Rep: OEB Doc: 122V9 Rev: 0 ONTARIO ENERGY BOARD Volume: 4 February 25, 2002 BEFORE: M. JACKSON PRESIDING MEMBER G. A. DOMINY VICE CHAIR AND MEMBER P. SOMMERVILLE MEMBER 1 IN THE MATTER OF the Ontario Energy Board Act, 1998; 2 AND IN THE MATTER OF an Application by Union Gas Limited for an order or orders approving the unbundling of certain rates charged by Union Gas Limited for the sale, distribution, transmission and storage of gas. 3 APPEARANCES 4 PAT MORAN Board Counsel CATHY LITT Board Staff OLGA SHPORA Board Staff PATRICIA JACKSON Union Gas Limited MARCEL REGHELINI Union Gas Limited GEORGE VEGH CEED & TCG BARBARA BODNAR Enbridge Consumers Gas ROBERT ROWE Enbridge Consumers Gas ALICK RYDER City of Kitchener MICHAEL JANIGAN VECC JOYCE POON VECC ANDREW TAYLOR WGSPG TIBOR HAYNAL TransCanada Pipelines IAN MONDROW HVAC Coalition ROBERT WARREN Consumers' Association of Canada PETER THOMPSON IGUA MICHELLE FLAHERTY IGUA BRIAN HOWELL IGUA DAVID BROWN Direct Energy Marketing Limited TOM WOODWARD OESC PETER SCULLY Cities of Greater Sudbury and Timmins RANDY AIKEN London Property Management Association GLEN MACDONALD Hydro One Networks 5 TABLE OF CONTENTS 6 UNION GAS LIMITED - PANEL 2 [12] CROSS-EXAMINATION BY MR. WARREN: [20] CROSS-EXAMINATION BY MR. BROWN: [387] CROSS-EXAMINATION BY MR. VEGH: [572] 7 EXHIBITS 8 EXHIBIT NO. F4.1 TCG's BOOK OF MATERIALS [66] EXHIBIT NO. F4.2 TCG's SUPPLEMENTAL BOOK OF MATERIALS [68] 9 UNDERTAKINGS 10 UNDERTAKING NO. G4.1 TO COMPARE THE DECONTRACTING PROVISIONS OF THE NEW ENLOGIX CONTRACT WITH THOSE OF THE PREVIOUS ENLOGIX CONTRACT [989] 11 --- Upon commencing at 9:30 a.m. 12 UNION GAS LIMITED - PANEL 2 13 MR. JACKSON: Good morning. Please be seated. 14 Ms. Jackson, anything preliminary this morning? 15 MS. JACKSON: No, Mr. Chair. 16 MR. JACKSON: Good. Mr. Moran, anything preliminary this morning? 17 MR. MORAN: Not for me, Mr. Chair. 18 MR. JACKSON: Mr. Warren. 19 MR. WARREN: Thank you, Mr. Chair. 20 CROSS-EXAMINATION BY MR. WARREN: 21 MR. WARREN: Panel, towards the close of business on Friday, I asked for and received undertakings for two pieces of information, and I understand from Ms. Jackson, Mr. Birmingham, that you have the response to one of them. And if I correctly understand it, it was the question dealing with whether or not Union had inquired of the three marketers, who controlled in excess of 90 per cent of the market, whether they were going to take up the direct billing option. 22 MR. BIRMINGHAM: Yes, this is in response to undertaking G3.5, and our evidence indicates that marketers are interested in billing. And we also know that there are marketers who already bill directly for their customers where those customers are large volume customers. And we recognize that this is -- the current situation is an impediment to marketers who want to do that for their small volume customers, and we simply want to remove that impediment and provide that option. And in some respects, I think that responds to the Chair's question on Friday which was, are there other impediments that we should be considering. 23 If we remove that impediment, that will give the marketers an unconstrained opportunity to add or to offer value-added services, packages, billing and payment options for the services that they provide. We believe that we'll further develop the competitive market for the sale of the natural gas commodity. We also think it will assist with any perceived reputational concerns. 24 But for the three largest marketers in our franchise area, they have not as yet expressed an interest in direct billing. It's our understanding that they're really focusing on other items that they view as their priority, primarily the electricity market opening. 25 I don't think that's necessarily a concern, because we are removing an impediment without taking any other options. And similar to what's happened in the past where we offer direct purchase and then we came forward with the T-service offering, we came forward with the ABC-service and now unbundled storage. 26 We're confident that the service will ultimately be used. It's often a matter of putting the service in place and getting parties comfortable with how it works before they actually take it up. 27 But to answer your specific question, Mr. Warren, they have not expressed an interest in the direct-bill option. 28 MR. WARREN: Thank you for that, Mr. Birmingham. 29 Now, this is just as a follow-up to that. It is, in a sense a, the flip-side of some questions that the Vice-Chairman, Mr. Dominy, was asking of the other Panel on Friday, and that is, can we isolate among the costs of the $15.7 million costs which are directly attributable to setting up a direct billing option? 30 MS. JACKSON: That -- that was addressed directly by Mr. Andrews and, specifically, he is the person best placed to speak to it. 31 MR. WARREN: I acknowledge that it may very well, Ms. Jackson, have been asked, but in the context of this answer, I just wonder if -- as an indulgence to me, if we could just find the answer. If Mr. Birmingham can tell me what the direct costs are. 32 MR. BIRMINGHAM: I think this is in response to Exhibit C1.15, Mr. Warren. 33 MR. WARREN: Thank you. 34 MR. BIRMINGHAM: This is in the context of having the systems available to provide the unbundled service. We had identified, given the fact we would have that infrastructure in place, an incremental cost for the electronic transfer for split billing of $800,000. 35 MS. JACKSON: And the only point I want -- having referred to Mr. Andrews' evidence, he was specifically asked about this and said that even without direct billing, the capability that's required and isolated in that line would still be required for the processes associated with unbundling. That's in his evidence of last week. 36 MR. WARREN: So in light of the information Ms. Jackson has just reminded me of, do I understand that there are no stand-alone costs which are -- are solely, if you wish, attributable to offering the direct billing option? 37 MR. BIRMINGHAM: We haven't -- we haven't developed a scenario that said if we didn't offer unbundled services, but we were to only offer direct billing, what is the total cost of that. 38 MR. WARREN: That's a fair answer, Mr. Birmingham. All of which leads me to this question: I'm puzzled as to why Union would offer a direct billing option, go to the trouble of making this proposal and leaving this evidence in this case, and not making an inquiry of the three marketers who control 90 per cent of the market, whether they were interested in taking that option up. 39 MR. BIRMINGHAM: We have discussions with the marketers all the time, Mr. Warren. The issue here is most of the marketers, to the extent that they are interested in billing, seem to be interested in the marketer-consolidated billing and they haven't been willing to acknowledge that direct billing is an option, because they want to pursue the marketer-consolidated billing option. 40 MR. WARREN: It's a little early in the day even for me to be facetious or sarcastic, sir, but, in light of that answer, is it not the case that you're proposing the direct billing option even though they may not want it at all? 41 MR. BIRMINGHAM: I believe it's fair to say that -- they don't want it right now and they would not use it immediately. But we're confident that it will be picked up because it does remove an impediment and will give them some other options in the future. 42 MR. WARREN: Thanks, Mr. Birmingham. 43 I want to look, then, at the general background to the billing proposals. There were no billing proposals which were discussed -- sorry, which were in the ADR agreement in the 0017 case? 44 MR. BIRMINGHAM: I think it depends on what you mean by billing proposals, Mr. Warren. Certainly, because there was an agreement to offer the unbundled service, that that had some billing implications that needed to be dealt with. But to the extent that we were talking about marketer-consolidated versus direct billing, no, there were no proposals or discussions on that particular topic. 45 MR. WARREN: And can we agree as well, Panel, that there were no billing proposals which were discussed by the Board in its decision in 0017, and my point of reference for that is section 6.4 of the decision which begins at page 309 and following. And we agree, the Board did not, in that decision, discuss billing options. 46 MR. BIRMINGHAM: Bear with us for a second, Mr. Warren, and we'll get the reference. Can I have your page reference again? 47 MR. WARREN: Section 6.4, heading storage and unbundling issues, beginning page 309 and it runs through for about four pages thereafter. 48 MR. BIRMINGHAM: I agree that there wasn't discussion of the billing options as it relates to marketer-consolidated and direct billing. As I say, there was an implication for the utility to be able to offer unbundled services for small volume customers, but it was limited to that. 49 MR. WARREN: And your choice of language this morning, Mr. Birmingham, is an interesting one. You say there are billing implications of the unbundling proposal. And what Union chose to propose for the 0078 case are two billing options. One is the enhanced ABC-service and the other is the direct billing; correct? 50 MR. BIRMINGHAM: In addition to adjusting our billing to accommodate the unbundled services, that's right. 51 MR. WARREN: Now, I just wanted to get the context with -- within which the proposals were made. 52 Can we agree, Panel, that at the time that Union made the two proposals to advance -- decided to make the two proposals to be advanced in this case, there was certainly a draft of the Gas Distribution Access Rule out there in the public domain for discussion; correct? 53 MR. BIRMINGHAM: That's correct. 54 MR. WARREN: And can we agree, Panel, that in the February 6, 2001, draft of GDAR to use the acronym, that that draft required, in section 8.3.1, distributors to offer three big options, one of which was described -- is described as gas vendor-consolidated billing; correct? 55 MR. BIRMINGHAM: This is the proposed gas distribution access dated February 6. Did you say 2001, Mr. Warren? 56 MR. WARREN: Yes. 57 MR. BIRMINGHAM: That's right. There are three billing options in there. The distributor-consolidated billing and the gas vendor-consolidated billing and split billing. 58 MR. WARREN: Now, in addition to that document, there is the Market Design Task Force which is -- report which has been introduced as Exhibit G1.3 in this case. And if you would, Panel, if you could turn up that document, please, at -- that exhibit, I'm sorry, G1.3, the Market Design Task Force. 59 MS. JACKSON: Just a small point of clarification on my friend's earlier question. Now that we have the Gas Distribution Access Rule before us, I'm reminded of its date. This is the first Board proposal and it does come after the filing of the evidence in this case. That was -- I'm referring to the premise of your earlier set of questions, Mr. Warren. Before this there were Board staff draft rules. 60 MR. WARREN: Mr. Chairman, I don't believe that the Gas Distribution Access Rule of February 6th, 2001, document is actually in evidence in this case, and my friend, Mr. Vegh, is going to use it as part of his cross-examination. And I'm wondering if I could impose on Mr. Vegh to prematurely deliver his book of materials so that the document is, in fact, in front of us. 61 MR. MORAN: Mr. Chair, Mr. Vegh has delivered two more documents that I assume he will want to have marked as exhibits. Perhaps we could just simply mark them right now and then Mr. Warren will be free to refer to anything he wants to in those documents. 62 MR. VEGH: I'll just identify them for the record. The first book is entitled Book of Materials, The Convergence Group. It's a cerlox-bound document. Panel 2, billing policy. And then the second book is called Supplemental Book of Materials. It's not cerlox-bound, it's just stapled. Those are the two texts. 63 And just for the record, the GDAR -- the proposed GDAR, dated February 6th, 2001, starts at page 41 of the supplemental book of materials. 64 MR. MORAN: Mr. Chair, perhaps the cerloxed volume TCG book of materials, we could mark that as F4.1. 65 MR. JACKSON: Thank you. 66 EXHIBIT NO. F4.1 TCG's BOOK OF MATERIALS 67 MR. MORAN: And the supplement -- TCG's supplemental book of materials will become F4.2. 68 EXHIBIT NO. F4.2 TCG's SUPPLEMENTAL BOOK OF MATERIALS 69 MR. WARREN: My thanks to Mr. Vegh for giving my cross-examination oxygen when it needed it. 70 Panel, could I ask you to turn up Exhibit F4.2, page 41, which is the February 6th, 2001 Board proposed GDAR. And if I could ask you to turn up section 8.3.1 of that document. 71 MR. BIRMINGHAM: So this is on page 61. 72 MR. WARREN: It's on page 61 in the handwritten notation, the upper right-hand corner. 73 Section 8.3.1 says, and I quote, "Distributors shall offer gas vendors three billing options as follows:" And the second bullet item under the heading gas vendor-consolidated billing says: "The customer shall receive one bill issued by the gas vendor. The bill shall inform the customer of the amount owing, the due date, and the individual components of the bill." 74 Now, Ms. Jackson just pointed out to us that chronologically this document, the Board proposed GDAR, follows the pre-filed evidence in this case. Do you understand that? 75 MR. BIRMINGHAM: Yes, sir. 76 MR. WARREN: Now, in light of that, but in light of the wording, the Board's direction that the distributor shall offer vendors three gas billing options, did Union consider filing supplementary or updated evidence with a proposal for gas vendor-consolidated billing? 77 MS. JACKSON: My friend calls this a direction. It's a draft rule. 78 MR. WARREN: Fair enough. 79 In light of the Board's wording -- you see the words "shall offer" in there; right? 80 MR. BIRMINGHAM: Yes, I do. 81 MR. WARREN: Now, in light of the draft rule that contains the words "shall offer," did Union consider filing supplementary evidence containing a proposal for what's called here "gas vendor" or otherwise is referred to as "marketer-consolidated billing"? 82 MR. BIRMINGHAM: No, we didn't, Mr. Warren, for a couple of reasons. One, as you're aware, there is a jurisdictional issue that will be dealt with through argument in this proceeding. 83 And the second reason is that when we looked at the impacts of what that might do to Union Gas, in particular, the risks around assay utilization, credit concentration, potential loss of franchises, cost of capital, value to the company, that we could not support an option as is described under gas vendor-consolidated billing. 84 MR. WARREN: Now, I was also referring you to G1.3, which is the Market Design Task Force. And I would like you to turn up, please, in that exhibit, page 31, which is -- 85 MR. BIRMINGHAM: Mr. Warren, this is the report to the Ontario Energy Board, dated February 4th, 1999. That's the one we're dealing with? 86 MR. WARREN: Yes, that's right, yes. 87 MR. BIRMINGHAM: Sorry, the page number again? 88 MR. WARREN: 31. 89 I'm looking at the text of the second full paragraph on that page which reads as follows: "Both assume that marketers should be obligated to serve all customers in their chosen market segments subject to there ability to stipulate commercially reasonable terms of service, i.e., price, name of terms, bill frequency, late payment charges, or interest on outstanding balances, credit checks, security deposits, advance payments, et cetera. Similarly, both assumed when marketers take on the retail billing function, they will effectively assume liability of the LDC for distribution charges and full responsibility for the collection thereof. As a result, the LDC distribution rate may reflect collection and bad debt costs related to marketer activity only. 90 Now, I want to focus on the words that appear in the middle of the paragraph, to read: "When marketers take on the retail billing function." 91 Now, can we agree that in the Market Design Task Force, there was a consensus agreement, which included Union, that there would be what is now referred to as marketer-consolidated billing? 92 MR. BIRMINGHAM: I wouldn't agree with that characterization, Mr. Warren. Let me explain why. 93 There is an attempt to come to a consolidated view of what the industry might look like in the future, direction that it was going. Union Gas was certainly part of that, and was part of that consolidated view. 94 That was dependent on a number of things, though, and one of them is actually contained in the first sentence on this page, which says, "Once the LDCs are out of the merchant function," that clearly, with 60 per cent of our customers still on system gas, with the ability to have customers return to us, as the default supplier, we are a long way from being out of the merchant function. 95 In terms of trying to come to a common view of what the industry might look like if it developed in a certain way, I would say that that view was part of what Union Gas was involved in, yes. 96 MR. WARREN: Can I then take it, Mr. Birmingham, when we look at the Market Design Task Force, that one of its underlying premises was this notion that Union would exit the merchant function? 97 MR. BIRMINGHAM: I think if there was an assumption that the market would develop in a way that would then allow the utilities to exit the merchant function, so that wouldn't be just Union but all the Ontario utilities. 98 MR. WARREN: That's a fair statement. But am I then to understand that when we look at Exhibit G1.3, the Market Design Task Force, we should understand that one of its fundamental premises no longer exists and therefore its binding quality is less than it might otherwise be; is that fair? 99 MR. BIRMINGHAM: I don't think you can take a complete view of the Market Design Task Force and say that, because if one or two assumptions are wrong, then the whole thing is wrong. I do think you have to take it in the context of which -- of where it was intended. So to the extent that the industry agreed that further unbundling of services should take place to further the competitive -- the competitive nature of the natural gas commodity market, I still think that's a valid objective and we're still working on that. To the extent that we're looking at billing options, where a fundamental premise is one where the utilities are supposed to be other than merchant function, then I do think we may have to take a different look. 100 MR. WARREN: Now, I also, just in the context of sort of background to the billing proposals, would ask you to turn up in your pre-filed evidence Exhibit B, tab 4, page 5. 101 MR. BIRMINGHAM: I have it, Mr. Warren. 102 MR. WARREN: And I think you may have touched on all of this before. Actually, if I could get you to go back to page 2, I'm sorry. Now, it's that reference that we're talking about, the three REMs controlling -- sorry, serving over 90 per cent of the small volume direct market. Now, are those three REMs asking for a marketer-consolidated billing option? 103 MR. BIRMINGHAM: One of them has recently expressed interest in a marketer-consolidated billing option. The other two have not. 104 The second marketer has indicated that they are still evaluating what they're going to do with respect to their retail business and may, in fact -- or would have to put together a business case themselves to determine whether they wanted to offer that. 105 And the third marketer has not indicated that they wanted to move to marketer-consolidated billing but would prefer the ABC-service and perhaps an enhanced version of that. 106 MR. WARREN: Now, sitting back for a moment, just -- I apologize for jumping around. But assuming that for this moment in time of the Market Design Task Force -- I have a memory, like recovered memory syndrome, it's a memory of Mr. Hassan, formally of Union Gas, sitting in the witness box in another room and repeating -- repeating and repeating his view of the universe in which there would be, as I recollect, 300 customers of Union Gas. Do you remember that vision of the universe as so forcefully argued by Mr. Hassan? 107 MR. BIRMINGHAM: I don't want to get into what might happen in the middle of the night, Mr. Warren. But I do recall that in the number of industry task forces and other discussions, we had tried to take a view of what the future of the gas market might look like. And we did have, as one possibility, the fact that the market may evolve to the point where the utilities would in fact exist the merchant function and we may only have several hundred customers, and the utility would be more of a wholesale-provider role. That was clearly one of the models the group was looking at. 108 MR. WARREN: And one of those models or that model would have, necessarily, involved marketer-consolidated billing, is that fair, or some form thereof? 109 MR. BIRMINGHAM: That would have been one of the options that was being examined, absolutely. 110 MR. WARREN: And in connection with that, did Union develop a model of marketer-consolidated billing under which it would have to operate if that eventuality came to pass? 111 MR. BIRMINGHAM: No, we didn't. It was really a theoretical model and the possible future of the -- of the gas industry. 112 What we were really focusing on with respect to the detailed proposals were what were the next steps that might lead us to further clarity around what the future looks like. 113 MR. WARREN: Can I then turn from those questions to the reasons why Union does not propose marketer-consolidated billing. And my text for these questions is Exhibit B tab 4, page 13 and following. 114 Now, I don't want to deal with all of these, Panel, but I want to deal with a number of them to see if I can understand their nature. 115 The first one I want it deal with is what's referred to as asset utilization risk. And do I understand this issue: that Union needs to be able to promote the use of natural gas in order to ensure that its assets -- its pipes, so on and so forth, are used at a level that guarantees the appropriate return for the company; is that fair? 116 MR. BIRMINGHAM: It certainly wouldn't guarantee wouldn't guarantee the appropriate return, but I think you have the concept right, Mr. Warren. The asset utilization risk really speaks to three things, or three components of it. 117 The first one would be promoting natural gas for existing customers. Those existing customers have declining use on an annual basis, and you've heard our evidence in past rate cases where customers are in more energy efficient housing, they're putting in new windows, they're using more efficient heating equipment. And on an annual basis, we see a decline in the average use per customer. 118 So it's being able to promote the use of natural gas so that there are more applications of natural gas, so customers are using natural gas for dryers or for barbecues or for stoves. It will help to offset the decline in the use of our assets because of that decline in the use per customers. So that's kind of the first part of the asset utilization risk. 119 The second part of it is keeping existing customers on natural gas. So you might think about this as fuel -- fuel competition, and that is where customers reach a point -- and it's typically where the -- they are replacing their heating equipment of some sort, that they will choose to either use natural gas or another fuel, typically electricity. And so promoting the natural gas helps influence the buying decision at the time that they're going to make that decision. 120 And then the third piece really is promoting natural gas through existing customers, but also to potentially new customers, and that's the new growth piece, both with respect to new housing and trying to get customers who are on other fuels coming over to natural gas. So it's really the three pieces. But those three pieces all go to the use of Union's facilities. 121 MR. WARREN: Now, can we agree, Panel, that certainly in the last several years, there have been at least two compelling reasons why natural gas has been chosen as the energy source, one of which is that it has been cheaper than its other two main alternatives, either oil or electricity; fair? 122 MR. BIRMINGHAM: With respect to the small volume market, would I say that has been one of the -- of its competitive advantages, yes. 123 MR. WARREN: And another competitive advantage is that it can be promoted as an energy source which is less harmful to the natural environment than other sources of energy; fair? 124 MR. BIRMINGHAM: Yes. We have, in fact, promoted it in that very way. 125 MR. WARREN: And can we agree that regardless of whether you have marketer-consolidated billing, that those advantages will either exist or not exist in the marketplace? 126 MR. BIRMINGHAM: I would agree that the fact of their existence will still be there. The question is how are consumers to find out about those facts? How are they supposed to be influenced? How do they know what the proper comparisons are? How did they know what's available to them? And it's really the communication vehicle that we have through the billing and retail relationship of those customers that allows us to give them that information. 127 MR. WARREN: So is it the case, then, that what we're talking about in asset utilization risk is that it will be more expensive and arguably less effective to promote the use of natural gas if there isn't this direct billing relationship? 128 MR. BIRMINGHAM: I would agree with both of those comments, Mr. Warren; that is, that it's our view that without the billing relationship that the utility currently has, the vehicles that we will have to use will be, no question, more expensive, in fact, much more expensive, and that the effectiveness of those communications will be less. 129 MR. WARREN: Now, I want to deal with the cost component of that bill. 130 It will be more expensive to communicate and, assuming that the universe -- assuming there is marketer-consolidated billing and Ms. Creighton has to advertise on television and radio or newspapers or wherever she is going to do it and it's more expensive, by whom would those costs be borne, those additional costs? 131 MR. BIRMINGHAM: My view, Mr. Warren, is all of those communications go to the effective utilization of Union's system, and because they go to the use of the system, they would be borne ultimately by the customers in rates. 132 MR. WARREN: So is it the case, then, Panel, that the additional costs just for promoting natural gas to offset this asset utilization risk you've identified, that those additional costs would have to be set off against any benefits that might accrue to residential consumers from the unbundled marketplace; is that not fair? 133 MR. BIRMINGHAM: I don't see the link between those two concepts, Mr. Warren. The unbundled services are going to be offered regardless of whether there is marketer-consolidated billing or not. The issue is if marketer-consolidated billing is put in place, are there benefits that the marketer-consolidated billing option brings which are incremental to those offered by direct billing, and do they offset the increased costs for the communications around items like asset utilization and the promotion of natural gas? 134 MR. WARREN: Let me just parse that response if I can. And let me return so that I understand it to a proposition which, admittedly, has been articulated by the preceding Panel, but I want to make sure I understand it. 135 There are -- I think Mr. Packer said, to be fair to him, that there may be benefits that will come to the residential consumers from unbundling in the form of a more competitive commodity market. Have I got it right? 136 MR. BIRMINGHAM: Yes. It's our view that offering the unbundled services, in particular, unbundled storage, will allow marketers to -- to better manage the cost of the commodity that they're offering to their customers. 137 MR. WARREN: Which, in my crude way of thinking, is there may be cheaper gas? 138 MR. BIRMINGHAM: Yes. It may be cheaper gas. It may also be cheaper storage, but that would certainly be one of the outcomes. 139 MR. WARREN: Now, just as an aside, cheaper gas, again, my crude mathematics, the benefits of cheaper gas increase, the more gas you consume; is that fair? 140 MR. BIRMINGHAM: I don't necessarily draw that comparison, Mr. Warren. A customer who has an existing home with their existing heating equipment will be, in fact, showing an average decline in their use, it will just cost them less if their commodity price is less. 141 MR. WARREN: But it is fair, though, at a high level of generality, that the cheaper the commodity costs, the benefit accrues -- a greater benefit accrues if you're consuming more gas. It's a function of volume, isn't it? 142 MR. BIRMINGHAM: I think the savings accrues when you take a steady base of consumption and then you compare the prices for that. 143 MR. WARREN: Now, the benefit of unbundling is offset by a number of costs, one of which is the $15.7 million; fair? 144 MR. BIRMINGHAM: It is going to cost $15.7 million to be able to offer the unbundled services to the small volume market, yes. 145 MR. WARREN: I understand that it is going to cost that. But I want to see if we can agree there are benefits which may accrue and you have to match against those benefits certain costs. And one of the known costs the $15.7 million; fair? 146 MR. BIRMINGHAM: When you're doing that comparison, yes. 147 MR. WARREN: Okay. Now, is it not also the case that there are certain additional costs, according to you, for Union Gas if it has to go an extra length to promote the use of natural gas? 148 MR. BIRMINGHAM: No. This is where I think we're getting a little twisted up, Mr. Warren. What you're doing is comparing the offering of unbundled services and the cost to be able to offer those unbundled services, as I understood your first question to me. 149 The second question then goes to what happens if there is marketer-consolidated billing. And those are two independent things. We are going to offer the unbundled services either through our ABC-service, or through a direct billing option so that the marketer can bill the customer. 150 Whether there is marketer-consolidated billing put in place, independent of the unbundled service, will drive things like these increased communications, yes. 151 MR. WARREN: We have agreed the increased communication costs are likely to have to be borne by the residential consumers under a marketer-consolidated billing scenario. 152 MR. BIRMINGHAM: Under marketer-consolidated billing, those costs would be recovered from customers, ultimately. The choice is that we don't do it and we have either greater loss in our system and those costs are picked up by the customers. 153 MR. WARREN: Now, just finally on this point. Do I understand it, Panel, on this asset risk -- asset utilization risk, that the concern is that you will never be able to promote the use of natural gas as effectively, or that it's just going to cost more, or both? 154 MR. BIRMINGHAM: It's both. It's our view that it will cost more and it will be less effective. 155 MR. WARREN: Now, the second issue which you've raised is cost of capital. And it's set out in Exhibit B, tab 4, page 17. But I would also like, if you wouldn't mind, Panel, to have a transcript reference, which is this past Friday's transcript. 156 Now, my transcript isn't paginated, it's referred to by lines, Panel, so I can't give you a page reference. But it's line 1200. 157 Take ten pages in from the back. Now, I think, Mr. Birmingham, this is you. Yes, it is you that's answering. And I want to take you to the top of that page. 158 MS. JACKSON: The different -- there are different versions of the transcripts. The top of the page is going to be different in each version. 159 MR. BIRMINGHAM: What paragraph number is it, Mr. Warren? I can follow from there if you have the paragraph number. 160 MR. WARREN: I'm beginning at 1200. 161 MR. BIRMINGHAM: Okay. It begins "The second cost would be the impact on our cost of capital..." 162 MR. WARREN: Right. "The second cost would be the cost of impact of capital..." 163 "The second cost would be the impact on our cost of capital, and this is where we would have, because of the inability for us to influence the use of natural gas, there is an impact on our ability to influence our revenues and costs." 164 May I suggest to you, Mr. Birmingham, that the statement "the inability for us to influence the use of natural gas" is an overstatement? You can't influence it, you just can't do it as effectively and it's going to cost you more to do? 165 MR. BIRMINGHAM: I agree with that, yes. 166 MR. WARREN: Now, in your pre-filed evidence at page 14, tab 4, Exhibit B, tab 4, page 14, beginning there, you talk about the perception of investors resulting from the -- 167 MR. BIRMINGHAM: This is on page 17. I believe you said 14. 168 MR. WARREN: Page 17. Thank you, Mr. Birmingham. 169 Beginning at line 19, last paragraph on that page, "Investors would perceive." 170 Now, what's the basis, evidentiary basis, for your statement about what investors would perceive? 171 MR. BIRMINGHAM: These are the periodic discussions that we have with financial analysts, the bond-rating agencies who rate our debt, and the discussions around the risks and opportunities for the company moving forward. 172 MR. WARREN: Has there been a survey of these bond-rating agencies or investors, something that the Board could look at so it could make an objective assessment of the support for this statement, "Investors would perceive"? 173 MR. BIRMINGHAM: There has been no survey, Mr. Warren. These are ongoing and periodic discussions that we have with the financial analysts and with the bond raters in the normal course of our business. 174 MR. WARREN: Now, on page 18, you talk about -- I'll give you line 8: "At the very least, investors would expect that the shareholders of Union and Westcoast Energy would be compensated for the loss of this value. Let me just ask first of all, how is it that this Board or anybody else can put a number around loss of value? Do you have an estimate of what the loss of value would be? 175 MR. BIRMINGHAM: In that paragraph, Mr. Warren, we talk about the value that's attributed to our ability to influence customer use, the asset utilization, and the three components of that utilization risk that we spoke about, and the credit risk concentration that could happen under marketer-consolidated billing. 176 We have not made an attempt to value that. We have not gone to that kind of detail. 177 MR. WARREN: Now, when you talk about an expectation of compensation, the expectation is you'd be compensated by whom? 178 MR. BIRMINGHAM: It will be through the rates. 179 MR. WARREN: So residential consumers would be expected to pay more for the -- among others, would be expected to pay more for your distribution service in order to compensate the shareholders for the loss of value; is that right? 180 MR. BIRMINGHAM: Yes. And there will be a higher risk to the company's business, which would go to the awarded return. So you're right, it will be residential customers, among others. We expect it would be all customer groups. 181 MR. WARREN: So in addition to having to absorb the added marketing cost to protect asset utilization, the residential consumers, among others, will be asked for this form of compensation, some form of compensation for the decline in the value of the company; have I got that right? 182 MR. BIRMINGHAM: If marketer-consolidated billing was imposed, yes. 183 MR. WARREN: Now, the third category of concern I want to touch on is the loss of franchise. And here, probably the easiest reference again is the transcript from last Friday, at paragraph or line 1198. 184 MR. BIRMINGHAM: This is also in our evidence on page 15 at Exhibit D, tab 4. 185 MR. WARREN: I appreciate that, thank you. 186 Now, have I got this correctly, the linkage on this point that the loss of direct contact with your customers might lead to a loss of their influencing the municipal officials who would enter into these franchise agreements; is that the linkage? 187 MR. BIRMINGHAM: That is the connection, Mr. Warren; that because we have a relationship with the end-use consumer, to the extent that we're negotiating a new franchise or a franchise renewal with municipal officials and that negotiation is not going as well as we would like, the end-use consumer can help influence that because they understand the value that Union Gas brings to their communities. Without the billing relationship, we would lose the relationship with the customer and customers would lose the understanding of the value that Union brings. 188 MR. WARREN: I'm sorry at 10:15 in the morning to express a note of scepticism, Panel, but surely - surely - you could send letters on an annual or semi-annual basis to the customer saying, "Ain't we great? We deliver gas effectively, and if you need to, can you tell your municipal officials that?" Isn't it just a case of reminding them via some means that you're terrific? 189 MR. BIRMINGHAM: I don't think it's nearly that simple, Mr. Warren. First thing is that again, this would be something that is more expensive and less effective. And I think the second important point is that to send, in your suggestion, a direct-mail piece once a year is not going to have customers recognize the value that we bring. We become invisible to the customer in a marketer-consolidated billing rule. The reason that they see value is they have ongoing -- an ongoing relationship with us and they see that on a regular basis. 190 MR. WARREN: Are you suggesting to the Board that if you don't have billing -- 191 MS. JACKSON: I'm sorry, I thought Ms. Creighton was leaning towards her microphone. 192 MS. CREIGHTON: I was. That was why I didn't take a breath. At the risk of being loquacious, which I hope I am not here, it's more -- the bill really represents the dialogue we have with our customers on a regular basis. It's more than -- it's more than just the fact that there an envelope there to remind them that we serve them. It's everything from notices by postal code to local community groups that appear on our bills. 193 We carry messages on our bills that you'll find in one of our exhibits - I could turn it up for you here - that actually list things like, "We have a shortage of housing for students in Windsor. If you have an affordable place for a student to live, call this number." 194 It's that sort of very local impact that our bill and our bill envelope has. It's also the fact that our bill is accurate, that it's timely, that we give customers the information they need in order to be able to be intelligent energy consumers. All of those things are things that customers are grateful to us for. 195 And elected officials, I don't know if you've ever been one, are very tuned in to how happy their electorate is. And if there is general grousing about Union Gas, that our bills are awful, they're hard to understand, that they don't come on time, that we don't tell them what they need to know, that we're not supportive of their local groups when they have things on the go, if those were issues in the community, we would have a much tougher time at franchise renewal. A much tougher time. And it's that whole fabric of community stuff that lends, I think, a positive influence in that franchise renewal consideration. 196 It's not simply: Is Union Gas a good guy? It's not -- it's a sum of many, many things, not just what you might consider to be the raw facts of issuing a bill. 197 MR. WARREN: Ms. Creighton, it's a difference of degree. You don't lose the ability to persuade people that the monopoly provider of the distribution service is doing a good job. You don't lose that altogether. You're just saying that you lose the most effective way to do that. Is that it, Ms. Creighton? 198 MS. CREIGHTON: I'm actually not ranking things. I'm just saying don't under estimate. For the customer who doesn't have a crisis, for the customer whose furnace doesn't break down, for the customer who doesn't feel the need to call us, this means of communication constitutes our conversation with them. And it is -- plays a big part of the trust they have in us. 199 So I don't mean to minimize or maximize it. I want to make sure that from my point of view you understand it. 200 MR. WARREN: But there are -- we can agree on this point, that there are other ways in which you can remind your customers that the monopoly provider for distribution services is doing a good job; correct? There are other ways you can do that. 201 MS. CREIGHTON: I presume we remind customers of how good we are every time we enter their basements. 202 MR. WARREN: Terrific. 203 Now, there is one final area that I want to touch on, and, Mr. Birmingham, it was in response to a question which was asked by your counsel in chief on Friday. It's in the transcript at page -- paragraph 1201. And I quote, "And the third one is the impact on the value of the company. Union has generated goodwill with customers for the better part of 90 years. And it's in fact one of the reasons why our communications vehicles are so effective. They trust us. It's also part of the reason why companies like Westcoast in 1992, and more recently Duke Energy, are prepared to pay a premium for companies like Union Gas." 204 Now, when was the Duke Energy transaction completed? 205 MR. BIRMINGHAM: It hasn't been completed, Mr. Warren. The offer was made September 20th and we are expecting the transaction will be closed by the end of March. 206 MR. WARREN: The offer was made in September. Of last year, 2001? 207 MR. BIRMINGHAM: September 20th, 2001. 208 MR. WARREN: Some six months after GDAR, which you've already referred to, in which the Board's draft said you've got to provide marketer-consolidated billing? 209 MR. BIRMINGHAM: That may be the chronological order of events, yes. I'm not sure what the relationship is that you're trying infer. 210 MR. WARREN: Well, surely the relationship, Mr. Birmingham, is that Duke was prepared to offer a premium in the knowledge that you may be required to provide marketer-consolidated billing. 211 MR. BIRMINGHAM: See what I was going to is the value of the company, and Westcoast paid a premium when they bought Union Gas as well. And the reason that they are prepared to pay a premium is that they understand that we have a billing relationship, a communications vehicle, with our customers that allows us to maintain the types of revenue streams that we have and to possibly increase them. And having that type of influence and direct relationship with the customer has value. It goes to what I called in those comments on Friday, the quality of earnings or the quality of revenue. 212 MR. WARREN: All I'm suggesting to you, Mr. Birmingham, is if we look for some objective evidence of this potential loss of value of the company, it would seem counter-intuitive that Duke would offer you what you say is a premium when they know that you may be required to provide marketer-consolidated billing. Can we not agree on that? 213 MR. BIRMINGHAM: No. Because what they do is value the company in part based on discounted cash flows, and those discounted cash flows represent cash flows given in the current relationship. 214 MR. WARREN: Can I turn, then, finally -- the final area is -- second last area is the evidence which Mr. Feldmann gave in chief on Friday, which is a number of items, seven as I recollect, that may increase the costs -- may be increases in cost as a result of marketer-consolidated billing. 215 Now, I want to begin first, Mr. Feldmann, with some background questions. First of all, if you wouldn't mind, please, turning up in the pre-filed evidence, Exhibit B, tab 7, which is Dr. Schwindt's evidence. Do you have it, Mr. Feldmann? 216 MR. FELDMANN: Yes, I do. 217 MR. WARREN: Now, in the fourth full paragraph, I'm sorry, on the first page, Dr. Schwindt is talking about the proposal for marketer-consolidated billing. And he says, and I quote, "In my opinion, the analysis of this proposed policy change is up for two shortcomings. First, there has been no systematic cost benefit analysis of the proposed rule change." 218 Do you know, Mr. Feldmann or members of the Panel, when Dr. Schwindt's evidence was prepared? 219 MR. FELDMANN: The page prior, actually, would suggest that Dr. Schwindt prepared this October 2001. 220 MR. WARREN: Okay. Now -- and I take it, or do I understand that there has been no cost benefit analysis of marketer-consolidated billing performed by Union? 221 MR. FELDMANN: That is correct. 222 MR. WARREN: Notwithstanding that, in your testimony last Friday, Mr. Feldmann, you listed the seven cost items. Now, I asked Mr. Birmingham on Friday how long you had been aware of these seven cost items and Mr. Birmingham's response is that you were generally aware that there were factors. 223 Let me ask you, Mr. Feldmann: How long have you been aware of the seven variables that could affect the costs of marketer-consolidated billing? 224 MR. FELDMANN: In terms of the argument -- or the information presented on Friday, we discussed what other issues may drive costs in relation to marketer-consolidated billing last week after hearing the Chairman's comments about what they would be in terms of what billing model. 225 MR. WARREN: And that's the first time you talked about these cost elements? 226 MR. FELDMANN: In the context, yes. 227 MR. WARREN: In the context of what? 228 MR. FELDMANN: In the context of the Chair's request about -- or requested information of the two billing models. 229 MR. WARREN: I'm talking about -- I suppose we would all like to be able to divine in advance what Chairman Jackson is going to think about. But I'm talking about marketer-consolidated billing. When was the first time that you thought about these cost items in relation to marketer-consolidated billing? 230 MR. FELDMANN: I think some of those cost items, if I refer back to Union's comments back on the draft distribution access rules, filed back in March of 2001, identified a number of other issues or issues relating to cost items as well. 231 MR. WARREN: So it's what, more than a year ago? 232 MR. FELDMANN: That would be my assumption, yes. 233 MR. WARREN: Now, the reason that I ask these questions, Panel, is this: You have been aware now for at least a year, since the February 6th, 2001, Board draft of GDAR, of the possibility of the Board ordering, among other things, some form of marketer-consolidated billing; correct? 234 MR. FELDMANN: That is correct. 235 MR. WARREN: Leave aside the jurisdictional issue to be argued at another time, but given the Board's draft, would it not have been prudent for you to have prepared a cost benefit analysis of marketer-consolidated billing, following, at least, that February 6th draft? 236 MR. BIRMINGHAM: In our view, it wouldn't, Mr. Warren, and for two reasons. 237 The first one is that it's not a proposal that we support. And we've laid out our reasons why we don't think it's appropriate. 238 The second reason was when it comes to a cost benefit analysis, while we've tried to indicate some of the variables that might impact the costs, when it comes to the benefits of marketer-consolidated billing, that isn't something that the utility can measure. That's something that the marketers would have to measure. 239 MR. WARREN: But these cost items I suggest to you, Mr. Birmingham, are uniquely within the capacity of Union to evaluate. 240 MR. BIRMINGHAM: They are questions that we need to have answered. There are alternatives and we would have to have answers to those questions to be able to determine what the costs might be. That was the point of Mr. Feldmann's earlier direct examination. 241 MR. WARREN: All right. Well, let's, then, go through them, if we can, Panel, seriatim. 242 They begin, for ease of reference, at paragraph 1148 of the transcript. 243 Now, the first point, I quote -- I think the first -- I was in the audience when the Chair asked the question, and that is: "What recourse would Union Gas have in terms of payment?" 244 With apologies. I'm not sure I understand, Mr. Feldmann, what this refers to. Is this the case where a marketer doesn't pay the bill, or the individual customer doesn't pay the bill, or both? 245 MR. FELDMANN: Could be either of the marketer or the consumer or, in essence, if the marketer failed to deliver on our system. 246 MR. WARREN: And the -- the cost implications, since we're talking about costs, is if the marketer failed, then the cost implication is what? You would then have to go to seek recovery from the marketer's customers; is that right? 247 MR. FELDMANN: In one of the scenarios, that would be correct. 248 MR. WARREN: So that there would be costs associated with your having to go after, I don't know, 100,000 individual customers; is that right? 249 MR. FELDMANN: That is correct. 250 MR. WARREN: Okay. And the -- is there any other cost component to this particular issue? 251 MR. FELDMANN: I'm sorry, perhaps I don't understand it. Are you're referring to where the consumer -- where we would have recourse back to the consumer, Mr. Warren? 252 MR. WARREN: I'm trying to understand the dimensions of the problem, Mr. Feldmann. So we have a circumstance where Union isn't paid for its distribution services, and your -- I want to work through the options, Mr. Feldmann, since you have them in your mind and I don't. 253 Your first recourse is to the marketer who has defaulted on payment to you? 254 MR. FELDMANN: That is correct. 255 MR. WARREN: And there is a cost associated with having to sue the marketer for the money; correct? 256 MR. FELDMANN: That is correct. 257 MR. WARREN: Yes. Now, if the marketer has gone broke or disappeared or whatever, then your second line is to go -- recourse is to go after the individual customers themselves? 258 MS. JACKSON: Can I just ask, because the -- the problem that alerts, the issue is: Who have you got recourse against? Is my friend's premise a wholesale situation or a retail situation? In other words, does Union have recourse as a wholesaler or as a retailer for the premise of this question? 259 MR. WARREN: You see the difficulty -- I'm sorry, Ms. Jackson, let me respond this way: The difficulty I have is I don't know what's in this witness Panel's mind. So when my friend, Ms. Jackson, albeit gently, taxes me with not asking the right question, my difficulty is that as of last Friday, we were told that this recourse problem was an issue. And I'm simply trying to understand the various scenarios that Mr. Feldmann has in mind when he says recourse is a problem. 260 Now, if Mr. Feldmann can tell me that there is a difference between a wholesale scenario and a retail scenario, I'm pleased to have that information so that I can get a grasp of the dimensions of this problem. 261 Now, Ms. Jackson has said there is a difference between a wholesale and retail relationship. Let's work through those. 262 MR. FELDMANN: All right. 263 MS. JACKSON: I was only trying to assist, because I thought that was what Mr. Feldmann said Friday. But if it wasn't clear, I'm glad to have it clear -- 264 MR. WARREN: It wasn't clear to me. It wasn't clear to me, and we always have to picture ourselves, to me, in the lowest common denominator. What is the nature of the wholesale relationship? 265 MR. FELDMANN: The nature of the wholesale relationship is where Union Gas would look for recourse from the marketer and would have no further recourse to a retail consumer. If the marketer failed to pay its bill, the only recourse we would have would be limited to the marketer, whether it was for a delivery of gas that didn't show up or because the marketer was in default. 266 The retail model would be -- our first line of recourse would be to a marketer, and if the marketer again defaulted payment to Union Gas, we would then look to the -- to the marketer's customer, in this case our distribution customer through the marketer, to look for recourse. 267 MR. WARREN: Now, in the second alternative, the retail relationship, there would be costs associated with Union having to then seek recovery against the -- all of the individual customers; is that right? 268 MR. FELDMANN: That is correct. 269 MR. WARREN: And one of the fears, as I understand it, is that those individual customers may say: You can't get recovery from us; we've already paid for this service to the marketer; correct? 270 MR. FELDMANN: That is correct. 271 MR. WARREN: So that there is a risk in the second scenario that you may not be -- you enter a quagmire of the retail customer saying: Sue somebody else, not us; correct? 272 MR. FELDMANN: That is correct, Mr. Warren. 273 MR. WARREN: Now, there are the costs that we can associate against -- with that are the costs of having to pursue the individual customers; correct? 274 MR. FELDMANN: That would be one of the costs, Mr. Warren. 275 MR. WARREN: And what are the other costs? 276 MR. FELDMANN: My experience, having had three marketers fail in our area, is that we have used direct mail. We have set up hot lines for telephones. Because again, a customer who just nonchalantly receives a bill from Union Gas, who has not seen a Union Gas bill perhaps ever, for services that they believe they've already paid for, it will generate customer inquiries, it will generate letters, it will generate electronic correspondence with customers looking for responses and answers, it will generate inquiries from the local politicians, whether they be federal, municipal or provincial. All of those issues will drive costs. 277 MR. WARREN: Now, is there a way that this particular category of risk can be mitigated, for example, by asking for a performance bond of some sort from the marketer? 278 MR. BIRMINGHAM: I think there is a couple of ways it could be mitigated, and that may be one of them, Mr. Warren, that we would ask for a performance bond, a letter of credit, some other form of financial assurance to cover the possible exposure that we would have in that scenario. 279 MR. WARREN: And again, at a level of simplicity, if you get an adequate performance bond, does this cost risk effectively disappear? 280 MR. BIRMINGHAM: Well, the risk doesn't disappear but the residual risk, that is, after you applied the mitigating measure may reduce the risk to near zero, correct. 281 MR. WARREN: Fair enough. Thank you for that distinction. 282 Now, the second item articulated by Mr. Feldmann on Friday is the communications issue and added costs, and we've already dealt with that in exchanges with you earlier this morning. I have. 283 I want to turn to the third element which begins at paragraph 1152 of Friday's transcript. And I quote: "I think a third element that would make resolution is one on what I would call customer disconnections for non-payment." 284 Can you explain to me, Mr. Feldmann, the dimensions of this problem and what the cost components are? 285 MR. FELDMANN: Certainly, Mr. Warren. 286 What we have today is Union Gas manages the credit risk under ABC-service on behalf of marketers. What I would ask or what I would suggest in this case is that we would be taking directions, I assume, from a marketer to disconnect service for non-payment from a marketer's customer to that marketer. What this would indicate is that we may be faced with a situation where today, for example, we manage disconnection for non-payment along with other utility service work. So, for example, we have the benefit of being able to plan, manage, and do that work in conjunction with other work on our operating system. In this case, some of that advantage may be lost. It may be an incremental cost. 287 In addition to that, I would suggest that what we would have, then, is the need, under a disconnection for non-payment, as condition of service, I would suggest, to physically disconnect and reconnect the service for operational and safety requirements. 288 The issue really is one of -- it's proposed in the GDAR, is we are the monkey in the middle. Who do we take the direction from? And under marketer-consolidated billing, is a customer actually locked into the marketer until he or she -- 289 MS. JACKSON: Mr. Feldmann, could I ask you to go a little more slowly? I'm looking at the reporter. 290 MR. FELDMANN: The question remains as to who has shut-off rights, who has the right to direct the distributor to disconnect service, and subsequently who would have the right to ask for a reconnection of service? Is it the customer? Is it the existing marketer serving that customer? Is it a new marketer who has agreed that irrespective of the customer's payment history, he or she is willing to take that customer on and ask for a reconnection of service? Or, ultimately, does the customer have the ability to ask Union Gas, even though you have disconnected my service this morning, I would now like to revert back to a system gas supply? 291 Those issues drive costs confusion within the marketplace. 292 MR. WARREN: Mr. Feldmann, if the issue is who has the right to direct either disconnection or connection, is that an issue of cost or is it an issue of negotiating the appropriate protocol with the marketer at the commencement of the arrangement? So that the marketer says, "We, as agent for a customer, have the right to say, 'Shut them off or open them up.'" 293 MR. FELDMANN: I don't think you can de-link those two issues, sir. The issue is the process drives the cost. So whatever process is negotiated as a Service Level Agreement between ourselves and the marketer, ultimately as an agent, the marketer and the customer, those processes in turn drive internal costs. 294 MR. WARREN: But if the arrangement is that the marketer has the right to tell you "Shut them off for non-payment," what's the additional cost to Union if the marketer says "Shut them off"? 295 MR. FELDMANN: Mr. Warren, there is no additional cost to terminate the service to the customer in that case. However, there is a cost for the reconnection and the inspection that occurs at the reconnection when the service is resumed. 296 MR. WARREN: That's an additional cost, and presumably that -- the question of how you deal with that additional cost is a matter which is negotiated with the marketer as part of the arrangement. And the marketer can, in turn, bill that cost into his or her charges to the customer, in other words, Mr. Feldmann, what I hear you saying is the problem of negotiating appropriate arrangements to cover the allocation of these costs. Is that not fair? 297 MR. FELDMANN: I think that's probably half the answer, Mr. Warren. The other issue that one would have to address is what if the customer asks us to reconnect service, and who pays for that service? Is it the customer or does Union Gas absorb that service? It may not necessarily be between Union Gas and the marketer. 298 MR. WARREN: But if your relationship, negotiated relationship, is between you and the marketer, then you don't listen to the customer; right? Again, I come back to the point is this not just the case of negotiating the appropriate protocol in advance with the marketer so that everybody knows the rules in advance? 299 MR. FELDMANN: Well, that's an interesting hypothesis, Mr. Warren, because that's one of the issues that drives an unknown cost. If you look at GDAR, they propose this -- they propose one set of circumstances -- one set of protocols which may or may not concur with the ones you've just put forward. So until you know what those protocols are, until you arrange or negotiate the services with a marketer - and that may be different between marketer A, B, and C - until you know whether or not we would take direction from a customer, I can't answer those questions. 300 MR. WARREN: Okay. Now, the fourth item, beginning at page -- sorry, paragraph 1156, is -- 301 MR. JACKSON: Mr. Warren, I think you have several more items, don't you, in your list? And I was just wondering if this might be an appropriate time to break for the morning. 302 MR. WARREN: That's fine, sir. 303 MR. JACKSON: Good. I think it's good timing. And, Mr. Feldmann, you referred to the GDAR having one set of protocols or circumstances, and the one reference I've seen to that this morning was quite general in nature. Could you just help me, after the break, and tell me if there is a specific reference in the GDAR materials, or perhaps in something followed up, that we could look at? Good. We'll break, then, for 20 minutes and come back at about 11:05. Thank you. 304 --- Recess taken at 10:45 a.m. 305 --- On resuming at 11:10 a.m. 306 MR. JACKSON: Thank you. Be seated, please. 307 Mr. Warren. 308 MR. WARREN: Mr. Birmingham, with apologies, I just want to go back to a point you made this morning so that I can understand it a little bit. 309 MS. JACKSON: I wondered, Mr. Chair, if you wanted Mr. Feldmann to deal with the question you raised just before the break, first? 310 MR. JACKSON: I think I'll leave it to Mr. Warren, if you would. Let's not forget that, but I think Mr. Warren, perhaps, is -- is it appropriate to do it now or did you want to go back first? 311 MR. WARREN: Go ahead, sir. 312 MR. JACKSON: It was with respect to the protocols or circumstances. Thank you very much, Mr. Feldmann. 313 MR. FELDMANN: Yes, Mr. Chair. I guess having reread the GDAR, one of the issues that's outstanding is the GDAR is really silent on the issue of disconnection for non-payment. I believe it's implied if you look at section 6.1.1 of the February 6 document. 314 MS. JACKSON: And that's, Mr. Chair, in Exhibit F4.2. I guess that's 52. 315 MR. JACKSON: Sorry, section 6? 316 MR. FELDMANN: 6.1.1 under service transaction request. 317 MR. JACKSON: All right. Thank you very much. I think that helps. 318 MR. FELDMANN: And just for the Chair's further understanding, we would also look at 6.6.2, which states that a distributor shall not decline a service transaction request of an existing customer -- a distributor shall not decline a system -- a transaction request of an existing customer to system gas for reasons of non-payment by the customer of commodity, distribution, or other non-commodity services. And its the linkage of those two items, Mr. Chair, that have to come together. 319 MR. JACKSON: Right. Thank you, Mr. Feldmann. Thank you, Mr. Warren. 320 MR. WARREN: Since it's fresh in our minds, Mr. Feldmann, are there any other issues in section 6 of GDAR, that is, the service transaction request, that would have cost implications that need to be explored for a marketer-consolidated billing regime? 321 MS. JACKSON: In the whole of section 6? 322 MR. WARREN: Generally, service transaction requests. 323 MR. FELDMANN: Mr. Warren, I haven't gone through the detailed review to look at those particular issues and whether or not they would generate incremental costs or whether those incremental costs would be stand alone or different than they would be under direct billing or the current ABC agency agreement. I have not done that work. 324 MR. WARREN: Okay. The reason I ask the question is that when I asked you on Friday last whether or not we had all of a complete list of the cost items, I was told, I believe by Mr. Birmingham or by you or by both, that we had all of the major items, and I'm just wondering if there are, in the service transaction request section, other cost items that may surface. But you don't know, you haven't looked at it; right? 325 MR. FELDMANN: That correct. 326 MR. WARREN: Okay. Mr. Birmingham, with apologies, I just want to go back to one point we were discussing a little while ago and that is under the heading "Asset Utilization Risk." And we were talking about the need to promote the use of natural gas, and I made a note of the need to do that in three categories; one was promoting natural gas for existing customers; second was keeping customers on natural gas, what you described as fuel-on-fuel competition; and the third was new growth. Do you remember that exchange? 327 MR. BIRMINGHAM: Yes, sir, that's correct. 328 MR. WARREN: Just in the last category, the new growth piece, that would be people who would not now be on natural gas? 329 MR. BIRMINGHAM: That's right. 330 MR. WARREN: So they're not getting bills from Union anyway, are they? 331 MR. BIRMINGHAM: No, sir. But what they are seeing are the mailings that we give to their neighbours and to their family and friends. They see those things. They see the presence of Union Gas in the community; they see billboards and other signs that are up and that helps influence their -- their choice of fuel ultimately. 332 MR. WARREN: And billboards and mailings are something which you continue to do in any event; correct? 333 MR. BIRMINGHAM: We will continue with some of those things. Obviously, under marketer-consolidated billing, we won't have a bill so there won't be any of those. 334 MR. WARREN: Mr. Feldmann, back to you. We're dealing with the seven cost items and we were -- I wanted to turn to customer relocations. This begins at transcript 1156, paragraph 1156. And your testimony on Friday was that customer relocations represent nearly 125,000 customers that move from location A to location B. 335 Now, as I understand your -- well, perhaps you can explain to me, Mr. Feldmann, why customer relocations is not a matter which can be covered off in your arrangement or your protocol with the marketer? 336 MR. FELDMANN: I will draw from my experience, Mr. Warren, and that is, customers react and notify Union Gas either through their lawyer when they are moving from location A to B and their lawyer would notify us to do a final bill. They will call us or the party moving into the current either rental unit or apartment will call us, or their landlord will call us. 337 At the heart of this issue, Union Gas manages those processes. What happens is, as more parties become involved in this process, the issue is one of confusion for both the customer and for the utility; that is, the customer may notify the broker that they currently are being served by that they're moving; they notify the broker that they would like to be notified or would like to go on that new contract at their new location; they can notify Union Gas or not notify Union Gas about this particular relocation. At the end of the day, it becomes a very complex and very convoluted process. 338 What I was trying to adjust here is that, in order for us to keep track, in order for us to ensure that customers and locations and physical property not receive free gas or gas which we cannot invoice, we would adopt a different process, and a process fairly common in other utilities, particularly in the electric business. 339 And that is, you physically do a rate, do the account reconciliation, and terminate service. And when you're notified by either, in this case, their new marketer or the customer, the new tenant or a landlord, to reactivate service, you would physically go out and reactivate the service. And that is the only way, I think, we would, as an organization, be able to ensure customers aren't receiving free gas between the time they leave and the time they relocate. 340 MR. WARREN: So the only way to manage the problem, in your view, effectively, is to do a cut-off and a restart; correct? 341 MR. FELDMANN: In essence, that is correct. 342 MR. WARREN: And that adds a cost to this process; correct? 343 MR. FELDMANN: Yes, it does. 344 MR. WARREN: Do you have an estimate for the 125,000 of what the additional cost would be? 345 MR. FELDMANN: Currently, within our rate filing, that charge, I believe we call it a connect -- customer connection fee, and it's $65 per customer. 346 MR. WARREN: So there would be an additional charge -- that system doesn't obtain today, the shutting off and restarting; is that right? 347 MR. FELDMANN: No. -- well, let me back-step. 348 The processes we have today, since we manage both the exit and the re-entry or the vacancy and re-occupancy, we typically do not terminate service at a customer's place of business or their home. So we will actually ask a customer, query a customer: Who is leaving and who is arriving? And our processes are set up such that we can actually attempt to contact the customer that's arriving on the site. So the processes that we have in place today means that we do very few physical disconnections upon vacancy. 349 In this case, we would probably adopt almost an universal policy where we would take that as part of our standard business practice. 350 MR. WARREN: And who would bear the costs of this. 351 MR. FELDMANN: I would assume that those people that are either moving would assume -- would incur these costs or are relocating, or their landlords or, depending on how we structure the rates, it could be everybody. And I am not a rate expert. 352 MR. WARREN: And this is something which cannot, as I understand your testimony, be covered off in the arrangements between you and the broker? 353 MR. FELDMANN: I don't believe it can effectively be covered off with any Service Level Agreement with a broker. 354 MR. WARREN: Now, the next item I want to touch on is the miscellaneous transactions. Beginning at paragraph 1162 of the transcript, you said that there were approximately 400,000 transactions that you bill customers for and you gave, among the examples, meter relocations, aids to constructions, NGV cylinder rentals, transfers, so on and so forth. 355 Now, let me deal with sort of the order of magnitude within this grouping. 356 Would the largest one of these 400 transaction letters to category be the meter relocations? 357 MR. FELDMANN: No, I don't believe so. It would actually be the account transfers. 358 MR. WARREN: And the account transfers cover what category? 359 MR. FELDMANN: Typically, that's the $35 account opening charge that we would have. 360 MR. WARREN: And again, is that not something which can be covered off by the arrangement with the broker? 361 MR. FELDMANN: I agree, it can be covered off with an arrangement with the broker. The issue that we would have is that, do we require preliminary credit approval to do this, or does it happen post-fact? Is it covered in our Service Level Agreement? Perhaps. I'm not saying this is an exhaustive list, Mr. Warren. But what I am saying is there are 400,000 transactions that either -- through service level agreements, by using Visa, MasterCard or American Express, we would have to collect our funds. 362 MR. WARREN: Finally, sir, two categories. The use of the account number. I'm not sure I understand why that's a problem. Can you not just get your brokers to agree that Union's account number will be used? 363 MR. FELDMANN: That would be my preference, sir. 364 MR. WARREN: And finally in the group billing, sir, you used an example of a Windsor public service organization. First of all, how many group billing arrangements are we talking about? 365 MR. FELDMANN: I couldn't answer that without having to verify the number. But there are a significant number because of the social housing aspect of housing in Ontario. 366 MR. WARREN: And I'm just wondering why it is, sir, that marketers couldn't do the group billing, because I'm not sure I understand the difficulty which that poses. 367 MR. FELDMANN: I would say that they would have that functionality, Mr. Warren, that marketers could do group billing. Because if they have that functionality, then I don't have to provide it within our shop, which means sequencing customer accounts perhaps even down to the cycle billing issue such that we can actually consolidate a number of bills over various locations for one single payment, organization, that's just the feature we have for our customers today, and it's one that I would hope marketers would have that functionality tomorrow. 368 MR. WARREN: It's possible the REMs may be able to do that. 369 MR. FELDMANN: It certainly is possible. 370 MR. WARREN: Finally, Panel, stepping back to a high level of generality, there is, as we've discussed in the beginning of the cross-examination, there is the GDAR draft requirement that marketer-consolidated billing be provided, and there is an indication that at least one of the big three marketers have said that they want marketer-consolidated billing. 371 My difficulty, and let me explain it to you, Panel, preliminary to my question, is in evaluating the strengths and weaknesses of marketer-consolidated billing, in the absence of a proposal from Union for some form of marketer-consolidated billing and in the absence of a cost benefit analysis, now you've told us, Mr. Birmingham, why it is you didn't make the proposal; there was a jurisdictional issue, plus there are these impediments which you've listed in your pre-filed evidence, plus there are the cost items which Mr. Feldmann has articulated. 372 I want to take you, if I can, Panel, if you wouldn't mind, turning up the second -- sorry, the first volume of the decision with the reasons in the 0017 case. 373 MR. BIRMINGHAM: I have the volume, Mr. Warren. 374 MR. WARREN: If you could turn up at page 31, beginning at paragraph -- or section 2.47, and I quote: "The Board observes that Union's is the first comprehensive gas utility PBR proposal to come before it. Further, the company did not, in this proceeding, provide the Board with an alternative should the Board not be comfortable with this proposal. The Board's view is the current application by Union does not contain enough information to set rates based on the traditional costs-of-service approach. Rejecting the current application in favour of costs of service would require Union to come to the Board with another application, as well as another hearing on the matter." 375 It then follows, in the next paragraph, an exchange between the Chair, Mr. Jackson -- Dr. Jackson, sorry, and then counsel for Union, Mr. Penny, in which Dr. Jackson asks Mr. Penny if the Board were to turn down this PBR proposal, will there be sufficient cost-of-service data on the record for the Board to follow its usual procedure of affixing rates for the company, the appropriate data that is forward-looking, and will the base year 1999 be sufficient as a base for the traditional costs-of-service methodology? Is there an alternative, a fall-back or do we just say no to PBR and trust your current rates are sufficient? And Mr. Penny gives an answer, but in fairness to Mr. Penny, he says, "No, there isn't." 376 There then follows two paragraphs down, section 2.50: "The Board is of the view that at the commencement of a first gap PBR --" I apologize. "The Board is of the view that at the commencement of a price gap PBR plan for a utility, it is important to have full, reliable, and tested base data for the utility reflecting current operations, including class cost of service data and class cost to revenue-to-cost ratios." 377 Now, you and I may, Panel, disagree on the tenor of those exchanges and those observations and may disagree on whether or not they reflected an attitude of the Board that may have been critical of Union for failing to provide proposals. My question to you is: Are we not in this case in exactly the same position as was pointed out in that decision; that is, that Union has not provided a proposal for marketer-consolidated billing and sufficient cost benefit data to allow the intervenors and the Board to make an assessment of that alternative? 378 MR. BIRMINGHAM: No, I believe there's a significant difference between the situation that existed with respect to Union's PBR proposal and what's happened here, Mr. Warren. 379 In the first place, Union is not proposing marketer-consolidated billing. It is not something that we brought forward and it isn't an alternative that we are looking to propose. 380 In the second place, it comes to a cost benefit analysis. We can't do a benefit analysis of marketer-consolidated billing. Those benefits are something that would have to be put together by other market participants. It may be able to be done through an industry group but not by the utility itself. 381 MR. WARREN: What does the Board do as a practical matter in this case if the Board wanted to consider marketer-consolidated billing as an option, given the dearth of information from Union, and after all, Union does, as you've conceded, have the relevant information about costs, what does the Board do? Does it order a further and better proceeding in which Union comes forward with a cost-benefit analysis or does it just say sorry, we can't consider marketer-consolidated billing because we don't have enough data? 382 MR. BIRMINGHAM: If the Board wants to pursue marketer-consolidated billing, Mr. Warren, they will have to determine what their next step should be. My view is that one of the better ways to go at it is to put together an industry group that would bring together the views of those groups and be able to provide a full picture of the costs and the benefits. What we have talked about are some of the costs that could drive our systems and processes if we were to move to marketer-consolidated billing, and we've talked about why we don't support it. 383 MR. WARREN: Thank you, Mr. Birmingham. 384 Thank you, Mr. Chairman, those are my questions. 385 MR. JACKSON: Thank you, Mr. Warren. 386 MR. BROWN: Mr. Chair, I will come up beside my friend, make it a bit easier on the Panel. 387 CROSS-EXAMINATION BY MR. BROWN: 388 MR. BROWN: Panel, my name is David Brown and I act for Direct Energy Marketing Limited. And Direct Energy, I suppose I should start off by saying, strongly supports the retail unbundling initiative that Union Gas has applied for in this proceeding, and has been a strong proponent of Union's on industrial and retail unbundling efforts. 389 But as you know, Mr. Birmingham, Union Gas and Direct Energy have slightly different views on whether or not retailer-consolidated billing should be implemented; correct? 390 MR. BIRMINGHAM: I think that's fair to say, Mr. Brown, yes. 391 MR. BROWN: And you appreciate that over the course of the past two years or so, Direct Energy has been one of the marketers who -- which has been a strong proponent of including the option of retailer-consolidated billing in the over all billing options available to any consumer; correct? 392 MR. BIRMINGHAM: Well, my understanding is that as an option, they have been supportive of it. I also understand that they're not necessarily saying that they would take it up, but that if they were going to take up something else, it would be marketer-consolidated billing. 393 MR. BROWN: And I think you've indicated that and I don't know whether it was you or Mr. Feldmann that had indicated that when Union has offered some new services in the past, such as the T-service, it has sometimes taken a few months and in some cases a few years before the market participants have responded and actually availed themselves of the service Union has been asked -- has been offering; correct? 394 MR. BIRMINGHAM: That's right, Mr. Brown. And I think that's really driven by the fact that, as I've said before, sometimes it just takes some time for customers to -- once the service is available, for them to understand how the service works, get comfortable with it, understand better how they can organize their operations to taking advantage of it. And I think the other aspect of it is sometimes the customers have other priorities. It's not that they don't want to take advantage of the service but there may be other things that are taking their attention away from it at that time. 395 MR. BROWN: So you would agree with me, it would be reasonable to expect that although some marketers now are saying that they don't have a present intent to use retailer-consolidated billing, in the fullness of time, they may well avail themselves of such an option, if it was offered? 396 MR. BIRMINGHAM: That may be possible, yes. 397 MR. BROWN: I would like, really, to focus my cross-examination on the reasons that Union has articulated for not advancing retailer-consolidated billing as an option. Perhaps the best place to start is at Exhibit B, tab 4, page 13 of Union's pre-filed evidence. 398 My friend Mr. Warren has gone over a number of these before and I really just wish to supplement some of the questions that he posed to you. I think it was you, Mr. Birmingham, who on the first issue, managing asset utilization risk, identified three sources of potential new business for Union. One is if the customer takes everything from gas service now, there may be new products that the customer could use, such as a gas barbecue, and if they did that, that would enhance the utilization of your assets; correct? 399 MR. BIRMINGHAM: Right. I think the way I described that, Mr. Brown, was the asset utilization risk deals with the declining average use per customer that we have on our system on an annual basis, and one of the ways that we look to try to offset that declining use is to promote the use of natural gas in other appliances, and that would be things like barbecues and dryers and stoves. 400 MR. BROWN: Then the second thing you want to do is keep your existing customers and make sure they don't go to, for example, electricity. 401 MR. BIRMINGHAM: That wasn't to keep people using natural gas. As I said before, that's typically at the time where their heating equipment or other equipment fails and they need to make a decision about what they're going to replace it with. 402 MR. BROWN: And the third source is really new customers, correct, people who are not your present customers? 403 MR. BIRMINGHAM: That's right. 404 MR. BROWN: And that would be, for example, there may be one home on a block that has been a hold-out and hasn't hooked up for natural gas for many, many years. They could decide to go onto natural gas; correct? 405 MR. BIRMINGHAM: That would be one example of a customer who could be using natural gas but isn't right now, yes. 406 MR. BROWN: And although that happens, I'm going to suggest to you that that is not the main source of your new business. In fact, the main source of your new business would be servicing new residential subdivisions that go in or servicing new commercial or industrial buildings that are constructed; correct? 407 MR. BIRMINGHAM: Our new business is a combination of what we call in-fill customers. That would be the very first example of the type of customer that you just described, somebody who already has access to a main but may not have an actual service line to their home. 408 The second one would be the very ones that you're talking about which is the new housing market and new subdivisions. 409 And then the third one would be commercial and industrial customers. I think it's fair it say, Mr. Brown, that depending on the economic circumstances, the proportions of the -- our new customers additions change and I believe that, in fact, last year we had more in-fill customer additions than we did new housing additions. 410 MR. BROWN: Well, I'm going to suggest to you that on an historic basis, the main source of your new business has come from extending gas service to new residential subdivisions or to new commercial, industrial buildings. That's the norm, is it not, Mr. Birmingham? 411 MR. BIRMINGHAM: I would say as an average, if you took a look at the last ten years, that would be true. I'm suggesting that the current circumstances don't reflect that type of growth pattern. 412 MR. BROWN: In order to solicit that new business, your bill-stuffers don't help you, do they, in the sense that the people that you have to deal with for a new subdivision or new industrial building are the developers of the buildings and those are the people your sales force have to go out and hustle and try and persuade, to sway them to use natural gas for their new facilities; correct? 413 MR. BIRMINGHAM: I think it depends on the type of customer, Mr. Brown. Certainly, Union Gas's reputation and our brand awareness in the marketplace helps us. 414 When it comes to a new industrial customer, we have industrial customer representatives that are responsible for looking at trying to get those types of new customers on match -- using natural gas. When it comes to residential customers, we have what's known as a channel marketing program that really works with the new housing builders, works with the equipment manufacturers and those types of people, to educate them about the benefits of using natural gas and that they will, in turn, influence the end-users making the decision. 415 MR. BROWN: My simple point is that -- my simple point is that in order to secure that business, you have to rely on channels of communication outside the bill-stuffers, do you not? 416 MS. CREIGHTON: I think we would need to acknowledge that -- actually, let me see. I think I might even be able to do this the right way. 417 MR. BROWN: That's not to say any of your previous answers were wrong, were they, Ms. Creighton? 418 MS. CREIGHTON: I thought I had either an interrogatory -- perhaps it's only by inference, but I did do make an attempt in our response to interrogatory C1.65 -- 419 MR. BROWN: Yes. 420 MS. CREIGHTON: -- to look at some of the alternatives, alternative communications options. 421 So if you look at things like television and radio and direct mail and so on, specifically, if you look at television which is on page 3 of 4 in that response, those production and air time estimates that you see there in the footnote, I indicate that the costs are representative based on Union's recent experience, which is to say from time to time we do use alternative means of communication, specifically, television, specifically, point-of-sale pieces, so that if you go into an appliance store, retail store, you might see a little sign on the counter promoting natural gas-burning appliances and so on. 422 We also have in the major media markets that we serve a newspaper insert. It looks like a little magazine called "Best Things," and it's a co-produced piece with appliance manufacturers and providers of services who share a common interest with us in selling more gas-burning appliances. 423 So we do recognize for that group of customers that we don't have yet, we're going to need more things, and in that case, we have invested in some advertizing that promotes the good decision-making on the part of certain customers who choose gas. 424 So we do recognize today that for those that you don't have already and you don't have that bill, you do need other things and we do use them. 425 MR. BROWN: I take it, then, from what you're saying, Union recognized the merits of the diversity of the communication channels? 426 MS. CREIGHTON: I think in that case where we didn't have the very effective, very cheap bill insert to rely on, we were forced to use an alternative. And this would always be the case, though as -- those alternatives are more expensive and hopefully not quite as effective. 427 MR. BROWN: Panel, could I ask you to turn to Exhibit F4.2. That's Mr. Vegh's supplemental book of materials that was marked as an exhibit this morning. 428 MR. BIRMINGHAM: We have it, Mr. Brown. 429 MR. BROWN: In particular, can you turn to page 51, which is the copy of the most current draft of the GDAR. 430 I would like to draw your attention specifically on page 51 to section 5.3.2, which is in the section about service level agreements that you would have with gas vendors, and it states that: "Co-operative marketing programs between the gas vendor and a distributor shall be subject to a Service Level Agreement and shall be offered on the same terms to all gas vendors without discrimination or preference." 431 You would agree with me that that provision of the GDAR contemplates in part the ability of the distributor and the gas vendor to engage in co-operative marketing programs under any of the billing options, including retailer-consolidated billing; correct? 432 MS. CREIGHTON: I would suggest that's the spirit of it, yes. 433 MR. BROWN: So even if there is retailer-consolidated billing, the draft GDAR contemplates that you might still have access to the bills that go out under this provision to -- encouraging joint marketing efforts; correct? 434 MS. CREIGHTON: Yes. 435 MR. BROWN: Thank you. 436 MS. CREIGHTON: I might add, though, I wouldn't see that as an apple-and-apple comparison. 437 MR. BROWN: I think your position is clear on that. 438 MS. CREIGHTON: Yeah. 439 MR. BROWN: If I could turn to the second reason that Union articulates for the -- not favouring retailer-consolidated billing, we can find this on page 15 of Exhibit B, tab 4. 440 This is the issue of municipal franchise relations. I'm correct, am I not, Mr. Birmingham, or whomever is the appropriate one on the Panel, that in the course of the past three years or so, Union has had two dog fights with local municipalities, in particular, Sudbury and Kingston, over its franchise arrangements; correct? 441 MR. BIRMINGHAM: We've had some particular challenges in renewing those franchises. 442 MR. BROWN: You're being diplomatic and you're not accepting my adjective. But in the case of the Sudbury franchise dispute, that was a matter that could not be resolved between Union and Sudbury and had to go to the OEB; correct? Or, I'm sorry, that was a matter that actually went to the courts, right off the bat, was it not? 443 MR. BIRMINGHAM: Sorry, I believe it's yet to come before the Ontario Energy Board, Mr. Brown. 444 MR. BROWN: Right. And indeed in that proceeding, you went before two levels of the Ontario courts. You went first before the Superior Court of Justice and ultimately had to go to the Ontario Court of Appeal, correct, where you triumphed? 445 MR. BIRMINGHAM: I believe there were two levels. I won't recall exactly the levels of the courts, Mr. Brown, but there certainly were two proceedings that occurred, that's right. 446 MR. BROWN: And in the case of the City of Kingston, in that case you did go before the OEB in first instance to secure a renewal of your franchise, did you not? 447 MR. BIRMINGHAM: I think in the first instance, Mr. Brown, we tried to negotiate the renewal of the franchise bill and that proved to be unsuccessful. Then we did approach the Ontario Energy Board. 448 MR. BROWN: And they had a hearing and they made a decision; correct? 449 MS. CREIGHTON: Yes, they did. 450 MR. BROWN: And then that decision itself was appealed to the courts, was it not? 451 MS. CREIGHTON: That's right. 452 MR. BROWN: And the court rendered a decision on that; correct? 453 MS. CREIGHTON: That's right. 454 MR. BROWN: If you turn to -- 455 MS. CREIGHTON: I should add that I -- I believe that we're not finished with that one yet. 456 MR. BROWN: If you turn to Exhibit B, tab 4, appendix A, which is your summary of the bill inserts, if you look down to the third subject that has "General Information," do you see that? 457 MS. CREIGHTON: Yes. 458 MR. BROWN: You will see references in May of 2000 and August 2000 to communications with Sudbury and Kingston customers regarding the franchise agreement; correct? 459 MS. CREIGHTON: That's right. 460 MR. BROWN: Both of those communications were in respect of the dispute that you were then having with those two municipalities; right? 461 MS. CREIGHTON: Generally speaking, yes. I would have to check on the dates. I'm not sure at what stage of the dispute we were at at that point. My guess is that was early days. 462 MR. BROWN: And we don't have copies of those communications that you issued to your customers in those two areas. Suffice it to say that notwithstanding your bill inserts, the municipalities in those areas continued in their quest to deny you a renewal of your franchise agreements; correct? 463 MS. CREIGHTON: Well, I can't argue with the fact that we have continued to discuss those franchise arrangements. I would suggest that -- that there was, by no means, a great deal of popular support amongst our customers for the actions that their politicians and municipal electric utilities were undertaking. 464 MR. BROWN: That's precisely the point I want to come to. Because is it not correct that in the face of a determined municipal council, that what Union Gas relies on to protect its franchises is not its bill inserts but its section 10 of the Municipal Franchises Act, which gives you remedies before the Ontario Energy Board? That's your main source of protection, is it not? 465 MS. CREIGHTON: I would suggest that where we have hundreds of franchises, that our relationship with customers and, generally, the very high regard that those customers hold Union Gas in is very important in the general contentment of the municipalities we serve in renewing their arrangements with us. 466 Whether there are particular agendas on the part of municipal politicians to achieve some other objective, I'm not suggesting that this is the only consideration for what we do in our bill, but it still does form part of the fabric that the municipal politicians have to consider in arriving at the conclusions they do. 467 MR. BIRMINGHAM: I think the distinction that we're drawing here, Mr. Brown, is that it's a matter of the proper process and the ease of the process in which those renewals occur. 468 And over that same time period, while we had those two challenges in front of us, we had roughly 40 franchises that were in fact renewed without that type of more litigious process. 469 MR. BROWN: In the case of Sudbury and Kingston, did Union Gas rely solely on bill inserts to communicate the issue surrounding the dispute with the municipality to its customers, or did Union Gas rely on other channels of communications as well? 470 MS. CREIGHTON: We -- I would have to check. This was a while ago. But I do recall that we also used some newspaper advertising, and we did quite a bit of what I would call media relations work, making ourselves available to talk to local reporters and so on. 471 MR. BROWN: The -- 472 MS. CREIGHTON: I should mention, the reason we did that is because the -- although it's extremely high, our bill-insert readership is about 70 per cent, so in a case where you would want to make sure that everyone was up to date, or where you couldn't wait for the next billing cycle to get them the information and you needed to communicate with them more -- in a more timely way, you would need to supplement the bill with an insert with something. I know in that case we did use newspapers. 473 MR. BROWN: If I would turn to the third reason that Union has advanced, that is, the impact on the value of the company and the cost of capital. Could I ask you, Panel, please, to first turn to Exhibit C4.43, and that's an undertaking or an interrogatory response. The question that was posed to Union is whether the company had conducted any studies or analysis of the impact of marketer-consolidated billing on Union or its parents, and your answer was no; correct? 474 MR. BIRMINGHAM: That's right. We had not done a study or analysis. 475 MR. BROWN: If you flip back to Exhibit C3.12, there is an interrogatory request there, and again it was whether you had conducted any studies relating to the imposition of gas vendor-consolidated billing and its impact on the cost of capital, and your answer there was no as well; correct? 476 MR. BIRMINGHAM: I think the answer really had two components to it, Mr. Brown. The first one was no, we hadn't conducted a specific study with respect to the impact on our cost of capital. 477 And the second piece was, ultimately, a study wouldn't, I don't think, prove to be very fruitful. In the end, it will be the financial markets that determine exactly what that impact will be. 478 MR. BROWN: Well, if we can then go back to Exhibit C1.34, you were asked in part in that question, in particular in part B, to provide a summary of the investment reports, bond ratings, and annual reports of the distribution utilities and those jurisdictions which have offered marketer-consolidated billing, both before and after implementation of marketer-consolidated billing, and your answer is or was that you did not have any such reports; correct? 479 MR. BIRMINGHAM: That's right. We hadn't looked at other jurisdictions where marketer-consolidated billing might have been introduced and what the corresponding impact on utilities might have been. 480 MR. BROWN: I'm going to suggest to you that in this proceeding, that Union Gas has not put before the Board any study or analysis which would suggest that there is any, or would be any, impact on the value of the company or cost of capital if marketer-consolidated billing was introduced. That's a fair statement; is it not? 481 MR. BIRMINGHAM: No, it isn't. Our pre-filed evidence, Mr. Brown, at Exhibit B, tab 4, beginning on page 17, it talks about the impact on our cost of capital, and I've spoken before on the potential impact of the value of the company. And I think it comes down to two things; one is on the cost of capital that really speaks to the potential for both a higher risk profile and therefore a higher risk premium to deal with some of the impacts of marketer-consolidated billing, and it also speaks to whether the utility, by virtue of having less influence over its revenues in cost because of marketer-consolidated billing, would therefore have a lower debt rating and a correspondingly higher debt cost for new or renewed debt. That's the impact of the cost of capital. We haven't tried to quantify that. We know that it's real because we talk to financial analysts and bond raters on a regular basis. But we haven't been able to quantify it. We haven't tried to quantify it. But there is no question that it is real. 482 The second impact is on the value of the company. And again there is no question that both Westcoast, when they first purchased Union Gas, and now Duke Energy, assuming that transaction closes, has paid a premium for the company, and one of the things that contributes to that premium is the fact that we continue to have more influence over our revenues and costs than would be available to us under marketer-consolidated billing. And I think it's -- there is no question in my mind that the value of the company will decrease under a marketer-consolidated billing scenario. 483 MR. BROWN: My simple point, Mr. Birmingham, is that there is no doubt that that is your perception, and you've articulated it in your pre-filed evidence and the answer that you gave to me. But you haven't produced any quantitative or historical information of the experience of other utilities to support that perception; correct? 484 MR. BIRMINGHAM: That's true. 485 MR. BROWN: Could you turn, please, to page 19 of Exhibit B, tab 4, which is the public safety issue. Page -- sorry, page 19, Exhibit B, tab 4, where one of the reasons why you don't support retailer-consolidated billing is the influence that that would have on Union Gas's ability to communicate with customers on matters of public safety; correct? 486 MS. CREIGHTON: That's right. 487 MR. BROWN: If I could ask you on that point to turn to Exhibit F4.2, this time to page 62 of the current draft of the GDAR. Do you have that? 488 MR. BIRMINGHAM: This is the handwritten page 62, Mr. Brown? 489 MR. BROWN: Yes, the one on the top right-hand corner. 490 MS. CREIGHTON: Yes. 491 MR. BROWN: You'll see under section 8.6 that there is an item 8.6.1 that reads: "Where gas vendor-consolidated billing is to be used to render bills to customers, the distributor shall ensure, through the Service Level Agreement with each gas vendor, that relevant safety information is included in the bills to customers." 492 You would agree with me that the draft GDAR directly contemplates a continuing role by the gas distributor in communicating safety information to consumers and mandates accessibility to the consolidated bill to that end; correct? 493 MS. CREIGHTON: My problem with that is I don't know if your bill is going to even be read by customers, with respect. My -- the issue I have here is that this is a completely untested communications vehicle. So while I appreciate that it's being offered, I have no indication at all that it's worth anything to me from the communications point of view. 494 The bill that I have is based on a brand relationship with a customer that's been developed over 90 years. There isn't another utility in Canada that has bill-insert readership as high as ours. We have worked very hard to establish this communication vehicle, and that's why it's effective. 495 Simply having a bill -- ask Sears, ask any other bill that might come to your home. Simply having a bill is no guarantee that the inserts will be read. And I have no comfort, I couldn't take for granted that safety communications in someone else's bill would get to customers, be read by customers, be understood and acted on. It would be, I think, irresponsible for me to make that kind of a leap of faith. I just don't think it's a given. 496 MR. FELDMANN: If I might offer a supplementary observation, Mr. Brown, and that is, even if Union Gas were provided envelope space with your client's bill, the issue of cost is silent in this case. And unless you're proposing that your client would offer that free of charge, I guess the question I would have is would your client offer this free of charge to the industry or would it be at a cost exactly one cent less than what it would cost Union Gas to do this directly in order to have the same information conveyed in. And I go -- again, it goes to the issue of cost in terms of who pays the cost. The issue is silent. And if I was a prudent business person, I know exactly what I would charge the utilities for that service, and that would be one half of one cent less than what it would cost me to do that on a direct basis. And again, that's an issue -- you know, it's like -- just an issue I think that would have to be addressed. I'll leave it at that. 497 MR. BROWN: And whenever you're embarking on something new, always -- there are always issues that have to be addressed, aren't there? 498 MS. CREIGHTON: You know, I think -- 499 MR. BROWN: That's called the price of change. 500 MS. CREIGHTON: Well, let me -- let me explore this because I think there are going to be two very different bases for the communications that go out in our envelope today and an envelope of a marketer tomorrow, should they decide to bill. 501 We are a monopolistic service today. We don't have to push anything. We don't have to -- we're not out there promoting decks and windows and, you know, sign up for this free offer or, you know, sign up on this new deal for five years instead of the three-year deal. 502 Marketers are in a competitive marketplace. It would surprise me greatly if they didn't view their envelope as an advertising channel. 503 And those are very different channels, then. An advertising envelope versus a monopolistic envelope that's really focused on information and education versus an envelope that's interested in your market share versus somebody else's market share in promoting your products over someone else's products. I think they're two fundamentally different vehicles. 504 MR. BROWN: With respect, Ms. Creighton, Union Gas does take the view that there is value in the billing relationship to it because of brand loyalty and brand recognition; correct? It's not altruistic; we just heard you're concerned about the value of the company, the utilization of the assets, cost of capital. They're bottom-line, brand-related considerations that Union brings to the table. And would you agree with me, there are going to be similar considerations that a marketer brings to the table, its brand recognition, is it not? 505 MS. CREIGHTON: My point about that is an old one. Our vehicle is a communications vehicle that will be different in its aspect from something that someone in a competitive business will have. 506 MR. BROWN: You would agree with me just on this point, which is the safety point: The GDAR, as it's currently drafted, gives the distributor the ability to ensure the safety messages do go out through the consolidated bill to customers? You agree with me on that; correct? 507 MS. CREIGHTON: I think that it doesn't get me anywhere. 508 MR. BROWN: Well, I'm going to suggest to you that the very valid concern you have about safety could be easily dealt with by negotiations through -- of the SLA. And my friend Mr. Warren has indicated that the simple solution to your problem is that you could negotiate in your SLA that every safety insert that you want a retailer to put in has to be prefaced in bold with a heading "Read this or your house will blow up." You do have that flexibility, do you not? 509 MS. CREIGHTON: What I'm suggesting to you is I can't negotiate in an SLA a readership that's high. I can't negotiate in an SLA a brand that's respected. These are -- there are things you simply can't negotiate. There are things you have to earn over time. 510 MR. BROWN: Mr. Chair, I'm moving on to a new area. Perhaps this would be an appropriate time? 511 MR. JACKSON: Yes. Thank you very much. It's 12:00 and we will break for lunch until 1:30. Thank you. 512 MR. WARREN: Mr. Chairman, can I advise the Board we do not have any questions for the next Panel, which is the Canadian Facts Panel, so I will -- I believe for everybody absent myself until I -- Dr. Schwindt arrives, whenever he may be on. Thank you. 513 MR. JACKSON: Thank you, Mr. Warren. 514 --- Luncheon recess taken at 12:00 p.m. 515 --- On resuming at 1:35 p.m. 516 MR. JACKSON: Please be seated. 517 Mr. Brown. 518 MR. BROWN: Thank you very much, Mr. Chair. 519 Panel, I want to continue with the factors which Union has articulated as basing its opposition to consolidated billing. I'm now at Exhibit B, tab 4, page 19. 520 After the issue of public safety, which we dealt with just before the break, the next item of concern which Union has expressed is that relating to credit risk. Mr. Birmingham, as I understand the problem generally that's been expressed here is that Union fears that under retailer-consolidated billing, it will have fewer number of people to look to in the event of default and it will have more money at risk with respect to each one of those entities; correct? 521 MR. BIRMINGHAM: Yes, I think that's a good characterization. 522 MR. BROWN: Could you turn to the draft GDAR again in Exhibit F4.2, this time at page 64. 523 This is section 9.3, which deals with policy parameters. But if I could direct your attention to section 9.3.6, it reads: "The maximum security required of a gas vendor shall not exceed --" and then it stipulates various amounts for each one of the billing options, distributor-consolidated billing, split billing, and gas-vendor consolidated billing. 524 So you would acknowledge, would you not, that the draft GDAR specifically contemplates that if retailer-consolidated billing is implemented, then the distributor would be entitled to require the retailer to post security to -- to secure its indebtedness, or potential indebtedness? 525 MR. BIRMINGHAM: I agree with that, Mr. Brown. Our evidence speaks to the fact that our credit risk gets concentrated in fewer customers. There are then ways you can go to mitigate that risk and this would be one of them. 526 MR. BROWN: It's a pretty big one, isn't it? You can get the retailer to post security, and in the event of a default, you can realize upon the security; correct? 527 MR. BIRMINGHAM: Yes. 528 MR. BROWN: Indeed, that's what the IMO is doing with the market participants in the wholesale market; is it not? 529 MR. BIRMINGHAM: I understand that's the approach they take. 530 MR. BROWN: And that's also the approach that the local electrical utilities companies are taking with retailers within their franchise areas; correct? 531 MR. BIRMINGHAM: I suspect that's the case, yes. 532 MR. BROWN: You are familiar with the terms of retail settlement code, are you? 533 MR. BIRMINGHAM: Yes. 534 MR. BROWN: You know that that code specifically allows distributors to require retailers to post security to cover their operating exposure. 535 MR. BIRMINGHAM: Yes. 536 MR. BROWN: Indeed, if you move on in the draft GDAR, if you go to page 66, which is article 10, you acknowledge, do you not, that article 10.1 directly talks about the steps which a distributor can take to realize the security which a retailer has posted; correct? 537 MR. BIRMINGHAM: Yes. Under the section entitled, "Financial Default by Gas Vendors," yes. 538 MR. BROWN: Right. I'm going to suggest to you that the draft GDAR has directly addressed the concerns that Union has voiced about credit risk, and has put in place or proposes to put in place a mechanism that will significantly mitigate those risks; is that a fair statement? 539 MR. BIRMINGHAM: Well, I would agree with respect to the risk of credit concentration. There are mechanisms in the draft Gas Distribution Access Rules that would go to mitigate all or most of that risk, yes. 540 MR. BROWN: And the draft GDAR goes one step further. And I think Mr. Feldmann referred the Chair to this section this morning, and that's back on page 56, section 6.6.2. 541 And this clearly indicates that if a customer, for whatever reason, wants to switch back to system gas, even if that customer is in default with the retailer, Union would be obliged to take that customer back on; correct? 542 MR. BIRMINGHAM: That, I think, is the intent of section 6.6.2. 543 MR. BROWN: So it gives you some clarity in that whole issue of who you can look to with respect to any outstanding obligations; right? 544 MR. BIRMINGHAM: Well, in respect of 6.6.2, what it tells us is that we can't decline a transfer from an existing customer to system gas for reasons of non-payment. Who we look to with respect to the credit is, I think, a slightly different issue. But the measures are addressed through the distribution rules as they are currently drafted. 545 MR. BROWN: The prudency requirements of posting security; right? 546 MR. BIRMINGHAM: Yes. 547 MR. BROWN: Right. Now, if we move on in Exhibit B, tab 4, to page 20, you have expressed another concern there, and this one you've headed, "Confusion in the Energy Markets," which I take it is a general cry of let's go slow, there is lots of stuff happening out there. So we can put this consolidated biller on the back burner until other issues in the energy markets get sorted out. Is that sort of the flavour or thrust of your concern there? 548 MR. BIRMINGHAM: Yeah. I think the intention of this was to indicate that with the electricity restructuring taking place and the unbundling of storage with respect to the gas business, that that might be enough for small volume end-use customers to try to absorb in the near term. 549 MR. BROWN: You appreciate, do you not, that as part of the new energy market that will open on May the 1st, 2002, customers will have the option of retailer-consolidated billing under the electricity regime; correct? 550 MR. BIRMINGHAM: That's correct. 551 MR. BROWN: And part of the process of educating consumers about their choices in the new power markets, in part, will mean educating consumers about the new billing options available to them; right? 552 MR. BIRMINGHAM: And the implications of those billing options, yes. 553 MR. BROWN: And so that's a matter that's on the table now, because the power market is going to open on May the 1st; right? 554 MR. BIRMINGHAM: It is a matter that's on the table with respect to electricity. I would also mention that the natural gas industry is in a little bit of a different position, and the people who are stepping out of the direct billing relationship and into a wholesale provider service are in a different position than Union Gas has been over the last 90 years. 555 MR. BROWN: Well, what I'm trying to suggest to you, Mr. Birmingham, is that if a customer -- if energy customers are being told you can get one bill from your retailer if you so choose, why not do the same thing for gas right now? Isn't this the perfect learning opportunity? What you can get in electricity you can get in gas as well. 556 MR. BIRMINGHAM: It's going to have to take on a different form, I think, in terms of the education. I don't think it's going to be enough to come forward and say, "Well, we can educate them about gas and electricity all at once," and that's the way it will work because -- they're starting from a different point, is my only -- was my only observation, that they're used to dealing with Union Gas, they're used to getting information from them. Now they'll be getting it from somebody else, and that's -- that difference in a relationship has to be explained. It's a little bit different than what's happening in electricity. 557 MR. BROWN: Finally, can I ask you to look back at the draft GDAR which is Exhibit F4.2, this time at 52, please? 558 MR. BIRMINGHAM: This is section 6 of the service transaction request? 559 MR. BROWN: Yes, it is, Mr. Birmingham. 560 MR. BIRMINGHAM: Thank you. 561 MR. BROWN: I would like to direct your attention to section 6.1.1, the first sentence of which reads: "A distributor shall take direction from a customer in accordance with the service transaction request as set out in the rule." 562 You would agree with me that that sentence embodies the general principle that a customer should be able to have the right to choose a variety of things, and a distributor should respond to that customer's choice or selection; correct? 563 MR. BIRMINGHAM: I would agree, Mr. Brown, that what section 6.1.1 says is that the distributor shall take direction from a customer in accordance with the service transaction request. 564 What I disagree with is the premise of that direction, in that I don't believe, and we don't believe as a company, that customers should choose their billing options. There aren't any other industries that work that way. The service provider chooses the billing options that they offer to customers. 565 With respect to Union Gas, we offer billing options as well, but the customer doesn't choose those. We choose the options. They get to select which ones best suit their needs. 566 MR. BROWN: Does Union Gas, as a matter of general principle, regard customer choice as a good thing? 567 MR. BIRMINGHAM: I think it's -- as a general principle, Mr. Brown, customer choice is a good thing, but it depends on what it's being applied to. In the case of billing options, we don't believe that it's the customer that should choose whatever billing option they want. There is no other industry that does that. It's the service provider or the provider of the goods that chooses how they're going to bill their customers for the services or the products that they produce. 568 MR. BROWN: Thank you Mr. Birmingham. 569 Thank you, Mr. Chair. That concludes my questions. 570 MR. JACKSON: Thank you, Mr. Brown. 571 Mr. Vegh. 572 CROSS-EXAMINATION BY MR. VEGH: 573 MR. VEGH: Thank you, sir. 574 Good afternoon, Panel. I'll be referring to two sets of materials for my questions. The first is what's called the supplemental book of materials, tab 4.2. Following that I'll be referring to the original of The Convergence Group material, 4.1. 575 Just by way of background on this issue. I'm representing a group called The Convergence Group which participated in the GDAR process, and it consists of Sunoco and Toronto Hydro Energy Services, who are both gas -- licensed gas marketers and licensed electricity retailers. 576 Panel, I wanted to address first with you some of the areas you went through Friday and this morning. I don't want to cover the same ground and I probably won't even be asking you substantive questions on those seven issues you've identified, but I would like to have a discussion around the process for dealing with these seven issues that you've identified. And these are the seven issues that you've identified as being necessary, really, to break out the costs of providing marketer-consolidated billing. And I take it that even apart from costing out this service, Union's position would be that these are the type of issues, these seven issues, that have to be addressed really in order to offer this service of marketer-consolidated billing? Is that right? 577 MR. BIRMINGHAM: Yes. Those are the significant issues that would impact our business processes and therefore the costs related to offering marketer-consolidated billing. 578 MR. VEGH: And even in addition to the costs, just to -- I mean what I'm getting at is to really understand what this service is. You would have to have some resolution around those issues? 579 MR. BIRMINGHAM: Yes. What we had raised, those are questions that, depending on the alternative that's chosen, therefore, will impact the costs and the processes that are needed to support. So those are questions that we've raised -- the most significant questions that need to be answered so that we could in fact come up with a comprehensive scenario. 580 MR. VEGH: So these are the non-exhaustive but leading issues that would have to be addressed in any resolution of the question of what is marketer billing and what should it look like? 581 MR. BIRMINGHAM: With respect to the aspect of just offering the service, that's right, Mr. Vegh. I'm not trying to be cute here, I just don't want to forget about the issues around things like asset utilization and the risk of franchise loss and the impact and value of the company. All of those things would have to be addressed as well. But in terms of just the more detailed piece around how do you cost out what marketer-consolidated billing would actually be, those are the seven questions that we think would have to be answered. 582 MR. VEGH: Right. Thank you. 583 And I would like you to turn to the supplemental book of materials. At page 1, reading from pages 1 to 3, there is an excerpt from the RP-1999-0017 pre-filed evidence from Union, and this was before Union had changed its position on marketer billing. And as I understand Union's original proposal, it was going to provide the option of a marketer-consolidated billing service in RP-1999-0017; right? 584 MR. BIRMINGHAM: We were considering offering that option, that's right. 585 MR. VEGH: Yes. And you said -- I'm looking down now at line 22, on page 1. You say, "In terms of the second stage of unbundling, Union is pursuing three initiatives necessary to provide wholesale billing capability." And by wholesale billing capability, you mean the ability to offer marketer-consolidated billing; right? 586 MR. BIRMINGHAM: Yes. The wholesale billing capability would include capturing all of the data we would need to give over to a marketer who would then bill, that's right. 587 MR. VEGH: So the answer is yes. By wholesale billing -- another way of saying marketer-consolidated billing. 588 MR. BIRMINGHAM: It's the -- it's the step before marketer-consolidated billing, yes. 589 MR. VEGH: Okay. And you refer to three processes and it's the second process that I would like to -- or three initiatives, and it's the second I would like to ask you some questions about. That's entitled "External Process" and that's at the top of page 86 of 87, or the top of page 2 of this book. There is a reference there that says: "External Process." It says: "The OEB has recently began discussions related to the development of its distribution access code. This process, which will involve stakeholder input, will establish rules as required and will address issues related to parties other than the regulated utilities billing end-use customers." 590 And that process that's discussed there, under the heading external process, that's the -- what became the Gas Distribution Access Rule or the GDAR rule, isn't it? 591 MR. BIRMINGHAM: That's right. 592 MR. VEGH: And that process started in December '99 and that was really the same time as this pre-filed evidence was filed; right? 593 MR. BIRMINGHAM: They would be right around the same time, I believe, that's right, Mr. Vegh. 594 MR. VEGH: So, then, the plan that Union had in place in December, 1999 was that Union would provide customers with the option of a marketer-consolidated billing service, and the process to address the major operational issues would be in the Gas Distribution Access Rule process? 595 MR. BIRMINGHAM: Well, we were looking at the possibility of offering marketer-consolidated billing, what the implications were on the external process. We knew that we were going to be working on the distribution access rule through the Board's process. And we had to look at how others might bill end-use customers, and that would be either in a split bill or a marketer-consolidated billing regime. 596 MR. VEGH: But in terms of how the process would work, the idea was that the details around these seven issues that you've discussed on Friday and today, and other operational issues that would arise, those sorts of issues would be addressed in the GDAR, but Union was prepared to offer marketer-consolidated billing on the belief that these issues could be addressed satisfactorily in the GDAR? 597 MR. BIRMINGHAM: We were certainly looking at it and we were expecting that the Gas Distribution Access Rule process would be the process that would be used to resolve those issues. 598 MR. VEGH: So there is nothing fundamentally improper with an approach which says we're going to offer -- or the Board should approve marketer billing and then work out the details of what that will look like in the separate process, the GDAR process. Nothing fundamentally wrong with that. That's what Union Gas was proposing to do? 599 MR. BIRMINGHAM: I don't think that's an accurate characterization, Mr. Vegh. I think what was happening is we were looking at some of the details, and in addition, the Gas Distribution Access Rule process would also be looking at some of the implications of the billing options including marketer-consolidated billing. 600 And I'm only drawing the distinction from saying we'll approve it and then we'll work out the details. I think the intent was that they're going to look at that and some of the details in fact would be worked out through the Gas Distribution Access Rule process. 601 MR. VEGH: But at some point, you need a process to just work out the details of what this marketer billing is really going to look like. 602 MR. BIRMINGHAM: As with any new service, you need a process to work out the details, make sure other people understand what the service is and how it's going to work, absolutely. I think Mr. Andrews spoke about that with respect to the offering the unbundled service as well, what he called the customer checkpoints. You need a process. 603 MR. VEGH: And the GDAR process, which, as we discussed, started in December, 1999, that process led to a -- well, the GDAR process, first of all, it was a task force of stakeholders who participated in drafting a report to the OEB on the Distribution Access Rule; right? 604 MR. BIRMINGHAM: It started that way and of course it -- I guess one can make the argument that it commenced with a process that was started a number of years before that, but yes. 605 MR. VEGH: The process had commenced a number of years before that. The Market Design Task Force process you're referring to? 606 MR. BIRMINGHAM: And the ten-year market review, yes. 607 MR. VEGH: So there was a progression from ten-year market review to Market Design Task Force to Distribution Access Rule Task Force and this Distribution Access Rule Task Force really started in December 1999 and culminated in a report to the Board dated June 2000; right? 608 MR. BIRMINGHAM: That's right. 609 MR. VEGH: And I've included excerpts from this report, starting at page 4 of these materials. 610 Maybe just to follow this process through. So this report was filed June 2000. Board staff issued a draft rule towards the end of 2000. The Board issued a proposed rule in February 2001. The oral consultation was carried out in June 2001. And there's still no decision in that process. Is that your understanding of how this worked out as well? 611 MR. BIRMINGHAM: Yeah, I think those are roughly the dates, Mr. Vegh. That's my understanding, yes. 612 MR. VEGH: And Union participated in the GDAR task force? 613 MR. BIRMINGHAM: Yes, we did. 614 MR. VEGH: And you had the opportunity, in that process, to raise the issues that you thought were necessary to offer -- or thought were necessary to evaluate marketer-consolidated billing. 615 MR. BIRMINGHAM: We had discussions with the parties about the different impacts of marketer-consolidated billing, yes. 616 MR. VEGH: Well -- and you had the opportunity to raise any issue around marketer billing that you thought was necessary to raise during that process? 617 MR. BIRMINGHAM: Yes. We weren't constrained in any respect if that's what you're asking. 618 MR. VEGH: And in fact, this task force addressed a wide number of issues in addition to marketer billing; right? 619 MR. BIRMINGHAM: Yes, that's right. 620 MR. VEGH: And just for everyone's reference, pages 5 to 8 of the materials that I filed is a -- is a table of contents for the report. I haven't filed the entire report. 621 The one issue of substance, though, that I would like to address with you respecting this report is the topic of credit risk which you raised on Friday and discussed earlier today, including most recently with Mr. Brown. 622 And if you turn to page 9 of the report, there is a -- sorry, page 9 of the book, page 45 of the report. There is a heading entitled "Prudential Requirements." And I won't read this to you, but just to go through how this -- how this issue was addressed. 623 So at page 9, section 5, "Prudential Requirements," there's a section on background, a section on discussion, and then there is section 5.3 which had recommendations, quite an extensive discussion, really, and the recommendations are set out at paragraphs 284 to 289 in some detail around how prudential requirements should look between retailers and distributors. 624 Now, I would just like to draw your attention specifically to paragraph 286, which sets out how the -- what is the maximum security that's to be posted by retailers under the three different billing options that were discussed in the report; distributor billing, split billing, and retailer-consolidated billing. 625 And so you would agree with me, won't you, that this issue was pretty thoroughly examined by the task force? 626 MR. BIRMINGHAM: The issue of measures which can mitigate the concentration of risk for the distributor was clearly an issue that was before the task force. 627 MR. VEGH: It was an issue before the task force and it was an issue around which the parties came to an agreement; right? If you look at paragraph 290, you see Union is listed as a party supporting the recommendation that we've just talked about? 628 MR. BIRMINGHAM: Yes. 629 MR. VEGH: And in the proposed DAR which Mr. Brown already took you to, section 9.3.6 adopts these recommendations, doesn't it? 630 MR. BIRMINGHAM: I haven't done a straight comparison of them, Mr. Vegh, but they look very comparable, yes. 631 MR. VEGH: While we're on the proposed Distribution Access Rule, could you turn to -- there is another instrument in the proposed Distribution Access Rule called a Service Level Agreement. 632 Can you turn to page 45 of the book where there is a description of Service Level Agreement. And you see the definition there. It says, "Service Level Agreement, or SLA, means the agreement that sets out the relationship between a distributor and either a customer or a gas vendor." 633 So it's a pretty broad definition, wouldn't you say, what constitutes a Service Level Agreement? 634 MR. BIRMINGHAM: Yes. 635 MR. VEGH: And then Service Level Agreements are dealt with in section 5.3 of the proposed distribution access rule. At section 5.3.1, you see there is an obligation of a distributor to enter into a Service Level Agreement with gas vendors, and the final sentence says, "A standard Service Level Agreement shall include provisions regarding the processing of service transaction requests and a dispute resolution process." 636 Again, that's -- quite a bit of room -- sorry. The Service Level Agreement is going to be an important document between the distributor and a gas vendor; right? 637 MR. BIRMINGHAM: Yes. 638 MR. VEGH: And it's going to cover a pretty extensive area -- pretty extensive sphere of areas between the distributor and the marketer? 639 MR. BIRMINGHAM: Well, at a minimum, it's going to have to cover the details of section 6, which is the service transaction request, and the identification of a dispute resolution process. 640 MR. VEGH: And the service transaction request, if you could start -- you mentioned section 6. Let's go to section 6 and in particular start at section 6.4. We see that service transaction requests cover -- and I'll just go to the headings, they cover the process for a change from system gas to competitive supply at 6.4; do you see that? 641 MR. BIRMINGHAM: I do. 642 MR. VEGH: 6.5, change from one gas vendor to another gas vendor. 6.6, a change from gas vendor to system gas? Do you see that? 643 MR. BIRMINGHAM: Yes. 644 MR. VEGH: And 6.7 change from gas vendor to system gas in the case of gas vendor default. 645 MR. BIRMINGHAM: Yes. 646 MR. VEGH: So the GDAR process contained a means to allow parties to participate in detailed resolution of the same type of issues that you say have to be addressed for marketer billing, and there is also an ongoing process for Service Level Agreements to deal with these issues even in further detail; isn't that right? 647 MR. BIRMINGHAM: I would expect that the Service Level Agreement would deal with these categories in even more detail than is contained in the proposed rule, that's right. 648 MR. VEGH: So when we take the process up until this point, is it fair to say that starting really in December, '99, Union as it does today, has some concerns about directions for marketer billing but in 1999 at least was prepared to leave that direction to the GDAR process? 649 MR. BIRMINGHAM: Well, if I step back a little bit, Mr. Vegh, if you go back to even as far as, say, 1994, the Ontario Energy Board encouraged industry consultation to try to resolve most of the issues as the commodity market was evolving. And this process, that is, the Gas Distribution Access Rule process, was one of those industry consultations in which the market participants tried to come together and form a common view of what the future might look like. 650 MR. VEGH: This process was actually to lead to a set of rules, wasn't it? And that makes this process a little different than the earlier one. 651 MR. BIRMINGHAM: Not necessarily. They would -- the earlier processes also led to rules and agreements around things like minimum conditions of supply. But I take your point that this one was intended to deal with access to the gas distribution system and I think would be broader in scope than happened in the past. 652 MR. VEGH: And as originally anticipated in '99, Union was prepared to allow this process to address the operational issues around marketer billing. I know Union changed its position later, but in December '99, you were prepared to have this process deal with those issues around marketer billing. 653 MR. BIRMINGHAM: We were expecting that that process would deal with the issues and culminate in some type of process before the Ontario Energy Board. 654 MR. VEGH: Well, you were out -- I had a little more specific ideas than that, I think. You were proposing marketer-consolidated billing in your -- or you said in your 1999-0017 application that you were prepared to propose marketer-consolidated billing; yes? 655 MR. BIRMINGHAM: That we were looking at it because we thought that might be one of the options that we would have to deal with, yes. 656 MR. VEGH: Well, you were prepared to propose it, weren't you? 657 MR. BIRMINGHAM: Yes. 658 MR. VEGH: And you were prepared to leave the details -- no. You were prepared to propose it. Now, obviously, you would have had some concerns about the need for direction around some issues. Just as you raised the other day, there are detailed issues around marketer billing. But you were prepared to leave those directions to the GDAR process? 659 MR. BIRMINGHAM: We were prepared to deal with those issues through the Distribution Access Rule process. 660 MR. VEGH: And then you participated in that process and you were not prevented from addressing any of the issues that you wanted to address in that process? 661 MR. BIRMINGHAM: That's right. 662 MR. VEGH: And in fact some of the issues that were addressed in that process, including the credit issue, were addressed to Union's satisfaction? 663 MR. BIRMINGHAM: Yes. 664 MR. VEGH: And on a going-forward basis, as these issues required further elaboration and further detail, they could be addressed either in -- through an amendment to the GDAR or through the SLA process contemplated under the GDAR? 665 MR. BIRMINGHAM: Well, it depends on which issue we're talking about, Mr. Vegh. I think with respect to some of the operational aspects of marketer-consolidated billing that Mr. Feldmann talked about, I think you're right. That process, or the Service Level Agreements, may get us to the point where we can address those. Answer those questions and you'll have the services going to work. 666 I don't necessarily think that, for instance, a Service Level Agreement between Union Gas and a gas vendor will deal with asset utilization risk per unit. 667 MR. VEGH: Those are bigger policy issues that simply have to be decided one way or the other. 668 MR. BIRMINGHAM: That's right. 669 MR. VEGH: Once that decision is made, and the details for how to operationalize this process are really properly the subject matter of the GDAR or a SLA under the GDAR? 670 MR. BIRMINGHAM: Once those policy issues are decided or what the approach is going to be to deal with those things, I think there will be a process that has to deal with the mitigation measures as well. 671 So let me give you an example just because I want to be clear about what I'm talking about. 672 Let me take the risk of asset utilization for existing customers. What we're trying to do is promote natural gas so an individual customer will use more gas appliances and that helps to offset the annual decline in natural gas use. 673 We do that through our bill messaging and bill inserts as the most effective means of doing that. To the extent we didn't have that available to us, one of the mitigation measures for that might be something like moving to demand rates for Union Gas. 674 So I only want to draw out this distinction, Mr. Vegh, that to deal with that issue, there may be mitigation measures where those mitigation measures would have to be put in place through a process other than the Gas Distribution Access Rule process or the Service Level Agreement negotiation. 675 MR. VEGH: And so if -- I understand that, fair enough. So you may have access to other processes to deal with other issues that could arise under marketer-consolidated billing. 676 MR. BIRMINGHAM: Yes. I think that's fair, too. We would need other processes to deal with any mitigation measures. 677 MR. VEGH: But insofar as the seven issues that Mr. Feldmann and Ms. Creighton identified as having to be resolved, they have been, I take it you would agree, they have been resolved in the GDAR or they could be resolved in the SLA? 678 MR. BIRMINGHAM: I think that's right, Mr. Vegh. In fact, I would expect that most of the issues, because they get to the particulars of how the service is going to work, would in fact be dealt with through the Service Level Agreement rather than a rule that the Ontario Energy Board would, in fact, sponsor. 679 MR. VEGH: Okay. So that -- that process worked, then? The GDAR process work for what it was intended to do? 680 MR. BIRMINGHAM: I'm sorry, Mr. Vegh? 681 MR. VEGH: I said then, as far as it goes, the GDAR process worked for what it was intended to do? 682 MR. BIRMINGHAM: Well, the GDAR process was intended to provide industry consultation to try to arrive at a consensus. It did that to a certain level. And I think we've already talked about the fact that there is still issues to be resolved. 683 MR. VEGH: Well, you disagree with some of the outcomes of that process, but -- but the process did what it was supposed to do, that is, work through -- identify and work through the issues that would have to be addressed to deal with marketer-consolidated billing, among other things. 684 MR. BIRMINGHAM: At a certain level, yes. 685 MR. VEGH: Now, I would like to follow through, though, to just see where we are today process-wise. And at page 68 of the book is a letter from Union Gas to the Board commenting upon the February 2001 proposed rule. And so the -- just to do the chronology, the rule was circulated for comment on February 6th and all parties had an opportunity to respond to that and Union filed a response. And what I've included at page 68 is a covering letter to your response, not all of the materials that were filed. 686 And your response, apart from the substantive issues, at the bottom of the letter, bottom of the first page of the letter, Union said: "Because of the far-reaching consequences that flow from the draft rule, the public interest will be best served by considering these matters in a full public hearing with expert evidence, cross-examination, and the ability for all parties to make argument before a panel of the Board." 687 So Union was -- Union's response to the -- one of the responses to the draft -- the proposed GDAR was that that process is now inadequate and we should have a full hearing on these questions. 688 MR. BIRMINGHAM: Well, the comments -- that comment was put in for at least two reasons, Mr. Vegh. The first one is, the Gas Distribution Access Rule process wouldn't be addressing some of issues that we've already talked about, so things like asset utilization or the risk of franchise loss or the impact of the value of the company, the Gas Distribution Access Rule process was never dealing with those issues. 689 We talked about the fact that if there are going to be mitigating measures for that, we would need other processes to deal with that. So that's one aspect of the consequences. 690 And the second aspect is that when we -- when we looked at marketer-consolidated billing and the impact it was going to have on the company, as well as on customers, that we wanted to make sure that, in fact, there was a full understanding of what those consequences were going to be, which is why we were -- we were supporting the need for a public hearing. 691 MR. VEGH: And so you asked -- you said to the Board, the current process for the GDAR is inadequate; we should have a full public hearing on this. 692 MR. BIRMINGHAM: We recommended to the Board that they have a full public hearing. 693 One of the other key issues, and I know we're not dealing with it in testimony, Mr. Vegh, is the fact that we need to deal with the jurisdictional piece as well. And that was another reason why we wanted to have a public hearing on this particular issue. 694 MR. VEGH: Well, at the GDAR consultation, your counsel argued that the Board did not have jurisdiction. And I take it that here you're -- you are going to argue that the Board does not have jurisdiction. 695 MR. BIRMINGHAM: That will happen in the argument phase of this hearing. 696 MR. VEGH: Right. So there is no -- nothing turns on whether or not we have an oral hearing in order for you to argue jurisdiction, does it? 697 MS. JACKSON: Well, Mr. Chair, there clearly is a position taken here that there is a jurisdictional issue that requires a hearing. Absolutely. And not a consultation but a hearing. 698 MR. VEGH: Okay. So now that you've got your hearing, are you satisfied on that point? 699 MR. BIRMINGHAM: Are we satisfied that there will be a process to deal with the jurisdictional issue? Yes. 700 MR. VEGH: No. So you're not going to come back later on and say, oh, we didn't mean this hearing, we meant another hearing, some kind of generic hearing in some other process somewhere. You're satisfied now that you're in the proper process -- that you've -- that this is the proper process to deal with this issue? 701 MS. JACKSON: Do you mean, Mr. Vegh, the jurisdictional process, the jurisdictional issue? 702 MR. VEGH: Well, is this the proper process for the Board to determine whether it has jurisdiction? And if the Board does determine that it has jurisdiction, is this a proper process for the Board to require marketer-consolidated billing? 703 MS. JACKSON: Do you mean, Mr. Vegh, is this the proper process in which the Board will decide what marketer-consolidated billing will look like? 704 MR. VEGH: Is this the process -- can the Board, in this case, order Union to provide marketer-consolidated billing, leaving aside your arguments about jurisdiction. 705 MS. JACKSON: Well, I would have thought not, Mr. Chair, but I would have thought also that's a question for argument. I think there is a policy issue before the Board right now. But there is, as the Board has heard, many, many, many questions about what marketer-consolidated billing is going to look like. And I would have thought it was not correct to say, at the end of this hearing, the Board would be making a decision about that. But I do think that's a matter of argument. 706 MR. JACKSON: I thought your question had two parts, Mr. Vegh. I thought you were first asking whether, in Union's opinion, this was an appropriate place to come for a ruling with respect to jurisdiction. And then secondly, your question about whether or not, depending on the outcome of that, the Board would be in a position to direct Union to provide marketer-consolidated billing. Did I misunderstand that? 707 MR. VEGH: No. Those are my questions, sir. 708 MR. JACKSON: Okay. Now, I don't think your first one has been answered as to what -- whether Union takes the position that this is an appropriate place to decide the question of jurisdiction. That might be obvious. If they're prepared to argue it here, it may be obvious that they consider this an appropriate place to get a ruling, I suppose. Maybe I should take that -- 709 MS. JACKSON: That would be correct, Mr. Chairman. 710 MR. JACKSON: Okay, thank you. And then the second question, I guess you have your answer to, do you, Mr. Vegh? 711 MR. VEGH: Oh -- 712 MR. JACKSON: I'm not sure. I may need to be reminded, too. It was -- your second part was, "Assuming the Board made a decision that it did have the jurisdiction, would this be an appropriate proceeding in which to direct Union to provide marketer-consolidated billing?" Did you get an answer to that? 713 MR. VEGH: No, I don't feel I do have an answer to that. 714 MS. JACKSON: Mr. Chair, my point was simply that in the absence of answering all the questions that would have to be answered to decide what marketer-consolidated billing was going to look like, I think it would be entire -- it flows, I think, from all the evidence you've heard that that would not, in Union's view, be an appropriate outcome at this stage. But I do think this is fundamentally an issue of argument. 715 MR. JACKSON: Fine. Thank you very much. I think that's as far as we need to take it. That clarifies it. Thank you. 716 MS. JACKSON: Thank you, Mr. Chair. 717 MR. VEGH: Well, maybe I could just get some clarification on this because I've been spending two years trying to bell this cat, sir. 718 MR. JACKSON: Yes. 719 MR. VEGH: There was -- there was Union's initial filing in 1999-17. There was a GDAR process that ran for two years. Union said during that GDAR process that that was not the correct place to answer this issue and asked for a hearing. The Board has given Union a hearing. And now I hear Ms. Jackson say this is not the correct place to answer this question, that we need something else, but I don't know what that is. So where will this issue be decided, then? 720 MS. JACKSON: I think we're at the point, Mr. Chairman, where my friend and I clearly have an issue we're going to argue about, which is how far the Board should go in making a decision in this case. But I do think it is a matter of argument and it depends, in part, on what my friend asks for. And I don't yet know -- I don't -- I do not only not know what my friend's jurisdictional argument is, I don't know what my friend is going to say to the outcome. And I think it's likely that whatever my friend says as to outcome, I may have a different view. But I think probably that's a question for argument. 721 MR. JACKSON: Okay. Well, Mr. Vegh, I'm sorry. Help me here. You were, I think, asking for an opinion of the company's witnesses as to whether or not the record would permit that to be reasonably done if the Board had jurisdiction; were you not -- 722 MR. VEGH: Yes. 723 MR. JACKSON: -- asking that question? 724 MR. VEGH: Yes. 725 MR. JACKSON: Okay. Now, Ms. Jackson, how would that not be appropriate? 726 MS. JACKSON: I do think that's a slightly different question. And if my friend wants to ask that question of the company, I think that's fine. 727 MR. VEGH: Panel is it your view that the record in this case is appropriate for the Board to make a determination on whether to order the option of marketer-consolidated billing? 728 MR. BIRMINGHAM: I think from our standpoint, Mr. Vegh, if the Board considered that benefits of marketer-consolidated billing as opposed to direct or split billing were sufficient that they wanted to order it in this hearing, they would also have to deal with the mitigation measures around some of the issues that we've talked about. So it would have to answer the questions that drive the processes that Mr. Feldmann testified to, and we would have to deal with the effects around issues like asset utilization, the risk to the franchise loss, the impact on the cost of capital and the value of the company, and the cost of communications as we continue to try to inform customers about things like rate changes and about promoting the bias for natural gas. 729 And I'm not sure that they've got everything that they need to be able to make a decision around those items. 730 MR. VEGH: Okay. So let's spend a little time on those, then. In terms of the -- what we've been describing as the operational issues, these seven operational issues, are you -- do you expect the Board to make a decision in this case that will provide you with direction on those seven operational issues? 731 MR. BIRMINGHAM: We've raised them as questions that need to be answered. Whether they can be decided here or whether they are followed through either at the Gas Distribution Access Rule process or through the Service Level Agreements, I think is an open question. But clearly this process that -- that is there, that can answer those questions. 732 MR. VEGH: Except, Mr. Birmingham, you're also saying the gas distribution access process is inappropriate and that's why we need this hearing? 733 MR. BIRMINGHAM: We raised the issue on a couple of particular issues, and as I indicated before, we said we needed a public hearing not so much to deal with answering specific questions and operational issues but to deal with the jurisdictional issues and to deal with the impact on the company as it related to items like asset utilization risk and the value of the company. 734 MR. VEGH: Okay. Then for those seven operational issues, are you prepared to say that those issues should really be addressed in the GDAR and so it comes down to a question of the other issues that you identified, these asset utilization risks, et cetera, the mitigating impact issue. 735 MR. BIRMINGHAM: I think the questions that Mr. Feldmann raised can be answered either through the Gas Distribution Access Rule process or through the Service Level Agreements. 736 MR. VEGH: Okay. 737 MR. BIRMINGHAM: And it may be useful if they're going to be answered throughout Service Level Agreement process for the Board to provide some indication of direction around that. 738 MR. VEGH: Okay. So now we get to the asset -- or to the mitigation factors that you spoke about. 739 Okay. So turning now to the mitigation measures you spoke about, I take it you're not saying that in this case, that the Board has to approve any particular mitigation measure? In fact, you haven't offered any particular mitigation measures. 740 MR. BIRMINGHAM: That's right. I'm saying if -- we haven't offered any mitigation measures because we don't believe that marketer-consolidated billing is appropriate, and you can achieve all the benefits through a direct billing scenario. But if the Board was to order marketer-consolidated billing through this hearing, then presumably they would also want to deal with the mitigation measures that address the concerns that we've raised. 741 MR. VEGH: Well, you would expect that the Board would balance the costs and the benefits; that's what you're saying? 742 MR. BIRMINGHAM: No, not at all. Balancing the costs and the benefits is a different question. What I'm talking about is something like how do we deal with communicating with customers around promoting natural gas? How do we deal with the loss of the utilization of our assets? And what is the mitigation measure for that? Is that moving to demand rates as an example? And should we come forward with a proposal to deal with that? How do we deal with communicating with customers around safety? And is the Board prepared to allow a deferral account to capture those increased costs? And how do we measure the effectiveness of that communication? So it's those types of mitigation measures that I think we need to see, Mr. Vegh. 743 MR. VEGH: Well, let's focus on the mitigation measures that you've -- that you've raised as true mitigation measures and not the operational issues that you say are appropriately addressed in the GDAR. 744 Turning to the mitigation measures. Isn't it also open for this Board to determine in this case that you've speculated about some cost that may be incurred but, really, you haven't put forward cogent evidence that these costs actually will be conferred -- will be incurred, and the Board can -- can effectively dismiss those concerns until you have something a little more concrete? 745 MR. BIRMINGHAM: No, I disagree, Mr. Vegh. The risks that we've talked about, for instance, around asset utilization, around the loss of franchise, around the value of the company, around increased operating costs are real. They are real risks. And that -- those risks are borne out through all of the testimony that we've had in all of our rate cases. The Board is well aware of what our risk profile looks like and the way that we've operated in the past. To say that we haven't brought forward any evidence on those is just wrong. 746 They are clearly there and they will be increased when marketer-consolidated billing is introduced. 747 MR. VEGH: Well, you haven't quantified any costs in this case that would be incurred by Union if marketer-consolidated billing is -- 748 MS. CREIGHTON: I have -- with respect, I have on the communication side provided quite a bit of detailed evidence on cost there. Those ones are easier to predict. We know how much the alternative means of communications cost. I'm talking about a three cent bill insert versus $1.40 for a direct mail piece most people consider junk mail. I think I have provided that interrogatory numbered C1.65 as detailed as I could get in terms of communications costs. Those are very real. You just multiply those by customer cost per million and you have the numbers that we'll be facing. 749 MR. VEGH: The asset management issues, Mr. Birmingham, that you referred to, those costs really haven't been quantified in this case. 750 MR. BIRMINGHAM: We haven't quantified the risk of asset utilization for existing customers with respect to promoting more applications. We haven't quantified the asset utilization risk for existing customers moving to other fuels. We haven't quantified the asset utilization risk related to growth or new customers. And we really can't, until we try to develop some sort of scenario around what customers are going to take marketer-consolidated billing, and how marketers and customers are going to behave underneath that -- that service, we don't have that scenario. We 751 MR. VEGH: Whether you said -- 752 MS. JACKSON: Excuse me, can -- I'm -- 753 MR. VEGH: Finish your answer. Sorry for interrupting. 754 MR. BIRMINGHAM: We know risks are there but we don't have a detailed scenario to try to come to some sort of quantification around those risks. 755 MR. VEGH: And you said, in all fairness, that even if we went to a more detailed analysis, it would be very challenging to everybody to quantify these risks and these costs. 756 MR. BIRMINGHAM: No, that's not right, Mr. Vegh. What I was referring to there was a question that Mr. Brown asked me around the cost of capital and the value to the company. And in particular, with respect to the premium that initially Westcoast paid for Union Gas, and now Union -- or, sorry, now Duke Energy is preparing to pay for Union Gas. Part of that purchase price premium is associated with the fact that we have goodwill with customers, that we have influence over our revenue streams and over our costs. 757 He asked me whether we could quantify those types of things and I said that you really couldn't. It was part of the premium. But it's -- it gets mixed in with a number of other things so that it would be very difficult to sort it out. 758 With respect to asset utilization risk or credit concentration risk or the risk of losing franchisees, if you develop a scenario around take-up measures, how a customer is going to behave with -- I think if we had some more parameters around what the scenario would look like, those are things that we could try to quantify. 759 So I think it depends on the risk that you're looking for. 760 MR. VEGH: So ultimately you won't be able to quantify -- you won't be able to quantify what the customer take-up is going to be and how is it going to differ under marketer billing versus distributor billing; right? You're going to have to have some assumptions and put forward some numbers around that? 761 MR. BIRMINGHAM: We don't have a possible scenario for the future offering marketer-consolidated billing, that's right. 762 MR. VEGH: Right, and to the extent you can quantify it, that quantification is just going to be as good as your assumptions about what the impact will be on asset utilization under marketer billing. And you really have no idea about what the correct assumption is on that, do you? 763 MR. BIRMINGHAM: Like any scenario planning, Mr. Vegh, you have to make some assumptions and you'll draw some conclusions from those assumptions. You're right, the conclusions will only be as reliable as the assumptions that go into them. 764 It's one of the reasons, frankly, why we say you can get the benefits that you're talking about, which is having a more competitive commodity market, by moving to direct billing and not have to deal with these issues that are -- only exist under marketer-consolidated billing. 765 MR. VEGH: So you say. Now, aren't we really in the situation in this part of the case, much as we are in the other part of the case, for issue 3.1, that it is very difficult to quantify what are the benefits and what are the ultimate costs and how are they commencible for both access to unbundled services and access to different billing requirements? Don't both of these elements of the case really just require, as I think one of your Panel said in the first -- one of your first Panel said, a bit of a leap of faith? 766 MR. BIRMINGHAM: I disagree with the number of the comments in your question, Mr. Vegh. And the first basis, the unbundled service, has already been agreed to by all of the parties in our last proceeding and by the Board. 767 Marketer-consolidated billing is not, so it's -- it is in a different circumstance all by itself. 768 With respect to a cost benefit analysis around marketer-consolidated billing, I would agree that that has not been provided, and as I say, to the extent that we want to pursue a more competitive market for the commodity and the sale of the commodity in Ontario, we can do that through direct billing and not have to deal with these issues. 769 MR. VEGH: When the Board approved the unbundling proposal and in fact had to resolve differences of parties' positions on the unbundling proposal, the Board didn't have, really, a cost benefit analysis in front of it, did it? The Board just had to make a decision, a policy decision, and the -- the implementation details followed that decision? 770 MR. BIRMINGHAM: Well, I would say that's only part of it, Mr. Vegh. One of the things that's happened, of course, is that the Board has encouraged the industry consultation to address the progress of the competitive market and what services might make sense next. 771 They have had the benefit of that industry consultation through the process that we followed, the customer consultation process which led up to our proposals on the unbundling. We filed evidence; there are lots of interrogatories, there is an extensive settlement negotiation around that, and the Board then had a settlement agreement put in front of them where a cross-section of the industry and a representative cross-section indicated that this would be the next step, that it made sense to them and they agreed. I think that's a very powerful thing for the Board to have. That is not the case with marketer-consolidated billing. 772 MR. VEGH: Well, the marketer-consolidated -- maybe we'll just leave it this way: This issue has been discussed, as you and I have gone through this afternoon, it's gone through the ten-year market review, it's gone through the Market Design Task Force, it's gone through the GDAR, and it's now in front of the Board in this case. Is there any reason why deferring this to some other process is going to provide some new information that hasn't been uncovered yet? Aren't we in as good a position now for the Board to make a decision as we are ever going to be? 773 MR. BIRMINGHAM: I don't think it's a matter of being in a position to make a decision, Mr. Vegh. I think it's a matter of can you deal with all of the impacts that come from the offering of marketer-consolidated billing? 774 MR. VEGH: I would like to speak to you just -- or ask you some questions around benefits of marketer billing. 775 Now, when we went through the first part of this case with the first Panel, the position that Union put forward was that demonstrating choice for customers is a benefit in and of itself, and my clients agreed with that position. 776 MS. JACKSON: I think that's a level of generality quite above what the first -- first Panel said. I think the first Panel said offering the option of unbundled service was a benefit. 777 MR. VEGH: Offering the option of unbundled service was a benefit for those customers even if the customers do not take the service, was I believe what the evidence was. Does that sound familiar? 778 MR. BIRMINGHAM: Yes. 779 MR. VEGH: And so even if someone didn't exercise that option, having the option in itself was valuable. 780 MR. BIRMINGHAM: Yes. 781 MR. VEGH: Now, under the GDAR, customers are given the option over choosing their billing supplier. Is that not of value to the customer? 782 MR. BIRMINGHAM: I don't know if it's of value to the customer, Mr. Vegh. It's, in our view, inappropriate for the customer to determine who is going to provide the billing. It's the service provider who gets to do that. 783 MR. VEGH: I know Union does not like it, but what we're looking at here is whether there are benefits to the customer that go with having the ability to make that choice. 784 MR. BIRMINGHAM: I don't think there is any evidence that shows whether there is benefit to that or not, Mr. Vegh. 785 MR. VEGH: Now, marketer-consolidated billing is also proposed to be available in the electricity sector when that sector opens up to retail competition in May; you're aware of that? 786 MR. BIRMINGHAM: Yes. 787 MR. VEGH: And you indicated earlier that Union faces competition with the electricity sector. I think you described it as fuel-on fuel competition? 788 MR. BIRMINGHAM: Over the electricity sector and other fuels as well, yes. 789 MR. VEGH: Yes. So is having similar rules in place for two industries in competition a benefit to customers? 790 MR. BIRMINGHAM: I don't know, Mr. Vegh, but I would say not necessarily. And, frankly, if there is some sort of benefit to marketer-consolidated billing on the electricity side that without marketer-consolidated billing on the gas side, if that was going to provide a disadvantage to the gas industry, then the party that should be most concerned about that is Union Gas. Because that will go directly to the competitiveness of our fuel, it will go to the asset utilization risk that I've already talked about, and we are not concerned about that because we don't think it will be a concern. 791 MR. VEGH: Well, then, perhaps it's the electricity distributors who should be concerned about this? 792 MR. BIRMINGHAM: Depending on the circumstances that evolve in that industry, Mr. Vegh, they may be concerned about it for the reasons that I've described for Union Gas. They may very well be concerned about the use of their assets. They may be concerned about how they communicate with customers around items like public safety, about rate changes and those types of items. 793 I guess we will have to wait and see. We don't have that industry open yet. 794 MR. VEGH: Well, then, to the extent that we have different rules in place for electricity and gas around this issue, then the gas side will have a competitive advantage from these rules, wouldn't it? 795 MR. BIRMINGHAM: Just let me understand. You're saying that the proposition is that the gas industry will have a competitive advantage because there is no marketer-consolidated billing? 796 MR. VEGH: Yes. 797 MR. BIRMINGHAM: Is that what you're asking? I don't think so. 798 MR. VEGH: You said one of your concerns about marketer-consolidated billing is that there is no one out there with a natural bias in favour of gas. If you have marketer-consolidated billing in electricity but no marketer-consolidated billing in gas, then there is no -- then there is someone out there with a bias in favour of gas, and that's the gas utilities, but no one out there with a bias in favour of electricity. 799 MR. BIRMINGHAM: Then it may put the utilities in the position where they can continue to influence use. That may or may not exist in the electricity industry. 800 MR. VEGH: So you would have opportunity -- or the Board would be giving you opportunities that it is not giving on the electricity side? 801 MR. BIRMINGHAM: Well, I don't know what the impact is going to be on the electricity side, Mr. Vegh. I just don't know. 802 MR. VEGH: I know you don't know what the impacts are going to be, but you're asking the Board to give the gas utilities an opportunity to have a way of influencing behaviour that the Board is not giving to the electricity sector. 803 MR. BIRMINGHAM: I think there is that potential, Mr. Vegh, that the natural gas utilities would be in a position of influencing use, and keeping their asset utilization up, and all of that goes to managing the reasonableness of our rates. That may or may not happen in the electricity side, and I agree that there could be a difference there. 804 MR. VEGH: Ms. Creighton, I just have some questions for you. 805 You said this morning that Union has quite an impressive history of customer readings for its bill inserts. Do you remember that? 806 MS. CREIGHTON: Yes, I do. 807 MR. VEGH: This a recent phenomena or have you always had this impressive record? 808 MS. CREIGHTON: I've been with Union Gas six years. Unlike most Union Gas employees, I'm not a lifer. But in my time at the company, the numbers have been -- well, actually, when I first came to the company, I didn't believe the numbers. They were so good I really questioned them. But they are consistent. They're checked more than once a year. In fact, the numbers are inching upward. 809 MR. VEGH: And you also said that you cannot say whether this impressive readership status will continue under marketer-consolidated billing? 810 MS. CREIGHTON: We wouldn't have a bill under marketer-consolidated billing. 811 MR. VEGH: But the idea -- the position was put to you that Union could include bill inserts in a marketer bill or could at least seek to do that, and you raised concerns about whether or not the readership would be as impressive if the material were in a marketer bill as opposed to Union's bill. 812 MS. CREIGHTON: I think the marketer's bill is an entirely different proposition from an utility bill. I think it's an advertising vehicle and a competitive industry. It is by its very nature different. The readership is going to be different. I would never expect readership to be as high in that kind of a situation as it is in a monopoly billing situation. Therefore, it would not be as effective. 813 MR. VEGH: So it is fundamentally different to have a bill for competitive service as a bill for monopoly services when it comes to customer readership effectiveness. 814 MS. CREIGHTON: What I'm saying is you use the envelope for different purposes. In competitive business, you're using the envelope to sell; in the monopoly situation, you're using the envelope to inform and to educate. 815 MR. VEGH: So the fact that Union is not pushing competitive products enhances its credibility? 816 MS. CREIGHTON: I think it does. I think our envelope is pretty straight up. And if you look at the contents, even -- even compared to other utility bills that do use their envelope to try and sell things, ours is different. 817 MR. VEGH: Now, until the last couple of years, though, Union provided a water-heater rental service it billed for and advertised in its bill inserts didn't it? 818 MS. CREIGHTON: In my six years, we have not used the envelope as an advertising vehicle. We really haven't. It's true we were in the water-heating business. We had very high penetration and we didn't particularly promote it through the envelope, no. 819 MR. VEGH: So the -- so the materials that you provided in your bills with respect to the water-heater options, you wouldn't consider those to be advertisements? 820 MS. CREIGHTON: I have to be honest. The only one I can recall was one that was -- where we were asked by Measurement Canada to de-mystify imperial versus metric-sized water tanks. They've all been -- it may be surprising to you, but they have -- they've all been pretty informational. We will -- let me just add. We will, on the bias for gas side, we will point out one of the advantages of natural gas is that your water will heat up faster in gas versus electric. 821 MR. VEGH: But you haven't seen any increase or decrease in the credibility of Union's message to customers since exiting the water-heater business? 822 MS. CREIGHTON: No, not at all. It's been going the other way. 823 MR. VEGH: Sorry, what's been going the other way? 824 MS. CREIGHTON: I'm saying readership's been going the other way. Did I misunderstand your question? 825 MR. VEGH: I was asking whether your credibility was increasing or decreasing since you left the water-heater business. 826 MS. CREIGHTON: I'm not speaking to our credibility specifically here. I'm speak to go our readership, and the readership numbers are trending up. 827 MR. VEGH: Okay. 828 MS. CREIGHTON: I think, frankly, that also speaks to the complexity of what's happening in the energy marketplace right now. I think there is a thirst for information out there that probably contributes to the readership as well. 829 MR. VEGH: I was going to turn to another area now. I don't know if this is a good time for a break. 830 MR. JACKSON: Thank you, Mr. Vegh, that's indeed a good time. So we will break for 20 minutes. Be back a little bit after five after three. Thank you. 831 --- Recess taken at 2:45 p.m. 832 --- On resuming at 3:10 p.m. 833 MR. JACKSON: Please be seated. There have been some observations about the warm weather both outside and inside. And if anyone would like to take a jacket off or be more comfortable, I think they should do so. 834 MS. CREIGHTON: Let's have a race. 835 MR. JACKSON: Not to be outdone. 836 MR. BIRMINGHAM: We're grateful for small mercies. 837 MR. JACKSON: It helps all of us, Mr. Birmingham. 838 Okay, now, Mr. Vegh? 839 MR. VEGH: Thank you. I'll be turning now to the book of materials marked F4.1. 840 MR. JACKSON: There are some very efficient people who follow me around. 841 MR. MORAN: Mr. Chair, it turns out the only way to turn off all the mikes during the break is the little red button on the back of your box. So otherwise -- 842 MR. JACKSON: I'll try to be more alert. Thank you. 843 MR. VEGH: Thank you. So, Panel, I'll be using Exhibit F4.1 entitled, the book of materials. I would like to ask you some questions now about how Union currently bills distribution customers. 844 And I take it that the calculation of the various inputs into the customer bill is carried out by Enlogix which is an affiliate of Union? 845 MR. FELDMANN: That is correct. 846 MR. VEGH: And Union's arrangement with Enlogix was reviewed with the Board in the EBO 1977-15 case; is that right? 847 MR. FELDMANN: That is correct. 848 MR. VEGH: I've included in my book at tab -- sorry -- page 2, EBO 177-15. 849 MS. JACKSON: Not 1977. 850 MR. VEGH: All right. EBRO 177-15, which was decided in 1997, for the record. 851 This service agreement at page 2, it says that the agreement between Union Gas and Union Energy, I take it Union Energy is now Enlogix, for the purposes of this agreement anyway? 852 MR. FELDMANN: That is correct. 853 MR. VEGH: And the case in which the Board reviewed this agreement, that case was decided under the old undertakings between Union Gas and the government of Ontario? 854 MR. FELDMANN: That is correct. 855 MR. VEGH: And those undertakings required prior Board approval before certain affiliate transactions could be carried out. 856 MR. BIRMINGHAM: That's right. 857 MR. VEGH: And so the issue in that case where the Board reviewed this agreement was whether the agreement between Union Gas and Enlogix led to a ratepayer harm, which I believe was a general criteria under the undertakings? 858 MR. BIRMINGHAM: I don't think it was so much a ratepayer harm that the Board was concerned about, Mr. Vegh, but rather whether there was any form of cross-subsidization between Union Gas and its affiliate. 859 MR. VEGH: To be fair, I should have brought a copy of the undertakings with me. But generally, and I don't have a copy of this decision with me so perhaps if your counsel does she can correct me, but the general review here was an affiliate relationship review to consider whether or not this agreement was in the interests of ratepayers? 860 MS. JACKSON: Well, I think if my friend -- I mean I don't have the material here, but there was an undertaking with a standard and there was a decision that talked to the standard. And if my friend wants to talk to what that standard was, I think it would be appropriate for us to have those materials before us. I don't -- I'm sorry, I didn't know this was coming up. 861 MR. VEGH: Again, I apologize for not having those materials. 862 But generally the Board had to approve the transaction, and if the transaction -- if the transaction -- if the Board did not approve the transaction, then Union did not go ahead with the transaction that's covered by this agreement; right? 863 MR. BIRMINGHAM: That's correct, yes. 864 MR. VEGH: And the Board did approve this agreement? 865 MR. BIRMINGHAM: They did. 866 MR. VEGH: And essentially this agreement involves Enlogix carrying out a number of bill-related transactions for Union; is that right? 867 MR. FELDMANN: That is correct. 868 MR. VEGH: And Enlogix is paid on a per-transaction basis? 869 MR. FELDMANN: That is part of how we would pay for the Enlogix fee. Part of it is also on the accounts. So there was an account set-up fee. But a portion of the bill is paid on a transaction basis, yes. 870 MR. VEGH: So there is both a transaction fee and a set-up fee. 871 MR. FELDMANN: That is correct. 872 MR. VEGH: So the more transactions that are carried out by Enlogix under this agreement, the more it's paid under this agreement? 873 MR. FELDMANN: That would be correct. 874 MR. VEGH: And during the proceedings in 177-15, Union gave evidence and made argument supporting this agreement or in favour of the Board approving this agreement. I would like to review some of them with you insofar as they're relevant to billing issues. 875 I would like to first turn -- and I have an excerpt from Union's -- I'm sorry, from the transcript of evidence in that case, starting at page 44 of Exhibit F4.1. And this is old material but I provided it to your counsel last week. 876 Do you have that starting at page 44? 877 MR. BIRMINGHAM: We do. 878 MR. VEGH: At page -- the transcript starting at page 44 sets out Union's -- or a piece of Union's evidence in chief, and that evidence in chief started with the description of the agreement by Mr. Wellard of Union. And if you turn to page 22 of the transcript, which is at page -- which is at page 52 of the book, you'll see Mr. Wellard is responding to some criticisms that were levied against the agreement. This is in his evidence in chief. And Mr. Wellard makes some comments about Union Gas's ability to control the number of transactions -- or the number of services that Enlogix provides to it. And on page 22, at line 6, there is a -- there is an answer - sorry, starting at line 10. There is a discussion around the material change part of the agreement, and Mr. Wellard is saying: "The material change part of this agreement only takes effect after the third year. In year two or three, the client is able it reduce its volumes or its activities by whatever it wants." 879 And then going down in line 18: "So, in essence, the client" -- and that's Union Gas -- "can download 90 per cent of the activity should it choose to do so in the first two or three years of the contract. So really it's basically this clause is in favour of the client and not in favour of Union Energy, which is now Enlogix. The other point I want to bring about is that there is also this reference to the most favoured nations clause and why it wasn't in there. The team really looked at that. And really a favoured nation clause deals with the future, and the team felt that in the contract we had the right to decontract significantly." 880 And so as I read it, Mr. Wellard is saying one of the major benefits to Union in the agreement was the ability to reduce the number of transactions that it would purchase from Enlogix, and he called that decontracting. Do you agree with that characterization? 881 MR. FELDMANN: I think, yes. The history that we've had is we have decontracted for the provision of rental water heating calculations from Enlogix, service order charges from our service business. We have decontracted for those functions. So in that case, Mr. Wellard would have been correct. We have since done that as we partitioned, as we sold those businesses of Union Energy. 882 MR. VEGH: And the ability to decontract was a benefit for Union? 883 MR. FELDMANN: That is correct. 884 MR. VEGH: Now, I had the opportunity to ask Mr. Wellard some questions on decontracting in the context of billing and I would like to take you to those questions. The first is at page 364 of the transcript, or page 71 of the -- of the book. 885 And Mr. Wellard and I had been having a discussion around this issue, around marketer billing, and the question I put to Mr. Wellard at the top of the page, starting at line 1, says: 886 "Question: Okay. Now, if the broker were to do that, that is, send out its own bill, then the utilities wouldn't have to pay a transaction cost relating to the processing of that bill for the marketer's customer, would it?" 887 And Mr. Wellard says: "Answer: I would assume that. What I am -- I would assume that to be true. They would be some cost that the utility would be freed from if we were no longer having to deliver -- having to produce a delivery printout of the bill." 888 "I caution that just from the standpoint that the utility that I see in the future certainly would continue to have profile as a connection to a service line, and there may be other things on the system that the government or regulator, or whatever it may be, requires to maintain such as appliance, the inventories, but we don't know how that situation is going to go." 889 "But I agree with you that if it was clear-cut that we weren't doing delivery any more, then we wouldn't be incurring that cost and neither should the broker community." 890 "Question: Now, do you know if the number of transactions for which Cisco charges" -- and Cisco is a previous name for Union Energy, so it's treated as Enlogix -- "the number of transactions for which Enlogix charges would increase or decrease in the marketer were to provide the bill?" 891 "Answer: If the broker relieved the utility of some of the transactions? Is that your question? 892 "Question: Well, if the marketer wanted to, if the marketer could provide one bill which could include the utilities charge, for example. 893 "Answer: If the marketer was displacing the utility in its duties to provide information to the customer, then we will not incur what the cost related to those duties." 894 And over the next page, on 73, at line 366, the Presiding Member helped me out a bit in my cross-examination, as they are prone to do sometimes, and the Presiding Member helped me out here and said at line 7: "I think if I can help here." And Mr. Wellard said: "Maybe you can". The Presiding Member asked: "What I would think is being asked is the degree of the decontracting that you're allowed to undergo. How far does that go? Would it go as far as if the broker were sending out the whole bill? Are you allowed to decontract right down, you know, in that case?" Mr. Wellard: "If that's the question." The Presiding Member: "Yes." Mr. Wellard: "If that's the question, the answer is we can decontract for any transaction that we presently do. And if the broker undertook all of those transactions, we could decontract those." 895 And as I read it, what he is saying in his answer here is that the Enlogix agreement allowed Union to decontract under its agreement with Enlogix in order to allow marketer-consolidated billing. 896 Do you agree with that? 897 MR. BIRMINGHAM: Both what Mr. Wellard has said, I think, is fairly clear on the face of it which is to the extent that we aren't doing a particular transaction, at least in theory, then we would be reducing our costs and our capability for providing that type of transaction, and the marketer would be taking those on. 898 MR. VEGH: Yes. But I don't think he was saying -- I don't think we were having a theoretical discussion here. We were talking about the agreement with Enlogix, and the question from the Presiding Member was: "Could Union decontract under the agreement so that Union -- so that the agreement allowed marketer-consolidated billing?" Is that fair? 899 MR. BIRMINGHAM: Well, the question, I think, is can Union reduce its charges from Enlogix if the marketer is providing the bill, and Mr. Wellard says yes. 900 MR. VEGH: Okay, thank you. 901 And just to -- to continue to address this point. At page 76, we've included the submissions -- the written submissions of Union on this issue as well. And starting at page -- sorry, paragraph 11, page 4 of the submissions, page 77 of the book, Union makes the following submission: "Finally with respect to benefits, and perhaps most significantly" -- so this is put forward as perhaps the most significant benefit -- "the contract between Union Sentra and Union Energy provides for decontracting. Union and Sentra can, on an annual basis, reduce or terminate the use of any services provided under the CIS contract. This aspect of the contract was specifically negotiated in order to accommodate the development of competitive markets for gas and ancillary services, and also to accommodate competitive markets for the provision of CIS services." 902 "This ability to decontract would not exist if Union and Sentra were to adopt the second best alternative, i.e., to develop internal CIS capacity." 903 And the next paragraph: "Intervenors have argued this, that the ability to decontract is not a significant benefit. This argument is based on the assumption that any services that are discontinued by Union and Sentra will be assumed by UEI and Enlogix gas marketing division, who in turn will contract for CIS services." 904 There is clearly some truth to this analysis. 905 The paragraph goes on. I just want to emphasize the second last sentence in that paragraph. "In any event, from the standpoint of Union and Sentra, the ability to decontract is a very significant benefit." 906 So, in light of Union's evidence and arguments in the case which approve the Enlogix billing arrangement, isn't it fair that Union emphasized with the Board that the Board should approve the agreement because that agreement provided Union with the ability to contract out of certain services? 907 MR. FELDMANN: That is correct, Mr. Vegh. And as I indicated, we eliminated 800,000 rental water heating charges every month that we would have paid for under this contract. We also eliminated all the service work that we would have done. And had we at that time developed an internal system, that capability would have been built into our system and we would still be paying for that capability today. So that would have been one of the benefits. 908 MR. VEGH: And is it also fair to say that one of the services that Union said to the Board that it could contract out of under the agreement were the services necessary to bill customers directly for distribution services? 909 MR. FELDMANN: Could you repeat that, Mr. Vegh, please. 910 MR. VEGH: I asked you if it was fair to say that one of the services that Union advised the Board that it could contract out of under the agreement were the services -- or was the service necessary to bill customers directly for distribution services? 911 MR. FELDMANN: What section would you be referencing, Mr. Vegh? 912 MR. VEGH: Well, I'm referencing to the exchange I had with Mr. Wellard about the ability to contract out of services. 913 MS. JACKSON: Can you give us that reference again, Mr. Vegh? 914 MR. BIRMINGHAM: I am assuming what you're doing, Mr. Vegh, is reading page 73, the quote that you just gave us. 915 MR. VEGH: On pages 71 to 72 to 73. 916 MR. BIRMINGHAM: Right. 917 MR. BIRMINGHAM: And this is Mr. Wellard's response, that we can decontract for any transaction that we presently do? 918 MR. VEGH: In response to the question of whether you could decontract for distribution services. 919 MR. BIRMINGHAM: And Mr. Wellard says yes, you can. 920 MR. VEGH: Right. So the question was: Where Union said to the Board that it could -- under the agreement with Enlogix that it put before the Board, one of the services it could contract out of was the services -- or was the service necessary to bill customers directly for distribution services. 921 MR. BIRMINGHAM: I would agree with that, Mr. Vegh. That is the testimony and the argument. 922 I should mention, though, that this situation is a little bit like the marketer-consolidated billing issue for us in that we had a particular understanding at a particular point in time, and as we looked at this in more and more detail, we understood different implications from the initiative that might not have been obvious at the start. 923 And one of the things that we've learned in the implementation of the CIS, that we've learned with the system that Enlogix runs for us in providing the services under the CIS contract, is that we can, in fact, decontract for individual services as they relate to the ancillary services. 924 But the way that they have designed their system is that the upstream transportation charge, the storage charge, the distribution charge, and the fixed monthly charges all key off of a commodity charge. 925 So the way that they've designed their system is they -- they actually have to have a commodity rate in there to be able to then derive the measurement of the other rates that are in there. So the commodity rate is what's referred to as the primary rate in their system. And the other charges that normally appear on their bill are what they call secondary rates. And they have a commodity one in order to generate the rates for the other ones. 926 And what that leads you to conclude is that with the structure that they have under there, in fact, they would have to reconfigure the way that they provide their service in order for us to be able to decontract for something like the distribution charge, which is the example that you just gave to us. 927 MR. VEGH: Well, the services that Union Energy provides are supposed to be consistent with the -- with the contractual arrangement regardless of how Union Energy actually went about building its systems, isn't it? 928 MR. BIRMINGHAM: That's right. 929 MR. VEGH: And you contracted for the ability to decontract from -- from the provision of billing for distribution services? 930 MR. BIRMINGHAM: That's correct. 931 MR. VEGH: So if Enlogix has to change its system, isn't that Enlogix's problem, or should it be Union's problem? 932 MR. BIRMINGHAM: I suspect that may be the case. All I'm suggesting to you is if we're going to be able to enforce that type of contractual clause, it's not going to be something that can happen immediately. 933 MR. VEGH: Union had been -- fair enough. And Union had been paying service fees to Enlogix over the course of this agreement? 934 MR. BIRMINGHAM: Yes. 935 MR. VEGH: And so Union, through its ratepayers, has already paid for the right to have options over billing services, and arguably paid for the right to decontract for distribution services under its agreement with -- already in place with Enlogix? 936 MR. BIRMINGHAM: Well, they paid for the services that were being provided under the contract. 937 MR. VEGH: Well, and there would have been some consideration for this most significant ability to decontract; no? 938 MR. BIRMINGHAM: That was one of the considerations in the Board's approval of the -- of the service to be provided from Enlogix. 939 MR. VEGH: But that was an important part of the negotiations between Enlogix and Union, to have this right to decontract? 940 MR. BIRMINGHAM: As we've said, we viewed it as a significant benefit. 941 MR. VEGH: Right. So Union -- Union Energy or Enlogix would have received some compensation for granting you that benefit? 942 MR. BIRMINGHAM: Well, I suspect there would have been some form of -- that would have entered into the negotiations. 943 MR. VEGH: So the ability to decontract would be reflected in the service fees that you've been paying to Union Energy? 944 MR. BIRMINGHAM: I guess to the extent that the service fees are based on, in part, flexibility within the contract, I suppose there is that indirect relationship, yes. 945 MR. VEGH: So the customers have already paid for the costs of -- I'm repeating -- I'm repeating myself. Why don't I move on. 946 Just a little more information about Enlogix. Enlogix provides billing services to Union Gas and to other companies as well; is that right? 947 MR. FELDMANN: That is correct. 948 MR. VEGH: Then I take it that Union Gas is a very large customer of Enlogix? 949 MR. FELDMANN: I expect we're probably if not the largest, one of the largest companies. That is correct. 950 MR. VEGH: And at page 79, there is -- of the book -- there is a cover page and some excerpts from the annual report for 2000 of Westcoast Energy Inc. And turning the page to page 80 -- or page 80 of the book, page 19 of the annual report, there is a description of Enlogix. And this description indicates, in the first sentence, "Provides billing and customer information services to energy and utility sectors, providing 13 clients with billing services for their 3 million customers." 951 So Union Gas has about a million customers? 952 MR. BIRMINGHAM: That's right. 953 MR. VEGH: So you would make up about one-third of Enlogix's -- of the customer base served by Enlogix? 954 MR. BIRMINGHAM: Of their customer base for the year 2000, yes. 955 MR. VEGH: Yeah. So I take it if marketer-consolidated billing is allowed, Enlogix faces a prospect of losing a large chunk of its customers. 956 MR. FELDMANN: I don't follow the logic, sir. The expectation and the reality is we need a CIS system irrespective of marketer-consolidated billing or not. That system needs to be in place. It is the backbone from which all other information on our system hangs. We need it, as Mr. Birmingham explained, we need it to calculate the commodity rate to determine whether or not a customer is a customer of a marketer of ours. We need the system irrespective of the billing options presented. 957 MR. VEGH: Well, you would need to contract for services from Enlogix, but one of the services that you would be able to decontract from are the services required to send a distribution rate to customers who will now send a distribution bill to customers who would be served under marketer-consolidated billing. And wouldn't Enlogix lose those customers to the marketer? 958 MR. FELDMANN: The reality is that Enlogix would still have a role to play to calculate the charges. The issue is that the bill print file, that is, the interface that actually takes the calculation and partitions it or puts it through our bill print machine which is run by Xerox, would be then redirected to one of the marketers. And that's an in-house function of Union Gas. That was really the undertaking that we had on Friday that we're still trying to get a number back for you. 959 MR. VEGH: Well, there would be some -- if Union Gas decontracted on distribution billing, there would be some loss of customers to Enlogix; no? Let me put it this way: There will be some loss of the cash flow between Union Gas and Enlogix under marketer billing. 960 MR. BIRMINGHAM: I don't think so, Mr. Vegh. That's what we're struggling with. If we agreed that to the extent that we could avoid sending out a bill and having the postage that accompanies that bill, we would -- that would be a cost reduction. 961 But the service that Enlogix provides, I don't see how that would be reduced. We still have to calculate the consumption, we still have to prepare the information as if a bill is going to be printed, and it's that information that would then be sent over to the marketer to be included on their bill. 962 MR. VEGH: So you've been paying for this right to decontract since 1997, but if you exercise that right to decontract, the service fees that you pay to Enlogix are not affected at all? 963 MR. BIRMINGHAM: We're not decontracting for a service that Enlogix provides us. That's where I think we're getting cross-threaded here. The service that Enlogix provides us really is the determination of the consumption, in getting it ready to be put on a bill. And it's from that point that, under a marketer-consolidated billing scenario, the marketer would take on the process. That would allow us to avoid the costs that we currently pay to Enlogix -- sorry, to Xerox, but not to Enlogix. 964 MR. VEGH: So you're saying there would be no reduction in the service fees you pay to Enlogix under marketer billing? 965 MR. BIRMINGHAM: That's right. 966 MR. VEGH: So then what have you been paying for all these years, for your right to decontract? 967 MR. BIRMINGHAM: Well, a couple of these things, Mr. Vegh. In the first instance, as Mr. Feldmann said, we transferred our ancillary merchandise programs to Union Energy and we decontracted for the services from Enlogix that provided the information that allowed us to bill for those services, so we had that. And we took advantage of that decontracting clause. 968 The other thing that we're looking at, going back, this is 1997, we're still thinking about a future where the utility might be out of the merchant function. And in that case, again, we would be in the potential situation where we wouldn't be providing a service at all, but clearly that -- that future possibility did not evolve. But we did take advantage of the decontracting clause as it related to our merchandise program. 969 MR. JACKSON: Sorry, Mr. Birmingham, as it related to? 970 MR. BIRMINGHAM: Our merchandise programs. Sorry. 971 MR. VEGH: The difficulty I'm having is that you come to the Board in '97, ask the Board to approve your arrangement with Enlogix. You tell the Board that perhaps goes to -- the significant reason in favour of this arrangement is that you can decontract for services, including distribution services, and now you say, "Oh, sorry, those customers that were captive prior to Enlogix are still captive. We will be billing for the -- the same amount of service fees will go from the utility to Enlogix regardless of the billing options chosen by customers." 972 MR. BIRMINGHAM: Well, Mr. Vegh, even under marketer-consolidated billing, we aren't decontracting for the distribution service. We are providing the distribution service. We're still reading the consumption at the residences or place of business of our customers, and we have to gather all of that information. It's that information that Enlogix provides. Then we have to prepare a bill. And it's that billing preparation that would happen under marketer consolidated billing that we would no longer have to do and we could avoid that cost. But the cost of actually reading the meters and gathering all of the consumption data is the stuff that Enlogix does for us and we wouldn't be able to avoid that. 973 The flexibility that is in the CIS contract, as it says here in our -- on page 78, "to accommodate the development of competitive markets for gas and ancillary services," just stop there for a second. With respect to the ancillary services, we have decontracted for those. We don't provide those services. We reduced the services that we received from Enlogix and we reduced the costs that we paid to Enlogix for those services. 974 With respect to gas, again, in 1997, this is at a time where we're talking about the potential for the utility to be out of the merchant function and we would have will the ability to decontract for that. But as I say, clearly this is not the future that awaited us. 975 MR. VEGH: So the arrangement is structured, then, that if you -- well, the -- let me ask you this: Has this agreement been amended since it was filed with the Board in '97? 976 MR. BIRMINGHAM: The contract with Enlogix? 977 MR. VEGH: Yeah. 978 MR. BIRMINGHAM: I believe it expired at the end of last year because it was a five-year agreement. And we are -- I think we are in the process of signing or have recently signed a new one. 979 MR. VEGH: Okay. Now, this contract that you're in the process of signing or have recently signed, does that contain the same sort of decontracting flexibility that you advised the Board was available under this arrangement -- the original arrangement with Enlogix? 980 MR. FELDMANN: I don't know that, Mr. Vegh. I'll have to take an undertaking to review our contract to the one that has been proposed. I'm not sure if I can answer that today. I would take an undertaking to look at the proposed contract and the one that's currently ready to be signed and get an answer back to Mr. Vegh. 981 MR. VEGH: You can anticipate my next question to that undertaking, because I assume that you won't have it to me while you're here on the stand. So my -- the follow-up question is, if Union has not negotiated a reduction in the service fees that it would pay to Enlogix under the scenario where Union is no longer billing for distribution services, why not? 982 MR. BIRMINGHAM: Let me try this again, Mr. Vegh. 983 Billing for distribution services or any of the services that Union provides is not what Enlogix does for us. That's not what the contract is for. 984 The contract that we have with Xerox is the one that generates the bill for those services. And it's that service provision that would be replaced by marketer-consolidated billing, to the extent that we were under that regime. But it doesn't affect the Enlogix services that we've contracted for. 985 MR. VEGH: Can you turn, please, to -- 986 MR. JACKSON: Mr. Vegh, I think we need to give that undertaking a number. 987 MR. VEGH: Thank you. 988 MR. MORAN: That would be G4.1, and I take it it's limited to the first question but not to the second question, since Mr. Vegh appears to have received an answer on the second question. 989 UNDERTAKING NO. G4.1 TO COMPARE THE DECONTRACTING PROVISIONS OF THE NEW ENLOGIX CONTRACT WITH THOSE OF THE PREVIOUS ENLOGIX CONTRACT 990 MR. VEGH: Over to page 82 of the book. This is a letter from Enbridge to the Board on the DAR process, and Enbridge raises an issue which hasn't -- which Union -- on argument which Union has not made and I just wanted to get your reaction to that argument. Now, this is also with respect to marketer billing. At page 86, the last sentence in the first paragraph says: "The gas vendor-consolidated billing option could reduce by almost one half the number of ECGs customers for whom Enbridge Commercial Services Inc." -- that's the Enbridge affiliate -- "provides billing services to ECG. This reduction, in turn, would correspond to the increase in the billing base of the gas vendor community. The result would be that Enbridge Commercial Services Inc. would lose revenue to the detriment of Enbridge Inc. and gas values would gain efficiency and market power." 991 So I take it from what you're saying that the concern raised by Enbridge that its billing affiliate will lose some customers is not shared by Union? 992 MR. BIRMINGHAM: That's right. The equivalent for Union Gas would be for Xerox to lose the billing base. 993 Let me try one more time to help you out with this, Mr. Vegh. If we wanted to be in the position to decontract for distribution service, it means we would no longer provide distribution services. We wouldn't be distributors and then we could decontract with Enlogix. But while we're providing those services, they gather that base data for us and it's sent to Xerox for the preparation of the bill and for mailing, and that's the role that the marketer would play under consolidated billing. 994 MR. VEGH: I understand what you're saying now and I understand what you said in '97. I'm not sure they're the same thing, sir. But let's go on. 995 MS. JACKSON: Well, my friend has asked his question, he has had it answered. And may I suggest he leave any characterizations he may think after the fact to make prudent to make -- that he make them in argument. 996 MR. VEGH: I would like to just conclude by asking some questions about your evidence earlier. We talked about how the billing relationship with customers has value and how maintaining that relationship has commercial value for Union Gas. I take it you would agree that marketers would also like to realize the commercial value of a billing relationship? 997 MR. BIRMINGHAM: Well, I think there's two things to that question, Mr. Vegh. The first one is they could, in fact, realize the value of a commercial relationship with customers if they elected direct billing. I suspect, though, that what they're trying also to do is use the value that Union Gas has by using marketer-consolidated billing. 998 MR. VEGH: Well, if the marketer wanted to leverage off Union Gas's relationship with the customer, wouldn't it do that through distributor-consolidated billing? 999 MR. BIRMINGHAM: And I think that's certainly the case. To the extent that Union Gas has a valued relationship with its customers and the customers are now getting a marketer-consolidated bill, it's entirely possible that the customers would view that as an implicit or explicit endorsement of the marketer. 1000 MR. VEGH: Isn't the question -- let's assume that there is value in maintaining the customer relationship through the bill, okay? 1001 MR. BIRMINGHAM: There is clearly value, yes. 1002 MR. VEGH: Okay. And let's assume that marketers would like to realize that value themselves as well, without going into what the motivations for that are. 1003 MR. BIRMINGHAM: Yes. And this is through? 1004 MR. VEGH: Through marketer-consolidated billing -- 1005 MR. BIRMINGHAM: Thank you. 1006 MR. VEGH: -- okay? 1007 MR. BIRMINGHAM: All right. 1008 MR. VEGH: And then doesn't the question, then, for the Board become how to ensure that the commercial value of the customer relationship is actually realized by the customer? The Board shouldn't be deciding between Union and the marketer over who gets the value of that relationship, should it? 1009 MR. BIRMINGHAM: I'm not sure I follow the question, but let me make a first attempt at it, Mr. Vegh. The value of the relationship with the customer is something that Union Gas has generated. We have worked to develop that value, and it is valuable to the company. 1010 It's reflected in the types of purchase premiums that have been incurred by our parents, and it's -- you see some of that value in the reliability and the effectiveness of the communication vehicles that we have with customers. 1011 If the marketers want to do a similar thing, then they can. They can do exactly what Union Gas does and what other companies and other industries do, which is bill for the services that they provide. They can develop that relationship with the customers and build the goodwill and the value in their businesses through those mechanisms. 1012 MR. VEGH: But you make it sound like the Board's job here is to deal out the value of the customer relationship between Union and the marketer, as opposed to having a set of rules which will ensure that the customer actually realizes the value that comes with the commercial relationship. 1013 MR. BIRMINGHAM: Well, as I say, the value is with the company that's generated that value and it's not -- I agree that we're not asking the Board to parse out value. What we're saying is, under direct billing, marketers should have that same opportunity that Union Gas has had to develop that value. We're also saying that under marketer-consolidated billing, we will lose value if the marketers trying to develop their own value through a consolidated bill. 1014 MR. VEGH: Yeah, except under marketer-consolidated billing, the customer has the choice whether or not they want to be billed by the marketer or the utility or by -- a split bill. Sorry, that's under the Board's -- the three options that the Board has put forward, the customer will choose which -- will choose with whom it has that relationship. 1015 MR. BIRMINGHAM: Under the draft Gas Distribution Access Rules, it's indicated that the customer has the choice. It's our view that that is inappropriate. Customers don't choose billing options. I don't choose to have my Internet service provider bill put on my telephone bill. I can't choose that. The service providers chooses the billing options, and that's what we do for our customers as well. 1016 Customers can pay on an actual basis or they can pay on a budgeted monthly basis. We also give them payment options that go along with that. To the extent that we see benefit in providing other billing options for our services to our customers, then we would do that. But the customers don't choose. Not -- they shouldn't be able to choose in this industry and they don't choose in other industries. 1017 MR. VEGH: Well, we'll discuss the way in which customers choose billing options in unregulated markets with the competition experts. But in this industry, you right now have -- you right now are saying to the Board that the Board -- you don't provide a competitive service; right? You provide a monopoly service. 1018 MR. BIRMINGHAM: We provide a monopoly regulated service, that's right. 1019 MR. VEGH: Right. And the terms of that service are regulated by the Board? 1020 MR. BIRMINGHAM: The terms and conditions of providing that regulated utility service are determined by the Board, yes. 1021 MR. VEGH: And so this isn't like the regular market you're talking about, where a provider can offer services to a customer. You're saying that a customer really has no choice, because the Board should prevent that customer from being able to have a market system where the billing options are made available among a source -- a number of suppliers? 1022 MR. BIRMINGHAM: I don't think so, Mr. Vegh. What I'm saying is whether it's a regulated service or an unregulated service, the billing options are determined by the service provider. The billing is not a regulated service. And it's the service provider that should choose how they're going to bill their customers. 1023 MR. VEGH: In an unregulated service, aren't these sorts of options determined in a market? 1024 MR. BIRMINGHAM: Yes, and they're determined by the individual service providers. 1025 MR. VEGH: Operating in a market? 1026 MR. BIRMINGHAM: Operating in a market, yes. 1027 MR. VEGH: And you do not operate in a market? 1028 MR. BIRMINGHAM: We do not operate with direct competitors. 1029 MR. VEGH: Right. 1030 MR. BIRMINGHAM: We do compete fuel on fuel, but we don't operate with competitors for the regulated services. 1031 MR. VEGH: Let me go about it this way: Leaving aside for the moment whether or not you think it's appropriate for Union to leave the value of the customer relationship, if the Board believes that it should be making a determination on the basis of benefits to the customers, isn't the most effective means to ensure that the value of the commercial relationship is realized by customers is to make some suppliers compete for that relationship? 1032 MR. BIRMINGHAM: What I'm struggling with, Mr. Vegh, is the value of the commercial relationship. The value in terms of pure financial value, as well as the value of being able to continue to have our assets utilized at the highest rate that they can, is with Union Gas. It's with the service provider. That's why I'm struggling with the question. The value of the customer relationship is with the service provider. 1033 MR. VEGH: It is today. If the value of that relationship is to be realized via customers, then the only way that could happen is to allow customers to choose from service providers; isn't that right? 1034 MR. BIRMINGHAM: No, I don't know what that means, Mr. Vegh, sorry. I'm having a hard time with the question. The value of the customer in a commercial relationship. That's the value that Union Gas has worked to generate. 1035 MR. VEGH: You're saying it may be that others are prepared to provide value to customers in exchange for taking on the billing relationship with the customers? 1036 MR. BIRMINGHAM: Well, they can provide billing and billing options to customers for the services they provide and that will create value in their businesses. 1037 MR. VEGH: And to the extent that the market among those potential service providers is competitive, then that value will be realized by the customers? 1038 MR. BIRMINGHAM: No. To the extent that service providers give different billing options for the services that they provide and they're successful in attracting customers to those services, then the value will be generated by the service provider. 1039 MR. VEGH: And realized by the customer? 1040 MR. BIRMINGHAM: Well, there will be a benefit to the customer in that they'll be choosing something they want. 1041 MR. VEGH: Thank you. Just one more question. When we -- this is more in preparation for Dr. Schwindt's evidence. Was there any information requested from Union by Dr. Schwindt that Union was not prepared to provide, in preparing his reports for you? 1042 MR. BIRMINGHAM: I don't know that, Mr. Vegh, but I can't imagine that there was any. I can't imagine that there was any information that Dr. Schwindt asked for that we wouldn't have provided. 1043 MR. VEGH: Thank you. Those are my questions. Thank you, sir. 1044 MR. JACKSON: Thank you, Mr. Vegh. 1045 It's 4:00, and I wonder if it might be appropriate to just take a poll at this time and see who is remaining to question this Panel, and how long they might be. Mr. Janigan, I believe, is in line. 1046 MR. JANIGAN: I believe I have about 45 minutes to an hour, Mr. Chair. 1047 MR. JACKSON: Thank you, Mr. Janigan. 1048 MS. FLAHERTY: I'll be very brief. I imagine ten minutes or so. 1049 MR. JACKSON: Thank you, Ms. Flaherty. Mr. Moran? 1050 MR. MORAN: About half an hour at the most. Let the record note I smiled. 1051 MR. SOMMERVILLE: And so did we. 1052 MS. JACKSON: Can you tell the record what that means? 1053 MR. JACKSON: The smile? 1054 Okay, so I would say we have a couple of hours. 1055 MS. JACKSON: And if one were to judge from experience, perhaps just a little longer. 1056 MR. JACKSON: Just a little longer. 1057 MS. JACKSON: We have or will have tomorrow the Panel, the Canadian Facts, ready to go when this Panel is finished. Now, I understand -- and I'm not sure how long that will take. 1058 I had -- I had wrongly assumed, because I understand from -- that Mr. Vegh wanted to have the survey panel that he's calling coming at a defined time, and I had understood that it was going to be more or less at the same time as Canadian Facts. 1059 I've understood from discussions I've just had with him that he was -- his preference was to have them on first thing Wednesday. I think that's fine. But the -- but what I don't want to do, even if it's physically possible, and I'm not sure that it will be, is in the unlikely event that we finish Canadian Facts substantially before the end of the day, and if Dr. Schwindt gets here, I don't want to press him in his jet-lagged status onto the stand for a short while to be interrupted by North Star on Wednesday morning. 1060 So if the Board is agreeable, I would suggest we go as far tomorrow as is necessary to finish Canadian Facts. But in the unlikely event there is some time left in the day, that we then -- unless North Star can come tomorrow, that we defer Wednesday morning to North Star, and then after they are finished, proceed with Dr. Schwindt. 1061 MR. JACKSON: That sounds agreeable to us. We can start North Star then -- 1062 MS. JACKSON: As I understand it, Wednesday morning. 1063 MR. VEGH: -- Wednesday morning, at 9:30. 1064 MR. JACKSON: That's good. Okay. Thank you very much for that update. And we are adjourned until 9:30 tomorrow morning. 1065 --- Whereupon the hearing adjourned at 4:05 p.m.