1405 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 Monday, June 26, 2000, 25 commencing at 0908 26 27 HEARING 28 VOLUME 9 Les Services StenoTran Services Inc. 613-521-0703 1406 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 1407 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 1408 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 1409 1 Toronto, Ontario 2 --- Upon resuming on Monday, June 26, 2000 3 at 0908 4 THE PRESIDING MEMBER: Good morning. Please 5 be seated. 6 Good morning. Before we start, are there any 7 preliminary matters? 8 MR. PENNY: I have none, Mr. Chairman. 9 THE PRESIDING MEMBER: Then I believe the 10 order of business is the cross-examination by Energy 11 Probe? 12 MR. PENNY: Yes. Mr. Stedman and Mr. Baker 13 are back and we have, I think just questions from Energy 14 Probe and the Board's questions. Then we propose to 15 move on to the third group of PBR issues when that is 16 done. 17 THE PRESIDING MEMBER: Thank you. 18 So Mr. Mattson it is in your court. 19 MR. MATTSON: Thank you, Mr. Chairman. I 20 would like to thank everybody for making some 21 arrangements because I could not be here on Friday and 22 could cross-examine today. 23 PREVIOUSLY SWORN: STEVE W. BAKER 24 PREVIOUSLY SWORN: MICHAEL A. STEDMAN 25 CROSS-EXAMINATION 26 MR. MATTSON: Mr. Stedman and Mr. Baker, I 27 just have some general questions on the overview and 28 rationale of your unbundling proposal. Les Services StenoTran Services Inc. 613-521-0703 1410 BAKER/STEDMAN, cr-ex (Mattson) 1 To begin with, what we have here in terms of 2 the unbundling proposal is a separation of your 3 transportation contracts from your distribution rates. 4 Is that fair? 5 MR. BAKER: I would put it slightly 6 differently in that what we have done is separated our 7 storage rates and our storage service from our 8 distribution rates. Transportation has been separated 9 for quite some time. 10 MR. MATTSON: Right. So you separated the 11 storage, then, from the distribution or from the 12 transportation. And the storage rates remain bundled. 13 Is that fair? 14 MR. BAKER: No. 15 MR. MATTSON: Explain how that isn't so? 16 MR. BAKER: The basis of our proposal was to 17 unbundle the storage service. So right now storage is 18 part of a bundled delivery or distribution service, and 19 what we have proposed through this proceeding is to pull 20 the storage service which is embedded in the current 21 bundled service out so that it can be offered on a 22 separate and discrete basis so that customers can 23 contract for that service and manage it separately. 24 MR. MATTSON: So maybe I am mixing some terms 25 here. 26 You have your transportation contract. I 27 understand your proposal is taking those contracts and 28 unbundling those contracts. Is that fair? Les Services StenoTran Services Inc. 613-521-0703 1411 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: What we talked about on Friday was 2 that in terms of upstream -- unbundling upstream 3 transportation, it is really a continuation of what we 4 currently do today to facilitate bundled direct purchase 5 whereby we make available our transportation capacity to 6 customers electing either a bundled or an unbundled 7 direct purchase option. 8 And one of the principal differences under the 9 unbundling is that we have tried to incorporate as much 10 flexibility as we can into the unbundled transportation 11 option, which is to allow diversions rather than -- just 12 let me step back -- rather than having the supply have 13 to be delivered to Union on a firm basis 365 days a year 14 under the unbundled option, customers only have an 15 obligation on 22 days. 16 But other than that it is very similar and 17 really a continuation of bundled direct purchase as it 18 exists today. 19 MR. MATTSON: I understand that and we are 20 going to get to that. 21 THE COURT REPORTER: Mr. Mattson -- 22 MR. MATTSON: Yes. 23 THE COURT REPORTER: -- I'm sorry. Could you 24 angle your mike towards you? 25 MR. MATTSON: Yes, yes. I'm sorry. 26 But with respect to your unbundling proposal, 27 what you are unbundling here is the transportation 28 contract. I mean these transportation contracts in your Les Services StenoTran Services Inc. 613-521-0703 1412 BAKER/STEDMAN, cr-ex (Mattson) 1 proposal will mean that a new customer who chooses the 2 unbundled option will be responsible for those 3 transportation contracts? That's what you are 4 proposing? 5 MR. BAKER: They will be responsible for them 6 in one of two ways: under a one-year temporary 7 assignment which, as I said, is exactly the way bundled 8 direct purchase is today. 9 MR. MATTSON: Right. 10 MR. BAKER: Or there is also an option of a 11 permanent assignment whereby they will take over the 12 contract that Union currently has and it would then be 13 in their name and theirs to manage. That is your 14 vertical slice. 15 MR. MATTSON: So you are saying in part you 16 are only -- your proposal is leaving the one-year 17 assignment for transportation as is, but there is also 18 this new option for permanent assignment contracts. So 19 you have offered this as a new element to your 20 unbundling? 21 MR. BAKER: Permanent assignments in Union 22 South have been an option that customers have had to 23 date as well, and they continue to have that for the 24 unbundled service. 25 MR. MATTSON: What are you unbundling then, 26 Mr. Baker? 27 MR. BAKER: Again, what we had talked about 28 Friday is that when you look at upstream transportation Les Services StenoTran Services Inc. 613-521-0703 1413 BAKER/STEDMAN, cr-ex (Mattson) 1 it already essentially is unbundled. 2 MR. MATTSON: So what are you unbundling? 3 MR. BAKER: We are unbundling storage. And we 4 have looked at, as I said, some additional terms and 5 conditions and flexibility that would flow from the 6 upstream transportation that doesn't exist today under a 7 bundled service. 8 MR. MATTSON: You have some new options under 9 what you were calling upstream transportation, meaning 10 the transportation contracts, and you are testifying 11 that you are unbundling storage rates. Fair? 12 MR. BAKER: That's correct. 13 MR. MATTSON: Okay. 14 Now, if I could talk just generally about who 15 benefits from this proposal. 16 MR. BAKER: Customers and marketers will 17 benefit by having a further option in addition to the 18 bundled offerings which are in place today. 19 MR. MATTSON: And when you speak of 20 "customers", who are you referring to? From Union's 21 point of view, who are your customers? 22 MR. BAKER: I would refer to both, both retail 23 energy marketers and end-use customers. 24 MR. MATTSON: And do you see them both 25 benefiting equally, the same, or are they different? 26 MR. BAKER: Again, it's hard to characterize 27 in terms of magnitude, but I think directionally there 28 would be benefits to both and the extent of those Les Services StenoTran Services Inc. 613-521-0703 1414 BAKER/STEDMAN, cr-ex (Mattson) 1 benefits would be subject to the terms and conditions of 2 the arrangements that are there in the marketplace. 3 MR. MATTSON: You say it's hard to 4 characterize. Have you addressed or can you tell -- can 5 you list the benefits to the REMs versus the benefits to 6 the end-use customers from your proposal? 7 MR. BAKER: Well, they really flow from one 8 another to the extent that a retail energy marketer for 9 instance has more ability to manage the services that 10 are currently embedded in a bundled service today. To 11 the extent that they can manage those more efficiently 12 or have other options in the marketplace, those will and 13 should translate into more competitive options on a 14 retail level to end-use customers. 15 MR. MATTSON: So from the REMs perspective or 16 point of view there may be more options which, in your 17 opinion, may bring about more competition to the end-use 18 customer? 19 MR. BAKER: That's correct. 20 MR. MATTSON: And how will the small customer 21 -- the end-use customer be able to determine those 22 benefits as a result of your unbundling proposal? Will 23 there be transparency in terms of how those costs are 24 allocated as there currently is? 25 MR. BAKER: Our proposal involves no change in 26 cost allocation per se. What it is, is merely 27 separating the service that is embedded in a bundled 28 service today. So customers will evaluate the Les Services StenoTran Services Inc. 613-521-0703 1415 BAKER/STEDMAN, cr-ex (Mattson) 1 additional options that would be presented by a retail 2 energy marketer much in the same way they do today. 3 MR. MATTSON: How will the customer 4 evaluate -- and I speak of the end customer -- evaluate 5 the costs and benefits under your unbundling proposal? 6 MR. BAKER: Much in the same way they do today 7 in that to the extent that they are served under system 8 gas they will have a commodity price from Union and a 9 transportation rate from Union. And to the extent that 10 a marketer presents an end-use customer with an option 11 that the customer views as having benefits to them, then 12 presumably they would select that option. 13 MR. MATTSON: So really the way you see it, it 14 is the REM option versus system gas. Is that fair? 15 MR. BAKER: Yes, that's correct. 16 MR. MATTSON: There will no longer be an 17 opportunity for the end-use customer, however, to see 18 through the arrangements, or see through the 19 arrangements of the costs and benefits as they are being 20 allocated between the company and their customers, or 21 your customers, which are the REMs, the big LDCs and 22 those other big shippers. There is no opportunity for 23 the end-use customer to see how those costs and benefits 24 are being allocated. Is that fair? 25 All they are going to look at is system gas 26 price versus what the REMs offer them. 27 MR. BAKER: They will look at what they are 28 paying today in terms of a system gas offering and they Les Services StenoTran Services Inc. 613-521-0703 1416 BAKER/STEDMAN, cr-ex (Mattson) 1 will make a comparison or evaluation in terms of the 2 alternate offering that's being provided by a marketer. 3 MR. MATTSON: Those are ones to the end-use 4 customers. Now let's look at your other customers who 5 are the REMs. You would also agree that in addition to 6 the REMs your customers would be LDCs, TransCanada, the 7 large industrial customers as well. Is that fair? 8 MR. BAKER: All of our infranchise and 9 exfranchise customers. 10 MR. MATTSON: These customers, I take it, will 11 be making arrangements for transportation and storage 12 with Union, is that fair? They will be going directly 13 to Union to make these arrangements? 14 MR. BAKER: Well, initially they will come to 15 Union and we will facilitate the upstream 16 transportationist side an assignment of the capacity 17 that Union has put in place to serve those customers. 18 And in terms of the storage, there will be a storage 19 contract with Union which is again similar to all of our 20 exfranchise customers where there will be a contract 21 with the parameters and terms and conditions of that 22 service and they manage it themselves. 23 MR. MATTSON: But in terms of the complexity 24 and the need for some sort of sophistication in order to 25 deal with Union, you would agree with me that small 26 customers as in terms of your unbundling proposal will 27 not have access to these sort of negotiations with Union 28 for these contracts? This is something that's reserved Les Services StenoTran Services Inc. 613-521-0703 1417 BAKER/STEDMAN, cr-ex (Mattson) 1 for your big customers, right, not your end-use 2 customers? 3 MR. BAKER: Well, I would never rule anything 4 out, but I think I would agree with you that from a 5 practical level for a single residential customer to 6 want to contract separately for storage and manage 7 upstream transportation and nominate supply into 8 upstream transportation capacity, I think your 9 proposition is correct. 10 MR. MATTSON: And so from the Board's point of 11 view in terms of looking at this proposal, would you 12 agree with me, Mr. Baker, that they need to direct their 13 attention to whether or not the REMs are going to 14 provide -- or there's going to be sufficient competition 15 at the REM level such that the end-use customer will 16 receive the best deals possible. That's something that 17 the Board should be concerned about? 18 MR. BAKER: I would agree and I would suggest 19 it's no different than what the Board has been concerned 20 about from the start of direct purchase and 21 deregulation. 22 MR. MATTSON: Certainly, the Board will no 23 longer have access to the information with respect to 24 the costs and benefits of negotiating these contracts 25 between Union and the REM. Is that fair? You and your 26 customers now will be doing this outside of regulation. 27 MR. BAKER: No, it's not outside of 28 regulation. Storage is still a regulated service and we Les Services StenoTran Services Inc. 613-521-0703 1418 BAKER/STEDMAN, cr-ex (Mattson) 1 will provide what is now we are now seeking approval for 2 is a regulated unbundled storage service. That will be 3 a contract between Union and the retail energy marketer. 4 MR. MATTSON: That part of it, I agree. But 5 the other part of the unbundled proposal is there will 6 be negotiations with respect to the capacity here for 7 the REMs to get access to transportation and storage to 8 service end-use customers. Those will be made between 9 your company and those marketers outside of regulations, 10 correct? 11 MR. BAKER: It's no different than negotiating 12 a contract today. What our proposal entails is that 13 retail energy marketers have a certain entitlement to 14 both upstream transportation and storage based on the 15 group of customers that they wish to move to a direct 16 purchase option and that is an entitlement as part of 17 our proposal. And to the extent that they don't want 18 all of that entitlement there, then there are some 19 options. 20 It really relates to the ADR Agreement wherein 21 the standard storage service was agreed to be optional. 22 So an REM may have an entitlement to 100 units of 23 storage and should he have another option in the 24 marketplace and not wish that, then he has an option not 25 to take it. 26 MR. MATTSON: So the fall-back position, 27 though, from the small customer's point of view is if 28 they don't like the REM's offerings, they always have Les Services StenoTran Services Inc. 613-521-0703 1419 BAKER/STEDMAN, cr-ex (Mattson) 1 the system gas offering, correct? 2 MR. BAKER: That's correct. 3 MR. MATTSON: And that's much the same as it 4 was under direct purchase? 5 MR. BAKER: It's the same as it is today, 6 that's correct. 7 MR. MATTSON: Mr. Baker, I know you were 8 around when we had the hearings with respect to direct 9 purchase, but you remember that the direct purchase 10 arrangements and the rationale behind direct purchase, 11 much of it was the result of the legislation at the time 12 that put some constraints on the company in terms of 13 unbundling these rates. 14 MR. BAKER: I think at the time of direct 15 purchase there were some legislative constraints in 16 terms of title transfer in the province and the direct 17 purchase mechanisms were set up considering those 18 constraints. 19 MR. MATTSON: And if we want to move forward 20 now that the legislation is changed and we want to move 21 to a more competitive environment, do you foresee a time 22 when you will be moving beyond the direct purchase 23 constraints that limited the original direct purchase 24 discussions and decisions? 25 MR. BAKER: I think in fact we are. For 26 instance, the buy/sell mechanism was a mechanism that 27 was put in place given the legislative constraints on 28 title transfer on the province, and the buy/sell has and Les Services StenoTran Services Inc. 613-521-0703 1420 BAKER/STEDMAN, cr-ex (Mattson) 1 is being eliminated. So we are moving to a situation 2 more of T-service and the unbundled service. 3 MR. MATTSON: But from a small customer's 4 point of view, they had system gas offerings before, 5 they had offerings from REM, how is this unbundling 6 proposal helping them? What you are saying is that it's 7 allowing some more -- how is it helping the end-use 8 customer beyond what they had prior to your proposal? 9 MR. BAKER: Well, in many respects we will 10 have to wait and see. But what it allows a marketer to 11 do on behalf of the customers that he or she is serving 12 is to take on a more active management of the assets 13 that underlie that service. 14 And to the extent that they can drive out 15 efficiencies in the management of that service, then 16 under the conditions of a competitive market those 17 benefits should flow through to the end-use customer. 18 MR. MATTSON: So you are hoping for some 19 indirect benefits, but there are direct benefits as a 20 result of your unbundling proposal for your big 21 customers. Is that fair? 22 MR. BAKER: I'm not sure what you mean by 23 "big"? 24 MR. MATTSON: The REMs themselves, the LDCs, 25 the industrial customers. There are some direct 26 benefits to them by giving them access to negotiate with 27 you for these rates. 28 MR. BAKER: There may be some benefits. It Les Services StenoTran Services Inc. 613-521-0703 1421 BAKER/STEDMAN, cr-ex (Mattson) 1 really depends on how the REMs choose to manage those 2 assets, and to the extent that they can manage them more 3 efficiently than Union has as a bundled service provider 4 and drive out benefits and efficiencies, then that would 5 be correct. 6 MR. MATTSON: Right, but they are getting 7 access directly to negotiations with your company, 8 that's their benefit. But in terms of the end-use 9 customers, their benefit will be is if the REM is able 10 to drive out some efficiencies, they may indirectly 11 benefit from this unbundling. 12 MR. BAKER: To just change the 13 characterization, it's not access to negotiate with 14 Union, it's access to a service that we are seeking 15 approval for in this proceeding. 16 MR. MATTSON: Access to a service, right. 17 Now, Mr. Baker, I'm sure you are familiar with 18 electricity reforms in this province? 19 MR. BAKER: Generally. 20 MR. MATTSON: And I think it's been the 21 position of your company in the past that you seek a 22 level playing field between the application of 23 regulation in gas and electricity in this province? 24 MR. BAKER: I think that's fair. We see that 25 gas and electricity should move in similar directions so 26 that there is more or less a level playing field. 27 MR. MATTSON: And the reasons why that's 28 important to your company? Les Services StenoTran Services Inc. 613-521-0703 1422 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: Because electricity is another 2 energy option for customers. So from a competitive 3 point of view there does need to be some symmetry. 4 MR. MATTSON: Do you see your unbundling 5 proposal as reflecting the changes or being symmetrical 6 to the changes that are occurring in electricity reform? 7 MR. BAKER: Directionally, I think that's 8 right. Electricity is starting from certainly a 9 different position than gas because everything was 10 effectively controlled right from generation through to 11 transmission by Ontario Hydro whereas that hasn't been 12 the case on gas where you have suppliers and producers 13 in the various producing basins. You have upstream 14 transportation companies that compete to get gas to 15 Ontario and then you have the monopoly distribution 16 company within Ontario. 17 MR. MATTSON: You say "directionally". In 18 other words, what direction are you moving in that you 19 are directionally reflecting what's going on in the 20 electricity? 21 MR. BAKER: I say generally the thrust of 22 electricity is to move in the same direction that gas 23 has moved in for the last number of years, which is to 24 open up the market to allow other marketers and to allow 25 customers to have other options to purchase and move 26 their electricity. So in that respect it's consistent. 27 MR. MATTSON: But when you say your company is 28 moving directionally toward that goal, in other words Les Services StenoTran Services Inc. 613-521-0703 1423 BAKER/STEDMAN, cr-ex (Mattson) 1 your unbundling proposal is not going as far as we are 2 currently seeing in the electricity reform? 3 MR. BAKER: I wouldn't agree with that at all. 4 MR. MATTSON: Why not? 5 MR. BAKER: Because we have had direct 6 purchase in Ontario for a number of years now whereby 7 customers have been able to purchase their own gas from 8 a supplier, typically in Alberta. We have had the 9 option to step into that capacity and manage the 10 transportation of their supply to Ontario. 11 What we are now doing is unbundling, if you 12 want to call it the infranchise delivery service and 13 separating out the storage component to allow customers 14 and marketers to manage that separately. It's different 15 from electricity in that from that perspective 16 electricity isn't stored, so there isn't any storage 17 component per se. 18 MR. MATTSON: No. But I agree with you that 19 you may have been a few steps ahead of electricity prior 20 to electricity reform through the innovative offerings 21 of direct purchase for end-use customers, but certainly 22 as a result of electricity reform you are now behind 23 electricity reform in terms of unbundling system 24 operations. Is that fair? 25 MR. BAKER: No. 26 MR. MATTSON: You would disagree with that. 27 MR. BAKER: Totally. 28 MR. MATTSON: Have you familiarized yourself Les Services StenoTran Services Inc. 613-521-0703 1424 BAKER/STEDMAN, cr-ex (Mattson) 1 with the responsibilities and duties of the independent 2 market operator in electricity reform? 3 MR. BAKER: Not in any significant detail, no. 4 MR. MATTSON: So then if I suggested to you 5 that there isn't a level playing field, it would be 6 difficult to you to comment on that without a better 7 understanding of the independent market operator's 8 function in electricity reform. 9 MR. BAKER: I know generally what the function 10 of the independent market operator is for electricity, 11 which is to basically administer access to the 12 transmission grid to ensure that all parties operating 13 in the competitive market have equal and open access to 14 the transmission grid. 15 MR. MATTSON: And if I said to you that that 16 is much more -- that the access to the transportation 17 grid in electricity is further ahead than access to 18 transportation and storage in GAAP, would you quarrel 19 with me on that? 20 MR. BAKER: I would totally disagree with that 21 characterization, yes. 22 MR. MATTSON: Where is the spot marketed gas? 23 MR. BAKER: With the end-use customer. 24 MR. MATTSON: We just went through that. All 25 the end-use customer has in gas is access to either 26 system gas or the REMs. 27 MR. BAKER: What you have is an REM who is 28 providing a gas service to an end-use residential Les Services StenoTran Services Inc. 613-521-0703 1425 BAKER/STEDMAN, cr-ex (Mattson) 1 customer. We will have options to arrange where he buys 2 his supply, how he gets it to Ontario. So to the extent 3 that he can buy spot gas, that is spot gas at Dawn or 4 somewhere else in Michigan, the marketer is free to 5 arrange that supply on behalf of his customers. 6 MR. MATTSON: Again, Mr. Baker, that's going 7 back to the old direct purchase model that a customer is 8 still reliant on the REMs to enter into these contracts 9 with you as opposed to a customer being able to directly 10 benefit. An end-use customer is a small, general, 11 uninterruptible firm service customer. They don't have 12 access to those spot markets. 13 MR. BAKER: To the extent that a customer -- 14 an individual residential customer -- wanted for 15 whatever reason to take that on themselves, they could. 16 To the extent that they wanted to move off system gas 17 and take on the responsibility of acquiring their own 18 supply, managing their own transportation, managing 19 their storage, they could. 20 I would question the economics of wanting to 21 do that, but it's theoretically possible that they 22 could. 23 MR. MATTSON: But theoretically, it would be 24 difficult, though, currently under your proposal? 25 MR. BAKER: I think there's some 26 administrative practicalities, but it could be done. 27 MR. MATTSON: Let's go through those 28 administrative practicalities. Could you list them? Les Services StenoTran Services Inc. 613-521-0703 1426 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: They would have to be prepared to 2 go out and negotiate for a supply of gas in Alberta. 3 They would have to nominate the supply of that gas into 4 the upstream transportation capacity that they would be 5 managing and they would have to nominate gas into an 6 outer storage to meet their anticipated demand on the 7 given day. 8 MR. MATTSON: They would have to do this 9 every day? 10 MR. BAKER: Under the unbundled service, 11 that's correct. 12 MEMBER JACKSON: Would there not be threshold 13 volume requirements on most upstream pipelines? 14 MR. BAKER: That's one of the practical 15 difficulties, that's correct. But a customer -- even 16 today under bundled direct purchase, a customer could 17 again theoretically arrange their own supply in Alberta 18 under a bundled direct purchase arrangement. What we 19 have seen in terms of a development of the market in 20 Ontario is that in general end-use residential customers 21 have not wanted to do that, but have. Certainly we have 22 seen a lot of movement to direct purchase where a 23 marketer will aggregate and do that on their behalf. 24 MR. MATTSON: Certainly in electricity when 25 you -- sorry, Dr. Jackson. 26 MEMBER JACKSON: No, that's fine. I just 27 wanted to clarify that. Thank you. 28 MR. MATTSON: Certainly in electricity when we Les Services StenoTran Services Inc. 613-521-0703 1427 BAKER/STEDMAN, cr-ex (Mattson) 1 go through those administrative difficulties, in 2 electricity there's no volume limit, is there? 3 MR. BAKER: I don't know. 4 MR. MATTSON: You don't know? 5 MR. BAKER: I don't know. 6 MR. MATTSON: And do you know that there's no 7 nominations required? 8 MR. BAKER: Again, I know that there is some 9 differences between gas and electricity. Is it 10 theoretically possible when the electricity market opens 11 for an end-use residential customer to purchase their 12 electricity in the market on a spot basis or from a 13 marketer? I think they can. 14 MR. MATTSON: And there's no imbalance fees as 15 well in electricity? 16 MR. BAKER: I am not an electricity expert. 17 MR. MATTSON: So you know that there's 18 differences. How has your company directed its mind to 19 levelling that playing field in the future? 20 MR. BAKER: To the extent that there's 21 differences, practical differences between gas and 22 electricity, those are what they are. What we are doing 23 on the gas side is taking the way the gas business 24 operates and then trying to put in place a framework 25 that will allow the next evolution, or the continued 26 evolution, of competitive gas services in the province. 27 MR. MATTSON: Mr. Baker, have you addressed 28 your attention to these differences in terms of trying Les Services StenoTran Services Inc. 613-521-0703 1428 BAKER/STEDMAN, cr-ex (Mattson) 1 to eliminate some of the practical difficulties for end- 2 use customers, such as no volume limit in electricity, 3 no nomination required, no imbalance fees? Have you 4 tried to bring about a level playing field so that the 5 end-use customer in gas has that same freedom or acts in 6 the competitive market that they are being offered in 7 electricity? 8 MR. BAKER: The way the gas business works is 9 that there is a requirement to nominate and every 10 pipeline and every operator in North America has to 11 nominate their supply and it is a reality that there 12 will, at various points in time, be imbalances between 13 supply and demand. And there are ways and means to deal 14 with that to the extent that you don't have the same 15 kind of imbalance structure on electricity because of 16 the fact that it's a different commodity. Again that is 17 what it is. 18 So on electricity, to the extent that how the 19 electricity market operates, they will try to put in 20 place a framework that makes sense for electricity, and 21 that's no different than what we are trying to do on the 22 gas side. 23 MR. MATTSON: It would appear to me, 24 Mr. Baker, that the intolerances in the electricity are 25 more demanding than they are in gas. 26 MR. BAKER: Again, if you are asking me to 27 comment on details of how electricity works, I am not 28 your person because I'm not an electricity expert. Les Services StenoTran Services Inc. 613-521-0703 1429 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: So then again, the company 2 hasn't addressed itself to these differences that exist 3 between the electricity -- 4 MR. BAKER: When we refer to a level playing 5 field, we aren't referring to trying to structurally 6 make electricity and gas one commodity so that 7 everything is identical between gas and electricity. 8 What we are trying to do at a higher level is to 9 continue to promote increased options for customers that 10 will provide increased competition in Ontario. That's 11 what we speak about in terms of a level playing field. 12 It's not trying to take what may be a nomination 13 imbalance on gas and try to structurally make it 14 identical to what may or may not exist on electricity. 15 That's not what we mean by a level playing field. 16 MR. MATTSON: I understand that. But what we 17 are talking about is access for end-use customers here 18 in terms of a level playing field. Certainly the end- 19 use customer in electricity appears to have a leg up to 20 the competitive market over your end-use customers. 21 MR. BAKER: To the extent that it may be 22 easier to buy electricity because it is a commodity 23 that, at least at this time, is generated all within the 24 province, it may be somewhat easier to do that. But I 25 think there are still the same practical issues on 26 electricity in terms of whether -- if I take myself as 27 an end-use customer, am I going to want to go through 28 what it would take to go out and separately contract for Les Services StenoTran Services Inc. 613-521-0703 1430 BAKER/STEDMAN, cr-ex (Mattson) 1 an electricity supply? Again, theoretically I can do 2 that. Practically do I want to do it? 3 I think the magnitude may differ but I think 4 the same issue is there whether you are talking about an 5 end-use residential customer's access on their own to 6 gas versus electricity. 7 MR. MATTSON: You understand in electricity 8 the end-use customer doesn't have to contract? It's 9 only in your system that they have to contract. 10 MR. BAKER: I say "contract" but I mean go out 11 and arrange for a supply of electricity. 12 MEMBER JACKSON: Mr. Mattson, when you are 13 making these comparisons, what sort of an industry 14 structure and buying and selling structure are you 15 thinking of for electricity? Are you thinking of one 16 which exists right now, or one that you speculate will 17 exist after market opening, or just what kind of 18 comparisons are you asking the witnesses to address? 19 MR. MATTSON: Thank you, Dr. Jackson. 20 I'm speaking of -- and I guess it's still 21 speculation in light of recent events, but I'm speaking 22 of what would be in place after market opening, in 23 particular with the independent market operator and the 24 role that it will serve in benefiting end-use customers. 25 MEMBER JACKSON: Given that in my short stay 26 at the Ontario Energy Board I have done relatively 27 little work on the electricity side, could you just 28 guide me as to what documents you might have relied on Les Services StenoTran Services Inc. 613-521-0703 1431 BAKER/STEDMAN, cr-ex (Mattson) 1 or what you have relied on in order to understand what 2 might happen after market opening? 3 MR. MATTSON: Luckily, Dr. Jackson, since 4 Mr. Adams will be testifying, he is a member of the 5 Independent Marketing Operating Board, and he will be 6 able to answer those questions as opposed to trying 7 indirectly through me to respond. So maybe when he 8 testifies next week he certainly will be able to assist 9 you with that. 10 MEMBER JACKSON: I'm really looking for as 11 clean as possible a record for my benefit in easing my 12 work after this portion of the proceeding, and also 13 trying to be helpful to you in order to have a clean 14 record too. I was just having trouble with some of 15 these comparisons and I thought maybe the witnesses 16 might too. 17 So in terms of this structure for electricity, 18 then the witnesses and I would be best to look at 19 Mr. Adams' testimony. Is that what you're saying? 20 MR. MATTSON: Generally, Dr. Jackson, I can 21 indicate that the market rules as approved by the Board 22 and the SSS decision, which I believe was released about 23 four months ago, but those two in particular set forward 24 the basis for an end-use customer and the competitive 25 options that will be available to them as a result of 26 the electricity restructuring. 27 Now, whether or not those are -- where they 28 sit and whether or not -- when the market is opened, and Les Services StenoTran Services Inc. 613-521-0703 1432 BAKER/STEDMAN, cr-ex (Mattson) 1 those things, I understand are now being reviewed. Some 2 of them are, but I don't believe those are. 3 THE PRESIDING MEMBER: Can I just clear the 4 record? 5 MR. MATTSON: Yes. 6 THE PRESIDING MEMBER: I believe you said the 7 market rules approved by the Board. Can you make clear, 8 I think it is the IMO Board and the Minister this time. 9 Isn't that correct? 10 MR. MATTSON: Yes, the IMO Board. 11 THE PRESIDING MEMBER: Just to make sure the 12 record is clear. 13 MR. MATTSON: Yes. 14 MEMBER JACKSON: And if I check those 15 references I will find out if there are any volume 16 thresholds too that limit access for the end-use 17 customer? I want to see if we can get some apples and 18 apples comparisons on the record. 19 MR. MATTSON: You will find that there aren't 20 volume threshold limits. I think, Mr. Baker has 21 acknowledged that. 22 MR. BAKER: I said, I don't know. 23 MR. MATTSON: Oh, he doesn't know. 24 MR. PENNY: Well, Dr. Jackson, regrettably one 25 of the problems here is that there is no evidence on the 26 record on this, and Mr. Adams' testimony does not 27 address any of these issues. It focuses in solely on 28 one particular aspect. Les Services StenoTran Services Inc. 613-521-0703 1433 BAKER/STEDMAN, cr-ex (Mattson) 1 So I'm not sure how ultimately we are going to 2 further the kinds of comparisons that Mr. Mattson wants 3 to make when there is no evidence available to do that. 4 MR. MATTSON: Which will make it difficult to 5 try to -- for the company to show that this is creating 6 a level playing field, which is why I'm cross-examining 7 him on this and trying to really see to what extent they 8 have addressed their mind to this level playing field 9 issue, and looked at what the end-use customer in 10 electricity is being offered. 11 It's clear that there are questions out there 12 and the company is not able to help us with them. 13 Really that's my job in cross-examination, is to get at 14 the company to try to see to what extent they have 15 addressed their mind to this issues. That's where I'm 16 going. 17 MEMBER JACKSON: Well, then I will let you 18 carry on with that objective, but I think you have had a 19 lot of situations in which they have said they have a 20 general knowledge but not a specific knowledge. But if 21 you want to try to pin that down in a few more areas, 22 then I guess that makes sense. 23 Thank you. 24 THE PRESIDING MEMBER: Mr. Mattson, it would 25 be helpful just to understand the concept of level 26 playing field. 27 I assume level playing field means that there 28 are similar treatments that would provide the customers Les Services StenoTran Services Inc. 613-521-0703 1434 BAKER/STEDMAN, cr-ex (Mattson) 1 of the two different energy forms similar types of 2 opportunity and not that one system has to replicate the 3 other or vice versa. 4 MR. MATTSON: That's it exactly, Mr. Dominy. 5 THE PRESIDING MEMBER: Okay. 6 --- Pause 7 MR. MATTSON: I think I have gone as far as I 8 can on that issue. 9 If I could I would like to turn to the issue 10 of stranded costs as discussed in your evidence. 11 Would you agree with me, Mr. Baker, that a 12 good definition for "stranded cost" is where the market 13 value is less than the historic cost? 14 MR. BAKER: That may be fundamentally what 15 gives rise to it, but I think further a stranded cost is 16 a situation where an asset or certain capacity is left 17 in a state where it is essentially unneeded or 18 unutilized, and then, depending on the market value 19 relative to the cost of that asset will give rise to a 20 differential. 21 MR. MATTSON: Right. The fact that -- the 22 reason why you put in the term "unutilized", you are 23 trying to get at that it has very little market value, 24 it really doesn't serve much of a purpose. 25 MR. BAKER: No, that's not true. 26 The concept of stranded cost was put in place 27 for upstream transportation is a situation where 28 depending on how that capacity is allocated, Union could Les Services StenoTran Services Inc. 613-521-0703 1435 BAKER/STEDMAN, cr-ex (Mattson) 1 be in a position where it has capacity that it no longer 2 needs or is in excess to what it needs to serve its 3 system customers. 4 Under current market conditions that's right, 5 there would be a cost. 6 What we talked about on Friday is that three 7 years ago, to the extent that same situation had arose, 8 there would have been a benefit because the market value 9 of transportation was significantly in excess of posted 10 tolls. 11 MR. MATTSON: Right. So in addition -- but I 12 think that fits with the definition of stranded cost and 13 market value less than historic costs, because you can 14 also have stranded benefits, that is where the market 15 value is greater than the historic cost. 16 MR. BAKER: I agree. 17 MR. MATTSON: Your proposal calling it "the 18 vertical slice", it tries to insure that both the 19 customer and the company are protected and fairly 20 treated from stranded costs. Correct? 21 MR. BAKER: Our unbundling proposal as an 22 overall principle tries to avoid or minimize stranded 23 costs where we can, and to the extent that those are 24 unavoidable, then we talked on Friday in terms of how 25 those would be treated. 26 MR. MATTSON: In terms of the stranded 27 benefits, they would be treated the same way? 28 MR. BAKER: I'm not sure what you mean by Les Services StenoTran Services Inc. 613-521-0703 1436 BAKER/STEDMAN, cr-ex (Mattson) 1 "stranded benefit". 2 MR. MATTSON: It's what we agreed on where the 3 market value is greater than the historic costs. 4 MR. BAKER: And what we had spent a lot of 5 time on Friday talking about was the fact that under an 6 optional allocation approach, which is at the heart of 7 the issue on upstream transportation, when the market 8 value is higher than full toll capacity customers will 9 want that capacity, so that benefit or that differential 10 will be taken. 11 So the utility being in a position where it 12 would have what you define to be a stranded benefit I 13 suggest won't arise. But under an optional allocation 14 approach to the extent that the market value of the 15 capacity is below cost, that's when marketers or 16 customers would, on an economic basis, say, "I don't 17 want your capacity. You take and manage the stranded 18 cost". 19 So it's not a symmetrical treatment under an 20 optional allocation approach. 21 MR. MATTSON: Thank you. 22 I would like to look into, then, how this 23 vertical slice proposal achieves fairness from the end- 24 use customers' perspective again. 25 How does the small customer benefit from the 26 vertical slice option or proposal? 27 MR. BAKER: Again it's an extension of the way 28 direct purchase is facilitated today. So in rates today Les Services StenoTran Services Inc. 613-521-0703 1437 BAKER/STEDMAN, cr-ex (Mattson) 1 customers are paying for the average cost to Union's 2 portfolio that has been arranged to serve them. 3 What we are proposing to do through the 4 vertical slice is provide that portfolio or slice of 5 that portfolio to a marketer who wishes to serve end-use 6 customers, so he essentially steps into our shoes. 7 Again, the fundamental thrust, which is the 8 same as direct purchase has always been, is that to the 9 extent that a marketer can manage that capacity better, 10 manage the arrangement of the supply at a better price 11 than Union, then there are benefits that will translate 12 into an offering to end-use customers. 13 MR. MATTSON: Again we have two types of 14 benefits here. One, direct benefits of the marketer, 15 and, secondly, we hope there may be some indirect 16 benefit for end-use customers. Is that fair? 17 MR. BAKER: To the extent that the market is 18 working, that's right. The customers have the option as 19 to whether or not they want to take an alternate service 20 that has been provided by a marketer, and they will make 21 that evaluation. 22 MR. MATTSON: Certainly the vertical slice 23 proposal has some pretty clear benefits for your 24 customers, who are the marketers, compared to a 25 cherry-picking type proposal. 26 MR. BAKER: I'm not sure that's a fair 27 characterization, given what we had heard on Friday. 28 MR. MATTSON: Just in regards to that last Les Services StenoTran Services Inc. 613-521-0703 1438 BAKER/STEDMAN, cr-ex (Mattson) 1 point -- 2 MR. BAKER: What we are saying now -- 3 MR. PENNY: Now that you have asked, you can 4 let him finish, please. 5 MR. MATTSON: Let him finish. 6 MR. BAKER: There are two components to our 7 upstream transportation proposal. One is a vertical 8 slice. Again, we talked about on Friday why we are 9 proposing the vertical slice, and that is that we don't 10 have -- or we have very little TransCanada FT capacity 11 left to continue on with the current methodology. So we 12 proposed a vertical slice that we think is fair to both 13 the remaining system customers and it's fair to 14 marketers going forward. 15 The other issue is the optional versus the 16 mandatory that we spent most of the day on Friday 17 talking about. 18 MR. MATTSON: On Friday, Mr. Baker, did you 19 indicate what unfairness might arise if pipeline 20 assignments are cherry-picked on a first-come, 21 first-served basis? 22 MR. BAKER: Well, it essentially means that 23 the customers that are last to choose a direct purchase 24 option, either directly or through their marketer, will 25 be left with potentially higher cost capacity or 26 capacity that has a longer remaining term associated 27 with it. 28 --- Pause Les Services StenoTran Services Inc. 613-521-0703 1439 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. PENNY: Mr. Chairman, just in thinking 2 about that question, it didn't make clear what proposal 3 was being referenced. 4 My recollection of the evidence from Friday is 5 that the only proposal that the words "first come, first 6 served" were used in relationship to were not the 7 Union's proposal but the IGUA-supported Alternative 1. 8 That is my recollection. 9 I wonder if Mr. Mattson can just confirm that 10 that is what he was asking about? 11 MR. MATTSON: Mr. Baker, what your counsel has 12 put forward, is that correct? 13 MR. BAKER: That is what I assumed you were 14 referencing because Union's proposal isn't a first come, 15 first served. It is a vertical slice of what is in the 16 portfolio. 17 MR. MATTSON: Thank you. 18 Another alternative, and I ask your comments 19 on it, which is why would you not auction your 20 transportation capacity as opposed to pursuing the 21 vertical slice option or the first come, first served 22 option? 23 MR. BAKER: We wouldn't want to auction our 24 capacity because we need it today to serve the customers 25 that remain on system gas. 26 MR. MATTSON: What about auctioning the -- why 27 not auction the stuff then that you need for the 28 unbundled customers? Les Services StenoTran Services Inc. 613-521-0703 1440 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: I am just not sure what you mean 2 by this. 3 MR. MATTSON: Instead of the vertical slice. 4 MR. BAKER: Because we don't think it's 5 appropriate. That is not the framework on which direct 6 purchase has been fundamentally put in place in this 7 province. We have arranged a portfolio of supplies that 8 the Board reviews regularly through their function to 9 regulate a system supply commodity cost. A fundamental 10 principle of direct purchase is when those customers 11 move direct purchase we make available the capacity that 12 we have put in place to serve those customers. There is 13 flexibility within that portfolio that marketers will 14 have the ability to replace that capacity when it 15 expires. 16 MR. MATTSON: Why are you limiting yourself to 17 what happened back in, I think, it was 1991 with respect 18 to direct purchase? What is the magic in the direct 19 purchase arrangements? 20 MR. BAKER: There is nothing magic in it but 21 that is the framework. Unbundling is simply an 22 extension of the existing bundled direct purchase 23 options that we have in place today. It is another 24 option. It is -- 25 MR. MATTSON: Well, auctioning though could 26 also be another option. It is just a different one from 27 what you did back with direct purchase. 28 MR. BAKER: Auctioning the capacity is no Les Services StenoTran Services Inc. 613-521-0703 1441 BAKER/STEDMAN, cr-ex (Mattson) 1 different than what we would have to do if you followed 2 an optional allocation approach. If a marketer had the 3 option not to take our capacity, what Union would in 4 effect have to do I wouldn't refer to it as auctioning. 5 I would refer to it as liquidating. We would have 6 excess capacity in our portfolio and we would have to go 7 out and liquidate that capacity. 8 We spent a great deal of time on Friday 9 talking about why that wasn't appropriate in Union's 10 view from an efficient and competitive market framework. 11 And there was -- I don't know whether you have reviewed 12 the transcripts, but there was an example that I used on 13 a number of occasions as to why in Union's view we 14 didn't think that that was appropriate. 15 MR. MATTSON: Mr. Chairman, we had some 16 difficulty with the transcripts as they didn't appear on 17 the Web over the course of the weekend and we haven't 18 ordered them. We don't have them delivered. So I only 19 have it through indirect viva voce sort of testimony 20 what happened on Friday. So I apologize for any of 21 that. 22 You are using the term liquidation. Okay. 23 All right. 24 MR. BAKER: Again, to give the perspective on 25 Friday, we were concerned about wanting to provide 26 options, as much flexibility and options as we can but 27 to make sure that there was true and efficient 28 competition that would result in true benefits to end Les Services StenoTran Services Inc. 613-521-0703 1442 BAKER/STEDMAN, cr-ex (Mattson) 1 users. And the example that I used was if the full 2 total capacity is at a dollar and the market value is 3 currently 70 cents, there is a discount of 30 cents. 4 Under an optional allocation approach what that will 5 result in on one hand is a marketer being able to or an 6 end-use customer being able to extract that 30 cent 7 differential. 8 But it will give rise to an equal and 9 offsetting cost on the other side of the equation being 10 Union, that will have to go out and liquidate that 11 capacity for the same market value that is in the 12 marketplace. So there is a 30 cent benefit on one hand 13 and there is a 30 cent cost on the other. And from an 14 end-use customer perspective, we don't think that it is 15 efficient to have a commodity cost benefit portrayed on 16 one hand with the utility then having to go out 17 subsequently or shortly thereafter to recover, subject 18 to the Board reviewing the prudency of those costs, that 19 30 cents from those very end-use customers. 20 MR. MATTSON: Driving your comments there, 21 Mr. Baker, would you agree that it is driven by a 22 concern that you have with respect to the first come, 23 first served? 24 MR. BAKER: No, that has nothing to do with 25 first come, first served. That is an issue that will 26 arise under an optional allocation methodology. 27 MR. MATTSON: Optional allocation? I thought 28 we were just -- the optional allocation in the first Les Services StenoTran Services Inc. 613-521-0703 1443 BAKER/STEDMAN, cr-ex (Mattson) 1 come, first served, you don't see those two as being the 2 same thing? 3 MR. BAKER: No, they aren't the same thing. 4 Under the first come, first served option, which is 5 alternative laid out in the ADR Agreement, there is an 6 obligation to Union's capacity as long as we have 7 capacity at a particular delivery point that the 8 customer wants, and given that our portfolio currently 9 has capacity at both Parkway and Dawn, there would be no 10 immediate stranded costs under that option. 11 MR. MATTSON: It all goes back to the cross- 12 examination by IGUA on Friday? 13 MR. BAKER: It goes in general to a lot of 14 conversations that we had on Friday. That is correct. 15 MR. MATTSON: To turn to the question, 16 Mr. Baker, as to whether or not Union will be an 17 independent system operator or will be an interested 18 system operator. Do you understand what I mean by those 19 two terms? One where Union would have a vested interest 20 as the operator and the other would be where you would 21 be completely independent of what the outcomes are. 22 MR. PENNY: I am not sure what -- 23 Mr. Chairman, I am not sure what it is that is being 24 asked. Does Mr. Mattson want Mr. Baker's response to 25 that or does he ask him to assume that for the purposes 26 of the question? 27 THE PRESIDING MEMBER: I think he is setting 28 the scene. I am not sure he has asked his question. Les Services StenoTran Services Inc. 613-521-0703 1444 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: No. Do you understand the 2 distinction I am making between the two? 3 MR. BAKER: I think I understand the 4 implication, yes. 5 MR. MATTSON: Do you agree that under your 6 proposal that Union does have an interest -- we can take 7 that as a vested interest -- in the operation of the 8 Dawn-Trafalgar system beyond just getting a fair rate of 9 return on its rate base? In particular I would ask you 10 to direct your attention to direct transactional 11 services. 12 MR. BAKER: Union has always had a vested 13 interest to utilize its system to the maximum extent 14 possible and that fundamental premise has not changed 15 through the unbundled service offering. 16 MR. MATTSON: Is that because that would 17 minimize costs to Union, net costs to Union meaning 18 revenue net of costs? 19 MR. BAKER: Yes. Certainly in the past there 20 has always been an expectation, and I think fairly so, 21 that to the extent Union has excess capacity on its 22 system at a point in time that we will do our utmost to 23 manage that excess capacity and sell it into the 24 marketplace. Those benefits have been the subject of 25 revenues that are brought forward to the Board for 26 disposition through deferral accounts or through a 27 forecast so that customers have benefitted from those in 28 rates. Les Services StenoTran Services Inc. 613-521-0703 1445 BAKER/STEDMAN, cr-ex (Mattson) 1 MEMBER JACKSON: I meant in terms of operating 2 the system between rate proceedings. I should have said 3 maximizing revenue minus your costs, but I guess I was 4 trying to say minimizing the costs to Union. 5 But I think we are on the same wavelength 6 there and we are talking about how you should operate 7 between rate cases. Right? 8 MR. BAKER: I think that's fair, yes. 9 MEMBER JACKSON: Yes. 10 MR. MATTSON: In keeping going then, do you 11 anticipate revenues from new unbundled services to 12 infranchise customers? 13 MR. BAKER: What the unbundled services are 14 are really a desegregation of services that are in the 15 bundled rate today. So there is no incremental revenue 16 stream that flows directly from the implementation of 17 the new unbundled service. 18 MEMBER JACKSON: How about other transactional 19 services, Mr. Baker? 20 MR. BAKER: I think, as has been covered both 21 in the evidence and in the testimony, the fallout of the 22 introduction of an unbundled service is that the 23 capacity that Union has had access to in the past 24 through offering a bundled service will be diminished 25 through the unbundled service because there will be a 26 contractual entitlement that the unbundled customer will 27 have to that capacity. So it is then theirs to manage 28 as they see fit. Les Services StenoTran Services Inc. 613-521-0703 1446 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: Mr. Baker, do you foresee a time 2 when pipeline balancing can be achieved without 3 balancing limits for each shipper and penalties of 4 shippers out of balance? 5 MR. BAKER: No, I don't. 6 MR. MATTSON: So in your proposal these are 7 permanent features of your pipeline unbundling. Is that 8 fair? 9 MR. BAKER: In balance fees are a reality -- 10 imbalances, pipeline imbalances are a reality of the gas 11 business and there will always need to be a mechanism to 12 deal with those so that there are no negative 13 consequences that flow on either side of the 14 transaction. 15 MR. MATTSON: Thank you. 16 I'm going to try to finish with -- 17 MEMBER JACKSON: Mr. Mattson, I just want to 18 make it perfectly clear, when I ask for clarification I 19 am not trying to limit your ability to get to your 20 point, but I am missing the line of questioning which 21 you have there. 22 I thought you were trying to get the witness 23 to admit that Union had some interest that might 24 override the interest of consumers, and the answer that 25 I was seeking to clarify was that he has an interest, 26 obviously, to operate the system efficiently. 27 You got that answer, but does that do you 28 any good? Les Services StenoTran Services Inc. 613-521-0703 1447 BAKER/STEDMAN, cr-ex (Mattson) 1 I just want to be perfectly fair that in 2 interjecting I wasn't trying to tell you that you 3 needn't establish your point. 4 MR. MATTSON: I thought through the first 5 couple of questions I established it. I wasn't going to 6 go into it. But, Dr. Jackson, I can -- 7 MEMBER JACKSON: Okay. Well, I don't want you 8 to go any further if you don't want to either. I just 9 want you to understand that I wasn't trying to close off 10 your questioning. 11 MR. MATTSON: Let me try this then, 12 Dr. Jackson. 13 To you, Mr. Baker, as an example: Could Union 14 ever be in a position to recover penalty payments from 15 two shippers during a balancing period, one of whom is 16 drafting or under-delivered at the receiving end by some 17 number of units and another who is packing or over- 18 delivered at the receiving end by the same number of 19 units? 20 MR. BAKER: Again, I am open to answer the 21 question, but this is, in my view, going to issues that 22 have already been settled in the ADR Agreement. I am -- 23 MR. MATTSON: And we are not objecting to the 24 interim proposal, but you recognize that you have 25 indicated it is a permanent feature and we are looking 26 at more in the future as to whether this needs to be 27 addressed in the future, Mr. Baker. 28 MR. BAKER: You are talking about imbalance Les Services StenoTran Services Inc. 613-521-0703 1448 BAKER/STEDMAN, cr-ex (Mattson) 1 fees. I'm not sure which ones you are talking about, 2 whether it's pipeline imbalance, is it storage? 3 MR. MATTSON: Either. You could answer the 4 question with respect to either or both. 5 MR. BAKER: Again, it's possible. Again, we 6 are getting into the ADR Agreement, but that is why we 7 have chosen to make some of the amendments on nomination 8 imbalance fees that we have. 9 MR. MATTSON: So you would agree that you 10 could recover penalty payments from two shippers during 11 a balancing period, one of whom is drafting or under- 12 delivered at the receiving end by some number of units, 13 and another who is packing or over-delivered at the 14 receiving end by the same number of units. 15 MR. BAKER: To the extent that they are over 16 the thresholds as modified in the agreements, that may 17 be correct. 18 MR. MATTSON: And would your shareholder have 19 an interest in that happening as much as possible? 20 MR. BAKER: No. The whole premise behind 21 nomination imbalance fees is to have some discipline 22 under the unbundled service to make sure that the 23 pipeline system is operating efficiently and that Union 24 can set up its storage facilities and its compression 25 facilities in as efficient a way as possible. That is 26 the interest that Union has in the nomination 27 imbalance fees. 28 We would be, frankly, very pleased if we Les Services StenoTran Services Inc. 613-521-0703 1449 BAKER/STEDMAN, cr-ex (Mattson) 1 didn't have them. That means that people are operating 2 within the tolerances and that they are managing the 3 service as they should. 4 MR. MATTSON: Right. But we are not talking 5 in the question about the customers. It's the system 6 that is unbalanced, not the customers. 7 MR. BAKER: The unbundled service is a service 8 that a customer is managing or a marketer is managing on 9 their own. There are still similar operational 10 implications in terms of whether people are drafting or 11 packing, as you put it. 12 MR. MATTSON: Right. So if the system is 13 safe, but there is some extra profit that can be made by 14 the shareholder, that would be a good thing. 15 MR. BAKER: You don't control the nominations 16 that an unbundled shipper would make. We have no 17 influence in the transaction. A customer will nominate 18 his supply relative to what he thinks his consumption is 19 on a given day and to the extent that that is out of 20 balance, that is what gives rise to a nomination 21 imbalance fee. 22 So the whole management of the service is 23 something that is not done by Union, it is done by the 24 customer. 25 MR. MATTSON: Setting aside whatever gives 26 rise to the imbalance, certainly your shareholder would 27 have an interest in that happening as much as possible. 28 Is that fair? Les Services StenoTran Services Inc. 613-521-0703 1450 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: No, I don't agree with that. 2 MR. MATTSON: The system is safe, you are 3 getting more revenue, why would you not agree with that? 4 MR. BAKER: The intent from Union in looking 5 at nomination imbalance fees was to make sure that under 6 the unbundled service the system continues to operate as 7 efficiently as possible. That is what Union, from a 8 shareholder's perspective, has an interest in. 9 MR. MATTSON: I will leave that for 10 argument then. 11 If I could move on to the issue of 12 transparency. 13 Shippers have access to the information about 14 capabilities, constraints and congestion at the receipt 15 and delivery points? 16 MR. BAKER: I'm not following the direction of 17 your question. 18 MR. MATTSON: On the Dawn-Trafalgar system, 19 would shippers have access real-time to the information 20 about capabilities, constraints and congestion at 21 receipt and delivery points? 22 MR. BAKER: Shippers on the Dawn-Trafalgar 23 system that have a contract have a contractual 24 entitlement to a certain amount of transmission capacity 25 and the assumption is that that will be there every day 26 of the year. To the extent that there was a problem on 27 the Dawn-Trafalgar system, or to the extent that there 28 was access capacity on the Dawn-Trafalgar system at a Les Services StenoTran Services Inc. 613-521-0703 1451 BAKER/STEDMAN, cr-ex (Mattson) 1 certain point in time, that information is released into 2 the marketplace and communicated with customers. 3 MR. MATTSON: How? 4 MR. BAKER: Take the example where there is 5 access Dawn-Trafalgar capacity that we think may be 6 there, it is taken out to the market essentially through 7 a tendering process to see if there is demand in the 8 marketplace for that unutilized capacity. 9 MR. MATTSON: What about constraints and 10 congestion? 11 MR. BAKER: Typically that's not an issue. We 12 design and we set-up the system so that we can meet our 13 contractual requirements. 14 MR. MATTSON: On your -- and I think it's an 15 acronym, Mr. Baker -- on your ENOM service. Do you 16 understand what I mean by that? 17 MR. BAKER: Electronic Nomination, that's 18 right. 19 MR. MATTSON: What is the traffic light icon? 20 MR. BAKER: What is what? 21 MR. MATTSON: The traffic light icon. I take 22 it, it comes up on the screen showing some of these 23 indications. What is it? 24 MR. BAKER: I don't know. 25 I think generally it's an indication to all 26 market participants in terms of how the Dawn-Trafalgar 27 system is operating, whether it's operating near 28 capacity or whether there is excess capacity at a point Les Services StenoTran Services Inc. 613-521-0703 1452 BAKER/STEDMAN, cr-ex (Mattson) 1 in time. It's a general indication to market 2 participants. 3 --- Pause 4 MR. MATTSON: So that in effect, Mr. Baker, 5 when we talk about how you are reaching out with the 6 information to the shippers that's one way you are 7 giving information is through this ENOM? 8 MR. BAKER: That would be one way. 9 MEMBER JACKSON: Is this an electronic system 10 that is accessible only to shippers, Mr. Baker? 11 Mr. Baker, will you help me on that? 12 MR. MATTSON: My understanding is that it is. 13 MR. PENNY: Mr. Mattson -- 14 MEMBER JACKSON: But I'm asking Mr. Baker. 15 MR. PENNY: I think there is a question from 16 the panel. 17 MEMBER JACKSON: I haven't visited this site 18 in my Web surfing. 19 MR. BAKER: It's not in your top ten? This is 20 an electronic nomination system that Union has put in 21 place to better administer nominations per customer. So 22 to the extent that they are nominating either storage or 23 transmission services on Union's system they can do it 24 electronically through the Web site rather than how it 25 used to be done which was by fax. 26 MEMBER JACKSON: Is this site open to anyone 27 to look at? 28 MR. BAKER: Yes it is. It's part of Union's Les Services StenoTran Services Inc. 613-521-0703 1453 BAKER/STEDMAN, cr-ex (Mattson) 1 corporate Web site. 2 MEMBER JACKSON: So one can see when there is 3 congestion on certain parts of the system. And this is 4 updated how often -- would it be hourly? 5 MR. BAKER: I wouldn't use the term 6 "congestion". I know the reference is being made to 7 electricity, but as I said Union designs its system so 8 that it is sized appropriately to meet all the 9 contractual requirements that it has on its system. 10 What the traffic light concept is that to the 11 extent that for instance traffic was indicated as being 12 low, it would be a general indication to customers 13 shipping on Union's system to the extent that they 14 wanted to move additional supply on that day or for that 15 week, it would give them a general indication in terms 16 of whether capacity may be available. They could then 17 contact a union representative to see whether there's a 18 service that would meet their requirements. 19 MEMBER JACKSON: But within the contracting 20 for the system, can it occur that nominations for a 21 particular day will exceed capacity and some will have 22 to be turned away? 23 MR. BAKER: No. Under the terms and 24 conditions of the contract you can't nominate in excess 25 of your contractual capacity. You can attempt that 26 which would be an authorized overrun service to the 27 extent that you attempted to do it through the 28 electronic nomination system. In most cases the Les Services StenoTran Services Inc. 613-521-0703 1454 BAKER/STEDMAN, cr-ex (Mattson) 1 nomination would be rejected because you were outside of 2 your contractual parameters. 3 MEMBER JACKSON: But if you were within your 4 contractual parameters, are there any situations where 5 you still might be turned away and/or receive only a 6 portion of your nomination because it was being 7 allocated on that day due to system constraints? 8 MR. BAKER: No. When you have a contractual 9 entitlement to a hundred units you have a contractual 10 entitlement to that hundred units. 11 MEMBER JACKSON: And your system is built with 12 enough capacity so that you can always deliver that? 13 MR. BAKER: Yes. We would never enter into a 14 firm contract if we did not have the capacity or the 15 means to provide it. 16 MEMBER JACKSON: So then just to be complete, 17 that kind of a situation could only arise if you had 18 some sort of an operations failure. 19 MR. BAKER: That's probably correct. That's 20 correct. 21 MEMBER JACKSON: Okay. Sorry, Mr. Mattson. 22 MR. MATTSON: Mr. Baker, how then will 23 customers be notified of call-backs? 24 MR. BAKER: What call-backs are you 25 referring to? 26 MR. MATTSON: Pipeline call-backs. 27 MR. BAKER: What pipeline call-backs? 28 MR. MATTSON: Parkway delivery. Les Services StenoTran Services Inc. 613-521-0703 1455 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: Physically, how will they be 2 notified? 3 MR. PENNY: Are you now asking questions about 4 the 22-day call-back at Parkway? I think Mr. Baker 5 is -- 6 MR. MATTSON: I think with all due respect to 7 the transparency, Mr. Penny, but that's the issue 8 I'm on. 9 MR. PENNY: I'm just asking for a 10 clarification, Mr. Mattson. I discern that Mr. Baker is 11 not understanding what your question is and it might be 12 of assistance if can you tell him what the subject 13 matter -- the question is relating to because I 14 personally also do not understand the question. 15 MR. MATTSON: Do you understand the question, 16 Mr. Baker? Would you like more clarification? 17 MR. BAKER: My assumption is you are talking 18 about the 22-day call-back at Parkway. 19 MR. MATTSON: That's right. 20 MR. BAKER: The customer would be in all 21 likelihood informed electronically or via a 22 representative at Union that the capacity that may be 23 currently diverted out of Union's franchise will be 24 required one or two days out given the projected demand 25 on Union's system. 26 MR. MATTSON: Currently you would be 27 anticipating a one or two-day notice. Is that fair? 28 MR. BAKER: That's right, prior day notice. Les Services StenoTran Services Inc. 613-521-0703 1456 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: Let me finish this off. Will 2 the customer review process be providing greater 3 transparency? Do you anticipate it providing greater 4 transparency starting on operational decisions, greater 5 than what may currently exist or you have envisioned? 6 MR. BAKER: I'm not sure what you mean by 7 "transparency on operational decisions". 8 MR. MATTSON: I guess transparency with 9 respect to commodity or deliverability curtailments, 10 dispatch instructions, balancing requirements, pipeline 11 access, or capacity calls -- that sort of information. 12 Do you think the customer review process will provide 13 transparency with respect to those issues? 14 MR. BAKER: I'm not ruling out that those 15 kinds of issues won't surface in a customer review 16 process, but to the extent that we are administering 17 something like the 22-day call at Parkway, I would 18 suggest that customers that would be subject to that 19 call would want to make sure, to the extent that they 20 had any questions, that they were getting their answers 21 from Union at that time, and wouldn't want to wait until 22 the customer review process to ascertain that. 23 MR. MATTSON: All right, but setting aside 24 those customers. Again I know that the bigger customers 25 are consumers, but with respect to the end-user customer 26 will they be able to access that information through 27 your customer review process -- the smaller customer in 28 customer groups. Les Services StenoTran Services Inc. 613-521-0703 1457 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: Again, I'm not sure what's being 2 asked. 3 MR. MATTSON: This information that we are 4 talking about commodity or deliverability, curtailment. 5 MR. BAKER: Again -- 6 MR. MATTSON: Do you indulge that information 7 to the customer review process so they can determine -- 8 MR. BAKER: The majority of services on 9 Union's system are firm services and we do our utmost to 10 ensure that we never have to curtail a firm service. To 11 the extent that it's an interruptible service those 12 services are curtailed at points in time, but that's a 13 term and condition of the service. 14 Union has an interest to operate in a way that 15 maximizes the flow on our system 365 days a year. So 16 ideally we would never want to curtail services to the 17 extent that we can provide the service and allow 18 customers' gas to flow. We do our utmost to do that. 19 MR. MATTSON: Maybe I can help assist in my 20 understanding of this. 21 Mr. Baker, what do you suggest be the public 22 interest criteria that will guide the decision making 23 with respect to the customer review process? Will it be 24 similar to that which guides the Board's review of your 25 costs currently? 26 MR. BAKER: I'm not really here in a position 27 today to speak to the customer review process. That is 28 another panel. Les Services StenoTran Services Inc. 613-521-0703 1458 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: But in terms of, obviously, 2 these sorts of questions that I am asking, access to an 3 irregular rate here. The customer review process, if 4 the information is seen to be necessary to some party, 5 although your company may think it's not necessary -- 6 MR. BAKER: To the extent that there is a 7 market requirement for information, it will get dealt 8 with in one way or another. And to the extent 9 customers, our customers have questions about the level 10 of service and the type of service or its provisions, we 11 talk about that with our customers and we explain it. 12 Similarly, to the extent that we had to 13 curtail a service, we do our utmost to provide people 14 notice that we are getting close to a situation where we 15 may have to curtail interruptible services. So that 16 generally doesn't wait until a customer review process, 17 we do it at the time the event is occurring. We 18 communicate that. 19 MR. MATTSON: I understand that, but the 20 customer review process is obviously going to extend 21 beyond just your customers, as you see it. It is going 22 to extend up to these small end-use customers who aren't 23 really your customers except indirectly through the 24 REMs. Will they have access to this information? 25 Their REM may have access to the information, 26 but will the end-use customer, who is getting an 27 unbundled service, will they have access to this 28 information through the customer review process? Les Services StenoTran Services Inc. 613-521-0703 1459 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: If an end-use residential customer 2 has a concern or a desire for information, to the extent 3 that they came forward to Union, whether it was in the 4 customer review process or not, we would do our utmost 5 to satisfy the request. 6 MR. MATTSON: Certainly if the Board made it a 7 requirement that this information be made available 8 through the customer review process, or could be made 9 available, you would have no objections to that? 10 MR. BAKER: I am not here to speak to the 11 customer review process, that is another panel. 12 We have a proposal in terms of what we think 13 should be dealt with in the customer review process. 14 I'm saying as a practical matter, to the extent that we 15 have customers out there, whether they are customers 16 that are served by a market, Union is still providing a 17 delivery service to those customers, so we would still 18 consider those to be our customers although we are just 19 not supplying their commodity and upstream 20 transportation. 21 MR. MATTSON: Right. 22 MR. BAKER: And to the extent that they had a 23 question or a desire for information, we would 24 provide it. 25 MR. MATTSON: Thank you. 26 Moving from transparency -- I only have 27 another 15 minutes, Mr. Chairman. I can continue on. 28 THE PRESIDING MEMBER: Please, carry on. Les Services StenoTran Services Inc. 613-521-0703 1460 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. MATTSON: Okay. 2 Mr. Baker, with respect to your long-haul 3 pipeline capacity commitments, I have a couple of 4 questions. 5 During direct examination it was suggested 6 that should Union secure a portfolio of T-capacity -- 7 the evidence was that Union suggested that it should 8 secure a portfolio of T-capacity, "as it sees fit." 9 Do you recall that? 10 MR. BAKER: Yes, I recall that. 11 MR. MATTSON: And this perspective, at least, 12 reflects some of the older approach to transportation 13 contracting that created some costs at risk for 14 stranding. Is that fair? 15 MR. BAKER: No, that's not fair. 16 MR. MATTSON: Certainly with respect to this 17 long term -- this portfolio approach, there is a risk 18 for creating sunken costs that are at risk for 19 stranding. Is that fair? 20 MR. BAKER: What we would agree with is that 21 the market value for transportation capacity varies. It 22 is a market. At certain times the capacity will be 23 above full toll, at certain times it will be below full 24 toll. 25 What Union does, as a system supplier, and in 26 its role as a system supplier, is attempts to put 27 together a portfolio that we think is reasonable and 28 prudent in terms of serving the system customers that Les Services StenoTran Services Inc. 613-521-0703 1461 BAKER/STEDMAN, cr-ex (Mattson) 1 we do. 2 MR. MATTSON: Who will decide what T-capacity 3 is contracted for? 4 MR. BAKER: Union decides as a system 5 supplier, and we are regulated by the Board in terms of 6 those decisions that we make. 7 MR. MATTSON: Union. And what should be the 8 role of regulation in Union's decisions? 9 MR. PENNY: Well, Mr. Chairman, we went 10 through this at considerable length and in quite some 11 detail, and these truly are totally repetitive 12 questions, in my respectful submission. 13 THE PRESIDING MEMBER: Perhaps we could just 14 have a very quick summary from Mr. Baker and that will 15 help Mr. Mattson. A very quick one, recognizing the 16 problem with the transcript. 17 MR. BAKER: Could you just repeat the 18 question, please? 19 MR. MATTSON: Yes. 20 What should be the role of regulation in 21 contracting for transportation capacity? 22 MR. BAKER: We don't see any need to change 23 the way system supply is regulated at the current time, 24 and we are not proposing any in this application. So 25 Union continues to make decisions on its portfolio to 26 serve system customers and the cost consequences that 27 flow from those decisions, be it commodity or supply in 28 the various basins or the transportation capacity, those Les Services StenoTran Services Inc. 613-521-0703 1462 BAKER/STEDMAN, cr-ex (Mattson) 1 are reviewed by the Board on a regular occasion. 2 MR. MATTSON: Did you, Mr. Baker, go through 3 the chain of events that led to you contracting with 4 Alliance on Friday? 5 MR. BAKER: We talked at a general level about 6 the Alliance/Vector and its inclusion in Union's 7 portfolio and the vertical slice, but I don't believe 8 that we have spent a lot of time on the details or the 9 circumstances leading up to that capacity. 10 MR. MATTSON: What precautions, then, did you 11 have in place to avoid potentially stranded costs in 12 that example? 13 MR. BAKER: The time Alliance/Vector was 14 contracted for, again, looking back in 1997, 15 transportation capacity was short to Ontario. There was 16 not sufficient capacity to Ontario. Union was not going 17 to get capacity through the TransCanada queue, and it 18 was at that time that Union, in its role as a system 19 supplier, made the contractual commitments that it 20 thought was appropriate to secure additional and 21 incremental capacity to Ontario. 22 You are in a situation where in today's market 23 circumstances, in general, incremental new pipeline 24 expansion into Ontario is not made without a long-term 25 contractual commitment. And that was the situation for 26 Alliance/Vector. 27 MR. MATTSON: Union -- your parent is an 28 investor in the Alliance/Vector system. Les Services StenoTran Services Inc. 613-521-0703 1463 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: Westcoast has an ownership 2 interest in the Alliance pipeline. 3 MR. MATTSON: And is the Alliance/Vector 4 contract -- you can just clarify this for me -- are they 5 approved by the Board as affiliate transactions? 6 MR. BAKER: No, because the Alliance pipeline 7 is not an affiliate. But the cost consequences that 8 flow from the Alliance/Vector capacity will be subject 9 to review by this Board. 10 MR. MATTSON: And when will that happen? 11 MR. BAKER: Subsequent to the time the 12 capacity is actually up and running. So it is due to 13 start this November. 14 So again, we talked on Friday that probably 15 the first time that the Board will examine or see cost 16 consequences flowing from the Alliance/Vector capacity 17 would be when we bring forward deferral accounts for the 18 year ending December 31, 2000, because the cost 19 consequences for Alliance/Vector will start this 20 November and be subject to the existing deferral account 21 mechanisms. 22 MR. MATTSON: All right. If Union had not 23 contracted for Alliance/Vector capacity for 2000-2001, 24 Union could have acquired any needed capacity from 25 secondary markets. Is that fair? 26 MR. BAKER: No. I just said there was a 27 shortfall of capacity to Ontario. 28 MR. MATTSON: In hindsight I'm speaking. Les Services StenoTran Services Inc. 613-521-0703 1464 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: No. Because you have a situation 2 where there is a shortfall of capacity and there was a 3 need and a recognition that additional capacity to 4 Ontario was required. Union being one party went out 5 and made the contractual commitment to support a new 6 pipeline and incremental expansion through Ontario. 7 Pipeline expansions by their nature are what I referred 8 to Friday as lumpy in that you build a certain amount of 9 capacity and it does take some time for demand and 10 supply to come back into balance. 11 So you have an incremental pipeline expansion 12 to Ontario. And we are now in a situation where there 13 is excess capacity. So there are opportunities in the 14 secondary market, but it was the initial decision to 15 support the incremental pipeline expansion to Ontario 16 that has now given rise to the opportunities for 17 discounted capacity in the marketplace. 18 MR. MATTSON: Mr. Baker, wouldn't it be 19 prudent then to stop contracting long for pipeline 20 capacity until you see the take-up on the unbundled 21 transportation? 22 MR. BAKER: Our decision to make upstream 23 transportation supply arrangements has nothing to do 24 with unbundling. It has nothing to do with direct 25 purchase. It is part of our role to serve system gas 26 customers. That is the first criteria and that is what 27 we look to do. 28 MR. MATTSON: Thank you. Les Services StenoTran Services Inc. 613-521-0703 1465 BAKER/STEDMAN, cr-ex (Mattson) 1 Finally, Mr. Baker, correct me if I am wrong, 2 but it occurs to my client that there are two 3 fundamentally different views of the purpose of 4 operating a pipeline. And the one is that you are 5 operating it for the benefit of the pipeline owners and 6 the other is that you are operating the pipe for the 7 benefit of the shippers. Do you see those two benefits? 8 Those two perspectives? 9 MR. BAKER: I am not sure that those are two 10 mutually exclusive perspectives. I think they are 11 essentially one and the same. 12 MR. MATTSON: So you see those as being one -- 13 not two -- you don't see there being a benefit for the 14 pipeline shareholder versus the benefit for the shippers 15 as being in any kind of conflict? You always see them 16 as being similar. 17 MR. BAKER: Yes, I do to the extent that you 18 go back -- to the extent that there is a requirement by 19 a shipper for a firm capacity on Union's system, we do 20 everything that we can to serve it and then to continue 21 to meet the contractual requirements for that firm's 22 service on an ongoing basis. 23 MR. MATTSON: If in the future at some future 24 date, Mr. Baker, an independent system operator for gas 25 was set up in such a way that Union would continue to 26 get full recovery of its reasonable pipeline costs but 27 had to give up the operational control, how would you 28 respond to that? Les Services StenoTran Services Inc. 613-521-0703 1466 BAKER/STEDMAN, cr-ex (Mattson) 1 MR. BAKER: I can't speculate on how we would 2 respond to that. That is something that would be far 3 removed from a decision that I would make. That is -- 4 MR. MATTSON: Why? 5 MR. BAKER: Because that is a fundamental 6 change to the business that Union is in today and that 7 -- the business that Westcoast Energy has an ownership 8 interest in. 9 MR. MATTSON: So you have an interest then in 10 keeping it the way it is or at least not proceeding in 11 that group? 12 MR. BAKER: I think we have an interest in 13 running the business in the way that makes sense and the 14 current market framework that we are in. And when I 15 look at it, I look at the North American gas market and 16 it is not characterized by independent system operators. 17 It is characterized by very many suppliers, very many 18 pipeline transportation companies, a significant number 19 of storage operators and a significant number of local 20 distribution companies throughout both Canada and the 21 United States. And that is an integrated framework that 22 has developed over a long period of time and again it is 23 not characterized by independent system operators on the 24 gas side. 25 MR. MATTSON: Thank you. 26 Thank you. Those are all my questions. 27 THE PRESIDING MEMBER: Thank you, Mr. Mattson. 28 Board staff, do you have any questions? Les Services StenoTran Services Inc. 613-521-0703 1467 BAKER/STEDMAN, cr-ex (Mattson) 1 DR. WIGHTMAN: We have no questions. 2 THE PRESIDING MEMBER: Okay. Thanks. 3 MEMBER JACKSON: I have no questions. 4 THE PRESIDING MEMBER: I have a couple of 5 quick ones so maybe we can complete them and we can have 6 the break and start with a new panel. 7 We have heard on the record that Alliance is 8 not an affiliate of Union. You have just made that 9 comment, Mr. Baker, I believe. I was wondering if you 10 could tell me how Alliance tolls are determined? 11 MR. STEDMAN: Maybe I will address that 12 question so I can get on the record today. 13 The Alliance tolls will be looked at through 14 the National Energy Board and they are judged on the 15 costs associated with that pipeline. 16 THE PRESIDING MEMBER: Is there a tariff? 17 MR. STEDMAN: Yes, there is. 18 THE PRESIDING MEMBER: So there is a set rate 19 for Alliance or is it a negotiated rate? 20 MR. STEDMAN: It is -- there is a set rate 21 that you can select, which we did, subject -- 22 THE PRESIDING MEMBER: So the rate of -- 23 sorry. 24 MR. STEDMAN: Subject to what the costs would 25 come in at the end of the day on that pipeline. 26 THE PRESIDING MEMBER: So the point I am 27 trying to get at is that the rate that is included in 28 your costs of transportation is a determined rate by Les Services StenoTran Services Inc. 613-521-0703 1468 BAKER/STEDMAN 1 the NEB? 2 MR. STEDMAN: That is correct. 3 THE PRESIDING MEMBER: Thank you. 4 There is a letter in the -- 5 MEMBER JACKSON: Do I understand you to say 6 though that there can be some adjustment to that rate 7 after the fact? In other words, that it might be some 8 sort of a full cost of service tariff methodology where 9 there is an adjustment. It seemed to me that you were 10 saying subject to what their costs come in at and that 11 just concerned me that it wasn't really a fixed toll. 12 MR. STEDMAN: If there is a fixed rate 13 equation that they use to come up with a tariff, 14 however, subject to what the costs come in after 15 construction is what the shippers would actually end up 16 paying. 17 So when the Alliance pipeline was first 18 assessed, there was a specific toll based on an estimate 19 of what the costs would be. There was a delay in that 20 project as I am sure you are aware due to National 21 Energy Board proceedings. And in that delay of one 22 year, the costs did increase because there are costs 23 associated with cancellations and delays. Those costs 24 do get recovered from those shippers electing that rate. 25 MEMBER JACKSON: I think I do now understand 26 the context of your previous remark. But essentially it 27 is a fixed toll. Once the shipper pays the toll he 28 won't be subsequently asked to pay more or given a Les Services StenoTran Services Inc. 613-521-0703 1469 BAKER/STEDMAN 1 credit depending on what the operating costs of the 2 system are for the year in question. It is a fixed toll 3 methodology? 4 MR. STEDMAN: That is correct. 5 MEMBER JACKSON: Thank you. 6 THE PRESIDING MEMBER: My second question 7 relates to Exhibit D -- Exhibit B, Tab 1, Appendix D. 8 That is the turn back policy. 9 MR. BAKER: Exhibit B, Tab 1, Appendix D. 10 THE PRESIDING MEMBER: And page 5. 11 MR. BAKER: Okay, I have got it. 12 THE PRESIDING MEMBER: There is that middle 13 paragraph and I was interested if you could just 14 elaborate on that paragraph to expand on it. 15 MR. BAKER: I think this does go to some of 16 the issues that we were talking about on Friday where we 17 had -- the MDTF report was finalized in February 1999, 18 and at that same time we were getting a significant 19 amount of pressure from the direct purchase shippers to 20 have the flexibility to access discounted capacity in 21 the market at that time. 22 So what we had -- what we had looked at is 23 that we would put the turn back policy in place as I 24 mentioned last week to essentially provide, to take the 25 flexibility that Union had within its TCPL contract 26 portfolio and provide that flexibility to all the direct 27 purchase customers. And the first point there, which 28 was "preserve system reliability" was really a Les Services StenoTran Services Inc. 613-521-0703 1470 BAKER/STEDMAN 1 recognition again that we do rely and count on Parkway 2 deliveries from the design of our system. 3 So to the extent that we allowed parties to 4 turn back the TCPL FT capacity that had a Parkway 5 delivery point, they had to replace that capacity with 6 firm deliveries at Parkway. So that was the first one. 7 The second one was, again, just some of my 8 comments were we wanted to try to provide as much 9 flexibility as we could to shippers in a way that was 10 continuing to move the competitive market and to provide 11 customers with competitive options. And we saw the turn 12 back policy as being in line with that in allowing 13 customers to go out and access the discounted capacity 14 that was available in the marketplace. 15 And the third one is that again to my comments 16 last week where it was certainly a key consideration for 17 us through the Market Design Task Force to structure 18 unbundling in a way that minimized or avoided stranded 19 costs where we could and the turn back policy was set up 20 in a way that allowed that to happen because we would 21 have the flexibility to turn now those contracts back to 22 TCPL and therefore there would be no stranded cost issue 23 for Union. So we saw it as consistent with the Market 24 Design Task Force and what we were trying to achieve. 25 THE PRESIDING MEMBER: Thank you. 26 What is the status -- I don't know whether you 27 are the right panel. What is the status for the billing 28 unbundling? I believe there is some -- are you the Les Services StenoTran Services Inc. 613-521-0703 1471 BAKER/STEDMAN 1 panel we talk to about what is happened with that? Your 2 proposal is to bring forward an unbundling proposal some 3 time at the end of this July. Is that correct? 4 MR. BAKER: Yes. The ADR Agreement lays out 5 the fact that Union would file an application in July to 6 start that process. 7 THE PRESIDING MEMBER: I knew it was in the 8 ADR. I just wanted to confirm it. 9 And if you look forward now -- and this is 10 just a general question -- with regard to the 11 availability of gas supply and the availability of 12 transportation, do you see the general market tightening 13 up as you go forward, or do you see at the present time 14 this availability of transportation to Ontario where 15 there appears to be some flexibility continuing some 16 period of time? It is just a sort of forecast. I know 17 you don't really want to forecast, but an idea of your 18 impression of what the gas markets are. 19 MR. STEDMAN: Maybe I will just go to some 20 history of what's happened over the last year or so with 21 the expansion projects. 22 As you know, if you look at that Exhibit 8.1, 23 where we look at the market price versus TCPL tolls, if 24 you look back to 1996 when TCPL tolls were going at 25 anywhere from two to four times the toll, the reason for 26 that was that the transportation out of the western 27 Canadian basin into Ontario and into eastern Canada was 28 tight and that pipeline was operating at a very high Les Services StenoTran Services Inc. 613-521-0703 1472 BAKER/STEDMAN 1 load factor. That's what caused the market price to 2 increase above tolls to the extent it did. 3 Then when around 1998 there was an expansion 4 of the northern border system which comes into Chicago, 5 as well as the TransCanada system which totalled about 6 1.4 Bcf a day, as that pipeline was built and that was 7 put into the market place, you saw the market price come 8 down. And that's where you get this cross-over in that 9 exhibit in September of 1998 when the actual market fell 10 below the TCPL tolls and that is caused by excess 11 capacity in the market place. 12 So what we are seeing right now is as of 13 November 1st of this year you'll also have a new 14 pipeline, Alliance/Vector, which comes into Chicago and 15 then eastern Ontario and that will create another lump 16 of capacity. 17 So now what you have is a considerable amount 18 of excess capacity that's coming out of the western 19 Canadian basin, and at the same time, the tolls are 20 going down below the FT toll on TransCanada. You are 21 seeing the market price of the commodity increasing 22 because there is excess pipeline and there is a 23 tightening right now of the gas supply that's available. 24 You have probably heard a lot of reports about 25 the delivery of supply into the pipelines and is there 26 enough drilling in the western Canadian basin? Our 27 opinion is there is enough supply to meet future 28 demands. It's just a matter of the timing of when this Les Services StenoTran Services Inc. 613-521-0703 1473 BAKER/STEDMAN 1 all gets connected. 2 What I mean by that is that there is a large 3 demand for supply in northeastern U.S. and a lot of 4 cogeneration demands and industrial demands. These 5 pipelines will eventually get connected between 6 Alliance/Vector, northern border, these U.S. pipelines 7 coming into the northeast. As that gets connected, and 8 as the gas gets connected in Alberta and in the 9 Mackenzie Delta region and northeast B.C., and makes it 10 way into the northeast you will start to see a 11 tightening of that excess supply again. That transport 12 will fill up and you will see this discounted market 13 come back in line, in my opinion, and could exceed some 14 of the toll values that you will see on Alliance and 15 TransCanada. 16 So it is a very cyclical market and the market 17 does work. It just takes time. 18 MEMBER JACKSON: I am sorry, the timing for 19 when that might tighten up? What's your thinking on 20 that? Two years out, five years out, or have you any 21 feel for it? 22 MR. STEDMAN: That is somewhat speculative. 23 It could turn around as quickly as a couple of years or 24 a year. However, some of the forecasts that you would 25 see through the National Energy Board -- you could see 26 some reports through the Gas Research Institute -- some 27 of these forecasts show the system tightening up as 28 early as three years, some show five years. Les Services StenoTran Services Inc. 613-521-0703 1474 BAKER/STEDMAN 1 MEMBER JACKSON: Okay. And the expansion on 2 the TransCanada PipeLines' system that you referred to, 3 was that predominately on the U.S. portion or was that 4 also on the northern line? I don't recall whether I 5 have read that or not. 6 MR. STEDMAN: There was an expansion on the 7 northern line as well. 8 MEMBER JACKSON: So both were expanded during 9 that 1998 period? 10 MR. STEDMAN: That is correct and in fact 11 Union did get some of that capacity in 1999. We 12 actually received 34,000 cubic feet a day -- 13 approximately 36,000 GJs. 14 MEMBER JACKSON: It was an increase coming in 15 through the U.S. then. Was that what you were thinking 16 of? 17 MR. STEDMAN: Actually, at that point in time 18 when we received the 36,000 GJs, there was some in our 19 northern line and there was some at Parkway that we 20 received and we did sign a 10-year contract at that 21 point in time too. 22 MEMBER JACKSON: Okay. And the expansion into 23 the U.S. northeast, do you see some of that gas flowing 24 through the Union system? Is some of that going to flow 25 through and connect with this proposed Millennium 26 pipeline, or where does the Millennium pipeline fit into 27 this? 28 MR. STEDMAN: The market will eventually Les Services StenoTran Services Inc. 613-521-0703 1475 BAKER/STEDMAN 1 connect. Our preference obviously is to come through 2 Dawn -- 3 MEMBER JACKSON: Yes. 4 MR. STEDMAN: -- through some system. With 5 Vector connected, there's a good sized pipeline. The 6 market will connect that. Obviously, Union has a 7 preference to making Dawn a much more liquid hub, making 8 competition into Ontario actually much more competitive. 9 So we would expect, either through Millennium or through 10 some pipeline, that the northeast would be connected. 11 MEMBER JACKSON: Good, thank you. 12 THE PRESIDING MEMBER: Following on that 13 discussion, you rejected that some time in the future 14 that the pipeline system may tighten up. Then who will 15 be responsible with the new unbundled arrangements for 16 contracting for additional capacity? As I understand it 17 now, pipelines don't get built under NEB jurisdiction 18 unless there are some long-term contracts underpinning 19 new capacity. 20 Who will be responsible for, say, trying to 21 ensure that there's sufficient capacity to serve the 22 market in Ontario? 23 MR. BAKER: To the extent that an unbundled or 24 a customer electing the unbundled service who is serving 25 a number of end-use customers in the case of a marketer, 26 to the extent that the demand of those customers being 27 served by that marketer increased, we would expect that 28 it would be the marketer that would then be accountable Les Services StenoTran Services Inc. 613-521-0703 1476 BAKER/STEDMAN 1 to arrange that transportation capacity. 2 Now that could happen in a number of different 3 ways. They could go out directly themselves and sign a 4 long-term contract, or they could approach Union and 5 Union would facilitate getting into the queue and 6 acquiring that capacity on their behalf and we would 7 obviously require some commitment from the marketer in 8 that situation. 9 But to the extent that we continue to have 10 growth in Ontario, new customers, new residential 11 customers coming on, that will fall, in my view, 12 predominately to Union as its role as a system supplier 13 to ensure, just like we did in the 1997 situation, that 14 we had and we have sufficient capacity into Ontario to 15 serve all the system customers that are in our 16 portfolio. 17 So it could very well be that to the extent 18 that we have continued growth, customer demand in 19 franchise, the Union in the first instance may be 20 required to acquire that capacity when things tighten up 21 and again you are into the same cyclical situation when 22 marketers come in and want to facilitate moving 23 customers off system to a direct purchase offer. 24 THE PRESIDING MEMBER: The last question -- 25 and I am not sure whether you can, or cannot answer 26 this -- but in terms of your unbundling proposals, which 27 have been put forward, is on one side, and the other 28 side we have a direct access task force that has been Les Services StenoTran Services Inc. 613-521-0703 1477 BAKER/STEDMAN 1 working away and which has not yet provided us with a 2 report. 3 The question I am asking is: Are your 4 unbundling proposals that you have proposed and those 5 that have been agreed with in the ADR -- some of them 6 have been -- is there any danger of inconsistency 7 between these proposals and supposing the board were to 8 accept the proposals, or some version of the proposals, 9 and your understanding of where the direct access task 10 force may be coming forward with its recommendations? 11 I know you can't give them to me, I don't know 12 whether you remember, but can you at least give me some 13 indication of is there a danger here? 14 MR. BAKER: In my view, the unbundled services 15 that have been proposed and largely agreed to through 16 the ADR will be directionally consistent with where the 17 Direct Access Rule Committee is going. I think it's 18 looking at ensuring that there is appropriate unfettered 19 access to the distribution system and the services 20 offered by utilities. 21 So I would not expect that there would be 22 directionally anything coming out of the direct access 23 rules that would in any way be inconsistent with the 24 proposals that we have put forward. 25 THE PRESIDING MEMBER: Thank you, Mr. Baker. 26 Those are the Board's questions. 27 Mr. Penny, do you have any redirect? I 28 remembered this time. Les Services StenoTran Services Inc. 613-521-0703 1478 BAKER/STEDMAN 1 MR. PENNY: No, I do not, Mr. Chairman, but 2 thank you. 3 THE PRESIDING MEMBER: So I think we will take 4 our break now. It is 11 o'clock. Could we come back at 5 say 25 after 11:00 and then we can sit through to one 6 o'clock? That is one way to do it. I would like a 7 reasonable break this morning. 8 MR. PENNY: Yes, sir. 9 Thank you. 10 THE PRESIDING MEMBER: Thank you. 11 --- Upon recessing at 1100 12 --- Upon resuming at 1133 13 THE PRESIDING MEMBER: Please be seated. 14 Mr. Penny? 15 PREVIOUSLY SWORN: PAT ELLIOTT 16 PREVIOUSLY SWORN: RICK BIRMINGHAM 17 MR. PENNY: Yes. As you can see, 18 Mr. Birmingham and Ms Elliott are back with us to speak 19 to the third bundle of issues, which is off-ramp, system 20 expansion and service quality and additional risks and 21 benefits. 22 But before doing that, I think it was agreed 23 last week that they were also going to speak to the one 24 carryover from the previous cross-examination which was 25 G3.3, and I think it was perhaps Mr. Warren who wanted 26 to consider his position on that. 27 So my suggestion is we deal with G3.3 and then 28 move onto the issues that are in the third group of Les Services StenoTran Services Inc. 613-521-0703 1479 ELLIOTT/BIRMINGHAM 1 issues. 2 THE PRESIDING MEMBER: Thank you, Mr. Penny. 3 So I believe it is Mr. Warren and any other 4 parties who -- Mr. Thompson has already asked his 5 questions I believe. 6 MR. PENNY: Yes. 7 MR. WARREN: Thank you, Mr. Chairman. 8 CROSS-EXAMINATION 9 MR. WARREN: Panel, in light of Mr. Thompson's 10 cross-examination, I have only a very few questions on 11 this topic. 12 First of all, by way of general overview, the 13 document which has been produced at G3.3, page 1 of 2 14 was, as I understood it, a management forecast for 15 fiscal 2000. And when I say "management forecast", it 16 was actually going to be used by the company in managing 17 O&M for this year. Is that correct? 18 MS ELLIOTT: That's correct. 19 MR. WARREN: And is there a different 20 document, another document, Ms Elliott, which reflects 21 what I will call the planning -- that may be too 22 imprecise a term, but I will try it as a first 23 attempt -- planning for the PBR regime? 24 Let me rephrase it, Ms Elliott, in light of 25 the look of stunned surprise on your face. 26 Is there another document than this which 27 would budget according to planned reductions or 28 efficiencies in O&M for the PBR regime? Les Services StenoTran Services Inc. 613-521-0703 1480 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 MS ELLIOTT: No. This is the current version 2 of the 2000 forecast. There have been other versions of 3 it in the past two years, but it is the same plan 4 updated as time passes for the most current information. 5 This document reflects the most current forecast of O&M 6 for planning and management purposes. 7 MR. WARREN: Now, this may be a related 8 phenomenon, but I'm not sure. 9 Does this 2000 document reflect the 10 reorganization of the company? 11 MS ELLIOTT: Yes, it does. 12 MR. WARREN: And if I were to look at this 13 document and try to identify where the 177 eliminated 14 positions would be, where would I find that? 15 --- Pause 16 MS ELLIOTT: This is the financial 17 implications of the reorganization. We provided in 18 Undertaking G1.1 the organizational chart that shows the 19 staffing levels subsequent to the reorganization and 20 there was an undertaking response that broke down the 21 current staff levels by the new areas. 22 Undertaking G1.6. 23 MR. WARREN: In terms of the financial 24 implications of the 177 eliminated positions -- this may 25 have been asked of you in another context and I 26 apologize if I am duplicating it, but I couldn't find it 27 precisely -- are there costs associated with the 28 elimination of the 177 positions in the form of, for Les Services StenoTran Services Inc. 613-521-0703 1481 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 example, severance pay or buy-out packages. That is 2 question number one. 3 Question number two is: If so where would I 4 find it in this 2000 budget? 5 MS ELLIOTT: Those costs were accrued in 1999 6 and you will find them in the package filed on the 1999 7 information which was Exhibit B, Tab 2, Appendix H. On 8 Schedule 1 at Note 4 there are restructuring costs of 9 $15.8 million. The costs of the severances and 10 relocations associated with the restructuring were 11 accrued in 1999. 12 MR. WARREN: Okay. Thanks. 13 MS ELLIOTT: The -- 14 MR. WARREN: Now -- sorry. 15 MS ELLIOTT: The staffing levels, after the 16 reorganization were in Undertaking G3.1. 17 MR. WARREN: Now, if I can take you to page 1 18 of 2 and to line 28, "Organizational Effectiveness and 19 Development". Can you tell me what that is? 20 MS ELLIOTT: It's an area within our HR 21 department that is responsible for training, education, 22 professional development. 23 MR. WARREN: And would that include some 24 component of retraining your staff to deal with the PBR 25 regime? 26 MS ELLIOTT: That includes all of the employee 27 education and training. So to the extent that there are 28 courses that are recommended for management in moving Les Services StenoTran Services Inc. 613-521-0703 1482 ELLIOTT/BIRMINGHAM, cr-ex (Warren) 1 forward, they would be, I guess, researched and handled 2 out of that group. 3 MR. WARREN: Those are my questions. 4 Thank you very much, Mr. Chair. 5 THE PRESIDING MEMBER: Thank you, Mr. Warren. 6 Who is next? 7 Mr. Mondrow. 8 CROSS-EXAMINATION 9 MR. MONDROW: Thank you, sir. 10 Panel, just very briefly, and I expect for 11 you, Ms Elliott. 12 I was reading yesterday again the agreement 13 that Mr. Warren recorded on the transcript in respect of 14 this undertaking response and I wonder if I could just 15 read this to you and then ask you a couple of questions 16 about it vis-…-vis what you have produced. 17 The transcript of the transcribed comments of 18 Mr. Warren are found in Volume 3, page 346. Let me just 19 read that to you. It's only a couple of lines. In 20 recording his understanding of what you are to produce, 21 Mr. Warren states as follows: 22 "So as I understand it, Union has agreed 23 to provide that drilled down detailed O&M 24 budget. Number one. Number two, 25 Ms Elliott is going to make to make an 26 attempt to connect the dots between that 27 document and the Appendix H, page 4 28 document." Les Services StenoTran Services Inc. 613-521-0703 1483 ELLIOTT/BIRMINGHAM, cr-ex (Mondrow) 1 Now when I look at I gather it's Exhibit B, 2 Tab 2, Appendix H -- the exhibit you just referred to a 3 moment ago, Ms Elliott at Schedule 4 -- there are three 4 columns to have actual figures for 1999 O&M and Board- 5 approved figures for 1999 O&M. Yet the undertaking 6 response used a third set of figures for 1999, that 7 is -- no, I'm sorry, no, it doesn't, it uses the Board- 8 approved 1999 figures. 9 My question is why you didn't use the actual 10 1999 figures. Was there any reason? Or you just 11 interpreted the request as asking for Board approved? 12 MS ELLIOTT: I interpreted the request as 13 moving from the Board approved, the approved O&M of 14 $258 million to the 2000 forecast. 15 MR. MONDROW: At page 2 of G3.3, you have 16 illustrated a re-mapping for each of the line items from 17 the 1999 budget, and the 1999 budget is different from 18 the 1999 Board approved. Correct? 19 MS ELLIOTT: The detailed lines are different. 20 The total is $258 million. What we needed to do to 21 manage the Board-approved number was to revisit all of 22 the various budgets that were behind the submission in 23 499, to come up with a management budget for 1999 that 24 totalled the Board-approved number. So what you will 25 see at page 2 of Exhibit G3.3 is our management budget 26 for 1999. 27 MR. MONDROW: Which obviously chronologically 28 followed the Board's decision in the last rates case in Les Services StenoTran Services Inc. 613-521-0703 1484 ELLIOTT/BIRMINGHAM, cr-ex (Mondrow) 1 E.B.R.O. 499. 2 MS ELLIOTT: It probably preceded the decision 3 that followed the ADR Agreement. 4 MR. MONDROW: If I took the ratios, the 5 mathematical ratios for each of these line items as 6 across the new company departments and applied those 7 ratios to the figures in the actuals column at 8 Exhibit B, Tab 2, Appendix H, Schedule 4, would I get a 9 result that is relatively close in respect of trying to 10 map the actuals forward to the new organization and 11 compare that then to the 2000 forecast for the new 12 organization? 13 MS ELLIOTT: You are asking if, for example, 14 looking at the first line, Major Industrial Markets, if 15 you took the actuals as a percentage of the budget, 16 would that map to the new organization? I guess in the 17 case of where it's a one for one match to a new 18 organization area, yes. Where we have the original 19 grouping that's been split up in the new organization, 20 I'm not sure that that mapping would -- that that 21 proportioning would work. 22 MR. MONDROW: So anywhere on page 2 where I 23 see figures on a line in more than one column -- columns 24 being the new organization departments -- the 25 mathematical ratio approach might not work. 26 MS ELLIOTT: It might not give you the right 27 response, no. 28 MR. MONDROW: Okay. I was just trying to save Les Services StenoTran Services Inc. 613-521-0703 1485 ELLIOTT/BIRMINGHAM, cr-ex (Mondrow) 1 you some work. 2 Would it be a lot of work for you to provide 3 an amended G3.3 or an additional page that takes the 4 actuals from 1999 and maps those to the 2000 forecast 5 for the new organization? 6 MS ELLIOTT: I don't know whether I can do it. 7 I know that we used the budget for the purpose of 8 re-mapping to the new organization. Whether that's 9 available on an actual basis, I would have to make some 10 inquiries. 11 MR. MONDROW: Mr. Chairman, the point of the 12 question is really to be able to at the end of the day 13 compare what was actually spent in 1999, including all 14 of the cost savings, with what is forecast for 2000 on 15 this document. And I wonder if I could, through you, 16 ask Ms Elliott to, on a best efforts basis, inquire as 17 to whether that would be a lot of work, and if not, to 18 provide that reconciliation. 19 --- Pause 20 THE PRESIDING MEMBER: Mr. Mondrow, 21 Dr. Jackson is going to elaborate a little bit on it, on 22 the request you have asked. 23 MEMBER JACKSON: I think the Board feels that 24 that could be useful for its deliberations as well and 25 so if it's possible for Union to do that, we would like 26 you to do it. And Ms Elliott I might just say that we 27 would invite you to make and document any reasonable 28 assumptions that seem to be necessary in order to do Les Services StenoTran Services Inc. 613-521-0703 1486 ELLIOTT/BIRMINGHAM, cr-ex (Mondrow) 1 that mapping. 2 Can I first ask then, on the basis of that 3 request as I have stated it, do you think that is 4 possible? 5 MS ELLIOTT: I can certainly check to see what 6 we can do and do the best we can to get something that 7 reflects the actuals matched to the new organization. 8 MEMBER JACKSON: Thank you very much. 9 Do we need an undertaking number? 10 DR. WIGHTMAN: G9.1. 11 UNDERTAKING NO. G9.1: Ms Elliott 12 undertakes to provide an amended G3.3 or 13 an additional page that takes the actuals 14 from 1999 and maps those to the 2000 15 forecast for the new organization 16 MEMBER JACKSON: Thank you, Ms Elliott. 17 THE PRESIDING MEMBER: Mr. Mondrow. 18 MR. MONDROW: Thank you very much, 19 Mr. Chairman. 20 Those are all my questions for this panel. 21 Thank you, Ms. Elliott. 22 THE PRESIDING MEMBER: Are there any other 23 parties who wish to ask questions on this matter that 24 haven't already asked questions? 25 Well, I think we are finished with G3.3 then. 26 Mr. Penny? 27 MR. PENNY: I have no re-examination on 28 G3.3, sir. Les Services StenoTran Services Inc. 613-521-0703 1487 ELLIOTT/BIRMINGHAM, cr-ex (Mondrow) 1 THE PRESIDING MEMBER: Thank you. 2 MR. MONDROW: Sir, if I might just interrupt 3 and request to be excused. That was my discreet issue 4 for this round. I will be back for the Monitoring, 5 Reporting and Customer Review Panel and expect that will 6 likely be tomorrow. So I will take my leave for the 7 rest of the day. 8 THE PRESIDING MEMBER: Thank you, Mr. Mondrow. 9 Mr. Penny, it's yours now. 10 MR. PENNY: Yes, Mr. Chairman, I would now 11 propose that these witnesses have both been sworn, have 12 been testifying to other issues, and I do not have any 13 examination-in-chief on this particular aspect. 14 THE PRESIDING MEMBER: Okay. 15 So I don't know which is the lead off cross- 16 examiner. I can start with Mr. Warren. 17 FURTHER CROSS-EXAMINATION 18 MR. WARREN: Thank you, sir. 19 Panel, there are in this cluster of issues 20 three topics, as I understand it: off-ramps, system 21 expansion on service quality and additional risks and 22 benefits. And I'm going to deal as briefly as I 23 mercifully can with each of them in order. And I will 24 start with off-ramps, if I can. 25 In that context, if you could begin by turning 26 up page 54, of Exhibit B, Tab 2, of the original 27 prefiled evidence. 28 MR. BIRMINGHAM: We have that, Mr. Warren. Les Services StenoTran Services Inc. 613-521-0703 1488 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 MR. WARREN: I want to begin, Mr. Birmingham, 2 just by understanding what an off-ramp is and how the 3 process will work from Union's point of view. At the 4 bottom of page 54, you describe an off-ramp as: 5 "Typically, off-ramps are invoked because 6 an event has occurred that indicates a 7 serious flaw in the framework that had 8 not been foreseen when it was 9 introduced." (As read) 10 There is a gloss on that, if I may describe it 11 that way, in interrogatory Exhibit C26.29 which is in 12 answer to interrogatory from Nova Chemicals. If you can 13 turn that up as well. 14 MR. BIRMINGHAM: We have it, Mr. Warren. 15 MR. WARREN: And in the second paragraph of 16 the response, it reads: 17 "Union would propose to use the off-ramp 18 under circumstances where its financial 19 position declined to a level that would 20 prevent the company from meeting its 21 operating requirements." (As read) 22 Is that what we are to understand by a 23 "serious flaw in the framework that had not been 24 foreseen when it was introduced"? Is it just that one 25 circumstance or are there others that are contemplated? 26 MR. BIRMINGHAM: There aren't any others that 27 are contemplated, Mr. Warren. The concept here was 28 really to have a look at the PBR parameters in the event Les Services StenoTran Services Inc. 613-521-0703 1489 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 that there was some unforeseen circumstance that would 2 basically prevent Union from operating, prevent it from 3 accessing capital markets and being able to serve 4 customers. 5 MR. WARREN: So when you say at page 55 of the 6 prefiled evidence, that: 7 "Union has a identified only one 8 off-ramp, a serious decline in Union's 9 financial position that would prevent the 10 utility from operating and perhaps 11 leading to financial failure...". 12 (As read) 13 You say you have identified it. Is that it or 14 are there others that would be like that that you might 15 contemplate? 16 MR. BIRMINGHAM: No, that's it. 17 MR. WARREN: That's it. Now, as I understand 18 the process, which is described in the evidence, Union 19 would identify the circumstance as having existed and 20 would go to the Board with a request for relief. Is 21 that correct? 22 MR. BIRMINGHAM: Not in the first instance, 23 Mr. Warren. It was our intention to approach customers 24 through the customer review process, and that was the 25 intention at lines 11 and 12 of page 55 where we bring 26 this forward through the customer review process. To 27 the extent that a consensus was reached with the 28 customers and intervenors through that process, then we Les Services StenoTran Services Inc. 613-521-0703 1490 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 would file whatever amendment was appropriate with the 2 Board for approval and implementation. It was only in 3 the circumstance where we couldn't reach a consensus 4 that we would then perhaps take it to the Board. 5 MR. WARREN: And the range of relief which the 6 Board might grant in those circumstances would include a 7 change in the parameters. Is that correct? 8 MR. BIRMINGHAM: That's possible, yes. 9 MR. WARREN: And it is also possible that it 10 might include a cancellation, if you wish, of the PBR 11 regime in a return to cost of service regulation? 12 MR. BIRMINGHAM: That's possible. It's also 13 possible that they wouldn't make any change. 14 MR. WARREN: I just want to understand the 15 range of possible changes. One is to do nothing. A 16 second is to change the parameters. A third is to 17 return to cost of service. Is there any other 18 possibility? 19 MR. BIRMINGHAM: In terms of trying to 20 identify the possible spectrum of outcomes, I think you 21 probably captured it where, at one end, the intervenors 22 and customers, through the customer review process, and 23 then ultimately the Board, would find that in fact the 24 circumstance was not related to the PBR parameters, and 25 then, in that case, would do nothing. I think at the 26 other end of the spectrum they might find that simply 27 fine-tuning the PBR parameters wasn't going to be 28 possible and that they would have to have some other way Les Services StenoTran Services Inc. 613-521-0703 1491 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 to go forward. And I presume that that would 2 potentially mean a return to cost of service. 3 MR. WARREN: Now, as I understand the process 4 which has been described, this is one that Union 5 initiates. In other words, Union takes it to the 6 customer consultation, customer review process, and if 7 unsatisfied Union then takes it to the Board. Do I 8 understand that correctly? 9 MR. BIRMINGHAM: That's generally right. The 10 decline in our financial position would be largely 11 preceded by a decline in our bond ratings, and that 12 would be the event that would trigger the possible 13 approach to the customer review process, and ultimately 14 to the Board. 15 MR. WARREN: Is there any circumstance where a 16 customer or customer groups could first go to the 17 customer review process and then to the Board saying 18 that, "We want either the parameters changed or a return 19 to cost of service"? 20 MR. BIRMINGHAM: No. 21 MR. WARREN: Now, can I ask you to turn up in 22 the same prefiled evidence, Exhibit B, Tab 2, page 4? 23 And as I understand that evidence, you list the 24 objectives for the new PBR framework and as I understand 25 your evidence, these are the objectives which you have 26 followed in designing the PBR framework. Is that 27 correct? 28 MR. BIRMINGHAM: That's right. Les Services StenoTran Services Inc. 613-521-0703 1492 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 MR. WARREN: And is it also fair to say that 2 among the considerations the Board might bring to bear 3 in assessing your PBR plan is whether or not you have 4 followed those objectives. Is that fair? 5 MR. BIRMINGHAM: Yes. 6 MR. WARREN: Now, one of the objectives -- 7 indeed the first of the objectives -- is fairness for 8 all stakeholders and appropriate balance between risks 9 and opportunities. And in that context, let me put this 10 proposition to you for your response. Would it not be 11 consistent with that criteria, "fairness to all 12 stakeholders", that there be what I might call a 13 symmetric off-ramp and that is an opportunity for 14 stakeholders to come to the Board asking for a change in 15 either the parameters or an abandonment of PBR? 16 MR. BIRMINGHAM: Not in our view, Mr. Warren. 17 In our view the customers continue to get the stretch 18 factor, which is the upfront commitment to a higher 19 productivity than Union has historically been able to 20 achieve. They also get protection on the service 21 quality with respect to the service quality indicators. 22 So from our standpoint, there isn't any necessity for it 23 to be symmetrical in that respect. 24 MR. WARREN: If for example, Mr. Birmingham, 25 it were the perception of the stakeholders -- consumers, 26 if you wish -- that the return generated by Union under 27 the PBR was simply too high, that it violated this 28 principle of fairness -- let's assume that circumstance Les Services StenoTran Services Inc. 613-521-0703 1493 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 for a moment. Again, I put the proposition to you, 2 would it not be consistent with this criterion of 3 "fairness for all stakeholders" that they be allowed to 4 go to the Board and say there should be a change in the 5 parameters? 6 MR. BIRMINGHAM: I don't believe so, 7 Mr. Warren. I don't think it needs to be symmetrical. 8 What we are talking about is an improvement in Union's 9 financial position with respect to its return on equity, 10 as I take the measure that you are using. And any 11 increase in that financial position is going to have to 12 be earned. That is we are going to have to make 13 investments to improve productivity, we are going to 14 have to make investments to grow and we are going to 15 have to manage the additional exposures that are under 16 the price cap. So I don't see any concern that the 17 Board would have or that, frankly, customers should have 18 to the extent that the utility is successful in doing 19 that. 20 MR. WARREN: Now, in fairness, Mr. Birmingham, 21 you have addressed this question -- or rather, 22 Ms Elliott has addressed this question -- in a number of 23 interrogatory responses, and I will simply point you to 24 the baseline interrogatory response, and that is a Board 25 Staff Interrogatory C1.141. 26 Now you have given, as I understand, 27 essentially three -- the Board staff asked you the 28 question to explain why, in the absence of assuring Les Services StenoTran Services Inc. 613-521-0703 1494 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 formula for returns in excess of some level, Union has 2 not seen fit to include an off-ramp that might protect 3 ratepayers. And my gloss on your answer is that there 4 are really three components to the answer. The first is 5 that the off-ramp, as you have designed it, protects 6 ratepayers and the company's interest from the risk of a 7 failure of the utility. Correct? 8 MR. BIRMINGHAM: Yes, that is the concept that 9 is expressed in the first paragraph that would prevent 10 the company from being able to serve customers, and also 11 would preclude customers from receiving that service. 12 MR. WARREN: So do I understand that that 13 answer is a statement that the design of the off-ramp is 14 intended to protect both the utility and ratepayers from 15 at least one category of risk which is the friability 16 of the utility. Correct? 17 MR. BIRMINGHAM: That is right. 18 MR. WARREN: Now, the second answer, or the 19 second component of the answer, is that ratepayers 20 require protection from excessive and unpredictable rate 21 increases, not utility earnings. And may I take it that 22 that is your view of it, but you would agree that the 23 ratepayers might have a different view of a fairly 24 balanced PBR regime that they would want, in other 25 words, to be protected from excessive earnings. Is that 26 not reasonable? 27 MR. BIRMINGHAM: No, I don't think it is, 28 Mr. Warren. As you say, what customers want are just Les Services StenoTran Services Inc. 613-521-0703 1495 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 and reasonable rates and to the extent that the price 2 cap proposal provides that, that is the protection that 3 they need. There isn't anything with respect to 4 utilities or anything that they need protection from. 5 MR. WARREN: Let me look -- I have your answer 6 on that. Thank you. 7 Now, let me look at the third category which 8 is in the last paragraph of the answer. 9 "Burden of proof continues to be on Union 10 annually during the customer review 11 process to ensure that rate changes 12 comply with the approved PBR Agreement. 13 The Board will hear issues where parties 14 cannot reach a consensus through this 15 process." (As read) 16 Certainly in looking at that answer you would 17 agree that the annual process will not, as I understand 18 it, have -- an annual customer review process will have 19 any discussion about whether or not Union's findings are 20 excessive. Is that fair? 21 MR. BIRMINGHAM: That is right. That 22 paragraph is intended to cover the fact that it is -- 23 the onus is on Union to provide the compliance with the 24 price cap during the customer review process. It 25 doesn't deal with the quantum of Union's earnings with 26 respect to some yardstick. 27 MR. WARREN: Now, let me put finally just in 28 one last cluster of questions on this issue. Les Services StenoTran Services Inc. 613-521-0703 1496 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 Let's suppose for a moment, Mr. Birmingham, 2 that the Board were to accept the notion that the 3 ratepayers consistent with the criterion of fairness 4 were entitled to be able to bring forward in the 5 customer review process and then to the Board the 6 question of whether or not the parameters as designed 7 gave -- resulted in Union having excessively high 8 earnings. 9 If the process were that the ratepayers could 10 bring that forward to the customer review process, 11 barring agreement they would come to the Board and they 12 would bare, as I understand the process, the ratepayers 13 would bare the onus of satisfying the Board that the 14 system wasn't working in a fair manner. 15 Now, if that is the -- if I have accurately 16 described the system, can you tell me what is wrong with 17 the ratepayers having the opportunity to do that if they 18 bear the burden of having to satisfy the Board? What is 19 wrong with that, Mr. Birmingham? 20 MR. BIRMINGHAM: I think a couple of things 21 from Union's perspective, Mr. Warren, I just want to 22 make sure I have the assumptions right. 23 The assumption here is that the Board would 24 make a finding with respect to the parameters of the 25 price cap plan and Union would put those into effect. 26 And to the extent that during a given year's annual 27 customer review process, ratepayers are then able to 28 take a look at the utility's actual earnings and if they Les Services StenoTran Services Inc. 613-521-0703 1497 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 felt that there was something improper about the level 2 of those earnings, they could bring that forward to the 3 Board for a redetermination of the price cap parameters. 4 Do I have that right? 5 MR. WARREN: Yes, I quarrel with the use -- 6 the notion of the word "improper". If it was -- if the 7 earnings were simply too high and if the ratepayers 8 perceive that that didn't represent a fair sharing of 9 risks and benefits. I have put it in that more anodyne 10 language. 11 MR. BIRMINGHAM: I think there is two 12 difficulties with it, Mr. Warren. The first one is that 13 the purpose of the price cap is to set out for customers 14 an up-front commitment to productivity and to the extent 15 that the company can meet and/or exceed that, then there 16 are rewards that flow from that. 17 As I understand your proposal of what happened 18 in that case, is that to the extent that the utilities 19 was successful that could then be returned to ratepayers 20 in whole or in part based on whether customers could 21 then make their case to the Board for some sharing of 22 those gains. And I think from my standpoint that 23 certainly looks a lot like cost of service regulation. 24 So I am not sure that there would be a fundamental 25 difference in the outcome between cost of service 26 regulation or the proposal that you have presented. 27 MR. WARREN: Just finally on this point, can 28 we agree, although we disagree I think, Mr. Birmingham, Les Services StenoTran Services Inc. 613-521-0703 1498 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 it is fair to say, on whether or not this ought to be 2 applied. But can we agree, at least at this point, that 3 a concern on the ratepayers about excessive earnings 4 would be mitigated through the implementation of some 5 form of earnings sharing mechanism? 6 MR. BIRMINGHAM: No, I disagree with that, Mr. 7 Warren. I have spoken at length about why I don't think 8 an earnings sharing proposal is appropriate, primarily 9 based on the way that the parameters have been set with 10 respect to this. And -- 11 MR. WARREN: Mr. Birmingham, with respect, I 12 wasn't asking you whether or not you think it is 13 appropriate. I understand you don't think it is 14 appropriate. I am just asking structurally a need for 15 what I will describe as a symmetric off ramp, that is an 16 opportunity for the ratepayers to say to the Board that 17 the terms of the PBR need to be changed because of 18 excessive earning. The need for that kind of off ramp 19 would be eliminated if we had an earnings sharing 20 mechanism. Is that not fair? 21 MR. BIRMINGHAM: I don't think it is fair, 22 Mr. Warren, because my problem is that I don't believe 23 that ratepayers need to be concerned about the level of 24 the earnings of the utility given the tightness of the 25 price cap parameters that Union has proposed. What they 26 need to be concerned about, and rightfully should be 27 concerned about, is whether the utility is charging them 28 just and reasonable rates. And that is our proposal, Les Services StenoTran Services Inc. 613-521-0703 1499 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 that will be the proposal that comes out of the Board's 2 decision in this case. 3 MR. WARREN: Okay. Thanks, Mr. Birmingham. I 4 have your answers. Can I then turn briefly to the 5 question of Service Quality Indicators. 6 MEMBER JACKSON: Mr. Warren, before you move 7 on, could I just ask a couple of questions and make sure 8 I have understood the answers properly? 9 MR. WARREN: Absolutely. 10 MEMBER JACKSON: Mr. Birmingham, I think in 11 response to questions from Mr. Warren you seemed to 12 understand him to be saying that the ratepayers might 13 want to be able to come to the Board and ask for a 14 return of some excess earnings. Did I understand that 15 correctly? 16 MR. BIRMINGHAM: The proposition that 17 Mr. Warren put to me was that to the extent that some 18 parties felt like there were earnings from a utility 19 that were too high against some bench mark or standard, 20 that they would then have the ability to approach the 21 Board and do something about that. I take it one of the 22 possibilities might have been having that returned to -- 23 some portion returned to ratepayers or otherwise 24 adjusting the price cap parameters. 25 MEMBER JACKSON: Right. And I think that is 26 what I understood to be the one concept which you 27 address. And I just wondered if to help us you might 28 also address the idea that they could come to the Board Les Services StenoTran Services Inc. 613-521-0703 1500 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 and ask that rates somehow be lowered to reduce earnings 2 prospectively, but not necessarily ask for any 3 adjustment to earnings up to that point in time. In 4 other words, no rebate to the customer just let's get 5 things back in line for the future. 6 So could you address that scenario too? I 7 just wanted to know what the company's position is, 8 whether it would find that more palatable but still not 9 palatable or how do you feel about it? 10 MR. BIRMINGHAM: I think it is equally 11 unpalatable is the way I would describe it, sir. The 12 approach then would take whatever productivity gain the 13 utility could manage in a particular year and put that 14 into rates perspectively. And so I think what happens 15 is ratepayers get the upfront commitment to productivity 16 and to the extent that on a year-by-year basis the 17 utility is able to exceed that target, all of that then 18 gets returned to ratepayers in a subsequent year. And 19 again, I think that, from my standpoint, looks a lot 20 like cost of service in terms of its impact. 21 I think my main concern, Dr. Jackson, would be 22 the fact that if the company and the ratepayers knew 23 that that was going to be the case, I don't think that 24 you would have the type of productivity incentive that 25 price cap is intended to generate. 26 I do think you would continue to have on a 27 one-year type of incentive as we have had under cost of 28 service regulation, but I don't see any fundamental Les Services StenoTran Services Inc. 613-521-0703 1501 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 change to the level of the productivity incentive that 2 would then exist in the framework to the extent that you 3 knew that on a one-year basis that was going to be 4 returned. The company would then be at risk for making 5 investments in productivity gains that needed to be -- 6 have benefits recaptured over a longer period. 7 MEMBER JACKSON: The answer doesn't surprise 8 me, but thank you for giving it to me. 9 MR. BIRMINGHAM: I don't like surprising the 10 Board. 11 MEMBER JACKSON: Well, that is good. 12 The other aspect of that line of questioning 13 which I wanted to just explore briefly was this question 14 of symmetry and I don't have any firmly formulated views 15 on that, of course, at the moment. 16 Mr. Warren explored the possibility of the 17 company getting into financial difficulty because its 18 earnings were presumably too low and you referred us to 19 a Board interrogatory -- I'm sorry, an interrogatory 20 response on that. 21 It seemed to me that the company was saying 22 that if it did get into trouble that the customers might 23 be subject to some serious risk of not getting service. 24 I wonder if we could just explore that a bit? 25 I know it is hypothetical because it hasn't 26 happened yet and I'm pretty sure that the Board wouldn't 27 desire to put in place a form of regulation where that 28 was likely to occur. But, similarly, they might not Les Services StenoTran Services Inc. 613-521-0703 1502 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 want to put in a form of regulation where equity returns 2 exceeded 30 per cent. I mean, at both ends of the 3 spectrum those are undesirable effects, I would think. 4 So on a purely hypothetical basis, if you did 5 get into trouble and your debtholders exercised rights 6 to take over control of the system because the company 7 defaulted on some debt issue, do you think that service 8 would stop to your customers, or do you think a trustee 9 might come in and operate the system using the same 10 staff, giving them the same pay and bonus structure and 11 that somehow customers might still be served? 12 If you would just comment on that line of 13 thinking, sir. 14 MR. BIRMINGHAM: In my view, Dr. Jackson, we 15 would never get to that point. 16 First of all, the intention of the off-ramp 17 really is that we never use it. We think that given the 18 way that the parameters have been set out we can manage 19 the exposures under any reasonable scenario. 20 I think only in the circumstance where we 21 would have a number of exposures come together 22 concurrently that we may get in a situation where we 23 start to see either declines in our bond ratings, then 24 followed by the potential for restricted access to the 25 capital markets. 26 In the circumstance that we are referring to 27 in the interrogatory was a situation where to the extent 28 that we couldn't get incremental funding from the Les Services StenoTran Services Inc. 613-521-0703 1503 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 markets that we may not be able to serve new growth on 2 this system because it would be financing the expansion 3 of the system growth -- 4 MEMBER JACKSON: Okay, I'm sorry -- 5 MR. BIRMINGHAM: -- but that would be well 6 before we would ever get into a circumstance where 7 bankruptcy was pending, that's for certain. 8 MEMBER JACKSON: If bankruptcy were pending, I 9 take it would a reasonable assumption that somehow 10 customers would still get service? 11 MR. BIRMINGHAM: Yes. 12 MEMBER JACKSON: Thank you. 13 Mr. Warren, thank you for that. 14 MR. WARREN: Thank you, Dr. Jackson. 15 With apologies, Mr. Birmingham, I'm now going 16 to -- Dr. Jackson parsed the answer to my question, now 17 I'm going to parse the answer to his question. 18 MEMBER JACKSON: Thank you. 19 MR. WARREN: I just want to do this for the 20 purpose of getting the record straight. 21 One scenario is where there is, if you wish, a 22 return to the shareholders of some excess profit after 23 the fact, and you said you weren't happy about that. 24 Then Dr. Jackson asked you about the second 25 possibility, which is a tinkering with the formula, an 26 adjustment of the formula going forward. Your answer, 27 which I made a note of, was that that was unacceptable. 28 And you put it, if I may say, using a strong adjective Les Services StenoTran Services Inc. 613-521-0703 1504 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 in absolute terms -- in that you said "it would be 2 unacceptable if the formula were changed to take away 3 all of the profits that they had made". 4 So my question is a third variation. If the 5 formula were adjusted to allow Union to keep some 6 portion of its incentives, the gains from the 7 incentives, but return some of those to the ratepayers, 8 would that still be unacceptable to you? 9 MR. BIRMINGHAM: Yes. I think the way I 10 responded to Dr. Jackson is that it would be equally 11 unpalatable and that would be returning any of the 12 productivity gains beyond the upfront commitment to 13 ratepayers in whole or in part. So I covered both of 14 those, Mr. Warren. 15 The one comment I would make is that I know 16 there are some jurisdictions who take a look at whatever 17 the utilities earnings are against some benchmark and 18 incorporate some of that for the parameters from their 19 second generation PBR, but it's not typical that they be 20 included in the year-over-year determination of the 21 parameters in the first PBR. 22 MR. WARREN: Thanks. 23 As promised, I now want to move on to service 24 quality indicators. I only have two categories of 25 questions on this. 26 The first is a response to a couple of 27 suggestions from Dr. Bauer -- I don't know that you need 28 to turn up his evidence, but it's found on page 39 if Les Services StenoTran Services Inc. 613-521-0703 1505 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 you do -- and that is this: 2 Dr. Bauer has suggested two detailed 3 additions, if you wish, to the service quality 4 indicators. The first is the collection of customer 5 survey data collected by an independent party to allow 6 an assessment of a customers' experience under the new 7 framework. 8 What, if any, objection would you have to the 9 use of that kind of customer survey data? 10 --- Pause 11 MR. BIRMINGHAM: I guess there are a couple of 12 things, Mr. Warren. 13 The first one is that we don't have a customer 14 satisfaction or customer service quality measure in a 15 comprehensive way laid out here. We have specific ones 16 that we have identified in the evidence that deal with 17 the service quality that customers receive. 18 So there isn't one that is specified here 19 other than as a high level, and we don't have one 20 specified by Union at this point. 21 The second concern with trying to develop this 22 is that there are a number of costs that go along with 23 that, but more than that is you need to be able to rely 24 on the outcome. Our experience with customer surveys is 25 that there are a number of things that can impact a 26 customers' response including, for instance, a change in 27 the commodity cost of gas, whereas what we are dealing 28 with here really are the delivery rates under price Les Services StenoTran Services Inc. 613-521-0703 1506 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 caps. So there would be a number of things that would 2 have to be developed. 3 Now, having said that, to the extent that 4 customers were interested in having this type of 5 measure, we have committed to working with customers 6 through the review process to develop additional service 7 quality indicators, because we realized that moving into 8 a slightly different environment, and certainly moving 9 under a different regulatory framework, might require 10 different service quality indicators than we have had in 11 the past. 12 So to the extent that customers wanted this, 13 we do have a forum in which we can develop and 14 ultimately implement this even during the term of the 15 first price cap. 16 MR. WARREN: Let me just parse that response. 17 First of all, you indicate that you have five 18 specific service quality indicators and not a general 19 customer satisfaction. If customer surveys were 20 designed to deal with the specific SQIs, would that meet 21 your first concern? 22 MR. BIRMINGHAM: This is a customer survey 23 that would deal with pipeline system integrity as an 24 example. 25 MR. WARREN: Well that's a bad example. 26 Let's take the second one, an achievement of 27 65 per cent telephone response with 20 seconds. 28 Let's suppose you have a customer survey and Les Services StenoTran Services Inc. 613-521-0703 1507 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 the customer survey said, you know, "They take a long 2 time to answer my phone, a really long time". So it's 3 designed specifically to address that. It's not just 4 some generalized customer satisfaction survey, but tied 5 to at least the four -- I'm sorry, at least the three of 6 them that may lend themselves, numbers two, three and 7 four. Would that deal with your objection -- with that 8 objection? 9 MR. BIRMINGHAM: Well I think it would, 10 Mr. Warren, but I'm not sure why you would want to do 11 that. 12 There would be an additional cost to put that 13 in place and we already have systems that measure these 14 and they are basically binary in their outcomes. That 15 is, either we achieve it or we don't. 16 MR. WARREN: The second objection you had was 17 that a customer survey -- this is my somewhat crude 18 metaphor for it -- a customer survey is a bit like 19 flypaper and you get a lot of stuff stuck to it that you 20 don't want to and you may get people objecting to the 21 cost of the commodity rather than the delivery 22 performance. 23 If I have correctly captured it, is it not 24 fair that even if you had that kind of customer survey 25 response in the customer review process you could argue 26 that this customer survey really doesn't help very much 27 and the SQI shouldn't be adjusted. Is that not fair? 28 There is an opportunity in other words in the Les Services StenoTran Services Inc. 613-521-0703 1508 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 process for you to discount or argue that it should be 2 discounted -- the survey results. 3 MR. BIRMINGHAM: This is with respect to 4 generating a customer survey that takes into account not 5 the specific service quality indicators, as listed at 6 page 58, but something more general of the customer's 7 experience under PBR? 8 MR. WARREN: No. I was responding to your 9 concern, and your concern was that customer survey data 10 may elicit complaints which were really driven by a 11 concern about the cost of the commodity and not about 12 delivery performance. I was responding to that by 13 saying is it not fair to say that in the customer review 14 process, or indeed before the Board, that you have an 15 opportunity to say that this particular customer survey 16 data is not very useful because the customers are really 17 complaining about other things like commodity price. 18 MR. BIRMINGHAM: I think there is that 19 possibility, but my point earlier was that to the extent 20 that parties were interested in having a customer survey 21 service quality indicator that would deliver some 22 empirical information about the customer's experience 23 under PBR, I think a properly designed one could be 24 useful. 25 MR. WARREN: Now the second suggestion that 26 Dr. Bauer makes -- a specific suggestion is again found 27 on page 39 -- is an indicator about employee safety 28 information to be kept at at least the present level. Les Services StenoTran Services Inc. 613-521-0703 1509 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 What objection, if any, would Union have, having that as 2 one of its SQIs? 3 --- Pause 4 MR. BIRMINGHAM: I don't think there's any 5 objection in principle, Mr. Warren, because Union is 6 responsible for employee safety. That is something that 7 we take seriously and we monitor anyway. The question I 8 think is whether that's something that is appropriately 9 reported to the Board in the context of regulating our 10 rates. It's our view that while that is management's 11 responsibility we will continue to discharge that 12 responsibility. 13 MR. WARREN: Now the second issue I wanted to 14 deal with respect to service quality indicators arises I 15 guess from a process. If I understand the process, 16 there is an annual report as part of the customer review 17 process on your achievement under meeting the standards 18 of the service quality indicators. Correct? 19 MR. BIRMINGHAM: That's right. 20 MR. WARREN: If as a result it goes through 21 the customer review process, and what happens then, 22 Mr. Birmingham, if you have not met one or more of the 23 service quality indicators? Does that go to the Board 24 then? 25 MR. BIRMINGHAM: We have laid out the process 26 on pages 56 and 57. The report to all of the 27 participants in the customer review process would 28 include a report on the causes of any service quality Les Services StenoTran Services Inc. 613-521-0703 1510 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 indicator and their proposed remediation. 2 In addition there would be a follow-up report 3 that would go through the customer review process to the 4 extent that parties agreed with that then the report 5 would be given to the Board. To the extent that parties 6 did not agree with potentially either the causes of the 7 nest indicator or the remediation that those could go to 8 the Board. 9 MR. WARREN: Now one of the possibilities 10 which you outlined on page 57 is the possibility of an 11 after the fact penalty which the Board might approach. 12 Is this correct? 13 MR. BIRMINGHAM: That's right. 14 MR. WARREN: Now, given that you contemplate 15 that the Board might after the fact impose a penalty of 16 some kind on you for missing one or more of the service 17 quality indicator standards, what is the problem with 18 there being a penalty in advance as an incentive to your 19 meeting the service quality indicators? 20 MR. BIRMINGHAM: I think there's a couple of 21 problems. One is I wouldn't want to have a thoughtless 22 approach to the application of the penalties, that is 23 there should be some consideration of the prudence of 24 the company's actions. 25 So to the extent for instance -- we will stay 26 with the example of telephone responsiveness -- that the 27 collective bargaining agreement with Union's unionized 28 workforce had expired and we were managing through a Les Services StenoTran Services Inc. 613-521-0703 1511 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 strike situation, we may well miss that service quality 2 indicator, but not for any particular reason that is 3 associated with PBR. We were just simply in that 4 situation and managing the best that we could in 5 handling all the operations out on our districts. So to 6 that extent, I wouldn't want it to be applied up front. 7 I think the second thing is that there isn't 8 any real measure of what the approach should be. I 9 think Mr. Hemphill referred to that in his testimony in 10 Volume 6, pages 866 to 867. That is you really need 11 some information to try to measure what the harm would 12 be to customers if there was going to be a penalty and 13 presumably it would vary among the service quality 14 indicators. We simply don't have any information to do 15 that assessment at this point. 16 MR. WARREN: Mr. Birmingham, let me just take 17 your answer and apply it in the context of what you have 18 given in your prefiled evidence. At page 57, you 19 contemplate specifically the possibility of the Board 20 imposing an after the fact financial penalty. Now at 21 that point I presume Union could say a financial penalty 22 is inappropriate because we were prudent, but the causes 23 of the failure were outside of our control. Correct? 24 MR. BIRMINGHAM: That's one possibility, yes. 25 MR. WARREN: So how is that different if you 26 have a penalty prescribed upfront subject to Union's 27 persuading the Board that they behaved appropriately and 28 prudently, and it was out of their control? What's the Les Services StenoTran Services Inc. 613-521-0703 1512 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 difference? 2 MR. BIRMINGHAM: In that case, I don't think 3 there is much difference. 4 MR. WARREN: Now, the second one which is, if 5 I can paraphrase it, a calibration of a penalty to the 6 degree of harm resulting from a failure to meet the SQI 7 standards. If that's going to be the case, is it not, 8 under your proposal when somebody asks the Board to 9 apply a financial penalty? They are going to have to 10 persuade the Board that an appropriate penalty is X 11 given the nature and extent of the failure. It's the 12 same thing, isn't it? 13 MR. BIRMINGHAM: They would have to support 14 the amount that they were advocating as a financial 15 penalty, yes. 16 MR. WARREN: How does that differ from having 17 the penalties prescribed, having the notion of a penalty 18 prescribed in advance as an incentive to comply? 19 MR. BIRMINGHAM: There isn't any way to 20 quantify that in advance based on empirical information. 21 MR. WARREN: I have your answer, thanks. 22 Can I move on then finally to the issue of 23 additional risks and benefits. This is found in your 24 prefiled evidence beginning at Exhibit B, Tab 2, page 64 25 and following. 26 Now, high level of generality -- 27 MR. PENNY: Sorry, can I interrupt just to ask 28 for the page reference again? Les Services StenoTran Services Inc. 613-521-0703 1513 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 MR. WARREN: Sorry. Page 64 and following. 2 MR. PENNY: Thank you. 3 MR. WARREN: Exhibit B, Tab 2, page 64. 4 Just by way of introduction, panel, I want to 5 understand what these risks -- what this list of risks 6 is intended to do. Is this intended to indicate to the 7 Board that these are the risks which Union is going to 8 have to manage and that, therefore, the allocation of 9 risks and benefits through the PBR formula is an 10 appropriate one? Is that what it's intended to do? 11 MR. BIRMINGHAM: The intention was to get a 12 comparative assessment of the risk that Union was 13 managing within its price cap parameters compared to how 14 those risks would otherwise be managed under a cost of 15 service framework. 16 MR. WARREN: Do I understand it though -- 17 again at a high level of generality -- Mr. Birmingham, 18 that if the Board were to conclude, for example, that 19 one or more of the listed risks did not in fact 20 represent a significant risk for Union, that the Board 21 should therefore look to recalibrating the formula in 22 order to better balance risks and benefits? Is that 23 true? 24 MR. BIRMINGHAM: I think, generally speaking, 25 the assessment of the risk goes to the amount of the 26 stretch factor that would be included in the 27 productivity commitment, that's right. 28 MR. WARREN: Okay. Now, is it fair for me to Les Services StenoTran Services Inc. 613-521-0703 1514 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 assume, Mr. Birmingham, that as a prudent manager of its 2 business, Union will have done its own internal risk 3 assessment with respect to each of these risks as part 4 of its business planning for PBR? 5 MR. BIRMINGHAM: That's right and we filed 6 that assessment not just in the text at pages 64 to 79, 7 but also at Appendix G. 8 MR. WARREN: All right, let's deal with them 9 then, seriatim, beginning at page 65. "Pricing 10 Volatility Risk". 11 Now, confessing in advance my embarrassment at 12 my dimness on this, among many other issues, I'm not 13 sure I understand the nature of the risk for Union from 14 pricing volatility. This is a risk for consumers that 15 prices may go up or down. What's the risk from Union's 16 perspective? 17 MR. BIRMINGHAM: Well, the corresponding risk 18 is that to the extent that under cost of service, 19 Union's rates would be more volatile based on changes in 20 their cost. That will not happen under the price cap 21 and Union will have to manage that on a year over year 22 basis. 23 MR. WARREN: As I understand the proposal 24 though, would I be right in saying that residential 25 consumers do bear some risk of price volatility from the 26 following sources: number one, the use of the basket 27 arrangement? Residential consumers might, for example, 28 have a price that would vary from a zero increase Les Services StenoTran Services Inc. 613-521-0703 1515 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 upwards to whatever it is, 3, 4, 5 per cent? Is that 2 not fair? They continue to bear that price volatility 3 risk? 4 MR. BIRMINGHAM: There is pricing flexibility 5 in the service basket design to the extent that the 6 rates could go up as much as 2.9 per cent based on the 7 proposed flexibility. 8 MR. WARREN: Now, a second category is that 9 consumers may face price increases due to the 10 passthrough items. Is that fair? 11 MR. BIRMINGHAM: They can face price 12 increases, or price decreases because of the 13 passthroughs, yes. 14 MR. WARREN: And non-routine adjustments, in 15 similar fashion, they would face the risk of price 16 increases. Is that correct? 17 MR. BIRMINGHAM: To the extent that any of the 18 non-routine circumstances arose, their prices could rise 19 or decline because of those items, yes. 20 MR. WARREN: Now, if we can accept that there 21 is at least notionally that risk of price volatility 22 continued to be borne by residential consumers, it's 23 also true that under your proposal residential consumers 24 cannot negotiate contracts for their rates. Is that 25 fair? That's reserved for larger industrial customers, 26 or larger customers, period. Is that fair? 27 MR. BIRMINGHAM: Generally speaking, it would 28 be a marketer on behalf of those residential customers, Les Services StenoTran Services Inc. 613-521-0703 1516 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 or a large commercial or industrial customer who would 2 look to negotiate a rate. 3 MR. WARREN: Now, the second category of risk 4 found on page 66 is the asset utilization risk. Is 5 asset utilization risk different under the PBR regime 6 than it was on a cost of service? 7 MR. BIRMINGHAM: Yes, sir, it is. That's the 8 intent of the text that's found on pages 66, and then 9 following on 67 under cost of service to the extent that 10 there was load loss resulting from either customers 11 leaving Union's system entirely because they have 12 relocated their plant or displaced natural gas with 13 other fuels or have bypassed Union's system. 14 Generally speaking, the effects of those 15 circumstances would be included in Union's cost of 16 service and then ultimately reflected in rates to the 17 extent that the Board approved them. 18 MR. WARREN: Has Union done a calculation of 19 the likelihood that there will be significant load loss 20 over the course of the five years of the term of this 21 PBR regime? 22 MR. BIRMINGHAM: The load loss calculations, 23 Mr. Warren, are at Exhibit B, Tab 2, Appendix G, and you 24 can see those really in the first five lines under the 25 category "Asset Utilization". 26 We have subdivided that category into the 27 alternate fuel loss, the potential impacts from 28 independent power producers, the potential loss to Les Services StenoTran Services Inc. 613-521-0703 1517 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 electric water heaters, franchise competition, and then 2 unbundling. There's some additional explanation for 3 those items also found in response to Exhibit C1.155. 4 MR. WARREN: Now the back-up, though I'm sorry 5 to be precise, Mr. Birmingham, the back-up, for example, 6 to alternate fuel loss, I presume that's principally 7 electricity? Is that fair? 8 MR. BIRMINGHAM: No. There are a number of 9 circumstances, Mr. Warren. 10 The first one would be where I have indicated 11 on page 67 at line 1, where we have a number of large 12 industrial customers who have alternate fuel capability 13 right at their plants to the extent of about 23 Bcf of 14 annual demand. So that would be the first one and that 15 tends to be heavy fuel oil more than it is electricity. 16 There wouldn't be any electricity in there. 17 MR. WARREN: May I just stay with that for a 18 moment? The price of heavy fuel oil now, the last time 19 I saw reports out of the OPEC Conference, is pretty 20 high. My question is have you done a calculation of the 21 likelihood in this category, for example, of large 22 industrial customers switching from natural gas to heavy 23 fuel oil? Have you done that calculation and have you 24 backed it up with any data? 25 MR. BIRMINGHAM: We haven't done a calculation 26 for that line specifically, Mr. Warren. What we did do 27 when we prepared the evidence is at line 6 of Exhibit B, 28 Tab 2, Appendix G, we said that with respect to all of Les Services StenoTran Services Inc. 613-521-0703 1518 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 the asset utilization risk we tried to quantify that in 2 Column A and turn that into a percentage in Column B. 3 Then we applied in Column C the probability of those 4 events occurring in a single year. So we have applied a 5 probability factor of about 20 per cent. 6 MR. WARREN: My only question, Mr. Birmingham, 7 is what's that based on? I understand you put these 8 figures down, but did you read them in the tea leaves at 9 the bottom of last night's cup of tea, or what surveys 10 or other analysis did you undertake so that you could 11 predict for example that your alternate fuel loss will 12 be 0.7 per cent, given the present differential between 13 the price of natural gas and heavy fuel oils? 14 MR. BIRMINGHAM: Two things, Mr. Warren. The 15 assessment really is based on our experience with 16 customers and our view of the market. 17 The second thing, though, is that we haven't 18 attempted to determine the probability or the likelihood 19 of an outcome based on a single year's experience or at 20 a point in time. This is really intended to look at 21 what could happen over the five-year term of the PBR. 22 MR. WARREN: Now, again I apologize, I 23 interrupted your answer. We will return to it 24 momentarily. 25 But on this question of large industrial sales 26 volume, one of the mechanisms you have built into your 27 PBR proposal is the opportunity to have individual 28 contracts with large industrial sales customers. You Les Services StenoTran Services Inc. 613-521-0703 1519 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 have the opportunity, I take it, Mr. Birmingham, of 2 trying to mitigate the risk of this load loss with 3 individual contracts. Is that right? 4 MR. BIRMINGHAM: Under PBR we are asking for 5 the ability to negotiate rates with customers, and to 6 that extent that capability could assist us in helping 7 to keep large industrial customers on the system, yes. 8 MR. WARREN: Now, the second category I think 9 you were taking me to was the sales to industrial -- 10 sorry, independent power producers. 11 You have indicated that the extent of that 12 loss may be $12.3 million or 1.6 per cent of your 13 revenue requirement. Correct? I'm looking at 14 Appendix G to B2. 15 MR. BIRMINGHAM: Yes, that's right. 16 MR. WARREN: What is the basis for that 17 prediction of $12.3 million, that you are going to lose 18 that as a result of the restructuring of these 19 contracts? 20 I mean, first of all, what is the evidence you 21 can produce that these contracts are actually going to 22 be restructured in a way that will result in this 23 load loss? 24 MR. BIRMINGHAM: There are a couple of 25 factors, Mr. Warren. 26 The first one is simply looking at the number 27 of contracts that we have that supply the independent 28 power producers; and the second one is the circumstances Les Services StenoTran Services Inc. 613-521-0703 1520 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 that those independent power producers find themselves 2 in right now. What we tried to do is show that in the 3 response to Exhibit C3.65. 4 --- Pause 5 MR. WARREN: That's a CAC Interrogatory C3.65, 6 and your answer is: 7 "The Report of the Advisory Committee on 8 the Management and Disposition of Ontario 9 Hydro's Contracts with the Non-Utility 10 Generators, dated October 14, 1999, 11 indicates that the contracts between the 12 IPPs and the Province of Ontario will be 13 restructured to respect the sanctity of 14 these specific contracts." 15 Is that right? 16 MR. BIRMINGHAM: That's the first part of the 17 answer. 18 It goes on to say, though, that the cost of 19 power that are provided by those independent power 20 producers is the highest cost to satisfy baseload demand 21 and that we would expect that at some point they should 22 be rationalized. And because Union is providing service 23 to those power producers on a one-year basis, that would 24 give rise to the risk that we have quantified at 25 Appendix G. 26 MR. WARREN: Is it not fair to say, 27 Mr. Birmingham, that this risk, as you have articulated 28 it in the second part of that answer, is entirely Les Services StenoTran Services Inc. 613-521-0703 1521 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 speculative. You don't know whether or not that is 2 going to happen or not? 3 MR. BIRMINGHAM: Those are the nature of 4 risks, Mr. Warren, that's right. We don't know whether 5 they are going to happen, but we can take a look at them 6 and try to determine what kind of impact they might have 7 on us. 8 MR. WARREN: Now, the third category on 9 page 67 is the "Deregulation of Electricity in Ontario". 10 So it would be the understatement of the year to say 11 that the impact of deregulation is the fastest moving 12 target in the world at the moment. 13 But your first category -- first of all, just 14 add a sort of high level of intuitive level. Would I be 15 wrong in saying that the deregulation of electricity 16 tends, broadly speaking, to result in new cogeneration 17 projects which would have the effect of increasing your 18 load? 19 MR. BIRMINGHAM: Well, that's possible, 20 Mr. Warren. It's not our expectation that we are going 21 to see anything certainly in the next four or five-year 22 period, mainly because the marginal cost to produce 23 power from new cogeneration units is going to be 24 substantially higher than some of the capability that 25 Hydro currently has. 26 So I think I testified earlier in this hearing 27 that to the extent that Pickering came back on, that 28 would be a much more cost-effective way to meet demand Les Services StenoTran Services Inc. 613-521-0703 1522 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 than new cogeneration facilities. 2 MR. WARREN: Okay. Let us take that, though. 3 Isn't it fair to say that if Pickering were to come 4 onstream, that the commodity cost of electricity would 5 still remain significantly higher, in all likelihood, 6 than natural gas? 7 MR. BIRMINGHAM: I think in the near term we 8 would still see electricity being priced higher than 9 natural gas, but the point under number 3(a), at line 12 10 of Exhibit B, Tab 2, on page 67, really goes to the fact 11 there is not just the commodity costs that impacts an 12 end-use consumer or a builder's choice with respect to 13 natural gas or electricity water heaters, it also goes 14 to the upfront cost. And, clearly, electric water 15 heaters are much cheaper to install in the first 16 instance. 17 MR. WARREN: Again, do you have any estimate? 18 This is the water heater market share which is 19 3.5 million. I'm looking at Exhibit B, Tab 2. Do you 20 have any studies or analysis that would support that 21 number? 22 MR. BIRMINGHAM: We have quantified the impact 23 and applied the probability assessment, Mr. Warren. 24 The only other thing that we are able to 25 provide at this point is a response to Exhibit C3.66, 26 which is anecdotal evidence about some of the things 27 that are going on in the marketplace. 28 But we haven't done a study or an assessment Les Services StenoTran Services Inc. 613-521-0703 1523 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 beyond the text and the numbers that are found in the 2 evidence. 3 MR. WARREN: Finally, Category 4, at the top 4 of page 68: 5 "Greater competition in the energy 6 industry, along with more unbundled 7 service offerings, will reduce Union's 8 opportunity and ability to achieve its 9 current storage and transmission 10 utilization." (As read) 11 Isn't it the case that historically Union has 12 achieved more than its forecast revenue from storage and 13 transmission utilization? 14 Directionally, where I want to get to is: 15 What is the support for the notion that this -- for the 16 $5 million in lost revenue that will flow from that? 17 What is that based on? 18 MR. BIRMINGHAM: The E.B.R.O. 499 approved 19 rates have $5.5 million of S&T transactional revenue 20 included in them and to the extent that customers elect 21 the unbundled services and take the asset capability 22 themselves, Union will not have those assets available 23 to generate the transactional revenue level, and that is 24 the risk that we are identifying here. That is the 25 $5.5 million that is currently in rates. 26 MR. WARREN: Now, the next category, at 27 page 68 is the "Addition of new facilities replacing and 28 reinforcing existing facilities". Les Services StenoTran Services Inc. 613-521-0703 1524 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 Is it not the case now, Mr. Birmingham, that 2 you can meet this risk by only building economically 3 viable system expansion? You would mitigate that risk 4 in this way. Is it not fair? 5 MR. BIRMINGHAM: There are two parts to that, 6 Mr. Warren. 7 The first part is with respect to an 8 economically viable system expansion, that is on the 9 basis of a profitability determination that might be 10 determined over, for instance, 30 years. 11 But there is a near-term earnings impact from 12 making that investment, and it is that impact that Union 13 will continue to have to manage under PBR, even for 14 those projects which are economically viable on a 15 long-term basis. 16 The second part of it is that with respect to 17 our distribution system expansion we are going to 18 continue to use the criteria under EBO 188 where an 19 individual project still only has to meet a 20 profitability index of 0.8 and have a rolling portfolio 21 projects be at least 1.0 before Union will invest in it. 22 MR. WARREN: With respect to the first 23 category of concern which is that you are not going to 24 earn a return perhaps till well into the 30-year life, 25 first of all, there is the possibility of your seeking 26 customer contribution to increase the economic viability 27 earlier on of the term. Is that fair? 28 MR. BIRMINGHAM: We would only be seeking a Les Services StenoTran Services Inc. 613-521-0703 1525 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 customer contribution to ensure that the project met the 2 economic threshold, not to improve it beyond a threshold 3 where it was economic. 4 MR. WARREN: And is it not the case over the 5 course of the 30-year term that you will have some 6 projects which will now -- have now been built, that the 7 revenue stream from those will be kicking in over the 8 course of the 30 years? It sounds like you don't have 9 any revenue from previous system expansion coming into 10 you. Is that not fair? 11 MR. BIRMINGHAM: No, that is right. All of 12 our revenue comes from system expansion. 13 MR. WARREN: And that is going to be coming 14 in. It is not to say you are not going to be having any 15 revenue for the next 30 years from projects that have 16 already been built. Is that fair, Mr. Birmingham? 17 MR. BIRMINGHAM: To the extent that those 18 customers stay with natural gas, that is right. 19 MR. WARREN: Now, declining use per customer 20 is a category which you have got on page 71 and I am not 21 sure I understand your estimate that declining use per 22 customer will continue. What is the evidence that you 23 have that declining use per customer will continue? 24 MR. BIRMINGHAM: Sorry, Mr. Warren. We have 25 skipped over storage expansion and distribution 26 expansion and we are at page 71? 27 MR. WARREN: Yes. I'm sorry. 28 MR. BIRMINGHAM: Okay. Thanks. Les Services StenoTran Services Inc. 613-521-0703 1526 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 The evidence that average use per customer 2 will continue to decline is based on the last many years 3 of experience with that market and the average decline 4 over that period has been roughly one per cent. And in 5 1999, our actual basis was over two per cent. 6 MR. WARREN: And it is your estimate, your 7 guess that that is going to continue. Is that right? 8 MR. BIRMINGHAM: It is our expectation that it 9 will continue, yes. 10 MR. WARREN: Now, the next category I wanted 11 to talk to you about is weather related variations in 12 use. Now, broadly speaking if the weather is warmer 13 than expected, Union may lose money. Is it also fair to 14 say that if weather is colder than normal, you may gain 15 more than you expected. Is that right? 16 MR. BIRMINGHAM: Yes, to the extent that 17 customers use more and we have charges that are assessed 18 on a volumetric basis and you know will earn more or 19 less based on the actual weather. That is right. 20 MR. WARREN: So there is both a risk and a 21 potential gain in weather related variations for Union. 22 Is that right? 23 MR. BIRMINGHAM: Yes, although the risk that 24 -- one of the risks that we are talking about with 25 respect to the weather here is that under cost of 26 service Union uses a 30-year rolling average. So even 27 to the extent that a particular year was warm, it gets 28 incorporated into the 30-year rolling average each time Les Services StenoTran Services Inc. 613-521-0703 1527 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 we come in to set our rates under cost of service. We 2 are not going to be resetting our rates with respect to 3 that 30-year rolling average under price cap. 4 MR. WARREN: Now, the category in which you 5 have got -- which is asset disposition and under a price 6 cap situation, again this is a category I am not sure I 7 understand the nature of the risk. Under the price -- 8 under the PBR formula, the proceeds from the sale of 9 assets will be to the benefit of Union. Is that fair? 10 MR. BIRMINGHAM: Yes. As you can see from our 11 evidence at line 16, this is consistent with the 12 exposure that the utility has on asset utilization to 13 the extent that you need tools to manage the asset 14 utilization. One of them can be the choice where you 15 would actually dispose of the asset. 16 MR. WARREN: And if you dispose of it, that 17 revenue goes to Union and its shareholders. Right? 18 MR. BIRMINGHAM: The revenue would go to the 19 company. That is right. 20 MR. WARREN: And to the extent that you lost 21 money on it, that would fall in the category of a 22 stranded asset? 23 MR. BIRMINGHAM: No. To the extent that we 24 lost money on it, that would be the company's 25 responsibility as well. 26 MR. WARREN: The final question I wanted to 27 ask you about -- 28 MEMBER JACKSON: What sort of assets were you Les Services StenoTran Services Inc. 613-521-0703 1528 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 address, Mr. Warren? I am sorry. I might have just 2 missed it. 3 MR. WARREN: I am looking at the category of 4 assets, Dr. Jackson, which appears for example of a 5 sale, one of the examples which is used -- I will just 6 see if I can find the page. 7 MR. BIRMINGHAM: It might be page 77. 8 MR. WARREN: Sudbury was an example of an 9 asset disposition that you were concerned about. Is 10 that right? 11 MR. BIRMINGHAM: Well, the example we have 12 given in the evidence, Mr. Warren, was with respect an 13 industrial customer who might bypass Union's system. 14 And so we could reduce the rate to try and meet their 15 bypass competitive alternative or we could sell the 16 distribution line to the customer and mitigate their 17 earnings impact that way. But to the extent that, as 18 you say, that was less than the net book value of the 19 line itself, it would be the utility's responsibility 20 for that. 21 MR. WARREN: What about assets like large 22 assets like the Sudbury distribution system, which is 23 mentioned somewhere in the evidence although I can't now 24 turn it up offhand. Is that in the category of risk 25 from asset disposition? 26 MR. BIRMINGHAM: Yes, to the extent that the 27 utility would no longer have that revenue stream, no 28 longer have the margin from that, whatever the sale Les Services StenoTran Services Inc. 613-521-0703 1529 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 would be you would have to manage the revenue shortfall 2 through the course of the PBR. And to the extent that 3 the sale of that was higher or lower than net book 4 value, that would be one of the things that went to help 5 mitigate the lost revenue. 6 MEMBER JACKSON: Yes. But what I was curious 7 about is what sort of threshold conditions would 8 determine that the gain on a sale of those assets would 9 go to the income statement rather than to the 10 accumulated depreciation reserve for some group of 11 assets? 12 Because normally under the regulatory 13 framework, a number of these gains could just wind up 14 adjusting the accumulated depreciation reserve. Can you 15 help me with that a little bit? Like what sorts of 16 assets are going to go straight to the -- when sold 17 would go straight to the income statement and what sorts 18 of assets would simply cause a change in the accumulated 19 depreciation reserve? 20 MR. BIRMINGHAM: Generally, Dr. Jackson, there 21 are two circumstances where the gain or loss on a sale 22 would flow to the income statement. The first 23 circumstance is when an individual asset is in a 24 category by itself. So you could actually measure the 25 amount of the gain or sale based on that individual 26 asset disposition. 27 The second circumstance is where the last 28 asset in a group of assets is disposed of and so you can Les Services StenoTran Services Inc. 613-521-0703 1530 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 then determine how much the accumulated depreciation was 2 off so to speak. So that again you can determine the 3 overall net loss or gain for that class of asset. 4 But beyond that we are still in the 5 circumstance where we would be following the pooled 6 method of accounting and to the extent that some of the 7 assets were contained within a category, then you are 8 quite right, the gain or loss would go to impacting the 9 accumulated depreciation pool for that class of assets. 10 MEMBER JACKSON: So then I really would need 11 some knowledge about the groups that are used within the 12 group depreciation methodology, and just as an example 13 right now, I may not need very much more knowledge for 14 this discussion, let me just ask you about the assets 15 that might be associated with a large customer on your 16 system that we discussed in terms of perhaps your 17 selling them to that customer. 18 Would they already have been set up in a 19 separate group or would they likely be part of a larger 20 group? 21 MR. BIRMINGHAM: They would be part of a 22 larger group. 23 MEMBER JACKSON: Thank you very much. 24 --- Pause 25 THE PRESIDING MEMBER: I'm sorry, Mr. Warren, 26 we are having a private conversation. 27 MR. WARREN: I have about five minutes left, 28 shall I finish? Les Services StenoTran Services Inc. 613-521-0703 1531 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 THE PRESIDING MEMBER: Please, carry on. 2 MR. WARREN: I just want to follow up on this 3 question of asset disposition to make sure I have 4 identified the issues. 5 When I look at page -- thanks to Ms. Symes, 6 she has pointed out where the reference was to Sudbury 7 and Kingston. We have got there on page 67 of the 8 prefiled evidence, Exhibit B, Tab 2, we have threatened 9 expropriation by the City of Kingston, and the City of 10 Sudbury. Now that expropriation -- do I understand it 11 correctly -- would also fit in the category of "asset 12 disposition and potential gains or losses from that". 13 Right? 14 MR. BIRMINGHAM: Right. 15 MR. WARREN: And presumably to the extent that 16 they are expropriated you have a mechanism, the 17 expropriation process which would allow you in some 18 public process to determine what the appropriate asset 19 value was. Correct? 20 MR. BIRMINGHAM: There will be a process to 21 set out what the appropriate value for the disposition 22 would be, yes. 23 MR. WARREN: Now in addition to the question 24 of that -- so in that category of asset disposition, we 25 then have the corollary concern which is that you have a 26 lost revenue stream when those assets disappear. 27 Correct? 28 MR. BIRMINGHAM: That's right. Les Services StenoTran Services Inc. 613-521-0703 1532 BIRMINGHAM/ELLIOTT, cr-ex (Warren) 1 MR. WARREN: You also have a corresponding 2 decline in costs. Is that not fair? 3 MR. BIRMINGHAM: There will be some operating 4 costs that go along with that, as well as the capital 5 cost that would be the subject of the disposition, yes. 6 MR. WARREN: To what extent in calculating 7 this risk have you balanced the loss of a revenue stream 8 against the loss of costs? 9 MR. BIRMINGHAM: The $3 million that you see 10 there, Mr. Warren, is in fact margin only. So it's net 11 of cost to the extent that we can calculate them. 12 MR. WARREN: Now the second category of asset 13 disposition, when you are talking about it on page 77 is 14 the bypass threat, is that right? Would your large 15 industrial customers bypass the Union system? 16 MR. BIRMINGHAM: Yes, and that could happen 17 with the independent power producers as well. 18 MR. WARREN: Now again, have you done a 19 calculation which we could look to by which we can 20 assess the likelihood or the extent of this risk? 21 MR. BIRMINGHAM: The extent of it has been 22 calculated in Appendix G but there's nothing further 23 than that, no. 24 MR. WARREN: Those are my questions. Thank 25 you very much. 26 Thank you. 27 THE PRESIDING MEMBER: Thank you, Mr. Warren. 28 I think we will break now and we will come Les Services StenoTran Services Inc. 613-521-0703 1533 1 back in an hour's time which would be about 10 past 2 2:00. I think an hour break is a reasonable break. 3 --- Upon recessing at 1305 4 --- Upon resuming at 1410 5 THE PRESIDING MEMBER: Any procedural matters 6 before we start? 7 Mr. Brett, I believe it's yours now. 8 CROSS-EXAMINATION 9 MR. BRETT: Thank you very much, Mr. Chairman, 10 Dr. Jackson. 11 Good afternoon panel. 12 I want to start by referring the issue of 13 benefits and risks, and most of my questions if not all, 14 will be in that area. 15 I want you to turn up page 64, which is your 16 list of risks and benefits that arise to Union out of 17 moving to PBR. 18 Before I get into the specifics, 19 Mr. Birmingham, I wanted to ask you. You have a long 20 list of risks here and they are I think fair to say of 21 different levels of importance, pose different 22 challenges to Union. 23 Could you give me, in your view, what are the 24 largest of these risks that are listed in the sense of 25 which ones would pose the largest challenges to Union 26 over the term of the PBR? If you had to pick three for 27 example, however you want to do it, which would be the 28 largest challenges here? Les Services StenoTran Services Inc. 613-521-0703 1534 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BIRMINGHAM: Well if you look at 2 Exhibit B, Tab 2, Appendix G, Mr. Brett, I think that 3 will, from a qualification standpoint, give you an 4 indication of what the ranking might be. But generally, 5 I would say that the three or four that are the biggest, 6 asset utilization I think generally from a number of 7 different sources, but keeping the asset utilization 8 high in our system I think is probably most significant. 9 The declining use per customer continues to be 10 of a fairly magnitude particularly based on recent 11 experience. So I would say that certainly is a key one. 12 The third one I might comment on is the 13 weather, and that is with respect to the potential for a 14 warming trend, and there is two dimensions to that. One 15 is under cost of service, as I mentioned this morning, 16 we would normally account for the most recent years 17 weather experience by including it in the 30 year 18 rolling average when we go forward into cost of service. 19 We are not doing that under this proposal. 20 Furthermore, what we have done is we have 21 taken a look at the weather over that 30 year period, 22 and rather than doing a rolling average we try to fit a 23 trend line to it, the same way that we do with use per 24 customer and that clearly shows a warming trend. That 25 is there is a downward decline in the degree days when 26 you fit a trend line to that data. So as I say that 27 warm weather trend is the third one. 28 Then the fourth one I would say is generally Les Services StenoTran Services Inc. 613-521-0703 1535 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 trying to manage inflation only because the expectation 2 is that inflation will grow. Some of the wage 3 settlements that we have seen recently, for instance the 4 CAW contracts which had a four and a half per cent 5 increase on the wages part alone would put significant 6 pressure on our O&M expenses that we will have to manage 7 underneath the price cap. So I think those are 8 generally the areas that we see as being the most 9 significant. 10 Just as a general question following upon that 11 last comment, if you have those concerns about inflation 12 on your O&M budget, why did you not pick an inflation 13 number that would change over the years and reflect the 14 expectations? 15 Or we could have kept an approach that would 16 have adjusted the inflation factor prospectively on an 17 annual basis, but we chose a fixed one to provide more 18 stability, more predictability to the prices. So that 19 when we came out and we told customers that their 20 delivery rates were going to change by no more than 1.9 21 per cent overall, we could explain to customers that in 22 fact it was a number, 1.9 per cent. It was not all that 23 every inflation would be less this productivity offset. 24 So we wanted to speak to a number, what that would mean 25 to customers. 26 MR. BRETT: Can I go back to your 30 year 27 average? Is that trend line that you discussed with the 28 -- is that in evidence? Les Services StenoTran Services Inc. 613-521-0703 1536 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BIRMINGHAM: No, sir. It is not in 2 evidence because we are not asking the Board to do 3 anything with it. All we wanted to do is take a look at 4 going forward, what might be happening with the weather. 5 MR. BRETT: Would you have any objection to 6 filing it as an undertaking? 7 MR. BIRMINGHAM: To filing the 30 years worth 8 of weather and fitting a trend line to that to show 9 that? 10 MR. BRETT: Yes. 11 MR. BIRMINGHAM: Sure. 12 MR. BRETT: Okay. If you would, please. 13 Mr. Chairman, if that's acceptable. 14 DR. WIGHTMAN: G9.2. 15 UNDERTAKING NO. G9.2: Mr. Birmingham 16 undertakes to file the 30 years worth of 17 weather and fitting a trend line to show 18 that 19 MR. BRETT: With respect to the new services 20 that you are going to put in place, and here I am 21 looking at pages 65 of your evidence and also pages 8 to 22 10 at the beginning of your evidence. You list there, 23 in particular on page -- this is one of the benefits 24 that you talk about to PBR for the utility. And the 25 benefit is, in a nutshell that you have the freedom to 26 create new services, and your proposal, as I understand 27 it, is that the revenue from the new services would 28 accrue to the shareholder, correct, with the term of Les Services StenoTran Services Inc. 613-521-0703 1537 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 the PBR? 2 MR. BIRMINGHAM: Right. To the extent that 3 the utility develop new services whether they were 4 regulated or unregulated services, the revenue stream 5 and the cost would accrue to the company during the term 6 of the PBR. That's right. 7 MR. BRETT: You mentioned four new services on 8 page 10. I'm looking at Exhibit B, Tab 2, page 10 of 9 88. And you talk there about four new services, load 10 balancing, demand and supply nomination, load profiling 11 and informational services that are not currently 12 offered. And I think you spoke earlier in the hearing 13 about load profiling, as I recall. 14 Could you just summarize briefly how you see 15 each of -- I take it none of these four services are 16 being offered, at least in the form that you are 17 contemplating at the moment? 18 MR. BIRMINGHAM: That's right. They were only 19 intended to be examples of what new service offerings 20 might be, but we don't have any proposals to offer those 21 at this point. 22 MR. BRETT: You don't have any specific 23 proposals to offer them, but you contemplate having 24 proposals to offer each of those four services over the 25 next year or two? 26 MR. BIRMINGHAM: Not at this time, Mr. Brett. 27 I think it will depend on how the market evolves. As an 28 example, I think the load profiling example that I used Les Services StenoTran Services Inc. 613-521-0703 1538 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 earlier was customers who would elect the unbundled 2 service and might want somebody to provide an 3 optimization model that would help them use the 4 unbundled assets and maximize the use of those assets 5 given a number of different load scenarios. 6 That is software and hardware that others 7 could offer. Whether parties come to the utility and 8 want that service to do it themselves, I don't know. We 9 will have to wait and see what types of services 10 customers are looking for. 11 MR. BRETT: If you do intend to -- you intent 12 to launch new services, if not these exact services, 13 services in this area, I mean these would be technical 14 examples of some of the services that you would seek to 15 launch over the term of the PBR. 16 MR. BIRMINGHAM: We hope to be offering some 17 new services over the term of the PBR, yes. 18 MR. BRETT: When you talk about load balancing 19 there, Mr. Birmingham, you are talking about offering 20 load balancing, I take it, to the unbundled customers, 21 to those customers that switched, that go to an 22 unbundled service. Could you just briefly outline the 23 kind of thing you have in mind that would be feasible 24 there? 25 MR. BIRMINGHAM: Well, that example was for a 26 customer who was going to elect the unbundled service. 27 You are going to have to manage the daily nominations of 28 their supply and their demand. The demand piece, of Les Services StenoTran Services Inc. 613-521-0703 1539 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 course, will be managed through the use of an algorithm 2 if they are a marketer that is representing the general 3 service customers. But there will be daily nomination 4 of both supply and demand and there may be a service 5 that Union can offer in that respect. 6 I would be surprised if parties came to us 7 with that, though, Mr. Brett, because in my view, if 8 they wanted that type of service from utility they would 9 simply elect the bundled service. And presumably the 10 way that they will manage their unbundled assets will be 11 different. And therefore they would want to do that 12 themselves or have somebody else manage it on their 13 behalf or aggregate it with a number of other people and 14 have somebody independent of the utility manage that. 15 MR. BRETT: Why would you think that they 16 would wish to stay away from the utility with respect to 17 asking for a daily load balancing service? I'm assuming 18 that they would have to have it from somewhere. I'm not 19 talking now about bundled customers but someone who has 20 gone unbundled, either a large industrial, the sort of 21 people that you think are going to go unbundled, large 22 industrial marketers that will aggregate loads. Why 23 wouldn't they look to you for that? 24 MR. BIRMINGHAM: Well, they may look to us for 25 that, but if that was going to be the case, if they 26 wanted the utility to manage their demand and supplies 27 within certain tolerances, they would simply elect a 28 bundled service and stay under a bundled service. It's Les Services StenoTran Services Inc. 613-521-0703 1540 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 only in the event that there can be other ways to manage 2 the assets that would provide incremental benefit to 3 those customers that they would be electing the 4 unbundled service, I presume. And in that case, I 5 suspect that they will want somebody else to manage 6 them, not us. 7 MR. BRETT: These new services that you are 8 speaking of, though, they are in addition to the S&T 9 services that you already offer, such as the exchanges, 10 the loans, the short-term storage. Those are all 11 existing S&T services and you will continue to offer 12 those, of course. 13 MR. BIRMINGHAM: To the extent that we 14 can, yes. 15 MR. BRETT: And these new services that you 16 are going to develop, do you expect that they will be 17 regulated services or services that you would wish to 18 classify as unregulated or both? How do you see that 19 breaking down? I know there was a bit of discussion on 20 this point a little earlier and you had some questions 21 by Dr. Jackson, I recall. But I just want to revisit it 22 for a moment to make sure I understand. 23 Which is the most likely kind of new service? 24 And what do you expect will be regulated and what do you 25 expect will be unregulated? And what's the criteria for 26 choosing between the two, in your view? 27 MR. BIRMINGHAM: Well, my expectation is that 28 we will be offering both regulated and unregulated Les Services StenoTran Services Inc. 613-521-0703 1541 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 services. 2 MR. BRETT: Load balancing for example, if you 3 were going to offer it would be an example of a 4 regulated service? 5 MR. BIRMINGHAM: Load balancing would be a 6 regulated service. That's right. 7 MR. BRETT: Whereas certain information 8 services that you might offer, load profiling, for 9 example, might be unregulated services? 10 MR. BIRMINGHAM: Load profiling would be a fee 11 for service and it would be unregulated. That's right. 12 MR. BRETT: What about-- 13 MR. BIRMINGHAM: But it will depend on the way 14 the market evolves, Mr. Brett. As an example, right now 15 we offer an interruptible service that allows up to 16 40 days of interruption. And there is a price that is 17 charged for that that is different than our firm 18 service. We might be in a situation where customers are 19 looking for different tiers of interruption. So as an 20 example, they might look for an interruptible service 21 that has 10 days, 20 days, 30 days and 40 days of 22 interruption and how those would be priced. 23 Those are clearly regulated services. They 24 deal with storage, transmission and distribution. And 25 we would develop that service. We would bring it 26 forward in the customer review process, hopefully for 27 consensus and give that consensus agreement to the Board 28 for approval. If there was no consensus, we would still Les Services StenoTran Services Inc. 613-521-0703 1542 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 have to approach the Board for approval because they are 2 regulated services. 3 MR. BRETT: Are you going to, as I understand 4 it, make an initial characterization of a -- when you 5 decide to bring forward a new service or offer a new 6 service in your market as a monopoly utility and using 7 your monopoly assets, you will put forward a 8 characterization of the service. You will say, "We 9 think this is regulated" or "We think this is 10 competitive." I take it that others, in the process of 11 the customer review, others will have an opportunity to 12 express a view as to whether that service -- whether 13 your characterization is correct. 14 For example, you may say something is 15 competitive, and I may say in looking at it, no, I don't 16 think that is competitive. There is no -- you haven't 17 shown that there is a competitive market for this 18 service in your franchise area. This should be a 19 regulated service. 20 Do you contemplate that the -- there was a bit 21 of ambiguity in your response I thought, a few days ago 22 on this issue. At least I took it to be that. I want 23 to be clear. In that example I gave you, in the 24 customer review process, do you see a consensus having 25 to be reached on that and if not, the Board settles 26 that? In other words, ultimately, the Board will decide 27 what is a competitive service and what is a monopoly and 28 therefore regulate its service. Is that the way you Les Services StenoTran Services Inc. 613-521-0703 1543 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 see it? 2 MR. BIRMINGHAM: Let me try to be as 3 unambiguous as possible. It was not my intention to 4 have any ambiguity around this. 5 MR. BRETT: Well, it may be just my 6 characterization. 7 MR. BIRMINGHAM: If it was storage 8 transmission or distribution, we would be bringing it 9 forward as a service in the customer review process, 10 ultimately for the approval of the Board. If it was an 11 unregulated service, it's not our intention to bring it 12 forward in the customer review process. 13 Now to the extent that we are going to offer a 14 new unregulated service, we would obviously have to 15 introduce that to customers to make them aware of that, 16 so there would be a process and a communication that 17 goes with that. But it would not be the customer review 18 process as we have contemplated under our price cap 19 proposal. 20 And to the extent that there are parties that 21 are concerned about whether Union is offering a service 22 that is or should be defined as a regulated service, 23 then I can see how that could form an agenda item for 24 the customer review meeting, and ultimately for 25 disposition by the Board. 26 MR. BRETT: And is there an issue in your mind 27 at all about whether or not the utility, as a matter of 28 principle, should be offering services that are Les Services StenoTran Services Inc. 613-521-0703 1544 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 competitive in its franchise area? In other words, how 2 do you deal with parties that might be, if it were a 3 competitive service, parties that might wish to offer 4 the same service and would be relying on information 5 from you in part in order to offer that service. Is 6 that a concern to you at all? 7 MR. BIRMINGHAM: It is not for me, Mr. Brett, 8 to the extent that it's an unregulated service. As an 9 example let's go back to the load balancing -- sorry -- 10 the load profiling service that I was talking about. 11 To the extent that others want to do that, 12 they will get the information from the customer with 13 respect to the scenarios that that customer would like 14 to see run and how they might operate it. There is not 15 anything unique about the service or the information to 16 use it. To the extent that there was some information 17 that was required from the utility that they couldn't 18 get from anywhere else, that we would make that 19 information available if the customer allowed it. And 20 that has been our practice for years. 21 MR. BRETT: As far as the revenue goes from 22 the revenues that might be generated from these 23 services, it seems to be fairly -- is it fair to say 24 given what you have told me about the absence of any 25 specific initiatives at that moment, that you don't 26 really have any idea of what revenues these services 27 might generate over the period of the five years? I 28 know you have put in a number. You have plugged in a Les Services StenoTran Services Inc. 613-521-0703 1545 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 number of 0.5 million in one of the interrogatories. 2 But it sounds to me like from what you have 3 said, that is not much more than just a placeholder. Is 4 that fair? This was just a matter of fact. I don't -- 5 MR. BIRMINGHAM: That's fair, Mr. Brett. 6 I think the amount that you are referring to 7 is in Appendix G at line 14, Column A. And that it was 8 just a placeholder. We don't know even what those new 9 services are going to be. The only new services that we 10 are offering, we are hopping to offer, in the near term 11 is the unbundled transportation and storage. But beyond 12 that we don't have any plans or any particular 13 definitions of what those services might be. 14 MR. BRETT: Okay. Can I just change to the 15 issue of market price storage, which is one of the other 16 new services that you speak about. There is another 17 interrogatory which is C21.144. It's an IGUA 18 interrogatory, C21.144, A, which I think -- do you have 19 that? 20 MR. BIRMINGHAM: Yes, sir, I do. 21 MR. BRETT: In that interrogatory it shows, as 22 I understand it, the storage that's coming up for the 23 exfranchise storage that is currently done at cost, it's 24 coming up for renewal in the future years, and you show 25 390,000 10(3) in 2001. Is that the Gaz Met storage that 26 was spoken about earlier? 27 MR. BIRMINGHAM: That is the long-term storage 28 that is -- has been resigned by GMI. Les Services StenoTran Services Inc. 613-521-0703 1546 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Okay, that has been resigned and 2 there is a premium associated with that, as I recall. 3 That number is in the evidence, is it? 4 MR. BIRMINGHAM: It was in my earlier 5 testimony. It's about $2.5 million, pre-tax. 6 MR. BRETT: In 2000? 7 MR. BIRMINGHAM: Right. 8 MR. BRETT: And then in each year thereafter? 9 MR. BIRMINGHAM: That's right. 10 MR. BRETT: Okay. And then the other amount, 11 the 155,000 shown in 2003, who is that with now? 12 --- Pause 13 MR. BIRMINGHAM: The contract expiries, by 14 party, Mr. Brett, are found in the response to 15 Exhibit C34.29. And the 155,000 10(3)m(3) that you 16 referred to is also GMI. 17 MR. BRETT: Okay. And in the 643, just to 18 hasten things along, who is that, Mr. Birmingham, in 19 2004? 20 MR. BIRMINGHAM: Of the 643,000 10(3)m(3), 21 563,000 is Enbridge Consumers Gas -- 22 MR. BRETT: Right. 23 MR. BIRMINGHAM: -- and the balance, which is 24 about 55,000 10(3), is again GMI. 25 MR. BRETT: Okay. And those aren't renewed 26 yet, I take it. 27 MR. BIRMINGHAM: No. They will be renewed at 28 whatever the prevailing market price is at the time. Les Services StenoTran Services Inc. 613-521-0703 1547 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: And do you have any view on what 2 that market price is likely to be at that time? Is it 3 likely to be any different or significantly different 4 from what it is today? 5 MR. BIRMINGHAM: I don't know, Mr. Brett. 6 Just looking forward that amount of time I expect that 7 some of the new pipeline expansions are going to put 8 some downward pressure on storage pricing. How far that 9 downward pressure will take it, I don't know. I also 10 don't know what new pools might be developed by others 11 in areas that would be immediately adjacent to our 12 franchise area. That might have some impact, so it's 13 hard to say. 14 MR. BRETT: And just for the record, the 15 position is that that premium under the PBR plan will 16 accrue to the utility? 17 MR. BIRMINGHAM: To the extent that there's a 18 premium or discount between the market price and the 19 embedded cost-based rate, that difference would be to 20 the account of the utility, that's right. 21 MR. BRETT: Now, do you expect any further 22 developments of storage of your own, which would be 23 coming forward during the PBR period, that would be 24 available to exfranchise customers or infranchise 25 customers? Or is that it? That storage that we see 26 there is really all of the storage that we would be 27 talking about over the PBR term? 28 MR. BIRMINGHAM: It will depend on the growth Les Services StenoTran Services Inc. 613-521-0703 1548 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 that happens during the PBR period. We are committed to 2 offering storage to infranchise customers for their 3 needs at cost-based rates and we will need to develop 4 new storage, ultimately, to do that. The same would be 5 true if there are demands from exfranchise customers who 6 are wanting to contract for additional storage, we will 7 be looking to develop some additional storage pools. 8 MR. BRETT: But you have no current projects 9 in the works that are going to, effectively, either 10 before the Board or in the planning phase, that are 11 going to generate storage volumes in the next couple of 12 years? The Century Pools project, is it already over 13 and is that already in service? 14 MR. BIRMINGHAM: The Century Pools storage 15 development at this point happened in two phases, 16 Mr. Brett, and I think both of those phases are complete 17 now. 18 MR. BRETT: So there's nothing more to come 19 from there. 20 Just, if I may, with respect to asset 21 dispositions, for a moment, you have talked about this 22 with Mr. Warren this morning, and I take it that the 23 current regime is that any asset dispositions go to the 24 account of the ratepayer, is that correct? Any gains or 25 losses from asset dispositions? I'm looking at page 77. 26 MR. BIRMINGHAM: Right, at line 15, where 27 we say: 28 "The utility will receive the proceeds Les Services StenoTran Services Inc. 613-521-0703 1549 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 from asset disposition." 2 MR. BRETT: Determined and attributed to 3 ratepayers or the utility by the OEB. What has been the 4 experience most recently? What's the most recent 5 example of an asset disposition that you have dealt with 6 in this manner? 7 MR. BIRMINGHAM: Under the cost-of-service 8 framework? 9 MR. BRETT: Right. Would be your transfer out 10 of ancillary services, I suppose -- 77.17. 11 MR. BIRMINGHAM: Yes, although that's really 12 not terribly helpful in that the transfer was at net 13 book value. So how gains or losses that are relative to 14 that net book value are treated, I don't think there's a 15 lot of direction to be taken from that. 16 We went back over a number of decisions, 17 Mr. Brett, and I think it's fair to say that there has 18 been a number of different types of treatment with 19 respect to the disposition of buildings or other assets. 20 Some have been attributed to the ratepayers, some have 21 been attributed to the utilities, some have been split 22 between the ratepayers and the utilities. So it's a bit 23 of a mixed bag. 24 MR. BRETT: And what you are saying here, as I 25 understand it, is that it would be the excess over book 26 value or the shortfall to book value that would go to 27 the utility under the PBR scheme. Is that right? 28 MR. BIRMINGHAM: That's right. It's measured Les Services StenoTran Services Inc. 613-521-0703 1550 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 against the net book value of the assets that are on the 2 books at the time. 3 MR. BRETT: So that what you were discussing 4 this morning with Dr. Jackson, whether or not this item 5 would go to the income statement or to the pool 6 depreciation, where you speaking there just about the 7 excess -- let's assume in this case that it's a sale at 8 greater than book value -- or were you speaking about 9 the entire amount? I wasn't clear on that. 10 MR. BIRMINGHAM: All of the proceeds are 11 accounted for under the pooled method of accounting as 12 going in against the class. The theory here being that 13 when a depreciation rate is set for a group of assets, 14 some of those assets will be shorter lived than the 15 average and some will be longer lived and you are not 16 going to be able to measure that until you get to the 17 end of the life of all of the assets in that class. 18 So what happens when you dispose of some 19 portion of those assets, to the extent that there is a 20 loss for instance, that would suggest that your 21 depreciation should have been higher, that is you 22 weren't depreciating it fast enough. But we don't 23 recognize that at the time of the disposition. We don't 24 recognize it until all of the pluses and minuses for the 25 class have been sorted out. 26 MR. BRETT: That's a separate issue. That's 27 an issue separate from how it shows up, and where it's 28 recorded as an issue separate from where the excess or Les Services StenoTran Services Inc. 613-521-0703 1551 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 deficiency goes effectively -- ratepayer or shareholder. 2 MR. BIRMINGHAM: No it's a related issue. I 3 think what I was telling Dr. Jackson is that under the 4 pooled method of accounting there are really only two 5 ways that the proceeds, and therefore the gain or loss 6 find their way into the income statement. 7 The first one is the one you and I were just 8 talking about which is when a class is finally disposed 9 of then whatever that difference is gets moved to the 10 income statement. 11 The second way is where an individual asset is 12 accounted for separately on the books of the company, 13 and when that asset is disposed of because it's in 14 effect a class by itself it then gets recorded as a gain 15 or a loss on the income statement. 16 MR. BRETT: Okay, I understand. So it's at 17 that point that there's a change from current practice. 18 I mean what you are saying here is that historically 19 under cost of service at that point that decision could 20 have gone either way by the Board, and from now on it 21 would automatically flow to the shareholder. An asset 22 in its own class for example sold for more than its book 23 value. 24 MR. BIRMINGHAM: That's correct. 25 MEMBER JACKSON: Mr. Brett, I'm sorry I didn't 26 understand it that way. So do you mind if I ask a 27 couple of questions and interrupt? 28 MR. BRETT: No not at all, sir. Les Services StenoTran Services Inc. 613-521-0703 1552 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MEMBER JACKSON: I thought from our discussion 2 this morning, Mr. Birmingham -- sorry, my memory is 3 failing here. 4 Mr. Birmingham, what we were basically saying 5 was that in the vast majority of cases, and certainly in 6 the example we considered that an asset that was 7 disposed of would probably be a member of a group that 8 was not coming to the end of its existence because that 9 was the last asset in the group. 10 So there would likely be an adjustment to the 11 accumulated depreciation if there was a gain say on the 12 sale of that asset effectively. In that case my 13 understanding is the net book value then of the group 14 would go down slightly, and you would have whatever the 15 remaining earnings for the utility on a slightly lower 16 rate base than you had before. So you get a little bit 17 of an increment to your percentage rate of return. 18 But, given that group asset probably was being 19 depreciated over a life of more than five years if there 20 was a rebasing utility customers would benefit from the 21 fact that went to the group depreciation reserve. So if 22 you like you get a little bit to the end of the PBR 23 process, but ratepayers if there were a full rebasing 24 benefit from the fact that the gain has gone to the 25 accumulated depreciation reserve. 26 Now that was my understanding from the 27 discussion this morning, but help me out because your 28 discussion with Mr. Brett seems to have gone the other Les Services StenoTran Services Inc. 613-521-0703 1553 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 way, and I have this slight problem of reading the word 2 utility here, and hearing shareholders in your oral 3 testimony, and utility could be a conduit for either, 4 i.e., they are ratepayers, or shareholders. So I would 5 like that clarified. 6 MR. BIRMINGHAM: The discussion that we had 7 this morning, Dr. Jackson, is unchanged. That is 8 generally speaking most of the assets that the utility 9 would dispose of are not in a separate class which was 10 the example that Mr. Brett just put to me, but rather 11 form part of a class of many assets of that similar 12 type. Therefore, to the extent that they are disposed 13 of that gain or loss would be accounted for within the 14 accumulated depreciation allowance for those assets. 15 So the gain or loss isn't recognized until all 16 of those assets are disposed of, and you can measure 17 what the overall impact was for that group of assets 18 that's consistent with the pooled method of accounting 19 for the utility. 20 The utility doesn't get any pick-up though 21 from that treatment because the depreciation that the 22 utility charges is on a straight line basis only on 23 cost. So the cost basis doesn't change, we continue to 24 apply the same amount. It's only in accounting for the 25 accumulating depreciation reserve, and in the end at the 26 end of the life of those assets then we will have true- 27 up effectively of all of the pluses and minuses for that 28 class. Les Services StenoTran Services Inc. 613-521-0703 1554 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Now you are right to the extent that those are 2 accounted for and rate base if there's some sort of 3 ongoing cost of service determination at some point in 4 the future rate base then would pick-up the changes to 5 the accumulated depreciation allowance by virtue of 6 those gains or losses, but there's no effect on the 7 depreciation expense during the PBR period if that's 8 where you were going. 9 MEMBER JACKSON: No I think I'm with you. So 10 although there would be no increment in dollar return 11 because the base were decreasing if we were still 12 measuring against a notion of rate base you would get a 13 slight pick-up in percentage rate of return, but no 14 pick-up in dollar return if I understand it correctly. 15 MR. BIRMINGHAM: To the extent that you are 16 measuring it against a smaller base. 17 MEMBER JACKSON: Yes. 18 MR. BIRMINGHAM: That would be true yes. 19 MEMBER JACKSON: Right. If there were 20 rebasing then at the end when there was a rebasing you 21 would have a smaller rate base from which to assess the 22 reasonableness of rates and give you another PBR process 23 going forward if that were the kind of rebasing used. I 24 realize we haven't gotten very far into that matter yet. 25 MR. BIRMINGHAM: No we still have that to look 26 forward to this week. 27 MEMBER JACKSON: Thank you. Mr. Brett, sorry 28 for that interruption. Les Services StenoTran Services Inc. 613-521-0703 1555 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Mr. Birmingham, do you have any 2 plans to make any significant asset dispositions in the 3 next few years? 4 MR. BIRMINGHAM: No. 5 MR. BRETT: With respect to volatility, 6 pricing volatility moving on to the risks you would 7 agree with me that I guess the largest single cost item 8 is the cost of gas. The cost of gas is going to 9 continue to be a pasture item under your scheme. It 10 will be volatile as we have seen. So volatility will 11 continue in an overall sense for the gas customer, the 12 system gas customer certainly, or any gas customer. 13 MR. BIRMINGHAM: To the extent that the 14 commodity value fluctuates then system customers will 15 pay for whatever the cost of the commodity is. 16 MR. BRETT: Assuming that's true for gas 17 transportation we have heard recently that TransCanada 18 tolls are projected to increase from $1.00 to $1.40 next 19 year. Those tolls are volatile, and that's not going to 20 change under PBR. That's a passthrough item. 21 MR. BIRMINGHAM: The upstream transportation 22 tolls are a passthrough, yes. 23 MR. BRETT: Now with respect to retroactive 24 adjustments gas costs adjustments can be retroactive 25 adjustments as well as perspective adjustments. Is that 26 fair? 27 MR. BIRMINGHAM: I'm sorry can you say that 28 again? Les Services StenoTran Services Inc. 613-521-0703 1556 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: Gas cost, you can adjust the price 2 of gas cost. It's been adjusted sometimes in the past 3 retroactively under cost of service as well as 4 perspectively. 5 MR. BIRMINGHAM: The quarterly rate adjustment 6 mechanism adjusts the cost of gas prospectively. That 7 is we use a 12 month looking forward consensus forecast 8 to determine that. The only retroactive adjustment that 9 happens with respect to gas cost is in the disposition 10 of the deferral accounts that are related to those gas 11 costs. 12 MR. BRETT: Right, and that won't change 13 under PBR. 14 MR. BIRMINGHAM: That's right. 15 MR. BRETT: So the customers will still face 16 volatility, and they will still face retroactivity. 17 They won't face notwithstanding the fact that you fixed 18 the delivery tariff the customers are still going to see 19 volatility and retroactivity under the PBR system. It 20 doesn't remove it in its entirety. 21 MR. BIRMINGHAM: That possibility still exists 22 with respect to the commodity and the upstream 23 transportation tolls. 24 MR. BRETT: I think you mentioned under cost 25 of service there was a retroactivity problem generally, 26 because hearings took place not always in a timely 27 fashion. But would you agree with me that if hearings 28 are scheduled in a normal way, as they have been in Les Services StenoTran Services Inc. 613-521-0703 1557 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 recent years, to end before the beginning of the gas 2 year, there shouldn't be a retroactivity problem -- any 3 more retroactivity problem under cost of service than 4 under PBR? 5 Indeed, you are proposing retroactive rates. 6 You are proposing to go back and start at 2000 in terms 7 of your PBR scheme, are you not? So I don't really 8 see -- or you do not agree with me that there is no 9 fundamental reason, intrinsic reason why cost of service 10 ratemaking is any more retroactive than PBR ratemaking? 11 That's what I'm really getting at. 12 MR. BIRMINGHAM: Well, for a given year to the 13 extent that a cost of service proceeding is held and the 14 Board's decision and order are received in advance of 15 the year in which those rates begin, then they can be 16 applied prospectively. You won't know necessarily what 17 they are until you get the Board's order which is 18 different than what our price cap proposal is. 19 But to the extent that you want to deal 20 exclusively with the timing, then you can eliminate 21 retroactivity under cost of service regulation with 22 respect to the delivery rates by ensuring that the cost 23 of service hearings are held and finalized in advance of 24 the test year to which they apply. 25 MR. BRETT: Well, you told Mr. Warren this 26 morning that small customers couldn't avail themselves 27 of the fixed price option unless they backed into it 28 through an aggregator or a marketer. In other words, Les Services StenoTran Services Inc. 613-521-0703 1558 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 you have a 5 million cubic metre threshold test which 2 you say came out of the settlement order in the last 3 settlement agreement in the last case. 4 Leaving aside the origins for a moment, one of 5 your points I think is under PBR that large customers 6 can fix their rate for five years. Do you agree with me 7 that smaller customers, like schools, for example, 8 because the level at which you apply that 5 million 9 cubic metre test is the account, correct? It's not the 10 aggregated legal entity. In other words, if I have 11 500 schools in my district, if my district used 12 5 million cubic metres of gas annually, that wouldn't 13 help me? Each of my schools would have to do the same. 14 MR. BIRMINGHAM: That's right. 15 MR. BRETT: So I might give you that simple 16 example, a school board couldn't directly itself make a 17 five-year contract with Union under this proposal for a 18 fixed rate. The only way it could do it, would you 19 agree with me, is to put itself in the hands of a 20 marketer and effectively have the marketer make a five- 21 year deal with Union? That's how I read the evidence. 22 I want to make sure I read it correctly. 23 MR. BIRMINGHAM: I think the discussion I was 24 having with Mr. Warren is that customers probably 25 wouldn't. It's not necessarily that they couldn't. I 26 guess in theory -- 27 MR. BRETT: Single family customers -- 28 MR. BIRMINGHAM: -- a residential customer Les Services StenoTran Services Inc. 613-521-0703 1559 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 could come to us and try to negotiate a rate. I just 2 don't think that's going to happen. We would need some 3 additional billing capability to be able to do that. 4 MR. BRETT: I agree with you. I'm not talking 5 about residential customers. I'm talking about 6 institutions like school boards, hospitals, 7 universities, people who have the capabilities, perhaps, 8 with their organizations, but who have a huge number of 9 like middle-sized facilities. A large commercial 10 property developer or owner has 500 buildings across the 11 country and no one of them are across your franchise, no 12 one of them would be, I think we can agree, 5 million 13 cubic metres. 14 In the aggregate they could certainly be so 15 and they would be sophisticated parties, or they might 16 think themselves that way. 17 Just confirm for me under your scheme as 18 formulated presently they can't do that. 19 MR. BIRMINGHAM: Subject to our amending our 20 billing system, Mr. Brett, those customers could 21 negotiate a rate if they wanted to. There's nothing 22 about our PBR proposal that would prevent them from 23 doing that. 24 MR. BRETT: You say subject to amending your 25 billing system. You can do that? You might amend your 26 billing system readily to accommodate that? 27 MR. BIRMINGHAM: Whenever I use the words 28 "billing system" and "readily" in the same sentence, I Les Services StenoTran Services Inc. 613-521-0703 1560 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 get very concerned. But there is the ability to amend 2 the billing system and provide that capability, yes. 3 MR. BRETT: With respect to what you 4 characterized as the number one problem, the asset 5 utilization risk -- and I think that is set out in 6 pages 66 and 67 of your evidence. I want to just touch 7 on a couple of points there. 8 You outlined several specific aspects of this 9 problem or challenge, and you discussed this at some 10 length this morning, the desertion of large industrial 11 customers to heavy fuel oil. Could you tell me just 12 before we get into this, very roughly, what is your 13 throughput for your own franchise area in Bcf? Just so 14 we don't get lost in numbers here, because I have been 15 using cubic metres. What would the total roughly be in 16 Bcf for infranchise throughput to all rate classes? 17 MR. BIRMINGHAM: I think if you look at 18 Schedule 3 in Appendix H, Mr. Brett, you will see -- 19 MR. BRETT: Yes, that's in cubic metres 20 isn't it? 21 MR. BIRMINGHAM: The throughput. 22 MR. BRETT: Okay, Schedule 3, Appendix H. 23 Yes, you have that in -- that's the one I was 24 remembering. That's 14.9 billion cubic metres. Is that 25 what that is? 26 MR. BIRMINGHAM: Column B is the total actual 27 volume for 1999. 28 MR. BRETT: Right. Les Services StenoTran Services Inc. 613-521-0703 1561 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BIRMINGHAM: Which should be 2 14,927 10(6)m(3). 3 MR. BRETT: What is that in Bcf, roughly, 4 please? 5 MR. BIRMINGHAM: About 527 Bcf. 6 MR. BRETT: Okay. And that's your infranchise 7 throughput. You would have additional throughput in 8 your transmission system that goes out of franchise, or 9 is that the total of everything? 10 MR. BIRMINGHAM: That's all of the 11 infranchise throughput. The exfranchise is incremental 12 to that. 13 MR. BRETT: Do you know offhand, roughly, how 14 much the exfranchise is? I couldn't find that number 15 too easily, but I am sure it's there somewhere. 16 MS ELLIOTT: The total throughput, Mr. Brett, 17 is at Exhibit B, Tab 2, Schedule 7. On line 10 we are 18 showing total 1999 approved throughput of 30,696 and 19 that's measured in 10(6)m. 20 MR. BRETT: What was that reference again? 21 MS ELLIOTT: Exhibit B, Tab 2, Schedule 7. 22 MR. BRETT: Okay, thank you. 23 MS ELLIOTT: If you take the infranchise 24 throughput away from that number you would arrive at 25 about 569 Bcf of throughput for the exfranchise market. 26 MR. BRETT: Okay, now with that background, or 27 backdrop, your first point is the loss of industrial 28 revenues. Do you have 275 billion there that is -- Les Services StenoTran Services Inc. 613-521-0703 1562 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 sorry, you have 23 Bcf -- 23 Bcf has immediate 2 alternative fuel burning capabilities. Has any of that 3 switched in 1999? 4 MR. BIRMINGHAM: Not for the entire year, 5 Mr. Brett. Typically what happens is the customers who 6 have the alternate fuel burning capability would do it 7 for a portion of the year. 8 MR. BRETT: Right. So some have switched for 9 a portion of the year? 10 MR. BIRMINGHAM: Some in the past have 11 switched for a portion of the year. 12 MR. BRETT: In the current 1999 since these 13 figures were -- 14 MR. BIRMINGHAM: I don't know. 15 MR. BRETT: What about year 2000, do you know 16 there at all? 17 MR. BIRMINGHAM: No, I don't. 18 MR. BRETT: Okay. Could you undertake to find 19 out, please? 20 What I guess I would be interested in, 21 Mr. Chairman, if it is possible would be the number of 22 entities that have switched and for what period of time 23 during the year? What length of time? I mean how many 24 months. If it is a month or -- I would like to get some 25 sense of the order of magnitude of this challenge. 26 THE PRESIDING MEMBER: Mr. Birmingham, do you 27 understand the question? 28 MR. BIRMINGHAM: Yes. I think the way that Les Services StenoTran Services Inc. 613-521-0703 1563 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Mr. Brett had characterized he wanted the number of 2 customers who have switched for all or part of the year 3 during 1999 or 2000. 4 MR. BRETT: And the volumes for which -- the 5 volumes they had switched. 6 MR. BIRMINGHAM: That is just what I was going 7 to ask. I presume you want to see the volumes as well. 8 MR. BRETT: Yes, please. Yes. And if you 9 have a forecast for the balance of 2000. 10 DR. WIGHTMAN: G9.3. 11 UNDERTAKING NO. G9.3: Mr. Birmingham to 12 provide the number of customers who have 13 switched for all or part of the year 14 during 1999 or 2000 and the volumes and a 15 forecast for the balance of 2000 16 MR. BRETT: With respect to the -- with 17 respect to your second item on page 60 of 67, which is 18 the IPP contracts, you are aware, I think, generally are 19 you, Mr. Birmingham, that these contracts -- these 20 Independent Power Producers' contracts with a successor 21 company to Ontario Hydro, the Minister of Energy is on 22 record saying that those contracts will be honoured, 23 those volumes will be honoured? 24 MR. PENNY: This evidence was put on the 25 record this morning, Mr. Chairman. Mr. Warren asked 26 precisely this question. 27 MR. BRETT: I don't think I heard the answer. 28 Perhaps you could just give me the answer if you don't Les Services StenoTran Services Inc. 613-521-0703 1564 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 mind. I just need a yes. 2 MR. BIRMINGHAM: Yes, that was the intent of 3 our response in the first paragraph of Exhibit C3.65. 4 MR. BRETT: You go on to say in that paragraph 5 though on page 67: 6 "This restructuring may well reduce..." 7 My emphasis" 8 "...may well reduce the economics of some 9 of the existing IPP facilities." 10 How can that be? When the Minister has said 11 that all of those contracts will be honoured in their 12 fullness, how is it that you can hold out the prospect 13 that somehow you are led to the conclusion that that may 14 reduce the volumes? 15 I do not understand that. I think that is 16 totally -- it is totally contrary to the known facts 17 about these contracts and I would like your comment on 18 that. 19 MR. BIRMINGHAM: There are really two aspects 20 to that, Mr. Brett. The first one is in the second 21 paragraph of the response to C3.65. 22 MR. BRETT: Let me just turn that up, please, 23 if I may. 24 --- Pause 25 MR. BRETT: Okay. I am sorry. The second 26 paragraph. 27 MR. BIRMINGHAM: Yes. The message in that 28 paragraph really was to say that from an economic Les Services StenoTran Services Inc. 613-521-0703 1565 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 standpoint the Independent Power Producers generally 2 represent at a highest cost to satisfy base load demand. 3 So to the extent that there are more economic sources of 4 power it would make sense at some point to use those 5 more economic sources, in particular when Pickering 6 comes back on. 7 MR. BRETT: You are speaking theoretically 8 here. I mean in economic terms. But you understand 9 that those contracts are 15 and 20 and 25 year contracts 10 and they don't have out clauses in them. The government 11 is obliged to purchase that power for that period of 12 time. 13 MR. BIRMINGHAM: I understand that the 14 government has made that commitment right now. 15 MR. BRETT: That is right. 16 MR. BIRMINGHAM: But the risk that we were 17 trying to get at there was the fact that to the extent 18 that the economics of those plants were such that the 19 government found another way to deal with their 20 commitment that it would make sense that those 21 Independent Power Producers not be the ones to supply 22 the power and because Union has one-year renewable 23 contracts with most of those Independent Power 24 Producers, there is the risk that we would lose that 25 supply. 26 The second piece is to the extent that the 27 Independent Power Producers are trying to improve the 28 economics of their supply and that is the third Les Services StenoTran Services Inc. 613-521-0703 1566 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 paragraph in C3.65, because of their location to major 2 pipelines, I think there is going to be -- there may be 3 an increased interest in bypassing Union's system. 4 MR. BRETT: Well, you are saying -- I won't 5 belabour this, Mr. Birmingham, I think you are saying 6 that somehow the government might break their contracts. 7 It is the fact of the matter that there are these -- 8 there is this -- this commitment has been given and 9 indeed some of the non-utility generators have some 10 capability, as I understand it, to increase production 11 at their sites. And if they were to do that on some 12 sort of sharing basis with the government in terms of 13 sharing a revenue -- incremental revenue streams, you 14 would have increased gas supply, not decreased gas 15 supply? 16 MR. BIRMINGHAM: My only point is, Mr. Brett, 17 that the government can satisfy its obligations under 18 those contracts in a number of ways. To the extent that 19 those generators do not continue to produce power and 20 use natural gas to produce that power during the term of 21 the PBR, there is that risk. The second piece is even 22 if the contracts are in place to the extent that those 23 power generators bypass Union's system, that forms the 24 other part of the risk. 25 MR. BRETT: Mr. Birmingham, wouldn't you agree 26 with me given that what you know about bypass in this 27 province and the history of OEB decisions on bypass 28 pieces, we are about as likely to get approval, Les Services StenoTran Services Inc. 613-521-0703 1567 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Independent Power Producers are about as likely to get 2 approval to do a physical bypass of your system as -- I 3 don't know -- the temperature suddenly dropping to 4 50 degrees outside today? Bypass -- 5 MR. BIRMINGHAM: Is that 50 Celsius? 6 MR. BRETT: Fifty Fahrenheit. 7 Bypass has not been a very easy sell in this 8 jurisdiction, Mr. Birmingham. And there is nothing to 9 suggest that I see out here that is going to change 10 that. 11 MR. BIRMINGHAM: I agree that there have been 12 a limited number of bypass applications to the Ontario 13 Energy Board over the last number of years, Mr. Brett. 14 But the Board, both in its legislation and I think 15 practically, is going to be dealing with a much more 16 competitive energy market and one of the aspects of that 17 increased competitive market, I think, is going to be 18 increased bypass -- an increased number of bypass 19 applications. And it will not surprise me that that 20 comes forward and I think the Board is going to be more 21 open-minded about that because of the -- because of the 22 desire to have a more competitive energy market in 23 Ontario. 24 MR. BRETT: Sort of a delayed implementation 25 of E.B.R.O. 410, 11 and 12? Delayed by 20 years. 26 MEMBER JACKSON: Everything has its time, 27 Mr. Brett. 28 MR. BIRMINGHAM: Everything has its time, Les Services StenoTran Services Inc. 613-521-0703 1568 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Dr. Jackson. 2 MR. BRETT: Well, the -- you are aware, 3 Mr. Birmingham, that TransAlta has announced publicly 4 that they are going to break ground for their co- 5 generation project in Sarnia, sort of smack in the 6 middle of your service area in the fall, some time this 7 fall, are you? Does this come as any great surprise 8 to you? 9 MR. BIRMINGHAM: No, sir, we have been working 10 with Transalta and the partners to that joint venture in 11 developing that project. 12 MR. BRETT: And I understand that it is in the 13 order of 500 megawatts. Correct? 14 MR. BIRMINGHAM: That is right. 15 MR. BRETT: And my understanding is very 16 roughly that for every 100 megawatts of power 17 production, assuming you are running at base load or 18 something pretty close to base load, you are going to 19 consume about 5 Bcf of gas a year. Is that fair? Or 20 would you take that subject to check? 21 MR. BIRMINGHAM: I will have to get back to 22 you, Mr. Brett. I will take it subject to check. 23 MR. BRETT: All right. So you will take it 24 subject to check. If you have a problem, you will get 25 back and let me know if you wanted to contest it. I get 26 this information from, well, impeccable sources. 27 --- Laughter 28 MR. PENNY: That remains to be seen. Les Services StenoTran Services Inc. 613-521-0703 1569 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: But I could always be wrong. 2 And you have spoken about other cogeneration 3 projects with me a couple of times, and again with 4 Mr. Warren this morning, so I won't beat that one any 5 further, except to ask you that, to the extent that you 6 have more projects going forward, like Sarnia -- they 7 may not all be as big as Sarnia but small projects like 8 the one going forward at Windsor, the Toromont Project 9 at Windsor, and other like projects, they will help you 10 deal with this issue of asset utilization and also with 11 the issue of declining use, general declining use, on a 12 per residential customer basis. In other words, they 13 will tend to offset -- they are increased throughput for 14 your system, first of all. Correct? I mean, they are 15 that. 16 MR. BIRMINGHAM: They are increased throughput 17 for the system, I agree with that, but that increased 18 throughput comes with a cost. 19 MR. BRETT: It comes with a cost. I'm not 20 suggesting it's zero cost but, on the other hand, you 21 would agreed with me, for example, when you are doing 22 something like Sarnia, or where an industrial company 23 wishes to make a cogeneration investment at its site -- 24 same for a hospital or a university -- you already have 25 the infrastructure built to their site. It's not a case 26 of having to connect a village or a township that you 27 are not presently serving. 28 So wouldn't it be reasonable to assume the Les Services StenoTran Services Inc. 613-521-0703 1570 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 costs would be considerably less for Union, in terms of 2 new infrastructure to service that inside defence plant, 3 than they would be to attach brand new towns, new 4 townships, the sort of thing you have had to do in the 5 recent years that you say has caused you to have a 6 relatively high capital, well, a relatively -- forgive 7 the use of the term -- inefficient use of capital? 8 MR. BIRMINGHAM: I think it depends on the 9 circumstances, Mr. Brett. Generally speaking, that's 10 true. It depends on where the plant might be. 11 To the extent that we need to reinforce our 12 system, there would be much higher costs associated with 13 that expansion. But I think, generally speaking, your 14 point is that growth helps us manage the exposures under 15 the price cap plan, and we agree with that. 16 MR. BRETT: Now, you mentioned, again on 17 page 67, that you saw more competitively priced 18 commercial and industrial applications, competitive 19 applications going against gas. Aside from the water 20 heater issue, which you discussed with Mr. Warren this 21 morning, are there any others? Or is the water heater 22 issue the most -- is that the point where you thought 23 you were most vulnerable to incursions by electricity on 24 your end-use market? 25 MR. BIRMINGHAM: Clearly, because of the ease 26 which water heaters can be replaced, that's where we see 27 the most vulnerability, in terms of the use of natural 28 gas. Some of the anecdotal evidence that we provided at Les Services StenoTran Services Inc. 613-521-0703 1571 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 Exhibit C3.66 also speaks to space heating, as well as 2 water heating, but the impact that we had quantified 3 here was with respect to water heaters. 4 MR. BRETT: You are not suggesting a wholesale 5 replacement of gas space heating by electric space 6 heating, are you, in the PBR term? 7 MR. BIRMINGHAM: No. 8 MR. BRETT: No. With respect to new 9 facilities and the risk, you say that you have the risk 10 of a challenge of expanding your system under PBR. I 11 take it that you have agreed that in assessing the 12 economics of your expansion projects, you are not 13 proposing to change any of your existing policies, that 14 is to say policies with respect to capital contributions 15 or any of the parameters that you use to calculate the 16 profitability of those projects. That is not something 17 that you are proposing that we change under PBR -- 18 discount rates, that sort of thing? 19 MR. BIRMINGHAM: Well, in terms of our 20 policies, Mr. Brett, I want to distinguish between the 21 policies and then the actual parameters that we use. We 22 are proposing to change any of our policies, and in 23 particular with respect to our distribution expansion, 24 we are going to continue to use an individual project 25 profitability index of 0.8 and a rolling profitability 26 index for the distribution portfolio of 1.0. 27 Now with respect to the parameters that we use 28 to evaluate each individual project, those change on a Les Services StenoTran Services Inc. 613-521-0703 1572 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 project-by-project and year-by-year basis, and that's 2 really to reflect the circumstances that exist at the 3 time, for instance, with respect to our cost of capital 4 or with respect to the characteristics of an individual 5 project. The only parameter in the evaluation that we 6 don't change is the period over which we evaluate the 7 economics, and that will remain unchanged. 8 MR. BRETT: And that period? 9 MR. BIRMINGHAM: For 40 years. 10 MR. BRETT: For 40 years. But you say you 11 would change you discount rate, for example, based on 12 changing your cost of capital. Is that it? 13 MR. BIRMINGHAM: That's right. 14 MR. BRETT: But you wouldn't be changing, for 15 example, the cost that you typically included in your 16 calculation, the capitalization ratios. You say each 17 one is different. Well each one, obviously, is 18 different. There are different amounts of pipe and 19 different amounts of engineering and the like, but you 20 are not going to change any of the manner in which you 21 do that calculation? 22 MR. BIRMINGHAM: In terms of the things that 23 we are going to consider in the economics, we are going 24 to keep those the same, that's right. 25 --- Pause 26 MR. BRETT: Now, you are aware, I think, that 27 one of the issues that has come up in other areas, other 28 jurisdictions, when regulators are looking back at Les Services StenoTran Services Inc. 613-521-0703 1573 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 experience under performance-based ratemaking, is the 2 issue of under-investment. In other words, regulators 3 look to see what companies had forecast their investment 4 was going to be under cost of service and, in some 5 cases, they appear to have noted a falling off of 6 investment, particularly in the early years of PBR. 7 Now, am I understanding correctly that when 8 you shift gears into PBR your incentives with respect to 9 capital investment are going to change somewhat, 10 particularly for that aspect of it that is not directly 11 linked to new customer additions, although I would 12 myself suggest that it may very well change for both 13 categories. 14 Do you agree that your incentive will change, 15 that you no longer have the incentive you have under 16 cost of service to invest robustly in new assets, new 17 rate base? 18 MR. BIRMINGHAM: Well, clearly I think the 19 price cap framework gives you a greater incentive for 20 capital efficiency. 21 MR. BRETT: What about timing of investment, 22 does it give you an incentive to postpone investment? 23 MR. BIRMINGHAM: That would all be part of 24 it, yes. 25 MR. BRETT: That would be part of capital 26 efficiency, in the sense that the later you make your 27 investment in the PBR period, the less interest rate 28 burden you have to bear over the five-year period, for Les Services StenoTran Services Inc. 613-521-0703 1574 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 example. 2 MR. BIRMINGHAM: Well, I think generally, 3 Mr. Brett, what you find in companies who operate in a 4 competitive market is that capital is one of the last 5 resorts. They don't spend capital until they have to, 6 and I think that is one of the benefits of PBR as well, 7 is that you have an incentive for the utility that is 8 similar to what happens in a competitive company. 9 MR. BRETT: Your SQIs, your Service Quality 10 Indicators as I examine them and they look like, I guess 11 they are similar to consumers, they don't seem to 12 contain any kind of measure or any kind of criteria 13 whereby a ratepayer or a potential ratepayer might rely 14 on, for example, to get rapid service from you. 15 I mean why would you not have something there 16 that talks to how long you would need to hook up a 17 customer after a request if they are in an area where 18 you have pipe laid? Or perhaps if they are in an area 19 where you don't have pipe laid, what is your average 20 time taken to some sort of criteria which would deal 21 with the time taken to make the required expansion? I 22 mean would you not think something like that, criteria 23 like that would be helpful? 24 In other words, how does the regulator know -- 25 how do people know in general that you are expanding 26 your system to meet new demands in a timely fashion? 27 You are not simply saying, "No we will do that two or 28 three years from now. We will hold off with what we Les Services StenoTran Services Inc. 613-521-0703 1575 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 have got. We are under price cap. We will set up the 2 cogen plants but we won't -- the low cost, high volume 3 stuff because we are not limited on volume, we have a 4 price cap. But we will slow down on servicing new 5 areas, new towns, new subdivisions and the like." 6 What is to stop you from doing that? Where is 7 your incentive not to do that? 8 MR. BIRMINGHAM: Well our incentive generally 9 is to hook up customers and have them using natural gas, 10 that in fact is how the utility makes money. 11 What we did do though, Mr. Brett, is you can 12 see the criteria that we used in looking at the service 13 quality indicators when we laid them out on page 57 and 14 through the last paragraph and discussions with Enbridge 15 Consumers Gas. One of the reasons that we didn't pick 16 something like, how quickly do you attach a new 17 customer, is that we attach roughly 25,000 customers a 18 year and we have a million. So it would be a Service 19 Quality Indicator that would deal with the fairly small 20 proportion of our overall customer base. 21 Now to the extent that that is something that 22 customers and other interested parties feel should be 23 added to the PBR proposal, that is something that we 24 have committed to in the context of the customer review 25 process. That is we will develop and implement new 26 service quality measures to the extent that people find 27 that they are more relevant in a lighter-handed 28 regulation environment. Les Services StenoTran Services Inc. 613-521-0703 1576 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: I want to talk to you for a moment 2 about your interest rate risk. I think the best way to 3 do this is to just briefly -- to summarize what you are 4 saying to us I think, and that is that as I understand 5 your position your admitted cost of capital has fixed 6 rates at the moment. Your cost of -- your debt that is, 7 for the most part, your long-term debt has fixed rates. 8 You are saying you will take the risk or you will meet 9 the challenge of paying the interest on new capital 10 required either debt or equity to finance expansion of 11 your system but with respect to equity you have a 12 passthrough item. 13 I want to talk to you about a different item, 14 about a different aspect of this. I want to focus on 15 your embedded debt for a moment. And will you just give 16 me -- your rate base is, give or take, about $3 billion? 17 A high level, a little under $3 billion. 18 MR. BIRMINGHAM: I think the number that you 19 are looking for, Mr. Brett, is at Exhibit B, Tab 2, 20 Appendix H, Schedule 7. And that shows the utility rate 21 base being $2.7 billion, and the long-term debt portion 22 of that being just a little over $1.6 billion. 23 MR. BRETT: Right. Now there is an 24 interrogatory response -- well, let me just go at this 25 in one of the stages. You have an interrogatory in your 26 last case in E.B.R.O. 499, which dealt with -- well it 27 actually dealt with a question on your cost of capital 28 binder E, which had to do with debt coverage ratios. Les Services StenoTran Services Inc. 613-521-0703 1577 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 But I simply wanted to refer to it for one purpose only, 2 and I will read it out to you and I will get it to you 3 if you like here -- 4 MR. BIRMINGHAM: I wonder if you could give me 5 the number of it? 6 MR. BRETT: Yes, it's J1.ES.240. Sorry, 7 J1.E3, pardon me, panel. J1.E3.240, page 3. 8 What I wanted to use this for was simply to 9 outline what they have put forward, and this was dated 10 September 18 of 1998. You may wish to make a note of 11 that date because in fairness to you may take a view 12 something has changed since. But as of that date you 13 projected your embedded long-term debt costs for Union. 14 This is going out from years 1999 to 2003. 15 MR. PENNY: Mr. Chairman, did Mr. Brett have 16 this document this morning before nine o'clock may I ask 17 through you? 18 MR. BRETT: Actually the answer is no, I 19 didn't. I came across it doing some preparation later 20 on this morning. But I will give this document to them, 21 Mr. Chairman, there's nothing -- 22 THE PRESIDING MEMBER: Well, what about you 23 giving the document to the panel now and we break for 24 15 or 20 minutes to have our afternoon break, and then 25 they will have had a chance to look at it in the 26 meantime. 27 MR. BRETT: That's fine, sir. 28 MR. PENNY: Can we find out perhaps before we Les Services StenoTran Services Inc. 613-521-0703 1578 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 break what it is Mr. Brett wants and then the panel can 2 turn their minds to that over the break? 3 THE PRESIDING MEMBER: Mr. Brett, perhaps you 4 could identify to the panel the question you wish them 5 to address. 6 MR. BRETT: Yes the question I wish to pose, 7 Mr. Chairman, Mr. Thompson has just shown me an 8 interrogatory response here in this case that also deals 9 with which I have. 10 But the question really is that given your 11 indebted cost of debt going forward in each of the next 12 several years, as you refinance that debt at current 13 interest rates, I want to ask you about the savings that 14 you anticipate generating in each of those occasions. 15 And you have covered some of that here in G3.7 in this 16 case. 17 MR. BIRMINGHAM: That's all of it, Mr. Brett. 18 That was in response to Mr. Jackson's question, and he 19 was referring to Note 9 of the annual report for Union 20 Gas which had all of our long-term debt in it. So what 21 we did is we listed all of the long-term debts that 22 would refinance during the five year PBR term. 23 MR. BRETT: Right. 24 MR. BIRMINGHAM: And we assumed, for the 25 purpose of illustrating the effect, that all of them 26 would be refinanced at basically the current rate, 27 without attempting to forecast what the interest rate 28 might be during that time frame. Les Services StenoTran Services Inc. 613-521-0703 1579 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MR. BRETT: At the current rate for Union's 2 long-term debt. 3 MR. BIRMINGHAM: Right. So that is what the 4 column entitled "Potential Savings", it is the very last 5 column, the response to G3.7 does. 6 MR. BRETT: I see that. So just to summarize 7 to make sure I understand, those are all of the 8 refinancings that you contemplate during the PBR period. 9 Well, in that event, Mr. Chairman, I think I 10 can short circuit this. This covers the point I wanted 11 to get to. 12 THE PRESIDING MEMBER: Thank you. Should we 13 still break? 14 MR. BRETT: Sure. Why not. 15 THE PRESIDING MEMBER: We will break now and 16 we will come back in 20 minutes. 17 --- Upon recessing at 1532 18 --- Upon resuming at 1555 19 THE PRESIDING MEMBER: Before we get started, 20 you have got some responses. Do you want to file them? 21 MR. PENNY: Yes, Mr. Chairman. For the record 22 there is filed today G2.6, which was actually an oral 23 response given by Ms Elliott at page 706 of the 24 transcript, but she reduced it to writing. And then 25 there is 4.2 dealing with the return on equity and then 26 6.3 and 6.4 are simply corrected versions of what had 27 already been passed out. These were the ones that 28 identified Mr. Thompson as the questioner when in fact Les Services StenoTran Services Inc. 613-521-0703 1580 ELLIOTT/BIRMINGHAM 1 it was Mr. Janigan. 2 THE PRESIDING MEMBER: Thank you. 3 Mr. Brett. 4 MR. BRETT: Mr. Chairman, my friend has a 5 comment on a procedural matter, I believe. 6 THE PRESIDING MEMBER: Sorry. Mr. Quinn. 7 MR. QUINN: Thank you, Chair Dominy. 8 We are -- I apologize if I am not familiar 9 with the protocol. But I was to understand that Union 10 was to approach us with some responses to the inquiries 11 we made on the profitability of the capital projects, 12 expansion projects made last Wednesday. Our hope by 13 your direction is that we would hear from them before 14 this panel sat. Since system expansion is under this 15 panel, I have yet to receive anything from Union in that 16 regard and I didn't know if there was an alternative to 17 taking a formal undertaking at this point or if this is 18 the appropriate time to do that? 19 THE PRESIDING MEMBER: Mr. Penny. 20 --- Pause 21 MR. PENNY: Mr. Quinn can put his request 22 formally on the record. It doesn't matter to us. We 23 are looking for what it is he asked for but haven't been 24 able to determine it yet. But if Mr. Quinn would feel 25 better with a formal request, he is perfectly at liberty 26 to make it. 27 THE PRESIDING MEMBER: I was just trying to 28 clarify. Is there or is there not an undertaking on Les Services StenoTran Services Inc. 613-521-0703 1581 ELLIOTT/BIRMINGHAM 1 this? There is an undertaking or there isn't an 2 undertaking? 3 MR. QUINN: There is not on this specific 4 request on the capital expansion projects relative to 5 their actual cost and volumes captured or resulting 6 productivity. In terms of process, we were to 7 understand that this panel was going to address system 8 expansion. And since it was an internal Union matter as 9 opposed to a matter for their consultants that this 10 would be maybe a more appropriate time to have that 11 accomplished. 12 THE PRESIDING MEMBER: I am just trying to 13 look at the undertakings on that day. 14 MS LEA: I don't think there is a formal 15 undertaking, Mr. Chairman, for this matter. 16 MR. PENNY: You may recall there was the 17 discussion on the transcript about this in which we 18 weren't sure -- the company wasn't sure whether it had 19 the data or had it in a form that would be accessible 20 and we were looking into that. And I don't think it was 21 ever given a formal -- we are still looking. We haven't 22 found the kind of thing Mr. Quinn was asking for yet. 23 But it was not at the time assigned an undertaking 24 number because the company agreed to discuss it with 25 Mr. Quinn off line to determine more precisely what it 26 was he was looking for. We did that. We are looking 27 for the information. 28 THE PRESIDING MEMBER: Mr. Penny, this is Les Services StenoTran Services Inc. 613-521-0703 1582 ELLIOTT/BIRMINGHAM 1 information that Mr. Quinn believes he needs in order to 2 ask or pose his questions to the panel on system 3 expansion. What is the likelihood that one would be 4 able to provide him the information or the best 5 information you could provide him so that he is in a 6 position to ask questions? It looks to me as though 7 this panel will be here tomorrow. 8 MR. PENNY: It appears that this panel will be 9 -- I mean this panel will be back tomorrow for sure. 10 But the problem is that the request involves looking 11 back at data from 1986 to 1996 on individual projects. 12 It is just not something that is sitting around on 13 someone's shelf that they can pull off. 14 THE PRESIDING MEMBER: Okay. 15 MR. PENNY: All I can say is that the company 16 is doing its best and if we can -- if we have that 17 information available, we will make it available. If we 18 determine that it is not possible to get that 19 information, we will advise the parties and Mr. Quinn. 20 THE PRESIDING MEMBER: Mr. Quinn, at the 21 moment that is the best I can do because if the company 22 doesn't have that information available, maybe we can 23 sort that out tomorrow because it looks as though it 24 will be tomorrow before we reach you and we can clarify 25 then how best to proceed. 26 MR. QUINN: I am satisfied with that, sir. I 27 didn't want the opportunity to lose the right to 28 question this panel and in terms of keeping on with the Les Services StenoTran Services Inc. 613-521-0703 1583 ELLIOTT/BIRMINGHAM 1 process, I didn't want to go back later on this week. 2 So I appreciate your understanding and I will be here 3 tomorrow morning and hopefully we can put this matter to 4 rest. 5 Thank you. 6 THE PRESIDING MEMBER: Hopefully it works out. 7 Thank you, Mr. Quinn. 8 MR. PENNY: Mr. Chairman, apropos the panel, 9 Ms Elliott is not available tomorrow but Mr. Birmingham 10 assures me that he can carry out without her on this 11 subject. So we will -- 12 MR. BIRMINGHAM: That was not the way I 13 represented it. 14 THE PRESIDING MEMBER: And I am sure that if 15 there is a question that Mr. Birmingham is unable to 16 answer, that it can be deferred. Because I think we are 17 going to see Ms Elliott back again, aren't we, or is 18 this the last -- 19 MR. PENNY: It may be that this is her last 20 appearance but I guess that depends on how things 21 unfold. 22 THE PRESIDING MEMBER: But then an undertaking 23 could be taken if necessary? 24 MR. PENNY: Yes, absolutely. 25 THE PRESIDING MEMBER: Thank you. 26 Mr. Brett, we are back to you. 27 MR. BRETT: Thank you, Mr. Chairman, 28 Dr. Jackson. Les Services StenoTran Services Inc. 613-521-0703 1584 ELLIOTT/BIRMINGHAM 1 CONTINUED CROSS-EXAMINATION 2 MR. BRETT: Just a few questions, panel, on 3 taxes and depreciation and one or two questions on off 4 ramps and then I will wind up. 5 With respect to the challenge you pose for 6 Union for changes in tax, property tax and capital 7 taxes, that is to say you manage those under the terms 8 of the PBR arrangement. Interrogatory F2.1 is your 9 first quarter results with the normalized 2000 and 10 forecast 2000 figures. If you could maybe turn that up. 11 MS ELLIOTT: We have that. 12 MR. BRETT: Okay. My question is on line 11 13 you have property taxes lumped together with capital 14 taxes and I wondered whether you could give me those two 15 numbers separate, that is, property taxes and capital 16 taxes on two -- as two separate entries for both 2000 17 normalized and forecast and 1999 actual? 18 I didn't see a separate number for capital tax 19 in the evidence. It might be there but it is not in 20 this interrogatory. It is not in this. 21 MS ELLIOTT: No, in most cases our 22 presentation groups those two items together. My 23 recollection is that property taxes are responsible for 24 about $48 million with capital taxes responsible for 25 seven. I will check that and get back to you if it is 26 anything different. 27 MR. BRETT: All right. So that is in all 28 three cases? Les Services StenoTran Services Inc. 613-521-0703 1585 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS ELLIOTT: Yes. 2 MR. BRETT: So in the actuals it is -- well 3 now, your actual property tax -- 4 MS ELLIOTT: The actual -- 5 MR. BRETT: -- your actual property tax in 6 1999 was 43.7 million. 7 MS ELLIOTT: It was 46 and -- 8 MR. BRETT: Sorry? 9 MS ELLIOTT: I would say the million dollar 10 increase is in the property tax component. 11 MR. BRETT: In the property tax component? 12 MS ELLIOTT: Yes. 13 MR. BRETT: Okay. If you wouldn't mind 14 confirming that. If you look just in this connection at 15 C21.149 -- C21.149, you see actual -- property tax 16 actual for 1999 is 43.7 million. Is that right? 17 MS ELLIOTT: Yes. 18 MR. BRETT: Am I reading that properly? So 19 that is really in the 1999 column in the F21 then of the 20 $54, $43.7 would be property tax, and then the balance 21 would be capital tax. 22 MS. ELLIOTT: Yes, that's correct. 23 MR. BRETT: Okay. Perhaps as you say you 24 could clarify for me the 2000 numbers forecast and 25 normalize for property tax and capital tax. 26 You had a deferral account for property tax in 27 1998-1999. Now I'm right in thinking that ends at the 28 end of 1999. Correct? Les Services StenoTran Services Inc. 613-521-0703 1586 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 MS. ELLIOTT: That's correct. 2 MR. BRETT: So you then move forward and that 3 was to accommodate restructuring of property taxes in 4 Ontario. You were going through a period of some 5 turmoil there so that the deferral account was put up to 6 capture that. Is that right? 7 MS. ELLIOTT: That's correct, and it has 8 subsequently been replaced by a non-routine adjustment 9 under the price cap proposal. 10 MR. BRETT: So the property tax under the 11 price cap proposal is a non-routine adjustment? 12 MS. ELLIOTT: To the extent that there's 13 further legislative changes that will significantly 14 impact property taxes in Ontario that would be why we 15 have defined the non-routine adjustment to deal with 16 municipal charges. 17 MR. BRETT: Right, but leaving that aside I 18 mean, am I right in understanding that you feel you are 19 basically through the period of legislative change with 20 respect to property tax? 21 MS. ELLIOTT: As far as we can see right 22 now, yes. 23 MR. BRETT: Now you have tended to, just 24 glancing at C21.149 you tended to over-forecast your 25 property taxes in the last several years to the tune of, 26 well it depends from year to year, but you have one year 27 in which you were slightly your actual was slightly 28 higher, but in the last four years you have a cumulative Les Services StenoTran Services Inc. 613-521-0703 1587 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 over-forecast of maybe $5 million, something like that. 2 Do you have any reason to think -- do you have 3 any sort of a forecast or a feeling where property taxes 4 will go in the next several years? Are they likely to 5 remain about where they are now? 6 MS. ELLIOTT: Property taxes are a function of 7 the capital investment. So to the extent that the 8 company increases its investment in property in Ontario 9 the property taxes will increase correspondingly. 10 As far as the tax rates I guess we are 11 expecting those to be managed within the price cap 12 formula, probably increasing no more than inflation 13 during the time frame. But the absolute amount of the 14 property taxes will depend on the amount of capital 15 invested in Ontario property. 16 MR. BRETT: You were saying any change in rate 17 applicable to the utility would be a non-routine 18 adjustment in either direction. 19 MS. ELLIOTT: Any change applicable to 20 legislative change, or municipal restructuring that's 21 beyond the utilities control, yes, is a non-routine 22 adjustment. 23 MR. BRETT: Are your property taxes peculiar? 24 Let me put it another way. Are they different in any 25 fundamental way from the property taxes applicable to 26 other kinds of property in the province? Do you have a 27 special part of the code, or anything of that sort? Or 28 do you follow general property tax principles? Les Services StenoTran Services Inc. 613-521-0703 1588 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 If you don't know I guess -- 2 MS. ELLIOTT: I don't know whether there are 3 specific areas that apply to us in terms of property 4 tax, no. 5 MR. BRETT: Okay. If I understand, without 6 dwelling on it unduly, the way you formulated your non- 7 routine adjustment is that it's any change in 8 legislation. It doesn't have to be legislation that 9 singles out the utility as such. It's any change in 10 property tax legislation that changes your rates of tax 11 would be a Z factor. 12 MS. ELLIOTT: Within the terms of the 13 materiality that has been defined in this proceeding, 14 yes. 15 MR. BRETT: With respect to the off-ramps 16 issue page 54 of your evidence you talk about off-ramps, 17 and you have a sentence there: 18 "Typically off-ramps are invoked because 19 an event has occurred that indicates a 20 serious flaw ..." 21 My emphasis: 22 "... a serious flaw, in the framework 23 that had not been foreseen when it was 24 introduced." (As read) 25 Now, Mr. Birmingham, let me ask you this. Is 26 there any level of profitability of the utility that 27 would arise as a result of the PBR system, and the 28 absence of an earnings sharing mechanism. Let's suppose Les Services StenoTran Services Inc. 613-521-0703 1589 ELLIOTT/BIRMINGHAM, cr-ex (Brett) 1 that returns balloon to 18 per cent in the third year 2 because of a series of steps that you took, and the fact 3 there was no earnings sharing mechanism carried forward 4 of certain steps taken in 1999, a number of different 5 items. 6 Is there any level like that of earnings that 7 you would say has become an issue, a public interest 8 issue that really would justify revisiting the plan? Or 9 do you regard literally, and practically the level of 10 the utility's earnings to be irrelevant? 11 MR. BIRMINGHAM: I think the public interest 12 question is one that the Board will have to answer, 13 Mr. Brett. With respect to Union's view of this, first 14 of all it would be a shock to me that the utility could 15 earn a return on equity of 18 per cent under a price cap 16 of 1.9 per cent. 17 In my view based on the way that the 18 parameters have been set for this plan that I don't view 19 the return equity to be a concern for ratepayers, no. 20 MR. BRETT: Thanks, those are my questions. 21 Thank you, panel. 22 THE PRESIDING MEMBER: Thank you, Mr. Brett. 23 I believe Mr. Thompson is next. 24 CROSS-EXAMINATION 25 MR. THOMPSON: Yes thank you, Mr. Chairman. 26 Panel, most of my questions have been touched on by 27 others, but I want to come back to a few items. 28 First of all you were discussing with Les Services StenoTran Services Inc. 613-521-0703 1590 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 Mr. Warren the relevance of the assessment of risks. My 2 note, Mr. Birmingham, was to the effect that you said 3 the assessment of risks goes to the stretch factor 4 issue. Do you recall that? 5 MR. BIRMINGHAM: Yes, what I was saying was 6 that when we look at what might happen under cost of 7 service and some of the additional risks that the 8 utility was taking trying to manage under the price cap 9 compared to cost of service that really went to the 10 determination of the stretch factor in the productivity 11 office. 12 MR. THOMPSON: Now, I just want to follow-up 13 on that a little bit. So if the Board took the view 14 that this Exhibit -- Appendix G I think it is that you 15 have developed showing these risks having a value of 16 about $75 million before probability adjustment, if the 17 Board took the view that was a grossly exaggerated 18 number what should it do? Enlarge the stretch factor? 19 MR. BIRMINGHAM: The consideration of the risk 20 would be one of the things that goes into the stretch 21 factors. So to take your example if the Board had the 22 view that in fact the additional exposures that the 23 utility was going to manage under the price cap didn't 24 have much of an impact on their determination of the 25 stretch factor then presumably there would be a larger 26 stretch factor. 27 MR. THOMPSON: Do you agree that the 28 assessment of risks is not related to the base issue? Les Services StenoTran Services Inc. 613-521-0703 1591 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: It depends on which risk you 2 are talking about, Mr. Thompson. What we have been 3 talking about is the events during 1999 that we were 4 trying to manage, were a number of the reasons why we 5 had the results that we did, and that we don't view the 6 1999 actuals as the appropriate base. 7 But, to the extent that you are looking 8 perspectively in saying what are the risks that the 9 utility has to manage within the price cap proposal that 10 doesn't directly go to the starting point for the price 11 cap. I would agree with that. 12 MR. THOMPSON: So the numbers that have been 13 arrayed at Appendix G, of Exhibit B, Tab 2 are not 14 relevant to the base issue? Do I understand you 15 correctly? 16 MR. BIRMINGHAM: I think that's fair. 17 MR. THOMPSON: And on this off-ramp point high 18 level, parties have been discussing that with you I 19 guess on an assumption that there is no earnings sharing 20 mechanism. To the extent that there is an earnings 21 sharing mechanism, would you agree that the off-ramp 22 issue takes on less significance? 23 MR. BIRMINGHAM: Yes. 24 MR. THOMPSON: There has been a lot of 25 discussion about the asset utilization risk and you have 26 quantified this in Exhibit B, Tab 2, Appendix G, before 27 probability adjustment at about $56.5 million. Is that 28 right? Les Services StenoTran Services Inc. 613-521-0703 1592 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: For the five sources of asset 2 utilization exposure? Right. 3 MR. THOMPSON: Yes, and the major one in there 4 is municipal franchise exposure and that's described in 5 the testimony at page 67 where you make reference to 6 both the Sudbury and the Kingston situation. Is that 7 correct? 8 MR. BIRMINGHAM: Yes, we cited as those as two 9 examples of this type of exposure. 10 MR. THOMPSON: And the Board released its 11 decision in the Kingston matter on Friday of last week. 12 Are you aware of that? 13 MR. BIRMINGHAM: Yes, my understanding is that 14 they have ruled on the franchise with respect to 15 Pittsburgh Township. 16 MR. THOMPSON: Right. So does that modify the 17 risk that you have quantified here at line 4 of this 18 Exhibit B, Tab 2? 19 MR. BIRMINGHAM: I don't think so, 20 Mr. Thompson. They were given as examples. The City of 21 Sudbury, of course, has gone through its court hearing 22 and that is clearly still in play and we don't know what 23 other ones might be coming forward. So they were an 24 example of what might happen. 25 MR. THOMPSON: Right. The Sudbury situation 26 is based on a clause in the Sudbury franchise agreement 27 which wasn't in the Kingston situation, as I understand 28 it. Is that your understanding? Les Services StenoTran Services Inc. 613-521-0703 1593 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. BIRMINGHAM: Yes. 2 MR. THOMPSON: And how many other 3 municipalities have clauses in their franchise 4 agreements similar to Sudbury? 5 MR. BIRMINGHAM: I don't know the exact 6 number, Mr. Thompson, it's quite a few. 7 MR. THOMPSON: Would you undertake to check, 8 please? 9 MR. BIRMINGHAM: I will. 10 DR. WIGHTMAN: G9.4. 11 UNDERTAKING NO. G9.4: Mr. Birmingham 12 undertakes to see how many other 13 municipalities have clauses in their 14 franchise agreements similar to Sudbury 15 MR. THOMPSON: And these clauses, I believe, 16 require any municipality that exercises its right to 17 purchase to pay going concern value. Is that your 18 understanding? 19 MR. BIRMINGHAM: That it would pay an 20 assessment of fair market value for the assets, yes. 21 MR. THOMPSON: Right. I think it was Mr. 22 Warren who was asking you some questions about your risk 23 assessment numbers here not having any offset for 24 disposition of the assets at the fair market value. In 25 the Kingston case, would you take this subject to check 26 and I'm reading from paragraph 3.4.8 of the Board's 27 Decision: 28 "Union estimated the market value of the Les Services StenoTran Services Inc. 613-521-0703 1594 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 assets in the Township of Pittsburgh at 2 $7.2 million compared to their book of 3 $4.7." (As read) 4 I think the multiple was about 1.5 times book. 5 Would you take that subject to check? 6 MR. BIRMINGHAM: Sure. 7 MR. THOMPSON: Okay. And if you lost all 8 these customers that you are postulating here to 9 municipalities and if they had to pay 1.5 times book, 10 surely, there would be a very significant offset to this 11 $30 million in this risk assessment calculation. In 12 other words, I think it would be more than $30 million. 13 MR. BIRMINGHAM: I think there's a mix of 14 things that are happening here, Mr. Thompson. The 15 difference between the book value and the fair market 16 value would be accounted for on the basis of the pooled 17 accounting method that is used for the assets, so 18 whatever the proceeds were would go into the accumulated 19 depreciation reserve. So there wouldn't be any income 20 statement impact from that type of disposition, but the 21 revenue stream would be lost. 22 So I think you would still see the impact on a 23 year by year basis. 24 MR. THOMPSON: Okay, this is back to the point 25 you were discussing with Dr. Jackson that if all these 26 municipal distribution assets are in a pool that's 27 larger than 1.5 times the book value of anything that's 28 sold, then that value will just go to reduce the size of Les Services StenoTran Services Inc. 613-521-0703 1595 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the pool. 2 MR. BIRMINGHAM: Yes, it's not so much that 3 it's bigger than 1.5 times the assets, you don't 4 recognize the difference between whatever the market 5 value is and the book value until such time that all 6 those assets are disposed of. 7 MR. THOMPSON: All right. So until the pool 8 is dry. 9 MR. BIRMINGHAM: Right. 10 MR. THOMPSON: Okay. Gee, what a thought! 11 Just following it through, under your PBR scheme the 12 proceeds of asset disposition are for the shareholder. 13 So what happens if we don't rebase at the end of five 14 years? Does this ever get into the pocket of the 15 shareholder before it shows up in the earnings 16 statement, I guess is what I'm asking? 17 MR. BIRMINGHAM: No. 18 MR. THOMPSON: So that's why you have retained 19 the $30 million in here as loss of margin and haven't 20 made any offsets for asset disposition? 21 MR. BIRMINGHAM: That's right. The only way 22 that the company actually receives any attribution of 23 the gains or losses is in fact when the pool is dry, as 24 you put it. 25 MR. THOMPSON: Okay, thank you. Now, there's 26 been also a considerable -- 27 MEMBER JACKSON: Excuse me. Are you sort of 28 laying claim to those right now, saying that if a pool Les Services StenoTran Services Inc. 613-521-0703 1596 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 runs dry that is the shareholder's --? 2 MR. BIRMINGHAM: That will be our position, 3 yes. 4 MEMBER JACKSON: Is there any prospect of that 5 happening before the board gets another chance to see 6 you? 7 MR. BIRMINGHAM: No. 8 MEMBER JACKSON: Thank you. 9 MR. THOMPSON: On this issue of risk 10 assessment there's been some discussion about volume 11 increments. You were discussing with Mr. Brett a new 12 cogen coming on in Sarnia, and this goes back to a 13 question that Mr. Dominy asked the experts, which was 14 should the Board have some information about your plans 15 in the future to get some idea of just how much might be 16 recovered under this PBR scheme? 17 My question of you is and maybe it was 18 Ms Elliott who answered this, I don't know, but does the 19 company internally forecast throughputs out five years? 20 MR. BIRMINGHAM: No. 21 MR. THOMPSON: How far do you take it out? 22 MR. BIRMINGHAM: One year, which is what we 23 have seen in the year 2000. 24 MR. THOMPSON: All right, so in the year 2000 25 the Sarnia cogen comes on at the end of the year. Is 26 that right? 27 MR. BIRMINGHAM: That's what we are 28 hoping, yes. Les Services StenoTran Services Inc. 613-521-0703 1597 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: All right. Is there anything 2 in the volume throughput forecast for 2000 dealing with 3 the Sarnia cogen? 4 MR. BIRMINGHAM: I don't believe there's been 5 any specific attribution of a volume for the Sarnia 6 regional cogen, Mr. Thompson. 7 MR. THOMPSON: And what is the expected 8 throughput for the Sarnia cogen? 9 MR. BIRMINGHAM: I don't know. I would have 10 to get that for you. 11 MR. THOMPSON: Would you get that, please. 12 And are there any other cogens -- just hang on 13 a minute. Let's give that a number. 14 MR. BIRMINGHAM: Oh, sorry! We need a number, 15 yes. 16 DR. WIGHTMAN: G9.5. 17 UNDERTAKING NO. G9.5: Mr. Birmingham 18 undertakes to find out what is the 19 expected throughput for the Sarnia cogen 20 MR. THOMPSON: Now, are there any other 21 cogens, that, to your knowledge, are likely to come on 22 stream during the PBR period? 23 MR. BIRMINGHAM: Not to my knowledge, 24 Mr. Thompson. There are certain customers that have 25 approached us about the idea of one, but none of them 26 has any sort of commitment or done any sort of detailed 27 planning about that. So I suspect that over the period 28 or the initial PBR term, customers will continue to Les Services StenoTran Services Inc. 613-521-0703 1598 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 examine the option, but we don't have any indication at 2 this point that there's anything beyond the Sarnia 3 regional cogen. 4 MR. THOMPSON: What's the usual lead time for 5 a cogen project, approximately? 6 MR. BIRMINGHAM: Based on the technology that 7 they have available now, from the time that they make 8 the decision to put it in place, to the time where it is 9 financed, in place and up and running is about 10 18 months. 11 MR. THOMPSON: Now, when you are calculating 12 this declining use per customer, is that just total 13 volume divided by total customers, or are you, when you 14 use that phrase, talking about a particular rate class? 15 MS ELLIOTT: It generally applies to the 16 general service rate classes, so it's the residential, 17 commercial and industrial customers that are served in 18 Union's rates, M2 rates 01, Rate 10 and Rate 16. Those 19 are largely heat-sensitive accounts and we take a look 20 at the history of those accounts, by month, by area, 21 normalized for weather, to see what those customer 22 groups us on a per-customer basis and project that out. 23 It's basically an econometric model that trends out the 24 use per customer. 25 MR. THOMPSON: Right. So is it confined to 26 small customers -- 27 MS ELLIOTT: Yes. 28 MR. THOMPSON: -- that phenomenon? And what Les Services StenoTran Services Inc. 613-521-0703 1599 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 do you do for the other customers? Do you calculate 2 some sort of use per customer there? Or do you take the 3 view that's really not relevant, they are so big? 4 MS ELLIOTT: We really don't look at a use- 5 per-customer model. The large customers are forecast on 6 sort of industry expectation and customer expectation 7 model, so that we are basically projecting out what the 8 customer is indicating to us they will be using in the 9 subsequent year. 10 MR. THOMPSON: Right. You told me you don't 11 do throughput forecasts on a five-year basis, you only 12 do the current year, as I understood you. When would 13 you, in the ordinary course of business, start 14 developing the throughput forecast for 2001? 15 MS ELLIOTT: We are in the process right now 16 of pulling together our 2001 forecast. 17 MR. THOMPSON: And when would that be 18 completed? Would it be completed before this case is 19 finished? 20 MS ELLIOTT: We are looking at an expected 21 completion of that in late August, early September. I 22 hope this case is completed before then. 23 MR. THOMPSON: All right. Well, are you in 24 the position today to give us some idea of 2001 25 throughput compared to throughput for 2000? 26 MS ELLIOTT: Not with any degree of certainty. 27 I haven't had an opportunity to look at any of the 28 information that's coming into my area on the 2001 Les Services StenoTran Services Inc. 613-521-0703 1600 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 forecast. 2 MR. THOMPSON: Right. When the company 3 internally advised management of what it expected it 4 might get from PBR, did it incorporate in that process 5 some estimates of the throughput gains? 6 MS ELLIOTT: In addition to looking at the 7 decline use per customer, I guess we look at 8 expectations of how many customers we may attach in the 9 year and how much capital will be required to attach 10 those customers. So we are ensuring that we have 11 incremental customers and incremental revenue to offset 12 the incremental cost of attaching those customers, which 13 is sort of one of the reasons why the declining use is 14 identified here as a risk, because that is a reduction 15 in revenue for which there is no corresponding reduction 16 in cost, yet the growth in that market would be offset 17 with corresponding increases in costs. 18 MR. THOMPSON: Well, I don't know if that was 19 telling me what you told senior management or not, but 20 was there some projection of growth and throughput when 21 management was advised what you might get out of PBR? 22 MS ELLIOTT: Well, the growth isn't a function 23 of what the outcome of the PBR plan would be. The 24 growth is really a function of the capital that we can 25 spend or invest in attaching those new customers. 26 MR. THOMPSON: Well, we have had quite a bit 27 of discussion previously about the fact that if your 28 volume throughput is higher than in the base year, that Les Services StenoTran Services Inc. 613-521-0703 1601 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 will produce a gain for the company. 2 MS ELLIOTT: If the volume throughput is 3 higher, that will produce incremental revenue. 4 MR. THOMPSON: Right. 5 MS ELLIOTT: In most cases, it would be our 6 expectation that that incremental revenue would be 7 offset with incremental costs because you don't get 8 throughput gains without making an investment to attach 9 those customers. Our goal is to attach customers on an 10 economic basis, such that the costs of doing that are 11 offset over time with the revenues that that volume 12 throughput will attract. 13 MR. THOMPSON: I understand that, but I was 14 trying to just focus on the data input for the 15 incremental revenue estimate. Did that include the 16 addition of new facilities for the cogen, for example, 17 the Sarnia cogen, and did it include those revenues? 18 MS ELLIOTT: No. The way we operate is the 19 incremental costs will be offset by incremental revenues 20 so that the Sarnia cogen, the cost of investment, would 21 be offset by the throughput for that customer. 22 MR. THOMPSON: Well, let's come at it. Do you 23 take growth forecasts out five years, customer 24 additions? Do you have a five-year plan in this 25 company? 26 MS ELLIOTT: We have a number of expectations 27 or a projection of what the opportunities in the 28 marketplace may be to attach customers over the five Les Services StenoTran Services Inc. 613-521-0703 1602 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 years. That's entirely dependent upon the capital that 2 we have to invest in that market. So there is an 3 interrelationship between the capital we are investing 4 and the customers we are attaching. 5 MR. THOMPSON: Okay, I understand that. But 6 under cost-of-service, my recollection is traditionally 7 somebody would ask for what's the customer additions 8 forecast for the next five years, and traditionally I 9 thought we got an answer. But -- 10 MS ELLIOTT: To do planning for capital 11 investments, yes. In terms of looking at the 12 requirements for capital over the next five years and 13 what we may be going to the market for, we will look at 14 what kinds of capital investment programs. We would be 15 looking at customer attachments and the opportunities in 16 the marketplace to do that. 17 MR. THOMPSON: And can you give us some idea 18 of the number of customer attachments that are being 19 forecast for 2001 and for the remaining years of the -- 20 well, 2000 through to 2004 being the term of the PBR? 21 MS ELLIOTT: I don't have the specific 22 information with me, but it's something in the range of 23 20,000 to 25,000 customers per year. 24 MR. THOMPSON: Well, do you want to take an 25 undertaking response to give us the precise numbers? 26 MS ELLIOTT: If you are looking for the 27 precise numbers, I would have to undertake to do that, 28 yes. Les Services StenoTran Services Inc. 613-521-0703 1603 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 DR. WIGHTMAN: G9.6. 2 UNDERTAKING NO. G9.6: Ms Elliott 3 undertakes to research the number of 4 customer attachments being forecast for 5 2000 through to 2004 6 MR. THOMPSON: And does this reflect any 7 addition of industrial customers? 8 MS ELLIOTT: That number wouldn't, no. 9 MR. THOMPSON: Are there estimates of large 10 volume users that the company has developed for the 11 purposes of its assessing its capital requirements? 12 MS ELLIOTT: I'm not aware of any. Normally, 13 those projects are dealt with on an individual basis. 14 As they materialize, we would look at putting a 15 placeholder, if you will, for capital required for 16 industrial customers to make sure we consider it. But 17 specific plans for specific customer growth in the near 18 future, I'm not aware of what they would be. 19 MR. THOMPSON: All right. You talk in the 20 evidence about the company taking on the redelivery toll 21 risk and you make reference to TransCanada's STS toll. 22 MR. BIRMINGHAM: That's right. That's page 72. 23 MR. THOMPSON: Yes. Is there something on the 24 horizon in terms of the development of that toll that 25 may have a bearing on that risk? Is it going to be a 26 negotiated toll in the future or do you know? 27 MR. BIRMINGHAM: I don't know, Mr. Thompson. 28 But the reason that we put it in there is we have the Les Services StenoTran Services Inc. 613-521-0703 1604 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 redelivery/delivery service component under the price 2 cap. You can see that at Exhibit B, Tab 2, Appendix C. 3 And the delivery/redelivery is really made up of a 4 couple of things. One is the STS service which is an 5 upstream transportation service that under usual 6 circumstances would be treated as a passthrough item and 7 there is also the N12 transportation service. 8 And so rather than try to -- while we are 9 looking at the delivery/redelivery service, try to split 10 those out somehow into the cap, we put the whole thing 11 under. So that was really the piece of it. But with 12 respect to what is going to happen to the STS toll, I 13 don't know. 14 MR. THOMPSON: Now, do you know if TransCanada 15 has any particular proposals on the table with respect 16 to that toll that would tend to either increase it or 17 reduce it? 18 MR. BIRMINGHAM: I am not aware of any, no. 19 MR. THOMPSON: You talk about O&M expense 20 variance risk in your -- in this risk section of your 21 testimony and you make the point that O&M expenses is 22 very much staff level driven. Is that correct? 23 MR. BIRMINGHAM: It is very much wages, 24 salaries and benefits driven and that is tied directly 25 to the number of roles that we have, yes. 26 MR. THOMPSON: And do you have staff level 27 forecasts taken out five years? 28 MS ELLIOTT: No, we don't. Les Services StenoTran Services Inc. 613-521-0703 1605 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 MR. THOMPSON: And how far in advance do you 2 do those forecasts? 3 MS ELLIOTT: I would say we are in the process 4 of doing 2001's right now. 5 MR. THOMPSON: All right. And are you in the 6 position to tell us if staff levels for 2001 are going 7 down or up compared to 2000? 8 MS ELLIOTT: I am not right now, no. 9 MR. THOMPSON: When would you be in a position 10 to tell us that? 11 MS ELLIOTT: The forecasts for 2001 won't be 12 complete until late August or early September. It will 13 be at that point where I will have an expectation of 14 what the staffing levels would be in that forecast. 15 MR. THOMPSON: Does anybody, Mr. Birmingham, 16 have a vision here as to where staff levels are headed 17 beyond 2001? 18 MR. BIRMINGHAM: I don't expect a material 19 change, Mr. Thompson. The only change that I can really 20 see happening other than being able to manage growth and 21 to the extent that we need additional staff to do that, 22 the only change I can see is our business restructuring 23 efforts were first to deal with the number of roles that 24 we had in the company and then over the next several 25 years start to change our business processes, and to the 26 extent that we can improve those business processes, 27 automate some of the things that are done manually, 28 there will be some detriments to the overall roles that Les Services StenoTran Services Inc. 613-521-0703 1606 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 we have in the company. 2 MR. THOMPSON: What are the types of 3 activities that the company is looking at to achieve 4 that objective? 5 MR. BIRMINGHAM: Well, for example, one of 6 them that we are looking at is the processing of direct 7 purchase contract changes and how when marketers move 8 customers from one contract to another that can be a 9 fairly labour intensive process. And so we are looking 10 at some ways that we can automate the processes. But we 11 are given -- we are at the point now we are identifying 12 how we would like some of the processes to work. But we 13 haven't started the detailed planning with 14 implementation yet. 15 MR. THOMPSON: Automatic meter reading is in 16 place for your company now, is it, or is it -- where is 17 it on the -- 18 MS ELLIOTT: No, it is not in place and not in 19 the near term in the forecast. 20 MR. THOMPSON: Is that one of the business 21 processes that you are considering? 22 MS ELLIOTT: It is obviously a process that is 23 on the horizon. It is still very expensive to implement 24 and to get the benefits out of it. 25 MR. THOMPSON: You had some discussion with 26 Mr. Brett about property taxes, capital taxes and income 27 taxes. The terms of income taxes they will be partially 28 flowed through, will they not, as part of the equity Les Services StenoTran Services Inc. 613-521-0703 1607 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 passthrough under your proposal? 2 MS ELLIOTT: The income taxes on the return on 3 equity passthrough will be flowed through, yes. 4 MR. THOMPSON: That is what I was trying to 5 say in a garbled sort of way. 6 Now, property taxes, Mr. Brett drew your 7 attention to C21.149 where Board approved property taxes 8 47 million in 1999 and your actual were a little bit 9 less than 44 million. Do you see that? 10 MS ELLIOTT: Yes. 11 MR. THOMPSON: And do I understand that the 12 difference is being flowed back to ratepayers in the 13 deferral account? Is that what I heard you say to 14 Mr. Brett? He talked about a deferral account but it 15 wasn't clear to me whether that four million comes back 16 to us or not. 17 MS ELLIOTT: Yes, there is a deferral account 18 in 1999 for the difference between the Board approved 19 number and the actual expense. 20 MR. THOMPSON: Right. But in your base that 21 the company is proposing the taxes number going forward 22 is 47 million. Have I got that right? Rather than the 23 44 million. 24 MS ELLIOTT: It is the 47 million and the base 25 because the base has got the approved number in it, yes. 26 MR. THOMPSON: Right. And I thought I heard 27 you say to Mr. Brett that in the -- in your forecast for 28 2000, one of those exhibits that has been filed, you Les Services StenoTran Services Inc. 613-521-0703 1608 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 said, if I heard you correctly, that capital -- property 2 taxes were 47 million? 3 MS ELLIOTT: Yes. 4 MR. THOMPSON: And is that because that is the 5 number in the Board-approved 499 or is that actually an 6 estimate of 2000 property taxes at $47 million? 7 MS ELLIOTT: That is an estimate of 2000 8 property taxes at $47 million. 9 MR. THOMPSON: What explains the jump from 10 43 to 47 -- 44 to 47? 11 MS ELLIOTT: It will be additional capital 12 that was spent in 1999 which will increase the tax base 13 as well as the capital being spent in 2000. 14 MR. THOMPSON: Right. Fine. That is all I 15 have. 16 Thanks very much. 17 THE PRESIDING MEMBER: Thank you, 18 Mr. Thompson. 19 Mr. Klippenstein. 20 MS SYMES: Mr. Chair, can I go next. I have 21 no questions. 22 THE PRESIDING MEMBER: That is fine. 23 MR. KLIPPENSTEIN: I believe I am next. I 24 don't think my cross-examination will be completed today 25 but I am happy to proceed unless there is someone who 26 would rather finish a short cross-examination today. I 27 am certainly in the Board's hands. 28 THE PRESIDING MEMBER: I have -- I am going by Les Services StenoTran Services Inc. 613-521-0703 1609 ELLIOTT/BIRMINGHAM, cr-ex (Thompson) 1 the list that I have inferred from the people who are 2 present. And it looks like there is Mr. Quinn, who I 3 think wanted to cross-examine tomorrow and then there is 4 -- I don't know whether Mr. Mia has any questions. 5 MR. MIA: I will be a little longer than 6 15 minutes. So probably about a half hour, 45 minutes. 7 THE PRESIDING MEMBER: And there is Mr. King 8 and Mr. Aiken. 9 So maybe Mr. Klippenstein you start and we 10 will see how far we get. 11 CROSS-EXAMINATION 12 MR. KLIPPENSTEIN: Thank you, Mr. Chairman. 13 Members of the panel, I have a number of 14 questions related to system expansion and I will be 15 limited to that area and Pollution Probe's line of 16 questioning is related to the issue of whether or when 17 it might occur that Union could earn a return from 18 system expansion projects that would result in a higher 19 return than the Board-approved rate. In other words, is 20 it possible that new customers might end up paying for a 21 higher return than the Board-approved rate? 22 With that issue in mind I have a number of 23 questions, specifically on the profitability index. And 24 that came up in Mr. Warren's cross-examination and 25 Mr. Brett's. And it didn't entirely clarify things in 26 my mind but let me just see if I correctly understood 27 some comments that you made, Mr. Birmingham, and toss 28 about some implications of those comments. Les Services StenoTran Services Inc. 613-521-0703 1610 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 As I understand it, the proposed price cap in 2 the PBR proposal would protect existing customers with 3 respect to distribution rates for the duration of the 4 proposal but that would focus on existing customers. Is 5 that right? 6 MR. BIRMINGHAM: It will also apply to the 7 customers who take service from Union during the course 8 of the PBR term. 9 MR. KLIPPENSTEIN: Let me ask how that would 10 apply to new customers? In other words, customers who 11 are hooked up during a PBR phase or on -- yes, new hook- 12 ups during a PBR phase. Is there any kind of a cap on, 13 for example, contributions in aid of construction for 14 customers who hook up during the PBR period? 15 MR. BIRMINGHAM: Well, there is a cap, I 16 guess, in two respects. The first one is that we only 17 charge a contribution in order to make sure that the 18 individual project meets the threshold that we needed to 19 meet. In this case we used an individual PI of 0.8. 20 Sorry, that is an individual profitability index of 0.8. 21 And the other cap, as you put it, is we survey 22 new cost price when we are going into new expansion 23 communities to determine what level of contribution 24 would be acceptable with respect to the ability to 25 expand our system and how many customers would attach 26 under different levels of contribution. 27 So I think there's a practical limit that, 28 based on our experience has capped out around $25 a Les Services StenoTran Services Inc. 613-521-0703 1611 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 month. 2 MR. KLIPPENSTEIN: Let me jump to the bottom 3 line on this as it were because it sounded from this 4 comment and earlier comments that it may be in line with 5 Union's thinking anyway. 6 Other possible ways of raising revenue for new 7 projects that were mentioned in the evidence, in 8 addition to contributions and aid include negotiated 9 rates and other charges. I wonder if Union would agree, 10 if the Board saw fit, to an order or a term that system 11 expansion projects not raise their PI above the 0.8 that 12 you mentioned or the 0.1 for the overall portfolio? 13 That may be Union's intention anyway, and as I 14 said, I'm just not sure if that's the case. 15 MR. BIRMINGHAM: For those projects that go 16 into the portfolio, it's our intention to continue our 17 practice which is to have an individual project PI, meet 18 at least 0.8 and to have their rolling profitability 19 index for the portfolio distribution projects to be 1. 20 So we would agree to that. That's been our past 21 practice and we are going to continue that practice. 22 There are projects, though, with respect to 23 individual industrial customers, where a single line is 24 run to those projects where the profitability index has 25 to be 1.0. And to the extent that we need a 26 contribution aid from those customers, then we charge it 27 to get it to 1.0. 28 So subject to those two circumstances, we Les Services StenoTran Services Inc. 613-521-0703 1612 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 would certainly be agreeable to it because that's the 2 way we have been managing it in the past and will 3 continue to manage that way during the PBR term. 4 MR. KLIPPENSTEIN: And just so I understand 5 it, my question I guess had two parts. One was the 6 general 0.8 PI for individual projects, which it sounds 7 like it's Union's intention, and the other half of that 8 coin, I guess, is the 1.0 for the portfolio. I'm 9 wondering if your answer included also agreement that 10 that's that kind of cap, if you will, was also intended 11 for the future. 12 MR. BIRMINGHAM: Well, they are not caps. 13 They are minimum thresholds. So to the extent that we 14 have a portfolio of projects that individually are 0.8 15 or greater and that the portfolio might be, for 16 instance, 1.3, then we would continue to manage in that 17 way. So the rolling profitability index for the 18 portfolio isn't capped at 1, it has to be at least 1. 19 MR. KLIPPENSTEIN: All right. Thank you for 20 that clarification. That raises some very serious 21 concerns in my mind and that is because, as I mentioned, 22 I'm just wondering if that is not a cap but a floor, if 23 the problem I mentioned earlier doesn't actually in fact 24 arise. 25 The profitability index is, as I understand 26 it, the ratio of the net present value of Union's 27 expected revenue stream from a systems expansion project 28 and then divided by the net present value of Union's Les Services StenoTran Services Inc. 613-521-0703 1613 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 expected cost stream from hooking up the new customers. 2 Is that fair? 3 MR. BIRMINGHAM: That's fair. 4 MR. KLIPPENSTEIN: And if a project's PI is 5 1.0, that means by definition that Union recovers all of 6 its costs including its board approved cost of capital. 7 Is that accurate? 8 MR. BIRMINGHAM: Over the life of the project. 9 That's right. 10 MR. KLIPPENSTEIN: Correct. 11 Similarly if the project's PI is greater than 12 1.0, then Union's return from the project over its life 13 will exceed its Board-approved cost of capital. Is that 14 right? 15 MR. BIRMINGHAM: The revenue stream will 16 exceed the cost of the project over the life of the 17 project. That's right. 18 MR. KLIPPENSTEIN: So looking forward from 19 now, new customer hook-ups or system expansion projects 20 might, if Union saw fit, have a planned or implemented 21 PI of greater than 1.0 which would mean that the new 22 customers would pay for a return to Union which exceeds 23 the Board-approved rate. Is that fair? 24 MR. BIRMINGHAM: There will be projects as 25 there have been in the past that have a profitability 26 index that is greater than 1. And that would be true 27 for those projects and there would be no customer 28 contribution in those economics. It's simply the nature Les Services StenoTran Services Inc. 613-521-0703 1614 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 of the project would drive the profitability index over 2 the life of that project that would be greater than 1. 3 MR. KLIPPENSTEIN: And there is a difference 4 isn't there in that in the past for a project which had 5 an index of greater than 1, the additional revenue went 6 back to the rate payers whereas under the PBR plan or 7 from now on, the additional revenue that exceeds 1.0 8 would go to the shareholders. Is that fair? 9 MR. BIRMINGHAM: The revenue stream from all 10 of our growth would go to the company during the term of 11 the PBR. 12 MR. KLIPPENSTEIN: Is it correct and fair to 13 say that in the past with respect to, for example, 14 EBO 188 that the concerns sometimes raised by 15 intervenors at that time would be that the companies 16 that were subject to cost of service regulation might 17 have somewhat of an incentive to proceed with system 18 expansion projects that were of insufficient 19 profitability, in other words, too low a PI? Is that 20 fair? 21 MR. BIRMINGHAM: I think that's fair, 22 Mr. Klippenstein. I think there are two concerns 23 generally. 24 One is that there shouldn't be undue cross 25 subsidization between existing customers and new 26 customers. And I think that's generally why the 27 profitability index of the distribution portfolio in 28 total has to be at least 1.0. And then second, there is Les Services StenoTran Services Inc. 613-521-0703 1615 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 a concern that even with respect to new customers, that 2 there shouldn't be undue cross subsidization between new 3 customers who are attached to projects that had a very 4 high profitability index and ones that had a very low 5 profitability index which is why the minimum of 0.8 was 6 put in place. 7 MR. KLIPPENSTEIN: Would you agree that the 8 incentive structure has changed or will change somewhat 9 and that there will be more of an incentive now for the 10 company to proceed with projects provided their PI can 11 be raised to above 1.0. Would you agree with that? 12 MR. BIRMINGHAM: I would say in the absence of 13 any other commitments, that would be true. But we are 14 going to manage with our commitments as they have been 15 made and comply with the EBO 188 guidelines. So we are 16 going to continue to put in place any project that has 17 an individual profitability index of at least 0.8 18 provided our overall portfolio has a profitability index 19 of 1.0. 20 MR. KLIPPENSTEIN: By that you mean of at 21 least 1.0? 22 MR. BIRMINGHAM: Of at least 1.0. That's 23 right. 24 MR. KLIPPENSTEIN: And I take it you wouldn't 25 necessarily agree to that Board putting in place a 26 requirement or cap that new projects don't exceed 1.0 27 in PI. 28 MR. BIRMINGHAM: No. And there is a couple of Les Services StenoTran Services Inc. 613-521-0703 1616 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 reasons for that. 2 One is that some of the projects by their very 3 nature are going to have a profitability index of 4 greater than 1. And that's a good thing because it 5 allows us to take on projects that have the lower PIs 6 and bring them into the portfolio. So we wouldn't want 7 that to happen because in the situation where an 8 individual project could only have a PI of 1, you would 9 never do a project that was more than 1.0 or you would 10 have to have some other treatment of the difference, and 11 you would never do one that was less. And we would 12 still like to do individual projects that have a PI of 13 0.8 or greater. 14 MR. KLIPPENSTEIN: But under your scenario 15 it's possible that even though some projects in the 16 portfolio have a PI of less than 1.0, it's possible for 17 the overall portfolio to have also a PI that's greater 18 than 1.0. 19 MR. BIRMINGHAM: There are individual projects 20 that have PIs that are less than 1.0 even though the 21 overall portfolio has a PI of 1.0 or greater. 22 MR. KLIPPENSTEIN: That's a slightly different 23 question. My question was it's possible, according to 24 the company proposal, that even though certain projects 25 may have a PI of less than 1.0, it is still possible for 26 the company's overall portfolio projects to have a PI of 27 greater than 1.0. 28 MR. BIRMINGHAM: Yes. Les Services StenoTran Services Inc. 613-521-0703 1617 ELLIOTT/BIRMINGHAM, cr-ex (Klippenstein) 1 MR. KLIPPENSTEIN: Okay. Thank you. 2 Mr. Chairman, that is all my questions on the 3 profitability index and I will be moving into another 4 area and I wonder if this would be a good time to break? 5 THE PRESIDING MEMBER: I think yes, that is a 6 good suggestion and we will meet again at nine o'clock 7 tomorrow. We will start with Mr. Klippenstein and with 8 or without Ms Elliott I understand. 9 As I understand it then, we have Mr. Quinn, 10 Mr. Mia and Mr. King, Mr. Aiken said he had no 11 questions, Board Staff and Board questions on this panel 12 and then we move on to another of Mr. Birmingham's 13 panels. 14 MR. PENNY: That is correct, Mr. Chairman. 15 THE PRESIDING MEMBER: We go into DSM. 16 MR. PENNY: Yes. And then to DSM on 17 Wednesday. 18 THE PRESIDING MEMBER: Thank you. See you 19 tomorrow then. 20 --- Whereupon the hearing adjourned at 1700, 21 to resume on Tuesday, June 27, 2000 at 0900 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 1618 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0908 1409 4 SWORN: STEVE W. BAKER 1409 5 SWORN: MICHAEL A. STEDMAN 1409 6 Cross-Examination by Mr. Mattson 1409 7 Questions by the Board 1467 8 Upon recessing at 1100 1478 9 Upon resuming at 1133 1478 10 PREVIOUSLY SWORN: PAT ELLIOTT 1478 11 PREVIOUSLY SWORN: RICK BIRMINGHAM 1478 12 Cross-Examination by Mr. Warren 1479 13 Cross-Examination by Mr. Mondrow 1482 14 Further Cross-Examination by Mr. Warren 1487 15 Upon recessing at 1305 1533 16 Upon resuming at 1410 1533 17 Cross-Examination by Mr. Brett 1533 18 Upon recessing at 1532 1579 19 Continued Cross-Examination by Mr. Brett 1584 20 Cross-Examination by Mr. Thompson 1589 21 Cross-Examination by Mr. Klippenstein 1609 22 Upon adjourning at 1700 1617 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 1619 1 UNDERTAKINGS 2 3 NO. DESCRIPTION PAGE 4 5 G9.1 Ms Elliott undertakes to provide 1486 6 an amended G3.3 or an additional 7 page that takes the actuals from 8 1999 and maps those to the 2000 9 forecast for the new organization 10 11 G9.2 Mr. Birmingham undertakes to file 1536 12 the 30 years worth of weather and 13 fitting a trend line to show that 14 15 G9.3 Mr. Birmingham to provide the 1563 16 number of customers who have 17 switched for all or part of the 18 year during 1999 or 2000 and the 19 volumes and a forecast for the 20 balance of 2000 21 22 G9.4 Mr. Birmingham undertakes to see 1593 23 how many other municipalities have 24 clauses in their franchise agreements 25 similar to Sudbury 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 1620 1 UNDERTAKINGS (Cont'd) 2 NO. DESCRIPTION PAGE 3 4 G9.5 Mr. Birmingham undertakes to find 1597 5 out what is the expected throughput 6 for the Sarnia cogen 7 8 G9.6 Ms Elliott undertakes to research 1603 9 the number of customer attachments 10 being forecast for 2000 through 11 to 2004 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