 MR. PENNY: For what it's worth. And we are 15 happy to have Mr. Birmingham -- 16 MR. THOMPSON: It's obviously worth a great 17 deal. 18 --- Laughter 19 MR. THOMPSON: Give it the merit it deserves, 20 Mr. Birmingham. 21 MR. BIRMINGHAM: I'm not sure I can do that in 22 a public forum, Mr. Thompson. 23 --- Laughter 24 MR. BIRMINGHAM: But, in order to respond, I 25 think I just want to restate one of the things that I 26 mentioned to Mr. Janigan yesterday, and that is the 27 question isn't whether, "Should there be earnings 28 sharing or not", the question that has to be answered Les Services StenoTran Services Inc. 613-521-0703 623 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 is, "Are the price cap parameters appropriately set?" 2 That includes "Is the inflation factor right? Is the 3 productivity factor properly determined? Is there a 4 stretch factor that the Board views as being 5 appropriate? Is the base right? Are the passthrough 6 adjustments and non-routine adjustments properly 7 defined?" 8 And if, after that assessment, they come to 9 the conclusion that there is some range of unacceptable 10 outcomes that would come out of this price cap proposal, 11 then any sort of sharing should be set at those 12 parameters. It's only a protection measure against some 13 range of unacceptable outcomes. The incentive that is 14 under price cap, as we have said before, is determined, 15 really, by three things: it's determined by the pricing 16 formula itself, which includes the stretch factor; it 17 includes the term of the agreement, and that is based on 18 the company's ability to then train their employees and 19 invest in productivity gains and recover the costs of 20 those investments; and the third thing is what the 21 criteria is to reset the price cap parameters, and, in 22 Union's view -- I don't think the Board would want it 23 blunt -- the incentive that is underneath that pricing 24 formula. But if they came to the assessment that there 25 is some range of outcomes that were unacceptable, from 26 their standpoint, based on the evidence in the overall 27 price cap parameters, then it's only in that 28 circumstance that some form of earnings sharing proposal Les Services StenoTran Services Inc. 613-521-0703 624 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 should be considered. 2 MR. THOMPSON: Well, my question was: Assume 3 that the Board finds that there is a need for earnings 4 sharing -- so make that assumption; I take your point 5 that it depends on a finding; assume that they make that 6 finding -- what do you think of my suggestion and, in 7 addition, assuming the Board makes that finding, does 8 Union have an earnings sharing proposal that it favours, 9 in the event that finding is made? 10 MR. BIRMINGHAM: Union does not have any sort 11 of earnings sharing proposal. The Board would have to 12 establish what range of outcomes would unacceptable, 13 from their standpoint. The only two suggestions I would 14 make is that, to the extent that they define those 15 outcomes, there would be a wide band to preserve the 16 productivity incentive that exists underneath the price 17 cap type formula and, presumably, it's only outside that 18 band that the unacceptable outcomes come into play, and, 19 furthermore, that any sort of sharing be symmetrical, 20 that is, if you are going to evaluate all the price cap 21 parameters and come to some range of unacceptable 22 outcomes, presumably those outcomes happen both on a 23 positive and negative side and so that there should be 24 some sort of symmetry, from a public interest 25 standpoint. 26 MR. THOMPSON: Well, the proposal I advocated 27 really would allow you to keep any productivity 28 improvements you were able to achieve in a warmer than Les Services StenoTran Services Inc. 613-521-0703 625 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 normal situation which took you below the 2 Board-approved. 3 Is that a wide enough band? 4 MR. BIRMINGHAM: No. 5 MR. THOMPSON: And it would give you, in the 6 event you were over the Board-approved, it would give 7 you the entire benefit of the colder than normal weather 8 component. 9 Is that a wide enough band? 10 MR. BIRMINGHAM: No. 11 MR. THOMPSON: But you have no view to offer 12 as to the width of the band. You are just saying to the 13 Board: Provide a band. 14 MR. BIRMINGHAM: Our view is that based on the 15 way that we have specified the price cap parameters, any 16 sort of earnings sharing proposal is not required. 17 MR. THOMPSON: The last topic is term of the 18 PBR r‚gime. 19 Could you turn up, please, Exhibit C21.154. 20 In this question this is talking about the 21 effective data that PBR plans. In sub (b) we ask: 22 "Would Union object to an effective date 23 for the PBR plan of January 1, 2001 with 24 the E.B.R.O. 499 rates to remain in force 25 throughout the year?" (As read) 26 And your answer was: 27 "Union expects that the year 2000 will be 28 a transition period, and the outcome of Les Services StenoTran Services Inc. 613-521-0703 626 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 this proceeding may be a freeze on rates 2 in 2000 with the necessary changes 3 implemented on January 1, 2001." 4 (As read) 5 I just want to understand the implications of 6 that expectation. 7 Do I understand that the expectation that you 8 have expressed there is that 499 rates remain in force 9 throughout 2000? Is that the expectation? 10 MR. BIRMINGHAM: The explanation and the 11 response in Part B of Exhibit C21.154, Mr. Thompson, 12 really ties to our implementation proposal as it is 13 found at Exhibit B, Tab 2, page 87. 14 That is where we are suggesting that the 15 financial effects of applying the price cap proposal to 16 the year 2000 can be implemented in a way that doesn't 17 necessarily have to affect the rates that are in place 18 right now. You will see that in the first couple of 19 bullet points on page 87. 20 MR. THOMPSON: I just want to understand how 21 it works. 22 Let's assume that the Board proceeds from 23 E.B.R.O. 499 revenue requirement, makes adjustments, 24 determines the cap, applies the cap, determines what is 25 to be passed through and what is not, considers the 26 non-routine -- and here I am talking about the 27 system-wide payment for increased delivery point 28 flexibility. And the bottom line is that the 499 Les Services StenoTran Services Inc. 613-521-0703 627 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 revenue requirement is excessive by $10 million. 2 Under this implementation proposal, do we 3 carry forward the $10 million as a credit to the 2001 4 base? 5 How does it work? 6 MS ELLIOTT: I think in the situation that you 7 have described, where a customer's rates would be 8 decreasing through a retroactive adjustment, in that 9 circumstance the change would probably be implemented to 10 refund that money to the customers. 11 Generally we find with customers the 12 difficulties arise and the problems come from 13 retroactive increases. So a reduction to customers' 14 rates retroactively, combined with deferral accounts 15 dispositions, which would refund customers' money, would 16 not necessarily involve or would not cause a problem 17 implementing those types of changes during the year. 18 The only condition I would put on that is, 19 depending on what the process or what the rate change 20 would be on January 1, 2001, we would want to make sure 21 that the message that is being communicated to the 22 customers is consistent. 23 Refunding money to customers at a point in 24 time and then subsequently increasing their rates may be 25 a problem. I would like to make sure that whatever 26 happens in implementing this rate change is managed to 27 avoid confusing the customers. 28 MR. THOMPSON: Could we do it the other way, Les Services StenoTran Services Inc. 613-521-0703 628 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 as a credit to the base going into 2001? 2 MS ELLIOTT: Yes. 3 MR. THOMPSON: The way you have described 4 would give you the 1.9 per cent increment on the refund 5 amount, 2001 forward; whereas giving it a credit would 6 not have that result. 7 Making the excess in 2000 a credit to the 2001 8 base would not give you the 1.9 per cent on the amount 9 of the excess. 10 MS ELLIOTT: For purposes of calculating the 11 increase for 2001, we would assume that the 2000 rate 12 reduction took place. 13 So if your question is would I escalate the 14 amount, excluding the credit, the answer is no. The 15 credit would be removed from the base before the factor 16 was applied to escalate the prices. 17 MR. THOMPSON: Let's assume it goes the other 18 way; that the Board goes through what you want them to 19 do for 2000 and the bottom line is a debit amount of 20 $10 million. 21 MS ELLIOTT: In that case, I would suggest 22 that we need to look at the balances in the deferral 23 account and the deferral account dispositions to line up 24 the increases with the credits from the deferral 25 accounts. To the extent that we can match those off 26 without impacting the customers, that would be the first 27 suggestion. 28 If there is still a charge to customers, then Les Services StenoTran Services Inc. 613-521-0703 629 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 I would deal with it the same way we just talked about 2 dealing with the credit, and that would be to either 3 apply it with the 2001 increase or, depending on the 4 size of it, recover it over a period of time to smooth 5 out the impact on customers. 6 MR. THOMPSON: Just so I understand that, if 7 the increase is $10 million, what you are saying is you 8 would take whatever is in the transactional services 9 deferral account and the market premium, and the overs 10 and unders from the others, and apply that to the 11 $10 million and carry forward any positive difference? 12 MS ELLIOTT: Yes, although I think I would 13 even suggest that we do it at a rate class level. 14 MR. THOMPSON: Yes, I assumed that. The big 15 picture there is you would try to mitigate the impact of 16 the $10 million going forward by using up deferral 17 account ratepayer credits to offset it. 18 MS ELLIOTT: Yes. What I suggest is we want 19 to avoid a situation where we are communicating to the 20 customers a price increase and refunding them money at 21 the same time. That tends to be confusing. 22 MR. THOMPSON: Last question. You are 23 suggesting a five-year term from January 1, 2000. You 24 recognize 2000 appears to be a transition year. 25 Could you live with a three-year term from 26 January 1, 2001? 27 MR. BIRMINGHAM: I think I discussed why we 28 needed a five-year term with Mr. Janigan yesterday, Les Services StenoTran Services Inc. 613-521-0703 630 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Mr. Thompson, and that is around our ability to prepare 2 our businesses processes and our employees to operate 3 within the framework, to make the investments to be able 4 to meet and hopefully exceed the stretch factor that is 5 included in the productivity portion of the pricing 6 formula. 7 You really need a longer period to evaluate 8 how PBR is working. To the extent that there is a 9 shorter term, it is Union's view that you need to reduce 10 the stretch factor to accommodate that shorter term. 11 You are not then in a position of making investments 12 that give you longer term productivity gains if there is 13 only a three-year term associated with this. 14 Part of that ties to the price cap parameters 15 as they are set for the second term. If there is some 16 assurance that the price cap parameters are going to be 17 reset on the basis that Union has proposed, then that 18 helps mitigate some of the concern about investing to 19 achieve productivity gains by not being able to even 20 recover the costs of those investments. 21 MR. THOMPSON: Your term is January 1, 2000 22 to 2004. 23 MR. BIRMINGHAM: That's right. 24 MR. THOMPSON: You accept the first year as a 25 transition year. 26 MR. BIRMINGHAM: We accept that for 27 implementation purposes that we are going to need to do 28 something different, because we are not in a position of Les Services StenoTran Services Inc. 613-521-0703 631 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 implementing rates at the beginning of the year. 2 MR. THOMPSON: In terms of the difference 3 between a three-year from January 1, 2001 and your 4 proposal, we are talking about a one-year difference. 5 I asked you could you live with it. I don't 6 know if I got an answer to that question. You seemed to 7 be saying no, you can't live with it. 8 MR. BIRMINGHAM: I can't live with it in the 9 absence of other changes to the price cap parameters. 10 MR. THOMPSON: The change you are suggesting 11 is reducing the stretch factor. 12 My question is: If we shorten the term by one 13 year from January 1, 2001, what is the stretch factor 14 reduction and how do you get there? 15 MR. BIRMINGHAM: There is an impact, 16 Mr. Thompson. We have not turned our minds to what that 17 might be. 18 MR. THOMPSON: Are you just going to calculate 19 1.9 per cent on what you might have got in the fifth 20 year and figure out what that is in dollars, and figure 21 out what that does to the stretch factor and say that is 22 the adjustment? 23 Is that the exercise? 24 MR. BIRMINGHAM: That could be one way to go 25 at it. 26 MR. THOMPSON: What are the other ways? 27 MR. BIRMINGHAM: I don't know. When we 28 considered the stretch factor, we considered a number of Les Services StenoTran Services Inc. 613-521-0703 632 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 things that went into the proposal, including the term. 2 I have not specifically said if the term is something 3 different, what does that do to the stretch factor. 4 There is a relationship, but we haven't 5 quantified that relationship. 6 MR. THOMPSON: Thank you very much, panel. 7 Thank you, Mr. Dominy, Dr. Jackson, for your 8 patience. 9 THE PRESIDING MEMBER: Thank you, 10 Mr. Thompson. 11 I think we should have a break. I suggest 12 that we take an hour and come back at five after 2:00. 13 Otherwise, we are going to run a long time. 14 Who is the next one for cross-examination? 15 It is Mr. Brett. 16 Mr. Brett, at five past 2:00 will you be ready 17 to go? 18 MR. BRETT: That is fine, thanks. 19 THE PRESIDING MEMBER: Thank you. 20 --- Upon recessing at 1303 21 --- Upon resuming at 1407 22 THE PRESIDING MEMBER: Mr. Brett. 23 MR. BRETT: Thank you, Mr. Chairman. 24 MR. PENNY: Mr. Chairman, before we begin -- 25 MR. BRETT: I'm sorry, Mr. Penny. 26 MR. PENNY: -- if I could just deal with some 27 of the procedural issues from this morning. 28 I should have said earlier this morning, for Les Services StenoTran Services Inc. 613-521-0703 633 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the record, Mr. Chairman, that we filed today the answer 2 to G3.1. That I think that was made available to 3 Members of the Board and to the party. 4 With respect to the briefing session on the 5 unbundling agreement, having spoken with those involved 6 we have determined that the optimal time for us to do 7 that would be on Monday afternoon, after lunch. 8 THE PRESIDING MEMBER: Okay. 9 MR. PENNY: That will enable Mr. Baker to get 10 her and prepare an overview for the Board. And 11 obviously, subject to the extent of the Board Members 12 questions and so on, and subject to your guidance 13 obviously, if we perhaps estimated that that might take 14 something in the order of an hour-and-a-half to the 15 mid-afternoon break or if the Board was of the view that 16 it was going to take the whole afternoon, we could let 17 parties know that. 18 THE PRESIDING MEMBER: What we are asking for 19 is someone to walk through the agreement, just give an 20 explanation of it. We are not assuming it's a 21 cross-examination of detail. We just want to have some 22 assistance in understanding it. That was really the 23 purpose of the request. 24 I don't see it going that long, do you? 25 --- Pause 26 THE PRESIDING MEMBER: Dr. Jackson is 27 uncertain how long it will take. 28 It wasn't our intention to make it a -- I Les Services StenoTran Services Inc. 613-521-0703 634 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 mean, I think we would then, having got that 2 explanation, think about it, and then if we had some 3 substantive questions we would raise them. But our 4 problem at the moment is -- I have read it a couple of 5 times -- just to understand what some of the things 6 mean. 7 --- Pause 8 MEMBER JACKSON: Neither of us on the Board 9 mind sitting for the full afternoon, but if it were a 10 more practical way to approach this, Mr. Penny, not 11 knowing exactly how long it's going to take and finding 12 it hard to guess today, we would also be quite happy to 13 just break when it's finished for the afternoon. And 14 maybe people could use that time for preparation and it 15 might speed up the rest of the hearing. 16 So my leaning is slightly that way, although I 17 want you to know I'm fully willing to sit here if you 18 believe it is more productive to do so. 19 MR. PENNY: Well, the only reason I raised it, 20 Dr. Jackson, was for the assistance of the parties in 21 determining how to plan the Monday. 22 MEMBER JACKSON: Yes. 23 MR. PENNY: If we are uncertain, then perhaps 24 it does make sense to just advise that we will sit for 25 the morning only on evidence and the afternoon will be 26 devoted to the briefing, and that way we can take as 27 long as is necessary without keeping people hanging 28 around who might otherwise not want to. Les Services StenoTran Services Inc. 613-521-0703 635 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MEMBER JACKSON: I think that's wise. I think 2 that we can't likely find ourselves unoccupied even if 3 we do have an hour left over at the end of the day. I'm 4 sure we will find something to do with it, meaning I am 5 behind in my reading. 6 MR. PENNY: Then we will continue with the PBR 7 panel for the morning, we will take a lunch break and we 8 will do the Board briefing in the afternoon. 9 MEMBER JACKSON: Yes. And we will sit until 10 one o'clock in the morning at least so that we get a 11 full morning. 12 MR. PENNY: Yes. Thank you. 13 MEMBER JACKSON: Okay. 14 MS SYMES: Mr. Chairman, could I just ask 15 then, the second piece of that is once you have heard 16 the briefing it is then your decision as to whether or 17 not to accept the ADR Agreement with respect to 18 unbundling, and that then affects what is going to 19 happen on Friday the 23rd. 20 It is probably difficult to ask you at this 21 point, but if you were to -- I understand that if you 22 were to accept the ADR Agreement then the unbundling 23 evidence on the outstanding issues would be heard on 24 Friday, otherwise a different panel will be slotted in. 25 Given that there are different players as to 26 the two alternatives on Friday, would you have any 27 estimate now as to when you might be making the decision 28 on whether to accept or reject the ADR Agreement on Les Services StenoTran Services Inc. 613-521-0703 636 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 unbundling? 2 --- Pause 3 THE PRESIDING MEMBER: This is a difficult 4 one, because basically, both Dr. Jackson and I want to 5 be able to make that decision quickly. Clearly, from 6 what we have heard, if we can make it quickly this week, 7 then -- but I can't make it to you today. It will be 8 two o'clock on Wednesday or something like that that we 9 make that decision. But certainly it is our intention 10 to try to make a decision as soon as possible. 11 MEMBER JACKSON: I think, on a best-efforts 12 basis, we discussed that we would try to do it for 13 Wednesday. 14 THE PRESIDING MEMBER: Best efforts. 15 MEMBER JACKSON: Best efforts. 16 --- Pause 17 THE PRESIDING MEMBER: I suppose I should just 18 ask one question, and it is to do with the ADR 19 Agreement. It is not part of the briefing, but it is 20 just to be absolutely certain I understand. 21 My understanding of ADR process is that all 22 parties are invited, all parties have had their 23 opportunity and have received an ADR Agreement. I know 24 there are a lot of unsettled issues in here, but on the 25 issues that are in the ADR Agreement, the settlement 26 does cover all parties in this hearing. There no one 27 who is disadvantaged by that. 28 MR. PENNY: That's correct. Les Services StenoTran Services Inc. 613-521-0703 637 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 THE PRESIDING MEMBER: Okay. I just wanted to 2 confirm that. 3 MR. PENNY: Absolutely. It's widely 4 advertised. Everyone who is an intervenor of record was 5 advised and had the opportunity to attend. 6 --- Pause 7 THE PRESIDING MEMBER: Mr. Brett. 8 MR. BRETT: Thank you, Mr. Chairman, 9 Dr. Jackson. 10 CROSS-EXAMINATION 11 MR. BRETT: Good afternoon panel. 12 MR. BIRMINGHAM: Good afternoon. 13 MR. BRETT: I'm going to just ask you some 14 questions to begin with on the "X" factor, the 15 productivity factor, and then a few questions only on 16 each of earnings sharing, the ROE adjustment, gas costs, 17 "Z" factors, and that should be it. 18 I just wanted to start by asking you to 19 confirm that the "X" factor that you have arrived at was 20 originally minus 4 per cent per year. It is now, I 21 gather, minus -- I'm sorry, not -- minus .4 per cent per 22 year. It is now minus .3 per cent per year, and that is 23 for each year of the five-year period. Is that right? 24 MS ELLIOTT: That's correct. 25 MR. BRETT: So that you were asked in an 26 interrogatory, C19.28 -- you may want to turn it up. It 27 is a short interrogatory. "C" as in "chapters", 19.28. 28 You were asked -- do you have it there now? Les Services StenoTran Services Inc. 613-521-0703 638 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Yes, we do. 2 MR. BRETT: You were asked in that 3 interrogatory to see if you could find another 4 jurisdiction anywhere in the world that had a PBR 5 plan -- had or has a PBR plan with a negative "X" factor 6 associated with it. 7 Just by way of background to that question, 8 you had assembled as part of your work for your 9 consultative process, you had assembled a group of about 10 26 plans in two binders which you were kind enough to 11 provide me a year or so ago of some of the major PBR 12 plans in North America. Your expert witness Christensen 13 has, as you know, summarized each of those plans in a 14 convenient summary, which is attached to his evidence at 15 Exhibit B, tab 3. 16 Now, when you were asked this question about 17 whether you could find a jurisdiction, your answer 18 basically was you didn't put forward any company name. 19 You did suggest that British Columbia West Kootenay 20 Power had a zero productivity offset for one year and 21 then you said that the regional electricity companies in 22 England and Wales were under a traditional RPIX price 23 control system for several years, and the answer here 24 says: 25 "Each of the companies has a different 26 `X' factor which ranged between zero to a 27 negative 2.5 for the 1990-1995 period." 28 (As read) Les Services StenoTran Services Inc. 613-521-0703 639 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 But there is no -- that's a general comment. 2 Do you have the names of any of the specific 3 companies or information on specific regional 4 electricity companies in the U.K. that actually have now 5 or had then a negative "X" factor? 6 MS ELLIOTT: No, Mr. Brett, we don't. That 7 might be a question to ask our expert witnesses. 8 MR. BRETT: Yes. I will ask them that when 9 their turns comes, but would you agree with me that of 10 the 26 PBR plans that you gathered together and used, 11 presumably in your deliberations, none of those 26 12 plans, whatever else they had, none of them had a 13 negative "X" factor, or could you take that subject to 14 check if you are not comfortable agreeing with me flat 15 out? 16 MS ELLIOTT: Yes, I will take that. 17 MR. BRETT: And the British Columbia West 18 Kootenay Power docket that you cite there that had a 19 product offset of zero, for O&M and capital cost 20 components in 1999, would you also take, subject to 21 check with me, that in the previous three years of that 22 PBR, West Kootenay Power's PBR, 1996, 1997 and 1998, it 23 had "X" factors in the case of the O&M costs of 4 per 24 cent in the first two years and 3 per cent in the third 25 year, and in the case of the generation and distribution 26 plant part of the company, an "X" factor of 2 per cent 27 in each year of the term? 28 Now, I have taken that off the summary of the Les Services StenoTran Services Inc. 613-521-0703 640 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 West Kootenay plan by your consultant, but for now would 2 you take it subject to check? In other words, I am not 3 disputing there was a zero price, there was a zero 4 productivity factor in the extended year in the final, 5 the current year of that plan, but for the three 6 previous years the "X" factors were positive and they 7 were significantly so. 8 MS ELLIOTT: That evidence is found at 9 Exhibit B, Tab 3 and it is in Appendix B. 10 MR. BRETT: Right. 11 MS ELLIOTT: And on page 4, the summary of the 12 West Kootenay Power plan -- 13 MR. BRETT: Right. 14 MS ELLIOTT: -- and I am reading that as well 15 for the O&M components, they had our productivity factor 16 a 4 in the first two years and 3 in the third year. 17 MR. BRETT: In fact, if I look further into 18 those 26 plans it seemed to my reading of them, and I 19 would ask you to take this subject to check, that in 20 virtually every case the "x" factors were positive. 21 They ranged all the way from .5 to 2.5 per cent per 22 year. 23 Very infrequently, and one case that comes to 24 mind, very infrequently there was an "X" factor of zero, 25 but the only "X" factor of zero that I saw was 26 associated with the Bangor Gas Company which, as I think 27 you will know, is a brand new gas utility which was 28 created in Bangor, Maine as a result of the east coast Les Services StenoTran Services Inc. 613-521-0703 641 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 gas discoveries. It is sort of a greenfield start up. 2 Would you take that subject to check? 3 MS ELLIOTT: Yes, that's all contained in the 4 evidence at Appendix B. 5 MR. BRETT: Right. 6 Now, if I can turn you to Appendix B for a 7 moment to one particular example there, I wanted to have 8 you look at B, if you could, just turn to Appendix B, 9 page B6 and just not too make too much of this at this 10 point, but B6 is the summary of the five year 11 performance based regulation plan for Southern 12 California Gas. 13 It's a revenue-per-customer plan and in that 14 plan, and I have noticed this in some of the others, 15 but, in particular Southern California Gas, as I think 16 everyone knows, is a large southern California gas 17 utility, one of the larger gas utilities in the United 18 States. It has a five-year plan and if you look at the 19 first paragraph there you see that the productivity 20 offset rises successively over each year of the plan. 21 It starts at 2.1 and then goes up each year to 22 2.5 in the fifth year. My question on that is: Have 23 you given any thought to the idea of having a 24 progressively escalating "X" factor as part of the Union 25 price cap plan? I take it the underlying theory of 26 these escalating "X" factors is it takes a while to get 27 cranked up, as it were, to be able to achieve 28 efficiencies in either operation and maintenance Les Services StenoTran Services Inc. 613-521-0703 642 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 efficiencies and capital expenditure -- or efficiencies 2 in financial management. These take time to implement. 3 Did you give any thought to having a price cap 4 that escalates over the five-year term? 5 MS ELLIOTT: The extent that we were, when we 6 were establishing this plan, looking at our objectives 7 and one of them being predictability and stability of 8 pricing, I guess we were looking at a formula that would 9 do that for customers, so that it was -- which we landed 10 on as a fixed price cap. 11 Varying that amount year over year would 12 result in rate changes that varied and were not 13 necessarily predictable -- predictable by the customers 14 without some explanation I guess as to what the formula 15 would be in each year. 16 MR. BRETT: I want for a moment to make sure I 17 understand one or two of the steps that you took to get 18 to the minus .3 productivity factor. I know you have 19 discussed this at some length, so I will try and 20 summarize this aspect of it. 21 Essentially, you did two historical total 22 factor productivity exercises, or let me put it another 23 way, when you calculated the total factor productivity 24 of the company as part of the determination of the price 25 cap, and this is really on pages 31 and following of 26 your main evidence, you first calculated the output 27 productivity and you did it twice. You did it first 28 with respect to -- first using customers as the index of Les Services StenoTran Services Inc. 613-521-0703 643 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 output and in that exercise would you confirm for me, 2 and this was the first exercise you went through, not 3 the updated. The updated would vary from all of these 4 numbers by, I take it, .1. 5 In your original exercise in the evidence you 6 arrived at a TFP growth rate of zero per cent when you 7 used numbers of customers as the measure of output. Is 8 that right? 9 MS ELLIOTT: That's right. 10 MR. BRETT: And then you did the exercise a 11 second time, identical in every respect, except that 12 rather than using customers as the measure of output, 13 you used throughput. 14 When you did the exercise that way you ended 15 up with a total factor productivity for the company over 16 the same period of minus .9 per cent. Right? 17 MS ELLIOTT: That's right. 18 MR. BRETT: And then you took those two 19 numbers, zero and minus .9, and averaged them out using 20 a 60/40 split, that is 60 toward volume and 40 toward 21 customers, to get at your TFP that you used of minus 22 0.5 per cent. Right? 23 MS ELLIOTT: Yes, that's right. 24 MR. BRETT: You then compared the minus 0.5 25 per cent with the historical rate of TFP growth for the 26 Canadian economy, which was plus .3 per cent, to arrive 27 at a TFP productivity differential of minus .8. Right? 28 MS ELLIOTT: Yes. Les Services StenoTran Services Inc. 613-521-0703 644 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: And you applied -- to which you 2 applied an "X" factor of .4 to get a productivity factor 3 of minus .4 per cent. Right? 4 MR. ELLIOTT: That's right. 5 MR. BRETT: Now, have you done any 6 calculation -- let me put it this way. When you did the 7 calculation of TFP based on volume as the measure of 8 output, and you mentioned this several times in the last 9 two days, you attribute your declining productivity over 10 the last ten years in large measure to declining volumes 11 per customer. That's correct? I don't mean exclusively 12 but predominantly. 13 MR. ELLIOTT: Certainly the two studies show 14 that when you measure output on customers, the 15 productivity is zero or in new revised numbers .1 per 16 cent. When you measure output using the distribution 17 volume, you see a negative productivity of minus .8 in 18 the revised numbers. The only difference between those 19 two studies is the difference between measuring 20 customers and measuring volume. 21 MR. BRETT: Right. I think everyone in the 22 room knows that there has been a very -- we are in the 23 middle of a very substantial restructuring of the 24 electricity market in Canada, Ontario and North America. 25 Some of the aspects of that restructuring impact on the 26 gas markets, I think everyone would agree. 27 We see such features as the conversion of 28 Lennox to gas, which is underway. We see the Les Services StenoTran Services Inc. 613-521-0703 645 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 announcement by Sithe Energy in the newspapers of two 2 800 megawatt gas fired plants to be constructed in 3 southern Ontario, not in your franchise I think but next 4 door in Consumers. I'm not sure about it though. 5 We see a lot of interest on the part of a 6 number of parties in distributed generation building gas 7 fired cogeneration facilities at a variety of end user 8 sites such as hospitals, universities, industrial sites. 9 As you well know, a number of your large 10 customers are examining the possibilities of gas fired 11 cogeneration plants, some of which will be quite large 12 if they come to fruition. 13 Finally, we have a number of the non-utility 14 generators that have contracts with the government which 15 are in the process of being renegotiated. I am 16 mentioning some of the factors, not all of them, but if 17 they are renegotiated and the Minister of Energy has 18 said publicly that he will honour these contracts, a 19 number of these non-utility generators have expressed an 20 interest in producing more power than they are now. 21 I take all of those factors and I ask you with 22 that in mind, looking at those trends, is it not quite 23 possible that your declining volume will reverse itself 24 and that you will be looking forward to increases in 25 throughput volume over the next few years. 26 If you were, and I guess I have two questions 27 in here, one, do you agree with me that there is a very 28 good likelihood that you will see increases in volume of Les Services StenoTran Services Inc. 613-521-0703 646 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 gas because of the wide -- because of the likelihood of 2 over this five year period -- perhaps not in year one, 3 perhaps not in year two, but particularly in years 4 three, four, five that you will see an increased demand 5 for your product for electricity production. 6 If that were to happen, then your volume based 7 productivity analysis of minus 9.9 per cent historically 8 could turn out to be pretty conservative, do you not 9 agree? 10 MR. ELLIOTT: I think you may have 11 misunderstood a comment I made on declining volume. In 12 absolute terms, we have seen our volumes increase. Our 13 customers have increased, but to get those increased 14 volumes and to the extent that we can capture some of 15 the increased volumes that you have referred to, we will 16 clearly have to put costs in place to do that. 17 To suggest that our productivity factor will 18 increase significantly will only be the case if that 19 volume can come at no cost, which is highly unlikely. 20 What we have to do over the PBR term is manage the costs 21 to attach those customers so that we can in fact improve 22 our productivity. 23 The decline in volume really goes to the fact 24 that in the general service market, customers are 25 becoming more efficient. Although we can attach a 26 customer at a cost where the productivity is zero, the 27 volumes that that customer consumes are declining on a 28 going forward basis. That's what resulted in our Les Services StenoTran Services Inc. 613-521-0703 647 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 negative productivity. 2 MR. BRETT: Well, I'm sure we will come to a 3 discussion of efficiency and to what extent the low 4 hanging fruit as it were has been taken in that area 5 later. 6 Just to focus in on your point about costs. 7 Don't you agree with me that a lot of this incremental 8 volume that I am alluding to which would be founded on 9 increased power production, unlike the case where you 10 have to put a pipe into a remote village somewhere in 11 the Bruce Peninsula to get that additional volume, here 12 you are talking about sites that you already serve, you 13 already have equipment into, you already have the 14 infrastructure in place. Maybe you have got to expand 15 it a bit, but this is surely a very different cost to 16 revenue ratio type of project than the kinds of projects 17 that you have been alluding to in the last couple of 18 days that have driven your volume per customer 19 numbers -- that have made you relatively inefficient. 20 In other words, you are not serving remote rural areas 21 here. We are talking about plants being built that will 22 consume more gas at sites that you are already serving. 23 While there might be some costs, would you not 24 agree it would be less? 25 MR. BIRMINGHAM: I will have to take that in a 26 couple of pieces, Mr. Brett. 27 The first one is with respect to the growth, 28 as Ms Elliott said, there will be incremental costs to Les Services StenoTran Services Inc. 613-521-0703 648 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 go along with that. Let's just take a couple of those 2 items. 3 With respect to the conversion of Lennox, 4 Lennox required significant incremental facilities from 5 Union to be able to provide the distribution facilities 6 to convert that plant. With respect to the Sithe 7 announcements, you are quite right. Both of the plants 8 that Sithe had announced, at least on a preliminary 9 basis, are in the Enbridge Consumers Gas franchise area. 10 I think more importantly two things have since 11 happened. One is the parent company of Sithe has been 12 looking to sell Sithe and market it and so the future is 13 somewhat uncertain at this point. More than that 14 though, I think based on the information that we have 15 seen it will be very difficult for parties to -- if they 16 put in that type of facility, to the extent that any of 17 the nuclear power plants come back on. 18 To the extent that, for instance, the 19 Pickering plant comes back into play, the marginal cost 20 of electricity coming out of that facility will make it 21 very difficult for a start-up operation to be able to 22 compete with it. 23 With respect to distributed generation and 24 some of the large customers who may want to put in 25 electricity, we hope that's the case. I think part of 26 that will be driven by the economics of that electricity 27 and in particular how the competition transition charge 28 affects the economics of those projects. Les Services StenoTran Services Inc. 613-521-0703 649 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Finally with respect to the independent power 2 producers or I think what you call the non-utility 3 generators, we spoke to that in our response to 4 Exhibit C3.65. 5 There may be some volume potential there for 6 us. We hope that's the case, but there will be a 7 requirement for additional cost to go along with that. 8 That doesn't necessarily impact the use for the existing 9 customers, which is the subject of our productivity 10 study. 11 Just one other quick comment. You mentioned 12 that this is a measure of inefficiency. As we have 13 stated before, the productivity study does not measure 14 whether the company has been inefficient or not. At a 15 high level, the simple example I would use is that if 16 Union managed all of its costs basically to be flat and 17 had declining use per customer at 1 per cent a year, we 18 would have a negative productivity factor of minus 1.0 19 per cent even though we have managed all our costs 20 basically to an even number. 21 To the extent that we want to look at 22 efficiency, I think that has to be a different question. 23 As an example, over the ten year study period, Union's 24 O&M per customer increased by roughly 0.7 per cent 25 annually when inflation was 2.7 per cent annually over 26 that same period. 27 MR. BRETT: You are not taking issue, though, 28 with the proposition that if your output increases -- if Les Services StenoTran Services Inc. 613-521-0703 650 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 you have fairly significant upward trend in total output 2 of gas of throughput over the next several years, that 3 that will impact -- 4 Are you saying that's irrelevant to your 5 productivity study? 6 MR. BIRMINGHAM: No, sir. I'm saying that the 7 volume that we could attach in the future will have 8 costs that are associated with it. 9 MR. BRETT: Well, that's correct. But it 10 doesn't necessarily -- the costs don't necessarily have 11 to be zero, do they, to leave you in the same position 12 you are in today? Isn't the issue the size of the costs 13 associated with the increased throughput relevant to the 14 size of the costs that you have had historically to get 15 increments of throughput? 16 In other words, it's relative levels of costs? 17 MS ELLIOTT: The productivity study measures 18 the growth rate. So if the output grows at a faster 19 rate than the input grows, there will be productivity 20 that is positive if the output growth rate is larger 21 than the input growth rate. 22 MR. BRETT: That's what I'm trying to say, I 23 think, yes. 24 MS ELLIOTT: That's positive productivity, 25 yes. 26 MR. BRETT: Okay. Well, we're on the same 27 wavelength there. I was afraid I was on a totally 28 different planet from you from a moment. Les Services StenoTran Services Inc. 613-521-0703 651 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BIRMINGHAM: No, sir. We are with you. 2 MR. BRETT: Okay. That worries me. 3 --- Laughter 4 MR. BRETT: No, seriously, I appreciate that 5 clarification. 6 I want to just move from -- 7 Just one or two more questions on this issue 8 of the mechanics, for want of a better term, of the way 9 you did your calculation. 10 One thing you did not do, as I understand it 11 -- you did not do an input price analysis yourselves for 12 the oil and gas -- for the gas distribution industry in 13 Canada. You did not do a pricing analysis of the price 14 index -- 15 You didn't develop an input price index, I 16 guess, in the sense that the Board staff developed an 17 input price index in their case with respect to the 18 municipal distribution companies that was specific to 19 that group of companies. You didn't develop a similar 20 input price index for the Canadian gas distribution 21 industry. 22 As I understand it, what you did is you 23 calculated a physical input index for Union Gas, and 24 then you deflated it by the GDPPI to get a price index 25 for inputs. Is that fair? If it isn't, where have I 26 gone off -- 27 MS ELLIOTT: That's fair. We did not 28 calculate an industry average. We calculated an average Les Services StenoTran Services Inc. 613-521-0703 652 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 for Union Gas. We did, however, indicate that in our 2 second generation, it would be our proposal to calculate 3 an industry average so that going forward, we can use 4 the industry benchmark rather than our own experience. 5 MR. BRETT: I understand that. But I guess 6 the question I am left with is, given the amount of time 7 that you have been working on this, why didn't you see 8 fit to calculate an industry input price index? Did you 9 try at all or did you make the assumption that it wasn't 10 worth the candle? I mean, this is a five-year plan we 11 are talking about. 12 MS ELLIOTT: Certainly at the time we started 13 this project, we didn't think we were going to have two 14 years to put it together. So it was an effort to come 15 up with an average or a productivity factor that 16 measured our performance and looking at the Canadian 17 economy. 18 MR. BRETT: Yes, you looked at the individual 19 case of Union and at the economy, the Canadian economy 20 as a whole. You jumped over the intermediate steps, 21 which is the performance of the -- the input performance 22 of the industry, the gas distribution industry as such, 23 right? 24 MS ELLIOTT: Yes, as a starting point. 25 MR. BRETT: Okay. 26 --- Pause 27 MR. BRETT: So that, for example, had there 28 been -- Les Services StenoTran Services Inc. 613-521-0703 653 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 If it had been the case that the Union inputs 2 varied significantly from that of the average for the 3 Canadian distribution industry, the output index, price 4 index, then your analysis would be, by most people's 5 standards, your analysis would be flawed to that extent. 6 Is that fair? I mean, nothing is perfect. I'm not 7 suggesting -- 8 But it would be very different than what 9 people would consider to be the classical approach to 10 this. 11 MS ELLIOTT: There is a response to an 12 interrogatory from Board staff at Exhibit C1.113. It 13 does tell you what is the Statistics Canada estimate of 14 the rate of gas industry, total factor productivity has 15 been from 1986 to 1999. It's been measured -- 16 Sorry. 17 MR. BRETT: What was that again? C -- 18 MS ELLIOTT: C1.113. 19 MR. BRETT: All right. 20 MS ELLIOTT: And that's 1986 to 1995. That's 21 a negative 2.3 per cent per year. To the extent that we 22 used our own, our result measured in volume, which is 23 the output measure that this factor has been based on, 24 our measure based on volume is a negative .8 per cent. 25 MR. BRETT: Okay. 26 I would like to talk to you briefly about 27 earnings sharings. Your position is that there should 28 not be earnings sharings, as I understand it. And, Les Services StenoTran Services Inc. 613-521-0703 654 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 again, you were asked about that in the interrogatories. 2 You were asked to comment about any other plans that did 3 not have earnings sharing. 4 This was in C1.78, Board staff 78. 5 Unlike the case of the negative productivity 6 factor, you were able to find a few plans that did not 7 have earnings sharing schemes in them. 8 We have done some analysis of the 26 plans 9 that you collected. Our conclusion is, from reviewing 10 the summaries that your consultant put together, that 20 11 of those had earnings sharing mechanisms of one kind or 12 another. Would you take that, subject to check? 13 MR. BIRMINGHAM: Sorry, can you repeat that 14 number, Mr. Brett? 15 MR. BRETT: Yes, 20 of the 26 have some form 16 of earnings sharings mechanism. 17 MR. PENNY: It does seem to me, Mr. Chairman, 18 this is really a matter for argument rather than 19 evidence. The plans are what they are and they can be 20 interpreted in whatever way Mr. Brett wants. I'm not 21 sure that it's a matter for evidence. 22 MR. BRETT: Mr. Chairman, I think we're really 23 talking about matters of fact here. I mean, we are 24 not -- 25 What I want to establish by these comparisons 26 in respect of both earnings and the productivity number, 27 is that these are -- that if you take the elements of 28 this Union plan together, the absence of earnings Les Services StenoTran Services Inc. 613-521-0703 655 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 sharing, the negative productivity factor, the way in 2 which they're dealing with the re-basing and the like, 3 that it's a very unusual plan. 4 I mean, what I will argue, ultimately, is that 5 it's a very harsh plan and it is very untypical of most 6 plans around the world. 7 What I am just trying to really do here is get 8 some context for that. I think it's a matter of fact, 9 looking at these. If the witnesses want to go through 10 them and come back and indicate whether they -- 11 If they want to defer their answer, that's 12 fine. I mean, I assume that they are reasonably 13 familiar with these things. It's their consultant that 14 did them. 15 But I just want them to agree with me that the 16 bulk of these plans have earnings sharing features. 17 That earnings sharing is the common -- is the rule 18 rather than the exception, I suppose, as a matter of 19 fact for these plans. 20 THE PRESIDING MEMBER: Basically, as I 21 understand it, what you are trying to get on the record, 22 is a statement from the witnesses that the plans that 23 were reviewed in preparing that plan, X of them didn't 24 have -- X neither Y or didn't have or did have earnings 25 sharing -- X out of Y did or did not have a -- 26 MR. BRETT: That's all I'm interested in. 27 THE PRESIDING MEMBER: So it's just simple 28 factual statements like that is what you are after -- Les Services StenoTran Services Inc. 613-521-0703 656 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: That's all I'm asking. 2 THE PRESIDING MEMBER: -- as opposed to 3 defences as to why or not. 4 MR. BRETT: Exactly. I'm not trying to get 5 into an argument about whether, you know, what the 6 consequences -- 7 THE PRESIDING MEMBER: So the question could 8 be how many of these plans had this. 9 MR. BRETT: Right. 10 THE PRESIDING MEMBER: Okay. I understand. I 11 think that would be reasonable. And if the witnesses 12 can answer that in the context -- if you were to 13 specify what you need, they might find it easier to do 14 it by way of an undertaking. 15 MR. BRETT: That would be acceptable, 16 Mr. Chairman. 17 --- Pause 18 THE PRESIDING MEMBER: The answer should be 19 relatively quick. Dr. Jackson is saying to me that it 20 is that sort of a question, so maybe if that is the sort 21 of question we could proceed that way. 22 MR. BRETT: All right. The question I have, 23 then, is that there are -- do you concur with me that 20 24 of the 26 plans have earnings sharing mechanisms, and if 25 not could you advise me why you disagree with that 26 either now or later. 27 MR. BIRMINGHAM: I can't verify that number 28 right now, Mr. Brett, but I would be happy to do that Les Services StenoTran Services Inc. 613-521-0703 657 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 through an undertaking. 2 MR. BRETT: Thank you. 3 MR. WIGHTMAN: G4.3. 4 UNDERTAKING NO. G4.3: Mr. Birmingham 5 undertakes to confirm whether 20 of the 6 26 plans have earnings sharing mechanisms 7 MR. BRETT: All right. With respect to the 8 issue of ROE adjustment, you have had substantial 9 discussion about this, but I want to just go back and 10 touch on a historical fact that you mentioned this 11 morning. 12 You had indicated I think that the Board had 13 introduced this ROE adjustment formula several years 14 ago. Is that right? 15 MR. BIRMINGHAM: That's right. 16 MR. BRETT: This formula was introduced in a 17 cost-of-service context. Correct? 18 MR. BIRMINGHAM: That's right. 19 MR. BRETT: The purpose of the formula, as I 20 understood it, was to really try and simplify the 21 process of arriving at the price of equity or the cost 22 of equity capital to avoid the very lengthy debates that 23 people had in earlier years about what was the 24 appropriate test to use and the conflicting expert 25 evidence and all of the regulatory paraphernalia that 26 went along with determining the cost of equity. Is that 27 your understanding of why the Board developed this 28 formulaic approach, to try to reduce this to a -- try Les Services StenoTran Services Inc. 613-521-0703 658 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 and avoid these lengthy debates and to put this on a 2 basis that was simpler and more respectful of regulatory 3 time and effort? 4 MR. BIRMINGHAM: I think that is a fair 5 characterization, Mr. Brett. 6 MR. BRETT: Would you also agree with me that 7 financial management, astute financial management, is a 8 very important part of the overall management of the 9 utility and that the quality of that management, that 10 financial management can influence the price the utility 11 pays for debt and equity capital through such things as 12 timing, appropriate timing of approach in the capital 13 markets, form of security selected, amounts, strategies 14 in going to market, choosing the most skilful possible 15 professional financial advisers? Is that fair? 16 MS ELLIOTT: Yes, that's fair. 17 MR. BRETT: And that everything else being 18 equal, at a high level a utility with a very strong 19 level of financial management skills should, everything 20 else being equal, be able to raise its capital on more 21 favourable terms than one that does not have such a high 22 skill level. 23 MS ELLIOTT: I would certainly agree that the 24 skill of the financial management is one of the 25 components, but the business that the utility is in and 26 the risks of that business are also the components. The 27 customer base, the risk profile, how the utility 28 operates are all part of -- Les Services StenoTran Services Inc. 613-521-0703 659 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Right. But I note, for example, 2 that in the Board's decision in the electric case, 3 RP-1999-0034, at page 35, I don't know whether you need 4 to turn this up, they were commenting on the usefulness 5 of an input price index for utilities and they made the 6 observation in the decision that the IPI, the industry 7 IPI serves as a benchmark the utilities can aim to out 8 perform through superior procurement and capital 9 financing strategies. 10 The only point in mentioning that is just to 11 underline this consideration that the financing 12 strategies are important, they are an important skill. 13 You do have control over your financing costs to some 14 extent. 15 MR. PENNY: Is there a question, there, 16 Mr. Brett? 17 MR. BRETT: Yes. I asked them to agree with 18 me that -- I would like to just get confirmed by 19 Ms Elliott that the company does, to some degree, have 20 control over its costs of financing and that the level 21 of skill of its financial management is a significant 22 factor in achieving productivity targets. 23 MR. BIRMINGHAM: I would agree, Mr. Brett, 24 that the company, like any company, does have some 25 influence over the cost of the debt that it would need 26 to continue to finance its business. What I would 27 disagree with is that in terms of capital financing 28 strategies, the utility does not have much latitude Les Services StenoTran Services Inc. 613-521-0703 660 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 there in that it is required to maintain the 35 per cent 2 equity component within its capital structure as 3 approved by the Board. 4 MR. BRETT: Fair enough. Maybe I should 5 have -- when I said "strategies" I didn't mean structure 6 so much as overall approach, the sophistication of their 7 overall approach to the capital markets, when they would 8 go, how they would go, what timing they would use and 9 the like. I concur that you have a deemed capital 10 structure that you have to live with and that you can't, 11 for example, over-leverage the company as a practical 12 matter beyond that point. 13 The question I have then really, following on 14 that, is how is that you -- given the importance -- I 15 mean when you read material on the efficiencies in 16 management that performance-based ratemaking is supposed 17 to generate, they talk first of all of course about 18 maintaining service quality, but then they often go on 19 to talk about O&M efficiencies, capital efficiencies and 20 efficiencies in raising financing, financing 21 efficiencies. 22 How is it, then, given that, that your 23 proposal splits that out and basically says that we are 24 going to make the cost of our existing -- of that part 25 of our rate base that is currently financed by equity a 26 passthrough item, and that we are going to continue to 27 apply a formula which made sense in a cost-of-service 28 environment but has no further application whatsoever Les Services StenoTran Services Inc. 613-521-0703 661 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 under PBR? 2 I don't understand. To me there appears to be 3 a disconnect there. Could you comment on that? Why do 4 you differentiate -- for example, you don't apply your 5 cost-of-equity passthrough to the increase in rate base, 6 but you make the amount in respect of -- you make any 7 changes in the cost in respect of the existing rate base 8 of passthrough. I don't understand the distinction. I 9 don't understand where it fits in a PBR scheme. 10 My understanding is the scheme is supposed to 11 incent you to -- appropriate financial management. 12 MR. BIRMINGHAM: And indeed it does, sir. For 13 any new investment Union will manage the costs of debt 14 and equity for new rate base investment levels. 15 With respect to the current approved level and 16 the application of the formula to that, you really have 17 to begin with the starting point which is the current 18 Board-approved rates. Our current rates do not 19 compensate Union for managing the interest rate risk 20 that then gets translated into a return on equity by 21 virtue of the Board-approved formula. In fact, that's 22 why the Board-approved formula exists in the first 23 place. If our rates did compensate us for that risk, we 24 wouldn't need the Board-approved formula. 25 So with respect to the current level of 26 investment, we need some mechanism to handle the changes 27 in the cost of that equity. 28 We had proposed, through the customer Les Services StenoTran Services Inc. 613-521-0703 662 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 consultation process, an up-front adjustment that would 2 effectively adjust our rates so that we would manage the 3 change in equity with respect to the existing investment 4 level. 5 What customers told us is that they would 6 prefer the pass-through adjustment be maintained. 7 The parameters of our price cap plan contain 8 no other mechanism to deal with the cost of equity and 9 changes in that cost of equity for the current rate base 10 investment. 11 MEMBER JACKSON: Could I just clarify my 12 understanding on this? 13 Thank you. 14 So we will get a change in the rate that is 15 applied to equity every year, is that right, under the 16 new methodology, that will reflect changes in inflation, 17 if I understand correctly? 18 MR. BIRMINGHAM: It is changes in the long 19 Canada interest rates, Dr. Jackson. But that's right, 20 every year, depending on what the change is, we would 21 use the -- in our proposal -- the September consensus 22 forecast --currently the November consensus forecast is 23 used. Whether that interest rate goes up or down, a 24 proportion of that change is then captured within the 25 return on equity adjustment. 26 MEMBER JACKSON: There is nothing within your 27 proposal, though, to change the deemed capital 28 structure; that stays the same. And, in fact, if I Les Services StenoTran Services Inc. 613-521-0703 663 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 understand it correctly, you don't intend to account for 2 changes in the dollar capitalization in total either, do 3 you, because you say that new investment will be managed 4 under the PBR process, is that correct? 5 MR. BIRMINGHAM: That's right. 6 MEMBER JACKSON: So you can manage your 7 capital structure over this period, too, under the PBR 8 concept? 9 MR. BIRMINGHAM: The additions to our capital 10 structure that are caused by the increases in the 11 investment that we make, that's right. 12 MEMBER JACKSON: I think I heard a comment 13 that you made about being somehow tied to keeping the 14 equity ratio constant over that period. It wasn't my 15 understanding -- but I don't know whether I have it 16 correctly -- it wasn't my understanding that you were 17 committed to that. I thought that you could go to the 18 debt market when it was appropriate to go to it and 19 hence have your debt ratio go up a little bit and then 20 at another time maybe your equity ratio climbs a little 21 bit. You are not compelled to keep it at the deemed 22 capital structure of the Board, are you? 23 MR. BIRMINGHAM: We are, sir, and that is with 24 respect to the undertakings that were given to the 25 Province of Ontario where we have been maintaining the 26 Board approved equity level as the commitment within 27 those undertakings. 28 MEMBER JACKSON: Thank you. That wasn't part Les Services StenoTran Services Inc. 613-521-0703 664 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 of my current knowledge. Thank you very much. I will 2 double-check that. 3 MR. BRETT: Thank you, Dr. Jackson. 4 So what you are saying is your plan, your 5 position now is that you are committed not to changing 6 that capital structure over the term of the plan? 7 In other words, you will not be seeking any 8 changes in that undertaking or anything of that nature? 9 That is part of this -- part of this plan, I guess -- 10 just as I asked the question on capitalization a couple 11 of days, that you have no plans to change your 12 capitalization ratio? You are saying you have no plans 13 to change the debt-to-equity ratio of the utility? 14 MR. BIRMINGHAM: At this point we have no 15 plans to have the undertakings amended which would give 16 us more latitude to change the ratios of debt and equity 17 that are currently within our capital structure. 18 MR. BRETT: Thirty five per cent 19 debt-to-equity ratio is in the undertakings, is it, as 20 an explicit number? 21 MR. BIRMINGHAM: No, it isn't. What the 22 undertaking refers to, basically, is the Board approved 23 equity level. So it is whatever the Board has approved 24 that is the requirement for us to maintain. 25 MR. BRETT: In this case it would be 499. It 26 would be what is approved in 499, or if the Board chose, 27 I suppose, they could condition their approval, in this 28 case, of the maintenance of the debt-to-equity level as Les Services StenoTran Services Inc. 613-521-0703 665 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 established in the 499 Decision. 2 MR. BIRMINGHAM: Right now it is the equity 3 level from the E.B.R.O. 499 Decision, which is 35 per 4 cent. 5 MR. BRETT: With respect -- using Mr. 6 Thompson's phrase -- well, no, let me use another 7 phrase. Let me use the phrase the "Z" factor. I have 8 one or two simple questions on that. 9 In your evidence -- I don't think you have to 10 turn this up -- but it is at page 36 of 88 of your main 11 volume of evidence, Exhibit B, Tab 2, page 36. You have 12 in there, as one of the "Z" factors, or, rather, one of 13 your proposed non-routine adjustments, a federal and 14 provincial income tax legislation. You mentioned in 15 your evidence in chief -- that's at page 36, item 2, 16 about two thirds of the way down the page -- federal or 17 provincial income tax legislation. 18 You mentioned in your evidence in chief, as I 19 heard you -- and I could have been mistaken -- but I 20 thought I heard you to say that these changes would 21 possibly be -- the phrase you used was "possible" -- 22 possibly these would be changes that would accrue in 23 this context to the benefit of the ratepayer through the 24 PBR system, because, as everyone is aware, there have 25 been recent changes to the Federal/Provincial Income Tax 26 Act 27 which will result in the declining levels of taxation -- 28 corporate income taxation for the company over the next Les Services StenoTran Services Inc. 613-521-0703 666 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 several years. 2 Now, I take it, just to confirm what is in 3 here, what you are saying -- your position is that those 4 decreases in tax would be considered non-routine 5 adjustments to the benefit of the ratepayer; is that 6 still your position? 7 MS ELLIOTT: Under Union's proposal, with a 8 fixed inflation rate, the current reductions in federal 9 and provincial income tax rates would be treated as a 10 non-routine adjustment, yes. 11 MR. BIRMINGHAM: Mr. Brett, just to clarify 12 one part of your question -- that was a comment that I 13 made about the possible use of it -- that was with 14 respect to my summary of non-routine adjustments, in 15 that it is Union's hope that we won't have any 16 non-routine adjustments during the period of the PBR. 17 The only exception that I see to that is, in fact, 18 legislative changes with respect to income tax that you 19 are referring to now, because they both seem to be on 20 the horizon now. 21 MR. BRETT: I understand. Okay. I don't know 22 exactly what those are as proposed, but I know there are 23 proposed reductions in each of the next several years. 24 Is that your understanding as well, Ms Elliott? 25 MS ELLIOTT: Yes, it is. 26 MR. BRETT: Just as a technical matter, how 27 will those get -- those will get reflected by way of the 28 "Z" factor mechanism effectively? Les Services StenoTran Services Inc. 613-521-0703 667 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Yes. What will happen, if the 2 non-routine adjustments are approved, as they have been 3 proposed, there would be a deferral account to capture 4 the costs or the benefits. In the next customer review 5 process, those costs or benefits would be included in 6 the price adjustments. That would be an addition or a 7 reduction in prices for the year, that would then, in 8 subsequent years, form part of the base rate. 9 MR. BRETT: You have not addressed -- well, 10 your proposal, as you have explained, provides for the 11 pass-through of the cost of gas. 12 Now, you are aware, I think -- I don't want 13 to pursue this in detail today, but I just want to flag 14 the issue. You are aware that certain of the plans that 15 are in existence today have some kind of incentive with 16 respect to gas procurement? Are you aware of that? 17 MR. BIRMINGHAM: I think there are some 18 utilities and some regulatory jurisdictions that have a 19 different treatment of the commodity cost than is 20 currently followed in Ontario. 21 MR. BRETT: Right. Okay. I think I will take 22 that up, if it makes sense to you, with the -- if I want 23 to take it further, I will take it up with your 24 consultants, because they would have, presumably, looked 25 at this on a -- they would be knowledgable about which 26 ones they were and how it works. Fair enough, from your 27 point of view? 28 MR. BIRMINGHAM: Sure. Les Services StenoTran Services Inc. 613-521-0703 668 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Finally, we have two utilities in 2 Ontario. Well, we have more than to gas utilities. My 3 apologies to my friends in the second row. 4 We have two large gas utilities. 5 Have you thought at all about any kind of 6 possibilities for benchmarking or comparison of Union's 7 results in this area, relative to Consumers Gas. 8 We understand Consumers is moving toward a PBR 9 plan, a full scale PBR plan as well. 10 Have you thought about the possibilities there 11 for some form of, for want of a better word, competition 12 to give ratepayers -- that is not an element of this at 13 the moment? 14 MS ELLIOTT: I guess specifically a 15 competition between us and Consumers is not something 16 that we have contemplated. What we have, however, 17 indicated is in preparation for the second generation of 18 the PBR plan we would look to an industry average. 19 Whether that is a Canadian industry average or 20 a North American average, I suspect it would have to be 21 more than an average in the province of Ontario. Since 22 there are only a few of us, we need to find an average 23 that we are not half of, to be fair. 24 MR. BRETT: I think I will leave it at that. 25 Thank you very much, panel. Thank you, 26 Mr. Chairman, Dr. Jackson. 27 THE PRESIDING MEMBER: Thank you, Mr. Brett. 28 No for Mr. Klippenstein, Mr. Mondrow. Les Services StenoTran Services Inc. 613-521-0703 669 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Ms Symes...? 2 MS SYMES: Mr. Klippenstein said that I could 3 have his spot. Since he is not here, that is an offer 4 that I don't have to pay for. 5 CROSS-EXAMINATION 6 MS SYMES: Could you get Exhibit C31, and I am 7 going to refer to 1 and 3 as part of the interrogatory. 8 Because it is Friday afternoon and I am the 9 fourth or fifth person asking you questions, I am going 10 to try to promise not to review what has already been 11 asked of you with respect to the PBR input into the 12 formula. 13 Both Mr. Janigan and Mr. Ryder yesterday took 14 you to Union's objectives for the PBR framework which 15 are set out on pages 4 and 5 of your evidence. 16 I believe, Mr. Birmingham, that you said to 17 Mr. Ryder that the goal was to create just and 18 reasonable rates. 19 Obviously the PBR formula or the PBR method of 20 regulation is a proxy for determining rates just as the 21 cost of service was a proxy. 22 You will agree with me on that? 23 MR. BIRMINGHAM: I would say it is the method 24 as opposed to the proxy. What comes out of that are in 25 fact just and reasonable rates. 26 MS SYMES: That what is aimed for are just and 27 reasonable rates. 28 MR. BIRMINGHAM: That is the objective when Les Services StenoTran Services Inc. 613-521-0703 670 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 you begin the process and when the Board orders its 2 decision. They become just and reasonable rates. 3 MS SYMES: Fair enough. And it is a proxy for 4 a market determination of rates. 5 MR. BIRMINGHAM: Certainly I think it is 6 widely accepted that one of the things regulation tries 7 to do is to mimic some of the outcomes from a 8 competitive market. 9 MS SYMES: And one of the alleged benefits of 10 the PBR method of determining rates is to encourage a 11 utility to become more efficient. 12 MR. BIRMINGHAM: One of the objectives of PBR 13 is to encourage a utility to become more productive, and 14 that includes cost efficiency. 15 MS SYMES: One of the ways that that is done 16 is by permitting them to keep some or all of the results 17 of the efficiencies achieved. 18 MR. BIRMINGHAM: Some or all of the results of 19 the additional productivity. 20 MS SYMES: Therefore, just using the words 21 from pages 4 and 5, for a PBR proposal to be fair, 22 simple, comprehensive, predictable, sustainable, and to 23 create just and reasonable rates, the system should not 24 depend upon luck or on chance. 25 MR. BIRMINGHAM: I would agree with that. 26 MS SYMES: You propose for the inflation 27 factor or inflation measurement the GDPPI, and I should 28 say that the Alliance does not dispute that the GDPPI is Les Services StenoTran Services Inc. 613-521-0703 671 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 an appropriate measure of inflation in this case. So we 2 can start there. 3 But what the Alliance objects to is that you 4 are proposing to fix the inflation factor at 1.6 per 5 cent per year over the five-year term. 6 I have that right? That is what you propose 7 to do? 8 MR. BIRMINGHAM: We are proposing to fix a net 9 price cap at 1.9 per cent and in computing that net 10 price cap the GDPPI forecast is 1.6 per cent for the 11 five-year period; that is right. 12 MS SYMES: So therefore in terms of your 13 filing and looking forward, then, out to 2004 you must 14 have looked at what are the possibilities or 15 probabilities of the inflation, the GDPPI, being greater 16 than 1.6 per cent in any one of or more than one of the 17 years of 2000 to 2004. 18 That must have been a concern to you. 19 MS ELLIOTT: At the time we put the proposal 20 together, we were looking at the forecast of inflation 21 over the five-year term, recognizing that that forecast 22 will vary over time. We did commit to fix our price cap 23 formula at the 1.9 per cent. 24 That will put us at risk for changes in the 25 rate of inflation during the PBR term. 26 MS SYMES: But, Ms Elliott, if you have 27 guessed substantially wrong, and that is that the 28 inflation exceeds 1.6 per cent, or substantially exceeds Les Services StenoTran Services Inc. 613-521-0703 672 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 1.6 per cent in one or more of those years, the net 2 impact will be felt by the shareholders. 3 MS ELLIOTT: Absent any offset through 4 productivity or other revenue increases -- with cost 5 management being productivity -- there were really three 6 things that worked together to deliver the earnings to 7 the shareholder: the price cap, the revenue generated 8 from the price cap; incremental revenues through 9 increased use of our system; and cost reductions. 10 To the extent that we cannot offset the impact 11 of an increase in inflation with increased revenue or 12 reduced costs, then there will be an impact to the 13 shareholder. 14 MS SYMES: Holding, then, all of those others 15 constant, if you are wrong about inflation and it is 16 higher than 1.6 per cent, it will come out of the 17 shareholders' earnings. 18 MS ELLIOTT: All other things being equal, 19 yes. 20 MS SYMES: And presumably the shareholders are 21 prepared to take that risk, or Union is prepared to take 22 that risk. 23 MS ELLIOTT: Yes, that is correct. 24 MS SYMES: Let's flip it around. If the 25 actual inflation rate is less than 1.6 per cent in one 26 or more of these years, then the ratepayers are going to 27 overpay for gas, all other things being held constant. 28 MS ELLIOTT: When you say in one or more of Les Services StenoTran Services Inc. 613-521-0703 673 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 these years for the ratepayers to -- if inflation, on 2 average, is less than we have fixed it at 1.6 per cent, 3 the price we are charging will reflect the 1.6 per cent. 4 That will produce a higher rate than if we had 5 varied the rate of inflation during the term and the 6 average rate was less than 1.6 per cent. 7 MS SYMES: Right. For example, this year the 8 current forecast for the GDPPI is 1.3 per cent. 9 MS ELLIOTT: That was the forecast in 10 September, yes. 11 MS SYMES: And so the difference is .3 per 12 cent. 13 MS ELLIOTT: For the one year, yes. 14 MS SYMES: And should that continue, just 15 taking that as a hypothetical, that the shortfall or the 16 actual GDPPI is .3 per cent less than the 1.6 per cent 17 on which your formula is based, your price cap formula, 18 would you agree with me that the ratepayers or customers 19 of Union will overpay by some 16 per cent? It's 20 cumulative. It's compounded. 21 MS ELLIOTT: If the average rate of inflation 22 for the five-year term is 1.3 per cent, we would set the 23 price cap at 1.6. 24 MS SYMES: Yes. 25 MS ELLIOTT: With a fixed price cap relative 26 to a price cap that will vary over the term, our rates 27 will be higher than they otherwise would be. 28 MS SYMES: And that compounding it, it is a Les Services StenoTran Services Inc. 613-521-0703 674 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 16 per cent overpayment. 2 MS ELLIOTT: I will have to check that, but 3 it's four years at 3 per cent a year. 4 MS SYMES: Right. If I have made a 5 mathematical error, please advise me. 6 THE PRESIDING MEMBER: I'm sorry, it's 7 .3 per cent. 8 MS SYMES: Point 3 per cent. 9 MS ELLIOTT: Right, it's at .3 per cent. 10 MS SYMES: Point 3 per cent times .3 per cent 11 times whatever. 12 And so, therefore, in such circumstances the 13 gain to Union shareholders is, in many ways, a matter of 14 luck as opposed to productivity. 15 --- Pause 16 MS ELLIOTT: You are taking a risk that Union 17 is looking at taking on by fixing the price cap and 18 giving me the side that says it wasn't a risk, it's an 19 opportunity, Union generates additional revenue as a 20 result of fixing the cap. 21 I guess I would tell you the probability of 22 that occurring relative to a higher inflation, given the 23 inflation where it is right now, I would expect it to be 24 higher over the term than lower. 25 So it was a risk that we looked at in fixing 26 the price, but it could work that actual inflation is 27 lower over the term. 28 MS SYMES: I understood that you measured the Les Services StenoTran Services Inc. 613-521-0703 675 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 risk and presumably you provided advice to Union on what 2 to set inflation at, at 1.6 per cent. 3 But my question is different. My question is: 4 If inflation, the GDPPI, is actually less than the 5 1.6 per cent, and the example I used was, say, 1.3 per 6 cent in each of the years, then the excess revenue to 7 Union depends on events that are totally external to 8 Union's performance. 9 MS ELLIOTT: Yes, that's correct. 10 MS SYMES: And that, as a regulator, this 11 Board obviously would be faced with the fact that in a 12 period of extremely low inflation or low inflation of 13 1.3 per cent per year, that the gas prices had gone up 14 1.9 per cent under your formula in each of the years. 15 --- Pause 16 MS ELLIOTT: I'm sorry. Could you repeat the 17 question? 18 MS SYMES: Sure. 19 In the period of the plan, the year 2000 to 20 2004, if inflation remains low such as the GDPPI is 21 1.3 per cent, or say less, then the rates produced by 22 your price cap of 1.9 per cent per year compounded will 23 produce rates that are substantially above the rates of 24 inflation, and especially looked at over a five-year 25 period. 26 MS ELLIOTT: I agree that if inflation is less 27 than we have fixed it at, including it in the formula, 28 and had we proposed a formula that varied with the rate Les Services StenoTran Services Inc. 613-521-0703 676 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 of inflation, by fixing the formula we have higher rates 2 than we otherwise would have had if the formula varied 3 with the rate of inflation. 4 MS SYMES: And so, therefore, at the end of 5 the process, at the end of the five years, in such a 6 scenario it would be very difficult to say that the 7 rates paid by customers were just and reasonable. 8 MR. BIRMINGHAM: No, I disagree, Ms Symes. 9 The just and reasonable portion -- and this is 10 the testimony that I gave yesterday or at some point 11 earlier this week -- that the just and reasonable 12 determination by the Board is going to be with respect 13 to how the pricing formula is set. 14 As I say, the Board can take comfort that it 15 starts with a just and reasonable base and they apply 16 the pricing formula that has widely accepted analytical 17 frameworks and factors in it. Simply comparing the 18 fixed nature of it to what the GDPPI actually was over 19 that period doesn't mean that the rates were or were not 20 just and reasonable, in our view. Setting the pricing 21 formula on the proper parameters means that you will 22 have just and reasonable rates. 23 MS SYMES: Mr. Birmingham, will you agree with 24 me that if the Board were to direct that the "I", the 25 inflation factor in your price cap, were the actual 26 GDPPI, this problem would be resolved? 27 MR. BIRMINGHAM: What problem is that? 28 MS SYMES: The problem of actual inflation Les Services StenoTran Services Inc. 613-521-0703 677 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 being less than 1.6 over the period of the plan from 2 2000 to 2004. 3 MR. BIRMINGHAM: How the inflation factor is 4 set I think is a function of a couple of things. There 5 are impacts on other parameters of the plan, depending 6 on how you establish the GDPPI. One of them, obviously, 7 that we have chosen to fix it because of the desire to 8 have more predictable, more stable rates for customers. 9 To the extent that there was forecast 10 annually, that would give a potential different result 11 for the pricing formula. 12 It also has other impacts with respect to 13 things like the definition of the non-routine 14 adjustments and, in particular, the legislation and 15 other types of changes, 16 But in my view, Ms Symes, whether the Board 17 chooses to support Union's proposal for a fixed cap or 18 change it annually, to me doesn't mean that one is just 19 and reasonable and one is not. It all depends on what 20 the overall parameters are. 21 MS SYMES: I'm asking about the result as 22 opposed to the process -- the rates as opposed to the 23 process. 24 MR. PENNY: Ms Symes, Mr. Birmingham just told 25 you that you can't do that, in his view. 26 MS SYMES: When you gave your high level 27 overview to the Board on day one on page 32 of the 28 transcript. No, I'm sorry. Just a second. Les Services StenoTran Services Inc. 613-521-0703 678 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 On page 32, Mr. Brett has just taken you 2 through the calculation as to how you have come to a 3 total factor productivity growth of minus 0.4 per cent. 4 I'm going to use the updated results because that's the 5 numbers I have from mine. 6 He has taken you to the fact that the 7 equivalent numbers in the Canadian economy are 0.3 per 8 cent, such that Union is 0.7 per cent below the Canadian 9 average. 10 Now, on the first day of the hearing, on 11 page 20 of the transcript beginning at line 2 you gave a 12 series of explanations as to why Union had a negative 13 TFP as compared to the national average. 14 You said: 15 "This is not surprising given that the 16 use per customer has been declining, that 17 cost inflation and legislative changes 18 such as pay equity have increased the 19 input costs. There have been increases 20 in other costs such as regulatory 21 expenses and demand-side management with 22 output which is not measured by TFP, and 23 that there have been no significant 24 technology advancements in the natural 25 gas industry. It's not like the telecom 26 industry." 27 I want to take that in part. 28 The first one, then, is that the use per Les Services StenoTran Services Inc. 613-521-0703 679 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 customer is declining and I want to understand, with 2 respect to that, are you saying that one of the things 3 is the warmer weather? Is that one of the things that 4 has been the cause? 5 MS ELLIOTT: No, I think there are two 6 different things there. There's certainly a weather 7 impact on the volume on our system but, in addition to 8 the weather, customers, on a normalized basis, are 9 using, on average, less gas, appliances are becoming 10 more efficient and housing stock is more efficient, or 11 smaller, but, at the end, the result is that, on 12 average, customers use less gas, and they are continuing 13 to use less gas. 14 MS SYMES: So, let me just go through... 15 Warm weather is a factor but it's not the 16 significant factor that you were talking about on 17 page 20. Is that right? 18 MS ELLIOTT: Not with respect to our 19 calculation of our historic factor productivity, no. 20 MS SYMES: And would you agree with me that 21 there is no fuel switching away from gas, at this point? 22 MS ELLIOTT: In our historic calculation, 23 there is probably not much switching from gas. In 24 fact -- 25 MS SYMES: Mr. Brett was trying to say, "Watch 26 out! You are going to have a wonderful fuel switching 27 to gas", but that isn't an explanation. 28 MS ELLIOTT: No, and in fact, if you look into Les Services StenoTran Services Inc. 613-521-0703 680 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 the future, we could see a switching from gas in the 2 general service market, depending on what happens with 3 electricity. But in calculating the historic TFP, I 4 would suggest that the efficiency of the appliances is 5 contributing to the use more so than any switching away 6 from gas to electricity. 7 MS SYMES: No; the third one, then, is the 8 energy efficiency, I guess, presumably, of the DSM 9 measures; a fact that stoves are more efficient, that 10 buildings have increased efficiencies, furnaces are more 11 efficient. These are the kinds of things that are 12 resulting in customers using less gas. Is that correct? 13 MS ELLIOTT: Yes, they certainly support. 14 MS SYMES: Okay. And could you please look at 15 Exhibit C31.1 and Exhibit C31.3. I want to compare the 16 two sets of numbers that Pollution Probe has asked of 17 you -- and this is, I guess, over, essentially, the life 18 of your DSM programs. 19 Now, the figures that you gave with respect to 20 historical TFP calculations, based on volumes, found on 21 page 32 of your evidence, actually stop in 1999. So 22 there's a bit of a discontinuity with respect to these 23 numbers. 24 But you really didn't start DSM activities 25 until 1995, the second last year of Table 5, on page 32. 26 Is that correct? 27 MS ELLIOTT: I don't know what year we started 28 the DSM activities but the question response deals with Les Services StenoTran Services Inc. 613-521-0703 681 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 1995 to 1999. Looking at 1995, I would suggest that it 2 was probably the first year. 3 MS SYMES: Subject to check, would you take 4 that as so? Yes, I -- 5 MS SYMES: And I will show you why, for a 6 variety of reasons. 7 Then, looking at 31.3, you have said that, I 8 guess, with the exception of 1998, that the actual 9 distribution volumes have continued to increase, from 10 1995 to 1999. 11 MS ELLIOTT: Yes; that will be as a result of 12 increased number of customers. 13 MS SYMES: I see. And if we look, then, at 14 Exhibit C31.1, for the same five years, 1995 to 1999, we 15 have an actual savings of gas, and that's in the second 16 column, by volume. But do you see, in 1995, it was 0.66 17 10(6)m(3)? 18 MS ELLIOTT: Yes. 19 MS SYMES: Okay. And the last year, being 20 1999, I believe that the actuals that have been filed 21 now are 37 10(6)m(3). I believe that has been filed, in 22 terms of the update that was produced by Union, in 23 March. 24 Looking, then, at the calculations. Comparing 25 the gas savings for the volume -- could you just mark 26 these numbers down, subject to check -- in 1995, then, 27 the gas savings per volume was .005 per cent; in 1996, 28 it was .062 per cent; 1997, .11 per cent; 1998, .2 per Les Services StenoTran Services Inc. 613-521-0703 682 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 cent; and 1999, .25 per cent. 2 MS ELLIOTT: And you have just calculated that 3 as a percentage of the volume on Exhibit 31.2? 4 MS SYMES: Sure. That's 31.3. Just compared 5 the DSM results that Union said it achieved, compared to 6 the throughput volumes for the in-franchise 7 distributions, the actuals. 8 MS ELLIOTT: Okay. 9 MS SYMES: I may have made a mathematical 10 error, but other than the mathematical error, would you 11 agree with me, then, the gas volumes saved, with respect 12 to DSM, have been insignificant, in terms of the 13 reduction in throughput, certainly as measured or 14 compared against the actual in-franchise distribution 15 volumes? 16 MS ELLIOTT: I would agree as a percentage of 17 total throughput those savings are in the -- well, the 18 highest one is the .25 per cent. 19 MS SYMES: Sure, but going back to Exhibit B, 20 Tab 2, page 32, the last two years that you report, 1995 21 and 1996, that in terms of why the productivity was so 22 low, a savings of .005 per cent or .62 per cent can't be 23 the explanation as to why the productivity factor of 24 Union was low. 25 MS ELLIOTT: Well, the reduction in volumes is 26 certainly a contributing factor. The other contributing 27 factor is the fact that there are costs, and costs are 28 increasing. So, in the output growth rate, I would Les Services StenoTran Services Inc. 613-521-0703 683 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 suggest the volume contributes to a decline in output 2 and the costs contribute to an increase in input. The 3 results will be an increase or a decrease in the TFP 4 growth rate. It's a contributing factor. 5 MS SYMES: Well, Ms Elliott, as we go forward, 6 first of all, into the first year of your proposed PBR 7 plan, the DSM volumes that are forecasted by Union are 8 no change from the 1999, that is 37 10(6)m(3). So, 9 going forward, then, there does not anticipate to be any 10 dramatic change with respect to the use per customer. 11 MS ELLIOTT: As far as that use per customer 12 is due to DSM. But there is a change in the use per 13 customer. Whether it's directly related to the DSM 14 programs or not, Union sees a decline in its use for 15 customer on an ongoing basis. 16 MS SYMES: Well, the second thing that, 17 Mr. Birmingham, you said in your high-level overview is 18 that Union had to face legislative changes, such as pay 19 equity. That was another reason for Union's negative 20 productivity. 21 MR. BIRMINGHAM: That they are cost increases, 22 and that was one of the things that caused an increase 23 in cost that did not have any sort of corresponding 24 increase in the output measure. 25 MS SYMES: And, Mr. Birmingham, of course, 26 that was 1987 legislation that required Union to pay men 27 and women equal pay for work of equal value? 28 MR. BIRMINGHAM: I don't know when the Les Services StenoTran Services Inc. 613-521-0703 684 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 legislation was passed. I agree that that was the 2 purpose of the legislation. It was implemented in Union 3 in roughly the early nineties. 4 MS SYMES: And you agree with me that the 5 legislation applied to all private sector employers in 6 Ontario, such as Union, with more than 50 employees? 7 MR. BIRMINGHAM: Yes. 8 MS SYMES: So, certainly, it would have 9 applied to Enbridge -- or probably what was then 10 Consumers Gas, as well as Enbridge? 11 MR. BIRMINGHAM: The legislation would have 12 applied to a number of companies, including Enbridge 13 Consumers Gas, yes. 14 MS SYMES: And if you look on page 33 in terms 15 of the Canadian economy productivity growth, it probably 16 applied to a substantial number of those companies in 17 the period 1988 through 1996 who had 50 or more 18 employees. 19 MR. BIRMINGHAM: Yes, I would agree with that. 20 What isn't known is what the impact of that legislation 21 was and whether the impact on those companies was the 22 same as it was on Union. I can tell you that the impact 23 on Union's costs was quite significant. 24 MS SYMES: It's not as though this legislation 25 singled Union out. It was a statutory obligation that 26 required all companies in Ontario to revise their pay 27 structures to bring them into compliance. 28 MR. BIRMINGHAM: Yes, I agree with that. Les Services StenoTran Services Inc. 613-521-0703 685 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 MS SYMES: And notwithstanding that 2 legislative obligation, the Canadian economy 3 productivity growth for other companies in the Canadian 4 economy was plus 0.3 per cent. 5 MR. BIRMINGHAM: That's right. My only point 6 is that the impact on any individual company of that 7 legislation could be quite dramatic. 8 MS SYMES: I gather you have achieved pay 9 equity. In fact, you probably achieved it about 1992 or 10 1993. 11 MR. BIRMINGHAM: We did implement the impacts 12 of the legislation. Yes. 13 MS SYMES: So it's not a factor that is in 14 play as you go into the PBR period. 15 MR. BIRMINGHAM: We don't expect any further 16 cost increases as a result of the pay equity 17 legislation. No. 18 MS SYMES: You have also said in Exhibit 19 C1.11, and that was the interrogatory to staff about 20 the -- I guess the impact of EBO 188 on system 21 expansion -- 22 MR. ELLIOTT: Is that question 11 or 111? 23 MS SYMES: I have 11. Isn't that in 11? 24 MR. ELLIOTT: Sorry. I think it's 111. 25 MR. BIRMINGHAM: 111 was some of the reasons 26 why Union's total factor productivity was negative for 27 the period. 28 MS SYMES: I do mean 111. I just didn't Les Services StenoTran Services Inc. 613-521-0703 686 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 record it correctly in my notes. 2 MR. BIRMINGHAM: We have it. 3 MS SYMES: In that one then there was an issue 4 in EBO 188 as to whether in system expansion the Board 5 should approve projects on a -- approve system expansion 6 on a project by project basis where the PI for each 7 project had to be greater than or equal to one or 8 whether Union could create portfolio projects and 9 proceed with the expansion if the portfolio was greater 10 than one. Is that right, Mr. Birmingham? 11 MR. BIRMINGHAM: The portfolio profitability 12 index had to be at least 1.0 and in addition, there was 13 an individual project threshold where that individual 14 project had to be at least 0.8. 15 MS SYMES: And fair enough that there was very 16 strong opposition to Union's position that the portfolio 17 approach was the appropriate approach to system 18 expansion. 19 MR. BIRMINGHAM: I would say there was a 20 variety of views in EBO 188. 21 MS SYMES: But Union's view was that they 22 should be permitted to expand even if an individual 23 project did not have a PI of greater than one. 24 MR. BIRMINGHAM: Yes. 25 MS SYMES: And I gather then from the decision 26 in 188 to today Union has engaged in system expansion 27 where individual projects had PIs of less than one. 28 MR. BIRMINGHAM: We have installed projects Les Services StenoTran Services Inc. 613-521-0703 687 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 which had a profitability index of 0.8 or greater. 2 MS SYMES: And that too is one of the reasons 3 you say that the TFP for Union is a negative number. 4 MR. BIRMINGHAM: It's an example where an 5 individual project over its life does not recover the 6 total cost that it takes to put the project in. 7 MS SYMES: And presumably that as you go into 8 a PBR period Union might well visit that sort of 9 decision-making. 10 MR. BIRMINGHAM: Our commitment is to continue 11 to use the EBO 188 guidelines. The benefit of using the 12 portfolio approach is that we can look at all of the new 13 projects that we are looking at doing and use the more 14 profitable ones to assist the economics of the less 15 profitable ones. That still allows us on an overall 16 basis to recover all the costs, including an approved 17 return for the life of all of those projects. 18 MS SYMES: Other than those three explanations 19 that you have given then, the actual productivity that 20 Union can be reasonably expected to achieve in the next 21 five years will be impacted then by these various -- by 22 the changes in these various items that you have 23 identified. 24 MR. BIRMINGHAM: They will be some of the 25 items that influence our productivity. 26 MS SYMES: Okay. The success of an SS of a 27 DSM program? 28 MR. BIRMINGHAM: The success of a DSM program Les Services StenoTran Services Inc. 613-521-0703 688 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 to the extent that we continue to grow the energy 2 efficiency savings and, therefore, increase the rate at 3 which the use per customer declines will be one impact. 4 MS SYMES: The pay equity obligations which 5 are over or have been met -- I guess that's a better way 6 of putting it. 7 MR. BIRMINGHAM: Right. 8 MS SYMES: And the system expansion which you 9 are now able to make informed choices on what to do, how 10 to proceed with your system expansion. 11 MR. BIRMINGHAM: We continue to use the same 12 approach that we have in the past. 13 MS SYMES: Now, in page 36 in your evidence 14 you have indicated the non-routine adjustments, "Z" 15 factors. A number of people have taken you through 16 those. I'm interested in line 18, legislation directed 17 at environmental issues. What are you talking about 18 there? What are you contemplating as a "Z" factor? 19 MR. BIRMINGHAM: What we had contemplated was 20 any legislation that might be implemented, for example, 21 to meet the government's commitment with respect to the 22 Kyoto agreement, so to the extent, for example, that 23 carbon tax legislation was brought forward and there is 24 some impact on utility from that, we would look at the 25 impact and see if it met the materiality threshold. 26 MS SYMES: Just a second. I'm trying to 27 understand what you are saying in light of the answers 28 that you gave to Mr. Thompson. Are you saying that Les Services StenoTran Services Inc. 613-521-0703 689 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 legislation directed at environmental issues such as the 2 obligation to meet or Canada's obligations under the 3 Kyoto agreement are unforeseeable? 4 MR. BIRMINGHAM: Yes, how the government is 5 going to meet those commitments. Over what period they 6 will meet those commitments is unforeseeable. 7 MS SYMES: And you therefore say that those 8 should be treated as a Z-factor. 9 MR. BIRMINGHAM: Yes. 10 MS SYMES: Are you also saying then that you 11 would bring it back as a Z-factor only if it also met 12 the materiality test; that is, a change of $1.5 million 13 annually? 14 MR. BIRMINGHAM: Positive or negative, that is 15 right. 16 MS SYMES: Yes, positive or negative. 17 MR. BIRMINGHAM: And that is the individual 18 threshold. There was also the team threshold where if 19 an individual item didn't meet that threshold but a 20 combination of items, where no individual item exceeded 21 the $1.5 million but the total added up to $3 million, 22 then we would bring it forward. 23 MS SYMES: Just to be clear, Mr. Birmingham, 24 other than Canada's obligation to the Kyoto Agreement, 25 is there anything else that you were imagining that fits 26 within line 18 of page 36? 27 MR. BIRMINGHAM: Not that comes to mind right 28 now, no. Les Services StenoTran Services Inc. 613-521-0703 690 ELLIOTT/BIRMINGHAM, cr-ex (Symes) 1 MS SYMES: Thank you, panel. Thank you, 2 Board. Those are my questions. 3 THE PRESIDING MEMBER: Thank you, Ms Symes. 4 It is 4 o'clock now. Mr. Penny, should we 5 close down? 6 MR. PENNY: Mr. Chairman, it is my 7 understanding that Mr. King and Mr. Aiken have, in 8 total, about ten minutes of questions. We thought it 9 might be useful to finish them up, if that is 10 acceptable. 11 THE PRESIDING MEMBER: If that is all right 12 with the Court Reporter. 13 Let's have a five-minute break and then we can 14 get on with things. 15 --- Upon recessing at 1600 16 --- Upon resuming at 1609 17 THE PRESIDING MEMBER: Mr. King...? 18 CROSS-EXAMINATION 19 MR. KING: I will be very short. Mr. Thompson 20 covered most of what I wanted to speak about. 21 The first point is just a point of 22 clarification really. I am looking at page 43. That is 23 unaccounted for gas as a passthrough item. 24 Just to clarify, I am looking at the sentence 25 beginning on line 14. We are talking here about the 26 variance between the forecast that you are going to get 27 for unaccounted for gas out of your new methodology and 28 the actual amount, and you say: Les Services StenoTran Services Inc. 613-521-0703 691 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 "It will not be recovered unless there 2 are offsetting variances in future 3 years..." (As read) 4 Which I understand. 5 "...or a proposal for recovery from 6 customers." (As read) 7 My question is whether this proposal for 8 recovery from customers can be a proposal initiated by 9 customers or whether it has to be initiated by Union. 10 MS ELLIOTT: There is nothing that would 11 prevent customers from coming forward with a proposal to 12 change the recovery of unaccounted for gas. 13 MR. KING: At a customer review process. 14 MS ELLIOTT: At a customer review process, 15 yes. 16 MR. KING: I would like to talk a bit about 17 the productivity factor and specifically the 40/60 18 weighting. 19 Could you turn up page 32. The productivity 20 factor you come up with uses two approaches. One is 21 based on customers and the second one is based on 22 volumes. The first approach you use gave an average of 23 positive .1 per cent, and the volume approach produced 24 an average of negative .8. You have weighted those, 40 25 per cent on the first figure and 60 per cent on the 26 volume figure, and you have come up with negative .4 per 27 cent. 28 I am reading the sentence that begins midway Les Services StenoTran Services Inc. 613-521-0703 692 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 through line 5: 2 "Union recovers approximately 60 per cent 3 of its distribution revenues through 4 volumetric charges." (As read) 5 I take it that that is telling me that the 6 40/60 split is one based on essentially fixed to 7 variable revenues. Is that right, with 40 per cent 8 being fixed and 60 per cent being variable? 9 MS ELLIOTT: That is correct. 10 MR. KING: My question, when I get to this 11 point, is why you would use an allocation of revenues as 12 opposed to an allocation of fixed versus variable costs, 13 on the assumption that costs would have been a better 14 item to use if we are talking about productivity rather 15 than revenues. 16 MS ELLIOTT: We are really talking about 17 weighting the output growth rates. Costs really measure 18 the input growth or are included in the calculation of 19 the input growth; and our output, being customers and 20 volumes, are weighted by the revenue shares, the 21 customer charges or the fixed charges and the volumetric 22 charges. 23 MR. KING: Did you ever consider using costs, 24 fixed and variable, instead of revenues? Or could you? 25 MS ELLIOTT: I guess we didn't consider it in 26 the weighting of an output measure. You are really 27 combining two things. Costs are the input, and the 28 output is the revenue. Les Services StenoTran Services Inc. 613-521-0703 693 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 If you look at the calculation, our input 2 factors are weighted by the cost and the output measures 3 are weighted by revenue. 4 MR. KING: Could you turn to an interrogatory 5 at Tab C24. It is no. 25. 6 Do you have that? 7 MS ELLIOTT: Yes, I do. 8 MR. KING: The response to this question is 9 essentially telling me that Union can change its rate 10 design to recover a higher proportion of its revenue 11 through the fixed charges than the current 40 per cent 12 without approval through the customer review process. 13 MS ELLIOTT: Well, Union can propose to change 14 its rate structure to alter the proportions recovered 15 through the fixed charges and the volumetric charges in 16 other directions during the term of the PBR plan. That 17 would be brought forward in the customer review process. 18 Even under the PBR plan the rates are approved by the 19 Board. 20 So I guess I would have dispute with the 21 "without approval" part of your question. 22 We can propose the changes, but we do need the 23 approval of the Board before they become rates. 24 MR. KING: Thank you. That is all I have. 25 MEMBER JACKSON: But would you do that through 26 the customer review process and then hope to bring a 27 settlement to the Board? Is that what you would 28 propose? Les Services StenoTran Services Inc. 613-521-0703 694 ELLIOTT/BIRMINGHAM, cr-ex (King) 1 MS ELLIOTT: Yes, that would be our proposal. 2 THE PRESIDING MEMBER: Thank you, Mr. King. 3 Mr. Aiken...? 4 MR. AIKEN: Thank you, Mr. Chairman. I guess 5 the bad news is I am last to go on a Friday afternoon, 6 but the good news is that I have only one question and 7 it is going to be fairly short. 8 CROSS-EXAMINATION 9 MR. AIKEN: We have heard a lot of talk over 10 the last few days about the stretch factor. I am 11 wondering if you can confirm for me that the dollar 12 figure in Union's proposal works out to be $3.1 million; 13 that being .4 per cent of the $766 million base to which 14 it would be applied? 15 MR. BIRMINGHAM: That is right. 16 MR. AIKEN: Those are my questions. 17 Thank you. 18 THE PRESIDING MEMBER: Mr. Aiken, I think -- 19 --- Laughter 20 MR. PENNY: We were saving the best for last. 21 THE PRESIDING MEMBER: Mr. Penny, is that all 22 for today? 23 MR. PENNY: I believe it is, sir. It is now 24 20 after 4:00. 25 Mr. Vegh still needs to cross-examine, but 26 when he saw that we were not going to finish by 4:00, I 27 think he -- 28 THE PRESIDING MEMBER: Then Dr. Wightman has a Les Services StenoTran Services Inc. 613-521-0703 695 ELLIOTT/BIRMINGHAM 1 point to make. 2 DR. WIGHTMAN: I actually have one or two very 3 short questions. If you prefer, I can wait until after 4 Mr. Vegh or -- 5 THE PRESIDING MEMBER: That might be useful if 6 you do it that way. If you really have very short 7 questions, we will do it then. 8 DR. WIGHTMAN: Fine. 9 THE PRESIDING MEMBER: As far as you know, 10 there is only Mr. Vegh to cross-examine. 11 MR. PENNY: As far as I know. He was the only 12 one still to go. 13 THE PRESIDING MEMBER: In which case, we will 14 see you on Monday, at nine o'clock. 15 What is the plan? We have Mr. Vegh. Do we 16 have any idea how long he is likely to be? 17 MR. PENNY: I had the impression that he was 18 going to be 30 to 60 minutes. Then I think we would 19 move to -- regrettably for the individuals involved the 20 same witnesses, but to the next panel. 21 THE PRESIDING MEMBER: There was an issue that 22 came up about the question of the unbundling ADR and the 23 certainty of what is the agenda for Friday. I think I 24 gave you our best estimation. 25 It struck me that the Board's best efforts to 26 approve could be to approve by Wednesday -- there are 27 certain things that need clarifying, and then ask 28 questions. That might mean that on Friday you would Les Services StenoTran Services Inc. 613-521-0703 696 ELLIOTT/BIRMINGHAM 1 have your unbundling panel. 2 It is just a thought. You might want to 3 consider what the alternative outcomes could be on 4 Wednesday. 5 You see, what I am trying to get at -- 6 MR. PENNY: I think what we said was that if 7 we know before Friday then we would do the unbundling 8 panel Friday. If we don't know before Friday, we do 9 have another panel lined up. It's the DSM panel. 10 THE PRESIDING MEMBER: So then the hot line 11 information must have something on it that alerts 12 because I am sure that on the DSM panel, Mr. Poch, for 13 example, would be most interested in -- 14 MR. PENNY: Quite so. I think the hot line 15 should alert parties to the possibility of that choice. 16 Presumably by mid-week we will have a clearer picture of 17 where we are going on that. 18 THE PRESIDING MEMBER: Thank you, Mr. Penny. 19 Yes, unfortunately for Mr. Birmingham and 20 Ms Elliott we continue to see you. 21 MR. BIRMINGHAM: I suspect that's your 22 misfortune, Mr. Chairman. 23 THE PRESIDING MEMBER: Thank you very much. 24 It has been a long week. 25 I would like Dr. Wightman to discuss with 26 Mr. Penny and other parties as to what the potential 27 forecast end date of the hearing part of this might be. 28 The reason I ask that is because there are other things Les Services StenoTran Services Inc. 613-521-0703 697 1 that I am associated with and that I need to know how to 2 schedule. 3 Thank you. 4 It is a very difficult forecast, I understand. 5 --- Whereupon the hearing adjourned at 1619, to resume 6 on Monday, June 19, 2000 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 698 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0902 516 4 Preliminary Matters 516 5 PREVIOUSLY SWORN: RICK BIRMINGHAM 521 6 PREVIOUSLY SWORN: PAT ELLIOTT 521 7 Cross-Examination by Mr. Thompson 521 8 Upon recessing at 1048 573 9 Upon resuming at 1117 1117 10 Upon recessing at 1303 632 11 Upon resuming at 1407 632 12 Cross-Examination by Mr. Brett 637 13 Cross-Examination by Ms Symes 669 14 Upon recessing at 1600 690 15 Upon resuming at 1609 690 16 Cross-Examination by Mr. King 690 17 Cross-Examination by Mr. Aiken 694 18 Upon adjourning at 1619 697 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 699 1 UNDERTAKINGS 2 PAGE 3 G4.1 Ms Elliott undertakes to provide an 593 4 illustration of a situation where 5 inventory levels drop by 50 per cent 6 based on a move from bundled to 7 unbundled service and to assume some 8 reasonable gas cost increase and show 9 how this works 10 11 G4.2 Mr. Birmingham to assume a 20 per 599 12 cent increase in throughput and show 13 what that would mean in over-recovery 14 of the $5.7 million; and then assume 15 some sort of expansion scenario that 16 would produce that level of throughput, 17 and show what that would cost in equity 18 dollars to illustrate what it is they are 19 managing under the cap compared to the 20 over-recovery 21 22 G4.3 Mr. Birmingham undertakes to confirm 657 23 whether 20 of the 26 plans have earnings 24 sharing mechanisms 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703