1177 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 23, 2000, 25 commencing at 0900 26 27 HEARING 28 VOLUME 8 Les Services StenoTran Services Inc. 613-521-0703 1178 1 APPEARANCES 2 JENNIFER LEA/ Board Staff 3 MICHAEL LYLE/ 4 JAMES WIGHTMAN/ 5 STEPHEN MOTLUK 6 7 MICHAEL PENNY/ Union Gas Limited 8 MARCEL REGHELINI 9 10 ROBERT B. WARREN Consumers Association of Canada 11 (CAC) 12 13 THOMAS BRETT Ontario Association of School 14 Business Officials 15 16 PETER THOMPSON Industrial Gas Users' 17 Association (IGUA) 18 19 MICHAEL JANIGAN Vulnerable Energy Consumers 20 Coalition (VECC) 21 22 MURRAY KLIPPENSTEIN Pollution Probe 23 24 IAN MONDROW Heating, Ventilation and 25 Air Conditioning Contractors 26 Coalition Inc. 27 28 Les Services StenoTran Services Inc. 613-521-0703 1179 1 APPEARANCES (Cont'd) 2 BETH SYMES/ Alliance of Manufacturers 3 CAROL STREET and Exporters Canada 4 5 MARK MATTSON/ Energy Probe 6 THOMAS ADAMS 7 8 GEORGE VEGH Duke Energy, Coalition for 9 Efficient Energy Distribution 10 (CEED), TransCanada Gas 11 Services, PanCanadian 12 Petroleum, Dynegy Canada, 13 Suncor/Sunoco, CanEnerco 14 Limited 15 16 ZIYAAD E. MIA Coalition for Efficient Energy 17 Distribution (CEED), 18 TransCanada Gas Services, 19 PanCanadian Petroleum, Dynegy 20 Canada, Suncor/Sunoco, 21 CanEnerco Limited 22 23 DAVID WAQU COMSATEC INC. 24 25 STANLEY RUTWIND TransCanada PipeLines Limited 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 1180 1 APPEARANCES (Cont'd) 2 RICHARD KING/ The Wholesale Group and the 3 CHARLES KEIZER/ Major Energy Consumers And 4 PETER BUDD Producers (MECAP) 5 6 PETER SCULLY Association of Municipalities 7 of Ontario 8 9 TANYA PERSAD Enbridge Consumers Gas 10 11 ANDREW DIAMOND/ Enron Capital Corp. 12 JOHN ROOK 13 14 DWAYNE QUINN/ City of Kitchener Utilities 15 ALICK RYDER 16 17 DAVID POCH Green Energy Coalition (GEC) 18 19 MICHAEL M. PETERSON Nova Chemicals 20 21 RANDY AIKEN London Property Management 22 Association 23 24 VALERIE YOUNG Ontario Association of Physical 25 Plant Administrators 26 27 MARY ANNE ALDRED HYDRO ONE NETWORKS 28 Les Services StenoTran Services Inc. 613-521-0703 1181 1 Toronto, Ontario 2 --- Upon resuming on Friday, June 23, 2000 3 at 0900 4 THE PRESIDING MEMBER: Good morning. 5 Are there any preliminary matters? 6 PRELIMINARY MATTERS 7 MR. PENNY: Mr. Chairman, a couple of filing 8 matters. 9 There are available for the Board and the 10 parties a number of transcript undertakings, and they 11 are G2.4 -- which corrects the mathematical error that 12 Ms Elliott had determined earlier -- G6.1, G6.2, G6.5 13 and G6.7. And then, for the assistance of the Board, in 14 relation to the effect of the ADR Agreement on certain 15 aspects of the evidence, principally the rate evidence, 16 there has been prepared, as we did in the last case, a 17 document, on yellow paper, with a brief one-page 18 explanation and then a series of updates of various 19 schedules and the rates which simply flow through, in 20 terms of the evidence, the changes that were brought 21 about as a result of the ADR settlement agreement. 22 THE PRESIDING MEMBER: Thank you. 23 I assume if there are any, questions related 24 to the details goes for the rates panel -- 25 MR. PENNY: The rates panel, I think would be 26 the panel to do that, yes, sir. 27 THE PRESIDING MEMBER: Thank you. 28 Ms Lea, have you anything you wish to -- Les Services StenoTran Services Inc. 613-521-0703 1182 Preliminary Matters 1 MS LEA: Yes. Two items, sir. 2 A few transcript corrections from yesterday, 3 on behalf of my colleague. 4 At page 1123 of the transcript, line 24, the 5 words "special" should be "social". At page 1124 of the 6 transcript, line 12, the word "progress", "economic 7 progress", should be "profits". At page 1128 of the 8 transcript, line 26, the word "reputation" should be 9 "refutation", and page 1130, line 6, the word 10 "followed", "the new equilibrium price would be 11 followed", it should be "lowered". 12 Thank you. 13 The second thing is that the CAC does have 14 questions for the panel today but I understand that 15 Mr. Warren cannot be here. He's asked Board staff to 16 ask those questions, so either myself of Mr. Wightman, 17 depending on who's available at the time, will be asking 18 those questions, whenever it's convenient, if that's 19 agreeable to the Board. 20 THE PRESIDING MEMBER: That's agreeable. 21 We will let the other engineers go first and 22 then -- unless there's a reason for these questions to 23 be asked -- 24 MS LEA: I don't think so; they may be covered 25 by others, so that's fine. Thank you. 26 THE PRESIDING MEMBER: And in any case, 27 Mr. Mattson had asked that he could ask on Monday so. 28 MR. PENNY: Just apropos of that, Les Services StenoTran Services Inc. 613-521-0703 1183 Preliminary Matters 1 Mr. Chairman, one of the members of this panel, 2 Mr. Andrews, is not available on Monday. He, however, 3 is likely -- given where we think Energy Probe is coming 4 from -- likely not critical to Energy Probe-type 5 questions in his area of expertise. So, in the event -- 6 we have actually attempted to reach Mr. Mattson to see 7 what his schedule actually was but I don't think we were 8 able to. But because of Mr. Andrews unavailability 9 Monday, to the extent we can get through everyone else, 10 that would be beneficial. 11 THE PRESIDING MEMBER: Thank you, Mr. Penny. 12 We will see how we go. 13 MR. PENNY: And I guess I should say, by the 14 estimates that people have provided to me, it sounds 15 like that's reasonably possible today. 16 THE PRESIDING MEMBER: Thank you. 17 MR. PENNY: So, this, Mr. Chairman, as you 18 know, is the panel to deal with the outstanding disputed 19 issues on bundling. Perhaps each of the witnesses could 20 come forward and be sworn. 21 THE PRESIDING MEMBER: Please bring them 22 forward. 23 SWORN: WAYNE E. ANDREWS 24 SWORN: STEVE W. BAKER 25 SWORN: MICHAEL A. STEDMAN 26 MR. PENNY: With your leave, Mr. Chairman. 27 EXAMINATION-IN-CHIEF 28 MR. PENNY: Mr. Andrews, let me start with Les Services StenoTran Services Inc. 613-521-0703 1184 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 you. 2 You, I understand, are currently the Manager 3 of Customer Support for Union Gas? 4 MR. ANDREWS: That is correct. 5 MR. PENNY: And you have been an employee of 6 Union Gas since 1983? 7 MR. ANDREWS: That is correct. 8 MR. PENNY: You hold a Bachelor of Commerce, 9 from 1982? 10 MR. ANDREWS: Correct. 11 MR. PENNY: And you have testified before this 12 Board on two prior occasions? 13 MR. ANDREWS: That is correct. 14 MR. PENNY: Can you describe your current 15 responsibilities. 16 MR. ANDREWS: Yes. As Manager of Customer 17 Support, I'm primarily responsible for contract 18 administration, direct purchase administration, 19 nominations and billing for all of Union's contract 20 accounts. That's essentially it. 21 MR. PENNY: Thanks very much. 22 And you participated in the preparation of 23 unbundling evidence in areas within your area of 24 expertise? 25 MR. ANDREWS: That's correct. 26 MR. PENNY: And do you adopt that evidence, 27 sir? 28 MR. ANDREWS: Yes, I do. Les Services StenoTran Services Inc. 613-521-0703 1185 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 MR. PENNY: Mr. Baker, you are currently the 2 Director of Products and Pricing for Union Gas? 3 MR. BAKER: That's correct. 4 MR. PENNY: And you have been with Union Gas 5 since 1989? 6 MR. BAKER: That's right. 7 MR. PENNY: And, prior to that, you were with 8 Clarkson Gordon, as an accountant? 9 MR. BAKER: That's correct. 10 THE PRESIDING MEMBER: Excuse me a moment, 11 Mr. Penny, they have to speak into the microphones, 12 otherwise it won't get picked up. So could they make 13 sure that they do so. 14 MR. PENNY: Thank you, Mr. Chairman. 15 You are a chartered accountant, Mr. Baker? 16 MR. BAKER: That's right. 17 MR. PENNY: And a certified management 18 accountant? 19 MR. BAKER: That's correct. 20 MR. PENNY: You have a Masters of accounting, 21 from the University of Waterloo? 22 MR. BAKER: That's correct. 23 MR. PENNY: And also a Bachelor of Arts, from 24 the University of Waterloo? 25 MR. BAKER: Correct. 26 MR. PENNY: And you have testified before the 27 Energy Board before, on behalf of Union Gas? 28 MR. BAKER: That's correct. Les Services StenoTran Services Inc. 613-521-0703 1186 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 MR. PENNY: Could you describe your 2 responsibilities, in relation to the unbundling proposal 3 which Union has made in this proceeding. 4 MR. BAKER: Yes. During mid-1999, I was given 5 project lead accountability for Union's unbundling 6 proposals that have been filed in this proceeding. 7 MR. PENNY: Thank you. 8 In that regard, you participated in the 9 preparation of the evidence that's been filed by Union, 10 with respect to unbundling issues in this proceeding? 11 MR. BAKER: Yes, I did. 12 MR. PENNY: And do you adopt that evidence? 13 MR. BAKER: I do. 14 MR. PENNY: Mr. Stedman, you are Director of 15 Acquisitions, with Union Gas? 16 MR. STEDMAN: That is correct. 17 MR. PENNY: And I gather that you have -- you 18 were formally the Manager of Gas Supply and 19 Transportation? 20 MR. STEDMAN: That's correct. 21 MR. PENNY: You have been with Union Gas since 22 1989 -- or with Centra, I should say? 23 MR. STEDMAN: That is correct. 24 MR. PENNY: And you have a Bachelor of applied 25 science in engineering? 26 MR. STEDMAN: That's correct. 27 MR. PENNY: And you have testified before this 28 Board, on previous occasions, on behalf of Union? Les Services StenoTran Services Inc. 613-521-0703 1187 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 MR. STEDMAN: Yes, I have. 2 MR. PENNY: And/or Centra? 3 MR. STEDMAN: Yes, I have. 4 MR. PENNY: And you have also testified before 5 the National Energy Board? 6 MR. STEDMAN: Yes. 7 MR. PENNY: Can you describe your current 8 responsibilities, insofar as they relate to the 9 unbundling issues. 10 MR. STEDMAN: I am responsible for the gas 11 supplying the upstream transportation, as well as the 12 regulatory aspects of FERC and the NEB. 13 MR. PENNY: Thank you. 14 And in that capacity, you participated in the 15 preparation of the evidence filed in this proceeding? 16 MR. STEDMAN: Yes, I did. 17 MR. PENNY: And do you adopt the evidence? 18 MR. STEDMAN: Yes, I do. 19 MR. PENNY: Mr. Baker, I wonder if you could 20 explain, for the purposes of background, in relation to 21 the disputed issues, which will be the subject of 22 today's evidence, explain the rationale underpinning the 23 development of Union's unbundling proposals. 24 MR. BAKER: Certainly. Unbundling is simply a 25 new service which represents the next step in the 26 continued evolution of gas services provided by Union. 27 Union has advanced its unbundling proposals on its own 28 initiative to facilitate the continued development of Les Services StenoTran Services Inc. 613-521-0703 1188 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 the market and to respond to customer demands for this 2 service option. But, fundamentally, unbundling is an 3 extension of the existing direct purchase service 4 options which provide customers greater access to the 5 underlying assets which are currently part of the 6 bundled service. 7 MR. PENNY: Focusing on upstream 8 transportation, how did Union's existing upstream 9 transportation capacity commitments arise, historically? 10 MR. BAKER: Union's role as a system supplier 11 has and continues to involve contracting for portfolio 12 gas supply and associated upstream transportation and 13 Union's commitments, in this regard, are made on behalf 14 of all system customers served by Union and the costs 15 related to the supply and transportation commitments for 16 system customers are regulated by the Board on a 17 passthrough basis and no margin is generated by Union on 18 either the gas supply or the transportation. 19 MR. PENNY: And, again, focusing on the 20 upstream transportation, what is the current existing 21 Union approach to facilitating direct purchase and how 22 does this relate to Union's unbundling proposal? 23 MR. BAKER: Direct purchase has from the 24 beginning of deregulation been facilitated by Union 25 providing access to its upstream transportation capacity 26 that was arranged for by Union on behalf of system 27 customers. So Union displaces its system supply serving 28 those customers and makes available the upstream Les Services StenoTran Services Inc. 613-521-0703 1189 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 transportation to customers or marketers. 2 The existing approved methodology is one that 3 is based on allocating or making available 100 per cent 4 TCPL FT capacity. Union was last directed by the Board 5 to continue this methodology in E.B.R.O. 493/494. 6 The issue of an optional allocation 7 methodology or approach for upstream transportation 8 which has arisen in this proceeding has never really 9 been a significant issue in the past for at least two 10 reasons. First, early on in commodity deregulation TCPL 11 capacity was all that Union had in its portfolio, so as 12 such there were little, if any, upstream transportation 13 options available. 14 Second, through most of the 1990s TCPL 15 capacity was either trading at tolls or at a premium to 16 posted tolls in the secondary market. So, as such, 17 customers very much wanted Union's capacity and there 18 was a desire for the capacity given that it had economic 19 value. 20 An optional allocation approach is, in Union's 21 view, a significant departure from the existing claim 22 work for bundled direct purchase and in Union's view 23 there is nothing inherent in this new unbundled service 24 which would warrant such a departure. 25 MR. PENNY: So that we are clear in terms of 26 first principles, what does unbundling upstream 27 transportation actually mean? 28 MR. BAKER: In Union's view, unbundling Les Services StenoTran Services Inc. 613-521-0703 1190 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 upstream transportation is an allocation or an 2 assignment of an existing upstream transportation 3 capacity which then allows customers or marketers to 4 manage that capacity on a going forward basis. 5 As I mentioned, the unbundled service option 6 is really an extension of the existing bundled direct 7 purchase option that has been in place for many years. 8 The one exception or difference to this which 9 is consistent with the intent of a new unbundled service 10 is the greater flexibility that has been proposed for 11 upstream transportation in Union South, where customers 12 electing the unbundled option would have the flexibility 13 to divert their supplies away from Union's system for 14 all but 22 days. This is contrasted against existing 15 bundled direct purchase option where those customers 16 have a 365 day firm commitment to deliver volumes to 17 Union. 18 But aside from this flexibility, the 19 unbundling of upstream transportation is consistent with 20 the allocation and the assignment of upstream 21 transportation capacity today for existing bundled 22 direct purchase customers. 23 MR. PENNY: How does Union propose to allocate 24 upstream transportation in the future to facilitate new 25 direct purchase for both bundled and unbundled direct 26 purchase? 27 MR. BAKER: The issue of the approach to 28 allocating upstream transportation capacity is not tied Les Services StenoTran Services Inc. 613-521-0703 1191 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 solely to unbundling. But, irrespective, Union is 2 proposing to continue allocating capacity on a mandatory 3 basis, but move to a vertical slice approach to 4 allocating this capacity prospectively to customers 5 electing direct purchase. 6 What the vertical slice simply means is that 7 it is a pro rata allocation of all of the transportation 8 components that are in Union's portfolio at a point in 9 time. So, as noted, it does represent a change from the 10 existing direct purchase displacement methodology which 11 allocates or assigns 100 per cent TCPL firm 12 transportation. 13 For the northern and eastern operations area 14 Union is proposing to stay with a 100 per cent TCPL 15 allocation methodology for direct purchase, given that 16 in this area there is a very small percentage of other 17 supplies. That area is primarily served by TCPL 18 capacity. 19 Union proposes that the vertical slice 20 approach be implemented effective November 1, 2000 in 21 Union South. 22 MR. PENNY: So why has Union proposed the 23 vertical slice approach, as opposed to the existing 24 100 per cent TCPL FT direct purchase displacement 25 methodology? 26 MR. BAKER: Union's proposed moving away 27 from -- moving to the vertical slice approach, given 28 that from a practical perspective Union has very little Les Services StenoTran Services Inc. 613-521-0703 1192 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 TCPL FT capacity left in its remaining system gas 2 portfolio and this has resulted primarily from 3 continuing to facilitate new direct purchase using 4 TCPL FT capacity only as Union was directed by the Board 5 in 493/494 in capacity that was turned back to TCPL 6 under the turnback policy. 7 So at any reasonable rate of continued direct 8 purchase facilitation Union will run out of TCPL FT 9 capacity and, therefore, a new allocation methodology or 10 approach is required. I would note that this is an 11 issue that would have had to have been addressed, 12 irrespective of Union's unbundling proposal. 13 What I mean there specifically is that we 14 would need a new methodology simply to continue 15 facilitating new bundled direct purchase that is in 16 place today. 17 MR. PENNY: So what is Union trying to achieve 18 through its mandatory vertical slice proposal in this 19 proceeding? 20 MR. BAKER: Union's objective is really to 21 find a proposal which in its view is fair and equitable 22 to all customers, be they system customers or direct 23 purchase. 24 Specifically, Union wants to avoid a situation 25 where those customers who are last to choose a direct 26 purchase option are materially disadvantaged in any way. 27 Also, a key objective by Union of its proposal 28 was to minimize or avoid any incurrence of stranded Les Services StenoTran Services Inc. 613-521-0703 1193 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 costs. It is for this reason that we supported the 2 continuation of a mandatory assignment of upstream 3 transportation as a means to facilitate direct purchase 4 going forward. 5 In Union's view it is not appropriate for 6 Union to have an obligation to contract for long term 7 firm transportation capacity and support incremental 8 pipeline expansion as part of its system supply role, 9 when there is a shortfall of capacity in the 10 marketplace. 11 Union's rationale in this regard is that any 12 new pipeline expansion will, in most cases, result in 13 excess capacity for a period of time until demand and 14 supply get back in balance. So to have a situation 15 where Union is obligated to support incremental 16 expansion to Ontario to meet growth, and then allow 17 customers or marketers the option as to whether to take 18 this capacity is going to create a situation where the 19 very pipeline commitments that create options that are 20 available to customers and marketers can be avoided 21 through an optional allocation approach. 22 MR. PENNY: So, obviously, Issues 1.2.1 and 23 1.2.2 involving the upstream transportation allocation 24 did not settle. What is the issue in dispute and why 25 does that dispute exist? 26 MR. BAKER: The issue really boils down to how 27 upstream transportation should be allocated. There are 28 three options outlined in the ADR Agreement, the first Les Services StenoTran Services Inc. 613-521-0703 1194 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 one being Union's mandatory vertical slice approach. 2 Alternative one, which is supported by 3 IGUA/Nova is really a first come, first served approach 4 which is, in my view, closer to a mandatory allocation 5 approach than an optional approach. 6 Alternative two, which is supported by CEED, 7 is a fully optional approach, in where there would be no 8 obligation to Union's existing portfolio. 9 This issue has arisen largely given the 10 current upstream transportation market, which is 11 characterized by excess capacity in Ontario and, 12 accordingly, capacity is trading at a discount to full 13 tolls. 14 It is worth noting that two to three years ago 15 there was a shortfall of capacity to Ontario and 16 upstream transportation capacity was at that time 17 trading at a significant premium to posted tolls. 18 As a response to the capacity shortfall, long 19 term upstream transportation capacity commitments were 20 made by Union to support incremental pipeline expansion 21 to Ontario. At that time it is worth noting that Union 22 was unable to acquire capacity through the TCPL queue at 23 this time. 24 So given that pipeline expansions, as I 25 mentioned, are what I would call lumpy and require some 26 time to allow new demand to fully catch up and utilize 27 all of the capacity that is created by an expansion, 28 there is currently excess capacity in the market at this Les Services StenoTran Services Inc. 613-521-0703 1195 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 time. 2 So given the availability of discounted 3 capacity, certain customers who are supporting 4 alternative two described in the ADR Agreement, would 5 like the option of turning back existing upstream 6 capacity which has been assigned to them by Union to 7 facilitate both existing direct purchase arrangements, 8 so those are the arrangements that are in place today, 9 as well as having no obligation to Union's existing 10 capacity in the event that existing system customers are 11 moved to a direct purchase option in the future. 12 MR. PENNY: You mentioned earlier the Board's 13 consideration of upstream transportation in 14 E.B.R.O. 493/494. Can you outline in more detail the 15 circumstances of that case and explain whether there is 16 any additional history that would be useful to the Board 17 in providing guidance on this issue? 18 MR. BAKER: Yes. In my view, it is helpful to 19 refer to E.B.R.O. 493/494 from a number of different 20 perspectives. Again, in 1997, at the time of that 21 proceeding, the upstream transportation market was tight 22 and TCPL capacity was trading at a significant premium 23 to posted tolls. In addition, at that time the U.S. 24 capacity that was in Union's portfolio was landing at a 25 cost which was in excess of the TCPL landed cost of gas. 26 So at that time Union was concerned about the 27 impact on remaining system customers of continuing to 28 facilitate direct purchase through a displacement of Les Services StenoTran Services Inc. 613-521-0703 1196 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 TCPL FT capacity only, because that was having the 2 impact of leaving what was then the higher priced U.S. 3 supply in Union's remaining system portfolio, which was 4 having the effect of streaming those costs to system 5 customers. 6 So at that time Union had proposed to 7 prospectively implement what we had referred to at that 8 time as a proportionate displacement methodology, which 9 is similar to the vertical slice methodology that we 10 have proposed in this application. 11 Customers and marketers at that time argued 12 strongly for the continuation of what I have referred to 13 as the TCPL only direct purchase displacement approach, 14 and there was no discussion or issues raised at that 15 time as to whether the allocation of upstream 16 transportation should be optional, again given that the 17 market value of that capacity was in excess of posted 18 tolls. 19 At that time customers in the northern and 20 eastern operations area were also arguing hard for 21 continued access to TCPL capacity and at that time they 22 wished a permanent assignment of that capacity, again 23 because it was recognized that it was a viable capacity 24 at that time. 25 The Board did not approve Union's 26 proportionate displacement methodology at that time, and 27 Union was directed to continue with the TCPL only 28 displacement approach. The Board's reasons at that time Les Services StenoTran Services Inc. 613-521-0703 1197 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 were that they were not convinced that the TCPL FT 2 capacity would diminish to the point where it would be 3 eliminated, and there was a concern about treating 4 direct purchase customers differently, based on the time 5 in which they elected the direct purchase option. 6 But coming out of that 493/494 proceeding, the 7 Board directed Union to look at an alternate methodology 8 of how the remaining cost differentials in Union's 9 system portfolio should be dealt with. So there was a 10 recognition that by continuing the TCPL only methodology 11 there were higher costs remaining in the system 12 portfolio. 13 So there was a concern about the cost impacts 14 to remaining system customers. That led to the 15 E.B.R.O. 493-04/494-06 proceeding, which identified the 16 cost differentials in Union's portfolio relative to a 17 TCPL landed cost benchmark, and that cost differential 18 was identified as consisting of two components, one 19 being a load balancing component and the second 20 component being a flexibility component. 21 The load balancing costs were -- the Board's 22 decision was that they were to be allocated to all 23 customers through the delivery rate, and the flexibility 24 cost would be allocated to all Rate M2 customers, again 25 through the delivery rate. 26 So, clearly, the situation today is really 27 opposite from that which existed in 1997. In 1997 28 Union's TCPL transportation was at a premium in the Les Services StenoTran Services Inc. 613-521-0703 1198 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 marketplace and parties wanted the capacity. Currently, 2 the upstream transportation is at a discount, for the 3 reasons I mentioned, and certain parties now want the 4 option not to elect an obligation to Union's capacity. 5 The change in the market value of the 6 transportation is illustrated in the graph that was 7 distributed yesterday, and that is entitled "TCPL Market 8 Value Versus Toll". 9 THE PRESIDING MEMBER: Could we have an 10 exhibit number, please? 11 DR. WIGHTMAN: Exhibit No. F8.1. 12 EXHIBIT NO. F8.1: Graph entitled "TCPL 13 Market Value Versus Toll" 14 MR. PENNY: Thank you. 15 The ADR Agreement contains some explanation of 16 the parties' positions on the unsettled issues. You 17 have explained Union's approach. Can you outline for 18 the Board the two alternatives representing the disputed 19 issues that are contained in the ADR Agreement? 20 MR. BAKER: I would start with Alternative 2 21 first, which is the alternative supported by CEED. This 22 is an option where all existing bundled direct purchase 23 and new bundled and unbundled direct purchase customers 24 would have no obligation or responsibility to Union's 25 upstream transportation capacity, and this was capacity 26 that Union had acquired to originally serve those 27 customers. 28 This option also suggests that customers Les Services StenoTran Services Inc. 613-521-0703 1199 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 should be free to deliver gas in any way they want into 2 any point on Union's system. Further, it is recognized 3 that this alternative would give rise to stranded costs 4 which, under this option, would need to be identified, 5 mitigated, and then any prudently determined costs 6 recovered from all customers, and that is all bundled 7 and unbundled system customers. 8 Alternative 1, which is supported by IGUA and 9 Nova, as I mentioned, is essentially a first come, first 10 served option, where customers wishing to arrange supply 11 at a particular delivery point, the example being 12 Parkway or Dawn, are obligated to choose capacity from 13 Union's portfolio, as long as Union has capacity in its 14 portfolio at that particular deliver point. So if they 15 wanted to deliver at Dawn, as long as Union had a Dawn 16 delivery point based capacity in its portfolio, they 17 would be obligated to choose from that capacity. 18 To the extent that Union didn't have capacity 19 at a particular delivery point sought by a customer, at 20 that time they would be free to arrange their own 21 supply. That really means "take none of Union's 22 capacity at that time". That is what could give rise to 23 stranded costs under this option, under this 24 Alternative 1. 25 In this circumstance a stranded cost 26 definitely wouldn't happen immediately, given that Union 27 does have capacity in its portfolio with both a Dawn and 28 a Parkway delivery point at the present time. Les Services StenoTran Services Inc. 613-521-0703 1200 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 So, in Union's view, Alternative 1 is, in our 2 view, more balanced compared to Alternative 2, and it 3 really lies in the middle of Union's proposal and the 4 Alternative 2 proposal. 5 Given that it is a first come, first served 6 proposal, it could create impacts on those customers who 7 are last to choose a direct purchase option, but the 8 issue of most concern to Union under Alternative 1 is 9 the potential for stranded costs, again, at some point 10 in the future. 11 Union is of the view that if this alternative 12 were modified to maintain an obligation to accept 13 capacity from Union's portfolio, even if there wasn't 14 capacity at a particular delivery point at a point in 15 time, this alternative is a workable option. 16 MR. PENNY: In Union's view, what would be the 17 impact of the Board adopting an optional upstream 18 transportation allocation approach along the lines of 19 Alternative 2, as outlined in the ADR Agreement? 20 MR. BAKER: Alternative 2, simply put, argues 21 that the allocation of upstream transportation should be 22 optional and that any stranded costs resulting from this 23 optional approach be recovered from all customers. 24 The potential stranded costs, in Union's view, 25 are significant, and they are outlined in Appendix B of 26 the ADR Agreement. 27 In Union's view, it is not appropriate to 28 proceed with an optional allocation for a number of Les Services StenoTran Services Inc. 613-521-0703 1201 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 reasons, the first being that an optional allocation of 2 upstream transportation would, in our view, create an 3 artificial market circumstance where marketers would 4 have an incentive to choose less than a full assignment 5 of their pro rata share of existing upstream 6 transportation capacity in order to potentially provide 7 increased commodity cost savings, either to themselves 8 or to the customers who they serve on direct purchase. 9 These savings would really be generated by 10 shifting some of the existing upstream capacity costs 11 from one group of customers, i.e., that group of 12 customers choosing direct purchase and electing not to 13 take Union's capacity, to another group of customers, 14 which would be the existing direct purchase customers 15 who chose to remain under an allocation of Union's 16 capacity, or system customers who remained on a system 17 gas option with Union. Those costs would be distributed 18 to those customers under this proposal through 19 recovering the stranded costs from all customer groups. 20 This would, in Union's view, not result in an 21 efficient market framework, given that marketers could 22 avoid the accountability for Union's existing upstream 23 transportation commitments made by Union originally to 24 serve those customers. 25 Then a customer that continues on system gas 26 would continue to pay not only the costs of that 27 capacity, which are embedded in current rates, but would 28 also be subject to a recovery of stranded costs to the Les Services StenoTran Services Inc. 613-521-0703 1202 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 extent that those were determined to be prudent by the 2 Board. 3 It also would result in a circumstance where, 4 in our view, gas savings would be portrayed to a direct 5 purchase customer and that those savings would, in all 6 likelihood, be subsequently reduced through the stranded 7 cost recovery mechanism that is proposed under this 8 alternative. Again, Union just doesn't think that that 9 is an efficient framework on which to pursue direct 10 purchase. 11 So the alternative two proposed by CEED would 12 force those stranded costs on all customers, and clearly 13 there are existing customer groups and there are 14 representatives in this proceeding that don't support 15 that. 16 Lastly, I would mention that this option 17 supports the ability to deliver gas anywhere on Union's 18 system and that would create system design and rate 19 implications because it effectively ignores the delivery 20 point obligations that are in place today and that are 21 required to support the existing system design. 22 MR. PENNY: Now, the CEED evidence alleges 23 that Union's mandatory vertical slice approach has the 24 effect of unduly limiting the flexibility of marketers. 25 Does Union feel that its mandatory vertical slice 26 proposal unduly limits the flexibility of marketers to 27 make arrangements for their customers in the 28 marketplace? Les Services StenoTran Services Inc. 613-521-0703 1203 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 MR. BAKER: No, we don't. In fact, Union has 2 provided, in its view, a significant number of options 3 that are either in place currently or will be in place 4 by virtue of the ADR Agreement that will provide 5 significant flexibility to customers and marketers. 6 These options, or the flexibility, are really 7 threefold, with the first one being Union's existing 8 TCPL turnback policy which is outlined at Exhibit B1, 9 Tab 1, Appendix "D". As the Board is aware, Union has 10 allowed existing direct purchase customers with an 11 assignment of TCPL FT capacity to turn this capacity 12 back to Union upon the expiry of Union's contracts with 13 TransCanada. So in this circumstance, customers are 14 then free to arrange for their own capacity in the 15 secondary market, discounted capacity, and the 16 flexibility that Union has provided to date under this 17 policy in Union south is to allow approximately 49 per 18 cent of the TCPL capacity that has been allocated to 19 existing direct purchase customers to be turned back. 20 Secondly, the solutions for additional 21 delivery point flexibility outlined in the ADR 22 Agreement, which has been agreed to by all parties, will 23 provide all customers and marketers the ability to move 24 20 per cent of their Parkway DCQ to Dawn. It will also 25 have the ability, through the Q mechanism that is 26 outlined in the agreement, to contract for additional 27 flexibility to move in excess of that 20 per cent to 28 Dawn. Les Services StenoTran Services Inc. 613-521-0703 1204 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 Lastly, looking forward under the proposed 2 vertical slice, approximately 50 per cent of the 3 capacity that would be allocated through the vertical 4 slice expires within two years so, as such, customers 5 receiving a vertical slice allocation would have the 6 flexibility to arrange for a replacement supply on this 7 capacity when it expires. 8 So, overall, hearing those three options that 9 have been provided, it is our view that the mandatory 10 vertical slice doesn't impede the operation of the 11 competitive market or limit the options available to 12 marketers to structure their own upstream transportation 13 portfolio. 14 I think, fundamentally, Union supports 15 facilitating as much flexibility as possible, but in our 16 view it needs to be done in a way which respects the 17 contractual commitments that are in place today and the 18 system design and integrity considerations. Again, it 19 is in Union's best interest to make gas as attractive as 20 possible and we have tried to put as many options in 21 place as we can to increase flexibility. 22 MR. PENNY: Finally, Mr. Baker, are there any 23 timing or other implementation issues associated with 24 implementing the vertical slice approach to the 25 unbundling of upstream transportation? 26 MR. BAKER: As outlined in the evidence, Union 27 was proposing the vertical slice be implemented 28 effective November 1, 2000. From a practical Les Services StenoTran Services Inc. 613-521-0703 1205 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 perspective, what that would mean is that Union would 2 need Board approval for this methodology by around 3 September 1 of 2000 in order to provide the necessary 4 time to begin processing contract changes under the 5 vertical slice methodology. So to the extent that the 6 Board's decision is subsequent to September 1, 2000, 7 that will mean there will be a delay in the 8 implementation of the vertical slice. In essence, Union 9 would implement the vertical slice approximately two 10 months subsequent to a Board decision in this 11 proceeding. 12 In addition, Union's proposed vertical slice 13 proposal includes Alliance/Vector capacity, which is in 14 Union's portfolio and is projected to start flowing 15 November 1 of 2000, November 1 of this year. 16 Given where we sit today with the timing of 17 this proceeding and the timing of a probable decision, 18 combined with the recognition that the Alliance/Vector 19 is a new pipeline option, Union can accept removing the 20 Alliance/Vector from the vertical slice for one year 21 until November 1, 2001. 22 Irrespective of that, Union is prepared to 23 speak to all the components in its portfolio, including 24 Alliance/Vector, in this proceeding as part of the 25 vertical slice proposal. To help facilitate that, 26 again, there was an exhibit filed yesterday entitled 27 "System Portfolio Landed Cost of Gas to Ontario". 28 MR. PENNY: Could that be given an exhibit Les Services StenoTran Services Inc. 613-521-0703 1206 ANDREWS/BAKER/STEDMAN, in-ch (Penny) 1 number, Mr. Chairman? 2 DR. WIGHTMAN: F8.2. 3 EXHIBIT NO. F8.2: Document entitled 4 "System Portfolio Landed Cost of Gas to 5 Ontario" 6 MR. PENNY: Can you just outline, Mr. Baker, 7 what Exhibit F8.2 is? 8 MR. BAKER: Exhibit F8.2 looks at all of the 9 components in Union's portfolio and compares the landed 10 cost of gas of those components to a TCPL landed 11 benchmark. There are a number of different scenarios 12 presented there based on different values for TCPL FT 13 tolls given that there is currently applications and 14 proceedings for TCPL that will have some effect to 15 change those tolls. So there are options provided there 16 to show the relative landed cost comparison of all of 17 our components relative to a TCPL landed gas cost 18 benchmark. 19 MR. PENNY: Just so we are all clear, does one 20 of these scenarios reflect TCPL tolls today? 21 MR. BAKER: Yes. The existing TCPL tolls are 22 in the first column which is the $1.01 per GJ. 23 MR. PENNY: All right. Thank you. 24 Thank you, Mr. Chairman, those are my 25 questions in examination-in-chief. 26 THE PRESIDING MEMBER: Thank you, Mr. Penny. 27 I'm not sure what the sequence has been. 28 Mr. Thompson is first up, but I'm not sure what Les Services StenoTran Services Inc. 613-521-0703 1207 ANDREWS/BAKER/STEDMAN 1 sequence the parties -- 2 MR. THOMPSON: Yes. Thank you, Mr. Chairman. 3 MR. ROOK: Mr. Chairman, I wonder, just before 4 Mr. Thompson begins -- my name is Rook, initial "J", and 5 I'm here for Enron -- does my friend have a copy 6 Mr. Baker's evidence this morning that he could give to 7 us at the break? I noticed that the witness was reading 8 his answers to the questions that Mr. Penny posed, and I 9 wondered, given the density of the answers, whether 10 there was a copy available because my notetaking was not 11 up to the speed of the witness' speaking ability. 12 MR. PENNY: We don't have a problem with that. 13 Mr. Baker just had some notes and they are legible so we 14 can make them available to Mr. Rook. The transcript 15 will reflect what he said, so I'm not sure what they 16 will add. 17 MR. ROOK: Well, the transcript won't be 18 available when I have to ask my questions. I would like 19 to look at what he said before I have to do that. 20 THE PRESIDING MEMBER: Thank you, Mr. Penny. 21 MR. PENNY: We will let Mr. Rook have a copy. 22 THE PRESIDING MEMBER: Thank you. 23 MR. THOMPSON: Panel, the focus of my 24 questions will be primarily the ADR Agreement. 25 THE PRESIDING MEMBER: Mr. Thompson, before we 26 start, Dr. Jackson wants some information so that when 27 the examination goes on he is able to follow it. 28 MEMBER JACKSON: I think I have seen a system Les Services StenoTran Services Inc. 613-521-0703 1208 ANDREWS/BAKER/STEDMAN 1 map with what you have referred to as delivery points. 2 I guess, first, for clarification, those are receipt 3 points into your system, are they? 4 MR. BAKER: That's correct. 5 MEMBER JACKSON: Okay. They are delivery 6 points off various pipelines that connect with your 7 system? 8 MR. BAKER: That's correct. 9 MEMBER JACKSON: Do you have a map? As I say, 10 I think I have seen one but I can't remember if it is in 11 the filed material. I think it would be helpful this 12 morning if I could sit here with a map in front of me. 13 MR. PENNY: There is a graphic diagram at 14 Exhibit B, Tab 1, Appendix E, which we have looked at 15 before. I think Mr. Baker took you to that during the 16 briefing on the ADR Agreement. 17 MEMBER JACKSON: Right. Thank you. 18 MR. PENNY: That's not a map in the 19 traditional sense of the word, but it does show the 20 entry points at Dawn and the Dawn-Trafalgar system and 21 where Parkway lies in the overall system. 22 MEMBER JACKSON: Yes. I think that will be 23 helpful. 24 Thank you, Mr. Penny. 25 MR. PENNY: Okay. 26 THE PRESIDING MEMBER: I'm sorry, 27 Mr. Thompson. Please -- 28 MR. PENNY: Frankly, if a map in the more Les Services StenoTran Services Inc. 613-521-0703 1209 ANDREWS/BAKER/STEDMAN 1 traditional sense of the word would be helpful, those 2 kinds of documents have been filed before in previous 3 proceedings and I'm sure we could find one and make 4 copies available as well. 5 MEMBER JACKSON: You know, I think it just 6 might. I'm not sure. 7 MR. PENNY: It always helps me once you get a 8 map. So why don't we get one at the break and we will 9 make it available to you. 10 MEMBER JACKSON: Thank you. 11 CROSS-EXAMINATION 12 MR. THOMPSON: Yes, panel, the focus of my 13 questions will be essentially what has been described in 14 the ADR Agreement, but with some additional information. 15 You have correctly pointed out that IGUA 16 supports what is described in the ADR Agreement as 17 Alternative 1. 18 Just to help us with the company's total 19 portfolio and the component of the portfolio that 20 remains system related, there is filed as 21 Exhibit C21.7 -- perhaps you could turn that up -- at 22 page 3, the summary of your transportation contracts as 23 at November 1, 2000. Is that correct? 24 MR. STEDMAN: That's correct. 25 MR. THOMPSON: All right. 26 Does that forecast that is displayed there 27 remain accurate today? Are there any material changes? 28 MR. STEDMAN: There was a slight change to Les Services StenoTran Services Inc. 613-521-0703 1210 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 that Exhibit 21.7. It was in the order of an exchange 2 going from Empress to Dawn. 3 MR. THOMPSON: Yes. Is this an item we 4 should add? 5 MR. STEDMAN: In that portfolio, yes. It was 6 a very small amount, a quantity of 128 10(3)m(3) a day. 7 MR. THOMPSON: And the commencement date? 8 MR. STEDMAN: Commencement, November 1998, 9 expiring November 2001. 10 MR. THOMPSON: Well, what I wanted to get at 11 is, this is your total portfolio that you have shown at 12 C21.7. Is that correct? 13 MR. STEDMAN: That is correct. 14 MR. THOMPSON: Based on your testimony, in 15 identifying the portfolio that is supporting system 16 transactions, it is a small part of the total TCPL and 17 then everything that falls below. Is that correct? 18 MR. STEDMAN: That is correct. 19 MR. THOMPSON: Could you just tell us how much 20 is forecasted to be supporting the system as at 21 November 1, 2000? 22 MR. BAKER: I believe those figures are 23 outlined in Appendix A to the ADR Agreement. 24 MR. THOMPSON: Yes. Unfortunately they are 25 in GJ. 26 Would it be possible just to, by way of 27 undertaking response, update C21.7 and segregate it as 28 between existing direct purchase and system? Les Services StenoTran Services Inc. 613-521-0703 1211 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. STEDMAN: Yes, we could take that 2 undertaking. 3 MR. WIGHTMAN: G8.1. 4 UNDERTAKING NO. G8.1: Mr. Stedman 5 undertakes to update C21.7 and segregate 6 it as between existing direct purchase 7 and system 8 MR. THOMPSON: Looking at Appendix A of the 9 ADR Agreement, the point that you make in your 10 examination-in-chief with respect to the TCPL component 11 that remains supporting system, according to Appendix A, 12 line 1, is only 10 per cent of the portfolio? 13 MR. STEDMAN: That is correct. 14 MR. THOMPSON: Just again to nail down the 15 information, if we go to -- this is with respect to the 16 north. 17 C21.58 gives us the north total portfolio, and 18 as of November 1, 2000 we find that at page 3 of C21.58. 19 Is that correct? 20 MR. STEDMAN: Yes. 21 MR. THOMPSON: Okay. Could you, by way of 22 under -- well, my understanding is based on the existing 23 situation there is a portion of the TCPL portfolio shown 24 under Item (a) that is supporting direct purchase 25 arrangements into the north and east. Is that correct? 26 MR. STEDMAN: There is actually that 27 portfolio, it's our total portfolio in the north, and 28 that reflects all of the direct purchase activity and Les Services StenoTran Services Inc. 613-521-0703 1212 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 T-service activity as well as system gas. 2 MR. THOMPSON: I understand that, but it -- 3 right. 4 I was just trying to have you segregate from 5 the portfolio the portion supporting direct purchase and 6 the remainder supporting system. 7 Could that be done by way of undertaking 8 as well? 9 MR. STEDMAN: Yes, we could. 10 DR. WIGHTMAN: G8.2. 11 UNDERTAKING NO. G8.2: Mr. Stedman 12 undertakes to segregate from the 13 portfolio the portion supporting direct 14 purchase and the remainder supporting 15 system 16 MR. THOMPSON: Big picture, how much of that 17 TCPL portfolio in the north and east is supporting 18 direct purchase currently? 19 --- Pause 20 MR. BAKER: While Mr. Stedman is getting the 21 figures I would just add that direct purchase in the 22 north is different from the south in that bundled direct 23 purchase arrangements in the north have not resulted in 24 any allocation or assignment of capacity. They are 25 essentially supply arrangements in Alberta. 26 For T-service customers in the north, that is 27 where there is an assignment or an allocation of the 28 capacity, so it would be that capacity that is embedded Les Services StenoTran Services Inc. 613-521-0703 1213 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 in C21.58 that we would need to identify and segregate. 2 MR. THOMPSON: Just so we are clear, I 3 appreciate T-service is supported by way of assignments, 4 but there is direct purchase going to the north and east 5 under what you call bundled delivery arrangements. Can 6 that be identified as part of this process as well? 7 MR. BAKER: Yes. 8 MR. THOMPSON: Okay. Thank you. 9 But percentage-wise, how much of the TCPL is 10 dedicated to direct purchase now, approximately, in the 11 north and east? 12 MR. STEDMAN: I would have to take an 13 undertaking to get that number for you. 14 MR. THOMPSON: Okay. Could you help us at 15 all? Without holding you to it, but is it a large 16 proportion or -- is it more than 50 per cent? 17 MR. BAKER: I think it would probably be close 18 to 50 per cent when you look at capacity that has been 19 allocated for T-service and capacity that has 20 facilitated the supply arrangement direct purchase in 21 the north. 22 MR. THOMPSON: Thank you. 23 THE PRESIDING MEMBER: Mr. Thompson, do you 24 want the undertaking in any case? 25 MR. THOMPSON: Yes, please. 26 DR. WIGHTMAN: G8.3. 27 UNDERTAKING NO. G8.3: Mr. Stedman 28 undertakes to provide percentage-wise how Les Services StenoTran Services Inc. 613-521-0703 1214 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 much of the TCPL is dedicated to direct 2 purchase now, approximately, in the north 3 and east 4 MR. THOMPSON: Thanks. 5 Now, let's then just focus on the south, if we 6 could, and perhaps go back to B21.7. 7 The contracts that are currently serving 8 system, being a small portion TCPL, and then these other 9 contracts are delivery-point specific. Am I right? 10 They specify either Parkway or Dawn? 11 MR. STEDMAN: That is correct. 12 MR. THOMPSON: And could you just -- is there 13 an exhibit somewhere that sets out the delivery points 14 of the contracts? 15 And if not, if you could just run down the 16 list, we know there's a TCPL -- or, sorry, maybe it's in 17 Appendix A. 18 MR. STEDMAN: I was going to say that. On 19 Exhibit 21.7, on the last column, it does have a 20 delivery point for each of those contracts. For 21 example, TCPL lands at the CDA, TransCanada CDA, which 22 is Parkway. 23 MR. THOMPSON: Okay. And we also have the 24 delivery points specified in Appendix A, as well. 25 MR. BAKER: That's correct. 26 MR. THOMPSON: All right. 27 THE PRESIDING MEMBER: Can I just clarify, so 28 I understand. Les Services StenoTran Services Inc. 613-521-0703 1215 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 CDA is Parkway. SWDA is Dawn. Is that what 2 it is? On 21.7, you show two identifiers. 3 MR. BAKER: That's right. 4 THE PRESIDING MEMBER: Sorry, Mr. Thompson. 5 MR. THOMPSON: Now, so the existing direct 6 purchases, in the south, which have displaced TCPL 7 capacity, shown in the first part of C21.7, have this 8 Parkway obligation if it's FT capacity. Correct? 9 MR. STEDMAN: That's correct. 10 MR. THOMPSON: And, at the moment, that's a 11 365-day obligation at Parkway? 12 MR. BAKER: For bundled direct purchase, 13 that's right. 14 MR. THOMPSON: If parties unbundle, they will 15 be subject to the 22-day call for volumes at Parkway, 16 and bundled and unbundled volumes at Parkway will have a 17 reduced obligation by 20 per cent, as a result of the 18 delivery point flexibility settlement? 19 MR. BAKER: That's right. 20 MR. THOMPSON: And an opportunity to increase 21 that beyond 20 per cent on a user-pay basis? 22 MR. BAKER: That's correct. 23 MR. THOMPSON: And in terms of the existing 24 situation, just to get the picture, for existing direct 25 purchasers, with respect to the point you are making 26 about turnback, you have allowed direct purchasers to 27 authorize you, in effect, to turn back to TCPL 28 capacity -- which you have done? Les Services StenoTran Services Inc. 613-521-0703 1216 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. BAKER: That's correct. 2 MR. THOMPSON: And those direct purchasers 3 can, then, access delivered gas at Parkway or secondary 4 capacity at Parkway? 5 MR. BAKER: That's correct. 6 MR. THOMPSON: And, at the moment, that is 7 probably produced as a savings compared to a 100 per 8 cent toll to Parkway? 9 MR. BAKER: That's correct. 10 MR. THOMPSON: So the turnback policy has 11 facilitated some benefits for infranchise users who are 12 obligated at Parkway? 13 MR. BAKER: That's correct. 14 MR. THOMPSON: But the Parkway obligation 15 prevents direct purchasers from getting the advantages 16 at Dawn? 17 MR. BAKER: For the portion that does not have 18 flexibility under the 20 per cent system-wide or the 19 additional through the cue, that's right. 20 MR. THOMPSON: But, currently, before this 21 flexibility kicks in, currently, large users could get 22 access to delivered gas at Dawn for interruptible 23 supplies or something over and above their firm 24 requirements? 25 MR. BAKER: That's correct. 26 MR. THOMPSON: It's not that they were 27 completely shut out but substantially shut out of Dawn? 28 MR. BAKER: That's correct. Les Services StenoTran Services Inc. 613-521-0703 1217 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. THOMPSON: And that's what the delivery 2 point flexibility settlement addresses. 3 Now, as the demand at Dawn increases, is the 4 differential between Dawn and Parkway likely to narrow, 5 in your view? 6 MR. STEDMAN: Could you repeat that question, 7 please. 8 MR. THOMPSON: Right. As demand at Dawn 9 increases, then, as can be satisfied, is the existing 10 differential between Dawn and Parkway likely to decline? 11 MR. STEDMAN: As more gas arrives at Dawn, 12 depending on the takeaway capacity going to Parkway, if 13 it is exactly where it is today, I would say that the 14 Dawn-to-Parkway differential would increase. 15 MEMBER JACKSON: Price differential in the 16 commodity we are talking about, is it? 17 MR. STEDMAN: It's basically to take the 18 transport from Dawn and transport it to Parkway. At 19 that -- today's environment might be 15 cents' value in 20 that transport. And that would increase -- as more gas 21 arrives at Dawn, it would increase because more people 22 would be trying to take that gas to Parkway. 23 MEMBER JACKSON: But the only place you would 24 see that is in the market price at Dawn and the market 25 price for gas at Parkway. Is that right? 26 MR. STEDMAN: That is correct. 27 MEMBER JACKSON: Thank you. 28 MR. THOMPSON: Now, IGUA doesn't favour your Les Services StenoTran Services Inc. 613-521-0703 1218 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 vertical slide proposal because, in its view, it leaves 2 new direct purchasers with little pieces of upstream 3 capacity that they probably won't be able to use. 4 You are aware of that? That's spelled out in 5 the IGUA testimony. 6 MR. BAKER: I'm aware that's the position, 7 that's right. 8 MR. THOMPSON: But IGUA is very sensitive to 9 your desire to avoid stranded costs. 10 In turn, I want to compare the difference 11 between what you are advocating the vertical slice and 12 what we are advocating. 13 In terms of the existing situation, you would, 14 as you say, grandfather existing direct purchasers; they 15 keep what they have, in effect? 16 MR. BAKER: They would, that's right. 17 MR. THOMPSON: And we would do the same. 18 And then, you would, mandatorily, impose a 19 vertical slice of your remaining portfolio supporting 20 system gas on anyone who wants to go direct purchaser or 21 a new -- sorry -- a system gas user who wants to go 22 unbundled? 23 MR. BAKER: That's correct. 24 MR. THOMPSON: And our approach is to say that 25 they must select what is in your portfolio at the 26 delivery point which they wish to access. 27 MR. BAKER: That's correct. 28 MR. THOMPSON: Now, you say that's a first Les Services StenoTran Services Inc. 613-521-0703 1219 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 come, first served approach; it certainly has that 2 aspect to it. But it has more of a choice than what you 3 are suggesting. 4 MR. BAKER: Yes, there's, clearly, more choice 5 in that option. To the extent a prospective direct 6 purchase customers wants to supply at Dawn, they can 7 choose between the various transportation options that 8 Union has in its portfolio at Dawn. So there is more 9 choice under that option. 10 MR. THOMPSON: And I guess the way we see it 11 is it allows choice but it contains a prohibition in 12 that they can't go to the secondary market, or other 13 sources, as long as Union has inventory that can 14 serve -- provide service to that customer at the 15 delivery point where they want service? 16 MR. BAKER: That's correct. 17 MR. THOMPSON: Okay. Now, just looking 18 forward, does Union envisage that it will continue to 19 serve a significant component of system gas users? 20 What are your forecasts, in that respect. 21 MR. BAKER: I think we have more or less given 22 up trying to forecast how much direct purchase we will 23 or may see in the future but, certainly, at this point, 24 we anticipate being a system gas supplier for some time. 25 MR. THOMPSON: On that assumption, do you 26 really envisage that under the approach that we favour 27 you will run into a situation of stranded costs? 28 MR. BAKER: Our view currently, with the Les Services StenoTran Services Inc. 613-521-0703 1220 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 current market conditions the way they are, customers' 2 preference is to be at Dawn. So we certainly see that 3 under that approach most customers would elect to take 4 the capacity with a Dawn delivery point. 5 Therefore, you could run into a situation 6 where all of the Dawn-based capacity is used to 7 facilitate new direct purchase and all that remains is 8 capacity with a Parkway delivery point. 9 Again, to your earlier point, that does depend 10 on how much direct purchase happens in the future, the 11 pace of that direct purchase. 12 MR. THOMPSON: But under our proposal if 13 anybody who picks Dawn would have to take up your 14 capacity serving Dawn and looking at Exhibit F8.2 that 15 includes Alliance/Vector which at the moment is at a 16 premium to TCPL? 17 MR. BAKER: That's correct. 18 MR. THOMPSON: Is it fair to say that part of 19 the differential between delivered gas at Dawn and 20 delivered gas at Parkway is wrapped up in the prospect 21 that Alliance/Vector capacity is selling at a 22 substantial discount in the secondary market? 23 MR. BAKER: That's not necessarily true. That 24 could be the reverse situation that Steve was 25 describing, where people would select Parkway instead of 26 Dawn at some future date. Today they want Dawn, but at 27 some date in the future they may select Parkway. 28 So then you would look at what's the assets at Les Services StenoTran Services Inc. 613-521-0703 1221 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 Parkway, assets that probably don't include Alliance and 2 Vector, so at that point in time you could run out and 3 have a scenario where you run out of Parkway capacity 4 and people would then -- then you have the stranded 5 assets at Dawn. 6 It really does depend on what happens with the 7 marketplace into the future. 8 MR. THOMPSON: I agree with that and I was 9 really just trying to get a feel for the probability 10 that there will be stranded costs under the scenario 11 that we suggest. I personally don't think there will 12 because of the market dynamics and because under our 13 proposal they have to take, to go to Dawn, 14 Alliance/Vector capacity at 100 per cent toll and that 15 may drive them away from Dawn in terms of your capacity. 16 MR. BAKER: I would certainly agree that the 17 potential for stranded costs is an issue that would be 18 pushed out into the future. Again, that would depend on 19 the two components that we have talked about. 20 It would depend on the pace of direct purchase 21 and it would depend on how the market evolves in the 22 future in terms of where the economics are for customers 23 in terms of whether they want to deliver at Dawn or 24 Parkway. So, I certainly agree to that extent. 25 MR. THOMPSON: And you said that our 26 alternative that you would find to be workable if once 27 all the capacity, one delivery point was taken, people 28 had to take it at the other whether they wanted it or Les Services StenoTran Services Inc. 613-521-0703 1222 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 not at that point? 2 MR. BAKER: That's correct. 3 MR. THOMPSON: If our scenario is realistic, 4 that contingency -- if everything gets pushed out into 5 the future that contingency may not arise? 6 MR. BAKER: That's correct. 7 MR. THOMPSON: Just in terms of implementing 8 alternative one, could you just describe how it would be 9 implemented? 10 MR. PENNY: Right. 11 Mr. Thompson, for clarity is the question if 12 the alternative one were adopted? 13 MR. THOMPSON: Yes. You said it was workable. 14 I just wanted to have you describe, if you would for the 15 record, the implementation features with respect to 16 alternative one to the extent they are any different 17 than the vertical slice. 18 MR. BAKER: There wouldn't be a substantial 19 difference. We would, at the time a customer or 20 marketer came forward with customers that they wished to 21 move to a direct purchase option, we would provide 22 information on what's in our portfolio at that time, and 23 they would then choose whatever components they wanted 24 out of the portfolio. 25 So, if they wanted a single transportation 26 supply at Dawn, they would choose that option. We would 27 displace the supply and make that upstream capacity 28 available to the customer or marketer. Les Services StenoTran Services Inc. 613-521-0703 1223 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. THOMPSON: Thanks. 2 Now, with respect to the alternative two and 3 your point about stranded costs, alternative two, as I 4 understand it, would permit existing direct purchasers 5 who hold an assignment of TCPL to really if they chose 6 to go unbundled to just walk away from that capacity and 7 pick up their requirements from the secondary market. 8 Is that your understanding? 9 MR. BAKER: I think that alternative goes 10 further than that. It is not limited to just unbundled. 11 It really envisions an existing bundled direct purchase 12 customer today that has an allocation of Union's TCPL FT 13 capacity. 14 Even for a bundled direct purchase customer 15 they would be allowed under that alternative to turn 16 that capacity back to Union, despite the fact that we 17 wouldn't have any ability to turn that capacity back to 18 TCPL. 19 So it is not limited solely to those customers 20 choosing an unbundled option. It applies to existing 21 bundled direct purchase customers as well. They would 22 have the ability to turn that capacity back. 23 MR. THOMPSON: I just wanted to then clarify 24 what's in Appendix B. Do you show here the total system 25 and direct purchase portfolio in the south in the volume 26 column? 27 MR. BAKER: That's correct. 28 MR. THOMPSON: This is Appendix B to the Les Services StenoTran Services Inc. 613-521-0703 1224 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 settlement agreement. So that's 502,804 GJ. Is that 2 right? 3 MR. BAKER: That's right. 4 MR. THOMPSON: And what you are showing here 5 is that if all existing system and all existing direct 6 purchase portfolio in effect walked away from their 7 Union capacity and picked up their requirements in the 8 secondary market what the cost impact of that would be. 9 Is that what that -- 10 MR. BAKER: That's correct. 11 MR. THOMPSON: Surely that's an unrealistic 12 scenario. Could everybody walk and get themselves 13 rebooked, if you will, for capacity outside of Union's 14 holdings? Is there enough out there to do that in the 15 secondary markets? 16 MR. BAKER: I think there are two things that 17 would come out of this analysis. One is certainly the 18 existing direct purchase portfolio. I think it is 19 realistic that a substantial portion of that could turn 20 the capacity back to Union and pick up capacity in the 21 secondary market. 22 The system portfolio, our customers that are 23 still on system gas, so there would need to be a 24 movement from those customers to direct purchase first 25 before the capacity would in effect be turned back to 26 Union. 27 MR. THOMPSON: All right. 28 The discounts you are showing in the column Les Services StenoTran Services Inc. 613-521-0703 1225 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 there per GJ is a discount from TCPL full toll? What's 2 this derived from, the 52 cents for TCPL and 56 for 3 exchange? How are those numbers derived? 4 MR. STEDMAN: The discount is the discount off 5 the tolls. 6 MR. THOMPSON: But is the benchmark the TCPL 7 toll? 8 MR. STEDMAN: For TCPL that is correct. The 9 discount for the next one, for Alliance and Vector, 10 would be a discount off the Alliance and Vector -- 11 MR. THOMPSON: Off each of the posted tolls 12 under the -- okay. 13 MR. STEDMAN: That's correct. 14 MR. THOMPSON: And so the total worst case 15 scenario discount, you have $277 million and what's 16 that, over the term of the contracts? 17 MR. STEDMAN: Yes. This chart in Appendix B 18 represents a shot at the market at a certain point in 19 time. This was done when the ADR was being developed 20 and at that point in time there was a total stranded 21 cost issue of around $101 million based on the market at 22 that point in time for the south. 23 Today, if you redid the numbers we did a few 24 days ago, the number is approximately $115 million. 25 That just shows the complexities of the market and how 26 the market does move. That could go down and up. 27 The other issue that falls into play here is, 28 when you go to liquidate large amounts of assets, the Les Services StenoTran Services Inc. 613-521-0703 1226 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 market value that you get for that transport wouldn't 2 necessarily be reflected in what you see today. So that 3 stranded cost could be significantly higher than that, 4 subject to what the markets are at the point in time you 5 go to liquidate. 6 A third component that affects the stranded 7 cost is the replacement of Parkway capacity. So it 8 really depends on what the customer's obligations are at 9 Parkway. If we had to liquidate Parkway capacity and 10 replace some peaking service, there would be some costs 11 associated with that as well. 12 So, at the end of the day, this represents a 13 one-year stranded cost. If you wanted to look at it 14 over five years, you could look at the market over five 15 years and judge it, but you could just multiply this 16 number by five to come up with approximately half a 17 billion dollars. 18 MR. BAKER: I think if I understand your 19 earlier question, Peter, the discount was 20 $12,000 -- that was $12,000 per day. To get the annual 21 cost column, that is multiplied by 365 days, to get the 22 total discount on an annual basis. 23 MR. THOMPSON: All right. I wondered why we 24 got the 277 to 101. 25 The $1,000 per day is the measure of dollars 26 in the dollars under the discount? 27 MR. BAKER: That's right. 28 MR. THOMPSON: And then if we multiply that Les Services StenoTran Services Inc. 613-521-0703 1227 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 number by 365, we get the annual cost in millions. 2 MR. BAKER: That's correct. 3 MR. THOMPSON: How does that translate into 4 dollars per GJ on average? 5 Based on the volumes -- if we divided the 6 volumes into $101 million, we would have some measure of 7 what people would have to pick up, would we not, if this 8 scenario unfolded? 9 --- Pause 10 I guess to do it per day would be 277 million 11 divided by the GJ per day, but do we have an annual 12 volume for GJ? 13 MR. BAKER: If you take the 277,000, which is 14 the discount in GJs per day, divided by the total number 15 of GJs in the portfolio, the 502,804, you would get 16 approximately a 55 cent per GJ discount, on average. 17 MR. THOMPSON: Yes, but I was looking at it 18 from the other perspective. Recovering this in rates, 19 is that the same number that we would have to recover in 20 rates? 21 You were saying that the stranded costs would 22 have an impact on rates. Is this the measure of impact? 23 MR. BAKER: That would be roughly correct if 24 the stranded costs were recovered from all customers on 25 a volumetric basis, that's right. 26 MR. THOMPSON: Okay. Then let's quickly turn 27 to the north, if we might. The portfolio in the north, 28 which was at C21.58 -- and looking at the expiry dates Les Services StenoTran Services Inc. 613-521-0703 1228 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 of the TCPL capacity -- C21.58, page 3 -- it appears 2 that the earliest your contracts start to expire is in 3 the autumn of 2003. 4 MR. STEDMAN: There is a small amount that 5 comes up in the EDA, the eastern zone, but it is a very 6 small amount. I believe it is 151 10(3)m(3) a day. 7 MR. THOMPSON: Oh, yes. In October of 2002. 8 MR. STEDMAN: That's correct. But there is a 9 much more significant amount in the north that comes up 10 in 2003. 11 MR. THOMPSON: But these expiry dates -- in 12 terms of your turnback policy, these are the earliest 13 dates at which you could turn some capacity back to 14 TransCanada. Is that right? 15 MR. BAKER: That's right. 16 MR. THOMPSON: Okay. I will come back to that 17 in a second. 18 In terms of the north, your approach, as I 19 understand it -- the service you have into the north is 20 essentially TCPL. There is some other there than takes 21 up something in the order of 3 per cent of the total 22 portfolio. Is that right? 23 MR. BAKER: That's correct. 24 MR. THOMPSON: The other consists of what? 25 MR. STEDMAN: I might add that for 26 today -- for 1998 there was a small percentage of other. 27 In today's environment, 2000, there is 100 per cent TCPL 28 into the north. Les Services StenoTran Services Inc. 613-521-0703 1229 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. THOMPSON: Are we not talking about north 2 and east? 3 MR. STEDMAN: Other northern -- other than the 4 southwest. 5 MR. THOMPSON: All right. When you say north, 6 you mean the north and the eastern operations, do you? 7 MR. STEDMAN: That is correct. 8 MR. THOMPSON: All right. So there is no more 9 other? 10 MR. STEDMAN: That is correct. 11 MR. THOMPSON: As of November 1, 2000. 12 MR. STEDMAN: That is correct. 13 MR. THOMPSON: And is there expected to be any 14 other going forward? 15 I had understood that you had some -- what 16 were called delivered supplies. Is that all gone now? 17 MR. STEDMAN: Union would certainly like to 18 see growth on our system in the north -- system growth. 19 As the demands grow, yes, there would be other 20 supplies -- other transport that would be required to 21 meet that demand in growth. 22 MR. THOMPSON: In IGUA's testimony -- and you 23 don't need to turn this up. Just for the Board panel's 24 reference, it is in the policy evidence at Tab 1, 25 pages 13 to 15. We had urged some consideration of 26 trying to accommodate some turnback in the north earlier 27 than the expiry dates of your TCPL contracts, and it 28 suggested that one way to do it might be to back off Les Services StenoTran Services Inc. 613-521-0703 1230 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 some of your delivered supplies and then allow some 2 customers in the north to access capacity in the 3 secondary market. 4 Just stopping there, that was our suggestion. 5 Would you agree? 6 MR. BAKER: I agree that was your suggestion. 7 MR. THOMPSON: And your answer to that was, 8 "We don't have any other capacity that wasn't backed by 9 transportation of one form or another", so you couldn't 10 do it, in effect. 11 MR. BAKER: That's right. 12 MR. THOMPSON: And that situation continues to 13 prevail. 14 MR. BAKER: That's right. 15 MR. THOMPSON: So that under the turnback 16 policy in the north, the earliest -- the best your 17 consumers could access the secondary market for their 18 existing direct purchase volumes would be 2002, and more 19 in 2003. 20 MR. BAKER: That's correct. 21 MR. THOMPSON: Now, was there some confusion 22 between the company and the customers in the north as to 23 the turnback policy in the north that you are aware of? 24 And, if there was, has it been clarified now? 25 MR. BAKER: I think it is fair to say that 26 there may have been some confusion because we are 27 dealing with two operational areas. So when we 28 implemented the turnback policy, it was a policy that Les Services StenoTran Services Inc. 613-521-0703 1231 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 would apply to both the southern and the northern and 2 eastern operations areas, but from a practical 3 perspective it could only be accessed by customers in 4 the south because that was the only area in which we had 5 expiring contracts with TCPL. 6 That confusion, to the extent that it was 7 there, was rectified by Union. We had contacted all the 8 T-service customers in the north to explain more fully 9 the turnback policy and had sent communication out to 10 those customers as well to explain what the turnback 11 policy was and when the timing of Union's contracts 12 expiry were and the fact that they could access turnback 13 at that time. 14 MR. THOMPSON: With respect to T-service 15 customers in the north, they do hold an assignment which 16 you mentioned in your examination-in-chief I believe. 17 MR. BAKER: That's correct. 18 MR. THOMPSON: Under the strict terms of that 19 assignment contract, at the end of it technically, I 20 guess, they would be in, in effect, free of the assigned 21 capacity. 22 MR. PENNY: I think that calls for a legal 23 conclusion, doesn't it, Mr. Thompson? 24 MR. THOMPSON: Well, maybe it does, but these 25 people administer the contracts. 26 I guess what I was driving at is this, that 27 some T-service customers believe that at the end of the 28 term of their assignment they should be able to access Les Services StenoTran Services Inc. 613-521-0703 1232 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 TCPL capacity in the secondary market. My understanding 2 of your company's position there is that contract is 3 subject to your turnback policy and so they should not 4 be able to access secondary market TCPL capacity before 5 you can turn it back. 6 MR. BAKER: That's correct. It really goes 7 back to the whole premise by which we facilitate a 8 direct purchase both in the south and the north. The 9 backbone underneath that methodology to facilitate 10 direct purchase was an obligation to the capacity that 11 Union had in place and that it had put in place to serve 12 those customers. 13 I think from a practical perspective, what we 14 have seen is very rapid movement in the market to where 15 there is now discounted capacity. Certainly, we don't 16 fault customers from wanting to look at every 17 opportunity they can to access discounted capacity, but 18 clearly the underlying premise underneath all direct 19 purchase options including that in the north was an 20 obligation to the capacity that had been arranged by 21 Union to serve those customers originally. 22 MEMBER JACKSON: Mr. Thompson, I didn't quite 23 understand the question, though, to which that was the 24 answer. 25 You talked about whether or not customers 26 would be able to access capacity in the secondary market 27 before Union exercised its right to turn back capacity. 28 Wouldn't your customers be even better off if there was Les Services StenoTran Services Inc. 613-521-0703 1233 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 more capacity having been turned back? There would be 2 more capacity available in the secondary market. 3 I guess I'm misunderstanding your question. 4 MR. THOMPSON: My question was really one of 5 timing. The question tied into the terms of contracts 6 that Union has with its T-service customers in the north 7 that terminate at a fixed point in time, let's say 8 October 31, 2000. Technically, they are no longer, 9 then, holding assigned Union capacity. These contracts 10 are not specifically subject to any turnback policy and 11 so some customers take the view we can go elsewhere and 12 leave Union, in effect, with some idle capacity. 13 The company's response to that, as I 14 understand it, is really the turnback policy. You have 15 to stick with us in terms of getting gas elsewhere until 16 we can accommodate your request to turn back. 17 MEMBER JACKSON: Okay. I see. That is where 18 the legal debate may come in as to whether or not they 19 have a right to require you to stay with them. Is that 20 correct? 21 MR. THOMPSON: That's correct. 22 MR. PENNY: That's why I interjected. Yes, 23 sir, Mr. Thompson's characterization of the effect of 24 that document may or may not be something that we 25 accept. 26 MEMBER JACKSON: But at the moment, the 27 administrative policy reflects the point of view that 28 the customer has to stay with Union. Is that correct? Les Services StenoTran Services Inc. 613-521-0703 1234 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 MR. THOMPSON: That's correct. 2 MEMBER JACKSON: Thank you. 3 MR. THOMPSON: The only reason I'm raising it 4 is because for IGUA to be consistent with what is 5 advocating in the south we should be subscribing to 6 endorsing the turnback policy in the north. I believe 7 that Union has clarified that with IGUA members in the 8 north and I wanted to just nail that down in the 9 evidence, if I could. 10 MEMBER JACKSON: Well, thank you for helping 11 me understand it. 12 MR. THOMPSON: Thanks. 13 Has that been clarified with customers in the 14 north, Mr. Baker? 15 MR. BAKER: To my understanding we have 16 contacted all T-service customers in the north and 17 explained the situation as you just outlined. 18 MR. THOMPSON: Finally, with respect to the 19 allocation approach in the north, when your policy was 20 initially developed you had this small piece of other 21 and you were proposing to, in effect, ignore it and give 22 people 100 per cent TCPL up to a threshold. 23 MR. BAKER: That's correct. 24 MR. THOMPSON: Is the threshold issue gone by 25 the boards now that there is no other "other"? 26 MR. BAKER: No. I think the situation can 27 still arise to the extent that Union continued to 28 displace or allocate TCPL capacity only in the north, Les Services StenoTran Services Inc. 613-521-0703 1235 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 and to the extent that Union had a desire or a need for 2 more capacity to serve growth and started to build back 3 up the other component of its portfolio there could 4 arise a situation in the future where that threshold may 5 hit but it is certainly not something that is going to 6 happen in the short term. 7 MR. THOMPSON: Could you just help us 8 understand where that threshold exists? It is described 9 at page 19 of the ADR Agreement. 10 --- Pause 11 MR. STEDMAN: It is also described in our 12 evidence on page 41 of 87. 13 MR. THOMPSON: Right. 14 The threshold kicks in if there is a certain 15 level of unbundling, as I understand it, in reference to 16 your overall level of TCPL FT capacity in the system gas 17 portfolio. I really just wanted to relate it back to 18 the update that you are going to give me with respect to 19 Exhibit C21.58, which will show a transportation 20 portfolio serving the north and east allocated between 21 system direct purchase and T-service. 22 Then if some portion of some piece of that 23 goes unbundled, we have to get to 60 per cent of 24 something and we hit a threshold. Can you help us 25 understand the mathematics of it? 26 MR. BAKER: I think what we need to do 27 there -- within the ADR Agreement there are two 28 thresholds that are being talked about. One is a Les Services StenoTran Services Inc. 613-521-0703 1236 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 threshold of 60 per cent, and this is under issues 1.2.5 2 and 1.2.6, so that is on page 19 that you referenced, so 3 to the extent that Union's system portfolio got to the 4 point where TCPL capacity represented 60 per cent or 5 less of that total portfolio, our proposal is that we 6 would move to a vertical slice approach at that time. 7 Then, under Issue 1.2.8 for the north, there 8 is a different threshold which is a 30 per cent 9 threshold level which was there to really say that to 10 the extent that we have, moving forward, incremental 11 T-service or incremental unbundled service up to a level 12 of 30 per cent, then that would provide Union and other 13 parties the right to examine the northern and eastern 14 area to see what the impact has been on facilitating 15 incremental T-service and the unbundled service at that 16 point in time. 17 So it was a recognition of the uniqueness of 18 the operations in the north. 19 MR. THOMPSON: Okay. Let's just try it with 20 a -- let's assume that your total portfolio is 100 units 21 and 50 of it is system and the remaining 50 is direct 22 purchase and T-service. Okay? 23 Taking the first threshold that you described, 24 the one described on 19, if all the existing direct 25 purchase and T unbundled, would that have any impact on 26 the threshold that we are talking about at page 19? 27 MR. BAKER: No, it wouldn't. 28 MR. THOMPSON: Okay. So it's just, within the Les Services StenoTran Services Inc. 613-521-0703 1237 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 existing system group, if -- what is it, 60 per cent of 2 that or is it 40 per cent, the 40 per cent unbundled 3 would then be on the cusp of the threshold? 4 MR. BAKER: Not necessarily because as people 5 unbundle or go T-service and take an allocation at TCPL 6 capacity, given our portfolio today the remaining system 7 portfolio would still have close to 100 per cent TCPL 8 capacity in it, so you wouldn't necessarily be close to 9 hitting that threshold. 10 The only way that threshold would be hit is 11 that if Union, again within its system supply portfolio, 12 decided at a point in the future that it could better 13 serve that system demand by something other than TCPL so 14 that it contracted for some other gas supply perhaps 15 delivered at Dawn, then that is what would change the 16 relative portfolio from what it is today which is 100 17 per cent TCPL. 18 MR. THOMPSON: Okay. So, I understand it now. 19 If we added 50 units of capacity and it was non-TCPL -- 20 MR. BAKER: That's correct. 21 MR. THOMPSON: -- and then, of the 100 units, 22 a number left, so that the overall level of FT capacity 23 in the system portfolio is 60 per cent or less, we would 24 be at the threshold. 25 MR. BAKER: That's correct. 26 MR. THOMPSON: And then, the second threshold, 27 in terms of cost management, coming back to my original 28 50 units of direct purchase in T and 50 of system, if Les Services StenoTran Services Inc. 613-521-0703 1238 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 the 50 of direct purchase in T unbundled that doesn't 2 trigger that threshold at all? 3 --- Pause 4 MR. THOMPSON: Or does it? 5 MR. BAKER: You would have -- if you take your 6 example, which is 50 units of system and 50 units of DP 7 plus T-service, you would really need to split out, in 8 your example, what is existing T-service. So, if you 9 assume that 30 units is existing bundled direct purchase 10 and 20 units is existing T-service -- 11 MR. THOMPSON: Right. 12 MR. BAKER: -- what we are saying is that, to 13 the extent that out of the remaining 80, which is system 14 and bundled direct purchase, if 30 per cent of that, 15 which is the reference to incremental, if 30 per cent of 16 that demand chooses either T-service or the unbundled 17 service, that is the nature of the threshold by which we 18 would examine the impacts of unbundling the T-service. 19 MR. THOMPSON: Okay. And the rationale is T 20 is closer to bundled than it is to unbundled, I guess, 21 operationally. Is that right? 22 And as you add T or unbundled service, you are 23 losing your diversity and your ability to make the 24 system gas customers' requirements without incurring 25 increased costs? 26 MR. BAKER: That's correct. 27 MR. THOMPSON: Thanks very much. Those are my 28 questions. Les Services StenoTran Services Inc. 613-521-0703 1239 ANDREWS/BAKER/STEDMAN, cr-ex (Thompson) 1 THE PRESIDING MEMBER: Thank you, 2 Mr. Thompson. 3 We will take a break now and come back at 4 11 o'clock. 5 Before we go, could I know what your sequence 6 of examination is so I'm not going to get them out of 7 sequence. 8 Mr. Vegh? 9 MR. VEGH: I believe I'm next. 10 THE PRESIDING MEMBER: You are next. Okay. 11 Thanks. 12 Okay, we will come back at 11 o'clock, then. 13 --- Upon recessing at 1037 14 --- Upon resuming at 1104 15 MR. PENNY: Mr. Chairman, over the break, we 16 did -- in fact, it was just before the break -- we got 17 copies of a map. I don't know whether it needs an 18 exhibit number or not; it's really just for the 19 assistance of the Board and parties. The map is a map 20 of the combined Union and Centra system from border to 21 border, show it shows the TCPL lines throughout the 22 north and then, in the southwest, it shows the general 23 layout and format of the Dawn-Trafalgar line and where 24 the various U.S. pipelines come in and so on. And that, 25 I think, although it's relatively small, when you get 26 down to southwestern Ontario, that, in combination with 27 the graphic depiction at Exhibit B, Tab 1, Appendix E, I 28 think it should give you a good sense of what the layout Les Services StenoTran Services Inc. 613-521-0703 1240 ANDREWS/BAKER/STEDMAN 1 is and which end is which and so on. 2 THE PRESIDING MEMBER: We might as well give 3 it an exhibit number, sir. 4 DR. WIGHTMAN: F8.3. 5 EXHIBIT NO. F8.3: Map of the combined 6 Union and Centra system 7 THE PRESIDING MEMBER: Thank you. 8 MR. PENNY: Mr. Chairman, the only other thing 9 that I thought I would make available to you -- you had 10 asked about the timing of the hearing the other day and 11 we have left parties with a June schedule which shows up 12 to what we are estimating is the end of our evidence. 13 That shows finishing next Wednesday. That, I will 14 confess, is a bit of an aggressive schedule but it 15 leaves us a couple of days. So, if we finish our case 16 next week, then we can move to intervenor evidence the 17 following week. The only reason we haven't given you a 18 schedule on that yet is we are still trying to find out 19 from some of the parties when their witnesses are 20 available. 21 I think it's looking like that it will spill 22 over into the week of July the 10th but we will be, 23 certainly, done in that week. 24 THE PRESIDING MEMBER: I'm just looking at the 25 issues on the original schedule you provided. 26 Two, three, et cetera, is on the 28th. Part 27 of the 28th is when you are expecting the rates panel 28 is up? Les Services StenoTran Services Inc. 613-521-0703 1241 ANDREWS/BAKER/STEDMAN 1 MR. PENNY: Yes. 2 THE PRESIDING MEMBER: Thank you. 3 I don't know that we will keep the -- it's a 4 forecast and like all forecasts, they can vary. 5 So, Mr. Vegh, I think you are up now. 6 MR. VEGH: Thank you. 7 CROSS-EXAMINATION 8 MR. VEGH: In my cross-examination, panel, I 9 will be referring to a few documents; you may want to 10 have them handy. 11 I will be referring to the graph that's 12 Exhibit F8.1 and I will be referring to the book of 13 materials that CEED prepared, which is Exhibit F3.1 -- 14 and, panel, I advised your counsel the other day of the 15 specific pages of Exhibit F3.1 that I was going to take 16 you to. I will also be referring to CEED's evidence, 17 which is Exhibit D5.1. And I will be referring to the 18 ADR settlement agreement, which is Exhibit A, Tab 7. 19 Turning, first, then, to Exhibit F8.1, which 20 is the graph entitled, "TCPL Market Value Versus Tolls", 21 as I understand it, this graph reflects the variance 22 between the TCPL tolls and the market value for TCPL 23 transportation. Is that right? 24 MR. STEDMAN: That's correct. 25 MR. VEGH: Now, this volatility that we see in 26 the transportation portions of this graph, is that level 27 of volatility restricted to TCPL? Or is it generally 28 reflective of the market value fluctuations for Les Services StenoTran Services Inc. 613-521-0703 1242 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 transportation to Ontario? 2 MR. STEDMAN: If it's a general trend, yes, it 3 would represent a lot of pipelines, but it's mainly 4 TransCanada value is what the numbers would show, if you 5 look to the left. It would show the true value for a 6 one-year market for TransCanada tolls. 7 MR. VEGH: I appreciate that. The particular 8 numbers here are TransCanada -- the market value for 9 TransCanada tolls. But would the market value for 10 transportation to Ontario generally fluctuate, in 11 accordance with this sort of pattern, not necessarily 12 the same numbers, but is it as volatile as this 13 would be? 14 --- Pause 15 MR. VEGH: Just generally. 16 MR. STEDMAN: Not necessarily. Because you 17 have a lot of U.S. pipelines that come into Ontario. So 18 you would have to compare them and look at their value. 19 And what we would have seen, in the past, for example, 20 is Panhandle value would have been -- the red line for 21 Panhandles, which are tolls, would have been higher than 22 what the market value was showing; whereas, that's come 23 more in line. So the trend -- the trend lines would be 24 basically the same but the value, compared against the 25 pipeline, would vary. 26 MR. VEGH: Right. It's a trend value that I'm 27 really asking about, the fluctuating part. It's a 28 volatile market for transportation coming into Ontario Les Services StenoTran Services Inc. 613-521-0703 1243 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 over this period. 2 MR. STEDMAN: That's correct. 3 MR. VEGH: Now, as you know, in this case the 4 Board is setting up a market design through unbundled 5 rates. The Board in doing that should try to take a 6 principled approach to what is the best sort of market 7 on a long-term basis in Ontario for transportation. 8 Isn't that right? 9 MR. BAKER: I wouldn't disagree with that. 10 MR. VEGH: So the Board's rules that it 11 developed shouldn't follow the volatility of these 12 market trends that we see in this graph. Right? 13 MR. BAKER: I am not sure I understand the 14 question. 15 MR. VEGH: All right. 16 It would be unusual, wouldn't it, for the 17 Board to set up market design rules based on where the 18 volatile transportation market seemed to be at any given 19 point in time. So to use this graph as an example, the 20 price for transportation coming into Ontario was high 21 for the period September 1996 to July 1998 and low for 22 the period September 1998 to May 2000. That sort of 23 fluctuation is a market fluctuation which the Board 24 should consider secondary to the fundamental policy 25 objective that it is trying to accomplish in unbundled 26 rates? 27 MR. BAKER: I would agree with you that the 28 policy and the methodology to facilitate direct purchase Les Services StenoTran Services Inc. 613-521-0703 1244 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 should be consistent, irrespective of where the market 2 is. So to the extent that the market value of 3 transportation is in excess of tolls at a point in time, 4 or whether it is below, the approach should be the same. 5 MR. VEGH: Right. 6 Now, the Board has, as you know, established a 7 number of committees and working groups and task forces 8 to address unbundling issues. You are aware of that? 9 MR. BAKER: I am aware of that. 10 MR. VEGH: And I won't take you to all of them 11 that are set out in Exhibit F3.1. They are there for 12 your reference, but I would like to take you to the 13 document at tab 4. Tab 4 is reportedly the market 14 design task force. In a sense, this is where all the 15 earlier task force reports and working groups 16 culminated. If you go to page 47, please, there is a 17 reference there to the same sort of issue that you and I 18 were just discussing, that is there are fundamental 19 principles which should inform unbundling. 20 Under the heading "Objectives" the report sets 21 out a definition of unbundling and the second sentence 22 in the paragraph it says: 23 "While its deliberations focused on 24 technical issues related to the 25 implementation of unbundling, the Rates 26 and Services Subcommittee was mindful of 27 the overall objectives of the exercise." 28 And it says: Les Services StenoTran Services Inc. 613-521-0703 1245 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 "The Subcommittee found the following 2 reference insightful." 3 And let me read it to you: 4 "The success of unbundling is a matter of 5 customer economics, not political 6 pronouncements. Regulators and 7 legislators can mandate open access, 8 utilities can create unbundled tariffs, 9 but if the customer cannot save money or 10 non-regulated marketers cannot profit by 11 selling either the commodity or new 12 services, unbundling will proceed very 13 slowly." 14 It goes on to say: 15 "The Subcommittee concurs with these 16 fundamental criteria." 17 So, would you agree with me that the MDTF at 18 least tried to follow some fundamental principles as to 19 the objectives of unbundling? 20 MR. BAKER: I agree that the MDTF was trying 21 to follow and set out some fundamental principles. 22 MR. VEGH: And Union was a member of the MDTF? 23 MR. BAKER: Yes, we were and on that quote 24 that you just referenced I would say that Union agrees 25 with that. Certainly when I read that quote and I look 26 at a reference to customer economics, again I look at 27 that in terms of there being real savings to an end-use 28 customer and not something that is artificial by showing Les Services StenoTran Services Inc. 613-521-0703 1246 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 a reduction in a cost of a joint optional approach, and 2 then that customer receiving potentially a higher cost 3 through some later disposition of stranded costs. 4 MR. VEGH: All right. 5 And that issue is addressed in this report as 6 well and we will get to that, Mr. Baker. 7 The task for then addressed this issue of 8 transportation allocation and I would like to take you 9 to the summary of recommendations of this task force at 10 page 3. Under the heading "Capacity Entitlement" this 11 task force, as I say after four years of industry-driven 12 solutions to this issue, the task force concluded that 13 it favours an optional rather than mandatory allocation 14 of stored and upstream transportation capacity to end 15 users with provision for LDC recovery of stranded costs 16 after mitigation. 17 Union was a member of the task force, right, 18 that concurred with this recommendation? 19 MR. BAKER: That's correct. 20 MR. VEGH: Now, Mr. Baker, you said in your 21 introductory statements this morning that the issue of 22 mandatory and voluntary allocation arose because some 23 marketers -- I'm sorry, the issue arose because of 24 excess capacity and capacity trading below tolls and you 25 said some marketers are trying to avoid some 26 responsibilities. 27 This recommendation that Union agreed with 28 goes beyond the question of -- goes beyond the issue of Les Services StenoTran Services Inc. 613-521-0703 1247 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 whether capacity is traded above or below tolls, isn't 2 it? 3 MR. BAKER: In terms of the MDTF report I 4 think it's critical to not pick out one particular 5 sentence in this report and deal with that in isolation. 6 Although that is a summary of the recommendation from 7 the task force, certainly there was not a consensus 8 resolution on this issue and that's outlined on page 13 9 of that agreement. 10 The principles that the task force took into 11 consideration are also laid out on page 15 of that 12 report, where in the full paragraph at the bottom it 13 talks about in addition to the general principles, that 14 there were three interrelated objectives associated with 15 capacity allocation and those are laid out there, which 16 are to preserve system integrity, reliability, provide a 17 level of flexibility that promotes effective competition 18 and minimize stranded or other transitional costs. 19 So I think it's key to when looking at this 20 report to look at it in its entirety and not simply 21 statements that appear in the report at a particular 22 location. 23 MR. VEGH: That's right. So the balancing 24 interest that you refer to on page 15, the task force 25 addressed its policy issues in the context of those 26 competing interests. Right? 27 MR. BAKER: That's correct. 28 MR. VEGH: And after considering those Les Services StenoTran Services Inc. 613-521-0703 1248 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 competing interests, the task force came up with the 2 recommendation that transportation on occasion should be 3 made on a voluntary, not mandatory, basis? 4 MR. BAKER: Two things on that. Again, on 5 page 13 it is clear that within the task force itself 6 there was not a consensus resolution on the issue. 7 In particular, if you turn to page 37 of that 8 document, there is a description which specifies what 9 Union's position was on this issue. The second-full 10 paragraph on page 37 talks about Union's concerns and 11 the fact that it was concerned about allocational 12 equity. What it had proposed at that time or the task 13 force was considering is a voluntary pro rata allocation 14 for all previously unassigned capacity. 15 Again, I think it is critical to recognize 16 that at the time Union was supporting, grandfathering 17 all existing direct purchase arrangements and we spoke 18 about that this morning. 19 So that there was no ability for customers 20 operating under an existing direct purchase arrangement 21 where Union had provided TCPL -- 100 per cent TCPL 22 capacity to option out of that capacity. 23 MR. VEGH: Mr. Baker, it says that Union is 24 proposing a voluntary assignment. 25 MR. BAKER: Yes, and it's a voluntary 26 assignment of all, and I would emphasize, previously 27 unassigned upstream transportation. 28 MR. VEGH: That's not what you are proposing Les Services StenoTran Services Inc. 613-521-0703 1249 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 in this case, are you? 2 MR. BAKER: I will get to that, Mr. Vegh, if I 3 can finish my remarks. 4 What I wanted to say was that Union was of a 5 view at this time that it could facilitate an optional 6 approach prospectively, using the flexibility that it 7 had in its portfolio at that time. So at the time of 8 the MDTF report, which was February 1999, Union had not 9 yet implemented its turn-back policy and we knew we had 10 a number of supply contracts with TransCanada that were 11 renewing. 12 So the thing on Union's part at the time was 13 that we may be able to facilitate an optional approach 14 going forward for a new direct purchase and we would use 15 that flexibility we had within our existing portfolio to 16 accommodate that, but the key point to recognize is that 17 shortly after the MDTF report was issued, which, as I 18 said, was February of 1999, Union implemented a TCPL 19 turn-back policy in and around April of 1999. 20 What we did through that turn-back policy was 21 provide flexibility to all existing direct purchase 22 customers, whereby they were allowed to turn back their 23 TCPL capacity that was allocated under the direct 24 purchase allocation to Union and Union would, in turn, 25 turn that capacity back to TCPL. That allowed all 26 direct purchase customers to go out and access 27 discounted capacity in the secondary market. 28 So what Union did in essence was take all the Les Services StenoTran Services Inc. 613-521-0703 1250 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 flexibility that it had in its portfolio and provide 2 that to all existing direct purchase customers. So 3 there was a significant event, is the way I would 4 characterize it, between the discussions that were going 5 on at the time of the MDTF report and what happened very 6 shortly and subsequently to the issuance of that report. 7 MR. VEGH: In implementing your turnback 8 policy did you advise parties that this means that Union 9 is no longer supporting a voluntary assignment or 10 voluntary option for previously undersigned capacity? 11 MR. BAKER: I would suggest to you that it was 12 clear through the MDTF that Union's support for a 13 prospective optional allocation was based on the fact 14 that it would use the flexibility in its portfolio, 15 because we knew that we had contracts expiring. So I am 16 not sure that it was made explicit, but Union was 17 certainly under a significant amount of pressure from 18 all parties in the marketplace, and justifiably so, to 19 provide as much flexibility as we could to access 20 discounted capacity that was in the market at that time. 21 And they were all the same parties that were -- or many 22 of the same parties that participated in the market 23 design task force that were certainly pressuring Union 24 to provide as much flexibility as we could, which led to 25 the turnback policy. 26 MR. VEGH: At the time of participating in 27 this task force, you had contemplated the turnback 28 policy? Les Services StenoTran Services Inc. 613-521-0703 1251 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: No, we had not. There was 2 probably some overlap between the finalization of that 3 report, in terms of finalizing it and getting it in to 4 the Board. As I said, in February of 1999 -- there was 5 a very concentrated effort in and around the spring of 6 1999 to land on and develop the turnback policy, to 7 apply it. The reason for that timing was that most of 8 Union's contracts with TCPL expire on November 1. So at 9 that time Union's contracts were set to expire November 10 1, 1999, and Union had to provide six months' notice to 11 TransCanada for any non-renewals. So parties knew that 12 the decision time was in and around April of 1999, and 13 that is what drove the timing. 14 MR. VEGH: Let's go back to this report and 15 the policy issues underlying the recommendations in this 16 report. 17 At page 17 there is a fuller discussion of the 18 capacity allocation methodology. There is a recognition 19 of what is called two basic approaches, and at the 20 introduction of the second paragraph on 17 there is a 21 reference to that: two basic approaches. The first 22 approach that is referred to there is one of tracking 23 entitlements, and then the second approach is set out at 24 the bottom of page 17, and it is that approach that I 25 would like to address with you. 26 It says that the other possible approach is to 27 rely on competitive and, where relevant, appropriate 28 regulatory mechanisms to operate in the capacity markets Les Services StenoTran Services Inc. 613-521-0703 1252 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 to flow any rents associated with capacity through to 2 end users. If the markets work properly, there should 3 be no need to track and reallocate capacity entitlements 4 among marketers whose customers exercise market choice. 5 And then, over on 18, under the heading 6 "Upstream Transportation", the conclusions from that 7 approach are set out: 8 "With respect to upstream transportation, 9 the Task Force was able to agree on a 10 framework for allocating capacity 11 associated with low volume end-users. 12 That framework is described in greater 13 detail below, but as a general matter it 14 relies on the second approach --" 15 That is, the market approach we just went through. 16 "It involves a one-time, optional 17 allocation of capacity to marketers, at 18 cost, with provision for recovery of 19 stranded costs, after prudent mitigation, 20 from all LDC delivered customers (so that 21 sales customers do not subsidize 22 transportation customers). In other 23 words, the Task Force believes that --" 24 -- and this is what I would like to emphasize with 25 you -- 26 "-- given conditions in upstream capacity 27 markets now (and anticipated over the 28 next several years), market forces can be Les Services StenoTran Services Inc. 613-521-0703 1253 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 relied on to ensure that either there are 2 no economic rents associated with 3 upstream transportation, or that any 4 rents that do materialize will flow 5 ultimately to end users." 6 Now, the conditions in the upstream 7 transportation market haven't changed in that sense, 8 have they? That market is effective to ensure that 9 economic rents that do arise will flow to end users, 10 isn't it? 11 MR. BAKER: I think you really need to define 12 what you mean by economic rent. Certainly from Union's 13 point of view, the situation that you have -- and I 14 think an example may help to illustrate it -- is that if 15 full toll capacity is a dollar and the capacity is 16 trading in the market at 70 cents, I think what has been 17 referred to is the fact that there is an economic rent 18 in this situation of 30 cents. If you follow through 19 what is certainly my interpretation of what was talked 20 about in the MDTF, to allow an optional allocation 21 approach to allow a marketer and their customers to 22 extract that 30 cent economic rent, through an optional 23 approach, what it does is, it leaves Union with excess 24 capacity, which it would have to go and mitigate. So we 25 would have capacity at the dollar toll and we would have 26 to mitigate it in a market where the value was 70 cents. 27 So there is a cost, and it has been referred to as a 28 stranded cost of 30 cents. Les Services StenoTran Services Inc. 613-521-0703 1254 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 So there is an equal and offsetting amount 2 between what a marketer customer would be able to 3 achieve through an optional approach and the 4 corresponding cost that would be left with Union to try 5 to mitigate the excess capacity, and in my view that is 6 not what I would term to be an economic rent. And that 7 really goes to the comments I made earlier, that in 8 Union's view to structure direct purchase in that kind 9 of a mechanism does not result in any efficiencies. 10 What we have done is said that to the extent 11 that we can facilitate flexibility, either through our 12 portfolio or through delivery point flexibility, or 13 through the fact that our contracts under the vertical 14 slice will expire within a couple of years, at that time 15 customers and marketers are free to make whatever 16 arrangements they want to make in the marketplace, 17 subject to system design and integrity considerations. 18 If there is an economic rent that exists at that point 19 in time, marketers are free to extract it. 20 MR. VEGH: Mr. Baker, you are answering a 21 large number of questions -- 22 MR. PENNY: You asked him a large number of 23 questions. 24 MR. VEGH: No. The one I asked -- 25 MR. PENNY: You asked him at least two. 26 MR. VEGH: Mr. Penny, the one I asked -- and 27 he answered at least five. 28 The one I asked had to do with the economic Les Services StenoTran Services Inc. 613-521-0703 1255 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 rents referred to at page 18. I take it from at least 2 the first part of your answer, Mr. Baker, that the 3 economic rent would be this 30 cent difference between 4 the transportation toll and the market value of the 5 transportation. 6 MR. BAKER: Yes. What I was trying to say 7 was -- what the report refers to is that these economic 8 rents should flow through to end users to the extent 9 possible. What I am trying -- 10 MR. VEGH: I will stop you there, please. 11 MR. PENNY: Perhaps you could let the witness 12 finish. 13 THE PRESIDING MEMBER: Carry on. 14 MR. BAKER: What I am trying to say is that a 15 30 cent economic rent, if you want to call it that, on 16 one side of the equation that leads to a stranded cost 17 of 30 cents on the other side of the equation for Union 18 does not result at the end of the day -- if you follow a 19 pure cost causation principle, will not result in any 20 value for the end use consumer. 21 So the report says that any rents that do 22 materialize should flow through to end users, and what I 23 am suggesting is that there will not be a benefit that 24 will materialize when you consider both sides of the 25 equation. Therefore, there will be no benefit to flow 26 through to the end user. 27 MR. VEGH: Finished? 28 MR. BAKER: Yes. Les Services StenoTran Services Inc. 613-521-0703 1256 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: The report is referring in this 2 paragraph to two things: one is to economic rents and 3 one is to stranded costs. And I would like to deal with 4 them separately. 5 The economic rents that are referred to here 6 is the difference between the toll value and the market 7 value of transportation. Yes? 8 MR. BAKER: Yes, I would agree. 9 MR. VEGH: And this report says that market 10 forces should be relied on to ensure that that 30 cents 11 works its way to end use customers. Yes? 12 MR. BAKER: That's right. 13 MR. VEGH: And have there been any changes in 14 the upstream transportation market which would prevent 15 that 30 cents from alternately flowing to customers? 16 MR. BAKER: Yes, clearly there has, and again 17 I come back to the fact that the MDTF specified, as an 18 interrelated objective, again on page 15, to minimize 19 stranded costs. The example that I just went through 20 suggests that you cannot look at the issue of economic 21 rent or end use customer benefit by considering one side 22 of the equation. By trying to do that, you can say at a 23 high level that there is an economic rent and, 24 therefore, there is a value that will flow through to 25 the end use customer. But that is not an appropriate 26 comparison or analogy in my view, because you have to 27 consider the other side of the equation, which is the 28 stranded cost issue, and the MDTF did acknowledge that Les Services StenoTran Services Inc. 613-521-0703 1257 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 there should be every attempt to minimize stranded costs 2 under an unbundling proposal. 3 MEMBER JACKSON: And the attempt to minimize 4 them in this case would be to charge all of their users 5 for any which occur? Is that what you are saying? 6 MR. BAKER: To the extent that stranded costs 7 were unavoidable, I think there was a recognition that 8 they should be paid for by all customers as trying to 9 facilitate the move to an unbundled service. Certainly, 10 Union's view of that is that, to the extent -- the 11 example that I would use is, to the extent that Union 12 had to invest in systems or process changes to be able 13 to offer an unbundled service, it is those kinds of 14 costs that need to be incurred to be able to facilitate 15 an unbundled service that should be picked up by all of 16 the customers because it is setting the structure to 17 allow all customers the opportunity to elect that 18 service. But I would differentiate that strongly 19 between the stranded costs that we are talking about in 20 this situation for upstream transportation capacity. 21 MEMBER JACKSON: Okay. I think that helps me. 22 You say you differentiate the stranded costs 23 that we are talking about on page 18 from which stranded 24 costs? I thought these would be the very sorts of ones 25 you would want to include in the group that would be 26 recovered from all customers. Not distinguish them, but 27 I am just not sure what the distinguishing -- 28 MR. BAKER: What I referred to were costs that Les Services StenoTran Services Inc. 613-521-0703 1258 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 are required to facilitate unbundling, not necessarily 2 stranded costs. So those are the process -- system 3 changes and things of that sort that, I think we would 4 agree, should be recovered from all customers. 5 MEMBER JACKSON: And you were saying there was 6 a relatively general agreement -- and I think you 7 mentioned page 15 -- I just wonder, just to help me 8 here, without having to scan the full page -- a 9 relatively good agreement that stranded costs, if 10 prudently incurred in the first instance by the company, 11 should be recovered from customers of the distribution 12 system. Is that correct? 13 MR. BAKER: Again, I would qualify that a bit 14 to say that, in my view, the overriding objective of the 15 MDTF, again on page 15, was to minimize stranded and 16 other transitional costs. That was the first principle 17 and I view that to be the overriding principle. But to 18 the extent that it is unavoidable through the unbundling 19 exercise that some stranded cost arise, then there was 20 an agreement that those costs would be recovered from 21 all customers. But I think the key and overriding 22 principle was to minimize stranded or transitional costs 23 in the first instance. 24 MEMBER JACKSON: Okay. I think I have that. 25 Thank you very much. 26 MR. VEGH: Mr. Baker, I'm still with you on 27 page 18. 28 Just for clarification, the second sentence Les Services StenoTran Services Inc. 613-521-0703 1259 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 that refers to the: 2 "...one-time, optional allocation of 3 capacity to marketers, at cost with 4 provision for recovery of stranded costs, 5 after prudent mitigation..." 6 The stranded costs that are referred to there 7 are the stranded transportation costs, aren't they? 8 MR. BAKER: That's correct. 9 MR. VEGH: Okay. 10 MR. BAKER: But, again, you cannot read that 11 recommendation from the MDTF in isolation from what 12 Union's position was and what it was proposing, which is 13 outlined on page 37 of the agreement that we just talked 14 about earlier. 15 MR. VEGH: Okay. So we agree, then, on what 16 we are talking about with respect to stranded costs. I 17 just want to confirm that we agree on what we are 18 talking about with respect to the economic rents. 19 You would agree that if marketers offered 20 unbundled services, the marketers operating in a -- 21 because of the competitive nature of the upstream 22 transportation market, the marketers would not be in a 23 position to pocket that 30 cents. Competitive forces 24 would require that 30 cents to flow ultimately to end 25 users. 26 MR. BAKER: Under ideal competitive market 27 circumstances I would agree. I think there is a great 28 deal of other opinions in terms of whether all those Les Services StenoTran Services Inc. 613-521-0703 1260 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 conditions exist. 2 MR. VEGH: In the upstream transportation 3 market? 4 MR. BAKER: For the direct purchase market in 5 Ontario. 6 MR. VEGH: Well, this report says that you can 7 rely on competition in the upstream transportation 8 market to ensure that economic rents go to customers and 9 I'm just asking you if there have been any changes in 10 the upstream transportation market since this report 11 that would make you resile from that conclusion. 12 What I'm saying is there are a great many 13 things that are referred to in this report, a great many 14 things like minimizing stranded costs, like making sure 15 that the economic rents flow through to the maximum 16 extent to the end user. 17 The MDTF focused on a framework that would 18 allow unbundling and provide real benefits to end users. 19 Again, what you are referring to is one side of the 20 equation. I don't dispute that with you, that to the 21 extent that a marketer is able to elect not to take 22 Union's capacity at full toll and elect discounted 23 capacity in the marketplace there is a differential; and 24 you can refer to that as an economic rent but, again, we 25 are back to the same position. 26 My position is that there is another side of 27 the coin that must be considered when you are trying to 28 isolate and look at the true value to an end-use Les Services StenoTran Services Inc. 613-521-0703 1261 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 consumer. So to follow through your example, even if 2 the full economic rent of a marketer being able to 3 access discounted capacity in the marketplace was flowed 4 through to that end-use customer, even if you take that 5 assumption, following a cost causation principle where 6 Union is now going to incur a stranded cost because it 7 now has to mitigate or shed its capacity in a secondary 8 market for that same value, that negative economic rent, 9 subject to a prudency review from the Board, will be 10 recovered from that very customer. 11 So there is a benefit on one hand and there is 12 a cost on the other, and I suggest that they net out 13 pretty close to zero. 14 MR. VEGH: I don't think we have to continue 15 this debate that much longer except to say that the MDTF 16 obviously considered both sides of that economic 17 equation and came to the conclusion that competition 18 should be relied upon to ensure that the benefits will 19 flow to end users and that all stranded costs after 20 prudent mitigation should be received or collected from 21 LDC delivery customers. Do you agree with that? 22 MR. BAKER: I agree with that. But, again, 23 you have to take that in the context of everything that 24 was going on at the time of this report. 25 I won't repeat the same remarks that I made, 26 but clearly Union's approach at the time of the MDTF is 27 described on page 37. It was consistent with everything 28 that was talked about in the MDTF. We wanted to Les Services StenoTran Services Inc. 613-521-0703 1262 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 minimize stranded costs and we wanted to use the 2 flexibility that we had at that time in our portfolio to 3 be able to try to facilitate an optional approach going 4 forward. 5 But a lot of things changes after the 6 conclusion of the MDTF and I talked about the turnback 7 policy. That is a significant event because we took all 8 the flexibility that we would have otherwise had to 9 facilitate an optional approach and we provided that to 10 all existing direct purchase customers. It's a 11 significant change and, in my view, you just can't pull 12 out bits and pieces of this report without reviewing it 13 in the total context of both our position at the time of 14 the report and the events that happened subsequent to 15 the publishing of this report. 16 MEMBER JACKSON: Mr. Baker, the customers of 17 Mr. Vegh would have contracts with you. Right? Of what 18 term would those contracts be? 19 MR. BAKER: The customer who is served largely 20 by Mr. Vegh's clients would have a direct purchase 21 contract or an agency agreement between the end-use 22 customer and the marketer. 23 MEMBER JACKSON: Okay. So that there really 24 isn't a contract for service on your system. It is only 25 because of the agency agreement that they are entitled 26 to manage a certain amount of transportation on your 27 system and upstream transportation which is related and 28 perhaps bundled. Is that correct? Les Services StenoTran Services Inc. 613-521-0703 1263 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: That's right. The customer signs 2 up for the direct purchase option and they sign an 3 agency agreement with the marketer which allows the 4 marketer to purchase the supply and manage the 5 transportation on their behalf. As I said, the way we 6 have facilitated that to date has been to allocate 7 100 per cent TCPL capacity in that transaction. 8 MEMBER JACKSON: But the customers we are 9 talking about, then, that are being acted for, 10 essentially have a contract which would allow them out 11 at maybe not any time, because I think we have discussed 12 that already too, but certainly a short period of time 13 and nothing that would exceed a year. Is that correct? 14 MR. BAKER: No. There are various contracts 15 that are out there in the marketplace, most of which are 16 under what we refer to as agency billing and collection 17 contracts. Those are not limited to a year. Those can 18 be long-term contracts where a marketer will provide an 19 option to a customer that fixes his gas supply and 20 commodity-related charges at a certain price for a 21 period of time, and those can be long-term arrangements. 22 MEMBER JACKSON: But the customer's contract 23 with you, which Mr. Vegh has an agency agreement to 24 manage, is an implied contract maybe under a rate 25 schedule. It's not necessarily something formally 26 signed, or is it? 27 MR. BAKER: There is really no contract 28 because residential customers on Union's system are what Les Services StenoTran Services Inc. 613-521-0703 1264 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 we refer to as non-contract customers, so under the 2 direct purchase arrangement what Union provides is a 3 delivery service, a regulated delivery service, and 4 there is no contract between Union and the end-use 5 residential customer for that. 6 MEMBER JACKSON: What I just wanted to clarify 7 for myself was that there is really no impediment for 8 anyone who has the agency agreement to say "We are going 9 off the bundled arrangement." There is no contractual 10 thing holding them to stay in the bundled arrangement 11 for another time period, they can go off, and that's 12 what creates this problem and this dollar amount which 13 has been described as economic rent. Is that correct? 14 MR. BAKER: If I'm trying -- 15 MEMBER JACKSON: I may have sinned. If I were 16 down where Mr. Penny is I have probably sinned by asking 17 too many questions at one time. Just let me see if I 18 can break it up for you -- go ahead. 19 MR. BAKER: If I understand your question it 20 gets at really I think the very issue that we are 21 talking about which is: Does or should a marketer have 22 an obligation for the capacity that Union has provided 23 to him to manage the agency agreements or the direct 24 purchase service on behalf of the end-use residential 25 customers that they are representing? 26 That is the very heart of the issue that we 27 are talking about here. It is certainly our view that a 28 term and condition of direct purchase, as it has been Les Services StenoTran Services Inc. 613-521-0703 1265 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 from the beginning of time since we facilitated direct 2 purchase, is that that has been the construct whereby 3 there is an obligation to take the capacity that we have 4 arranged on behalf of those customers when we were 5 serving them as system customers. The marketer then 6 steps into our shoes. They arrange the supply. They 7 manage the transportation. 8 What we are saying here is that that should 9 continue. But to the extent that our underlying 10 contracts expire, either with TransCanada or with our 11 other U.S. sources of supply, the marketer at that point 12 in time has the freedom to go out and make their own 13 arrangements. 14 Again, that gets back to the turnback policy 15 where if initially a marketer was allocated 100 units of 16 capacity under direct purchase, what the turnback policy 17 is allowed is 49 units of that capacity of being turned 18 back, and the marketer can now go out and arrange for 19 whatever source of supply he wishes, subject to the 20 system integrity and design. 21 MEMBER JACKSON: And that will be the first 22 time that he has an actual contract for transportation. 23 MR. BAKER: That's right. 24 MEMBER JACKSON: Thank you very much for that 25 help. 26 I am sorry, Mr. Vegh, if I have interrupted 27 your thought process. I hope I haven't. 28 MR. VEGH: Not at all. Thank you, sir. Les Services StenoTran Services Inc. 613-521-0703 1266 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 Mr. Baker, just by way of clarification, when 2 we talk about the unbundled services under the U2 rate 3 and the other unbundled rates, those services do not now 4 exist; right? 5 MR. BAKER: That's correct. 6 MR. VEGH: If there is a residential customer 7 or a number of residential customers that are now what 8 we call system customers, then when those customers make 9 a decision to sign up with the marketer and choose an 10 unbundled service, it is those customers who will be 11 assigned a vertical slice; right? 12 MR. BAKER: That's correct. The vertical 13 slice applies prospectively to existing system customers 14 that then elect a direct purchase option. It is not 15 specific, to be clear, to just unbundled customers. 16 This is a methodology. We are not retracting 17 the bundled direct purchase option which exists today. 18 Prospectively, whether customers elect either a bundled 19 direct purchase option through a marketer or an 20 unbundled direct purchase option through a marketer, the 21 vertical slice methodology would apply. 22 MR. VEGH: What we are talking about in this 23 case, at this stage of the case, is the design of the 24 unbundled rates; right? 25 MR. BAKER: Correct. 26 MR. VEGH: What the MDTF was talking about was 27 the design of unbundled rates; right? 28 MR. BAKER: I am not sure that is exactly what Les Services StenoTran Services Inc. 613-521-0703 1267 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 the MDTF looked at. I think they were looking at the 2 business principles and approach that should guide the 3 development of an unbundled service. 4 MEMBER JACKSON: Mr. Vegh, it is an unbundled 5 service that we are talking about, isn't it, not an 6 unbundled rate at this point? 7 MR. VEGH: Thanks for the clarification. 8 That's right, the unbundled service. 9 MEMBER JACKSON: Thanks. 10 MR. VEGH: What we are addressing here is the 11 unbundling of upstream transportation so that a customer 12 can take on an unbundled service and provide their own 13 transportation arrangements. 14 MR. BAKER: That's true. But what we are 15 talking about is -- that is the ideal end state, if you 16 want to look at it, where all of the transportation and 17 all the supply would be contracted for and managed by a 18 marketer on behalf of the customers that they serve. 19 The issue that is inherent in the MDTF -- and 20 it is inherent in the issues that we are talking about 21 today -- is how best to transition to that end state. 22 Those are issues that I would suggest were not 23 resolved at a consensus level at the MDTF. They were at 24 a high level principle basis but there were substantial 25 details, that we are dealing with now in this 26 proceeding, that were open questions at that time. 27 MR. VEGH: Well, the report says what it says, 28 and it states a pretty unequivocal consensus. Just in Les Services StenoTran Services Inc. 613-521-0703 1268 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 terms of clarifying what you say, your position was that 2 the MDTF, at page 37 -- and just so I understand it, it 3 says at page 37: 4 "Union is proposing a voluntary temporary 5 assignment of all previously unassigned 6 upstream transportation of tolls." 7 (As read) 8 Leaving aside what happened after the MDTF 9 report, does this accurately state what Union's position 10 was at the MDTF and what it was that Union proposed? 11 MR. BAKER: Yes, it does. As I said, you 12 cannot look at it, in my view, and say: Well, let's not 13 worry or look at what happened after the MDTF. 14 But to your point, that is what we had 15 proposed at that time. The two critical elements were 16 that Union was supporting grandfathering existing 17 arrangements. So to the extent that we had allocated 18 100 per cent TCPL capacity to facilitate direct purchase 19 to that time, there was going to be no impact or effect 20 on those direct purchase arrangements. 21 That position was supported by a number of 22 parties. 23 What we were talking about here at the time of 24 the MDTF was a prospective optional allocation, again 25 using the flexibility that we had within our TCPL 26 contracts at that time. 27 MR. VEGH: Right. So it was the remainder, 28 and that remainder was to be a voluntary assignment. Les Services StenoTran Services Inc. 613-521-0703 1269 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: Using the flexibility that we had 2 with our contract at that time. 3 MR. VEGH: And just to get the chronology 4 down, this report is February of 1999 and your 5 application, which calls for a mandatory assignment, is 6 December 1999. 7 Since the time of the consensus in the MDTF 8 report -- I'm sorry, not since that time. At the time 9 of the report Union did not have a PBR proposal before 10 the Board; right? 11 MR. BAKER: That's correct. 12 MR. VEGH: And since this report Union has 13 filed a PBR application with the Board and is asking the 14 Board to implement PBR at the same time as it implements 15 this unbundling. 16 MR. BAKER: Is there a question? 17 MR. VEGH: Is that right? 18 MR. BAKER: Yes, that's correct. 19 MR. VEGH: One of the reasons that Union is 20 asking that PBR and unbundling be implemented at the 21 same time is that Union's service offerings will compete 22 with unbundled service offerings, isn't it? 23 MR. BAKER: Could you repeat that, please? 24 MR. VEGH: One of the reasons why Union is 25 asking that the Board approve its PBR proposal at the 26 same time as the unbundling proposal is that Union's 27 service offerings, its bundled service offerings, will 28 be competing with unbundled service offerings. Les Services StenoTran Services Inc. 613-521-0703 1270 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: No, I don't agree with that. 2 What our unbundling proposing is, is an option 3 to customers. We structured the unbundled service back 4 to the definition of an unbundled service, which is to 5 pull out the discrete components of a bundled service 6 and provide those on an unbundled basis to parties that 7 wished to elect that service. 8 But clearly the unbundled service has not been 9 structured in any way that says that Union has any 10 discrimination or desire to match a bundled service to 11 an unbundled service. 12 Union derives its revenue -- it's a delivery 13 company and so to the extent that volumes are flowing 14 through our system, either under a bundled or unbundled 15 service is a good thing to Union. 16 MR. VEGH: Can you turn, please, to Board 17 Staff Interrogatory 1.69. Do you have that? 18 MR. BAKER: Yes. 19 MR. VEGH: In the middle paragraph in your 20 answer you say: 21 "Unbundled services provide more options 22 to customers. Providing these services 23 to retail energy marketers increases the 24 supply alternatives, creating competitive 25 choices for small residential customers. 26 Those customers that choose to remain on 27 a bundled service will do so only if the 28 price of bundled service remains Les Services StenoTran Services Inc. 613-521-0703 1271 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 competitive with the alternatives 2 available on the market. 3 Implementing PBR will provide Union 4 the flexibility to manage the price 5 increase to ensure that bundled services 6 remain a competitively priced option for 7 customers." (As read) 8 Mr. Baker, doesn't that answer say that one of 9 the reasons why Union is proposing PBR at the same time 10 as unbundling is because its bundled service offerings 11 will be competing with the unbundled service offerings 12 of REMs? 13 MR. BAKER: No, I don't. I don't subscribe to 14 that position at all. 15 What this is trying to say is that under PBR 16 we will be allowed to manage the price of our delivery 17 service to all customers, so that we can try to maintain 18 as competitive an option, a gas option for customers, as 19 we can. So it refers to bundled, but there is no intent 20 at all on Union's part to try to discriminate between a 21 bundled and an unbundled service. 22 This is trying to go to the point that 23 customers have other competitive options in the 24 marketplace, be it electricity, be it alternative fuel, 25 whatever, and what we want the ability to do under PBR 26 is to manage the sum total of all the costs and all the 27 risks that we face in our business to provide a 28 competitive natural gas option to customers. Les Services StenoTran Services Inc. 613-521-0703 1272 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: Well, when you say that there are 2 competitive options available, this interrogatory 3 response refers to competitive options available from 4 REMs, doesn't it? 5 MR. BAKER: Certainly. To the extent that an 6 REM can provide an unbundled service that's attractive 7 to a customer and keeps that customer consuming gas, 8 Union has no difficulty with that at all. 9 MR. VEGH: You have no difficulty with it, but 10 doesn't your bundled service offering compete with the 11 unbundled service offerings of REMs? 12 MR. BAKER: No. 13 The cost allocation rate design principles we 14 have today apply to the bundled services that we have. 15 As you pointed out earlier, we don't have an unbundled 16 service yet. 17 All we have done under the unbundled service 18 is take out the components, the separate components of 19 that bundled service which is primarily storage. So we 20 have pulled out the storage and we will offer that on an 21 unbundled basis to marketers or customers that want 22 that. They then have the freedom to manage those assets 23 in any way they choose and to the extent that they can 24 derive greater efficiencies out of those assets and 25 provide benefits to customers on a natural gas option 26 that's a good thing. 27 So it is not a competition between bundled and 28 unbundled. There are strictly two options that are Les Services StenoTran Services Inc. 613-521-0703 1273 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 available to customers in the marketplace. 2 MEMBER JACKSON: I am wondering, it would help 3 me understand this if I knew what baskets the two 4 different services were in for purposes of application 5 of a price cap. Do you know? 6 It's probably -- if I knew which page to flip 7 to quickly I'd probably find it. 8 MR. PENNY: Dr. Jackson, you are referring to 9 the pricing flexibility and the basket design under PBR? 10 MEMBER JACKSON: Yes. It seems to me that in 11 all likelihood these could both be in the same basket, 12 but if they are not it would be useful to know because I 13 think it might influence the answer to the question. 14 MR. BAKER: Well, the services, whether it's a 15 bundled service or an unbundled service, the service 16 attaches to the end-use consumer. So, if you take the 17 Rate M2 class to residential class and Union south, it 18 will be a bundled service and an unbundled service. So 19 they will both be in the same basket and they will both 20 be subject -- 21 MEMBER JACKSON: That's what I thought I was 22 recalling, that it was defined on the customer basis 23 level of takes. So that maybe I should do no more than 24 ask you if that does reinforce the answer you just gave 25 or does it take away? 26 MR. BAKER: Certainly in my view it reinforces 27 it there. To the extent that a customer is in a basket 28 and whether they are bundled or unbundled, there is Les Services StenoTran Services Inc. 613-521-0703 1274 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 certainly no -- 2 MEMBER JACKSON: There's no opportunity to 3 change the relationship between the bundled rate and the 4 unbundled rate? I am just wondering. If there is no 5 opportunity, then that seems to be part of the answer 6 that you are giving and I just wanted to nail it down by 7 relating to the baskets. But if I have got that wrong, 8 if there is any way to still change the relationship 9 between the rates for those two services then I leave it 10 to Mr. Vegh to try to explore it. 11 MR. VEGH: And the more detailed question may 12 be better left for the panel on rate flexibility, but I 13 guess what I can say is that the pricing parameters 14 within a given basket apply equally to all the services 15 within that basket. 16 MEMBER JACKSON: Thank you. 17 MR. PENNY: Dr. Jackson, that evidence 18 reference, in case you want to look it up, is at 19 page 45, in B, Tab 2. 20 MEMBER JACKSON: Thank you. 21 THE PRESIDING MEMBER: Modified by 22 Supplement C. 23 MR. PENNY: I beg your pardon? 24 THE PRESIDING MEMBER: Modified by the 25 supplementary filing C. 26 MR. BAKER: That's right. 27 MR. VEGH: Mr. Baker, you referred to the 28 delivery revenues that Union receives from bundled and Les Services StenoTran Services Inc. 613-521-0703 1275 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 unbundled customers. Union has another source of 2 revenues that it is proposing to be able to keep in this 3 case. Isn't it the S&T revenues? 4 MR. BAKER: That's a component of our PBR 5 proposal. That's right. 6 MR. VEGH: And the S&T revenue is arrived from 7 using the assets available or the assets -- I'm sorry, 8 the S&T revenues arise from transactions using assets 9 that are available for bundled services? 10 MR. BAKER: Generally, that's the circumstance 11 today. That's right. 12 MR. VEGH: And as customers go to unbundled 13 services they effectively take those assets with them? 14 MR. BAKER: That's correct. 15 MR. VEGH: So Union loses the ability to gain 16 a revenue from those assets? 17 MR. BAKER: That's right and we fully 18 acknowledge that that's an outcome of implementing an 19 unbundled service and that is part of the reason why it 20 is tied together with a proposal to eliminate the 21 deferral accounts that exist today. 22 MR. VEGH: So you are not neutral as to 23 whether a customer takes on a bundled service or an 24 unbundled service? 25 MR. BAKER: There will be impacts relative to 26 the revenue stream that we have today, that's right, but 27 to suggest that Union has an incentive or is in any way 28 trying to design services or price them such to Les Services StenoTran Services Inc. 613-521-0703 1276 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 discriminate between a bundled and an unbundled service, 2 that is simply wrong. 3 There will be impacts and that is what we are 4 trying to address. We have identified that as a risk in 5 the PBR proposal and that is what we are trying to 6 address on a comprehensive basis with our PBR proposal. 7 MR. VEGH: Well, I have your position on that. 8 Thank you. We will address that in argument I'm sure. 9 Another thing that's happened since the MDTF 10 report is that Union no longer proposes to transfer its 11 billing relationship to REM, its billing relationship 12 with customers to REM. Right? 13 MR. BAKER: That's correct. 14 MR. VEGH: So Union is no longer prepared to 15 allow REM to take on the billing relationship, to take 16 on that customer relationship? 17 MR. BAKER: That's correct. 18 MR. VEGH: So, when we look at what happened 19 since the time of the MDTF report -- 20 MR. BAKER: I should rephrase that. 21 Union is prepared to allow an REM to take on 22 the billing relationship for the services that they 23 provide, or for the services that Union provides, which 24 would be the delivery service, in that situation, that 25 Union would continue to bill for the service that it 26 provides. 27 MR. VEGH: Right. So you are no longer 28 prepared to give up that billing relationship? Les Services StenoTran Services Inc. 613-521-0703 1277 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: For the service that we provide, 2 that's correct. 3 MR. VEGH: Right. In your earlier version of 4 the evidence in this application you were prepared to 5 transfer that billing relationship to REM? 6 MR. BAKER: The issue was subject to an 7 evidence update on our part, that's correct. 8 MR. VEGH: But an evidence update where you 9 changed your position on that point? 10 MR. BAKER: That's correct. 11 MR. VEGH: So when we look at what happened 12 since the time of the MDTF report, where Union agreed to 13 a voluntary allocation, and you look at what's happened 14 since the MDTF report, we haven't identified changes in 15 the upstream transportation market that would have an 16 effect on whether market premiums will be passed on to 17 customers, what we see, I suggest to you is that Union's 18 role in the market has changed. 19 MR. BAKER: I totally disagree with that 20 characterization. 21 The significant event that's happened on 22 upstream transportation is the fact that Union has 23 provided all of the flexibility that it had contemplated 24 at the time of the MDTF. It has provided all of that 25 flexibility to direct purchase customers. That is the 26 event that has changed. 27 MR. VEGH: I would like to discuss your 28 existing -- I would like to discuss your portfolio for Les Services StenoTran Services Inc. 613-521-0703 1278 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 November 1, 2000 -- and that's at Appendix A of the ADR. 2 Before we get to the specific elements of the 3 portfolio and what it's made up of, I would like to ask 4 you some questions about how this portfolio, this mix of 5 transportation, has been put together, in the past, and 6 as we see it as proposed for November, 2000. 7 I take it that in putting together the 8 transportation portfolio, Union is using what, in its 9 judgment, is optimal for its system customers? 10 MR. STEDMAN: That is correct. 11 MR. VEGH: And the components of this optimal 12 mix will change, from time to time? These components 13 aren't engraved in stone. Right? 14 MR. STEDMAN: Subject to the contract 15 parameters, that is correct. 16 MR. VEGH: And one of the factors which may 17 lead Union to changing the mix is the component -- or 18 are the components of its system customers? 19 MR. STEDMAN: Could you repeat the question, 20 please. 21 MR. VEGH: So that if you had -- based on the 22 different mix that you had left in your system, would 23 you put together a different transportation portfolio? 24 MR. STEDMAN: I guess when -- we have a gas 25 plan that identifies what the forecast is for system gas 26 and we look at our portfolio and we may acquire some 27 assets to facilitate that demand. 28 MR. VEGH: In doing that, you look at the Les Services StenoTran Services Inc. 613-521-0703 1279 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 transportation opportunities that are available in the 2 market? 3 MR. STEDMAN: That is correct. 4 MR. VEGH: And you look at the supply or 5 receipt point opportunity that, I guess, accompany the 6 transportation opportunity? 7 MR. STEDMAN: There's a bunch of components 8 that fit in with that but one of those is the receipt 9 point and the delivery point of that pipeline. 10 MR. VEGH: And there's an element of judgment 11 as to what is the best mix of elements, in terms of 12 receipt point, delivery point, quantity, those sorts of 13 things? 14 MR. STEDMAN: To some extent, that is correct. 15 I mean there's judgment when you go out to acquire a 16 contract but you look at all the all alternatives based 17 on a number of factors, one being the basin that that 18 pipeline is coming from, whether it be the western 19 Canadian basin or the Gulf of Mexico, and where that 20 pipeline arrives and the value of that pipeline and the 21 term of that contract, all factor into a decision 22 process of whether or not you would acquire that 23 pipeline. 24 MR. VEGH: So what you are trying to do, then, 25 is accomplish an optimal mix for your set of customers, 26 in light of the demand that you see on your system, or 27 for system gas, in light of your judgment as to what the 28 best transportation and supply arrangements that are Les Services StenoTran Services Inc. 613-521-0703 1280 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 available in the market? 2 MR. STEDMAN: That is correct. 3 MR. VEGH: Now, an REM that is a marketer who 4 is putting together their own transportation mix, they 5 could well have a different customer mix and a different 6 view of what the best portfolio would be for their mix 7 of customers. Isn't that fair? 8 MR. STEDMAN: That's correct. 9 MR. VEGH: Now, if an REM put together a mix 10 of transportation and supply based on the marketer's 11 view of what would be best for their customer mix, Union 12 wouldn't be prepared to take that mix from the marketer, 13 would it? 14 MR. BAKER: Our position, under the unbundled 15 service, is that, to the extent a marketer, through the 16 flexibility provided in our portfolio, makes his own 17 supply arrangements that if those customers come back to 18 system that we will not accept back capacity that we 19 haven't -- or may not accept capacity back that we 20 haven't arranged. To the extent that there's still 21 capacity that we have assigned to that marketer, we have 22 agreed, in the ADR Agreement, that would take back that 23 capacity. So in a Union capacity that was still under 24 assignment, we would take that capacity back, or a 25 proportion of that capacity, if customers were returned 26 to system. 27 MR. VEGH: Right. So, this list at 28 Appendix A, that's a one-way street; a marketer can't Les Services StenoTran Services Inc. 613-521-0703 1281 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 come to you and say, "Here's my portfolio. I want the 2 mandatory allocation of this portfolio to you when my 3 customers go back to system"? 4 MR. STEDMAN: They could come and request that 5 we take it, that we take the assets, and just like any 6 other pipeline that we would look at, we would consider 7 that. But it is not a mandatory to do that, no. 8 MR. VEGH: So it's voluntary, on your side? 9 MR. STEDMAN: That is correct. 10 THE PRESIDING MEMBER: And, Mr. Vegh, can I 11 just check. That's something that was agreed to by the 12 parties in the ADR Agreement? 13 MR. VEGH: There is no disagreement on this 14 issue; I'm just asking from -- 15 THE PRESIDING MEMBER: No, no. I'm sorry. I 16 just wanted to make sure that I had read it correctly, 17 that it was in the ADR Agreement. It says, under 18 "Administrative Amendments", it says: 19 "With the exception the administrative 20 amendments outlined above, there is no 21 agreement on this issue." (As read) 22 So I assume that to mean that there was 23 agreement on the administrative issues. Under page 12 24 and 13 of the ADR Agreement. 25 MR. VEGH: I'm not suggesting there's 26 disagreement on those issues. 27 THE PRESIDING MEMBER: I'm just trying to 28 explain the implications of this -- Les Services StenoTran Services Inc. 613-521-0703 1282 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: Yes. 2 THE PRESIDING MEMBER: Okay. I just wanted to 3 confirm that there wasn't disagreement. Thank you. 4 MR. VEGH: Thank you. 5 Now, on a going forward basis -- and I suppose 6 it's Mr. Stedman that I will be asking these questions 7 to -- Union will continue to put together a portfolio 8 which, in its view, meets the needs of its -- or best 9 meets the needs of its system customers? 10 MR. STEDMAN: That is correct. 11 MR. VEGH: And it will take both the 12 long-term view -- what are the long-term needs, what are 13 the short-term needs. Those are some of the elements 14 that go into that mix? 15 MR. STEDMAN: Whenever we look at a portfolio, 16 we look at short-term contracts, long-term contracts, 17 where the basin is. So all of those aspects would be 18 taken into consideration when we look at their 19 portfolio. 20 MR. VEGH: Now, the other set of customers you 21 have, the REMs, the non-consuming customers, when they 22 look at what sort of system portfolio that you should be 23 putting together they are going to take a little 24 different perspective, aren't they? 25 MR. STEDMAN: I don't know what the REM would 26 consider when they are doing it, but the factors may be 27 similar. They may have different mandates for their 28 customers than what we would consider. Les Services StenoTran Services Inc. 613-521-0703 1283 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: This portfolio under your proposal 2 will eventually be passed down to REMs if customers 3 moved to unbundled services? 4 MR. STEDMAN: That is correct. 5 MR. VEGH: So the REM will be looking at this 6 portfolio that you put together and question whether it 7 is something that suits their mix? 8 MR. BAKER: I think the distinction that needs 9 to be made is that at a point in time the customers are 10 Union's system supply customers so we view them in that 11 context and we make the supply arrangement through the 12 portfolio that we deem are appropriate. 13 MR. VEGH: For your system customers? 14 MR. BAKER: That's right. 15 MR. VEGH: But your system customers aren't 16 your only customers who have to live with this 17 portfolio. Right? The REMs, another set of customers, 18 are going to have to live with this portfolio. 19 MR. BAKER: To the extent that REMs migrate 20 customers who are currently on system and direct 21 purchase -- again back to the fundamental principles of 22 direct purchase -- we make available the capacity that 23 is in our portfolio to the marketer, that's right. And 24 to the extent that the marketer wishes to modify that in 25 any way, what we have talked about is the flexibility in 26 our portfolio will be provided to the marketers so that 27 as capacity expires, be it TransCanada capacity or 28 whatever component of capacity, they will have the Les Services StenoTran Services Inc. 613-521-0703 1284 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 ability at that time to make whatever transportation 2 arrangements they deem are appropriate. 3 MR. VEGH: I'm not talking about marketers now 4 with existing customers, I am saying marketers who want 5 to compete in the market and be able to take customers 6 from system gas to unbundled services. Those 7 marketers -- those are the marketers that will have to 8 live with whatever system portfolio you put together on 9 a going forward basis. Right? 10 MR. BAKER: Following -- that's right. 11 Following the principle of unbundled service we make 12 available the capacity that we have contracted on behalf 13 of those customers when they were served by Union as a 14 system customer. 15 MR. VEGH: So which set of customers would you 16 be acting -- or which set of customers' needs will you 17 be considering in putting together you system portfolio, 18 your bundled customers or the REMs? 19 MR. BAKER: Well, at a particular point in 20 time, as I mentioned earlier, system customers are 21 Union's customers. There is no arrangement that an REM 22 has with those customers. They have the potential to go 23 out and market a service to those customers, but at any 24 given point in time they are Union's customers and 25 therefore we structure the portfolio based on our 26 considerations as to the best mix. 27 MR. VEGH: So, in other words, you will put 28 this portfolio together on the basis of your assessment Les Services StenoTran Services Inc. 613-521-0703 1285 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 of the need of your system customers and you won't have 2 regard to the assessment -- or you won't have regard to 3 the needs of REMs who want to provide unbundled services 4 to those customers? 5 MR. BAKER: I'm not sure that I would 6 characterize it that way at all. 7 Union's obligation as a system gas supplier is 8 to structure a portfolio in the best way we see fit and 9 we are regulated in terms of the gas costs, the supply 10 costs and the transportation costs that flow from those 11 through the Board. 12 So our principal obligation as a system 13 supplier is to the customers and making sure that we are 14 making those arrangements in the best way we can. 15 MR. VEGH: Again going back to the 16 transportation mix and how that fits into your 17 assessment of your customer needs, transportation I 18 guess is just one element of your supply portfolio? 19 MR. STEDMAN: If I understand it correctly 20 there are two components that make up landed gas, one is 21 transportation and one is the commodity that you buy in 22 the basin. 23 MR. VEGH: So commodity is a component. And 24 spot gas, that is a component of your supply portfolio 25 at times, isn't it? 26 MR. STEDMAN: It is at times. 27 MR. VEGH: And you also deliver gas from 28 storage to your system customers? Les Services StenoTran Services Inc. 613-521-0703 1286 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. STEDMAN: That is correct. 2 MR. VEGH: So these elements, transportation, 3 commodity outside of the province, spot gas, storage, 4 these are all part of the mix of supply sources that you 5 would rely upon to provide supply to your customers? 6 MR. STEDMAN: That is correct. The gas that 7 is in storage did arrive into storage from some of these 8 pipelines in the first place. 9 MR. VEGH: Or Ontario supply. 10 MR. STEDMAN: That is correct. 11 MR. VEGH: Turning now to the same issue from 12 the REMs perspective, with the agreement agreed to in 13 the ADR, REMs have some flexibility now in the 14 management of the storage assets. Right? 15 MR. BAKER: That's correct. 16 MR. VEGH: As a result of the ADR they do not 17 have to take storage. Right? 18 MR. BAKER: That's correct. 19 MR. VEGH: And if they do want to take 20 storage, they can assign that storage to a third party? 21 MR. BAKER: Yes, or do the same thing through 22 a title transfer. 23 MR. VEGH: Right. And if they did want to 24 assign it to a third party they could -- or this third 25 party could manage storage assigned by a number of REMs. 26 Right? 27 MR. BAKER: That's possible. 28 MR. VEGH: So as the market unfolds, it may be Les Services StenoTran Services Inc. 613-521-0703 1287 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 that some REMs or unbundled customers will find it to 2 their advantage to use gas from storage, some will use 3 long-haul transportation, some will use spot gas. They 4 will be dealing with the same sort of supply mix as 5 Union dealings? 6 MR. BAKER: That's correct. 7 MR. VEGH: As Dawn develops as a hub, there 8 may be greater reliance on spot gas than there is now? 9 MR. BAKER: As I said, I'm not going to 10 comment on what an REM may or may not want to include in 11 their portfolio at a point in time. There can be many 12 things that they want to consider in serving their 13 customers and that is a decision that they will make. 14 Again, once the capacity that has been 15 allocated to them through Union expires, they can make 16 whatever arrangements. It can be long-term 17 transportation, short-term spot gas, again subject to 18 the terms and conditions of the direct purchase 19 arrangement and the unbundled arrangement. 20 MR. VEGH: Fair enough. 21 The trick or the challenge, I guess, for 22 unbundled services will be for the REMs to put together 23 the right kind of mix to offer an attractive competitive 24 service. Right? 25 MR. BAKER: That's a consideration. 26 MR. VEGH: And it is through this potential 27 for optimal use of these assets that the customers will 28 see the benefits of unbundling. Les Services StenoTran Services Inc. 613-521-0703 1288 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: I wouldn't disagree. 2 To the extent that a market can arrange supply 3 in whatever way he can and generate savings to the 4 customers that he is serving, that is the intent of 5 direct purchase. 6 MR. VEGH: It is to operate these assets on a 7 competitive basis in the competitive market? 8 MR. BAKER: That's right. 9 MR. VEGH: Now, Mr. Stedman, I believe in your 10 cross-examination with Mr. Thompson you, I think, made 11 the observation that depending on what happens at 12 Parkway, Parkway delivery at some point may become more 13 valuable than Dawn delivery and it's possible that Dawn 14 delivery at that stage could become a stranded cost. Do 15 you remember that? 16 MR. STEDMAN: That is correct. 17 MR. VEGH: So if customers did have a choice 18 on a voluntary allocation, some customers who did not 19 take up an allocation of some capacity may later learn 20 to regret it, right? 21 MR. STEDMAN: They may. One of the things I 22 try to avoid is trying to speculate on what is going to 23 happen in the market, because things change from day to 24 day. The market can swing anywhere from 30 to 40 cents 25 on the commodity. So, as one scenario, that could 26 occur. 27 MR. BAKER: Just to add to that, on that point 28 the existing methodology for allocating upstream Les Services StenoTran Services Inc. 613-521-0703 1289 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 capacity for direct purchase maintains the delivery 2 point deliveries associated with the supply that Union 3 relies on today. 4 So if I heard you correctly, Mr. Vegh, it was 5 to the extent that a customer decides to option out of 6 Union's capacity at Parkway. As we mentioned earlier, 7 that does create implications on Union's system from 8 both a design and operation point of view and from a 9 rate point of view. 10 MR. VEGH: Leaving aside delivery point or 11 system flexibility issues and just looking at market 12 issues, Mr. Stedman, the only point I was trying to make 13 with you is that these questions of transportation are 14 ultimately competitive issues. 15 Let me put that more clearly. 16 MR. STEDMAN: Thank you. 17 MR. VEGH: The issue of how a marketer will 18 succeed or fail is ultimately an issue of how well they 19 operate in a competitive environment using these assets. 20 MR. STEDMAN: I was fine until you put the 21 last thing in, "using these assets", because they have 22 other assets as well. 23 MR. VEGH: Right. Using these and other 24 assets. 25 MR. STEDMAN: That is correct. 26 MR. VEGH: In a competitive market people 27 succeed or fail based on the choices that they make, 28 using those sorts of assets. Les Services StenoTran Services Inc. 613-521-0703 1290 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. STEDMAN: That is correct. 2 MR. VEGH: And this is the type of 3 market -- the competitive market is the type of market 4 that we are asking the Board to pursue in this case. 5 MR. BAKER: What we are asking the Board for 6 in this proceeding, to be clear, is approval of a new 7 service option which will provide customers increased 8 ability to manage the individual assets that are 9 currently part of a bundled service, and that is 10 principally storage. 11 MR. VEGH: I took your application to be your 12 proposal for unbundling storage and transportation. Are 13 you saying now that really the only unbundling that you 14 are proposing here is an unbundling of storage? 15 MR. BAKER: No. What I tried to clarify 16 clearly in my opening remarks was that the unbundling of 17 upstream transportation isn't in my view a totally new 18 phenomenon like it is for storage, because we 19 essentially unbundle upstream transportation today. We 20 allocate upstream transportation to facilitate direct 21 purchase through the turnback policy, and now through 22 the delivery point flexibility agreement. Marketers and 23 customers then have the ability to manage that capacity. 24 So unbundling is simply an extension of the 25 existing bundled direct purchase framework as it relates 26 to upstream transportation, with the exception that I 27 outlined earlier of the 22-day callback flexibility, 28 where customers now have more flexibility in managing Les Services StenoTran Services Inc. 613-521-0703 1291 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 the upstream transportation under the unbundled service 2 to divert and manage those upstream supplies. 3 MR. VEGH: But you are still with me that we 4 are at least trying to create more competition in the 5 management of transportation assets? 6 MR. BAKER: I am not sure I agree with you to 7 say "more". We are trying to continue to facilitate as 8 much competition and management of those assets as we 9 can. But in my mind there is not a significant 10 difference between our obligation and what we have been 11 trying to do to date. And under bundled direct purchase 12 customers, again I will come back to the turnback policy 13 and the delivery point flexibility. Those are all 14 proposals and mechanisms for flexibility that apply 15 equally to bundled and unbundled customers. 16 MR. VEGH: Can you turn to Appendix A, please? 17 I have some more questions on your portfolio forecasts 18 for November. 19 MR. PENNY: Mr. Vegh, is it the ADR Agreement? 20 MR. VEGH: Yes. I want to understand some of 21 the implications of this for an REM going to an 22 unbundled service. I am focusing in particular on the 23 headings under "Receipt". Are you asking the Board in 24 this case to require an REM who takes a customer from 25 system gas to an unbundled service to acquire 13 per 26 cent of their gas supply portfolio from the gulf? 27 MR. STEDMAN: That is correct. 28 MR. VEGH: And you are requesting the Board to Les Services StenoTran Services Inc. 613-521-0703 1292 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 require these REMs to purchase another 24 per cent of 2 their portfolio -- purchase their gas -- 24 per cent of 3 their gas from mid-continent. 4 MR. STEDMAN: That's correct. 5 MR. VEGH: Again, I guess, 29 per cent from 6 Empress and 34 per cent from northern Alberta. 7 MR. STEDMAN: Just to be clear, we are asking 8 the Board to approve -- to look at this portfolio, and 9 that portfolio does include different bases. It 10 includes the western Canadian basin, which has 11 TransCanada PipeLines attached to it. It also has 12 Alliance/Vector attached to it. We are also asking them 13 to look at Panhandle, which comes in in the 14 mid-continent, and to buy gas at that point, as well as 15 Trunkline, which is out of the Gulf of Mexico. 16 The REMs are also sophisticated buyers and 17 they probably, most likely, in their portfolio, within 18 their company, have similar buying patterns that we 19 would. They may or may not have that. If they do not, 20 then, yes, we would be asking, if they had Trunkline and 21 they didn't have gulf supply, that they would be 22 required to buy gulf supply and transport it on 23 Trunkline. 24 MR. VEGH: I will raise with you an unfair 25 legal question, maybe just to let the Board know that it 26 is going to come up. Do you seriously think the Board 27 has authority to tell a supplier where they have to 28 purchase their gas from? Les Services StenoTran Services Inc. 613-521-0703 1293 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. PENNY: It, of course, is a legal 2 question. I think Mr. Vegh can address that in 3 argument. 4 MEMBER JACKSON: Could I just ask, for 5 clarity, how this will work? Will it be re-billed to 6 the REM for as long a period of time as your original 7 contract lasts? Or, will it be completely and totally 8 assigned, so that the REM takes, essentially, title to 9 these supplies and then is billed, say, from Trunkline, 10 in the case of the gulf supply? Which of those two 11 alternatives? 12 MR. STEDMAN: The principle would be to assign 13 or allocate that pipe to that REM. So that REM would 14 then be responsible for the contract term and the 15 contract, and the price, and all of the parameters that 16 go around it. 17 Just to be clear, we are not actually asking 18 the REM that he has to buy supply and he is forcing it, 19 because he does have an option. The REM could sell that 20 transport into the secondary market as well. That is 21 one option. Or, use it for another source, or something 22 else. 23 MEMBER JACKSON: But when he takes it over, he 24 doesn't deal with you any more with respect to that. It 25 is not sort of flowing through on your books; it is gone 26 as far as your books are concerned. Is that right? And 27 he gets his bill from the other pipeline. 28 MR. STEDMAN: From a contractual point of Les Services StenoTran Services Inc. 613-521-0703 1294 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 view, we would be assigning -- or sub-assigning part of 2 that contract to that party, because there were some 3 issues in regard to credit worthiness and so forth. So 4 they could be temporary one-year assignments that we 5 would be giving to the REMs. But he would 6 have -- usually would have that obligation under our 7 contract. 8 MEMBER JACKSON: I understand that he would be 9 obligated to pay for that. What I am wondering is who 10 he deals with. Does he deal with you still with respect 11 to that? Or, does he deal with the pipeline company 12 with which you had originally contracted? 13 MR. STEDMAN: In a situation of a temporary 14 assignment, they would still be dealing contractually 15 through our administration group. However, if they did 16 elect in the southern area to have a permanent 17 assignment, then there would be a release of that and an 18 assignment of that capacity and that person would deal 19 specifically with the pipeline. 20 --- Pause 21 MR. BAKER: Just to be clear, even under what 22 we do today, which are one year temporary assignments, 23 the shipper really does -- in that case, the marketer of 24 the customer steps into our shoes and deals with the 25 pipeline company directly, so they would get billed 26 directly from the pipeline company and they would 27 nominate their supply on that pipe. 28 MEMBER JACKSON: Thank you very much. The Les Services StenoTran Services Inc. 613-521-0703 1295 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 reason I guess it arose in my mind was I thought we 2 would be talking about the transfer of some pretty small 3 volumes, and then if we had a vertical slice through the 4 small volume we would be talking about very small 5 volumes. I just wondered if these actually get 6 transferred over on the books, and you are saying yes 7 they do. 8 MR. BAKER: Right. 9 MEMBER JACKSON: Thank you. 10 THE PRESIDING MEMBER: Can I ask a question, 11 then? 12 You talked about permanent assignments. What 13 is the scope of permanent assignments? You refer most 14 of the time to temporary assignments. Are there 15 permanent assignments and have they taken place on all 16 these pipelines? 17 MR. STEDMAN: They have not taken place on 18 U.S. pipelines at this time. 19 In the U.S., when you go to released capacity, 20 if you release capacity for greater than one month you 21 actually have to go through a bidding process. It's a 22 FERC regulation, so there isn't -- unless you are 23 actually title owner and own the gas you can't transport 24 it on that pipe. So, basically, what happens -- or what 25 we are going through right now in order to facilitate 26 this vertical slice methodology, is some FERC rulings 27 which would allow us a waiver to the process of posting 28 and when we do that, then we would be able to assign Les Services StenoTran Services Inc. 613-521-0703 1296 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 without posting that capacity. 2 MR. BAKER: But further to the question, there 3 is still an option for the unbundled customer as to 4 whether they want to take a temporary one-year 5 assignment which will continue to facilitate or to the 6 extent that they want a permanent assignment and we can 7 facilitate the permanent assignment we would try to do 8 that as well. 9 I think the one issue on permanent assignments 10 that arises most is with the northern and eastern area 11 because there is a lot of interconnection between the 12 other services and our other contractual rights with 13 TransCanada. But in the south it is our evidence that 14 to the extent that customers wanted a permanent 15 assignment we would facilitate that. 16 THE PRESIDING MEMBER: Thank you. 17 I'm sorry, Mr. Vegh. 18 MR. VEGH: Thank you, sir. 19 I would like to ask you some questions about 20 the Alliance/Vector portion of the portfolio. By way of 21 background, I would just like to get some clarification 22 of this and how this was addressed or how 23 Alliance/Vector was addressed in 499. 24 Can you turn please to Tab 6 of the book of 25 materials, that's Exhibit F3.1. 26 Tab 6 is an excerpt from your evidence -- 27 Union's evidence in 499 on a number of things, including 28 transportation and supply. Can you please turn to Les Services StenoTran Services Inc. 613-521-0703 1297 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 page 11 of 44. It says "From E.B.R.O. 499, Exhibit D1, 2 Tab 1, page 11". There is a reference there in the 3 middle paragraph to the Alliance Pipeline Project. 4 It concludes by saying, "This combined 5 transportation option" -- that is, I take it Alberta to 6 Chicago, Chicago to Dawn: 7 "This combined transportation option is 8 assumed delivered at the western end of 9 Union's system at an average cost of 10 8 cents per GJ above the TCPL eastern 11 zone tolls." (As read) 12 I have that correct? That's what we are 13 talking about, the total delivered cost of 14 Alliance/Vector as proposed in 499 with 8 cents a GJ 15 above TCPL eastern? 16 MR. STEDMAN: Again, at the time of this 17 filing when we put this together and you looked at what 18 the tolls were on TransCanada and what they were on 19 Alliance, and you looked at the commodity at that point 20 in time, the analysis generally showed about an 8 cent 21 premium over TCPL based on a period of time. 22 MR. VEGH: Okay. You were asked some 23 interrogatories on this issue and those are set out at 24 the last two pages of this document. The first was a 25 Board staff interrogatory, J1, D1.128. There is a 26 reference to this 8 cents and you were asked to advise 27 how it was calculated and how Union justified the 28 additional cost. I see that you pulled the evidence and Les Services StenoTran Services Inc. 613-521-0703 1298 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 never did answer that question. 2 So this additional cost or in fact this 3 capacity was never approved by the Board, was it? 4 MR. STEDMAN: When we go to approved, we 5 approve the costs not the specific pipeline. So in that 6 circumstance the Board wouldn't be approving Alliance or 7 Vector. In this specific proceeding, what had happened 8 is -- this was in the blue page in that filing, the 9 updated -- there was a delay in the Alliance pipeline 10 for one year so it wasn't going to show up in rates so 11 we pulled it from the portfolio. That is why we did not 12 adjust this issue in that proceeding. 13 MR. VEGH: Yes. That's how I understand it as 14 well, that you never did answer these questions, then, 15 of how is the cost calculated and how does Union justify 16 the additional costs so the Board never had a chance to 17 review that, how the cost was calculated and how any 18 additional costs would be justified. Right? 19 MR. STEDMAN: That is correct. 20 MR. VEGH: Just so I'm clear, even if your 21 proposal on the vertical slice is approved, 22 Alliance/Vector is not part of the portfolio which REMs 23 must take on unless and until Alliance/Vector is 24 approved by the Board. Is that right? 25 MR. BAKER: The distinction I would draw there 26 is that the Board typically doesn't improve the 27 contracts. What they approve are the cost consequences 28 that flow from those contracts. So I would agree to the Les Services StenoTran Services Inc. 613-521-0703 1299 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 point that to the extent that Union is proposing that 2 the vertical slice be effective November 1 of 2000 there 3 will, in all likelihood, not have been at that time a 4 review by the Board of any cost consequences that have 5 flowed from that transportation. But, again, it's the 6 cost consequences that flow on an annual basis on the 7 individual components and really all the components in 8 Union's portfolio and there has not, in the past, been 9 specific Board approval of specific contracts. 10 MR. VEGH: In the past, your specific 11 contracts would not have been particularly relevant, 12 would they? Just the cost of those contracts. 13 MR. BAKER: General, that's right. 14 MR. VEGH: And in the future, under your 15 proposal, the specific contracts take on a much greater 16 relevance, don't they? 17 MR. BAKER: I'm not sure there is much greater 18 relevance. I'm not sure what you are referring to. 19 MR. VEGH: In the future, if your proposal is 20 approved, then an REM who moves a customer from system 21 gas to unbundled will now have to take on your specific 22 receipt and delivery obligations in accordance with the 23 proportions you are proposing and that is certainly 24 significant to an REM. 25 MR. BAKER: I agree with what you outlined. 26 That is what we are proposing. Again following the 27 principle of direct purchase, we are making available 28 capacity that we have arranged on behalf of those Les Services StenoTran Services Inc. 613-521-0703 1300 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 customers who are now being moved to a direct purchase 2 option. 3 MR. VEGH: I am just suggesting to you that 4 the make-up of your capacity takes on a degree of 5 relevance under your vertical slice proposal that it did 6 not have under cost of service. 7 Do you agree with that? 8 MR. BAKER: I would agree that through the 9 vertical slice proposal marketers will now have to 10 manage more than simply TransCanada capacity which they 11 have had to in the past. I can't speak for what 12 marketers do or don't think about that. 13 MR. VEGH: The consequences to system 14 customers, who are potential unbundled customers, go 15 beyond cost consequences as a result of this proposal, 16 don't they? 17 MR. BAKER: I am not following your question. 18 Right now customers that are on system gas pay 19 for in their rates the average cost of all the gas 20 components in Union's portfolio. To the extent that a 21 customer in the future elects a direct purchase option 22 and we make that capacity available to the marketer 23 serving those customers, there is nothing fundamentally 24 that has changed in respect of those end use customers. 25 MR. VEGH: Well, to the marketer, the marketer 26 now takes on the physical or contractual requirement. 27 They are not just taking on a cost; right? 28 They are taking on a contractual requirement Les Services StenoTran Services Inc. 613-521-0703 1301 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 with a receipt point and a delivery point. 2 MR. BAKER: I agree with you. That is the 3 basis of direct purchase. 4 MR. VEGH: What I am suggesting to you is that 5 simply reviewing the cost consequences of a particular 6 contract is insufficient. 7 MEMBER JACKSON: Insufficient for what? 8 MR. VEGH: For the Board to approve a 9 portfolio that you are proposing to have in place for 10 unbundled transportation. 11 MEMBER JACKSON: He is asking your opinion of 12 whether it is insufficient for us. 13 MR. BAKER: I'm sorry. 14 MEMBER JACKSON: I think that is the case, 15 isn't it, Mr. Vegh? 16 MR. VEGH: Yes. 17 MR. BAKER: My view would be that to the 18 extent the Board approves the cost consequences that 19 flow from our system portfolio to system customers 20 through its regulation of our supply and transportation 21 components on a flowthrough basis, which is the basis 22 today, that would provide the approval to then allocate 23 capacity through the proposed vertical slice. 24 The determination that the costs were prudent 25 flowing to system customers would result in the same 26 situation as we have had for direct purchase all through 27 time where we have had largely TCPL FT contracts. We 28 have had supply contracts into that pipeline capacity. Les Services StenoTran Services Inc. 613-521-0703 1302 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 The Board has looked at the entire portfolio, and we 2 have allocated the TCPL capacity to facilitate direct 3 purchase. 4 I wouldn't see that being any different 5 relative to what we are approving here, albeit that we 6 do recognize that there are more components than there 7 have been in the past. 8 MR. VEGH: On the cost consequences that you 9 at least admit do require approval, would you agree then 10 that unless and until the Board approves the cost 11 consequences of this Alliance/Vector contract, the cost 12 of this contract will not be made part of the system 13 portfolio? 14 MR. BAKER: I think that speaks in part to one 15 of my opening comments, which was that there are, from a 16 practical perspective, some issues around the start-up 17 of Alliance/Vector. It starts this November. We are in 18 a proceeding now that is bumping up fairly close to the 19 start of that capacity. 20 From Union's perspective, we are prepared to 21 accept a delay in Alliance/Vector being part of the 22 vertical slice for a year. I think that would allow two 23 things practically to happen. It would allow the 24 pipeline to get up and running, and also for at least 25 two months in 2000 there would be cost consequences 26 flowing from the Alliance/Vector capacity, which would 27 then be brought forward to the Board for the deferral 28 account impacts of that capacity in the 2001 customer Les Services StenoTran Services Inc. 613-521-0703 1303 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 review process. 2 THE PRESIDING MEMBER: Mr. Vegh, can I ask a 3 question on the structuring of the review of these costs 4 and the PBR proposal. 5 The cost of gas is a passthrough cost, 6 isn't it? 7 MR. BAKER: That's correct. 8 THE PRESIDING MEMBER: The cost of 9 transportation is a passthrough cost. 10 MR. BAKER: That's correct. 11 THE PRESIDING MEMBER: So the prudency of 12 those costs are outside the PBR framework. 13 MR. BAKER: No. The gas cost deferral 14 accounts that we have in place today will remain in 15 place under PBR. So through the customer review process 16 we will bring forward those deferral account balances 17 through that process. To the extent that there is a 18 resolution out of the customer review process, those 19 balances will then be brought forward in a 20 recommendation to the Board for disposition. 21 To the extent that there are any issues on 22 those deferral accounts, they would similarly be brought 23 forward to the Board for adjudication. 24 THE PRESIDING MEMBER: I understand what you 25 are saying. The whole PBR plan includes the customer 26 review process and includes the review of the prudency 27 of the deferral accounts in the plan. 28 But this effectively becomes an annual review Les Services StenoTran Services Inc. 613-521-0703 1304 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 of the prudency of the transportation and gas supply 2 arrangements that Union has entered into to meet its 3 system gas requirements. 4 It may be done through a customer review 5 process which ultimately makes a recommendation which 6 the Board may or may not accept. 7 MR. BAKER: Yes, I think that is a fair 8 characterization. 9 THE PRESIDING MEMBER: I understand. I just 10 wanted to make sure I understood where you stood. 11 Sorry, Mr. Vegh. 12 MR. VEGH: And just so I understand, until the 13 prudency of the costs for Alliance/Vector are approved 14 by the Board, they will not form part of your gas cost 15 passthrough. 16 Am I right? 17 MR. BAKER: The only twist I would put on that 18 is that the costs that flow from Alliance/Vector will be 19 ongoing costs. I guess I would characterize it a bit 20 differently, which is subsequent to the first time the 21 costs that flow from that capacity are approved by the 22 Board either through rates or through a deferral account 23 disposition, then it would be subsequent to that period 24 of time that that capacity would form part of the 25 vertical slice allocation. 26 THE PRESIDING MEMBER: Can I go back to my 27 question again. 28 In the context of this application, there is Les Services StenoTran Services Inc. 613-521-0703 1305 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 also a component, which is the passthrough costs related 2 to the gas supply and the upstream transportation 3 arrangements which needs an approval in the rates which 4 are going to be the subject of a panel coming up. 5 Those rates would include upstream 6 transportation and the gas costs. 7 MR. BAKER: I believe the mechanism that is 8 outlined in PBR is generally as you stated, except that 9 we are not proposing in this proceeding right now to 10 change the gas supply costs and the transportation 11 costs. 12 The gas supply commodity costs, as the Board 13 is aware, are dealt with through the quarterly rate 14 adjustment mechanism. 15 What we had proposed under PBR is that, to the 16 extent that there were cost consequences from the other 17 components of our gas supply -- namely, the 18 transportation components -- that once the impact of 19 those hit a certain threshold then we would apply to the 20 Board to change those rates. 21 But we are not applying for a change in those 22 rates in this proceeding. 23 THE PRESIDING MEMBER: So, in other words, 24 what we have is a cents per gigajoule number or dollars 25 per gigajoule number for transportation costs included 26 in rates, and then all the deviations from that going 27 into a deferral account for subsequent disposition? 28 MR. BAKER: That's correct. Les Services StenoTran Services Inc. 613-521-0703 1306 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 THE PRESIDING MEMBER: And unless that reaches 2 a certain level, you are not proposing to change the 3 rates at this time? 4 MR. BAKER: That's true. 5 As I said, for the transportation and the 6 commodity will continue to be evaluated on an ongoing 7 basis through the QRAM. 8 THE PRESIDING MEMBER: Thank you. 9 Sorry, Mr. Vegh. 10 MEMBER JACKSON: But, Mr. Vegh, you did get an 11 additional answer for which I think you hadn't yet asked 12 the question, and that is that the vertical slice 13 methodology for allocation volumes to your customers 14 could click in before the disposition of the costs that 15 might relate to a change in supply. Am I correct on 16 that, Mr. Baker? 17 You might be willing to defer this for a year, 18 but once it comes into place, if a customer goes from 19 bundled to unbundled, you will use the then current 20 portfolio supply to determine what gets allocated to 21 that REM. 22 MR. BAKER: That's correct. To maybe deal 23 with it in a bit more detail, to the extent that there 24 is a delay in the Alliance/Vector for a year, if we fast 25 forward to the customer review process that will take 26 place in 2001, what we would be bringing forward in that 27 review process is the deferral accounts at the end of 28 2000 for disposition, so there would be two months of Les Services StenoTran Services Inc. 613-521-0703 1307 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 cost impacts related to the Alliance/Vector capacity 2 within those deferral accounts. 3 We would be bringing forward a projected 4 portfolio similar to Appendix A that says these are the 5 components of the vertical slice that we are proposing 6 be effective November 1, 2001. There will presumably be 7 discussion with the parties on both of those issues. 8 MEMBER JACKSON: But December 1 there would be 9 no discussion. That portfolio would just change if 10 there had been general agreement about the methodology 11 on November 1. Is that correct, or does that portfolio 12 hold for a year? 13 MR. BAKER: It holds for a year. We are 14 trying to take the portfolio as it exists in November 1 15 of each year and hold that allocation, those allocation 16 percentages constant for a year. 17 MEMBER JACKSON: Thank you. 18 MR. VEGH: In terms of the projected portfolio 19 though, you said, just following up on your answer, that 20 you will provide the projected portfolio and then we 21 will have a discussion about that portfolio? 22 MR. BAKER: I wouldn't rule anything out in 23 terms of what may or may not happen in the customer 24 review process, but clearly the Alliance/Vector and in 25 fairness we recognize it is a new pipeline capacity and 26 so it is a little bit different in that regard from the 27 other components in our portfolio. and that's again why 28 I said at the outset that we were prepared to speak to Les Services StenoTran Services Inc. 613-521-0703 1308 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 the Alliance/Vector capacity and the decisions and the 2 circumstances leading to us contracting for that 3 capacity. 4 Although we are not asking anything specific 5 in terms of rate impacts flowing from that capacity, we 6 did think that it was worthwhile to have that discussion 7 in this proceeding for the benefit of the Board, so that 8 there would be some sense in terms of whether that would 9 be appropriate going forward again November 1, 2001 to a 10 vertical slice portfolio that had Alliance/Vector in it. 11 MR. BAKER: But to the original question 12 there, there can be discussions in the customer review 13 process. 14 THE PRESIDING MEMBER: Mr. Vegh, could I ask a 15 quick question? It is now one o'clock and I was 16 wondering whether would you find the time convenient to 17 break and then we can come back? 18 MR. VEGH: Yes, that would be fine. 19 THE PRESIDING MEMBER: Would this be all right 20 now? 21 MR. VEGH: Yes. 22 THE PRESIDING MEMBER: So could we come back 23 at two o'clock then, please. 24 MR. PENNY: Mr. Chairman, just before we 25 break, you had posed a question to me which I had not 26 really thought about when I answered it. It results 27 from my advising Dr. Jackson where the issue on the 28 baskets was and that was at page 45 in B, tab 2. You Les Services StenoTran Services Inc. 613-521-0703 1309 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 then asked me, as adjusted by the C supplement, to which 2 I said yes, and that in general the evidence on pricing 3 flexibility is adjusted by supplement C, but the 4 particular issue that we were moving at the time, which 5 is the design of the baskets and whether both bundled 6 and unbundled rates are in the same basket, there is 7 nothing affected by the update. So that evidence wasn't 8 changed. 9 THE PRESIDING MEMBER: Mr. Vegh, that was my 10 error, not yours. I was just keeping a mental tag on 11 everything to do with pricing flexibility. I lumped 12 them together. Thank you. 13 We will see you at two o'clock. 14 --- Upon recessing at 1300 15 --- Upon resuming at 1405 16 THE PRESIDING MEMBER: Mr. Vegh...? Unless 17 there's anything that has to be -- administrative stuff 18 before we carry on? 19 Mr. Vegh, please carry on. 20 MR. VEGH: Thank you. 21 I would just, panel, like to clear something 22 up in the conversation before lunch about the 23 Alliance/Vector. 24 When you are proposing to include the 25 Alliance/Vector capacity in the vertical slice? 26 MR. BAKER: I think where we are, from a 27 practical perspective, given, again, where are in the 28 proceeding, that it probably makes most sense to have Les Services StenoTran Services Inc. 613-521-0703 1310 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 that included November 1, 2001. 2 MR. VEGH: I see. Now, if the customer takes 3 up unbundled service on November 1, 2000, what capacity 4 are you proposing to download onto them? 5 MR. BAKER: The capacity that we would propose 6 to allocate, in that situation, would be as defined on 7 Appendix A, with the exception of the Alliance/Vector 8 capacity. 9 MR. VEGH: Meaning what? That the customer is 10 free to make up that 34 per cent on whatever capacity is 11 available? 12 MR. BAKER: No. The percentages would be 13 recalculated and spread out amongst the other sources 14 of spot. 15 MR. VEGH: And are you proposing some sort of 16 reallocation of that capacity for a customer, then, on 17 November 1, 2001, to account for the Alliance/Vector? 18 MR. BAKER: I'm not sure maybe I understand 19 the full question. 20 MR. VEGH: Okay. Can the customer keep the 21 capacity that -- or continue to manage the capacity 22 that's allocated to them on November 1, 2000, on a going 23 forward basis or -- 24 MR. BAKER: That's correct, that's the way it 25 would work. 26 MR. VEGH: Okay. 27 MR. BAKER: There would be no claw back or 28 adjustment at a later date. Les Services StenoTran Services Inc. 613-521-0703 1311 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: Okay. And will the Board have the 2 opportunity to review whether the Vector/Alliance 3 capacity should be included in the vertical slice prior 4 to your date of November 1, 2001? 5 MR. BAKER: I guess what I tried to indicate 6 before the break was that through the 2001 customer 7 review process, we will be bringing forward deferral 8 accounts for the year ending December 31st, 2000, and 9 that will include two months' worth of Alliance/Vector 10 capacity. So I think it would -- it's probably fair to 11 say that they would happen at the same time. 12 MR. VEGH: Let me put it this way: Are you 13 prepared to say that the Alliance/Vector capacity will 14 not be included in the vertical slice until that 15 capacity has been approved by the Board? 16 MR. BAKER: Again, I think we need to -- the 17 difference in words isn't until the capacity is approved 18 by the Board, to my view, it would be until the cost 19 consequences flowing from that capacity are first 20 approved by the Board. Again, because, traditionally, 21 the Board has not specifically approved the contracts 22 themselves but the costs that flow from them. 23 MR. VEGH: And your proposal is that that 24 approach should not change? 25 MR. BAKER: That's correct. 26 MR. VEGH: The document I took you that 27 started this, I guess, was the interrogatories that were 28 asked in 499, in J1, D1.128, and the reference there was Les Services StenoTran Services Inc. 613-521-0703 1312 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 that the combined transportation option, at that time, 2 was Alliance/Vector, where they set the GJ above the 3 TCPL eastern zone tolls. 4 What is that figure now? 5 MR. STEDMAN: If you refer to Exhibit 8.2. 6 MR. VEGH: Okay. 7 MR. STEDMAN: Now, this chart that is labelled 8 "Systems Portfolio Landed Cost of Gas to Ontario", the 9 intent here is that it would show some reference as to a 10 reference price against TransCanada. And, in this case, 11 if you look at a TCPL toll which is approved at $1.01, 12 at this stage, the premium for Alliance and Vector, the 13 landed cost comparison would be up 15 cents versus the 14 eight. 15 I must point out, though, that this is based 16 on today's market. This is also based on a year-year 17 time frame. When we were referring to the eight-cent 18 number, it was -- I believe it was done over a five-year 19 period on gas pricing. So it's not an apples-to-apples 20 comparison. 21 MR. VEGH: Well, what would be an 22 apples-to-apples comparison to the eight cents? 23 MR. STEDMAN: For a five-year time frame? I 24 don't know right now. 25 MR. VEGH: Well, can you undertake to advise 26 me on that? 27 MR. STEDMAN: The problem with that 28 undertaking is that I mean you have to speculate what Les Services StenoTran Services Inc. 613-521-0703 1313 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 the five-year price is. It's very easy to look at one 2 to two years, even three years. If you go up to a five 3 year period, we can get some numbers and try to see what 4 we can do but it's hard; there would be a lot of 5 different -- a lot of different people would have 6 different views on what five-year gas cost would be. 7 MR. VEGH: Well, if you could -- 8 MR. STEDMAN: I guess I'm not seeing how it 9 may relate to what we are doing in this proceeding. 10 Because that -- we lay out here -- in this 8.2, it does 11 lay out what we think for one year would be, at this 12 stage. 13 MR. BAKER: If anything, we are trying to 14 indicate that it impacts -- this calculation is that 15 there is a TCPL toll application that's looking at 16 changes that will take place in TCPL tolls and, again, 17 you need to try to speculate or forecast what those 18 revised TCPL tools would be. So, rather than get into 19 that kind of speculation, we tried to provide some 20 sensitivities on Exhibit F8.2. 21 MR. VEGH: Well, I understand that -- it's 22 your evidence. Are you prepared for us to refer to this 23 15-cent figure as being the cost above TCPL tolls? And 24 if you are not, what is the cost above TCPL tolls? 25 MR. STEDMAN: Well, in fact, I'm not saying 26 that it would definitely be 15 cents. It's really 27 dependent on what the gas cost is going to be, as well. 28 That factors into this. You can't compare two different Les Services StenoTran Services Inc. 613-521-0703 1314 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 pipelines because they come from different points within 2 the western Canadian basin. So the gas costs may vary, 3 as well. 4 So, what I'm saying right now, in this chart, 5 is that, for a one-year price -- which is prices as of 6 last week, in the marketplace -- when you land gas into 7 Ontario on the two different pipelines, it shows up 8 right now as 15 cents higher on Alliance and Vector, 9 compared to TransCanada, at a toll of $1.01. 10 MR. BAKER: I think the other thing that was 11 trying to be illustrated by Exhibit F8.2, as well, is 12 that Union has always approached its system supply role 13 from a portfolio approach, so what it illustrates is 14 that, while the Alliance/Vector on this analysis may be 15 treating at a 15-cent premium above a TCPL landed cost 16 comparison, there are all of the other sources of supply 17 that are trading below that TCPL landed cost benchmark. 18 MR. VEGH: On the next page, Exhibit J.14 from 19 499, there is another question on this eight cents a GJ, 20 and in the second paragraph, it says: 21 "To the extent a transportation option is 22 included in the utility supply plan, the 23 cost of this transportation capacity 24 would be included in the cost of gas 25 forecast. Should the cost of this 26 transportation capacity differ from 27 TCPL FT tolls, the cost variance 28 (positive or negative) would be Les Services StenoTran Services Inc. 613-521-0703 1315 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 considered to be a load balancing cost 2 and recovered in the delivery component 3 of rates." 4 What I want to know is whether this -- it 5 appears to me that the variance between TCPL tolls and 6 other transportation capacity is relevant for load 7 balancing costs. Am I wrong? 8 MR. BAKER: I think, to be exact, that 9 probably should have referred not only to just load 10 balancing but also flexibility-related costs. This 11 again relates back to the E.B.R.O. 493-04/494-06 12 proceeding where a proceeding dealt with the cost 13 differential relative to a TCPL-landed FT benchmark and 14 those costs were segregated into those two components 15 and recovered, as is explained in this interrogatory 16 response. 17 MR. VEGH: So the cost differential that is 18 relevant for load balancing and for flexibility costs, 19 that cost differential, is that captured in this 15 cent 20 figure? 21 MR. BAKER: The 15 cents would be part of it, 22 and you would have to look at all the other components 23 of the portfolio which are below the TCPL-landed 24 benchmark. 25 MR. VEGH: To get the variance that suggests 26 in load balancing and in flexibility we would go down 27 this list entitled "Differential to TCPL at $1.01" and 28 determine the variance from adding those up. Les Services StenoTran Services Inc. 613-521-0703 1316 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. BAKER: Directionally, that's right. But 2 again it's based on -- yes, it is, it's based on a 3 landed cost differential, so a landed cost of gas that 4 flows on TransCanada FT versus the landed cost of gas 5 that flows on all of the other pipelines which is what 6 is illustrated in that chart. 7 MR. STEDMAN: So if you wanted to give a 8 specific example using Exhibit 8.2, if you look at -- 9 based on the market prices when this was done, at a 10 price -- if you look at TransCanada and the landed 11 price, at a toll of $1.01 it's $6.60. The rest of the 12 portfolio, the way we have it today, basically has an 13 average landed cost for the rest of the portfolio 14 landing at $6.43. The difference between those two 15 would mean that you would be -- generally, if your price 16 is landed the way that is described here you have a 17 17 cent credit going into that deferral account. 18 MR. VEGH: Okay. Thank you. 19 I would like to address the issue now of 20 stranded costs. Mr. Baker, you referred to that issue a 21 few times. 22 In terms of the information at Appendix B to 23 the ADR, that information sets out effectively your 24 above market transportation costs, right, or at the time 25 of this calculation. Is that correct? 26 MR. BAKER: Differential between our full toll 27 capacity and the market value. That's right. 28 MR. VEGH: And your proposal for unbundling Les Services StenoTran Services Inc. 613-521-0703 1317 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 doesn't contain any mechanism to reduce these above 2 market costs, does it? 3 MR. BAKER: No, these are contractual 4 obligations that Union has within its portfolio. 5 MR. VEGH: So when you speak about preventing 6 costs from being stranded, you are not talking about 7 reducing these costs, you are talking about ensuring 8 that these costs are passed on to unbundled customers. 9 MR. BAKER: I'm not sure you can differentiate 10 the two. I think it is truly a stranded cost issue if 11 the Alternative 2 approach was followed which is the 12 optional approach, it would leave Union with excess 13 transportation capacity that it would have to mitigate, 14 and that would then give rise to a stranded cost. 15 MR. VEGH: Yes. My only point is that your 16 proposal is to address that issue by ensuring that these 17 costs are passed on to unbundled customers. 18 MR. BAKER: I wouldn't characterize it like 19 that because what our proposal is -- these are the costs 20 that are currently embedded in rates for system 21 customers today and again following on with the whole 22 philosophy of direct purchase, we are proposing to 23 provide access to that capacity to marketers under the 24 direct purchase arrangement. So there is no difference 25 in cost in terms of what an existing customer that is 26 paying today with Union's portfolio will necessarily pay 27 when he has taken direct purchase. 28 MR. STEDMAN: To be fair, it's really a Les Services StenoTran Services Inc. 613-521-0703 1318 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 stranded cost avoidance strategy more than a stranded 2 cost reduction strategy, isn't it? 3 MR. BAKER: That's fair. The principle that 4 we have followed on on bundling is to minimize or avoid 5 stranded cost. 6 MR. VEGH: Now, if you could, I would like you 7 to turn to CEED's evidence, Exhibit D5.1. 8 --- Pause 9 MR. VEGH: Go to paragraph 45. There is a 10 reference here to evidence that was filed by Enbridge 11 Consumers Gas and it's a separation application and a 12 quote from how the Enbridge evidence addresses a general 13 criteria by which regulators have approached the 14 mitigation and recovery of stranded costs. The criteria 15 set out is whether they were first prudently incurred to 16 serve the public interest, whether the company has taken 17 reasonable steps to mitigate the costs and whether their 18 recovery will result in an increase in rates. 19 Do you agree that that's a reasonable way to 20 address stranded costs? 21 MR. BAKER: To the extent that stranded costs 22 arise or are unavoidable and they do arise, I think this 23 is generally the approach that would be taken to look at 24 how those should be disposed of, but again, under our 25 unbundling proposal, the principle is to structure in a 26 way that avoids the incurrence of those. To the extent 27 that they are unavoided, I think that is generally the 28 practice. Les Services StenoTran Services Inc. 613-521-0703 1319 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 MR. VEGH: So this is a reasonable way to 2 address a stranded cost approach -- to address stranded 3 costs. It's perhaps not the only way but it's a 4 reasonable way. 5 MR. BAKER: To the extent that they can't be 6 mitigated in or eliminated in the first instance, yes. 7 MR. VEGH: Okay. So if we consider these 8 criteria first in terms of the prudency, under Union's 9 mandatory allocation proposal what procedures are in 10 place to ensure that the costs which you propose passing 11 on to REMs were prudently incurred? 12 MR. BAKER: The same process that we were 13 speaking about this morning whereby we are regulated by 14 the Board for all of our gas costs, commodity and 15 transportation under a flowthrough basis and the Board 16 regularly reviews all of those costs for inclusion in 17 our rates or for disposing of amounts included in 18 deferral accounts. 19 MR. VEGH: So then under your proposal, the 20 prudency criteria would be addressed effectively through 21 the customer review process that looks at the 22 transportation costs. 23 MR. BAKER: That's one avenue as well. Also 24 when we would apply for a change in our commodity rates 25 through the QRAM process, there would be a determination 26 or an evaluation from the Board at that time as to 27 whether that was appropriate as well. 28 MR. VEGH: Okay. In terms of mitigating Les Services StenoTran Services Inc. 613-521-0703 1320 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 stranded costs, your proposal passes through all of your 2 transportation costs to bundled and unbundled customers, 3 doesn't it? 4 MR. BAKER: Bundled customers today are paying 5 for the costs that are included in Union's portfolio and 6 what we do to facilitate direct purchase, be it bundled 7 or unbundled direct purchase, is we make available that 8 capacity that underlies the portfolio. 9 MR. VEGH: But all the above-market costs here 10 that are referred to in Appendix "B", your proposal is 11 that these costs be passed through to bundled and 12 unbundled customers. 13 MR. BAKER: They are included in rates today 14 so, yes. 15 MR. VEGH: Under that passthrough proposal 16 Union is not financially incented to look for 17 opportunities to mitigate these costs, is it? 18 MR. BAKER: I look at it to say that there are 19 no costs to mitigate. These are contracts and costs 20 that we have gone out and arranged within our portfolio 21 to serve those customers. 22 MR. VEGH: The approach to stranded costs 23 which is referred to in CEED's evidence includes a 24 requirement for Union to mitigate stranded costs. Your 25 proposal does not contain any means by which Union has 26 an incentive to mitigate above market costs or stranded 27 costs, does it? 28 MR. BAKER: Well, they are not stranded costs Les Services StenoTran Services Inc. 613-521-0703 1321 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 unless something happens to make them stranded. That is 2 the whole issue that is at hand. I understand that 3 CEED's position is that it should be optional. 4 So again going back to the example this 5 morning, CEED or the groups that it represents could go 6 into the marketplace and pick up capacity for 70 cents 7 that had a full toll of $1.00. 8 I agreed that there is a differential there, 9 and that would in fact take place. 10 I also indicated that it is only prudent and 11 appropriate to look at the other side of the equation, 12 which is that Union would then be forced into a position 13 of going out and liquidating a portion of its capacity. 14 It would face the same market conditions as the 15 marketer, and it would have in all likelihood a cost for 16 that same 30-cent differential that would then need to 17 be brought forward and recovered from customers. 18 From an end use customer perspective, it is a 19 zero sum gain. 20 MR. VEGH: But from a Union perspective, under 21 what you call the CEED approach, there would be a duty 22 to mitigate stranded costs. 23 MR. BAKER: Certainly if the CEED approach, 24 the voluntary allocation was followed, there would 25 definitely be stranded costs in Union's portfolio, and 26 we would have to mitigate those and liquidate those 27 supply contracts. 28 MR. VEGH: If you look at Appendix B, I would Les Services StenoTran Services Inc. 613-521-0703 1322 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 like to conclude by being clear on what Appendix B tells 2 us and what it doesn't tell us. 3 Appendix B provides information on the 4 distance between Union's southern system transportation 5 assets and the market value of those assets; right? 6 MR. STEDMAN: Maybe I could take you through 7 what Appendix B does show. 8 If you look at TransCanada -- we are showing 9 both the system portfolio and the direct purchase 10 portfolio. What we are looking at is what are the 11 stranded costs associated with giving a full optionality 12 to basically the CEED proposal. 13 If you went and gave everybody that option and 14 everybody on the system and direct purchase had elected 15 that optionality to take no transport, what this chart 16 would show would be that there would be $101 million 17 stranded cost issue after mitigation at market that we 18 would then have to go to the Board for prudency and 19 disposition in our rates. 20 What it does show here -- as an example, 21 TransCanada, if you look at the discount that is 22 available in the market right now, if you are out 23 selling TransCanada's transportation, you would get 24 about 50 cents on the dollar. 25 That means if you were able to sell that 26 transport in the first place for 50 cents, and you were 27 paying a toll of $1.00, that would mean that you would 28 have a stranded cost of obviously 50 cents. Les Services StenoTran Services Inc. 613-521-0703 1323 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 If you add those all up, based on the contract 2 entitlement we have, you get a stranded cost of 3 $101 million per year. 4 MR. VEGH: This is the cost for your 5 transportation asset, but you have other upstream assets 6 as well; right? 7 You have storage assets. Union has storage 8 assets. 9 MR. BAKER: Storage assets are enfranchised 10 assets. 11 MR. VEGH: You have gas storage assets that 12 are not included in this chart of your asset, don't you? 13 MR. BAKER: Again, storage is part of what we 14 refer to as the delivery service in franchise. So it is 15 not what we refer to as an upstream gas supply cost. 16 MR. VEGH: You have storage assets that serve 17 ex-franchise customers as well. 18 MR. BAKER: That is correct. 19 MR. VEGH: Union's storage assets have a value 20 above their cost, don't they? 21 MR. BAKER: They may. To the extent that 22 there is excess storage at a point in time, we would go 23 out and market it. And I think at the present time 24 there is a differential above cost. 25 Again, according to the ADR Agreement, we are 26 providing an unbundled storage service to all 27 enfranchised customers at cost. 28 MR. VEGH: You use both your storage assets Les Services StenoTran Services Inc. 613-521-0703 1324 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 and your transportation assets to provide transactional 2 services, don't you? 3 MR. BAKER: The assets that we use principally 4 to provide transactional services are the storage and 5 enfranchised storage and transmission assets. 6 MR. VEGH: But you also use your 7 transportation assets, don't you? 8 MR. BAKER: Maybe some use of that, to a 9 limited extent. But the majority of Union's 10 transactional business relates to utilizing the 11 enfranchised storage and the enfranchised transmission 12 capacity. 13 MR. VEGH: So you have storage assets. You 14 have transmission assets. And you have transportation 15 assets that you use to provide transactional services. 16 That produces a revenue for union? 17 MR. BAKER: That's correct. 18 MR. VEGH: Under your PBR proposal you will 19 use these assets to provide new services as well, and 20 that provides another stream of revenue to Union? 21 MR. BAKER: I would characterize it a little 22 differently; that under our unbundling proposal we are 23 proposing to provide access to the assets that Union 24 currently has access to do today through a bundled 25 service. 26 Clearly our evidence is that our ability to 27 achieve the same level of transactional business that we 28 have had in the past is going to diminish, because it Les Services StenoTran Services Inc. 613-521-0703 1325 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 will now be marketers or customers utilizing that 2 capacity themselves that will take those opportunities. 3 MR. VEGH: But you will be using those assets 4 to provide new services, and Union proposes to keep the 5 revenue from those services. 6 MR. BAKER: We are proposing to eliminate the 7 deferral accounts that are currently in place. Rates 8 currently have approximately $5.5 million of 9 transactional business embedded into them, and we are 10 proposing to remove the deferral accounts under the PBR 11 proposal such that any revenue achieved over that amount 12 that is included in rates would not be subject to 13 deferral. 14 MR. VEGH: So subject to that $5.5 million 15 contribution imbedded in rates, leaving that aside, the 16 revenue from storage assets, the revenues from 17 transmission assets, additional revenues from 18 transportation assets, all these revenues are not set 19 off against what you describe as your potentially 20 stranded costs here, are they? 21 MR. BAKER: There are two points. These costs 22 are only stranded if the optional approach is accepted. 23 To be clear, the amount of revenue or margin potential 24 for transactional business would not come anywhere close 25 to the stranded cost potential numbers that are outlined 26 in Appendix B. 27 MR. VEGH: But it may be that in any given 28 year, if you were to include in this calculation of Les Services StenoTran Services Inc. 613-521-0703 1326 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 market costs by reference to your costs -- if you were 2 to include the value of storage and include S&T revenues 3 and revenues for new services and revenues from 4 transmission and revenues from transportation, in any 5 given year your upstream assets taken as a whole may not 6 be below cost. 7 Isn't that fair? 8 MR. BAKER: I don't buy that at all. 9 This analysis in Appendix B is at a point in 10 time. If we were to have shown this two years ago or 11 three years ago, all of Union's capacity would have been 12 trading at a premium in the marketplace and all those 13 numbers would have been positive. 14 From a symmetrical point of view what we have 15 done consistently to facilitate direct purchases, we 16 have provided access to that capacity irrespective of 17 what the value in the marketplace is at point in time. 18 We acknowledge that the market is going to move. 19 Sometimes it will be up, sometimes it will be down, 20 depending on what the fundamentals are in the 21 marketplace, but our approach has been consistent all 22 along. 23 So when we were allocating TCPL FT capacity 24 three years ago, that capacity had a premium to full 25 toll and marketers and customers were able to avail 26 themselves to that capacity. 27 We are now in a different market downturn and 28 it is trading at a discount to full toll. We don't Les Services StenoTran Services Inc. 613-521-0703 1327 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 dispute that, but again the market value changes at a 2 point in time and if this chart was done three years ago 3 it would have been the exact opposite. 4 MR. VEGH: I think that's an important point, 5 Mr. Baker. Isn't it also important to say that this 6 really doesn't reflect the full picture of what the 7 value of Union's assets would be under unbundling? All 8 you have done here is set out the below market costs of 9 your transportation and ignored the above market value 10 of your other asset? 11 MR. BAKER: Comparing apples to oranges, this 12 is in relation to unbundling upstream transportation. 13 To the extent that there is transactional revenues from 14 Union's transactional business that is a fact, it's a 15 reality. I am not disputing that. But what we are 16 talking about here and isolating clearly is the impact 17 of an optional approach to unbundling upstream 18 transportation. 19 MR. VEGH: Those are my questions, panel. 20 Thank you. 21 THE PRESIDING MEMBER: Thank you, Mr. Vegh. 22 I am not sure who is the next person. 23 Mr. Rutwind. 24 MR. PENNY: I think Alliance would be next in 25 the ordinary course. 26 THE PRESIDING MEMBER: I am sorry. Ms Symes. 27 Ms Street. 28 MS STREET: Thank you. Les Services StenoTran Services Inc. 613-521-0703 1328 ANDREWS/BAKER/STEDMAN, cr-ex (Vegh) 1 I have very few questions. 2 CROSS-EXAMINATION 3 MS STREET: Mr. Baker, the rationale of 4 unbundling or one of the key rationales, I take it, is 5 to attempt to ensure that those who benefit from 6 unbundled services are the ones who bear that cost, that 7 there is a fair and equitable system in place for all 8 systems and unbundled users? 9 MR. BAKER: That's correct. 10 MS STREET: And that the IGUA proposal which 11 we have referred to as alternative or proposal No. 1, 12 Union's concern with that proposal is that there is a 13 potential for stranded cost above and beyond the 14 potential in Union's proposal? 15 MR. BAKER: That's correct. It's not 16 something that would -- it's not a stranded cost that 17 would arise immediately, but there is the potential 18 further on down the road. That's correct. 19 MS STREET: And the size or the extent of that 20 potential is open to debate? 21 MR. BAKER: That's fair. 22 MS STREET: And that IGUA's proposal also 23 suggests that if there are any such stranded costs that 24 may occur in the future that who would bear those 25 stranded costs would be determined by this Board at some 26 future date. Correct? 27 MR. BAKER: That's correct. 28 MS STREET: And I take it that if we apply Les Services StenoTran Services Inc. 613-521-0703 1329 ANDREWS/BAKER/STEDMAN, cr-ex (Street) 1 Union's rationale of applying the cost of those stranded 2 costs equitably that it would be Union's position that 3 those who have benefited from the unbundling would be 4 the ones who would pay for any such stranded costs? 5 MR. BAKER: As a general principle that's 6 right. 7 MS STREET: I have no other questions. 8 Thank you. 9 THE PRESIDING MEMBER: Thank you, Ms Street. 10 I am looking down the list. It's Mr. Waqu‚ 11 next according to my list. Is that correct? 12 MR. WAQU: Thank you, Mr. Chair. 13 Good afternoon, panel. 14 CROSS-EXAMINATION 15 MR. WAQU: T-service customers in the north 16 have previously and currently operated with a temporary 17 FT assignment of Union's TCPL FT capacity. Is this 18 correct? 19 MR. BAKER: That's correct. 20 MR. WAQU: In the past, when Union's 21 representatives have met with the T-service customers in 22 the north were the customers told that T-service 23 capacity may not be available to them in the future upon 24 renewal or at the end of the temporary contract. 25 MR. STEDMAN: I can't comment on what they 26 were told, but I can comment on how Union operates 27 T-service and the election to go on T-service 28 historically. Les Services StenoTran Services Inc. 613-521-0703 1330 ANDREWS/BAKER/STEDMAN, cr-ex (Waqu‚) 1 MR. WAQU: When a customer comes to our reps 2 and asks to go from a bundled service to a T-service 3 what we have typically done is looked at our gas plan to 4 see what impact that would have on the whole system 5 because, as you know, the whole system in the north is a 6 very integrated system and that when you do one thing in 7 one area, it affects a lot of other things within that 8 franchise. 9 So what we do is we look at the gas plan and 10 look at the impacts that would have on rates. When a 11 customer comes and asks for say, and as an example, 100 12 units, we may go back to that customer and say "we can't 13 accommodate a hundred units because of the impact it may 14 have on other bundled customers. However, we can 15 accommodate 90." We would always endeavour to try to 16 accommodate that customer to some extent, as long as it 17 didn't have a detrimental impact on other customers. So 18 in that circumstance we would give that customer 19 90 units. 20 At the end of that one year what we say to our 21 customers is that you would fall back to a bundled 22 customer, and you request again the ability to go 23 T-service and an allocation of that pipe because again 24 it is an integrated system. We would look at what is on 25 the system at that point in time and how we are 26 operating the system. 27 In that case we may go back and say, "well, we 28 can accommodate your hundred this year, or we can only Les Services StenoTran Services Inc. 613-521-0703 1331 ANDREWS/BAKER/STEDMAN, cr-ex (Waqu‚) 1 accommodate 80." That's historically how we have 2 operated T-service in the north. 3 MR. WAQU: So under that scenario Union would 4 have the right to take back the capacity after the 5 temporary contract of one year is over? 6 MR. STEDMAN: The way we look at it is the 7 customer would fall back to a bundled customer and then 8 would have the right to request to go T-service again 9 under some assignment of capacity. 10 MR. WAQU: So the T-service customers would 11 only have rights to that capacity on a one-year basis? 12 MR. BAKER: Historically, I think as 13 Mr. Stedman said, that's been the practice. What is 14 proposed on a going forward basis is that we allocate 15 capacity to both T-service and the unbundled service 16 based on the methodology that's outlined in the 17 evidence. 18 MR. WAQU: Thank you. 19 I am only speaking of currently and the past 20 previous years. 21 Did these same T-service customers in the 22 north apply to Union for long-term capacity on TCPL? 23 Did they apply for a long-term contract? 24 MR. STEDMAN: Some customers did. 25 MR. WAQU: Would you agree that the reason 26 that these customers applied for a long-term capacity 27 was to protect themselves from Union not renewing their 28 capacity or taking the capacity back? Les Services StenoTran Services Inc. 613-521-0703 1332 ANDREWS/BAKER/STEDMAN, cr-ex (Waqu‚) 1 MR. STEDMAN: I wouldn't know why the customer 2 specifically would have requested it. It could be -- in 3 some cases that I know of it's because they have an 4 incremental growth and it was either Centra or Union or 5 the customer going in to acquire that transportation, 6 going into a TransCanada queue, for example. 7 In a lot of cases, the customer would ask to 8 go into a TransCanada queue through Union Gas because 9 they didn't want to go through the administration and we 10 would help facilitate that at the request. 11 But in most cases that I am aware of it was 12 for incremental growth on the system and at their 13 request. 14 MR. WAQU: For a customer that does not have 15 incremental growth of their plants would you agree that 16 it would be reasonable under the scenario that we just 17 presented in the past years that the customer would 18 apply for long-term capacity for the reason to protect 19 themselves from -- or to protect themselves in the way 20 that they would have capacity for the next years coming? 21 MR. STEDMAN: One of the things is that when 22 we sign up a customer we do have that obligation to 23 serve them under a firm contract, so they have that 24 right to continue on that contract on an annual basis. 25 MR. WAQU: Not necessarily as a T-service 26 customer you are saying. I am only speaking as a 27 T-service customer. 28 MR. BAKER: I think where we agree is that Les Services StenoTran Services Inc. 613-521-0703 1333 ANDREWS/BAKER/STEDMAN, cr-ex (Waqu‚) 1 there could be many reasons and it is difficult for us 2 to put ourselves in the minds of the customers they may 3 be referring to at a point in time. 4 Another reason that they may want -- I think 5 what you are referring to is a permanent assignment of 6 the capacity. It could well be that there is value to 7 that capacity in the marketplace at a point in time, so 8 it is of greater value to have that on a permanent basis 9 themselves. 10 So there can be many different reasons. 11 MR. WAQU: What I am asking is, the reason 12 that I suggested, would you consider that a reasonable 13 reason? 14 MR. STEDMAN: I guess it could be a case -- a 15 situation. 16 MR. WAQU: I would suggest that that was the 17 reason why the customers asked for a longer term. 18 Those are my questions. Thank you very much, 19 panel. 20 THE PRESIDING MEMBER: Thank you, Mr. Waqu‚. 21 Mr. Rutwind? 22 CROSS-EXAMINATION 23 MR. RUTWIND: On behalf of TransCanada, good 24 afternoon, Mr. Chair, Dr. Jackson and panel members. 25 There are a number of reasons put forth by 26 Union as to why, in fact, it chose a mandatory 27 allocation of upstream capacity, and I am trying to 28 ascertain what is the prime driver in those. A number Les Services StenoTran Services Inc. 613-521-0703 1334 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 of matters have been put forward of things to the effect 2 of minimization of stranded costs; there should be some 3 economic rent flow to the end user; flexibility; 4 promoting competition; access to marketers and so on. 5 When the initial review was done by Union, and 6 ultimately settled upon a mandatory allocation, what 7 were the prime drivers at that time? 8 MR. BAKER: I think we would include all of 9 the drivers that you mentioned. Certainly some of the 10 principles ones were maintaining consistency with the 11 way direct purchase had been facilitated from the 12 beginning of direct purchase, minimizing stranded costs, 13 and making sure that we have a proposal that is 14 symmetrical. So, as I mentioned, at times when the 15 capacity is trading at above tolls in the marketplace, 16 Union similarly has an obligation to make that capacity 17 available to customers willing to take direct purchase. 18 And the same thing is consistent when the value of the 19 capacity is trading below tolls. 20 MR. RUTWIND: But from a theoretical 21 standpoint, it shouldn't be price specific at any given 22 moment in time. I think you said that earlier today as 23 well. 24 MR. BAKER: That is my exact point. It should 25 not matter what the market value is, and what we have 26 proposed is consistent with that. 27 MR. RUTWIND: Let us take a scenario here. 28 When we are dealing with the upstream Les Services StenoTran Services Inc. 613-521-0703 1335 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 allocation and the mandatory vertical slice allocation, 2 let me put TransCanada's position to you very 3 succinctly. I am effectively paraphrasing our evidence. 4 Really, this isn't unbundling anything, when 5 you are dealing with upstream allocation by mandatory 6 allocation of vertical slice. What is happening here 7 is, the customers receive, whether they want to or not, 8 a portfolio of upstream transportation and storage 9 entitlement that matches the portfolio of assets that 10 Union itself assembles in its role as the exclusive 11 provider of bundled services. That is effectively what 12 they are getting, isn't it? 13 MR. BAKER: There are a couple of caveats that 14 I would put on that. One, your reference to storage is 15 no longer appropriate, given the ADR Agreement. 16 MR. RUTWIND: Correct. 17 MR. BAKER: And, secondly, to put it into 18 perspective, what customers and marketers have gotten 19 through our approach to facilitating direct purchase is 20 the capacity, as you have outlined, and what they have 21 also received is the flexibility within that portfolio, 22 through the turnback policy, through the delivery point 23 flexibility, and prospectively through the vertical 24 slice when that capacity expires. 25 As I mentioned, a good portion of that 26 capacity expires within two years. At that point in 27 time marketers are -- or customers are available to make 28 their own arrangements in the marketplace. Les Services StenoTran Services Inc. 613-521-0703 1336 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 MR. RUTWIND: Now, a good proportion of that 2 expires within a couple of years. But, nonetheless, 3 there are the Alliance/Vector contracts, and they appear 4 to make up, I think, at this stage, or at least 5 projected for November 1, 2000, from Appendix A to 6 Exhibit A, Tab 7, 34 per cent of the portfolio at that 7 time. 8 It is also to be noted that they are for 9 15-year terms. 10 Now, perhaps it is saying one thing by 11 introducing great flexibility in the capacity to enter 12 into direct contracts themselves, but many of these will 13 not be able to do so, particularly with respect to the 14 portfolio having 15-year contracts for 34 per cent of 15 the total portfolio. 16 MR. BAKER: There are clearly some long-term 17 contracts within our portfolio. That goes back to the 18 approach Union has taken as its role as a system 19 supplier. We do assemble a portfolio. 20 I would say that perhaps a more fair way to 21 look at the proportion of Alliance/Vector in our 22 portfolio is to look at it in terms of our total 23 transportation capacity, including that which we have 24 already allocated to facilitate direct purchase. And it 25 is certainly substantially less than the 34 per cent 26 that you have just quoted. 27 The reason that the other components are a 28 fairly high proportion of our remaining system portfolio Les Services StenoTran Services Inc. 613-521-0703 1337 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 is because of the fact that we have continued to 2 facilitate direct purchase by displacing TCPL FT 3 capacity only. So, as we continue to do that, all of 4 the other components of our portfolio will increase in 5 terms of percentage size. 6 MR. RUTWIND: That is not to say that you 7 won't be potentially entering into long-term contracts 8 in the future as well. Vertical slice will happen every 9 November 1, 2000, 2001, et cetera, et cetera. Are you 10 implying that there is the capacity to enter into a 11 similar situation with Alliance/Vector or some other 12 companies for very long-term contracts that will further 13 limit the capacity of those to direct contract for 14 shorter terms? 15 MR. STEDMAN: I certainly would not say that 16 we would not enter into a long-term contract again. It 17 may be with TransCanada. 18 If you look historically, we have entered 19 TransCanada's queues over a number of years, and we have 20 acquired 10-year contracts. 21 When we went into the Alliance position, we 22 also entered into some TransCanada 10-year contracts. 23 If you look at our portfolio details in the 24 contracts that we do have, there are also some long-term 25 contracts on TransCanada. 26 Generally, we look at long-term contracts 27 within the portfolio as a benefit for our customers. We 28 saw this two or three years ago when it was going at a Les Services StenoTran Services Inc. 613-521-0703 1338 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 premium. Our customers saw rates that were less 2 volatile than the market. What they saw were 3 TransCanada tolls at, say, 90 cents when the market was 4 going at $2 to $4. So they were getting some nice, even 5 prices at their house. 6 So we do see some benefits in long-term 7 contracts. That is why we get into those contracts. 8 Would we have 100 per cent of our contracts 9 under a long-term contract? No, we would not. 10 Would we have a portion of our portfolio, like 11 we have today? That is why we have what we have, 12 because there are some benefits in the long term. 13 MR. RUTWIND: Let me come back to a particular 14 issue. I am trying to see if there was a paramount 15 consideration that sort of turned the tide in the 16 direction of mandatory as opposed to voluntary. 17 I think there was mention earlier today -- 18 access to markets was something important that was 19 considered. Was that at all paramount in the decision? 20 MR. BAKER: I am not sure what you are 21 referring to when you say "access to markets" -- 22 MR. RUTWIND: Access to marketers. Creating 23 an environment whereby marketers would have more ability 24 to make transactions. 25 MR. BAKER: I think as a general principle 26 that is our approach. We try to provide within our 27 contracts and within our system as much flexibility as 28 we can to all of those taking gas service on our system. Les Services StenoTran Services Inc. 613-521-0703 1339 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 MR. RUTWIND: I think there is an issue, as 2 well, in terms of flexibility in promoting competition. 3 Would not a voluntary allocation, that is to say, 4 voluntary, taking it or not, provide greater 5 flexibility, rather than having to take whatever the 6 vertical slice is and, if it has short and a mixture of 7 long-term contracts, waiting until they expire before 8 being able to create shorter term ones, if that is in 9 fact what you want? 10 MR. BAKER: In our view it is not appropriate, 11 for the reason that, in our view, that really doesn't 12 amount to effective competition. 13 Again, back to the numerical example that I 14 have used on a number of occasions, an optional approach 15 will certainly provide flexibility to a marketer or a 16 customer in going out and accessing a market 17 differential at a point in time. That creates an equal 18 and offsetting issue on Union's portfolio, in terms of a 19 stranded cost that, subject to a prudency review, would 20 be recovered from those very customers. 21 Again, it is back to the zero sum game 22 argument, and in our view that isn't sufficient 23 competition. 24 To the extent that our capacity allocated to 25 facilitate direct purchase expires and marketers can go, 26 or customers can go and access replacement capacity in 27 the marketplace at that time, on their economic terms 28 and conditions, then they are free to do that. Les Services StenoTran Services Inc. 613-521-0703 1340 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 MR. RUTWIND: If you have a zero sum game and 2 the economic result would be zero, but you also increase 3 flexibility to a number of players, such as marketers to 4 enter into the market, and take positions and close them 5 out, isn't that an increase in flexibility? 6 I am asking you, by going voluntary, wouldn't 7 there have been a greater degree of flexibility 8 available within the series of transactions that 9 ultimately make up for the transportation of natural 10 gas? 11 MR. BAKER: Sure. That is what is being 12 proposed under an optional approach. As I said, for a 13 marketer being able to access an optional allocation, it 14 does create greater flexibility for them. 15 But back to some of the principles that we 16 were talking about in respect of the market design task 17 force and some of those early initiatives, it was to 18 promote unbundling and promote competition in a way that 19 would provide benefits -- true and real benefits -- to 20 the end use consumers. That is where I do not agree 21 with an optional approach in the way that it has been 22 structured, in terms of where is the benefit to the end 23 use consumer. 24 MR. RUTWIND: So it's your view that there's 25 no benefit to the end user, it being a zero sum gain, 26 and as a consequence of that, really, there is no 27 further consideration given to a truly voluntary 28 approach? Les Services StenoTran Services Inc. 613-521-0703 1341 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 MR. BAKER: Again, I will come back to the 2 point where that the proposition that seems to be put 3 forward is that there's no flexibility, that this is a 4 mandatory approach and it locks marketers and customers 5 into a portfolio at which they can't do anything and, in 6 our view, that's simply not the case. All marketers and 7 customers operating under direct purchase, again, as I 8 mentioned, have had the ability through our turnback 9 policy to turn back 49 per cent of that capacity, they 10 have got the delivery point flexibility as laid out in 11 the ADR Agreement. 12 So, to imply that this is very strict or 13 onerous, in terms of mandatory, and there's no 14 flexibility there or ability of marketers to go out and 15 access the secondary market for discounted capacity just 16 isn't the case. 17 MR. RUTWIND: But isn't this the time, then, 18 to move along if you say you have been so successful up 19 to this point and 49 per cent has, in effect, been made 20 voluntary? Can't you, then, take the next step and say, 21 "Well, perhaps we should go fully voluntary, that all 22 the players come in, have the greatest flexibility and 23 choice available and let the market figure it all out 24 from there"? 25 MR. BAKER: No, because it puts -- again, it 26 comes back to, from an efficient -- in our view, from an 27 efficient competitive market point of view, if you are 28 going to take a benefit on one side of the equation and Les Services StenoTran Services Inc. 613-521-0703 1342 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 there's going to be a cost on the other side of the 2 equation, and particularly for customers that are 3 remaining on system gas, any proposal to allocate a 4 stranded cost that would arrive in that situation and 5 propose to recover that from all customers, including 6 system customers, is, in our view, not appropriate 7 because there's no benefit to a system customer because 8 a marketer or a customer electing direct purchase has 9 elected not to take the transportation capacity that 10 Union had arranged, initially, to serve them. 11 THE PRESIDING MEMBER: Let me go to one other 12 aspect, for a moment, if I may, and you can assist me 13 here, if TransCanada has the right understanding. 14 We understand the proposal existing direct 15 purchase customers who have been allocated, at that 16 time, TransCanada firm capacity would have that 17 entitlement grandfathered so they are not subject to a 18 vertical slice methodology. 19 Is that, in effect, what will be occurring? 20 MR. BAKER: That's correct. 21 MR. RUTWIND: So there is a timing difference 22 here, in the sense that if -- some of those are 23 grandfathered and they are basically not involved with 24 the situation of having to take a vertical slice and in 25 that vertical slice have Alliance and Vector long-term 26 capacity that they really can't do very much with for a 27 long period of time. So there's a difference between 28 those people and the new direct purchasers who end up Les Services StenoTran Services Inc. 613-521-0703 1343 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 having the Alliance/Vector issue to deal with. 2 What I'm getting at is that there seems to be 3 a discrepancy here. On the one hand, you are indicating 4 that there's an issue of fairness, with respect to the 5 stranded cost issue, but is there not a similar one with 6 the proposal that you have already made? 7 MR. BAKER: Well, it's a practical issue in 8 that the approach to facilitate direct purchase -- and I 9 went through the history earlier this morning -- has 10 been to facilitate it through 100 per cent TCPL FT only, 11 and we have continued to do that for a number years and 12 we are at the point where, practically, we don't have 13 very much TCPL FT capacity left in our portfolio. So 14 you are left with the issue, in terms of how do you 15 change that and what approach do you go forward with, in 16 the future? And, again, our view is that there hasn't 17 been anything changed to move off of the fact that a 18 marketer wanting to take customers' direct purchase 19 should have to take the capacity that has been arranged 20 for to serve those customers by Union. 21 So there's a difference. There's no -- we are 22 admitting to that. But, in our view, there's not much 23 that can be done to rectify it. 24 MR. RUTWIND: But one could level the kind of 25 unfairness, that's the one unfairness, if one can say 26 that it is so, that we have been able to find here; it's 27 perhaps no different than the kind of unfairness that's 28 alluded to in terms of the stranded cost situation. Why Les Services StenoTran Services Inc. 613-521-0703 1344 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 not move towards a voluntary allocation, at this stage, 2 and deal with the stranded cost issue on an annual 3 basis? You have already volunteered -- and I'm mixing a 4 couple of questions together -- but has not the company 5 volunteered to really deal with the year 2000 to 2001 a 6 34 per cent Alliance/Vector on a stranded cost basis for 7 the one year? 8 MR. BAKER: No. 9 MR. RUTWIND: Is that effectively what's 10 happened? 11 MR. BAKER: No, that's not effectively what's 12 happened, at all. 13 MR. RUTWIND: Perhaps you can explain what has 14 happened, the implication being that there's a 15 commitment for that and that notwithstanding that it 16 will not enter into the vertical slice, so something has 17 to be done with it. 18 MR. BAKER: No, nothing has to be done with 19 it, at all; it's simply a component of the portfolio 20 that will continue to serve system customers until, as 21 we proposed, November 1 of 2001, when it will then 22 become part of the vertical slice. So there's nothing 23 that has to happen. We need the capacity to serve our 24 existing system customers and, for the period 25 November 1, 2000, to 2001, that's what the capacity will 26 be used for. 27 MR. RUTWIND: That's what the capacity will be 28 used for but it will not form part of the vertical slice Les Services StenoTran Services Inc. 613-521-0703 1345 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 if people want to go unbundled. Does there not have to 2 be an accounting date of it somewhere along the line? 3 MR. BAKER: No. It's part of the cost that 4 will remain in Union's system portfolio, and it will be 5 treated as such. It's no different than any other 6 component that's in our portfolio today. Today, we have 7 U.S. capacity in our portfolio and those costs are part 8 of the portfolio and they are part of the regulated 9 system supply in gas cost deferral account process 10 that's in place today. 11 MR. RUTWIND: Let me get back to the stranded 12 cost issue. 13 If there would be a paramount consideration, 14 was it the avoidance of stranded costs that was the key 15 one, in terms of moving along with a mandatory as 16 opposed to a voluntary proposal? 17 MR. BAKER: It's a combination of -- again, 18 our principle is that we should pursue unbundling in a 19 way where there are real benefits to end-use consumers 20 and minimizing stranded costs to the extent that we can 21 is a principle that we had in designing the unbundling 22 proposals. 23 MR. RUTWIND: But, really -- and I think it's 24 been alluded to by another examiner -- but are we not 25 moving off from minimizing stranded costs into total 26 avoidance of stranded costs? Is that what it has 27 become, in effect? A fear of incurring any stranded 28 costs. Which derives the entire decision-making Les Services StenoTran Services Inc. 613-521-0703 1346 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 process. 2 MR. BAKER: It's not a fear of incurring 3 stranded costs, at all. To the extent that the 4 unbundling process resulted in stranded costs that were 5 unavoidable, we are not fearful of bringing those 6 forward and dealing with them in the way that's been 7 outlined and bring those forward to the Board for their 8 adjudication. 9 What you have is a situation here where the 10 stranded costs can be avoided and can be avoided in a 11 way that does not end up resulting in detrimental impact 12 to remaining customers that are served by Union. It's 13 just not appropriate, in our mind, to have the 14 capacity -- to have marketers or customers option out of 15 the capacity knowing that that's going to raise the 16 stranded cost, knowing that we are going to have to 17 bring that forward to the Board and knowing that Union 18 is going to have to go out, assuming that the costs are 19 being prudent, and turn around and recover those costs 20 from customers. 21 And I can tell you that, as a residential 22 customer, I would be disillusioned, I think, to say the 23 lease, if I was presented with an offering that 24 portrayed a commodity cost savings to me, on one hand, 25 and I made a direct purchase decision, because of that, 26 and some period of time later received a bill from the 27 utility which essentially clawed back all or a portion 28 of those savings because we had a stranded cost. And, Les Services StenoTran Services Inc. 613-521-0703 1347 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 again, in our view, that's just not an efficient way to 2 structure direct purchase in this province. 3 MR. RUTWIND: Let me ask you about stranded 4 costs and how it would be dealt with. 5 Stranded costs, would they be calculated on an 6 annual basis? Or is it a one-shot thing done once and 7 for all? I'm talking about Alliance/Vector, as an 8 example. 9 MR. BAKER: Under an optional approach, a 10 stranded cost issue would be an annual issue because, as 11 existing system customers were moved from system to 12 direct purchase under an optional approach, that would 13 give rise to excess capacity in Union's portfolio which 14 we would then have to mitigate those costs and there 15 would be a stranded cost implication. So it would be, 16 in my view, an ongoing issue. 17 MR. RUTWIND: I now it's not for this 18 proceeding, but I think you have indicated, on a number 19 of occasions today, there is a customer review committee 20 that one would go to and then, from that point on, one 21 could go to the Board and they could, then, make a 22 decision as to the prudency of the cost incurred. Is 23 that what we understand? 24 MR. BAKER: To the extent that you have 25 stranded costs that are unavoidable, that you can't 26 avoid, that would be the process, that's right. 27 MR. RUTWIND: Let me go to a few more specific 28 areas. Let me put this to you, what if, say, one could Les Services StenoTran Services Inc. 613-521-0703 1348 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 have a mixture and, you see, one of the problems with 2 this is always the concern about the appearance that 3 perhaps matters aren't prudent, when in fact they may 4 well be, were prudently incurred. 5 But if one goes to even a mixture perhaps some 6 of that concern is alleviated, the mixture being as 7 follows: Keep a mandatory allocation for shorter-term 8 arrangements and then voluntary for longer-term 9 arrangements. That would certainly cut down the 10 difficulty or administrative difficulty that you might 11 have been alluding to. 12 Has there been consideration given to 13 something like that, which again is sort of a mid-point 14 to some extent between a true voluntary and a true 15 mandatory. 16 MR. BAKER: There is no fundamental principle 17 that I can think of as to why that approach would be any 18 way prudent. I don't know how you would differentiate 19 necessarily between having short-term contracts be 20 optional and long-term contracts be mandatory. There is 21 no fundamental basis that I can think of in terms of why 22 that would be appropriate. 23 Again, you go back to the fundamental 24 principle underlying direct purchase, which is we make 25 available the capacity that we have contracted for on 26 behalf of those customers. That's what we are proposing 27 to do. 28 MR. RUTWIND: I think if I have got it from Les Services StenoTran Services Inc. 613-521-0703 1349 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 you, and at least this is your position, if it turns out 2 into a zero sum gain, that it isn't worth the 3 administration of it, is that where we are at, zero sum 4 gain economically? 5 MR. BAKER: Well, there is certainly an 6 administrative aspect to it, but there is also a 7 customer education and a customer knowledge aspect to 8 that as well, again to ensure that a customer isn't 9 being portrayed to have gas cost savings that are going 10 to be eroded through a stranded cost issue and a 11 stranded cost recovery. 12 I think further, again under the alternative 13 two proposal, where the stranded costs are proposed to 14 be recovered from all customers, including system 15 customers, there would be a detriment to system 16 customers under that kind of a methodology. 17 Are we still talking about REMs here that are 18 serving customers that don't have even a one-year 19 contract necessarily? They just have some sort of an 20 implied contract to the rate schedule, are we still 21 talking about that situation or are we going beyond 22 that? The reason I ask is because I can't imagine how 23 one would know whether one was getting into a short-term 24 situation or a long-term situation, so just help me on 25 that. 26 MR. RUTWIND: I think perhaps I was looking at 27 it from the point of the vertical slice and the 28 portfolio that is being held by Union and if the Les Services StenoTran Services Inc. 613-521-0703 1350 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 portfolio would have in it a mixture of contracts which 2 it ordinarily would and if some of those were long term 3 those over a certain number of years would be considered 4 to be long-term contracts. 5 They would then be voluntarily take it or 6 leave it would be the position of the customer. Whereas 7 the shorter ones, they would because of administrative 8 difficulties perhaps and a fair amount of work to track 9 all those, would be on a mandatory basis. 10 MEMBER JACKSON: So my problem was maybe I was 11 thinking in terms of the kinds of contracts which 12 customers might have with Union or with an REM and you 13 are talking about the contract with the pipeline, are 14 you? 15 MR. RUTWIND: Yes. 16 MEMBER JACKSON: And you are saying that 17 somehow one could distinguish the long term from the 18 short term in terms of the supply portfolio and say that 19 the long term would be somehow not included in the 20 vertical slice by option, whereas the short term would? 21 I don't know whether I am the only one who is 22 confused on that, but -- 23 MR. BAKER: I think to help, the effect of 24 what is being suggested is that clearly in this market 25 circumstance customers want the ability to access 26 discounted capacity that is available in the 27 marketplace. So I think the crux of the suggestion 28 really is have a mandatory allocation for the shorter Les Services StenoTran Services Inc. 613-521-0703 1351 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 term capacity, which will allow us to get out of that as 2 fast and get out there and access the discounted 3 capacity in the secondary market. Whereas the 4 longer-term capacity then stays within Union's 5 portfolio. 6 Again, it's a variation, in my view, which is 7 really of the same issue, which is you will have the 8 same impacts under that as you will -- 9 MEMBER JACKSON: But you would still allocate 10 the same total capacity to the REM under that situation 11 then, is that the suggestion? It's not that some of it 12 would be allocated and some not for every switch from 13 system to non-system. It's that -- it's understanding 14 the question I am having trouble with. 15 MR. BAKER: I think instead of if you take one 16 component of the portfolio, say through the vertical 17 slice, take TransCanada, there is a portfolio, a 18 contract that Union has in its portfolio and for ease of 19 illustration say some of it's three year and some of 20 it's five year. 21 What we would do through the vertical slice is 22 essentially give a pro rata slice of those contracts as 23 well, so there would be -- if there was 10 units of 24 TransCanada capacity allocated, there might be five 25 units of three year and five units of five year. 26 I think what is being suggested is rather than 27 give us five units of three year and five units of five 28 year, give us 10 units of three year. I think -- that's Les Services StenoTran Services Inc. 613-521-0703 1352 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 my understanding of what has been proposed. 2 MEMBER JACKSON: Let's just get that clarified 3 then from the questioner and move on. I am sorry, I -- 4 MR. RUTWIND: I think we can move on from that 5 area. It was a proposal. I think it would be brought 6 up in our evidence as well. There were allusions to it 7 in direct evidence. 8 Let me move on to one or two other areas. I 9 understand the major concern that you have is not in 10 terms of the voluntary and mandatory. The issue is not 11 to do with prudency. You are not concerned about the 12 underlying contracts to any extent. The concern is an 13 economic one and is a zero sum one and that you can see 14 no economic benefits flowing from a voluntary situation 15 which would not already been there from a mandatory 16 situation. Does that sum it up? 17 MR. BAKER: No. I think what I said in 18 fairness was that it was both an economic consideration 19 and a value proposition to the end-use customer and the 20 example that I provided was a system customer where they 21 have nothing to do with the direct purchase arrangement 22 and the direct purchase marketer, say, not electing 23 capacity under an optional approach, but yet to the 24 extent that that gives rise to stranded cost the 25 alternative that has been put forward in the 26 ADR Agreement would suggest that those stranded costs go 27 to all customers, including system customers. 28 So it goes further than just the economic zero Les Services StenoTran Services Inc. 613-521-0703 1353 ANDREWS/BAKER/STEDMAN, cr-ex (Rutwind) 1 sum gain issue to the implications to all customers and 2 particularly their remaining system customers. 3 --- Pause 4 MR. RUTWIND: I will just be a moment, sir. 5 --- Pause 6 MR. RUTWIND: Thank you, very much. 7 Those are my questions. 8 THE PRESIDING MEMBER: Thank you, Mr. Rutwind. 9 Then we have Mr. Rook and is Mr. Scully -- are 10 you going to be asking questions? 11 MR. SCULLY: Yes. 12 THE PRESIDING MEMBER: I believe it is 13 Mr. Scully who is next, but I don't mind whichever way 14 you go. 15 I thought what we would do is take a very 16 short break, and then we would finish in one long run to 17 the end of the afternoon. 18 We will take a break for 20 minutes. When we 19 come back we will sit through until we are finished the 20 rest of the questions. Thank you. 21 --- Upon recessing at 1522 22 --- Upon resuming at 1542 23 THE PRESIDING MEMBER: Welcome back. 24 Mr. Scully, please. 25 MR. SCULLY: Thank you, Mr. Chairman. 26 CROSS-EXAMINATION 27 MR. SCULLY: Gentlemen, I want to talk about 28 how the vertical slice might actually operate. So Les Services StenoTran Services Inc. 613-521-0703 1354 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 Appendix A to the settlement agreement is a good 2 reference. 3 But just before that, Mr. Stedman, I thought I 4 heard you say earlier today that there might be some 5 problems with the proposed assignment because of FERC 6 requirements; that you may not be able to assign the 7 U.S. contracts the way you are proposing to assign them 8 because of those difficulties. 9 Is that a fact? 10 MR. STEDMAN: No. Union Gas is competent that 11 we will be able to assign at some stage -- through some 12 process we will be able to assign to our customers. 13 There are three different ways that we are 14 looking at it. 15 We have been in touch, through our Washington 16 lawyers, with FERC and we have some meetings planned. 17 There is some precedent in the U.S. for unbundling and 18 the ability to have a waiver on posting process for a 19 utility's unbundling. 20 There are two examples, Baltimore National 21 Fuel Gas and Atlanta Light where they have granted that. 22 We would ask for a full waiver in that circumstance, and 23 we are quite confident we could get that. 24 The second option would be to get an interim 25 order, which would be the fallback position. An interim 26 order would just be given for one year at a time. 27 The third option would be to go through the 28 posting process where we would actually post the Les Services StenoTran Services Inc. 613-521-0703 1355 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 capacity at max rates so that we will be in compliance 2 with the posting process. Then the customer would be 3 billed the max rate, and to the utility we would credit 4 back the difference between the negotiated rate and the 5 max rate. 6 So at the end of the day the customer ends up 7 paying the negotiated rate that the utility negotiated. 8 If we had to get down to the third option -- 9 it is not our preference, but if we got down to that 10 one, we are comfortable that we would be able to satisfy 11 that assignment criteria. 12 MR. SCULLY: So today you can't do it but you 13 are confident you can by November 1, 2000. 14 MR. STEDMAN: That is correct. 15 MR. SCULLY: When I look down the list on 16 Schedule A, what am I doing for exchanges? Where am I 17 going to buy gas and where am I getting transportation 18 from? 19 MR. STEDMAN: The three exchanges that you see 20 listed on Appendix A all have Empress as a receipt 21 point. So you would buy your gas at Empress. 22 MR. SCULLY: Right. 23 MR. STEDMAN: If you wish to transport on that 24 exchange. We would take that gas and redeliver it to 25 the customer back at Parkway or Dawn, depending on 26 the -- 27 MR. SCULLY: So I would be getting an 28 assignment of Union transportation -- Les Services StenoTran Services Inc. 613-521-0703 1356 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 MR. ANDREWS: No, Mr. Scully. I am just going 2 to clarify it, Mr. Scully -- and I can talk, just for 3 the benefit of everybody else. You are probably curious 4 as to whether I could actually talk. 5 The way the exchanges are going to work, 6 Mr. Scully, the customers will place the nominations 7 with Union Gas, much like they do today, with the FT, so 8 it will make it easy for them. Essentially, as 9 Mr. Stedman was alluding to, the customer would buy the 10 gas at Empress and he would have to have it title 11 transferred there and he would pick it up. And 12 depending on whether the gas is delivered at Dawn or 13 Parkway, they would basically tell us and do the 14 nomination process. 15 MR. SCULLY: I did have some questions for 16 you. I am just not encouraged because now you are 17 talking. 18 There will be a form of contract provided by 19 Union for each of these unbundled rates. 20 MR. ANDREWS: There is going to be an 21 unbundled service contract. Is that what you are 22 referring to? 23 MR. SCULLY: Yes. 24 MR. ANDREWS: Yes. 25 MR. SCULLY: What stage of preparation is 26 that at? 27 MR. ANDREWS: I believe that we have some 28 working drafts right now with respect to what we call Les Services StenoTran Services Inc. 613-521-0703 1357 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 the U2 service contract. I think we are still working 2 on the other service contracts, the U5, the U7 and I 3 think the U9. 4 MR. BAKER: The other thing I would just 5 mention is that the contracts will need to be finalized 6 for anything that comes out of this proceeding as well. 7 MR. SCULLY: Right. But is a working draft 8 something that you could file now? 9 MR. PENNY: Mr. Chairman, it is a draft. 10 Mr. Baker has quite correctly indicated that it in any 11 event would be subject to any of the rulings that may 12 come out of this proceeding. I don't know how an 13 initial draft of that kind could be of any use to anyone 14 in these proceedings or of assistance to the Board in 15 deciding anything that is before it. 16 MR. SCULLY: Mr. Chairman, in my experience 17 there is many a slip twixt the lip and the cup. Quite 18 often in this business it is in the form of contract, 19 and the nitty-gritty of the language that is in it that 20 makes a difference. 21 For instance, on the assignment we have eight 22 different transportation contracts being assigned here. 23 Am I going to have to make eight nominations each day? 24 It is that kind of thing. I am wondering if 25 we saw the form of contract, there may indeed be a 26 solution to that that Union has worked its way through. 27 MR. PENNY: It seems to me, Mr. Chairman, if 28 that is the information that Mr. Scully wants he should Les Services StenoTran Services Inc. 613-521-0703 1358 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 ask those questions. Looking at one initial draft of 2 the contract is not going to help. 3 We are happy to answer those questions. 4 THE PRESIDING MEMBER: Let's let Mr. Andrews 5 for the moment and see where we get to. 6 MR. ANDREWS: Could you rephrase the question, 7 please. I am not sure what you are asking now. 8 MR. SCULLY: I think there may be -- would you 9 agree that there is going to be a practical problem for 10 a direct purchaser if he has to make eight nominations 11 each day because your vertical slice, according to 12 Appendix A, would have him assigned eight transportation 13 contracts? 14 MR. ANDREWS: Yes, we are mindful that there 15 may be some burden, I guess, with respect to having to 16 deal with more transportation contracts than they are 17 currently used to. 18 In the current scenario it is just the 19 TransCanada FT. So we kept that in mind when we were 20 looking at putting our proposal in place, and that is 21 one of the reasons we had put in place the 300 GJ 22 threshold, Mr. Scully, to avoid having to allocate very 23 small units of pipeline capacity to customers. So it 24 would be at least somewhat more practical and a little 25 bit easier to use. 26 But you are correct that the way this will 27 work is that these assignments will require a customer 28 or their agent to place nominations on those upstream Les Services StenoTran Services Inc. 613-521-0703 1359 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 pipelines. 2 THE PRESIDING MEMBER: Mr. Andrews, rather 3 than giving specific contract language, is it possible 4 for you to produce a document which defines or 5 identifies the obligations that are going to be included 6 in the contract, without the contract language itself? 7 I don't know whether that would address 8 Mr. Scully's concern as to what are the things that are 9 going to be required of the party entering the contract. 10 I don't know whether it is possible or not. I 11 just throw that out as a suggestion. 12 MR. ANDREWS: The way we plan to approach 13 this, as we said before, the vertical slice would be 14 applicable to customers who would take up the bundled 15 service and the unbundled service. 16 We are going to take one approach for the 17 bundled side. As you probably know, Mr. Scully, with 18 the bundled contracts and the delivered contracts we 19 currently have the language of the assignment process 20 imbedded in there for the FT. 21 What we are going to do is add schedules to 22 the bundled T contract to allow the customers to pick up 23 the assignment with these other pipelines. For the 24 unbundled arrangement, we are developing what we call a 25 vertical slice agreement, and that will be a separate 26 agreement separate from the unbundled contract. 27 In either of those two documents essentially 28 what will happen is that we will summarize what each of Les Services StenoTran Services Inc. 613-521-0703 1360 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 these components will be for a given contract or a given 2 set of contracts and what the requirements are on behalf 3 of the marketers in order to place the nominations with 4 the upstream pipeline. 5 At this point I think we have a draft of the 6 vertical slice agreement that we are working on with the 7 required schedules. 8 THE PRESIDING MEMBER: Mr. Scully...? 9 MR. SCULLY: Well, your suggestion that any 10 kind of a summary or outline of the basic areas to be 11 dealt with, that certainly would be a step towards 12 getting us closer to the reality of what we are all 13 going to have to live with. 14 MR. BAKER: I don't know if this will help or 15 hinder, but just to expand on what Mr. Andrews said, we 16 have an assignment agreement in place today that handles 17 the TransCanada FT. In essence, what we are proposing 18 is just an expansion of that standard assignment 19 contract. Instead of it being applicable to one 20 pipeline contract or one source of supply being TCPL FT 21 today, it will be an assignment agreement that will 22 reflect all of the components within the vertical slice. 23 So it is similar to the standard assignment 24 agreement that is in place currently. 25 THE PRESIDING MEMBER: So do I infer from 26 that -- and I don't know; I have not seen an assignment 27 agreement so I have no idea what the obligations are -- 28 that the assignment agreement you currently have, what Les Services StenoTran Services Inc. 613-521-0703 1361 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 you are implying is that instead of having it related to 2 one pipeline arrangement, it is going to have the same 3 obligations to eight pipeline contracts. 4 Is that what the proposal is? 5 MR. ANDREWS: Yes, that's correct. 6 THE PRESIDING MEMBER: Does that help, 7 Mr. Scully? That's a concern you are raising, the fact 8 that you have got to do this eight times instead of 9 once. 10 MR. SCULLY: Yes. You grasped that. 11 There's been a suggestion that the 12 transportation contract slice, once it's signed, can be 13 treated by the party that receives it. In other words, 14 there is flexibility, you can sell it off in the 15 secondary market to suit your particular situation. Is 16 that part of your suggestion of what can happen here? 17 MR. STEDMAN: That is correct. 18 MR. SCULLY: In order to sell the assignment, 19 wouldn't I have to have a firm assignment for the 20 remaining term of the contract or, I guess, a minimum of 21 a one-year period before I have got a marketable...? 22 MR. STEDMAN: Well, you have to remember that 23 these would be temporary one-year assignments. So what 24 we would be doing is getting a sub-assignment, or a 25 third-party assignment would take place on a temporary 26 basis to that person that you had sold that capacity to 27 for that year, or longer. So we would have to set up 28 sub-assignment between the two parties. Les Services StenoTran Services Inc. 613-521-0703 1362 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 MR. SCULLY: Okay. 2 MR. STEDMAN: That type of arrangement. 3 MR. SCULLY: Union would be doing that -- are 4 we getting into your transactional services business 5 here? 6 MR. STEDMAN: No, not at all. We would 7 facilitate that just like we do today. And if the 8 customer wanted a permanent assignment, then there isn't 9 an issue at all because then you would -- that customer 10 has the full rates and the contracts associated with 11 that transport and they would just permanently assign it 12 to another party. Subject, obviously, to the pipelines 13 rules and regulations in regards to creditworthiness and 14 so forth. 15 MR. SCULLY: If I had an assignment of the 16 contract from -- say I have a one-year assignment of the 17 Panhandle contract for delivery to Parkway and I want to 18 sub-assign it to TransCanada Gas Services. I can just 19 go to them and say, "Let's draw up a sub-assignment 20 agreement; we will deal with Panhandle and we will Union 21 know that this is happening"? 22 Is that the way that you contemplate it 23 working? 24 MR. STEDMAN: What we would have to do is 25 because it is -- the primary name would be Union Gas, 26 under the temporary one-year assignment. So you would 27 have to come back to Union Gas and tell us that you have 28 a third party that you want to assign it to. And then Les Services StenoTran Services Inc. 613-521-0703 1363 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 you would have to facilitate the paperwork with Union to 2 sub-assign it to that third party. 3 MR. SCULLY: Okay. So -- 4 MR. STEDMAN: -- administration to it. 5 MR. SCULLY: -- Union would have their credit 6 check. Panhandle would have their credit check. 7 When I think of what can happen here -- 8 MR. STEDMAN: Just to clarify. Panhandle -- 9 we are the primary holder of the contract, like, with 10 TransCanada, we are the primary holder of the contract. 11 Right? If we do a temporary assignment, that would 12 really be at Union's -- you don't have to go to back 13 TransCanada to get the creditworthiness under a 14 temporary assignment; it's only when you are doing the 15 permanent assignment. So the creditworthiness is really 16 with Union, not with the pipeline, when you are doing a 17 temporary assignment. 18 MR. SCULLY: I think, realistically, you would 19 have to agree with me, if I'm a minimum qualifier for 20 your unbundled service of 5 million a year, I'm going to 21 have some pretty small pieces here in your vertical 22 assignment and I'm going to want to get rid of them. 23 I'm going to want to concentrate my transportation 24 arrangement. 25 Doesn't that sound like a reasonable approach? 26 Instead of having eight, if I can work it down to two or 27 three, that's a reasonable objective, would it not be? 28 MR. STEDMAN: I don't necessarily agree Les Services StenoTran Services Inc. 613-521-0703 1364 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 because -- it depends on the customer. Union has a 2 bunch of other contracts, as well, that they can mix in 3 their portfolio and, as a portfolio, it's a good package 4 to have, so they may or may not get rid of that 5 capacity. 6 MR. BAKER: To the extent that someone wanted 7 to consolidate and not, as you are suggesting, 8 operate -- I'm not sure it's exactly eight -- but not 9 operate, you know, a number of assignments through the 10 vertical slice, then you are free to do that. 11 MR. SCULLY: But how realistic is it? You 12 know. I'm going to be out there, trying to peddle 15 13 GJs a day on Panhandle. It just doesn't seem to me that 14 there's going to be an active viable market out there 15 for these bits and pieces that your proposal will 16 create. 17 MR. STEDMAN: There's different ways of 18 treating that gas. I mean one way is where you are 19 buying the gas you sell, you transport it on the 20 pipeline, you have it landed at Dawn and that you sell 21 gas delivered at Dawn, along with all your other gas. 22 See, there's different ways marketers can handle that 23 capacity. 24 For buying the gas, there's enough suppliers 25 out in the marketplace that you can acquire it -- 26 different portions of supply and use it. 27 What you would find is that a lot of these -- 28 once this gets developed, a lot of the people who are in Les Services StenoTran Services Inc. 613-521-0703 1365 ANDREWS/BAKER/STEDMAN, cr-ex (Scully) 1 the REM business would have a portfolio of a lot of 2 these assets and they would be adding on to the existing 3 portfolio that they have. 4 You are right, if you were brand new and you, 5 all of a sudden, went out and got 1,000 customers, you 6 would have a very small contract that you would have to 7 manage. 8 MR. SCULLY: Those are all my questions. 9 Thank you, Mr. Chairman. 10 THE PRESIDING MEMBER: Thank you, Mr. Scully. 11 Mr. Rook. At last. 12 MR. ROOK: Thank you, Mr. Chair and 13 Dr. Jackson. Recognizing that I'm the last to the jury 14 this afternoon, I will attempt to minimize trodding on 15 territory that's already been tilled. 16 CROSS-EXAMINATION 17 MR. ROOK: Members of the Panel, I would like 18 to deal with some of the issues that have already been 19 canvassed but I want to come at it from a slightly 20 different perspective. 21 Are we on common ground that the Board, in 22 disposing of Union's application, as it relates both 23 generally and specifically to unbundling, must have 24 regard to the objectives set out in the Ontario Energy 25 Board Act 1988, more particularly, those in section 2 26 thereof? 27 MR. BAKER: I don't have it memorized but I 28 think that's probably a fair characterization. Les Services StenoTran Services Inc. 613-521-0703 1366 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: And recognizing that I have a copy 2 in front of me and you do not, let me just make 3 reference to one or two of the particular objectives -- 4 MR. PENNY: We have a copy here, Mr. Rook, and 5 Mr. Baker would be happy to look at it. 6 MR. ROOK: All right. Thank you. 7 In that section 2, the Board must consider the 8 degree to which the application facilitates competition 9 in the sale of gas you use. Do you see that? 10 MR. BAKER: Just a sec. 11 MR. ROOK: It's on page 84 and 85 of the 12 consolidation. 13 MR. BAKER: Yes, I see it. 14 MR. ROOK: And in forming or fashioning your 15 application, was that a consideration that you took into 16 account both generally and as it relates to unbundling? 17 MR. BAKER: Yes. 18 MR. ROOK: And would it also be fair to 19 suggest that you have regard to the other specific 20 objectives at Item 2, for example, to maintain just and 21 reasonable rates for the transmission, distribution and 22 storage of gas? 23 MR. BAKER: Yes, I think that's fair. 24 MR. ROOK: And, similarly, at least two of the 25 other three remaining, Item 3 to facilitate the rational 26 expansion of transmission and distribution systems and 27 Item 4 to facilitate the rational development and safe 28 operation of gas storage, would those also have been Les Services StenoTran Services Inc. 613-521-0703 1367 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 factors that you took into account? 2 MR. BAKER: Those are factors that we take 3 into account, generally, not in addition to the 4 unbundling proposal, that's right. 5 MR. ROOK: Now, focusing on bundling -- and my 6 questions will be related, specifically, to upstream 7 transportation -- let me suggest to you that the 8 proposal that Union has put forward only minimally 9 facilitates competition in the sale of gas to users in 10 Ontario. Would you agree or disagree with that 11 characterization? 12 MR. BAKER: I disagree. 13 MR. ROOK: And let me suggest to you that 14 taking your evidence as a whole and trying to look at it 15 reasonably objectively, what this proposal essentially 16 is concerned to do is to ensure that stranded costs, as 17 you have chosen to define them, don't land at the 18 doorstep of Union Gas and have to be dealt with by Union 19 Gas. Do you agree or disagree with that 20 characterization? 21 MR. BAKER: I disagree. 22 MR. ROOK: Now, looking, then, given your last 23 two answers, am I correct that the proposal that is 24 currently before the Board is essentially the vertical 25 slice proposal? 26 MR. BAKER: Yes, that is the proposal to 27 prospectively implement a vertical slice allocation 28 methodology to facilitate direct purchase both bundled Les Services StenoTran Services Inc. 613-521-0703 1368 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 and unbundled direct purchase. 2 MR. ROOK: And that is commencing on or about 3 November 1, 2000. Correct? 4 MR. BAKER: That's correct. 5 MR. ROOK: All right. And in that context 6 would you look at Appendix A to the Settlement 7 Agreement, please. Others have asked questions, but I 8 want to be certain that at least my client understands 9 what is on the table. 10 Recognizing that this is a forecast, am I 11 correct that if your proposal is accepted customers 12 would be allocated those elements of contracts in the 13 proportions shown on Appendix A on a pro rata basis? 14 MR. BAKER: They would be allocated supply -- 15 they would be allocated a transportation assignment in 16 the proportions that are outlined on that appendix. 17 MR. ROOK: So that to take a hypothetical 18 example, if customer A wished to have 100 units of 19 supply, 20 per cent of that would be TransCanada FT with 20 delivery at Parkway? 21 MR. BAKER: That's correct. 22 MR. ROOK: And similarly for all of the other 23 seven or eight that are shown there. Correct? 24 MR. BAKER: That's correct. 25 MR. ROOK: And that would apply for the term 26 of the contract, that is the underlying contract that 27 Union has with the upstream pipeline company? 28 MR. BAKER: That's correct. Les Services StenoTran Services Inc. 613-521-0703 1369 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: So that if this proposal is 2 accepted, and assuming that Alliance/Vector comes 3 onstream, for the purposes of my question, on 4 November 1, 2000, customer A in my hypothetical will 5 have allocated to it 34 per cent of the overall 100 per 6 cent on the Alliance/Vector pipeline in the first year. 7 MR. BAKER: That's generally correct, although 8 we have had a discussion earlier about the delay in the 9 Alliance/Vector forming part of the slice, but subject 10 to that that is correct. 11 MR. ROOK: All right. I accept that 12 qualification. 13 And what is contemplated by the vertical slice 14 is that so long as the underlying contract remains in 15 force, in this case Alliance/Vector, customer A or any 16 other customer will have to make arrangements to take an 17 assignment on Alliance/Vector for something in the order 18 of a third of its requirements on a going-forward basis? 19 MR. BAKER: That's correct. To the extent 20 that it is a brand new customer that has no current 21 direct purchase volumes and therefore no current direct 22 purchase portfolio, that's correct. 23 MR. ROOK: All right. And in taking that 24 assignment, and subject to the exigencies of the 25 contract that may exist, that customer or customers will 26 acquire that transportation on Alliance/Vector at the 27 same price that you paid Westcoast and others who are 28 the owners of Alliance/Vector. Is that correct? Les Services StenoTran Services Inc. 613-521-0703 1370 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. BAKER: You would pay the price that Union 2 has paid the contract for that capacity. 3 MR. ROOK: And Union has contracted with the 4 owners of Alliance/Vector, one of whom is Westcoast, 5 Union's parent, for that capacity on Alliance/Vector's 6 pipeline. 7 MR. PENNY: I think Mr. Rook is a better 8 lawyer than to think that contracts are made with the 9 owners of a company. The contract is made with the 10 company. 11 MR. ROOK: Be that as it may, it is 12 acknowledged, is it not, Mr. Baker, that Westcoast is 13 one of the shareholders of Alliance/Vector, indeed both 14 pipelines but to slightly different degrees. 15 MR. BAKER: Westcoast has an ownership 16 interest in the Alliance pipeline, that's right. 17 MR. ROOK: So that looking through the 18 vertical slice to the real market, in the 15 years in my 19 hypothetical, the customers who have contracted will pay 20 whatever the contracted price is that was negotiated 21 between Union and Alliance/Vector when that contract was 22 entered into in 1998 or 1999. Correct? 23 MR. BAKER: That's correct. 24 MR. ROOK: All right. So that to the extent 25 the cost on Alliance/Vector exceeds the market price for 26 transportation from other sources, the customer who has 27 taken that assignment is purchasing capacity in excess 28 of the market. Correct? Les Services StenoTran Services Inc. 613-521-0703 1371 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. BAKER: That hypothetical could go both 2 ways. Depending on what happens in the transportation 3 market that capacity could be landing at less than other 4 capacity in the marketplace. 5 MR. ROOK: Granted. But if the picture that 6 we see today were to hold true, the answer to my 7 question would be yes. And if your qualification is 8 correct, the answer to my question would be no. 9 MR. BAKER: That's correct. 10 MR. ROOK: Indeed, if one looks at 11 Exhibit F8.1, it may be that in some years the slings 12 and arrows of outrageous fortune would be beneficial, 13 that is to say the contract price would be below market 14 and in other years not so beneficial if the market price 15 is above the contract price. 16 MR. BAKER: That's fair. 17 MR. ROOK: Right. And only time will tell -- 18 in the case of Alliance/Vector over the 15 year term -- 19 whether the benefits and the costs end up being positive 20 or negative, assuming this proposal is accepted by the 21 Board. 22 MR. BAKER: Again, I think you can do that 23 analysis for every component in the portfolio but, as we 24 have said, Union as a system supplier has followed a 25 portfolio approach and, as you can see, there are 26 different components in the portfolio each with a 27 different economic value at a point in time. So from 28 the perspective of a prospective direct purchaser taking Les Services StenoTran Services Inc. 613-521-0703 1372 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 a vertical slice, it would be the sum total or 2 consolidation of all the contracts that he is managing 3 and in terms of the average market value of all those 4 pieces as opposed to strictly just one of them at any 5 particular point in time. 6 MR. ROOK: That is fair enough. But you will 7 acknowledge, will you not, that to have one-third of 8 your proposal, or of your portfolio mix, with one 9 supplier in a circumstance where the contract price 10 exceeds the market price, it is certainly something that 11 would concentrate the thinking of anyone who was 12 thinking of purchasing capacity from Union under your 13 proposal. Isn't that correct? 14 MR. BAKER: I'm not necessarily sure that I 15 agree with that from the perspective that again if the 16 cost of the portfolio that Union uses to serve its 17 system customers that is embedded in rates and is paid 18 for in rates, so -- 19 MR. ROOK: I'm sorry. Are you finished? 20 MR. BAKER: No. I'm just saying, that is what 21 is embedded in rates, so there is no -- to the extent 22 that a potential direct purchaser takes a vertical slice 23 of Union's portfolio, they are at no cost disadvantage 24 in terms of what those customers are paying today in 25 their rates. 26 MR. ROOK: But surely the customers who 27 purchase the portfolio are in business to make a profit 28 and if one-third of the capacity that they have Les Services StenoTran Services Inc. 613-521-0703 1373 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 allocated to them, they know if it were to be resold 2 would be resold at a loss. Surely that reduces the 3 opportunity available to that customer to make a profit 4 on its business, as contrasted with the other situation 5 where all of the capacity could be purchased in the open 6 market at whatever the market price happens to be, in 7 this case well below, as I understand it, what 8 Alliance/Vector is charging Union Gas. 9 MR. BAKER: I guess I wouldn't agree really, 10 from the perspective that direct purchase from its 11 beginning and even today has, to some extent, been a 12 commodity offering. 13 So much of the savings that have arisen 14 through direct purchase have arisen from the fact that 15 direct purchase customers or marketers take an 16 assignment of Union's capacity under direct purchase and 17 to the extent that they can go out and negotiate 18 commodity cost savings relative to what Union has in its 19 portfolio -- and I'm speaking now about the commodity 20 cost -- then there is a value proposition there for both 21 the marketer and the end-use customers that they are 22 serving. 23 And again looking at the portfolio, and not 24 trying to isolate one component out of it, there is a 25 very large percentage of the capacity in this vertical 26 slice that will expire within a relatively shorter 27 period of time and at that point in time, to the extent 28 that the market still is what it is today with Les Services StenoTran Services Inc. 613-521-0703 1374 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 capacities trading at a discount, marketers at that time 2 are free to go out and access that discounted capacity 3 and again extract greater value out of that portfolio. 4 MR. ROOK: Right. Let me pick up on a couple 5 of the elements of that answer. If you look at the 6 fourth item in Appendix A -- which is the third exchange 7 item reading from the left -- as I understand this 8 appendix, that contract that is shown there expires on 9 November 1, 2001. Is that correct? 10 MR. BAKER: That's correct. 11 MR. ROOK: And if I understand the burden of 12 what you just said correctly, you are suggesting that at 13 least one year after the vertical slice begins, when a 14 new vertical slice is determined on November 1, 2001, 15 customers can purchase an additional 12 per cent of 16 their requirements for transportation on the open 17 market. Is that correct? 18 MR. BAKER: That's correct. 19 MR. ROOK: Now, in light of that comment, 20 would you look quickly at page 17 of Exhibit B of your 21 evidence? 22 MR. PENNY: Tab 2. 23 MR. ROOK: Yes. Thank you. 24 MR. BAKER: Isn't that Exhibit B, Tab 1? 25 MR. ROOK: Tab 1. I am sorry. I always 26 assume Mr. Penny is right and I was too quick that time. 27 My book was opened at Tab 2. 28 MR. PENNY: Page 17. Les Services StenoTran Services Inc. 613-521-0703 1375 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: In that portion of the testimony, 2 if you go back to page 15, you will see that it is 3 generally under the heading, Proposed Upstream 4 Transportation Allocation Methodology and then looking 5 at the bottom of page 16 to give you the context, it 6 says reading at line 22: 7 "Union proposes that all upstream assets 8 either directly assigned or allocated be 9 one-year Evergreening Agreements that 10 will automatically roll over every year 11 subject to one of the following --" (As 12 read) 13 And "the following" that I want to concentrate 14 on is Item E at line 5 on page 17, and it says: 15 "Underlying upstream contracts can be 16 renegotiated with terms and conditions 17 acceptable to the customer and Union, 18 given that some assets allocated to 19 customers had an expiry date and thus as 20 such will need to be either renewed or 21 replaced on expiry". (As read) 22 When I read that passage, it struck me that 23 there was some question -- at least in my mind -- as to 24 whether under your proposal customers would be free to 25 negotiate whatever arrangements they wanted to on or 26 about November 1 of each and every year because it 27 appears that Union's concurrence is required. 28 Can you comment on that? Les Services StenoTran Services Inc. 613-521-0703 1376 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. BAKER: Let me clarify because that is 2 clearly not the intent. The intent is that on the 3 expiry of those contracts -- the one that you just 4 referred to in Appendix A -- upon the expiry, the 5 unbundled customer/marketer is free to make the 6 arrangements that they want. 7 What this was trying to say is that to the 8 extent that that customer wished to have that asset 9 renewed and wanted Union to facilitate that, that we 10 would do that and then it would then once again fall 11 under the one-year Evergreening Agreements that would 12 roll over. 13 So again, that was at the customers' option in 14 terms of whether that was something that they wished to 15 do or wished to do in conjunction with Union. 16 MR. ROOK: So what you are saying then is that 17 it's only in that limited circumstance that the total 18 flexibility that you have described would be limited. 19 MR. BAKER: Again, I really wouldn't describe 20 it as limited because it would be at the customers' 21 option so if they didn't want to do that they would be 22 free to go into the marketplace and replace the capacity 23 themselves. 24 MR. ROOK: All right. Thank you. 25 Now then, with the benefit of that -- going 26 back to Appendix A -- if I now understand the vertical 27 slice proposal correctly, if this is accepted by the 28 Board, the vertical slice is potentially changeable to Les Services StenoTran Services Inc. 613-521-0703 1377 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 the extent of 12 per cent of the capacity shown here on 2 November 1, 2001. Is that correct? 3 MR. BAKER: That's correct. 4 MR. ROOK: And that the next opportunity would 5 occur on November 1, 2002 in respect of a further 37 per 6 cent of the capacity that is shown on Appendix A. 7 MR. BAKER: That's correct. 8 MR. ROOK: All right. 9 MR. BAKER: I might add, just for clarity, in 10 regards to TransCanada's FT contract. 11 MR. ROOK: Yes. 12 MR. BAKER: You see that the remaining term is 13 2.9 years. That is the portfolio of different terms. 14 So there is some one-year contracts that come up over 15 that period that would allow that contract to be 16 non-renewed as well. 17 So I believe when you look at 2001, the total 18 percentage would be approximately 50 per cent, if you 19 included the TransCanada contracts that come up for 20 renewal. 21 MR. ROOK: Is that assuming that 22 Alliance/Vector begins in 2000 or 2001? 23 MR. STEDMAN: That was with the assumption 24 of 2000. 25 MR. ROOK: Right. Thank you. 26 MR. BAKER: Those percentages would actually 27 be higher to the extent that Alliance/Vector was delayed 28 for one year. Les Services StenoTran Services Inc. 613-521-0703 1378 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: I understand that. 2 Now, pending the termination of the existing 3 contracts, under your proposal the customers who take an 4 assignment of the vertical slice cannot turn back any of 5 that capacity expect possibly that which is on 6 TransCanada FT. Am I correct in that? 7 MR. BAKER: Well, I think it's the terminology 8 on turn back. Turn back and non-renewed capacity is 9 really the same when upon the expiry of the contract the 10 customer in essence either turns it back to Union and we 11 in turn turn it back to TransCanada or they go into the 12 marketplace and they replace that expired capacity with 13 whatever they want in the secondary market. 14 MR. ROOK: What I meant was -- perhaps my 15 question was badly put, they often are. Between the 16 commencement date and the termination date of the 17 contract, a customer cannot turn back to either Union or 18 to the underlying supplier the capacity that it has 19 contracted to take under the vertical slice unless it is 20 TransCanada and is in accordance with that policy. Is 21 that correct? 22 MR. STEDMAN: Maybe I would add a little bit 23 of clarify to that. There is a TransCanada piece, but 24 when those contracts on Panhandle do expire, the 25 customer has the right then to not take that pipe as 26 well. So that Evergreening contract would end. 27 MR. ROOK: I appreciate that, but what I am 28 attempting -- let me put it this way. Mr. Baker, in Les Services StenoTran Services Inc. 613-521-0703 1379 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 your evidence, you have made much of the fact that the 2 TransCanada turn back policy has introduced a measure of 3 flexibility in price competition in the market since 4 that policy has been in effect. Correct? 5 MR. BAKER: It certainly allowed customers to 6 go out and access discount capacity in the marketplace, 7 that's right. 8 MR. ROOK: And what I am asking is, leaving 9 aside TransCanada, is there a similar policy in effect 10 on the other pipelines that are shown here in 11 Appendix A? 12 MR. BAKER: Well, in effect there is. I think 13 the difference that maybe we are tripping a bit over is 14 that on the TransCanada contracts, at the end of the 15 primary term which has typically been a 10-year terms, 16 they roll over in what is termed one-year renewable 17 contracts. So there are renewal rights under those 18 contracts. So the turn back policy to date has allowed 19 customers to turn back the capacity to Union which we 20 then have the flexibility to turn back to TransCanada. 21 The other contracts that you see in 22 Appendix A, are essentially just term contracts without, 23 to the best of my knowledge, renewal rates. So at the 24 time they expire, they expire. So again, back to our 25 previous conversation. When those expire, the customer 26 that has taken an allocation of that within the vertical 27 slice is then free to go into the marketplace and 28 replace that capacity with whatever arrangements they Les Services StenoTran Services Inc. 613-521-0703 1380 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 deem appropriate. 2 MR. ROOK: Let me try it again. Let's focus 3 on Alliance/Vector to illustrate my point. If a 4 customer has taken a vertical slice and it determines 5 that it has too much capacity, it has, as I understand 6 the evidence, two choices. It can simply maintain that 7 capacity and pay for it, whatever the charge might be, 8 or it can attempt to mitigate its loss and sell that 9 capacity in the market at a price below that which it 10 paid Union and Alliance/Vector. Am I right in that? 11 MR. BAKER: You need to draw a distinction 12 between the bundled service and the unbundled service 13 because under the bundled service today -- take the 14 scenario where a customer elects bundled service and 15 takes a vertical slice for 100 units of capacity. The 16 next year we do what we term an annual DCQ adjustment. 17 So we look at the last 12 months, normalize to average 18 consumption for that group of customers, and to the 19 extent that it has been reduced, Union adjusts the 20 allocation of that capacity and essentially takes the 21 capacity back into Union's portfolio, so the customer 22 isn't long. 23 Under the unbundled, there is a difference in 24 the unbundled service, as you had explained, where it 25 is, in our view, a different type of service, where they 26 are taking on a greater obligation and management for 27 that service. So, in that case you described, that 28 would be correct. Les Services StenoTran Services Inc. 613-521-0703 1381 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: Just as a point of clarification, 2 under your proposal will a customer be entitled to sell 3 its excess capacity within its slice, even if it sells 4 it at a loss? Or, is it simply stuck with the excess 5 capacity? 6 MR. BAKER: If they have elected to take an 7 assignment of capacity under the one-year renewable 8 assignment, they would have to mitigate that on an 9 annual basis. If they elected to take a permanent 10 assignment of a capacity, so that the capacity was now 11 physically held by them, they would be free to dispose 12 of that. 13 MR. ROOK: If the current price in the 14 secondary market remains lower than the tariff price, 15 were that to be done, they would suffer a loss 16 represented by the difference between those two. 17 MR. BAKER: If that were to happen. But when 18 I look practically, given the flexibility that is in the 19 portfolio, I have a hard time imaging that it would 20 happen, given that, as you have pointed out -- the 21 line 4 -- 12 per cent of what would get allocated in the 22 vertical slice expires in 2001, and then a fairly 23 substantial amount of capacity expires in 2002. So, to 24 the extent that the volume was reduced for whatever 25 reason, there is the flexibility in that portfolio to 26 adjust the transportation requirements to serve the 27 demand. So I don't think it would be a case of 28 necessarily having to go out and sell or mitigate Les Services StenoTran Services Inc. 613-521-0703 1382 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 capacity at a loss, because there is flexibility within 2 that portfolio that would allow that to be adjusted. 3 MR. ROOK: I see. 4 Would you at least agree with this, gentlemen: 5 that under the vertical slice proposal, particularly as 6 it relates to unbundled customers, the risk going 7 forward is transferred to the customer who takes an 8 assignment of the capacity, as per the vertical slice? 9 That is the risk that he will either be in or out of the 10 money in relation to the market price for that capacity. 11 MR. BAKER: I view it slightly different; that 12 a customer electing the unbundled service is taking on 13 an obligation to manage a service on a daily basis, as 14 opposed to a bundled service. So they would be allowed 15 greater opportunity to access both advantages in a 16 market when capacity is above toll, and similarly they 17 would be accountable for managing the capacity when the 18 market value is below toll. 19 MR. ROOK: That sounds like assuming the risk 20 to me, but I will leave that and move on. 21 MR. BAKER: I just want to say, risk and 22 reward. 23 MR. ROOK: I see. 24 Would you look at Appendix B for a moment? 25 If I understand Appendix B correctly, the 26 portion that appears on the appendix above the line 27 "Direct Purchase Portfolio" represents the volumes that 28 are shown on Appendix A. Am I correct in my Les Services StenoTran Services Inc. 613-521-0703 1383 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 interpretation of Appendix B? 2 MR. BAKER: That's correct. 3 MR. ROOK: And if I understand Appendix B, 4 then, the vertical slice that is under discussion in 5 your proposal is that which is shown under the general 6 heading "System Portfolio" on Appendix B. 7 MR. BAKER: That's correct. 8 MR. ROOK: Without getting mired in the 9 minutia of the appendix, what this appendix is 10 attempting to demonstrate is the annual cost in millions 11 of dollars, given a current view, represented by the 12 difference between the contracted price and the current 13 price in the marketplace. 14 MR. BAKER: That's correct. 15 MR. ROOK: Insofar as system portfolio costs 16 are concerned, that cost is estimated at $53 million 17 annually; correct? 18 MR. BAKER: That's correct. 19 MR. ROOK: In reality, that cost, were this 20 system proposal to be accepted by the Board, will be 21 determined by at least two factors. First, what is the 22 actual market price in the relevant time period, and 23 second, to what extent do customers mitigate the cost; 24 correct? 25 MR. BAKER: It wasn't really going to 26 customers mitigating the cost. Clearly, what this was 27 attempting to show was that, to the extent that there 28 was an optional allocation methodology that was adopted, Les Services StenoTran Services Inc. 613-521-0703 1384 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 this would be capacity that would now reside in Union's 2 portfolio that we no longer needed. We would be long 3 capacity and we would have to go out and mitigate that 4 capacity, and that is the value. 5 MR. ROOK: But if I understand the number 6 correctly, this is a worst case scenario in the sense 7 that it assumes that the price in the market remains 8 below the tariff price, and it also assumes that you are 9 not able to re-sell that capacity for a price that puts 10 money in your pocket. So this is a worst case number. 11 It could be less, but it won't be more. 12 MR. BAKER: I guess what it shows is that it 13 is based on -- I would agree with your proposition that 14 it is based on the current market value at a point in 15 time. So, to the extent that the market value changes, 16 which it does daily, those numbers will change. But I 17 wouldn't agree that it is what I would term to be a 18 worst case scenario. 19 We talked earlier this morning that, to the 20 extent that it was known in the marketplace that Union 21 was going to have excess capacity that it was 22 essentially going to be forced to liquidate through an 23 optional allocation approach, I would suggest that our 24 ability to extract even the market value would be 25 severely limited. 26 In addition, to the extent that we are faced 27 with capacity that has a Parkway delivery point, our 28 ability to mitigate that is made more difficult by the Les Services StenoTran Services Inc. 613-521-0703 1385 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 fact that we rely from a system design perspective on 2 those Parkway deliveries showing up. 3 So, to the extent that we had to mitigate the 4 capacity, we would have an additional cost that we would 5 have to incur to make sure that we maintained the 6 Parkway deliverability from a system design point of 7 view. 8 MR. ROOK: One thing that has fascinated me 9 about your proposal is that, if I understand the 10 proposal correctly, you are opposed to an optional 11 methodology because, among other reasons, you are 12 concerned that the stranded costs will be visited on 13 Union and, through Union, on Union's system customers. 14 Am I correct in that impression? 15 MR. BAKER: Not entirely. I think our 16 concerns were grounded in the perspective that we didn't 17 think that it was appropriate or really going down the 18 path of leading to efficient competition where you had 19 an offering that would be put to customers on the one 20 hand by a marketer that would say "I've got an optional 21 allocation methodology with Union. I can save you 22 30 cents on your commodity and your transport. There's 23 the direct purchase offering," and then look at the 24 other side of the equation and have that same customer 25 then faced with a bill from Union, subject to going 26 through the appropriate review and prudency reviews with 27 the Board that says here's a 30 cent cost or higher. 28 MR. ROOK: But that scenario only Les Services StenoTran Services Inc. 613-521-0703 1386 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 materializes, with respect, if the market price for the 2 capacity is below the tariffed price, does it not? 3 MR. BAKER: I suggest to you that the only 4 time a marketer would want to non-elect Union's capacity 5 is in a situation where the market value was below 6 tariff because there are other options available in the 7 marketplace. So we would be faced with the same 8 situation as a marketer only the reverse. 9 MR. ROOK: But that assumes, does it not, that 10 Union is prohibited by the Board from selling whatever 11 capacity it has contracted for at the market price? 12 MR. BAKER: No, it doesn't. 13 MR. ROOK: Just a moment, let me debate that 14 with you for a moment. 15 In a competitive market, Union, and other 16 customers in the market, whether it be Sunoco or the 17 other customers that Mr. Vegh represents, are free, are 18 they not, to contract with suppliers of capacity in the 19 open market and to arrange whatever contractual 20 arrangements they choose to arrange. In a competitive 21 market would you not be entitled to do that, just as you 22 do today? 23 We have a portfolio of delivery requirements 24 here in Ontario and we believe that we need this much 25 transportation capacity in order to supply the service 26 that we supply and we, therefore, will purchase it in 27 the market from whomever we choose. 28 MR. BAKER: In an ideal, perfect market Les Services StenoTran Services Inc. 613-521-0703 1387 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 circumstance that is correct. I think what we deal with 2 and have always dealt with through direct purchase is 3 what's the appropriate mechanism by which to get to 4 that, what I term an ideal end state and that really 5 raises the issues that we are talking about today. 6 MR. ROOK: And that's why we are having this 7 debate because let me suggest to you that in that 8 market, and assuming there were not transitional issues, 9 in that market essentially there are a group of buyers 10 of transportation. They are Union, Sunoco and others, 11 and there are a group of sellers of transportation, they 12 being TransCanada, Alliance/Vector and others, and in 13 that market Union and others would be entitled to buy 14 and sell transportation requirements at whatever the 15 market price was at that time. At least in theory isn't 16 that correct? 17 MR. BAKER: That may be correct. 18 MR. ROOK: Well, accepting that it is for the 19 purposes of my question, what strikes me as odd about 20 the entire Union proposal is that it is focused solely 21 on the stranded cost that may be sustained, but ignores 22 the fact that Union might well be able to sell its 23 transportation at a profit if the market price exceeds 24 the tariffed price as it did between September 1996 and 25 September 1998, as per Exhibit F8.1. 26 MR. PENNY: Do you want the witness to comment 27 on that statement? 28 MR. ROOK: Yes, I do. Les Services StenoTran Services Inc. 613-521-0703 1388 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. BAKER: I think what we are talking about 2 is as we sit here today at a point in time and looking 3 at the graph at Exhibit F8.1, we are in a situation 4 where capacity is trading below toll. 5 So to the extent that under an optional 6 allocation approach our posted toll is a dollar and the 7 market is 70 cents, a marketer will elect not to take 8 Union's capacity to try to get that 30-cent 9 differential. 10 Union's immediately long capacity at that 11 point in time, we immediately have to go to the 12 marketplace and try to mitigate that long position to 13 mitigate the demand charge exposure. We will have no 14 greater ability to get in excess of the market price. 15 We will get the market price which is 70 cents, in which 16 case we will have the stranded cost of 30 cents. 17 MR. ROOK: Accepting all of that, Mr. Baker, 18 if we were having this debate in June of 1997 rather 19 than June of 2000 precisely the opposite would be true, 20 in that having contracted long term as you did, you 21 would be entitled under my hypothetical example, should 22 the Board approve it, to go into the market short and 23 sell your transportation at a price in excess of the 24 contracted price and put that difference in your pocket? 25 MR. BAKER: No, that's not right because we do 26 not make money or profit on either a commodity or the 27 transportation. 28 MR. ROOK: I acknowledge that, Mr. Baker, but Les Services StenoTran Services Inc. 613-521-0703 1389 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 we were talking about a world in the future in which 2 there will be competition. I am suggesting to you that 3 in fashioning your proposal you have looked solely at 4 the negatives of competition, that is the downside of 5 the stranded cost, given current market conditions, and 6 ignored the fact that there is a business opportunity 7 for Union and hence for its customers, were Union able 8 to sell its capacity at a premium in the market? 9 MR. PENNY: Mr. Chairman, that's a completely 10 unfair characterization. The question was put to Mr. 11 Baker about June of 1997. He gave an answer to that and 12 now he's being remonstrated because he is not speaking 13 to the future. 14 MR. BAKER: I simply say that from my 15 perspective Union's approach has been consistent. Where 16 the market was in 1997 and where the market is now, and 17 where the market was in 1997 we allocated TCPL capacity. 18 We provided access to that capacity to customers 19 electing direct purchase when the market value was 20 significantly above toll, and marketers had the ability 21 at that time to use that capacity. 22 And we are proposing the same methodology or 23 the same approach be used now that we are in a situation 24 where the capacity is below toll. 25 MR. ROOK: Let me put the proposition to you 26 in a different way and then I will press mercy to the 27 Board and leave it. 28 As I understand this entire proceeding, it's Les Services StenoTran Services Inc. 613-521-0703 1390 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 all about performance-based regulation and to my 2 simplistic mind what that means, among other things, is 3 that Union in the future will be less regulated and more 4 competitive in the future than it has been in the past. 5 If that simplistic understanding is correct, 6 why would you tie your hands to an opportunity to 7 increase your performance given the fact that the price 8 of transportation is so volatile as shown on Exhibit 9 F8.1? 10 MR. BAKER: Their PBR proposal starts from a 11 framework under which gas supply costs continue to be 12 regulated on a flow-through basis for both the commodity 13 and the transportation. So, as we sit here today Union 14 is not in the business as a system supplier to go out 15 and speculate on selling transportation at a point in 16 time because it's high and seeing what we can do at a 17 time when it's at a discount. That's far removed from 18 where we sit today and where our obligation as a systems 19 supplier is. 20 MR. ROOK: Thank you. 21 Now, my last question with respect to Appendix 22 B in the Settlement Agreement, can you just assist me at 23 least with respect to the direct purchase portfolio and 24 by way of oversight is that the volume of gas and/or 25 transportation that is associated with the gas that is 26 currently under direct purchase within Union's network? 27 MR. BAKER: It represents the volume of direct 28 purchase in Union's system that still operates under an Les Services StenoTran Services Inc. 613-521-0703 1391 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 assignment of Union's capacity. 2 MR. ROOK: And is it within that line, as it 3 were, that the TransCanada turnback policy functions? 4 MR. BAKER: That's correct. 5 MR. ROOK: And am I correct that a portion of 6 that volume is available for turnback and has been since 7 April of 1999? 8 MR. BAKER: I believe that volume has already 9 been netted out. I think if you were to look at that 10 number prior to the time we instituted the turnback 11 policy it would have been higher, so we had a greater 12 proportion of capacity still in our name under contract 13 with TransCanada that we have since under the turnback 14 policy turned back to TransCanada. 15 MR. ROOK: I see. So that the amounts shown 16 here of 355,848 gigajoules per day is an amount that 17 under current market conditions is out of the money, to 18 use the jargon, at the present time? 19 MR. BAKER: The market value is below full 20 toll, that's right. 21 MR. ROOK: And that's, if I am understanding 22 this correctly, 49 millions per day -- I'm sorry, 23 per year. 24 MR. BAKER: That's correct. 25 MR. ROOK: So to put it differently, at least 26 insofar as this aspect of it is concerned, consumers of 27 gas in Ontario on Union's system are responsible for 28 costs in that amount in excess of what would apply if, Les Services StenoTran Services Inc. 613-521-0703 1392 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 in the best of all possible worlds, they were able to 2 purchase it in the market. 3 MR. BAKER: At this specific point in time, 4 that is right. Again, if you were to do this analysis 5 reversing time to three years ago, to 1997, those 6 numbers would have been exactly opposite and probably 7 significantly higher. 8 MR. ROOK: I take your point. 9 One other area that I was curious about is 10 this: Can you give us some assistance as to how 11 significant upstream transportation costs are as a 12 component of the overall costs that a customer incurs in 13 having gas delivered from whatever basin it comes from 14 to the customer's premises? 15 MR. STEDMAN: For some clarity, were you 16 asking for the percentage of landed costs as what the 17 residential customer may pay on his bill, delivered to 18 his house? 19 MR. ROOK: Well, my question was a somewhat 20 higher order, more of a tree-top level. 21 If the total cost system-wide to deliver gas 22 from point A to point B is a dollar, what portion of 23 that cost would be made up of upstream transportation, 24 infranchise transportation, storage, peaking and related 25 services? Can you give us some order of magnitude? 26 MR. BAKER: I don't have that number at my 27 fingertips. 28 THE PRESIDING MEMBER: Another way to put it Les Services StenoTran Services Inc. 613-521-0703 1393 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 is: What proportion of the cost of gas is the commodity 2 cost of gas or the molecule itself? 3 MR. ROOK: That is another way, Mr. Chairman. 4 There may be a way of getting at this question 5 through Board interrogatories. But in a sea of experts 6 here I thought maybe we could avoid that. 7 MR. STEDMAN: I could touch on one spot. 8 If you look at Exhibit 8.2 -- 9 MR. ROOK: I'm sorry, Exhibit...? 10 MR. STEDMAN: Exhibit 8.2. And look at the 11 landed cost of TransCanada. 12 MR. ROOK: Yes. 13 MR. STEDMAN: It is $6.60. The toll is a 14 dollar, so therefore it is one-sixth of that part of it. 15 Obviously that doesn't take into account the other 16 aspects that you listed, like storage. 17 MR. BAKER: The disability is that it is going 18 to change as a proportion, depending on what customer 19 class you look at, whether it is residential or what 20 rate it is. 21 MR. ROOK: Fair enough. Perhaps you could 22 look then at Board Interrogatory C1.4, page 8. Do you 23 have that? 24 MR. BAKER: Yes, I do. 25 MR. ROOK: These questions focus solely on the 26 southern area. My sole purpose in turning to page 8 is 27 to try to put some details on the answer that Mr. Baker 28 just gave. Les Services StenoTran Services Inc. 613-521-0703 1394 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 If I look at this particular page it appears, 2 from this example at least, that storage is a relatively 3 modest component of the overall cost, whether it be 4 bundled or unbundled. 5 Is that a reasonable interpretation of the -- 6 MR. BAKER: What this is showing is -- page 8 7 of C1.4 looks at the components of the delivery charge. 8 So you are right, that storage as a component of the 9 overall cost of delivering gas to the customer is 10 certainly smaller than the delivery portion of it. 11 MR. ROOK: Both in the bundled and the 12 unbundled calculation of the delivery, if I understand 13 the way the tariffs work correctly, the commodity charge 14 includes both upstream and infranchise delivery cost, 15 does it not? 16 MR. BAKER: I believe that this example 17 excludes commodity. It is just delivery. 18 MR. ROOK: I thought that is what I just said. 19 I am assuming -- it is called a commodity 20 charge, but I thought that the commodity charge was 21 really a reference to the delivery charge. 22 MR. BAKER: That's right, the cost of the 23 delivery service recovered on a commodity basis. 24 MR. ROOK: Right. What I am attempting to 25 understand, from looking at page 8 of 13, is whether you 26 can tell, in looking at this, what portion of that 27 overall commodity charge is attributable to upstream 28 transportation. Les Services StenoTran Services Inc. 613-521-0703 1395 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. BAKER: It's not in there. That's the 2 problem. 3 MR. ROOK: It's not in there at all? 4 MR. BAKER: No. 5 MR. ROOK: In all of these, if you look at the 6 next page, for example page 9, would you have the same 7 answer? 8 MR. BAKER: That's right. All these examples 9 exclude the commodity costs. 10 MR. ROOK: Exclude commodity costs. When you 11 use the word commodity, you are talking about the gas. 12 MR. BAKER: Gas and upstream transportation. 13 MR. ROOK: So we can't rely or get any benefit 14 or comfort from this interrogatory in an attempt to 15 determine how significant upstream transportation costs 16 are as a proportion of the overall costs incurred. 17 MR. BAKER: Just give me a minute. 18 --- Pause 19 MR. BAKER: I will try to be helpful here. If 20 you go to Exhibit F8.2 and pick as a landed cost of 21 gas -- which again includes commodity and 22 transportation -- and take the TCPL line, which is $6.60 23 a GJ. 24 MR. ROOK: Yes, I have that; thank you. 25 MR. BAKER: That translates into an annual 26 cost to a customer of approximately $750 a year. As Mr. 27 Stedman said, approximately one-sixth of that cost is 28 transportation. Les Services StenoTran Services Inc. 613-521-0703 1396 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: And that is upstream 2 transportation. 3 MR. BAKER: That's right. 4 MR. ROOK: And what about infranchise 5 transportation? 6 MR. BAKER: Well, infranchise transportation 7 is what is found on page 8 of Exhibit C1.4. 8 MR. ROOK: Can you translate that or offer us 9 any assistance as to how that relates to F8.2? 10 MR. BAKER: It doesn't relate. I am trying to 11 do it. 12 What I had understood your question was: 13 Let's look at the total cost to a residential customer, 14 which includes commodity, upstream transportation and 15 the delivery service infranchise. 16 Page 8 doesn't do that for you. So what I 17 have tried to do is piece it together to say that on 18 page 8 the bundled delivery rate on an annual basis is, 19 say, $370 or $369. 20 If you were to add the commodity and upstream 21 transportation to that again on an annual basis, it is 22 around $740, $750 a year. So an average residential 23 customer would pay roughly $1,000 a year. 24 Out of that what I term to be the commodity 25 cost, which is the commodity itself and the upstream 26 transportation at $750 a year, approximately one-sixth 27 of that is related to the upstream transportation 28 itself, and the remainder is the commodity cost. Les Services StenoTran Services Inc. 613-521-0703 1397 ANDREWS/BAKER/STEDMAN, cr-ex (Rook) 1 MR. ROOK: I see. All right. I think I 2 understand that now. 3 So that the infranchise delivery service, as a 4 proportion of the overall cost in that example, is much 5 higher than the upstream transportation cost, as a 6 proportion of the overall? 7 MR. BAKER: That's correct. 8 MR. ROOK: Please bear with me for a moment. 9 --- Pause 10 MR. ROOK: Thank you, panel. Those are my 11 questions. Thank you, Mr. Chairman. 12 THE PRESIDING MEMBER: Thank you. 13 So, Mr. Penny, we are at the end of the day 14 for this one -- Dr. Wightman...? 15 DR. WIGHTMAN: I believe Ms Lea mentioned 16 earlier that, on behalf of CAC, they requested that we 17 put a few questions to the panel. 18 THE PRESIDING MEMBER: We can do that tonight, 19 or we can do it on Monday because, I believe, 20 Mr. Mattson has still to cross-examine. 21 MR. PENNY: Mr. Chairman, I gather from 22 Mr. Wightman, it's extremely short -- 23 THE PRESIDING MEMBER: Let's get it done, 24 then. 25 MR. PENNY: -- and I wonder if we might just 26 done it done. 27 THE PRESIDING MEMBER: Dr. Wightman, carry on. 28 EXAMINATION Les Services StenoTran Services Inc. 613-521-0703 1398 ANDREWS/BAKER/STEDMAN, ex (Wightman) 1 DR. WIGHTMAN: Thank you. 2 Again, these are as a result of a 3 communication received from CAC. 4 Mr. Baker, I believe Mr. Rutwind discuss with 5 you the grandfathering of the existing direct purchase 6 upstream capacity assignments and how this policy -- the 7 rationale for this -- 8 MR. BAKER: That's correct, 9 DR. WIGHTMAN: And there was some discussion 10 about the fairness aspects of this, too. Correct? 11 MR. BAKER: That's correct. 12 DR. WIGHTMAN: Okay. So I'm going to drop the 13 questions that relay to that, and there are only three 14 remaining, then. 15 The first one is: Did Union consider the 16 following alternative? Offering all customers capacity 17 based on the mandatory vertical slice methodology and if 18 this was considered, why was it rejected and could you 19 compare it to the grandfathering proposal. 20 MR. BAKER: It was looked at, and I recall 21 that it did receive some discussion in and around the 22 time of the MDTF committee discussions and, generally, 23 there was substantial support to grandfather the 24 existing arrangements so there wasn't going to be any 25 market instability, if I can refer to that, where 26 everybody would have to take the existing arrangements, 27 some of which have been in place for a long period of 28 time, in the case of industrials that have operated Les Services StenoTran Services Inc. 613-521-0703 1399 ANDREWS/BAKER/STEDMAN, ex (Wightman) 1 with, say, a TransCanada portfolio, since the time they 2 went direct purchase back in 1986 through 1987, to 3 suddenly have to almost give that back or have that 4 capacity clawed back and then get a proportional 5 allocation or verbal slice allocation redistributed. 6 So it has been discussed in those forums and, 7 generally, was thought that it was just not workable and 8 was going to introduce some instability in the 9 marketplace that wasn't justified. 10 DR. WIGHTMAN: Thank you. 11 The second, and the second-last, question 12 reads: Given the current differential between TCPL 13 capacity and Alliance/Vector, would you agree that 14 system customers are paying more than they would 15 otherwise if the existing direct purchase customers were 16 not automatically given access to their capacity? Would 17 you agree with that statement or not? 18 MR. BAKER: I'm not sure I followed the last 19 part of that question, but... 20 DR. WIGHTMAN: Is the cost higher going to the 21 system customers -- this allowing the first right of 22 refusal of the direct purchase customers to their 23 upstream capacity assignments -- higher than it would be 24 if they got the same -- they weren't grandfathered? 25 That's the way I understand this question. 26 MR. STEDMAN: So if you vertically sliced 27 across everybody, including direct purchase customers -- 28 DR. WIGHTMAN: Yes. Les Services StenoTran Services Inc. 613-521-0703 1400 ANDREWS/BAKER/STEDMAN, ex (Wightman) 1 MR. STEDMAN: -- would the cost be higher or 2 lower -- 3 DR. WIGHTMAN: To the system customers. 4 MR. STEDMAN: -- to the system customers? 5 DR. WIGHTMAN: Yes. Yes. I think that's what 6 they are... 7 MR. BAKER: No, I don't believe that they 8 would. Again, right now, we still have the methodology 9 in place whereby we look at the differential within our 10 portfolio relative to a TCPL landed cost of gas and, 11 again, those costs differentials are segregated into 12 either a load balancing component or a flexibility 13 component, so those costs would still remain and get 14 allocated in much the same way as they are today. 15 DR. WIGHTMAN: Thank you for that. 16 The last question is: Has there been 17 consultation with existing direct purchase customers as 18 to this proposal and are they supportive of the 19 grandfathering proposal? 20 MR. BAKER: I think the majority of customers 21 that are under direct purchase today, I think, support 22 grandfathering but, again, the issue which arises in 23 this proceeding is, even to the extent that they are 24 grandfathered, should they or can they have the ability 25 to option out of that capacity at any point in time. So 26 I think there's general agreement on grandfathering the 27 existing direct purchase arrangements, which are 100 per 28 cent TCPL FT. But the issue that we have been talking Les Services StenoTran Services Inc. 613-521-0703 1401 ANDREWS/BAKER/STEDMAN, ex (Wightman) 1 about still remains, which is: should those customers 2 be allowed to option out of that capacity, irrespective 3 of when Union can turn the capacity back to TCPL. So 4 the whole optional allocation issue is still there. 5 DR. WIGHTMAN: I hope I have represented CAC's 6 concerns. 7 THE PRESIDING MEMBER: Are there any other 8 parties who wish to cross-examine? We are just left 9 with Board questions and Mr. Mattson's questions, which 10 we would resume on Monday morning. Is that correct? 11 MR. PENNY: That's correct. 12 THE PRESIDING MEMBER: Dr. Wightman? 13 DR. WIGHTMAN: Could we confirm on the record 14 what time we will be reconvening Monday morning or put 15 it on the hot line with a detailed message? 16 THE PRESIDING MEMBER: Nine o'clock is fine by 17 me, but is it all right by all parties? 18 MR. PENNY: Yes, sir. 19 THE PRESIDING MEMBER: Because I think for all 20 we can get done -- and both Mr. Mattson and Mr. Adams 21 are Toronto-based so it shouldn't be difficult for their 22 travel arrangements. 23 Anything Mr. Penny? 24 MR. PENNY: No, sir. Thank you. 25 THE PRESIDING MEMBER: Have a good weekend and 26 see you on Monday. 27 --- Whereupon the hearing adjourned at 1706, 28 to resume on Monday, June 26, 2000, at 0900 Les Services StenoTran Services Inc. 613-521-0703 1402 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0900 1181 4 Preliminary Matters 1181 5 SWORN: WAYNE E. ANDREWS 1183 6 SWORN: STEVE W. BAKER 1183 7 SWORN: MICHAEL A. STEDMAN 1183 8 Examination-in-chief by Mr. Penny 1183 9 Cross-Examination by Mr. Thompson 1209 10 Upon recessing at 1037 1239 11 Upon resuming at 1104 1239 12 Cross-Examination by Mr. Vegh 1241 13 Upon recessing at 1300 1309 14 Upon resuming at 1405 1309 15 Cross-Examination by Ms Street 1328 16 Cross-Examination by Mr. Waqu‚ 1329 17 Cross-Examination by Mr. Rutwind 1333 18 Upon recessing at 1522 1353 19 Upon resuming at 1542 1353 20 Cross-Examination by Mr. Scully 1353 21 Cross-Examination by Mr. Rook 1365 22 Examination by Dr. Wightman 1397 23 Upon adjourning at 1706 1401 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 1403 1 EXHIBITS 2 NO. DESCRIPTION PAGE 3 F8.1 Graph entitled "TCPL Market 1198 4 Value Versus Toll" 5 F8.2 Document entitled "System 1206 6 Portfolio Landed Cost of Gas to 7 Ontario" 8 F8.3 Map of the combined Union and 1240 9 Centra system 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 1404 1 UNDERTAKINGS 2 PAGE 3 G8.1 Mr. Stedman undertakes to 1211 4 update C21.7 and segregate it 5 as between existing direct purchase 6 and system 7 8 G8.2 Mr. Stedman undertakes to segregate 1212 9 from the portfolio the portion 10 supporting direct purchase and the 11 remainder supporting system 12 13 G8.3 Mr. Stedman undertakes to provide 1214 14 percentage-wise how much of the 15 TCPL is dedicated to direct 16 purchase now, approximately, in 17 the north and east 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703