Rep: OEB Doc: 129LW Rev: 0 ONTARIO ENERGY BOARD Volume: 2 6 JUNE 2002 BEFORE: S. HALLADAY PRESIDING MEMBER R. BETTS MEMBER A. SPOEL MEMBER 1 RP-2001-0032 TRANSCRIPT VOLUME #2 2 IN THE MATTER OF the Ontario Energy Board Act, 1998; AND IN THE MATTER OF an application by The Consumers Gas Company Ltd., carrying on business as Enbridge Consumers Gas, for an order or orders approving or fixing rates for the sale, distribution, transmission and storage of gas for its 2002 fiscal year. 3 RP-2001-0032 TRANSCRIPT VOLUME #2 4 6 JUNE 2002 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel WILFRED TEPER Board Staff ZORA CRNOJACKI Board Staff JOHN FARRELL Enbridge Consumers Gas DOUG HAMILTON CME TONY MOUTSATSOS CME PAT MCMAHON Union Gas GLEN MACDONALD Hydro One Networks RANDY AIKEN NRG DAVID POCH GEC MICHAEL JANIGAN VECC JOYCE POON VECC JAMES HAMILTON OESC THOMAS BRETT OASBO IAN MONDROW HVAC Coalition TIBOR HAYNAL TransCanada PipeLines ROBERT WARREN CAC DAVID BROWN Direct Energy Marketing VALERIE YOUNG OAPPA DUANE CRAMER Sithe Energies GEORGE VEGH CEED MURRAY KLIPPENSTEIN Pollution Probe PETER THOMPSON IGUA JASON STACEY Natural Gas Specialist 8 TABLE OF CONTENTS 9 ENBRIDGE CONSUMERS GAS - PANEL 2 [24] EXAMINATION BY MR. FARRELL: [31] CROSS-EXAMINATION BY MR. WARREN: [86] CROSS-EXAMINATION BY MR. JANIGAN: [348] CROSS-EXAMINATION BY MR. MORAN: [611] PROCEDURAL MATTERS: [668] ENBRIDGE CONSUMERS GAS - PANEL 3 [685] EXAMINATION BY MR. FARRELL: [691] CROSS-EXAMINATION BY MR. WARREN: [856] 10 EXHIBITS 11 EXHIBIT NO. F.2.1: COMPENDIUM OF EVIDENCE FOR CROSS-EXAMINATION BY VECC [346] EXHIBIT NO. F.2.2: DECISION TREE [758] EXHIBIT NO. F.2.3: ALLIANCE-VECTOR SCHEMATIC [762] EXHIBIT NO. F.2.4: DIAGRAM ENTITLED "ALLIANCE PIPELINE LIMITED ESTIMATED YEARLY AOS CAPACITY" [765] EXHIBIT NO. F.2.5: DOCUMENT ENTITLED "TIMELINE" [768] 12 UNDERTAKINGS 13 UNDERTAKING NO. G.2.1: TO PROVIDE THE VALUE OF THE FIRST ALLIANCE CONTRACT ENTERED INTO [867] UNDERTAKING NO. G.2.2: TO PROVIDE FORECAST OF GAS COSTS FOR THE TEST YEAR, THE COST CONSEQUENCES OF THE NEW PATH [1023] UNDERTAKING NO. G2.3: TO DETERMINE EXTENT TO WHICH EXCHANGE RATE HAS AN EFFECT ON TPL COSTS AS OPPOSED TO ALLIANCE-VECTOR [1408] 14 --- Upon commencing at 9:35 a.m. 15 MS. HALLADAY: Please be seated. 16 Good morning. Before we begin, are there any preliminary matters? 17 I neglected to announce on Tuesday that we will be sitting full days starting at 9:30 each day with an appropriate break for lunch, an appropriate break halfway through the morning and the afternoon. 18 Mr. Farrell? 19 MR. FARRELL: Good morning, Madam Chair. 20 I'm presenting the first panel of witnesses on issue 2.1, which is ECG's Alliance and Vector transportation arrangements. 21 Sitting closer to the Board is Dr. W. G. Foster. Dr. Foster is executive vice-president of Foster Associates Incorporated, which is a firm of economic consultants. His resume is found at Exhibit A.14.7, attachment 1. 22 Sitting to Dr. Foster's right is Mr. Richard G. DeWolf. He is senior vice-president, Ziff Energy Group, which is a firm of resource consultants. Mr. DeWolf's CV or resume is found at Exhibit A.6.6. 23 So perhaps they could be sworn or affirmed as they may choose. 24 ENBRIDGE CONSUMERS GAS - PANEL 2 25 W.FOSTER; Sworn. 26 R.FOSTER; Sworn. 27 MR. BETTS: The witnesses are sworn. 28 MS. HALLADAY: Thank you, Mr. Betts. 29 MR. FARRELL: Madam Chair, we're presenting Dr. Foster and Mr. DeWolf now in advance of Mr. Stauft, even though their written evidence is rebuttal evidence vis-a-vis Mr. Stauft's pre-filed evidence. We think it is more efficient to have Dr. Foster and Mr. DeWolf and, indeed, ECG's own witnesses, who will follow these gentlemen, appear before Mr. Stauft does. 30 We do not waive our right, though, to recall either or both of these witnesses after Mr. Stauft's appearance if we see a need to contradict or qualify something new in Mr. Stauft's testimony. 31 EXAMINATION BY MR. FARRELL: 32 MR. FARRELL: Dr. Foster, your rebuttal evidence is Exhibit A, tab 14, schedule 7. 33 MR. FOSTER: Yes, it is. 34 MR. FARRELL: And you are responsible for ECG's responses to CAC interrogatories 69 through 78 at Exhibit I, tab 2, schedule 69 through 78? 35 MR. FOSTER: I am. 36 MR. FARRELL: Were those exhibits by you or under your direction or control? 37 MR. FOSTER: They were. 38 MR. FARRELL: And are these exhibits accurate, to the best of your knowledge or belief? 39 MR. FOSTER: Yes. 40 MR. FARRELL: Mr. DeWolf, your rebuttal evidence is Exhibit A, tab 14, schedule 8? 41 MR. DEWOLF: That's correct. 42 MR. FARRELL: And you are responsible for ECG's responses to CAC interrogatories 79 through 95 at Exhibit I, tab 2, schedule 79 through 95? 43 MR. DEWOLF: That's correct. 44 MR. FARRELL: Were these exhibits prepared by you or under your direction or control? 45 MR. DEWOLF: Yes, they were. 46 MR. FARRELL: And are these exhibits accurate, to the best of your knowledge or belief? 47 MR. DEWOLF: I have one minor correction to response number 81, and it's on the very last line of the first page of that response, where it reads: 48 "...in the latter half of 2002, reflected changes in the North American market..." "2002" should read "2001." 49 Other than that, you're correct. 50 MR. FARRELL: Thank you. 51 Dr. Foster, would you please turn up your resume. 52 MR. FOSTER: Yes, sir. 53 MR. FARRELL: Madam Chair, Dr. Foster's resume, as I mentioned earlier, is attachment 1 to Exhibit A, tab 14, schedule 7. I intend to lead Dr. Foster through his resume in order to qualify him as an expert. 54 Dr. Foster, you hold the following degrees: A Bachelor of Science from the University of Maryland in 1970; Master of Arts from George Washington University in 1975 -- 55 MR. WARREN: Excuse me, Mr. Farrell. 56 Madam Chair, if it saves time, I take no issue on Dr. Foster's qualifications and his expertise, and if he wants to save time on that, then we don't need to go through this exercise as far as I'm concerned. I don't know what Mr. Janigan's position is -- 57 MR. JANIGAN: I am of a similar view, Madam Chair. 58 MS. HALLADAY: That's fine with me. Do any of the intervenors have a problem with Dr. Foster being declared an expert witness? 59 Unless, Mr. Farrell, you want to go through his resume. 60 MR. FARRELL: No, the purpose of doing that was to ask you to accept him as an expert, and if you are prepared to -- 61 MS. HALLADAY: Fair enough. I think we are prepared to accept -- 62 MR. FARRELL: And I was going to go through the same exercise with Mr. DeWolf. 63 MS. HALLADAY: Same? Any problems? No. 64 MR. FARRELL: So you accept Mr. DeWolf as an expert as well. 65 MS. HALLADAY: Yes. Thank you. 66 MR. FARRELL: Dr. Foster, would you please summarize your rebuttal evidence. 67 MR. FOSTER: Yes, sir. Briefly, Enbridge requested that I review and comment on the Consumer's Association of Canada's claim that Enbridge was imprudent to enter into the agreements with Alliance and Vector for firm transportation capacity. This claim stems from Mr. Stauft's evidence filed in this case. I strongly disagree with Mr. Stauft. 68 In coming to his conclusion, he did not follow normal acceptable guidelines for testing for prudency. In my evidence, I made reference to guidelines to a study that was sponsored by the National Regulatory Utility Commission, NRUC, that provided a good summary of these guidelines. 69 These include, one, a utility decision should be presumed to be prudent; otherwise, managers would be deterred from making decisions, and regulators would be micro-managing the utility. 70 Secondly, a review, when it is taken, should consider what a reasonable person would have done in similar circumstances. In other words, the decision should not -- if it were to be prudent, would not be unreasonable, one that exceeds normal limits, or be excessive. 71 Three, a prudent review should only take into account information available at the time the decision was made. In other words, one should not use hindsight. 72 And lastly, a prudent review should only use factual information. Evidence must include facts, not merely opinion nor one's alternative judgments. 73 In deriving at his opinion, Mr. Stauft violated at least three of these principles. He has not made it his determination based on fact. His evidence is merely his judgment, or hearsay. He is just second-guessing the utility's decision. He would have -- in fact, he would have the utility play the market rather than purchase needed supplies for its core customers' requirements. 74 He relied on hindsight in his evidence before this Board. This hindsight includes the later development of the Chicago and Dawn markets and the use of price differentials to support the claim that it was a better deal to rely on market purchases rather than contract for needed firm capacity to meet requirements. And lastly, he did not consider what a competent utility manager would have done in a similar circumstance. The only claim that since Chicago LDCs - that's local distribution companies - did not contract on Alliance, that somehow Enbridge was imprudent to do so. He gives no consideration to whether the Chicago LDCs needed the capacity to meet their growth as Enbridge did, nor did he consider the fact that Enbridge was relying on only one pipeline for its gas supply from western Alberta, its principal supply source, when the Chicago LDCs were very diversified with respect to pipeline capacity from their supply sources. 75 In my opinion, Enbridge was prudent in contracting for Alliance and Vector, in fact, in all probability would have been imprudent not to contract for this gas, this pipeline capacity, when it needed the capacity to meet its long-term supply and at the time was relying on one pipeline for its deliveries. Thank you. 76 MR. FARRELL: Thank you, Dr. Foster. 77 Mr. DeWolf, would you summarize your rebuttal evidence? 78 MR. DEWOLF: Yes. 79 I was retained by Enbridge Consumers Gas to look at the prudence of Enbridge Consumers Gas's transportation arrangements on Alliance and Vector, specifically to respond to Mr. Stauft's evidence as to what was the general knowledge of the natural gas industry in Canada at the time Enbridge Consumers Gas made its arrangements for those -- for that pipeline. 80 Specifically, I'm in disagreement with Mr. Stauft as to his rejection of Alliance capacity as a reasonable option for Enbridge Consumers Gas to source natural gas from western Canada. 81 Specifically, there are a couple of areas as to the likely effect that the construction of Alliance would have had on TransCanada capacity that was looked at in the 1996 to 1998 time horizon based on examinations by the National Energy Board, the group that I work with, as well as TransCanada itself, publishing expert testimony by a well-recognized resource engineering firm as to what was available for natural gas in western Canada to support the construction of Alliance as well as TransCanada. 82 The second part was -- would be the likely effect on price where Mr. Stauft had made the statements that there would be a substantial rise in western Canadian gas prices where the National Energy Board itself had said it is difficult to predict the specific impact that Alliance will have had on gas prices in Alberta and on producer net-backs. So where he makes fairly definitive views as to what the general outcome was or would be and what the industry thought, I'm in disagreement with that being a common view within the industry. Those are the primary areas. 83 MR. FARRELL: Thank you, Mr. DeWolf. I have no further questions. The witnesses are available for cross-examination, Madam Chair. 84 MS. HALLADAY: Thank you, Mr. Farrell. 85 Who is first? 86 CROSS-EXAMINATION BY MR. WARREN: 87 MR. WARREN: Dr. Foster, I'd like to begin with you, please -- 88 MR. BETTS: I'm sorry, I can't hear. Start over, please. 89 MR. WARREN: Dr. Foster, I'd like to begin with you if I can, please, and I'd like to review first the nature of your retainer, because given what you said this morning, I'm now somewhat confused about it. 90 Were you retained by Enbridge Consumers Gas to review the prudence of their decisions to contract for capacity on Alliance and Vector? 91 MR. FOSTER: I was initially contacted, I believe, after Mr. Stauft's evidence was filed in these proceedings. I don't know exactly when those -- that evidence was filed; nevertheless, I was contacted initially to review and comment on his testimony. 92 In my research with respect to his testimony and the information that supported the decision to contract on Alliance and Vector, I came to my own conclusion with respect to whether it was prudent or not prudent for Enbridge to make those arrangements. 93 MR. WARREN: Can I get back to my question, please, Dr. Foster, and ask if you would answer it. Were you retained by Enbridge Consumers Gas to review and provide an opinion on the prudence of their opinion on the Alliance and Vector capacity; yes or no? 94 MR. FOSTER: I believe the answer was -- I answered that and the answer is yes. 95 MR. WARREN: Can you tell me, sir, in arriving at the opinion with respect to the prudence of the decision to contract for Alliance and Vector capacity, what records and information within Enbridge Consumers Gas you reviewed in arriving at that opinion? 96 MR. FOSTER: The information that I reviewed are in the record in these proceedings. That includes the forecast that Enbridge made and filed before the National Energy Board, as well as some cost differentials that Enbridge has made with respect to what it would cost for deliverance of Alliance vis-a-vis TransCanada 97 MR. WARREN: And are those -- what you reviewed listed anywhere in your pre-filed evidence? 98 MR. FOSTER: The former is. I don't think the latter is. 99 MR. WARREN: Can you tell me, sir, what internal memoranda, records, or other documents of Enbridge Consumers Gas you reviewed in arriving at your opinion that their decision to contract for Alliance and Vector capacity was prudent? 100 MR. FOSTER: No more than I just described. 101 MR. WARREN: Now, you cited, Dr. Foster, in your testimony in chief this morning, your components of the prudence test, and I'd like you, sir, if you wouldn't mind, I just want to deal with that issue. Now, the context for my question is the following: Another panel of this Board has recently completed consideration of an application by Union Gas Limited for approval of certain matters arising out of the customer review process, and one of the issues that was reviewed in this case was their decision, that is, Union's, to contract for Alliance and Vector capacity. 102 Now, in the course of the argument by Union in that case, they set out a number of authorities, U.S. authorities, for what constituted the prudence test. And one of them that they cited, and this appears, you don't need to turn it up, it turns on the text -- it's on the written text, it appears in Volume 9 of the proceedings in the RP-1999-0017 case. The authority they cited, and I wanted to put to you, sir, to see if you agree with it, was a report that was prepared by the National Regulatory Research Institute. Are you familiar with that body? 103 MR. FOSTER: I'm really having trouble hearing you because there's noise above me, so you'll have to repeat the name. 104 MR. WARREN: The authority that I'm going to refer you to is a report that was prepared by the National Regulatory Research Institute. Are you familiar with that body? 105 MR. FOSTER: Yes. 106 MR. WARREN: I'm going to read to you, sir, an extract from their report to see -- which deals with the prudence test to see if you agree with their statement of what the prudence test is. 107 MR. FARRELL: Before you ask the question, could I just hand the witness a copy of the report so he has a copy in front of him while you're reading it. 108 MR. WARREN: I don't have a copy of the report. It appears in the transcript. 109 MR. FARRELL: Okay. 110 MR. WARREN: It appears in that volume of the transcript at -- there's no pagination, it's by paragraph, 262. And I quote as follows: "Review of the many recent state commission applications of the standards suggests four guidelines for the successful use of the prudent investment test. These are, first, that there should exist a presumption that the investment decisions of the utilities are prudent; the presumption of prudence can be overcome, however, by an allegation of imprudence that is backed up by substantive evidence creating a serious doubt about the prudence of the investment decision. Once the presumption of prudence is overcome, a commission needs to decide on the legal standard for judging prudence. The second guideline is to use a standard of reasonableness under the circumstances; that is, to be prudent, a utility decision must have been reasonable under the circumstances that were known or could have been known at the time the decision was made. A corollary to the standard of reasonableness under the circumstances is a prescription against the use of hindsight in determining prudence. Observing this prescription is the third guideline. The prescription against hindsight makes it unwise for a commission to supplement the reasonableness standard for prudence with other standards that look at the final outcome of a utility's decision, though consideration of outcome may legitimately have been used to overcome the presumption of prudence. The fourth guideline is to determine prudence in a retrospective factual inquiry. The evidence needs to be retrospective in that it must be concerned with the time at which the decision was made. Testimony must present facts, not merely opinion, about the elements that did or could have been entered into the decision at the time. Often the evidence for the state commission's retrospective factual inquiry is developed through a staff investigation. Such a staff investigation can look at the past in great detail and therefore can be time-consuming and expensive." 111 Do you agree with that statement of the application of the prudence test? 112 MR. FOSTER: Those are the four guidelines that I summarized in my opening statement. 113 MR. WARREN: I take it your answer is yes, you agree with that statement; is that correct? 114 MR. FOSTER: Yes. 115 MR. WARREN: Now, would you agree with me, Dr. Foster, that if there were evidence, for example, that a decision to make an investment were influenced by a conflict of interest, would that overcome the presumption of prudence? 116 MR. FOSTER: I believe it could. 117 MR. WARREN: Dr. Foster, I am now going to ask you to refer to one of the interrogatory responses to an interrogatory delivered by my client, Consumers' Association of Canada. Dr. Foster and members of the panel, it is Exhibit I, tab 2, schedule 69. Now, it's regrettably a big mound of stuff, and I'll try and find where in the mound -- I will direct you where in the mound it is. 118 MR. BETTS: Could you repeat the reference for me. 119 MR. WARREN: Exhibit I, tab 2, schedule 69. It's otherwise known as CAC interrogatory number 69. 120 Dr. Foster, and members of the panel, there are a number of appendices to this interrogatory response and the questions I am about to ask relate to appendix 3, Roman numeral III, which is, as the crow flies, about halfway through the pile. 121 MR. FARRELL: It's about a third of the way through, judging by where Dr. Foster is flipping in the binder but it's a pile of paper. Maybe if you just -- 122 MR. WARREN: If it's of any guidance to you, appendix 3 consists of the transcripts that Dr. Foster has given over the years to the Georgia Public Service Utilities Commission. 123 MS. HALLADAY: Continue on, Mr. Warren. 124 MR. WARREN: I apologize for the delay, Madam Chair, but I think it's important that the panel members have the actual documents in front of you because it's -- it will be difficult -- 125 MS. HALLADAY: We do, Mr. Warren. Thank you. 126 MR. WARREN: Thank you. 127 Now, Dr. Foster, I wonder, just to save time, if you can agree with my summary of what appendix 3 to this exhibit is. Am I right that for a period of four years, you gave testimony on behalf of commission staff of the Georgia Public Service Commission in relation to applications by Atlanta -- let me get this right, Atlanta Gas Light Company's applications for recovery; is that right? 128 MR. FOSTER: That's close. It was their annual supply plan and their PGVA files that were made annually, correct. 129 MR. WARREN: And the years that are in appendix 3 are transcript for the testimony in four years, the first being recovery year commencing October 1, '95, the second being recovery year commencing October 1, 1996, the third being recovery year commencing October 1, 1997, and the fourth recovery year commencing October 1, 1998; is that correct? 130 MR. FOSTER: I'd have to confirm that, but subject to check, yes, sir. 131 MR. WARREN: Now, Dr. Foster, if you wouldn't mind, please, let's deal with first of them which is identified. 132 If I look at page 3 of the first year, I'm quoting an answer to your question, "What is the purpose of this testimony?" Answer: "I have been requested by the Georgia Public Service Commission staff to review and provide my opinion on Atlanta Gas Light Company's gas supply plan and gas cost adjustments (recovery) factor for the recovery year commencing October 1, 1995." 133 If I then go to page 4, the page over, you say, and I'm looking at the question and answer sequence appearing at line 250 -- sorry, beginning at line 17. Question: "Has AGL established a criterion in order to meet these requirements?" Answer: "Yes, AGL uses best-cost criterion. The company cites security of supply and prices, two characteristics of best cost." 134 Can you tell me, sir, whether or not those two -- that criteria with those two components are relevant to this Board's analysis of the prudence of the decision to contract for supply on Alliance and Vector. 135 MR. FOSTER: Yes, I believe they are. 136 MR. WARREN: I've now been told that I have to slow down and speak up. 137 And I ask you, sir, to then turn to page 22 of that year's transcripts. Under the heading "Foreclosing Reasonableness Review," the transcript reads as follows: Question: "What is your concern pertaining to this issue?" And the answer appears on the page over. Answer: "In my opinion, AGL is attempting to weaken the whole review and approval process by its statement on page 14, line 9 of its prepared direct testimony that 'having been adopted for the prior recovery year, they (contracts) cannot be removed reasonably from the plan for the recovery year,' emphasis added. 138 "I understand this statement to mean that AGL believes that once a gas supply contract has been approved for any previous recovery year by any commission, it cannot be deemed unreasonable by any other commission for any other subsequent recovery year. 139 "This would, of course, make this review process and the law underlying this process inoperable and ineffective. Markets and other conditions do change. A contract in one period may well not be used or useful or be reasonable or appropriate in another period. This commission cannot and must not be foreclosed from reviewing and determining the reasonableness and usefulness of AGL's supply contracts that it has entered into to provide services to its firm customers. 140 "I recommend that the commission's order in this proceeding offer a clear statement of this position." 141 Now, Dr. Foster, I don't want to take your time and the Board's time, but can we agree that a statement in virtually identical terms appears in each of the four transcripts we have for the recovery years that are included in this exhibit? 142 MR. FOSTER: I don't recall that it was but it was an issue before the Georgia Commission during this period. 143 MR. WARREN: Can you take it, subject to check, Dr. Foster, that if the Board were to go through the four transcripts, that a statement that is virtually identical in its terms appears by you in each of those four years? 144 MR. FOSTER: Again, subject to check, yes. 145 MR. WARREN: Now, I just want to, if I can, understand the logic of the analysis contained in those statements. You will correct me, no doubt, where I go wrong. 146 When we are looking at the application of the reasonableness test, can we agree that the considerations that applied in the year in which a decision was made don't change, they are historically the same; correct? 147 MR. FOSTER: That's correct. 148 MR. WARREN: And that what changes are the circumstances from year to year in the succeeding years; is that correct? 149 MR. FOSTER: That's correct. 150 MR. WARREN: And as I read it, what you said under oath to the Georgia Public Service Utility Commission is that the commission, or by analogy this Board, can apply the changing circumstances from year to year to assess the reasonableness of the base decision; is that correct? 151 MR. FOSTER: Well, I don't know. I was only referring to the Georgia Public Service Commission in this statement. It is correct that this Board, assume, and also in Georgia, has the ongoing responsibility to review the reasonableness of gas costs charged by the utility. In fact, I state that in my testimony in this proceeding. 152 MR. WARREN: Dr. Foster, I didn't ask you for a statement of what the obligation of the Board is. I want to stay with the question I asked you and I want to see if I understand the logic of these statements you gave under oath four years running to the Georgia Public Utilities Commission. 153 Do I understand it that, according to these statements, the commission, or by analogy this Board, can use the circumstances as they develop from year to year to assess the reasonableness of a contract that was entered into some time before; yes or no? 154 MR. FOSTER: I can't answer it yes or no, and I will not. 155 MR. WARREN: We have what you said under oath, Dr. Foster. Let's move on, then, to the second point I wanted to deal with. 156 If you turn to page 25, under the heading, "Implications of AGL's affiliation with SoNet Marketing." 157 MR. FARRELL: Would you give the reference again, Mr. Warren. I'm trying to find it myself; I have just gotten a copy. 158 MR. WARREN: Page 25 of the first year's transcript of the testimony before the Georgia Public Service Utilities Commission. 159 MR. FARRELL: Page 25, thank you. May I just make a comment? What is filed is not really the transcript, it's the written evidence. 160 MR. WARREN: I apologize, sorry. This is written evidence which was adopted by you as correct; is that correct? 161 MR. FOSTER: That's correct. 162 MR. WARREN: All right. The implication -- this is under the heading "Implications of AGL's affiliation with SoNet Marketing," and in the first question and answer sequence, you're asked: 163 Question: "Dr. Foster, you stated that there are implications of AGL's equity investment in SoNet Marketing. Please explain." Answer: "In May 1995, AGL announced an agreement in principle to purchase 35 percent interest in SoNet Marketing," and then you go on to say that "SoNet Marketing" -- this is on the page over, 26. "SoNet Marketing was owned 100 percent by SoNet Inc., parent of Southern Natural Gas, and the largest supplier of AGL." 164 Do I understand, sir, that what SoNet Marketing was was an entity which was selling gas to AGL? 165 MR. FOSTER: That's correct. It was a new contract that Atlanta Gas Light was entering into with SoNet Marketing. Atlanta Gas Light took 35 percent interest and SoNet Marketing and SoNet, or Southern Natural Gas, was the principal pipeline gas supplier to Atlanta Gas Light. 166 MR. WARREN: Now, do I understand, sir, that the concern that was underlying this testimony was that Atlanta Gas Light might enter into a contract with an affiliated company that was of benefit to the affiliated company but wasn't necessarily of benefit to its ratepayers; is that fair? 167 MR. FOSTER: I have to review the definition of affiliated company in Georgia. I have forgotten. I did have the concern of the -- in fact, I do say the implications of AGL's affiliation with SoNet but there are legal definitions of affiliate companies in Georgia, like in other jurisdictions. But my concern, as you are pointing out, was this relationship that Atlanta Gas Light had just developed with SoNet Marketing while SoNet was Southern Natural Gas, who I think supplied 80 percent of Atlanta Gas Light at the time. It may have been higher than 80 percent; it was very large. 168 MR. WARREN: Dr. Foster, if I leave aside -- if I don't use the word "affiliate" and use a more general observation and say, was your concern that Atlanta Gas Light might be purchasing gas from a company in which it has a 35 percent interest thereby conferring a benefit on that company to the detriment of its ratepayers, is that -- have I captured the essence of your concern on this issue? 169 MR. FOSTER: If I can add the fact that Southern Natural Gas was the pipeline that -- providing the largest share of its pipeline capacity to Atlanta Gas Light, yes, that was my concern. 170 MR. WARREN: If I take you to the bottom of page 26, you made certain recommendations to the Georgia Public Service Utility Commission, and if I can read them: 171 "I recommend that AGL be required to assure this commission of 'arm's length bargaining' between itself and SoNet Marketing. This would include provisions that would maintain the level of competition in AGL's market. This absence of arm's length bargaining can certainly work to the detriment of the firm ratepayers; for example, AGL could release capacity to its affiliate to provide SoNet Marketing with a competitive advantage over other marketers and thereby reduce the capacity of release credits applied to AGL's recovery factor. AGL could also negotiate an above-market price for gas purchases from SoNet under its gas supply arrangement, and these higher gas costs would be passed through to the firm ratepayers vis-a-vis the adjustment factor." 172 And then if I go down to the next question and answer sequence, about halfway through the answer on page 27: "I recommend that AGL file an annual report with this commission summarizing all of its activity with SoNet Marketing and document transactions with SoNet Marketing to prove that terms and conditions are no more favorable than with non-affiliated companies." 173 Have I captured your recommendation correctly? 174 MR. FOSTER: You read it correctly. 175 MR. WARREN: Now, Dr. Foster, are you aware in this case that the evidence on the record, which we will explore with the next panel, is that Enbridge Consumers Gas's decision to contract with Alliance conferred a -- at least, it would appear, three forms of benefit on their parent company, Enbridge Inc., or one of its subsidiaries, they being, first, assistance in securing regulatory approval for the Alliance gas pipeline; secondly, assistance in securing financing for the Alliance gas pipeline; and thirdly, assistance or an intention to assist in the utilization on the Link pipeline. Are you aware of those facts? 176 MR. FOSTER: I'm generally aware that Enbridge is -- has an equity interest in Alliance as well as Vector. I have not studied the benefits that would accrue to Enbridge or to Enbridge Consumers in this regard. 177 MR. WARREN: Now, Dr. Foster, you agreed with the proposition I put to you this morning that a conflict of interest may act to overcome the presumption of prudence in the application of the reasonableness test. I'd ask you, sir, as an expert in forming an opinion on the prudence of Enbridge Consumers Gas's decision to contract at least on Alliance, should you not have reviewed the potential or the possibility of a conflict of interest in coming to your conclusion? 178 MR. FOSTER: I did not see a conflict of interest between the utility, the LDC, and the parent. To me there was no conflict. 179 MR. WARREN: But you didn't review that, did you, in forming this opinion. You told me -- I'm sorry, just to complete the question, Dr. Foster. You told me you didn't review any of the internal records or memoranda of Enbridge Consumers Gas with respect to how this decision was arrived at? 180 MR. FOSTER: Well, with respect -- 181 MR. FARRELL: Excuse me. He told you that he hadn't reviewed anything beyond what was in the record. 182 MR. WARREN: That's not my recollection of his answer. 183 MR. FOSTER: No, I did review the record, and I do not see any conflict of interest between the parent and the LDC. They both have pretty much the same interest. The LDC has the requirement to have long-term firm capacity delivered to their system. The parent owns a portion of that pipeline. 184 MR. WARREN: Prior to your writing your pre-filed evidence, which is Exhibit A, tab 14, schedule 7, did you review the nature of the arrangements, or rather the benefits that were conferred by Enbridge Consumers Gas on its parent or another subsidiary of its parent in -- before coming to that -- sorry, before delivering that pre-filed evidence? 185 MR. FOSTER: To the extent that I just stated, yes. 186 MR. WARREN: Did you review, for example, the internal memoranda of Enbridge Consumers Gas with respect to that transaction? 187 MR. FOSTER: I'm not sure which internal memorandum -- 188 MR. WARREN: Did you review any internal memorandum? 189 MR. FOSTER: I reviewed most of the filings in this docket, and if it's in this this docket, I've reviewed it. I reviewed everything that I could find in this docket prior to writing my testimony. 190 MR. WARREN: Now, can we agree, sir, that the -- in reaching its decision to contract for supply, the principal concern of Enbridge Consumers Gas would be in the welfare of its ratepayers, security of supply and least cost; is that fair? 191 MR. FOSTER: I believe there is a best-cost criteria here that they follow which include those two criteria, yes. 192 MR. WARREN: And can we also at agree, at least hypothetically, that the interest of Enbridge Inc. in its investment -- I'm sorry, Enbridge Inc. or whatever vehicle of Enbridge Inc. invested in Alliance, that their interest in investing in the Alliance pipeline is in securing a high rate of return for their investment, making a successful investment; is that fair? 193 MR. FOSTER: I'm not sure they would use the characterization "high." They would expect a reasonable rate of return on their investment. 194 MR. WARREN: And can we not agree, sir, that at least hypothetically, certainly Enbridge Inc., in making a decision to invest to recover a fair rate of return, doesn't need to be concerned about the impact or the effect of that investment decision on the ratepayers of Enbridge Consumers Gas. 195 MR. FOSTER: I would hope they would. 196 MR. WARREN: Would they not, sir -- they are not a regulated entity, Enbridge Inc.. They are interested in getting a fair rate of return for their shareholders, are they not? 197 MR. FOSTER: Alliance is regulated, and I believe that the implications that -- and known facts that Enbridge is -- owns the distribution company is -- would be reviewed and scrutinized. So it's not that they can act blindly. 198 MR. WARREN: Sorry, it would be a review and a scrutiny as by whom? 199 MR. FOSTER: By this Board and before the NEB and before the FERC, because they are regulated entities. 200 MR. WARREN: So do you believe, sir, that before this Board were to look at approving the Alliance -- the contract for capacity in the Alliance, it should review the question of whether or not that investment reflected a conflict of interest and was in the best interest of the ratepayers? 201 MR. FOSTER: I don't believe that this Board should second-guess or scrutinize decisions before they are made. Those decisions are -- should be assumed to be -- presumed to be prudent, and we're here now discussing because it was a challenge. 202 MR. WARREN: Mr. Foster, can I turn you to the second of the pre-filed evidence. I apologize, third. It's the 1997 recovery year, and it's about 30-odd pages along further from what we've just been talking about. And my specific reference, Dr. Foster ... 203 I apologize, Madam Chair, this is defeated by the fact that this is not paginated. It's, in fact, the fourth transcript along. It's for the 1997 recovery year. 204 MR. FARRELL: Is this the one, Mr. Warren, on the first page of it that says "GPSC docket number 7710-U"? That may help the Board members to find it. Upper right-hand corner. 205 MR. WARREN: I don't know, let me check. The one I'm looking at is DPSC docket number 7710-U. 206 MR. FARRELL: That's the one I'm referring to. Thank you. 207 MS. HALLADAY: We have that. Thank you. 208 MR. WARREN: The reference I want to turn you to, if I can, Dr. Foster, is on page 21. The question is: "What recommendations would you make about AGL's entry into new supply contracts?" Answer: "As mentioned earlier, I recommended two basic changes to AGL's contracting policy. Both changes relate to AGL's potential to exit the merchant function pursuant to the provisions of the deregulation act. 209 "First, the commission should not approve any replacement contracts that have terms greater than one year. Preferably all new contracts should be winter-only contracts. 210 "Secondly, the commission should direct AGL to increase its purchases of spot gas supplies. I do not believe that the level of spot gas that AGL has in its supply plan is reasonable. In this light, I recommend that the level of annual producer reservation fees for well-head purchases that AGL may collect over the 1997/1998 recovery year be capped at the level of such fees in existing operational contracts." 211 Now, if I could ask you at the same time, Dr. Foster, to turn up an interrogatory response that was delivered by Enbridge Consumers Gas, to an interrogatory delivered by my client. And the reference, Dr. Foster and members of the panel, is Exhibit I, tab 2, schedule 63, CAC interrogatory number 63. It's Exhibit I, tab 2, schedule 63. 212 Do you have it, Dr. Foster? 213 MR. FOSTER: I do. 214 MR. WARREN: And like the earlier exhibit, there are a number of appendices to this, and if the panel members and Dr. Foster go to the third page of the exhibit, the first of the appendices is an interoffice memorandum to Riedl & Holder from Otsason. And the date is 1996/10/25. I take it it's the 25th of October, 1996. 215 Do you have that, Dr. Foster? 216 MR. FOSTER: I do. 217 MS. HALLADAY: Sorry, Mr. Warren, which appendix were you referring to? 218 MR. WARREN: The first of the appendices, but they are not identified as such. You just have to work through them, and it's the first page of the interrogatory response. 219 MR. FARRELL: If you look closely in the upper right-hand corner of the first page, there is a header that indicates it's appendix 1, but it's only on the first page of each appendix. 220 MS. HALLADAY: Thank you. 221 MR. WARREN: Do the panel members have it? 222 MS. HALLADAY: Yes. 223 MR. WARREN: Now, if I can ask you, sir, to turn to the third page, page 3, of that memorandum, where Mr. Otsason is reviewing pros and cons of entering into the Alliance gas contract. 224 MR. FOSTER: Yes. On page 2 he starts with the list of pros, and he goes on and lists the cons on page 3. 225 MR. WARREN: And on page 3, in the last full paragraph on that page, I quote: 226 "The most significant con" -- unhappy use of terms, I suppose -- "in my view is the risk associated with making a long-term commitment for upstream pipeline capacity at a time when it is unclear what our future role will be in this area. If we, as a regulated LDC, will no longer be involved in providing upstream transportation to our franchise area, having a new long-term contractual commitment obviously increases the risk of having stranded assets and potentially being at risk for recovering the associated cost." 227 Now as I read Mr. Otsason's expression of his concern, it is spot on with the concern which you expressed to the Georgia Public Service Utility Commission in the quote I just read. 228 MR. FOSTER: No, and I can explain why. 229 The Georgia legislature had passed a law prior to this testimony which would eliminate the merchant function of Atlanta Gas Light. They were going out of the merchant business. There was no doubt, no doubt in anybody's mind -- in fact, Atlanta Gas Light wrote the law that was filed to the Georgia commission, and I reviewed it and sat on committees that looked at the risk of implementing that law. I believe that they had already filed or were just about to file, this is Atlanta Gas Light, their application to exit the merchant function and they had deadlines, and it was very explicit when they were leaving and in fact they did leave the merchant function. 230 With respect to the second part, the spot gas, Atlanta Gas Light was buying 10 percent of their gas on the spot market. That was far lower than any LDC of comparable size. I don't think that these two situations are the same. 231 MR. WARREN: Well, the difference, I take it from your answer, Dr. Foster, is that Atlanta Gas Light had made a commitment to exiting the merchant function, whereas in the case of Enbridge Consumers Gas, it was a possibility as expressed in Mr. Otsason's memo. Is that the difference? 232 MR. FOSTER: It was more than a commitment on Atlanta Gas Light. The legislation was quite clear that they would exit the merchant function, that is correct, that it was a known fact at the time. 233 MR. WARREN: But can we not agree, sir, that certainly Mr. Otsason, Enbridge Consumers Gas's own employee, expressed a concern. Is it not fair to say that in light of that concern, the decision to contract for 15 years on Alliance should have reflected the fact of the possibility of exiting the merchant function? That's what you said in Georgia. 234 MR. FOSTER: Well, I did not say the possibility of exiting the merchant function in Georgia. They were going to exit the merchant function. They did not need that capacity. The forecast for gas supply requirements of Enbridge showed that they needed the capacity. 235 MR. WARREN: So am I to understand your testimony this way: The fact that it was a possibility that they might exit the merchant function, a concern expressed by their own employee, was not relevant to their decision to contract for Alliance capacity; is that your evidence this morning? 236 MR. FOSTER: I didn't say that and I believe you have to ask the company that question. I do not know. Their own employee made that reference so they were obviously concerned about it, he was obviously concerned about it. 237 MR. WARREN: Can I ask you, then, sir, to return for the moment to the components of the least-cost test that you agreed with me this morning were relevant, and one of those was the issue of price. 238 Now, Dr. Foster, and members of the panel, if you would stay with that exhibit I've just been referring to, Exhibit I, tab 2, schedule 63, and we'll stay first with the first of the appendices which is Mr. Otsason's memo. If I again go to page 3 -- sorry, page 2, Mr. Otsason says: "The Alliance route will have a cost which is slightly higher but within 5 cents a gJ of the cost of the TCPL route." Do you see that? 239 MR. FOSTER: I do. 240 MR. WARREN: So we can agree that on ECG's own analysis, the Alliance route was not the least cost -- sorry, was not the lowest price alternative; correct? 241 MR. FOSTER: I'm not sure what went into the 5 cents. I think he was probably comparing it to the existing route of TransCanada, and of course TransCanada has been, as far as my whole career, has been on a constraint with respect to capacity and had to increase the capacity to -- had higher costs to meet the further requirements. 242 Saying that, I would also say that it's probably always true that incremental capacity to the market would probably cost more than existing capacity. You've got to build a new pipeline, and if you need it then you have to possibly pay a marginal price for it. In this instance, it may have been up to 5 cents, according to this analysis. 243 MR. WARREN: All I ask you to agree with me on is you said that one of the components of the least-cost test was price. We can agree, can we not, that on ECG's own analysis, Alliance was not the cheaper alternative; correct? 244 MR. FOSTER: Again, I don't know. There were other benefits to Alliance that weren't quantified in the 5 cents, including the ability to compete, put competitive pressures on TransCanada for lower rates. Also other advantages that were offered by Alliance, those weren't quantified in that 5 cents. 245 MR. WARREN: And you have a separate analysis in your pre-filed evidence on other benefits and your argument would be that the other benefits may offset the difference in price; correct? 246 MR. FOSTER: Correct. 247 MR. WARREN: But on your test, just the narrow little test, is it the lowest price -- Alliance is not the lowest price, is it? 248 MR. FOSTER: Price per sale based on straight rates, no, according to this analysis. 249 MR. WARREN: Okay. 250 Now, can we go to the next of these memoranda which is identified as appendix 3 to the same exhibit, which is a memorandum dated 31st of May to L. Beatty from G. Dan; do you see that? 251 MR. FOSTER: Not yet. Is it -- 252 MR. FARRELL: It's part of the same one. You just have to -- attached to the first memo are a number of documents to the Alliance open season documents, so you have to get through to the next memorandum. There are a few pages to flip through. 253 MR. FOSTER: The one dated 5/1999? 254 MR. WARREN: 31/5/1999. 255 MR. FOSTER: Right. 256 MR. WARREN: Now, if I go to the second page of this memorandum, the paragraph which begins at the top with the words "an alternative to the physical transportation," the last sentence in that paragraph reads: 257 "Based on the above swap cost, and assuming Vector's cost is 26 cents a decatherm U.S., including fuel, there was a potential cost differential of up to $2.8 million U.S. per year." 258 Now, as I read that, and again we haven't got to the ECG panel yet, as I read it, what Mr. Dan is saying to Ms. Beatty is that the Vector alternative is not, on a pure price comparison, the cheapest alternative; do you agree? 259 MR. FOSTER: At that time, it appears to be 28 -- $2.8 million a year greater, straight on a commodity-cost basis. 260 MR. WARREN: And one of the tests which you articulated as a relevant test in this case is whether or not the choice is the lowest price. And again, it would appear, leaving aside the question of offsetting benefits, that the Vector choice was not the cheapest price; correct? 261 MR. FOSTER: Yes, and of course that doesn't offset the -- it does not take into consideration the other benefits of this project. 262 MR. WARREN: Now, the final memorandum I wanted you to look at in this same exhibit, if you just go along in my copy about four pages or three pages, it's marked appendix 5. It's a memo the same date, 31/5/99, again to Ms. Beatty from -- I apologize, I don't know whether it's Mr. or Ms. Serpanchy. 263 MR. FOSTER: Mister. 264 MR. WARREN: Mr. Serpanchy, thank you. 265 Do you have that memorandum? 266 MR. FOSTER: I do. 267 MR. WARREN: And if I go to the second page, about four paragraphs down, beginning with the paragraph, "The choice of option B over A or C," the second sentence begins: 268 "The Vector alternative is Canadian 3 million more expensive than delivered service. There is a potential risk of Dawn recovery of this amount, because it is not the cheapest alternative." 269 Again, it would appear, using the one narrow criterion of cheapest price, that according to ECG's own analysis, Vector was not the cheapest alternative; fair? 270 MR. FOSTER: That's what it says, yes. Based on the very extreme narrow criteria of price alone. 271 MR. WARREN: Which you have agreed is relevant to this case; right? 272 MR. FOSTER: It is relevant. 273 MR. WARREN: Now, you have cited -- sorry, Enbridge Consumers Gas in their pre-filed evidence - you don't need to turn it up - they have cited as one of their objectives in entering into the Alliance and Vector contracts the fact that it would encourage competition; do you understand that? 274 MR. FOSTER: I understand that. 275 MR. WARREN: And can you and I agree, sir, that encouraging competition, the benefit of competition -- I'm sorry, let me rephrase the question. 276 Can you and I agree that the benefit of competition flows from the existence of the pipeline and not necessarily from ECG's contracting for capacity on the pipeline? 277 MR. FOSTER: You will have to explain that question to me. I don't understand it. 278 MR. WARREN: Well, I have to assume what it is that ECG meant, because they haven't testified on this yet. 279 In the crude and simplistic terms, which are the only ones that I am able to function at, I understand the analysis that if you've got one pipeline, TCPL, that if you build a second pipeline, it offers competition, and encouraging that competition may result in, among other things, lower TCPL rates. 280 Does that seem a reasonable analysis to you? 281 MR. FOSTER: It does. 282 MR. WARREN: And can we then agree that the competition comes from the building of the pipeline to compete with TCPL as opposed to ECG's contracting for capacity on the pipeline? 283 MR. FOSTER: Not entirely. I think Enbridge would have to be able to use that pipeline, the alternative pipeline, to put competitive pressures on the TransCanada system. 284 MR. WARREN: And I ask you to return to the first of the memoranda, which is the first appendix in Exhibit I, tab 2, schedule 63. That's the Otsason memo of October 1996. 285 Sorry to make you jump around, panel members, but it's a different context. 286 MR. FOSTER: I'm back. 287 MR. WARREN: Have you got it? 288 MR. FOSTER: Yes. 289 MR. WARREN: I'd like to begin on page 2 with a list of pros. Pro number 1: "Alliance will provide an alternative to the NOVA/TCPL route thereby creating some competitive pressure on these incumbents." 290 Do you see that? 291 MR. FOSTER: That's correct. 292 MR. WARREN: Now, if I turn to the next page, we have a list of the cons, and then after the list of the cons, the first paragraph after that says: "Pros 1 and 2 would be realized whether we contract on Alliance or not, as long as the Alliance project proceeds." 293 Do you see that? 294 MR. FOSTER: I do. 295 MR. WARREN: It would appear that ECG appears with the proposition that the building of the pipeline creates the competitive pressure, regardless of whether they contract for capacity; correct? 296 MR. FOSTER: Well, I see what they said. I think that it certainly would add even greater pressure, competitive pressure, if Enbridge had the opportunity to use that pipeline, not to just the fact that it was there. So to that extent, I would add emphasis to it, that greater competition would exist in the instances where Enbridge could and would use that pipeline as an alternative to TransCanada. 297 MR. WARREN: Do you know whether, in the result, Dr. Foster, TCPL tolls have gone down as a result of, among other things, the building of the Alliance pipeline? 298 MR. FOSTER: I do not. 299 MR. WARREN: Do you have any reason to quarrel with my assertion that they haven't gone down? 300 MR. FOSTER: No, they may have been lower than they otherwise would have been, but I do not know if they would have gone down. 301 MR. WARREN: I have just two other areas that I want to cover with you Dr. Foster, and I want to, if I can, return to that portion of that test of reasonableness which focuses on evaluating the circumstances that existed at the time that the decision was made. That's the context for these questions. 302 Now, I want to understand, if I can, what the relevant time period is for this assessment. The evidence which regrettably we haven't been able to test with the ECG panel so we're not -- I'm not quite sure what the time lines are, but it would appear from the evidence now on the record that sometime in the second or third quarters of 1996, Enbridge Consumers Gas was assessing the question of whether or not it should contract for 15 years on the Alliance system. It would also appear from the record that the Alliance pipeline would have come into operation, at the earliest, sometime in 1998 or 1999. I apologize for the fuzziness of the time lines because we haven't yet heard from Enbridge on exactly those time lines. In the result, it didn't come into operation until sometime late in 2000. But the planning horizon, as I read the evidence, was a decision being made in 1996 for pipeline capacity that was going to come into effect somewhere between two and three years later. 303 Now, in that context, can you and I agree -- or would you agree that the assessment of the utility should not look just at the circumstances that exist in the second and third quarters of 1996, but should try and assess the circumstances that might affect the decision up to the time at least when the pipeline is going to begin operation? 304 MR. FOSTER: I don't know. 305 MR. WARREN: Do you not believe it's reasonable to take that under consideration? 306 MR. FOSTER: I don't know the commitments made; I don't know the continuing need of the utility. I can't answer that question. 307 MR. WARREN: Would you agree that in making the assessment, they should consider the factors that might affect it over the course of a 15-year contract? 308 MR. FOSTER: Yes. 309 MR. WARREN: Now, if I could ask you to turn up, finally, one of your interrogatory responses which, panel members, is Exhibit I, tab 2, schedule 75. 310 Now, one of the debating points -- 311 MR. FOSTER: I'm not quite there yet. Response to CAC 75. 312 MR. WARREN: Yes. I take it one of the points, Dr. Foster, one of the points of disagreement between you and Mr. Stauft is the question of whether or not the Chicago market was a viable alternative for gas supply for Enbridge Consumers Gas; correct? That's one of the differences between you and Mr. Stauft. 313 MR. FOSTER: In 1996, I -- I don't believe that Chicago could have been considered as a viable supply for long-term supply for Enbridge's growth, yes, that's correct. 314 MR. WARREN: Now, if I look at exhibit -- I take it you would agree that by 1998, Chicago was a well-functioning market; is that correct? 315 MR. FOSTER: That's not what Exhibit 75 says. 316 MR. WARREN: I appreciate that. 317 MR. FOSTER: It says once Northern Border expansion/extension and thereby Alliance became operational in 1998 and 2000 respectively, a foreseeable consequence was that Chicago would become a well-functioning market. 318 MR. WARREN: I apologize. I wasn't tying my question to that specific exhibit; I'm going to get to that in a moment. But my question is can we agree -- for example, if I look at the interrogatory response two before that, which is CAC interrogatory number 73, Exhibit I, tab 2, schedule 73, I concluded from reading that that you agree that by 1998, Chicago was a well-functioning market. 319 MR. FOSTER: The first paragraph on that response says: "While the market centre did exist in Chicago in 1996, Dr. Foster believes that this market did not become a well-functioning market until Northern Borders expansion/extension and Alliance became operational." Northern Border became operational in 1998, and Alliance in 2000. 320 MR. WARREN: Then if I look at Exhibit I I tab 2, schedule 75, you agree with the proposition that the development of Chicago as a well-functioning market was a foreseeable consequence of the Northern Border and Alliance expansions; correct? That's what it says. 321 MR. FOSTER: If it was -- yes, if it was certain that Alliance and Northern Border were constructed, and when they were constructed, then one could have perceived Chicago as becoming a well-functioning market. 322 MR. WARREN: So my question to you is: When Alliance was making a decision in -- sorry, I apologize, Freudian slip. 323 When ECG was making a decision in the second and third quarters of 1996 about gas supply that was to begin in 1998 and 1999, can we not agree that one of the factors they should have considered was the development of the Chicago market as a result of the Alliance and Northern Border expansions? 324 MR. FOSTER: I don't know. I think that the concept of city gate-delivered purchases were brand new at that point. Some people were considering them, but to -- you've got a circularity problem to start with that both Alliance and Northern Border had to be in existence. 325 And furthermore, the concept of city gate purchases were brand new, if not existed at all, so I don't know if they should have considered it or not. 326 MR. WARREN: Dr. Foster, my final question to you is this, and it has to do with getting your opinion on the question of risks associated with a contract: Would you agree with the proposition, Dr. Foster, that if this Board were to conclude that the decision to enter into contracts for capacity on Alliance and Vector were reasonable decisions, they were to reach that conclusion, do you agree that Enbridge Consumers Gas should bear the risks that accrue to entering into that contract? 327 MR. FOSTER: If this Board concludes that this -- entering into this contract was reasonable, and I assume that you mean that it was prudent, which I believe it was, I believe that the company has an ongoing responsibility to minimize its gas costs and do everything in its power to keep its gas costs at a reasonable level that's competitive, and that they have to, of course, abide by the contracts that they have entered into so that they can't violate those contracts, but they must continue to operate their system at a least-cost basis. And to that extent, yes. 328 MR. WARREN: Thank you very much, Dr. Foster. I have no further questions. 329 And, Mr. DeWolf, while, of course, it's always enormously beneficial to have a witness from Calgary, I have no questions for you. 330 MS. HALLADAY: Thank you, Mr. Warren. 331 Mr. Janigan, will you be the next person to be cross-examining? 332 MR. JANIGAN: Yes, I will, Madam Chair. 333 MS. HALLADAY: And how long do you think you will be? 334 MR. JANIGAN: I had planned to do -- I had planned on the basis that there were two panels, so it will -- I would say that I would probably have about a half an hour for Mr. Foster and probably about 45 minutes for Mr. DeWolf. 335 MS. HALLADAY: Well, that's fine. 336 Now, I think, might be an appropriate time to take a morning break, and we will reconvene at five after 11. 337 --- Recess taken at 10:53 a.m. 338 --- On resuming at 11:10 a.m. 339 MS. HALLADAY: Please be seated. 340 Mr. Janigan. 341 MR. JANIGAN: Thank you, Madam Chair. 342 Before I begin, I wonder if I could have marked, for identification purposes, a book of reference materials for cross-examination for the counsel of Vulnerable Energy Consumers Coalition, I believe the panel has a copy of and as well the witness panel has a copy of. 343 MS. HALLADAY: Mr. Moran? 344 MR. MORAN: Madam Chair, I believe the exhibit number would be F.2.1, if we consider this panel to be panel 2. It was panel 1 on Tuesday, I think. 345 MS. HALLADAY: That's fine. 346 EXHIBIT NO. F.2.1: COMPENDIUM OF EVIDENCE FOR CROSS-EXAMINATION BY VECC 347 MR. JANIGAN: Thank you, Madam Chair. 348 CROSS-EXAMINATION BY MR. JANIGAN: 349 MR. JANIGAN: Now, Dr. Foster, what I propose to do is go through the evidence that you have offered and highlight certain questions and answers that appear in that evidence. 350 The first question that I would like to start with is question 24 in your evidence, if you would turn that up. "Is it -- would you please proceed with the list of Mr. Stauft's assumptions." "Yes, Mr. Stauft stated that the Alliance project was universally perceived as uneconomic; therefore, ECG should not have contracted for capacity. He does recognize that, in spite of this view, parties have contracted for 1.325 Bcf per day of long-term service on Alliance and 0.7 Bcf per day of long-term service on Vector long haul, and both projects have received regulatory approval in Canada and the U.S." 351 Now, Dr. Foster, I take it that you view the existing contracts on Alliance and Vector as rebutting Mr. Stauft's statement. 352 MR. FOSTER: I do believe that it provides some alternative evidence that there was a universal view that the project was uneconomic, yes. 353 MR. JANIGAN: And are you aware of who the shippers are on Alliance and Vector? 354 MR. FOSTER: Not specifically, but I do know that they are primarily, particularly on Alliance, they are marketers. 355 MR. JANIGAN: I'm sorry, I didn't catch the last word. 356 MR. FOSTER: Marketers. 357 MR. JANIGAN: Yes. 358 And if I could refer you to page 1 to 11 of VECC's materials, first of all -- page 1 to 11, and once again, this is an index of customers that has been taken off the Internet. Would you confirm, in looking at that, that predominantly the shippers on Alliance are producers, a marketer or an LDC that is also affiliated to the owners of the Alliance pipeline? 359 MR. FOSTER: Yes, the predominant customers of Alliance are producer/shippers, marketers, and Union and Consumers also has capacity on Alliance. I believe that Enbridge is also an owner and I believe Westcoast is as well, as well as Union. 360 MR. FARRELL: Excuse me, Dr. Foster, when you said Enbridge, you meant Enbridge Inc. or another affiliate, just so the record is clear, because you've been using Enbridge to describe ECG from time to time. 361 MR. FOSTER: I have. Consumers Gas Company is listed, LDC as the shipper -- owner/shipper, on Alliance. 362 MR. JANIGAN: If you look on page 14 of Exhibit F.2.1, could you confirm that the shippers on Vector are also affiliated with the Vector ownership? 363 MR. FOSTER: Well, here we have Union Gas again, and I believe Westcoast is an owner. We have Enbridge, the utility -- gas utility, and Enbridge Inc. has an ownership. We also have Michigan Consolidated Gas. I'd have to confirm whether its parent is an owner of Vector; I don't recall. 364 MR. JANIGAN: Dr. -- 365 MR. FOSTER: The reason I bring up Michigan Consolidated Gas is it is an LDC serving Michigan. 366 MR. JANIGAN: My analysis was somewhat less sophisticated than that, Dr. Foster. I looked on the column indicating affiliate and found a "yes" all the way down the line. 367 MR. FOSTER: I see that now, thank you. 368 MR. JANIGAN: And on the next page, I believe there's a -- page 15, there is an outline of the Vector partnership structure. 369 Now, Dr. Foster, can you confirm that the Alliance pipeline was initially owned by producers that were concerned about gas prices in Alberta, given the lack of pipeline capable of taking out their products? 370 MR. FOSTER: I've read that in the materials that I've reviewed. 371 MR. JANIGAN: And you believe it to be true? 372 MR. FOSTER: I believe that there was a -- that there was a pipeline constraint out of Alberta that was affecting the price, yes. 373 MR. JANIGAN: Now, I wonder if I could skip ahead in your testimony to question 27, and it's: "Would you expect a utility manager to make a decision based on the speculation that current market conditions would reverse themselves 180 degrees and stay that way over the long term?" Your answer was: "No, most analysts would agree that there are substantial uncertainties in future market developments. An LDC must first determine the benefits of that capacity based on existing market conditions prior to analyzing what those benefits would be after the LDC is contracted for capacity." 374 Now, I believe Mr. Warren has covered with you potential impact of all the different build-out of pipelines, but I wanted to ask you just one last question in that area. Drawing upon your experience in the natural gas market throughout the U.S., can you cite to me an example wherein there has been an expansion of an existing or a new pipeline with a capacity as large as 1 to 2 Bcf into a market area that has had no impact on existing market conditions? 375 MR. FOSTER: No. 376 MR. JANIGAN: I wonder if I could go further in your evidence, Dr. Foster. In question 32: "Were these expansions on TransCanada increasing the pipeline's tolls?" Answer: "Yes. For example, the TransCanada Nexus project, which was an alternative to Alliance in 1996, was expected to raise the eastern zone toll from $0.907 per gJ to $1.02 to $1.04 per gJ, and you referenced ECG's response to CEED interrogatory number 2 in RP-2000-0040. A copy is attachment 4 to this testimony." 377 I wonder if it might be possible to go to that particular interrogatory that you cited. 378 MR. FOSTER: I'm there. 379 MR. JANIGAN: And in particular, I wanted to take you to the comparison of route alternatives table, which is attachment 4 or page 4 of the -- and the cost of the Alliance alternative is a toll of 1.01 gJ plus the fuel of .068 gJ, which brings us to a total cost of Alliance at 1.078 per gJ; is this correct? 380 MR. FOSTER: That's correct. 381 MR. JANIGAN: And this is higher than the cost of the TCPL Nexus, which was 1.02 to 1.04 per gJ, which you've cited. 382 MR. FOSTER: I'm just wondering if the Nexus project numbers include the fuel. I do not know if it includes the fuel. 383 MR. JANIGAN: Okay. Apart from that qualification, you would agree with me that the numbers for the Alliance alternative are higher? 384 MR. FOSTER: I will only agree with you that 1.079 is greater than 1.02. 385 MR. JANIGAN: If I can go further with your testimony, Dr. Foster. Question 33: "Were there other benefits to contracting with Alliance-Vector to ECG M utilities customers?" The answer is: "Yes, diversification as well as other benefits. Diversification of ECG's transportation portfolio would encourage competition and enhance the security of supply for its customers. The alternative transportation routes would enhance the utility's ability to mitigate excess capacity; for example, the Alliance-Vector route would provide access to markets in Chicago and points east, where ECG could sell excess gas after using most of the route. 386 "In addition to the advantage of diversification, Alliance has operational advantages, including the use of authorized overrun service, transportation of rich gas on a volumetric basis or the equivalent, and cheap expandability by the use of more compression." 387 Now, Dr. Foster, if Nexus was built rather than Alliance, and given that it, too, was a new pipeline, wouldn't expansion also be cost effective, as Nexus could also rely upon compression for expansion? 388 MR. FOSTER: Possibly. I do not know the design of Nexus. I do know that the existing TransCanada system was very expensive to expand, and there were, in fact, important hearings before the NEB talking about whether these expansions should be incrementally priced or rolled in priced but -- and I have been, of course, involved in a number of those hearings. 389 But this is -- the reference here was to the existing TransCanada system as opposed to the Nexus system. 390 MR. JANIGAN: Thank you. 391 MR. DEWOLF: Excuse me. My understanding, "Nexus" was the term used by TransCanada for a multiplicity or multi-year expansions to its existing system, that it wasn't a brand new system. 392 MR. JANIGAN: As it existed in 1996, however, it was the competitor to Alliance. 393 MR. DEWOLF: It was, but you implied or stated that it was a new pipeline, and what I'm saying is it wasn't. It was a multi-year program by TransCanada to expand its existing system. 394 So I don't think it would necessarily have the same sort of advantages that Alliance had where Alliance is a high-pressure, rich gas stream pipeline. 395 MR. JANIGAN: It was a new project. Whether or not you can classify it as a new pipeline is another thing. Is that what you are saying? 396 MR. DEWOLF: That's right. It was another project, but it had the same -- as pointed out in some of my evidence, there were issues to deal with, just TransCanada's expansion as compared to a brand new system. 397 MR. JANIGAN: Now, getting back to your -- to the quote on the question and answer, Dr. Foster, how could Alliance on its own in 1996 provide diversity to ECG when it didn't enter into the ECG franchise area? 398 MR. FOSTER: Well, of course, Enbridge had to make some arrangements to transport the gas from the terminus of Alliance to its franchise area, which they had planned and ended up, of course, with construction of Vector. 399 MR. JANIGAN: So the diversity really comes from the Vector pipeline, does it not? 400 MR. FOSTER: The diversity comes from both systems. Vector by itself is not going to help, you need both Alliance and Vector 401 MR. JANIGAN: Another Alliance by itself won't help the diversity? 402 MR. FOSTER: You need the integration of the two, unless you can arrange some kind of alternative to Vector. 403 MR. JANIGAN: Question 43. Mr. Stauft is critical of the long-term nature of ECG's arrangements with Alliance-Vector. 404 MR. FOSTER: Yes, sir. 405 MR. JANIGAN: Answer, apparently; on page 30 of his testimony, he states that "Even though Alliance and Vector were properly certified by the NEB that does not imply that it was reasonable or prudent for ECG to subscribe for 15 years' service on them." 406 Further, question 44: "Does Mr. Stauft overlook ECG's put-call arrangement with Enbridge Inc. for the second tranche of Vector capacity? See ECG's pre-filed evidence, paragraphs 20 and 24." Answer: "Yes." 407 Now, in making these comments, are you aware that the five-year put-call for the second tranche of Vector was for existing customer demand and that it replaces an existing contract that has established a right to be on a one-year renewal basis? 408 MR. FOSTER: I'm not sure of the latter. I do know that -- or I believe that the second tranche was a substitute for TransCanada's -- some of TransCanada's system; I'm not sure about the latter part of your question. 409 MR. JANIGAN: You weren't necessarily, then, aware of the terms of the contract with TCPL, that it had a one-year renewal basis? 410 MR. FOSTER: That's correct. 411 MR. JANIGAN: Okay. 412 Now, page 21 of your report which is unfortunately located in that infamous interrogatory 69, the analysis of LDC peak-day planning which is in appendix 1 of Exhibit 1, tab 2, schedule 69. 413 MR. FOSTER: Which page, please? 414 MR. JANIGAN: Page 21. 415 MR. FOSTER: I'm there. 416 MR. JANIGAN: And it indicates, it states that an additional element of LDC flexibility is shorter-term firm transportation contracts with pipelines. 417 MR. FOSTER: That's what it states. 418 MR. JANIGAN: My question to you, Dr. Foster, would it not be contrary to the ideal of establishing greater flexibility for the LDC to trade a one-year firm contract that rolls over on an annual basis with what is in effect a five-year term contract? 419 MR. FARRELL: You're asking him to make the assumption that what you're saying is correct? 420 MR. JANIGAN: That's correct. 421 MR. FOSTER: I apologize, would you repeat the question. 422 MR. JANIGAN: Would it not be contrary to establishing greater flexibility for the LDC to trade a one-year firm contract that rolls over on an annual basis, to trade it to obtain what is in effect a five-year term contract? 423 MR. FOSTER: Well, if the utility has the option to obtain a one-year roll-over with the ability to have right of first refusal and obtain that contract, I can make that assumption. 424 MR. JANIGAN: I wonder if I could take you to -- once again, to that same interrogatory, Exhibit I, tab 2, schedule 69, appendix 2, a paper entitled "LDC Gas Supply Portfolios." 425 MR. FOSTER: Yes. 426 MR. JANIGAN: That was released in 1994. And on page 1-5, you make the following point with regards to transportation: "Transportation as a criteria may diminish in importance in the future as supply hubs or the use of market storage grow such that the transportation from these storage facilities or market centres to the city gate replaces traditional transportation from the well head to city gate." 427 Is this changing trend to transportation still valid today? 428 MR. FOSTER: I think today with certain market hubs being created, certain LDCs are relying on deliveries at the city gate for their gas supply. Back in 1994, when this paper was written, we did a survey for AGA and we found that firm transportation was probably the most important criteria. These LDCs had to meet their long-term firm requirements and they were just beginning at that time in certain markets that had storage, for example, California and so forth, that they were considering these market hubs but it was very uncertain. 429 I think the only one LDC that we surveyed out of 20 or 30 that had suggested -- it was not in Chicago, mind you -- but these pipelines in the U.S. had three to five -- I'm sorry, these LDCs had three or five pipelines serving them at the time and they were quite diversified. 430 MR. JANIGAN: Okay. But I take it this was a realistic possibility of what might occur in the future, and you noted the same in 1994. 431 MR. FOSTER: As I indicated, one LDC mentioned that city gate purchases was a possibility, and based on this, it was a possibility that firm pipeline transportation would be reduced in importance when it was in 1995, because it was very important. It was the highest criteria the pipe -- that the LDCs listed with respect to their portfolio. 432 MR. JANIGAN: I wonder if I could take you to, in that same interrogatory answer, Exhibit I, tab 2, schedule 69, appendix 1, your paper analysis of LDC peak-day planning. 433 MR. FOSTER: Yes, sir. 434 MR. JANIGAN: And on page 22, you make the following comment regarding gas supply contracts: "Spot contracts are usually monthly, and purchases depend on market conditions in terms of both need and prices. Spot gas will most likely be purchased during the summer for storage injection." 435 Why is it that LDCs should rely upon monthly price spot contracts rather than daily price spot contracts? Is it to provide price stability for a customer? 436 MR. FOSTER: In 1995, I don't think there were daily purchases or very much daily purchases. Spot prices were monthly purchases, and that's all there was as opposed to an annual contract. 437 MR. JANIGAN: What about today? 438 MR. FOSTER: Today, there is a daily market, a monthly market, and an annual market. There is also derivatives that they'll go to for LDCs to meet their particular goals. 439 MR. JANIGAN: And advice that you would give to an LDC, would you advise them to rely on monthly spot contracts rather than daily price contracts? 440 MR. FOSTER: It depends totally on their gas supply portfolio and their particular goals and requirements. 441 MR. JANIGAN: I take it the monthly gas spot contracts would provide more price stability for the LDC's customers? 442 MR. FOSTER: It would certainly be a known price for the month as opposed to a daily price, yes, sir. 443 MR. JANIGAN: And why is it also more common for spot gas to be purchased during the summer as opposed to the winter? 444 MR. FOSTER: Historically, the price of gas has been less in the summer, because the requirement in the winter for heating purposes. However, looking at the data and the information in the last few years, it's sort of reversed itself in the States. But in many of the historic past -- recent years, because of the requirement for use of gas for power generation, so some of those historical trends have changed, and it really depends on the particular market. 445 MR. JANIGAN: Thank you, Dr. Foster. Those are all my questions for you. I now have some questions for Mr. DeWolf. 446 Mr. DeWolf, were you or Ziff Energy retained by ECG prior to the decision made by the company to contract for capacity on Alliance on November 6th, 1996? 447 MR. DEWOLF: No. 448 MR. JANIGAN: And on page 2 of your evidence, you indicate that you were retained to provide a response regarding the prudence of ECG's transportation arrangements on the Alliance and Vector pipeline systems, and what was the general knowledge in the natural gas industry at the time ECG made its arrangements with these pipelines. 449 MR. DEWOLF: That's what it says. That's correct. 450 MR. JANIGAN: Now, not to parse your response too finely, but were you -- in the response that you were retained to give, were you also to give an opinion with respect to prudence, or were you simply to bring to bear some evidence that's associated with that? 451 MR. DEWOLF: Well, based on the work in the evidence, the point was Mr. Stauft had laid out some historical viewpoints that he had that led to his view that the decision by Enbridge Consumers Gas was imprudent. 452 Looking at the issues as far as the general knowledge and some of the other aspects to deal with the market at the time, it was my view that Mr. Stauft's conclusion, based on that information, was incorrect and that it would be the flip side to say the decision -- if you knew the information at the time, the correct information, then you would consider that the decision was prudent. 453 MR. JANIGAN: But you didn't review all the internal memoranda of the company in an effort to come to a conclusion on the basis of the prudence of the company's actions, you were mainly concentrating on what was going on in the industry. 454 MR. DEWOLF: I was responding to the allegations of Mr. Stauft and how he was making the statement that the -- based on the information that he had put forth to the Board here that, in his view, the decision was imprudent. 455 I was using the information of the known facts based on the evidence I've put forth to say as an independent advisor or looking at the information at the time, based on known facts, I couldn't come to a conclusion that ECG's decision was imprudent. 456 MR. JANIGAN: But you didn't review all the internal memoranda of the company to make that? 457 MR. DEWOLF: That's correct. 458 MR. JANIGAN: Now, according to your updated response to CAC interrogatory 95 of May 28th, you advised that neither you nor Ziff prepared any studies, reports, analyses, notes, forecasts, and other documents for natural gas utilities in Canada and the U.S. on the issue of gas supply for the period of -- for the period 1996 onwards, with the exception of the gas supply markets in transition dated February 1998? 459 MR. FARRELL: Excuse me. You left out an important qualifier. The question says, "... gas supply for natural gas utilities in Canada and the United States." 460 MR. JANIGAN: Thank you. I think I said that but thank you, Mr. Farrell. 461 MR. DEWOLF: Based on my review of the reports that we've done, that's my belief. 462 MR. JANIGAN: Okay. Now, and that gas supplies market and transition is dated February of 1998, is it not? 463 MR. DEWOLF: That's correct. 464 MR. JANIGAN: And in your evidence on page 8, do you disagree with Mr. Stauft's view of the expected price effects of the new ex-Alberta pipeline capacity? 465 MR. DEWOLF: Could you point out specifically where you are? 466 MR. JANIGAN: If you turn up page 8 and look to the bottom, and the question "Do you agree with Mr. Stauft's view of the expected price effects of the new ex-Alberta pipeline capacity as it's provided in pages 16 to 19 of his evidence," your answer is, "Mr. Stauft presents a view of the natural gas market in 1996 and what could be readily anticipated in 1999 and beyond that was not based upon the view held by many parties, including TransCanada, the NEB, and ourselves at Ziff in 1996." 467 MR. DEWOLF: That's what it says, and then it follows on page 9, I highlight a number of those specific points to support that statement. 468 MR. JANIGAN: And you cite excerpts from two NEB decisions supporting that assertion and the date of these decisions is November of -- is November of 1998 in each case? 469 MR. DEWOLF: That's correct. One for Alliance and one for TransCanada. 470 MR. JANIGAN: Okay. And by 1998, did the Nexus expansion plan cease to be a factor of possible increased capacity to Chicago? 471 MR. DEWOLF: I believe the Nexus plan, as it was a competitive alternative by that stage, had ceased. I'd have to take that subject to check, but I believe it was. 472 MR. JANIGAN: Okay. In 1996, would we have -- would knowledgeable individuals in the industry have known that the Nexus project would be eliminated and replaced with a conventional build? 473 MR. DEWOLF: I just want to go back and look at some of my information that I have here. I would have said that it was an alternative that TransCanada had put forth to Alliance. My recollection is because it was substantially late to the proposal by Alliance, it probably would have had some challenges as to its viability as Nexus itself, and that was one of the reasons TransCanada went back to its traditional approach in going by an annual expansion basis. Not much different than when you say 1996, not much different than the same view that was held with Maritimes and Northeast pipeline and TransCanada's proposed Maritimes pipeline that was put forth significantly later than the Maritimes and Northeast. And again it was the view that they were coming after perhaps the barn door gate was open and everyone was rushing out for competitive alternatives. 474 MR. JANIGAN: But in 1996, the Nexus project was a viable option. 475 MR. DEWOLF: It was a proposal by TransCanada. 476 MR. JANIGAN: Or viable proposal. 477 MR. DEWOLF: It was a proposal. I can't say that was viable. 478 MR. JANIGAN: Now, by 1998, was the Northern Border expansion in place? 479 MR. DEWOLF: It came into place by the end of 1998. 480 MR. JANIGAN: And in 1996 was this expansion likely? 481 MR. DEWOLF: My view is yes. 482 MR. JANIGAN: Now, I also presume that you are not saying in your testimony that Mr. Stauft was the only person that held his views with respect to the expected price effects of ex-Alberta pipelines in 1996. 483 MR. DEWOLF: No. What I was saying was it was in response to the position that -- and statement that Mr. Stauft had made, and I'll quote it at page 18 his evidence, it says: "In fact, the almost universal view in the gas market at the time was that if all the proposed pipeline projects went ahead, the Empress-NYMEX -- my maximum differential would be reduced, Alberta prices would increase by more than the amount that would render both TransCanada and Alliance-Vector long-haul capacity uneconomic." 484 I then give you a response that the National Energy Board put in its decision in dealing with Alliance. "It is difficult to predict the specific impact that Alliance project will have on gas prices in Alberta and on producer net-backs once it is built," and it further goes on and says that you could actually have lower prices for net-backs to producers. So to say it was universal, I think, is far too strong a statement. 485 MR. JANIGAN: Once again, those two are 1998 decisions; is that correct? 486 MR. DEWOLF: They're decisions that were based on information that was filed by Alliance and TransCanada far earlier than November of 1998. 487 MR. JANIGAN: Now, I want to take you to page 76 of your evidence, according to page 7, that Ziff was of the view that Alberta -- the Alberta-Chicago differential would decline as a result of the pipeline expansion. 488 MR. DEWOLF: That's correct. 489 MR. JANIGAN: And in fact for this to happen, I would take it the Chicago delivered price would have to decline as well. 490 MR. DEWOLF: Not necessarily. 491 MR. JANIGAN: Explain the circumstances where it would be. 492 MR. DEWOLF: Sure. Basically, in that time frame, somewhere around the end of '93/'94, and I believe it's in one of the responses, we give the price differentials between Alberta and NYMEX or into Chicago, there was a lack of take-away capacity for pipelines out of Alberta. Because of that, there was a build-up of supply within Alberta that was being discounted, if you want to say, because there wasn't enough -- there was more supply than market, so the supply was being discounted such that if you had firm capacity on any of the pipelines leaving Alberta, you could actually get a significant premium in the market to selling that versus trying to sell it in the inter-Alberta market. Alleviating the bottleneck would therefore, in our view, and as we've put in the support in a couple of my responses, was that the differential would go downward likely and stay around the cost of transporting the gas to those markets as opposed to remaining substantially discounted and therefore a very high differential. So at that point in time, pipeline capacity was actually on the secondary market selling at a very high premium. 493 MR. JANIGAN: But, specifically, many people held the view that the build-out of the Alliance pipeline would depress the delivered price in Chicago; would you not agree? 494 MR. DEWOLF: There were parties that would say that the price, given that you were introducing a substantial amount of new volume into the Chicago market, you would have an effect and likely decline the Chicago market; but at the same time as the expansions that were being put forward by Alliance and other parties, including TransCanada into the midwest market, as I show in one of the responses, the supply from the traditional areas of the south-west into the midwest market were declining. So in many -- in a number of views, it would have been held that the gas was going to be supplemental to those declines. 495 In addition, there was many pipeline proposals to take away that gas, away from just the midwest market, the tri-states and other projects that would move it to the north-east or mid-Atlantic region. 496 MR. JANIGAN: Well, let's -- I'd like to go to my book of materials, which is Exhibit F.2.1, and visit some of the articles that were in the trade press around the time that these decisions were being made. 497 I wonder if we could turn up page 21 of Exhibit F.2.1, "Inside FERC's Gas Market Report." As you can see from the bottom of that page 20, it recites the press release from Alliance that: "By serving the already well-piped Chicago area, the Alliance pipeline will create an opportunity to deliver western gas to a point where North American market competition exists and the market volume and liquidity is large." 498 If you look over on the next page, an official from the Natural Gas Pipeline of America, a Phil Bottger, about halfway down the middle of the page, expresses, I guess, some doubts or pessimism that: "'The Chicago market is not growing by the kinds of leaps and bounds that can accommodate that volume of gas,' said Phil Bottger, Natural's vice-president for market development. 'The Chicago area is already being served by several pipelines. When you come to market with that much gas, it's going to have a downward effect on prices in Chicago and most producers will have to realize that their net-backs will be diminished.'" 499 So clearly Mr. Bottger, in any event, held that opinion. 500 MR. DEWOLF: And what I was saying was, if all the gas remained in Chicago. But there were many proposals being put forward to move that gas or incremental amounts of that gas away from the Chicago market into the mid-Atlantic and the north-east. 501 MR. JANIGAN: Now, skipping ahead here to page 25, this is an excerpt from Platt's Oilgram News of June 25th, 1996. 502 MR. DEWOLF: I have it. 503 MR. JANIGAN: And in fact, once again, there is an expression of doubt from I guess another pipeline company, NOVA, at the bottom: "'While some describe the project as the boldest step,'" that is, the project being Alliance, "'yet to address a lack of take-away capacity, NOVA refuses to concede the economics of Alliance. The project seems at cross purposes,' says NOVA spokesman Paul Clark, 'and Chicago will be oversupplied.'" 504 I would assume that the net effect of being oversupplied is the price will diminish; is that correct? 505 MR. DEWOLF: I'm not sure. Those latter statements aren't there. You have to understand that NOVA -- Alliance was perceived by NOVA as a competitor, so this is the view the opposite side to Alliance's position, and so was Natural Gas Pipe. I mean you are basically quoting what the view is from the competition, and of course they are going to take the most negative view possible. 506 MR. JANIGAN: If you could skip ahead to page 29 of that same exhibit, another excerpt from Inside FERC's Gas Market Report of August 23rd, 1996, about three-quarters down the page, I want you to look at the comment from the vice-president of NIPSCO, Randy St. Aubyn. 507 MR. DEWOLF: Sorry, page 29? 508 MR. FARRELL: Sorry, just -- page 29? 509 MR. JANIGAN: Yes. About three-quarters of the way down the page. If you look, there's a comment from Randy St. Aubyn, the vice-president of NIPSCO. 510 MR. FARRELL: It starts with "I expect..." 511 MR. JANIGAN: And the second line being, "'It is absolutely going to have an impact,' Randy St. Aubyn, vice-president of NIPSCO Energy Services, said of the Northern Border expansion. 'It will lower prices here in Chicago. Expansion will be positive for Canadian producers, because it will give them a much needed outlet for their supply. But in the U.S., the mid-continent producer is going to take it in the shorts, because there's nowhere to go with his gas.'" 512 MR. DEWOLF: And that's in reference to the Northern Border expansion. 513 MR. JANIGAN: Actually, your point is made on the next page with the comment by Michel Scott of Newmac. He also thinks that in the Northern Border expansion, which was certainly a likely outcome at that time, that the Northern Border expansion will -- "'Scott expects the Northern Border expansion to fill very rapidly to its full capacity. He believes the incremental volumes would exert downward pressure on Chicago area prices. The competition in Canada for space on the pipeline also could push prices down. As volumes outstrip capacity once again,' he added, 'we kind of did it to ourselves in California, and that has been kind of ugly.'" 514 MR. DEWOLF: Seems to contradict the following statement: "Space on the Northern Border project is quite valuable." That would imply that there was seen that there's a value to having that excess capacity out of Alberta. 515 MR. JANIGAN: You would disagree with his conclusion, I take it? 516 MR. DEWOLF: To get the main view that what I am saying here was was it universal that you would have the view that Mr. Stauft has put forth? I didn't say that there wouldn't be any other parties. 517 What I'm saying is what was in the public at the time, referencing to deal with Alliance, was that even the National Energy Board, in all the evidence put forth, including TransCanada, including NOVA, including Foothills, which were competitors to Alliance, the NEB could not come up with a definitive conclusion what might happen to prices. 518 MR. FOSTER: If I could add to that, you know, you add a lot of capacity to a particular market, the price will drop. That's a far cry from making a conclusion or saying it was a universal view that prices will fall so much that the project would be uneconomic for the life of the project. 519 Of course when you add 2-plus Bcf of gas to a market, the price will fall. There is no doubt about that all at once. The NEB recognized that, the industry would recognize that, and these would -- what they are saying. 520 But they needed an expected capacity to be built out of Chicago to the markets where they needed that gas, and this was the expectation all along. 521 MR. JANIGAN: I take it that you quarrel with Mr. Stauft's use of the adjective "universal" more than anything? 522 MR. DEWOLF: Well, it's both the universal view and the stretch to say that more than an amount that would render TransCanada, the Alliance-Vector long-haul capacity uneconomic. 523 And the view there was I -- you were talking about declining prices maybe in Chicago. That's not to say or even to say that Mr. Scott still felt that Northern Border would have value. You're not going to pay 60 cents, have a differential go to 50 or 40 cents in the long haul, and consider that transportation valuable. I don't see how that would make sense. 524 So the issue was was it going to make the Alliance-Vector long-haul capacity uneconomic. I disagree with that point, too; that sure at the very beginning, as the NEB even points out, due to the lumpiness, which is just that massive amount coming all at once, you might have some short-term effects, but they were to be short-term effects. 525 As I point out in my evidence, there is a lot of other issues that have transpired since that time frame that have influenced the current market economics. 526 MR. JANIGAN: Back to returning to my questions concerning your comments with respect to Mr. Stauft's evidence, it's clear that you disagree with Mr. Stauft's conclusions, and you disagree with Mr. Stauft's conclusions that these were universal conclusions in the industry. But clearly, they were conclusions held by people other than Mr. Stauft? 527 MR. DEWOLF: No, I disagree with you. The citations that you've given me are basically based on the price in Chicago. I fully recognize that the price could decline. I said that at the very beginning. 528 The issue was what -- what Mr. Stauft is saying is that the differential between these two points, Chicago or NYMEX and Alberta, would be such that you would render Alliance TransCanada uneconomic, and I don't believe that's the case. 529 You're citing specific prices. That's not to say that the differential between the two -- and understand, the differential is -- a market value is going to say that that was going to drop from, at that time, somewhere in the $1.50 plus range down to 40 cents or 50 cents. I don't think anyone anticipated it in the long haul that that differential would drop down to those sort of levels, but that it would at least drop down, as we put in one of my responses, to roughly the cost of transportation. 530 If it's down to the cost of transportation, that doesn't say that Alliance-Vector is uneconomic then. 531 MR. JANIGAN: And that's based upon your view that there were pipelines in the works that were going to be taking this gas away from the Chicago market? 532 MR. DEWOLF: Vector is one. There were others. 533 The other aspect is you are also looking at -- you're looking at how much of that capacity is actually going to get filled up quickly afterwards too. So what -- you know, was it because the lumpiness that you are going to have, 1.3 Bcf a day turn-back on TransCanada, the reports that I filed, we assumed that there would be some turn-back but it would be short-lived. 534 MR. JANIGAN: I'm just going to deal with that issue about the gas or the capacity to take gas away from Chicago in 1996, and I note on your -- in your testimony on page 7, I think in lines 8 and 9, that at the time the producers were looking to the market to commit to any incremental take-away pipeline capacity from Chicago to points east. 535 MR. DEWOLF: Yes. 536 MR. JANIGAN: And you indicate the view that the producers were reluctant to commit to any incremental take-away of capacity and were looking to the market to do it. 537 MR. DEWOLF: Post the Chicago market. 538 MR. JANIGAN: Yes. And if you look on page 31 of the materials, and this, once again, is not '98, this was August 23rd, 1996, when in fact, in the third paragraph down, no one is yet signing up for capacity away from Chicago. The Canadian producers and marketers that are supporting the Northern Border project apparently expect U.S. gas to scoot out of their way when their gas arrives in the Chicago area and see no need to sign up for additional firm space under their connecting pipelines. 539 MR. DEWOLF: That's what I said. 540 MR. JANIGAN: Isn't that indicative of a problem with respect to take-away capacity? 541 MR. DEWOLF: Maybe you could rephrase. Which take-away capacity? 542 MR. JANIGAN: Take-away capacity from Chicago. 543 MR. DEWOLF: And Mr. Scott said -- Newmac Scott said that if Chicago prices get too low relative to hindering up, all the U.S. gas will just turn around and go somewhere else. So what you're looking at is it will either be absorbed in the Chicago market because the U.S. producers aren't prepared to compete and therefore prices would likely rise back up, or someone is going to take out the capacity, whether it's LDCs, marketers. There were many different proposals being put forth for gas to move away from the Chicago area. That's not to say everyone was signing up for it, but there were proposals. 544 MR. JANIGAN: Well, let's skip ahead to page 35. We have TransCanada's president, CEO, George Watson, commenting on the Alliance. About three-quarters of the way down the page, he says: "I do think there is a market problem," he said, of Alliance. "You are just taking a bunch of gas to Chicago and dumping it without a market take-away strategy. It just doesn't seem prudent to me." 545 Clearly he was of the view at the time that there was not a market take-away strategy that was in existence. 546 MR. DEWOLF: Well, it's -- again, you are quoting from a competitor who has a project, Nexus, which was also targeting natural gas into that area and beyond. TransCanada also owned 33 percent of Northern Border so, you know, it was statements by the competition. So you have to take that with a grain of salt. 547 MR. JANIGAN: Yes, but I believe you cited TCPL as someone in support of your view, on page 8 of your evidence, did you not, at the bottom? 548 MR. DEWOLF: That was dealing with the price effects as to gas supply situation. The -- 549 MR. JANIGAN: But certainly -- 550 MR. DEWOLF: Let me finish. The issue there was dealing with Mr. Stauft's statement that at the time, the Northern Border expansion projects, TransCanada's 1998 expansion were likely to proceed and ECG was effectively assuming the Alliance project would also proceed, all of the projects were completed, the inevitable result would be large amounts in excess of 1 Bcf a day of excess pipeline capacity out of Alberta. The statement by the National Energy Board says: "The Board is satisfied with the methodology used in the scenarios presented by TransCanada in its analysis of the overall supply capacity of the western sedimentary basin. The study demonstrates there will be sufficient supply over the long term to ensure adequate utilization of the TransCanada PipeLine system, including the proposed facilities." 551 We're at the same time, at the same time of hearing as Alliance, if you go on further into the page 10: "As recognized elsewhere in these reasons, the Board accepts there may be some temporary under-utilization of existing pipeline systems following the start-up of Alliance due to the large scale of the project." 552 So I'm having difficulty saying that -- to agree to your statement that TransCanada's disagreeing with what I was saying based on the evidence put forth by themselves in front of the National Energy Board throughout 1996 right through to 1998, that there was adequate gas and that even the National Energy Board only felt that it would be very short term as to any under-utilization on TransCanada. 553 MR. JANIGAN: But you are citing, in the November 1998 decision of the NEB in support of those comments, I'm looking at an article from October 23rd, 1996, and I believe, Mr. DeWolf, in terms of looking at -- we got into this by chasing around whether or not the price of delivered gas in Chicago would decline, and I believe your comment was that it's not going to decline because there were available pipelines to take that gas away from Chicago that were in the works at the -- in 1996 and onward. 554 MR. FARRELL: Excuse me, you have a contradiction in your question. You said "available pipelines in the works." Now, please clarify the question. 555 MR. JANIGAN: That there were pipeline proposals in the works that would be taking away that -- the gas coming into Chicago. 556 MR. DEWOLF: I don't think I said that I disagreed that the midwest prices would not decline. I said that -- but it would be short term. The point that I was talking about was the differential, to say that -- would that be to a level that would render the Alliance-Vector project uneconomic, meaning the differential. You're paying a pipeline rate to get to the market that is substantially higher than the value of that transportation as perceived in the marketplace. 557 MR. JANIGAN: But that view is based upon your view of the ability to take the gas from Chicago elsewhere, is it not? 558 MR. DEWOLF: It was based on my view that even -- that the market would adjust whether it was pipelines or whether or not the Canadian gas would be more competitive, for a variety of reasons, in the Chicago market and the gas that was traditionally into those areas would be backed off and go to other markets. 559 MR. JANIGAN: Okay. I wonder if you could -- if I could have you skip ahead to page 38 of the materials. On page 38, Robert Reid, the senior vice-president for TransCanada PipeLine, commenting on the development with the Northern Border and Alliance projects, says that -- I'll just quote it directly: "Robert Reid, senior vice-president for TransCanada Pipelines Ltd. hinted that Canadian producers are jumping at the chance to move gas out of the country without considering all of the consequences. 'More capacity is certainly required but my opinion is, let's not overreact,' Reid said. 'This industry has a habit for many years now of chasing something with a great deal of enthusiasm only to find that things get out of sync.'" 560 It seems clear that TCPL is expressing some grave reservations about the consequences of these pipeline expansions. 561 MR. DEWOLF: Well, at the same time TransCanada was putting forward its own pipeline expansions that, in essence, would be competing with Alliance, and I think it's fair to put -- read the next statement into the record, which is: "The president of Alliance took exception to Reid's remarks. 'I don't think we need to be overly cautious when it comes to pipeline expansions,' he said. 'I think we have been way too cautious and that's the main reason we have an oversupply of gas in Canada, in Alberta, and a lack of take-away capacity.'" 562 There was a lot of concerns about the ability for TransCanada to expand effectively to meet the ongoing markets that was perceived by producers. 563 The other aspect is some of the advantages that Dr. Foster mentioned earlier and what was discussed was the authorized overrun. One of the big issues that was through the 1980s into the early part of the '90s was the ability to provide some, if you want to say, excess capacity in building the pipelines, so that you don't get into this perceived aspect. You just meet the contracted demand at that point in time and therefore, within a year, you filled up the pipeline, you're back into a bottleneck. Alliance, with its -- because of its order of magnitude, gave a substantial ability to have that excess. So that's one of the reasons it's offered overrun service which allows a firm shipper to reduce its firm rate, which is very important. TransCanada didn't have that type of service. 564 MR. JANIGAN: I just want to return once again to your comments concerning Mr. Reid's statements here. I take it that when you juxtapose TransCanada and Alliance, you say that you have to pay attention to who is paying the person that's offering the opinion when you judge the veracity of that opinion, would you? Is that -- 565 MR. DEWOLF: Well, what I'm saying is when you are into the trade press, when people are being quoted, I say you have to take it with a bit of a grain of salt, that if -- as to maybe the hyperbole and the veracity of the statement when -- to say that there is a -- that if Alliance is built, that's not the right one, come over to my side because we're the best ones to build it. At the same time, you're talking about 1996 and TransCanada was putting forth further expansions to its system and they were making statements that there was -- through its experts, that there was substantial amounts of natural gas in western Canada that could support all these expansions. Even Nexus, which was, as one of the quotes you just gave me earlier, was bigger than Alliance. 566 MR. JANIGAN: I take it Mr. Reid is now a senior associate with your firm, Ziff Energy? 567 MR. DEWOLF: Yes, he is. 568 MR. JANIGAN: I take it you don't know whether he still holds the same opinion. 569 MR. DEWOLF: I don't know. I didn't ask him. 570 MR. JANIGAN: And the same month that Mr. Reid gave this opinion was the same month that ECG committed to Alliance, was it not? 571 MR. DEWOLF: I'll take that subject to check. 572 MR. JANIGAN: Okay. If I could take you back to page 7 your evidence, it indicates that while Alberta -- that's at the top, the second paragraph: "While Alberta natural gas producers were prepared" -- I'm sorry, I'm looking in the wrong section and I'm looking at the wrong section in the evidence while my question refers to another section. The section I would like is: "While Alberta producers were looking to the Alberta and U.S. markets to be reconnected, regarding price, I am not convinced that any of the producers were looking to lose over the long term due to the basis differential being lower than the Alliance pipeline toll on a sustained basis." 573 I am highly doubtful that a producer or marketer that had committed to Alliance capacity would be willing to sell term gas longer than one year to ECG or another LDC at a loss by absorbing a discount in effect of the Alliance pipeline toll. 574 Now, do you have any evidence to support that statement? 575 MR. DEWOLF: It's been my experience, having worked for a producer association and for a producer for quite a few years, that they are not willing to take out pipeline capacity if it's their view that they are going to lose money on it in the long term. 576 You made a statement by Michel Scott, and it is to say they learned their lessons from the PGT expansion, and that took close to nine, ten years before they were actually gaining back in their transportation costs, or what they could pass on to the market, the full value of that transportation. 577 MR. JANIGAN: I wonder if I could refer you to page 39 of Exhibit F.2.1, and this is from an article from "Inside FERC" of December 2nd, 1996. 578 And it gives an account of a study that had been prepared by Hagler Bailey Consulting Inc. for the INGAA Foundation. And what is the INGAA Foundation? 579 MR. DEWOLF: The INGAA Foundation is the -- how can I say -- the funding part of the Interstate Pipeline Association in the United States, so they -- rather than through the association itself, it has set up a foundation where the money is directed, and at that point, retain consultants. 580 MR. FOSTER: I'd like to just clarify that, because INGAA does get funding from their own membership. Aside from the INGAA Foundation, the INGAA Foundation is somewhat independent from INGAA itself, and its members also include manufacturers and -- as well as the pipelines. So that special studies such as this sometimes are funded through the INGAA Foundation, where INGAA itself does work on lobbying for the pipeline industry. Just clarification. 581 MR. JANIGAN: And the acronym stands for the Interstate Natural Gas Association of America; is that correct? 582 MR. FOSTER: Yes. 583 MR. JANIGAN: And I believe Ziff Energy is a foundation member. 584 MR. DEWOLF: Yes. 585 MR. JANIGAN: Now, on page 40, in an account of the report, it noted that: "The report" -- and it's about halfway down the page: "The report also touched on the continuing downward pressure on the price of transportation capacity, noting that the market has changed from one in which a few sellers had incentives to keep the price high to one in which an expanding array of buyers and sellers has competitively bid prices down in all but the most capacity-constrained markets." 586 If you look down further to the second last paragraph, it also notes: "'Investors in new projects are likely to be only those who need the capacity for more strategic purposes, such as producers and capacity merchants, where the overall project is profitable even if the pipeline piece is not. Currently, proposed expansion into the midwest from Canada and the Rocky Mountains is an example of this phenomena. Producers of the major underwriters in efforts to find new premium markets for their gas,' the report observed. 587 "It also noted that distributors and end-users are likely to remain the primary subscribers for segments downstream of market centres or storage, while marketers and capacity merchants should control a growing share of overall pipeline capacity." 588 Now, clearly, this report anticipated that circumstances where, in fact, the pipeline may be uneconomic, or the pipeline portion of an overall project might be uneconomic. 589 MR. FARRELL: To who? 590 MR. JANIGAN: To the ownership. 591 When I ask you -- I asked you a previous question concerning the -- concerning the evidence that you had to back your statement that -- and I will put the statement directly: "I'm not convinced that any of the producers were looking to lose over the long term due to the basis differential being lower than the Alliance pipeline toll on a sustained basis." 592 Would you not agree that this paragraph would seem to contradict that statement? 593 MR. DEWOLF: I don't think so. 594 MR. JANIGAN: Can you explain why. 595 MR. DEWOLF: They are basically saying that in some of the areas, that they are not giving any time frame for this, so I think there is some recognition that there is going to be downward pressure on the transportation price, if you want to say, compared to the differential. And I don't disagree with that. The point is, is it going to be for the long term. 596 And I don't think I would agree with you that owners of a pipeline are going to say, If we are going to build a pipeline, it's going to remain uneconomic for the life of its project. There may be -- and you have to distinguish between some of the owners and producer or an LDC who may be contracting for that capacity. There are a variety of reasons to do that. 597 MR. JANIGAN: Well, Mr. DeWolf, do you agree or disagree with the statements in this report, the Hagler Bailey report that I put to you on page 40? 598 MR. DEWOLF: I'm not disagreeing with their views that in some instances, this might be the case, but they don't put a time frame. And I was specific in mine that in the long term, there are going to be short-term effects. 599 MR. JANIGAN: But they do talk about a proposed expansion into the midwest from Canada and the Rocky Mountains. I would presume that Alliance is caught in that turn of phrase. 600 MR. DEWOLF: I can't say that they specifically stated Alliance or not. It is a pipeline that serves western Canada into that region. It's clear that the differential has dropped below. Was that assumed to occur in '96, that in the long term the differential would be below the cost of transportation, I disagree with that statement. 601 MR. JANIGAN: But there's no study that is available from that time frame that could back up that statement apart from what you've given us? 602 MR. DEWOLF: I gave you one of our studies in 1998, February of '98. 603 MR. JANIGAN: But nothing from '96 though? 604 MR. DEWOLF: No. 605 MR. JANIGAN: Thank you, Madam Chair, those are all my questions. 606 MS. HALLADAY: Thank you, Mr. Janigan. 607 Are there any other intervenors who wish to cross-examine these witnesses? 608 Mr. Farrell, do you have anything in reply? Oh, sorry, Board staff, of course. 609 MR. MORAN: Just a few questions, Madam Chair, if I may. 610 MS. HALLADAY: Thank you. 611 CROSS-EXAMINATION BY MR. MORAN: 612 MR. MORAN: Dr. Foster, I want to just explore the principles or guidelines that I believe you are recommending to the Board for the purpose of testing the prudency of the contracts that we are talking about, two of the guidelines in particular. You talked about the need to understand what the facts were at the time that the decision was taken; right? 613 MR. FOSTER: Yes, sir. 614 MR. MORAN: And to avoid using hindsight in determining those facts. 615 MR. FOSTER: Well, I think it's more than that. I also think it's truly a question of the situation that they were in at the time would have to be studied and make the determination whether it was a reasonable decision at the time. That's somewhat different than saying that, well, let's take today and look at the price differential of that and prove that the decision was wrong. 616 MR. MORAN: Right. And then what falls from that is the use of those facts using what I would term as the reasonable person test in similar circumstances; right? That's again what you are suggesting. 617 MR. FOSTER: The reasonable person test has maybe been overused, but I guess it is useful in the sense that mostly everybody knows what it is, that you've got to look at what a competent utility manager would have done and say well, did he make the right decision based on what he knew at the time and was he excessive, was he unreasonable in making that decision. Those are adjectives that are quite often used in coming up with a reasonable person test or -- or competent manager decision. 618 MR. MORAN: So based on the use of reasonableness or -- we are talking about, in effect, an objective test; right? 619 MR. FOSTER: Objective? 620 MR. MORAN: Yes. 621 MR. FOSTER: Yes, it should be objective. 622 MR. MORAN: So when we talk about the facts that existed at the time, it's fair to say, then, that we're talking about facts that were either known or reasonably ought to have been known to the manager at the time. 623 MR. FOSTER: That's correct. 624 MR. MORAN: Okay. Now, with respect to the contracts that we're actually looking at in this proceeding, we're looking at four different decisions at four different points in time; isn't that correct? Is that your understanding? 625 MR. FOSTER: I believe there are four agreements. I do know that the first and second tranche of the Vector and then there is -- I'd have to review the actual agreements to confirm that there are four of them. I will take that subject to check. 626 MR. MORAN: Fair enough. And subject to check, we've got an agreement for capacity dated in November of '96 on Alliance. 627 MR. FOSTER: Yes. 628 MR. MORAN: And then a subsequent agreement for more capacity on Alliance in November of '97. 629 MR. FOSTER: That's correct, I do recall that now. 630 MR. MORAN: And then the two tranches on Vector that you referred to just a moment ago. 631 MR. FOSTER: Yes. 632 MR. MORAN: So it's fair to say, then, in looking at the application of the guidelines that you are recommending, you'd have to look at the facts in relation to each of these decisions at the time that each of those decisions were made. 633 MR. FOSTER: That's correct. 634 MR. MORAN: So the facts that might exist at decision point, one might be different from the facts that apply at decision point two? 635 MR. FOSTER: Yes. The fact that you had entered into the first agreement in the preceding period may influence the economics that are being entered into in the subsequent period of time. 636 MR. MORAN: So in theory, a decision at one point that might be prudent doesn't necessarily mean that a decision at a subsequent point is equally prudent. You have to look at it based on the subsequent facts that apply to that decision. 637 MR. FOSTER: That's correct. 638 MR. MORAN: And in looking at the facts, would you agree that one of the facts that's appropriate to look at is the relationship between ECG and its parent company, EI? 639 MR. FOSTER: Yes. 640 MR. MORAN: And another fact to look at is the nature of the contract itself, its term and how it compares to the kinds of terms that had been entered into previously? 641 MR. FOSTER: Well, yes, of course, one would have to look at the term and -- but I wouldn't phrase it as you did. I would phrase it as what terms LDCs had to have with new pipelines during that period and they were, in fact, long-term contracts. It wasn't like a rollover contract where you have rights of first refusal. That was not -- you couldn't consider that as a fact in this situation. 642 MR. MORAN: And finally, I take it you will agree that even if a decision is held to be prudently made, it doesn't automatically follow that all of the costs associated with that decision flow through to the ratepayers. 643 MR. FOSTER: I would think that the -- as I indicated earlier in one of my questions, that if a decision was deemed prudently made and that -- and I -- that there is continuing review or responsibility of most commissions, and this Board as well, that the company, in following all the terms and conditions and -- that they have committed to and the commission has approved, that the company still has the ability, some flexibility in subsequent years to keep costs at a reasonable level and those should be reviewed. 644 Just for disallowing a cost after a prudency review, to me, is not fair to the company unless, in subsequent events, the company has not taken steps with the rights of its contract to continue to minimize cost of service while meeting the long-term -- or the needs of its customers. So just to say that the cost is higher than alternative costs is not enough. Incremental -- a company will always have a portfolio of gas supplies. Some will be higher than others by definition. We just can't pick and choose and say well, that one's too high and looks unreasonable. It would be only fair to prove the company hasn't done everything it can to reduce those costs under the best-cost standards, and while continuing to meet its contractual obligations under those terms. 645 MR. MORAN: Now, as I understand it, when somebody wants to get regulatory approval to construct a pipeline, one of the things the regulator looks for is are there any people willing to use that pipeline; correct? 646 MR. FOSTER: One of the -- yes, market is a criteria that the regulators look at in approving projects. 647 MR. MORAN: They don't want to approve a pipeline that nobody is interested in. 648 MR. FOSTER: That's correct. 649 MR. MORAN: So to the extent that ECG signs a contract for capacity on Alliance, presumably that is something that makes it a little bit easier for the Alliance pipeline to get approved; correct? 650 MR. FOSTER: It may. In this particular instance, though, Consumers is such a small portion of the contract capacity on Alliance, I don't think it would make any difference. I think they have contracted for 6 percent of the total. In my experience, before the FERC, that's a relatively small amount and I don't think it's a make-or-break deal. It might influence them but it certainly is not a large percentage of the capacity on that pipeline. 651 MR. MORAN: And of course this pipeline isn't there simply to serve ECG's customers in Ontario, is it? 652 MR. FOSTER: I did not hear you. 653 MR. MORAN: The Alliance pipeline isn't in existence simply to serve ECG's customers in Ontario, is it? 654 MR. FOSTER: Absolutely not. The Alliance pipeline was built to serve the growing market in the midwest and also to serve the markets east of the U.S. north-east -- east of the midwest -- there will be -- there's supposed to be, there was expected to be new pipelines that were constructed like Vector, Crossroads, Millenium, other pipelines that would take gas out of the midwest. The big market was power generation needs which there continues to be. 655 The U.S. market was expected, and I expect has continued to be expected, to reach over 30 Tcf of gas, much of which was gas generation needs. We have entered into a recession; we entered into it six months after Alliance went into effect, and it has very much affected that market, and no one could have anticipated that recession in 1996, unfortunately. 656 MR. MORAN: Thank you. Those are my questions, Madam Chair. 657 MS. HALLADAY: Thank you very much, Mr. Moran. 658 Mr. Farrell, do you have anything? 659 MR. FARRELL: No, I don't, Madam Chair. 660 MS. HALLADAY: The panel have no questions of Dr. Foster and Mr. DeWolf. Thank you very much. 661 I think now is an appropriate time to break for lunch and we will reconvene at 2:00. Thank you. 662 --- Luncheon taken at 12:35 p.m. 663 --- On resuming at 2:03 p.m. 664 MS. HALLADAY: Please be seated. 665 Good afternoon. Before we begin, are there any preliminary matters? 666 MR. FARRELL: I have a few, Madam Chair. 667 MS. HALLADAY: Thank you, Mr. Farrell. 668 PROCEDURAL MATTERS: 669 MR. FARRELL: On Tuesday, after the review of the settlement proposal and in particular in reference to issue 2.5, you asked me if Board staff was involved in the risk management working group and I said that they were. This is at paragraphs 143 and 144 of the transcript for the first day. We've since checked the minutes of that meeting which are filed as Exhibit I, tab 1, schedule 12, and found that Board staff was not present at the meeting, so I apologize for the erroneous advice on the first day. 670 MS. HALLADAY: Thank you. 671 MR. FARRELL: Before introducing the panel, I wanted to just indicate that we have distributed some materials at the back of the room, much like the materials that I distributed or in the same category as the materials that I distributed on Tuesday, for the examination-in-chief of this panel. So when the -- what we have made available for panel number 4, which deals with issue 5.3, is a schematic called "Information Flow" to which are appended certain of the reports for illustrative purposes that are referred to in the schematic, and we'll make sure that you and your colleagues have copies. That's for that panel. 672 We have filed with the Board today, and are serving parties and made copies available at the back of the room, a revised attachment to Exhibit I, tab 3, schedule 44. That document is the agency agreement between Enbridge Consumers Gas and Enbridge Inc. that deals with the gas services component of the affiliate outsourcing. And as indicated, I can't remember on the response to what interrogatory, the revision includes the protocols for transactional services in particular and there are corresponding changes. So that has been filed with the Board today. 673 In addition, at the back, we've put a white document entitled "Scheduled Agency Agreement," just like the blue document. This has been a revision marked so that when parties are trying to compare the updated version versus the old version, they don't have to read it line for line, they can just rely on this revision marked "copy" which indicates all of the changes we have made. We thought that would facilitate matters. 674 For panel number 5, that panel next week will be dealing with issues 2.3 and 2.4; this is full system gas cost allocation matters. There are two documents at the back which we will use during the course of the direct examination. One is entitled "Comparison of Cost Recovered from System Gas and Direct Purchase Customers," and the other is an overview of agent billing and collection service, or what is commonly called ABC-service. 675 MS. HALLADAY: Mr. Farrell, do you propose to introduce these documents as exhibits now or as we're going through? 676 MR. FARRELL: As part of the direct examination, I would then have them introduced; for example, when I introduce this panel, we will be dealing with the documents that I distributed on Tuesday and it would be when they identify it and adopt it, then I would propose that they be introduced as F.2. whatever we're at. I guess the first one would be F.2.2 and so on. 677 MS. HALLADAY: Right. 678 MR. FARRELL: And in that regard, Madam Chair, we now have or we put at the back of the room one of the ones that was handed out on Tuesday and was called "Alliance-Vector," one schematic, and it was just black and white. We now have colour copies so it makes a little easier when Mr. Brennan will take you through it, and I think Mr. Moran has copies for the panel. 679 In addition, I think Mr. Moran is handing to you a document that says, "Alliance Pipeline Ltd. Estimated Yearly AOS Capacity," which is a graph. This document wasn't handed out on Tuesday, it's taken from the response to Exhibit I, tab 2, schedule 63, and it's attached to I think it's appendix 3 or appendix 4 to that response. So it's already on the record. We just thought it would be easy for you to have it available when Mr. Brennan is taking you through the colour schematic. 680 MS. HALLADAY: Thank you. 681 MR. FARRELL: So this panel, I'll introduce the witnesses to you. 682 Sitting closest to the Board is Janet Holder. Ms. Holder is vice-president of operations. Her CV appears at Exhibit A, tab 6, schedule 3, pages 1 and 2. Next to Ms. Holder is Frank Brennan. Mr. Brennan is director, energy policy and analysis. His CV is found at Exhibit A.6.1, page 4. Next to Mr. Brennan is Don Small. Mr. Small is manager, gas costs and budget. His CV is found at Exhibit A, tab 6, schedule 1, page 23. And to his right is Mr. Arunas Pleckaitis. Mr. Pleckaitis is vice-president, opportunity development. His CV is found at Exhibit A.6.3, pages 4 and 5. 683 Perhaps these witnesses, I think with the exception of Mr. Small, need to be sworn or affirmed. 684 MS. HALLADAY: Thank you, Mr. Farrell. 685 ENBRIDGE CONSUMERS GAS - PANEL 3 686 J.HOLDER; Sworn. 687 F.BRENNAN; Sworn. 688 A.PLECKAITIS; Sworn. 689 MR. FARRELL: Just a moment, Madam Chair. 690 Madam Chair, we are presenting this witness panel to testify in relation to all of the written evidence and interrogatory responses including the reply evidence and responses to CAC's interrogatories on the reply evidence in advance of Mr. Stauft's appearance. Our reasons here are the same as they were for Dr. Foster and Mr. DeWolf, and we accordingly preserve our right to recall any of these witnesses after Mr. Stauft's testimony is complete. 691 EXAMINATION BY MR. FARRELL: 692 MR. FARRELL: Ms. Holder and gentlemen, the evidence relevant to issue 2.1 is listed in the settlement proposal at page 12. Were the "A" and "I" series of exhibits that bear all of your names prepared by you or under your direction or control? 693 MS. HOLDER: Yes. 694 MR. BRENNAN: Yes. 695 MR. SMALL: Yes. 696 MR. PLECKAITIS: Yes. 697 MR. FARRELL: And are those exhibits accurate, to the best of your knowledge or belief? 698 MS. HOLDER: Yes, they are. 699 MR. BRENNAN: Yes, they are. 700 MR. SMALL: Yes, they are. 701 MR. PLECKAITIS: Yes. 702 MR. FARRELL: Mr. Small, were the "D" and "M" series of exhibits prepared by you or under your direction or control? 703 MR. SMALL: The ones pertaining to gas costs, yes. 704 MR. FARRELL: Just the ones that are listed in the settlement proposal. And are these exhibits accurate, to the best of your knowledge or belief? 705 MR. SMALL: Yes, they are. 706 MR. FARRELL: Ms. Holder, you are now ECG's vice-president of operations? 707 MS. HOLDER: Yes. 708 MR. FARRELL: Could you outline briefly your responsibilities. 709 MS. HOLDER: I currently have responsibilities for sales, operations, and storage at Tecumseh for Enbridge Consumers Gas. I also have complete responsibility for St. Lawrence Gas and Gaz Affaire [phoen]. 710 MR. FARRELL: And you were director, gas supply, in 1996? 711 MS. HOLDER: Yes, I was. 712 MR. FARRELL: And you were involved in ECG's decision in November 1996 to acquire firm transportation or FT-service from Alliance for a daily volume of 50 million cubic feet per day? 713 MS. HOLDER: Yes, I was. 714 MR. FARRELL: And you were vice-president, energy services, in 1997. 715 MS. HOLDER: Yes. 716 MR. FARRELL: And were you involved in ECG's decision in November 1997 to increase the FT-service with Alliance by 25 million cubic feet a day to 75 million cubic feet a day? 717 MS. HOLDER: Sorry, the date was 1990 -- 718 MR. FARRELL: November 1997, when you were vice-president, energy services. 719 MS. HOLDER: Yes. 720 MR. FARRELL: Your CV indicates that you were an ECG witness in the National Energy Board's GH-3-97 hearing. 721 MS. HOLDER: Yes, I was. 722 MR. FARRELL: And that was the hearing of Alliance's facilities application. 723 MS. HOLDER: Yes, it was. 724 MR. FARRELL: You were vice-president, market development, and then vice-president, market development and supply in 1999. When did you add supply to your responsibilities? 725 MS. HOLDER: In November 1999. 726 MR. FARRELL: I take it, then, or should I, that you were not involved in ECG's decision in June 1999 to acquire FT-service from Vector for 96,000 decatherms per day. 727 MS. HOLDER: That's correct. 728 MR. FARRELL: But you were involved in ECG's decision in December 1999 to acquire a second tranche of FT-service from Vector for 79,000 decatherms per day. 729 MS. HOLDER: Yes. 730 MR. FARRELL: And also in ECG's decision in December 1999 to enter into the so-called put-call arrangement with Enbridge Inc. in relation to the second tranche. 731 MS. HOLDER: Yes. 732 MR. FARRELL: Mr. Brennan, you are ECG's director, energy policy and analysis? 733 MR. BRENNAN: Yes, that's correct. 734 MR. FARRELL: And you were ECG's manager, gas supply planning from 1990 to 1999? 735 MR. BRENNAN: Yes, that's correct. 736 MR. FARRELL: And in 1999, you became director, gas supply services? 737 MR. BRENNAN: That's correct. 738 MR. FARRELL: Your CV indicates that you were also an ECG witness in the National Energy Board's GH-3-97 hearing of the Alliance facilities application. 739 MR. BRENNAN: Yes, that's correct. 740 MR. FARRELL: Do you have a copy of the decision tree Alliance-Vector 1 that was distributed on Tuesday? 741 MR. BRENNAN: Yes, I do. 742 MR. FARRELL: Did you prepare it? 743 MR. BRENNAN: Yes, I did. 744 MR. FARRELL: Would you please lead us through it. 745 MR. BRENNAN: Certainly. 746 The purpose of having this decision tree was just to outline the decision process that went on at ECG prior to ECG entering into the Alliance and Vector contracts. 747 The overriding reason was that we had an incremental demand of 50 million cubic feet a day of additional capacity that we needed. 748 At that time, we looked at three -- there were three alternatives out there. If you look at the top of the chart there, on the left-hand side is a traditional path, which is the TCPL-Nova route. In the middle was the Chicago-Dawn option, and the third over on the right-hand side is the new path, which is the Alliance-Vector 1 path. 749 MR. WARREN: Sorry, Madam Chair, I don't have the exhibit that the witness is referring to. We have a time line tree. 750 MR. FARRELL: All three of them were handed out on Tuesday. 751 MR. MORAN: Perhaps we should mark them as exhibits -- 752 MS. HALLADAY: That's where we were heading, Mr. Moran. 753 MR. FARRELL: I was going to let Mr. Brennan finish and then give this an exhibit number and then move to the other ones, yes. 754 Do you want to mark it now? That's fine. 755 MS. HALLADAY: Sure. Why don't we mark it, and then we can refer to it. 756 MR. FARRELL: So the decision tree would be F.2.2 757 MR. MORAN: That's right. 758 EXHIBIT NO. F.2.2: DECISION TREE 759 MR. FARRELL: Why don't we mark them all, and then we know what we have. 760 And then the next document I'll ask Mr. Brennan about is the Alliance-Vector 1 schematic, the colour-coded one. 761 MR. MORAN: F.2.3. 762 EXHIBIT NO. F.2.3: ALLIANCE-VECTOR SCHEMATIC 763 MR. FARRELL: The next document -- well, the document he will use in conjunction with F.2.3 is the portion of a document already filed, but maybe for convenience of reference, we should just give it a number. 764 MR. MORAN: That's the diagram entitled, "Alliance Pipeline Limited Estimated Yearly AOS Capacity," and that would be F.2.4. 765 EXHIBIT NO. F.2.4: DIAGRAM ENTITLED "ALLIANCE PIPELINE LIMITED ESTIMATED YEARLY AOS CAPACITY" 766 MR. FARRELL: Then finally there is the document that Mr. Warren referred to, which is just called "Time Line." 767 MR. MORAN: F.2.5. 768 EXHIBIT NO. F.2.5: DOCUMENT ENTITLED "TIMELINE" 769 MR. FARRELL: Sorry for the confusion, Madam Chair. 770 MS. HALLADAY: No problem. 771 MR. FARRELL: Mr. Brennan? 772 MR. BRENNAN: Maybe I will just back up a little bit now that everyone has a copy of the decision tree. 773 So right at the very top, the overriding concern or desire was to increase our capacity, because we had an incremental demand of 50 million cubic feet a day. 774 And the three options or alternatives were the traditional path which is the TransCanada-NOVA path, the Chicago-Dawn option for a new path called the Alliance-Vector 1 path. And what I've tried to do here is outline the different aspects of those different alternatives that led to our decision to enter into the Alliance contract itself. 775 Starting off on the left-hand side with the traditional path, there was certainly some uncertainty around whether or not TransCanada was going to expand and if they were going to expand. During that time frame, there was the notion that they were going to come forward with the Nexus project. That changed several times throughout the process. 776 It was a high pressure line. It was going to go initially from Empress in Alberta all the way to eastern Canada. Then I believe after that it got changed to only a high pressure line from Empress to Emerson and then another line down into the Chicago market. 777 We viewed the TransCanada route, as our analysis showed, that it was going to be more expensive than the Alliance route over the longer term. 778 With respect to the Chicago-Dawn option, it was not the company's -- it wasn't the company's policy -- or not policy, but practice, I should say, to contract for delivered supply to meet the long term. 779 We've always relied on holding long-term transportation essentially right back to the supply basin. And in this case, as far as the Chicago is concerned or even Dawn, at that time our view was that those were not liquid trading points at that time, at least not in 1996. 780 And there was also a potential for a greater cost volatility in buying delivered supply, if you like, in that you can see that back in December of 2000, prices were up around $10, and yet in October of 2001, they were down to $2.50. And we viewed not having a physical piece of pipe as being less reliable than having a physical piece of pipe. 781 And the new path, as far as Alliance-Vector, for several reasons, we thought that provided diversity in terms of our transportation routes that we had, because up until that point, we only had the one path, which was the TransCanada system. 782 So in having that diversification, it provided a few things for us. It provided us, obviously, security of supply. It also provided us with a competitive alternative to TransCanada. 783 And as well, it also allowed us to mitigate any UDC costs in the extent that there was some unutilized capacity. 784 And finally, in our view, it was that it was less expensive than the TransCanada alternative over the long term. 785 So based on those -- or this assessment, it was our choice, then, to -- decision to go and contract for the first 50 million cubic feet a day of Alliance capacity. 786 Then, in November of 1997, there was an opportunity for us to increase that capacity by another 25 million cubic feet a day. So at that time, in November of 1997, we were preparing our application for the National Energy Board for our approval of the Alliance contract that we had. At that time, we were looking at our demand requirements over that time frame. 787 So we had an updated demand that indicated that we had an incremental requirement, not just for 50 million a day, but out to 2000, 2001, you could absorb up to 99 million cubic feet a day of additional capacity. And at the same time, Vector was also an alternative route at that point that had the capacity to be able to move that additional 25 million if you like. So based on that, we decided to enter into or in fact amend the Alliance contract to include the additional 25 million cubic feet a day. 788 Then in 1999, we had to make a decision how to move gas from Chicago to Dawn. Maybe I should just back up a little bit. When we made the decision in November of 1996, we had an alternative to move gas from Chicago through to Dawn and that option was a combination of three pipeline. It was the A&R pipeline, it was the MichCon pipeline and it was the Link pipeline. But subsequent to us entering into that present agreement with Alliance, A&R withdrew that offer to us and at that point, then we were then looking at other alternatives to move gas from Chicago to Dawn which then led us to the four alternatives that you see at the bottom of the page here. And those four alternatives were to do a Chicago-Dawn exchange or a swap as it's been called, look at the Vector pipeline, the TriState pipeline, or again A&R at that point in time came back with another alternative which was again close to their initial offer to us which included the A&R, MichCon and Link pipelines. 789 And looking at the Chicago-Dawn exchange, we felt that there was going to be a lot of volatility in price from year to year and when you go out and buy the swap or do an exchange. We felt it was less reliable than having the single pipeline through our market. The other thing too was how that swap would be priced, and it would basically be priced on T-service values which you may know over the short term, but if you're trying to contract or turn gas or longer term gas being greater than one year, then you are probably going to have to pay a premium for that. 790 As far as the Vector pipeline, we felt this was a good option because it provided a single pipeline connection from Chicago straight through to Dawn. Therefore, we felt it would be more reliable. And it was less expensive than either the TriState or the A&R, MichCon and Link alternatives. 791 With the TriState, while it also provided the single pipeline connection between Chicago and Dawn, it was more expensive than the Vector alternative. And finally, the A&R, MichCon, Link, it consists of multiple pipelines. So again while it was more reliable than a swap, it was more complex to the extent that it meant you had to deal with more than one pipeline, you were dealing with essentially three pipelines. And again, even in addition to that, it was even more expensive than the Vector alternative as well. 792 So based on that, it was our decision to enter into a present agreement with Vector on June 1st 1999 for the first tranche of the Vector capacity. 793 MR. FARRELL: Thank you, Mr. Brennan. Do you have a copy of the Alliance-Vector 1 schematic which is now Exhibit F.2.3? 794 MR. BRENNAN: Yes, I do. 795 MR. FARRELL: And together with it, I understand you are going to use in your explanations the AOS document which is F.2.4. You didn't prepare the Alliance 1, that's my understanding, that was prepared by Alliance. 796 MR. BRENNAN: That's correct. 797 MR. FARRELL: But you did prepare the schematic F.2.3? 798 MR. BRENNAN: Yes, I did. 799 MR. FARRELL: Would you please explain what we have here. 800 MR. BRENNAN: Certainly. What we tried to do here was -- you will probably be hearing over the course of cross-examination a lot of numbers being thrown out and different units and everything else. What I tried to do in this schematic was to provide the different units and numbers and try and try to put them in perspective so both Board members and intervenors can follow that. So what I've shown here on the top left is the inlet to the Alliance pipeline, and the Alliance pipeline is unique in that it not only offers firm transportation, it also offers us the opportunity to take advantage of something called authorized overrun or AOS. And I'll explain that in a minute. 801 In addition to that it also allows us to move gas that we've called rich gas, which means that it has a higher heat content than most traditional pipelines. Just coming back to the AOS-service, the AOS-service comes about due to the fact that the contracting capacity on the Alliance pipeline is just over 1.3 Bcf a day but the actual capacity is in excess of that. So that additional excess capacity is allocated to the firm shippers as authorized overrun service. And the only charge that shippers have to pay for moving that AOS is the fuel to move it from in Alliance down to Chicago. 802 Going back to the table though, on the left-hand side you will see our base supply. That base supply was 75 million cubic feet a day, this is after we took the increase of the 25 million, and if I expressed that in terms of decatherms, and to make that conversion I had to assume the heat content of the gas in the Alliance pipeline. And that conversion was 1070 BTUs per cubic foot and that takes me to the 80,250 decatherms a day. And if I expressed that energy, if you like, in gigajoules per day it results in 84,668 gigajoules jewels per day. 803 Moving over a bit to the right, what I've shown there is a series of tables that look at the different levels of the AOS-service that can be provided on the Alliance pipeline. And maybe before I go any further I will refer you to Exhibit F.2.4 which is the Alliance pipeline estimated nearly AOS capacity. That diagram shows more or less the distribution that we would expect to get for AOS over the course of the year. And you can see throughout the winter period, it's up to almost 25 percent of your contracted capacity would be available as AOS, and during the summertime it would be down around just over 11 percent. 804 So what I've shown then going back then to F.2.3, if I look at the -- maybe -- I'm sorry. On an annual average basis, AOS would be 16 percent, and that's shown by the solid horizontal line on the Exhibit F.2.4 805 So the annual average of 16 percent resulted in an additional volume of 12 million cubic feet a day. And again, if I use the conversion factor of 1070, I come up with 12,840 decatherms a day, and the corresponding number in gigajoules per day. 806 And if I do that for the remaining three alternatives there, which is the winter max of 25 percent, summer of 11 percent, and the winter average of 20 percent, so if I just look over the winter period, it's approximately 20 percent. 807 So all this gas is going into the Alliance pipeline at the top end, and it's being moved through the Alliance pipeline. So our contracted capacity is 75 million on the Canadian side, but FERC requires that rates be expressed in terms of energy on the U.S. side, so then they have to convert that to energy. 808 And the conversion factor that they use is something a little different than I had. They used 1095 BTUs per standard cubic foot. 809 When the gas moves through the Alliance pipeline, it arrives in Chicago. There, the gas is first -- what's called natural gas liquids or NGLs are extracted from the gas stream, and then those natural gas liquids are then fractionated into the different components, those being propane, butane, pentane, and so on. 810 So what then you are left with is lean gas, but you what in exchange for those natural gas liquids is an equivalent energy amount of lean gas in Chicago. 811 Therefore, can you see that if you look at the green numbers, the volume that is going through Alliance, the 80,250, and if you add, for example, the 20 percent AOS during the winter period, you would get the 96,000 decatherms a day that's shown under the Vector pipeline. So that's our contract capacity for Vector 1. 812 Now, there is the whole issue, I guess, of what happens when you get different amounts of AOS throughout the year, because that number will change nearly on a day-by-day basis. 813 So for example, in the wintertime, when we get something like 25 percent AOS, you'll be moving a number of around -- again, I'm sticking to the green numbers here -- you are going to get 20,063 decatherms a day, and if you add that to the 80,250 of your base supply, you are going to get about 100,000 decatherms a day. 814 That's an excess of the 96,000 that we have contracted from Vector 1. In that case, that additional supply will be used either for using for fuel on Vector, or it will be sold into the Chicago market. 815 On the other hand, when you are in the summer, when you are only getting 11 percent AOS, then you would add the corresponding green numbers, those being 8,828 and 80,250, and you would get 89,078. 816 And then that would be a shortfall of being able to fill the Vector 1 capacity. Then in that case, you would be purchasing gas in the Chicago market to fill Vector 1 capacity. 817 MR. FARRELL: Do you have a copy of the document that's entitled "Time Line," Exhibit F.2.5? 818 MR. BRENNAN: Yes, do I. 819 MR. FARRELL: And was that prepared by you? 820 MR. BRENNAN: Yes, it was. 821 MR. FARRELL: Would you briefly describe it. 822 MR. BRENNAN: Yes. What we tried to do, there is going to be a lot of dates being thrown around in the course of cross-examination. What we tried to do here was just sort of highlight some of the major dates in terms of when projects were announced, when present agreements were signed, and when transportation agreements were signed. 823 So what we've done here is just listed some of the major ones to help people put things in perspective in terms of a time line as to when things happened. 824 MR. FARRELL: Thank you, Mr. Brennan. I forgot to ask you one question at the outset, which was, would you please briefly just outline your responsibilities as director, energy policy and analysis. 825 MR. BRENNAN: I'm responsible for upstream regulation. I'm also responsible for administering the service level agreements that we have with Enbridge Inc. and with Enbridge Operations Services. 826 MR. FARRELL: Thank you. 827 Mr. Small, you are ECG's manager, gas costs and budget. 828 MR. SMALL: That's correct. 829 MR. FARRELL: Would you please outline briefly your responsibilities. 830 MR. SMALL: My responsibilities include the preparation of the gas cost budget for the company that gets filed as part of its main rate case, and then any supporting testimony and answering of any interrogatories. 831 We would also -- I'd also be responsible for any updates to that budget that could come in the form of updates during the hearing itself. These updates would be -- could be for volume changes or for changes in natural gas prices. 832 I'm also responsible for putting together the gas cost related to the quarterly rate adjustment mechanism or QRAM that you would see as mid-term or mid-year filings. 833 My responsibilities also include overseeing the verification and the booking of gas costs on a monthly basis. That would be our actuals that would appear in the books of the company. 834 And also responsibility would be for entries into the various gas supply deferral accounts, and that would include the purchased gas variance account. 835 MR. FARRELL: Thank you. And you are responsible for the notional deferral account that was established in last year's settlement proposal? 836 MR. SMALL: Yes. 837 MR. FARRELL: And that is, for the record, Exhibit D.2, tab 2, schedule 4. 838 MR. SMALL: That's correct. 839 MR. FARRELL: Mr. Pleckaitis, you are ECG's vice-president, opportunity development? 840 MR. PLECKAITIS: Yes, I am. 841 MR. FARRELL: Would you briefly outline your responsibilities. 842 MR. PLECKAITIS: My responsibilities include general policy direction, strategy for gas supply for Consumers Gas. That's the reason that I'm here for this panel. I also am involved in market development for Consumers Gas, technology research, and also have the responsibilities as president of Enbridge Gas New Brunswick, our gas distribution company in New Brunswick. 843 MR. FARRELL: Thank you, Mr. Pleckaitis. 844 Ms. Holder, would you please summarize ECG's position on this issue. 845 MS. HOLDER: Okay. We do believe that ECG's management was prudent in taking the decision to sign the contracts for transportation on Vector and Alliance. I think it's important we go back to the time that we were at when we were making those decisions. We were seeing or experiencing a very strong market growth over the past five years and we were expecting to see that growth continue on a go-forward basis. So there definitely was a need for us to find supply into our market. 846 Also, at the time, one of our gas supply objectives was to acquire services from the transportation or services from a transporter that could help us diversify our gas supply portfolio. Basically, what we were referring to here is reduce our reliance on a single source of supply such as the traditional path of TransCanada. 847 It is our view that the Vector and Alliance transportation could provide us with the gas into our market, provide the diversification we were looking for and at a competitive price for gas delivered to our markets. 848 Now, the diversity of the supply portfolio really does deliver to us three other key values that may be a little more difficult to quantify. First of all, it does increase the security of supply into our market which is good for our ratepayers. Second, it provides us a means of mitigating excess supply when there's a change in market demands such as a slow down in economy or warm weather. Again, that is to the benefit of our ratepayers. And the third is that it does encourage competition between TransCanada and other pipeline companies or other transmission companies, and again that should be to the benefit of our ratepayers. 849 MR. FARRELL: Do you wish to comment on the cost differential between the two paths from western Canada? 850 MS. HOLDER: Yes, we had agreed to track the notional difference in cost between our traditional path, the TransCanada path, and the new path which is the Alliance-Vector path in a notional account. We believe that these costs, for all the reasons given in our evidence, are reasonable and therefore should be recovered in rates. 851 MR. FARRELL: Thank you. 852 I have no further questions of this panel Madam Chair. They are available for cross-examination. I will point one thing out, though. I thought that -- it may have been filed already. The witnesses were aware of the change when they said the evidence was accurate, but in Exhibit A, tab 14, schedule 9, which is the ECG's reply evidence, the bullet at the top of the page has all the right words but they are in the wrong order and so we have filed or are in the process of filing a change to the page. I don't think much turns on it. It just refers to the decision to enter into the put-call arrangement with Enbridge Inc.. 853 As I say, somehow the gremlin in the word processor scrambled it, so if you read it the way it's written, it wouldn't make much sense. But I think people would get the gist of it. So a revised page is on the way so that the record would be complete. I just wanted to point that out. 854 MS. HALLADAY: Thank you, Mr. Farrell. 855 Mr. Warren. 856 CROSS-EXAMINATION BY MR. WARREN: 857 MR. WARREN: Mr. Small, can you tell me what the value, in dollar terms, was of the Alliance contract you entered into, the first of the Alliance contracts in 1996, on an annual basis? How much did it cost? 858 MR. SMALL: Back in 1996? 859 MR. WARREN: Yes. The original contract with Alliance, that's Alliance 1 in November of 1996. 860 MR. SMALL: I have no idea. I didn't get involved into looking into any of the costs until the agreements had already been reached, and then including those forecasted costs as part of our 2001 rates. 861 MR. WARREN: Mr. Brennan, do you know the answer? 862 MR. BRENNAN: You are talking about what the toll was times the volume? 863 MR. WARREN: Right. 864 MR. BRENNAN: I don't know offhand, but I think we probably have it in our evidence here in terms of gas costs. 865 MR. WARREN: You don't need to turn it up now, but can I get an undertaking to get me the number -- can we agree -- sorry, can I get an undertaking to get me the number, please. 866 MR. MORAN: That would be G.2.1, Madam Chair. 867 UNDERTAKING NO. G.2.1: TO PROVIDE THE VALUE OF THE FIRST ALLIANCE CONTRACT ENTERED INTO 868 MR. FARRELL: I would just point out that the contract in 1996 was a precedent agreement with a pipeline that had yet to apply for facilities. So by definition, they didn't have tolls in place from which one could calculate the so-called value. 869 What I think we would do in the undertaking, would get the value as we estimated the tolls to be in the decision-making process, if Mr. Warren wants that number for 1996. 870 MR. WARREN: Thanks. 871 Can we agree, Messrs. Brennan and Small, that it was a big number, many, many millions of dollars? 872 MR. BRENNAN: Yes, it was. 873 MR. WARREN: Okay. Now, unfortunately, this is a little bit out of order, Mr. Brennan, but your testimony-in-chief from the last few minutes has led me to the concern that I don't have a complete record, and I want just to make sure that I have got a complete evidentiary record. 874 You said -- and in connection with this, I'd like you to have Exhibit F.2.2, which is the decision tree, and I'd also like you to turn up an interrogatory response to my client, which is Exhibit I, tab 2, schedule 63. 875 MR. BRENNAN: I have that. 876 MR. WARREN: Now, in that interrogatory, the CAC asked you to: "Please provide all studies, reports, notes, and any other written material whether internal to ECG or otherwise relied on/considered in relation to, or in support of the following: 1) The decision in November 1996 to acquire firm transportation service from Alliance Pipeline Limited Partnership and Alliance Pipeline LP." 877 Now, in response to that, was with respect to qualifications about what was "readily available," you produced four documents, which are listed below. 878 Now, in your examination-in-chief just a few moments ago, you said, apropos, the decision tree F.2.2, that your analysis showed that "the traditional path TCPL would be more expensive than Alliance over the longer term," and that's what is reflected on this document. 879 Now, in Exhibit I.2, tab 2, schedule 63, the first of the attachments, appendix 1, is a memo from Mr. Otsason to, among others, Ms. Holder. Do you have that? 880 MR. BRENNAN: Yes, I do. 881 MR. WARREN: Now, at the bottom of the first page, Mr. Otsason says: "Since a number of the adjustments which enhanced the economics of the Alliance route are certain to occur to some degree, my expectation is that the most likely outcome will be that the Alliance route will have a cost which is slightly higher but within 5 cents a gigajoule of the cost of the TCPL route." 882 Do you read that? 883 MR. BRENNAN: Yes. 884 MR. WARREN: Now, I have not been, in response to my interrogatory, provided with any other analysis, and yet your testimony a moment ago said that your analysis was that TCPL would be more expensive than Alliance over the longer term. 885 Where is the analysis you are referring to? 886 MR. BRENNAN: If you carry on in that particular exhibit, which is the Exhibit I, tab 2, 63. Carry on with Mr. Otsason's letter. You will see an attachment to that, and there is a table that shows the comparison between the TransCanada-like NOVA route, versus the Alliance -- and it wasn't Vector at that time, but it was the A&R MishCon link. 887 And if you look at that, it shows that there was a cost difference, if you like, in favour of the Alliance route of some 12.2 cents. 888 MR. WARREN: All right. 889 MR. BRENNAN: That's the saving that I am talking about. 890 MR. WARREN: Then why would Mr. Otsason say that it was 5 cents more expensive a gigajoule? 891 MR. BRENNAN: Well, I suspect that this table was done prior to him writing the memo, so I guess I can only speculate that he was looking at some of these numbers and saying, Okay, well, some of these may materialize, some may not. So I think he was making a judgment call. 892 MR. WARREN: Now, let's just stay with the table that you've shown me. 893 MR. FARRELL: Just a moment. 894 Sorry, Mr. Warren. 895 MR. BRENNAN: Sorry. Maybe just to go back and reiterate that. If you go back to page 1 of the memo from Mr. Otsason to Mr. Dan, to Ms. Holder, you'll see on the transportation economics, what we've shown here is what, in the second, third line, are -- it says: "Transporting western Canadian gas to our market will be in the year 2000." 896 So what he was referring to there, my guess would be that he was referring to the first year of service, not necessarily over the long term. 897 MR. WARREN: Who prepared the chart which is attached to Mr. Otsason's memo? 898 MR. BRENNAN: I'm not sure. I don't know. 899 MR. WARREN: Now, when I look at that chart, I see two figures at the bottom of the page, which is -- and can you explain to me what those figures mean under the -- you've got NOVA- TCPL, and Alliance, A&R, Link, TCPL. 900 What are the two comparisons? And let me explain my confusion, because when I look at the bottom line, if you wish to use that cliche, the TCPL route looks to be some 24 cents cheaper than the Alliance route. 901 MR. BRENNAN: If you take a look at the numbers on the bottom, they are comparing the base case which includes NOVA and TransCanada and that works out to be $1.416, and you are right, on the other side it's $1.65. And those numbers are brought up to the top as the base case and that difference, as you said, is 23 cents. Then if you go through the adjustments, after you go through the adjustments, then there is a shift away from the TransCanada route to the Alliance route in favour of the Alliance route of some 12.2 cents. 902 MR. WARREN: Now, the figures that we've got for the adjustments, the incremental TCPL, what's "exp" stand for? 903 MR. BRENNAN: Expansion. 904 MR. WARREN: What figure does that represent? 905 MR. BRENNAN: It was expected that if the Alliance pipeline didn't go, TransCanada would have to expand. 906 MR. WARREN: And has it in fact expanded? 907 MR. BRENNAN: Well, at the time, there was the Nexus project that was planned, so definitely the Nexus project was there. They were looking to expand by 2.3 Bcf a day. That's what that represents, that -- it would have to be an expansion of the TransCanada system that would increase the TransCanada route by some 6.3 cents. Not only that, but it would also have to expand the NOVA system in order to be able to heat the TransCanada system, and that would be an additional expansion and our estimate was 1.2 cents. 908 MR. WARREN: What was the source of that estimate? 909 MR. BRENNAN: Based on information of prior expansions of both of those systems. 910 MR. WARREN: And did, in fact, those increases ever take place? 911 MR. BRENNAN: Did these costs ever take place? 912 MR. WARREN: Yes. 913 MR. BRENNAN: There had been expansions on TransCanada. Whether it's for these same volumes, I can't tell you. I don't think -- obviously TransCanada did not expand the 2.3 Bcf, no. 914 MR. WARREN: Now, the second question I wanted to ask you, just following up from your examination-in-chief, was -- 915 MS. HOLDER: Excuse me, Mr. Warren, I apologize, but I just want to make sure that everybody understands that there was a need for market -- or for supply for the market in Ontario. Had Alliance-Vector not been built, something had to have been built. Either that or we would have been telling customers, no, you can't add to our system; no, you can't grow your demand. So there definitely was a need for supply in Ontario. Without Alliance-Vector, there would have been -- if it wasn't TransCanada, it would have been something else, so there still would have been an increase in costs. 916 MR. WARREN: Well, Ms. Holder, you can understand the confusion, can you not, when you've got a memo which says -- and it goes to you. 917 MS. HOLDER: Yes. 918 MR. WARREN: Which says that the Alliance route will have a cost which is slightly higher but within 5 cents of the costs of the TCPL route and attached to that is a document which appears -- according to what Mr. Brennan says, nobody knows who produced it or when it was produced which gives a different answer. You can understand the confusion, can you not? 919 MR. FARRELL: Just a correction, Mr. Warren. The bottom of the table shows when it was produced. 920 MR. BRENNAN: Mr. Warren, if you go back to the first page -- 921 MR. WARREN: Am I right, Mr. Brennan, that we don't know who produced this chart? 922 MS. HOLDER: This chart was produced by either Juri or people who work for Juri -- Mr. Otsason or people who worked for Mr. Otsason at the time. 923 MR. WARREN: So what's the explanation for the apparent contradiction between the text of the memo and this chart? 924 MR. BRENNAN: I think if you look at the first page you'll see -- again, in the bottom paragraph there, you say that the Alliance route -- sorry. "This approach will result in a range of results showing the Alliance route as being 23 cents a gJ more expensive to 12 cents lower cost than the TCPL alternative." That ties in, in my mind, to this table. 925 MR. WARREN: Okay. Then let's stay with that, Mr. Brennan, because if it ties into the table, somehow Mr. Otsason must have distilled that to reach the conclusion which appears six lines below, that it's going to be 5 cents more expensive. This is -- excuse me, panel, I just want to preface the question. This is a multi-million dollar investment by your company and you've got a memo here which, frankly, I don't understand because it appears to have contradictory data. But am I wrong in reading it that Mr. Otsason appears to have taken the range and concluded that it's going to be 5 cents more expensive? 926 MS. HOLDER: I think we are, in all honesty, trying to help here. I think it's important that yourselves and the Board members do understand that we did take this situation very serious at the time and did a complete analysis. I will preface my comments by saying we did forewarn that we didn't -- we couldn't produce every single piece of document and note and conversation that was used to come to the decision, but we do believe what we have provided here reflects everything that was used in making our decisions. 927 When we talk about the 5 cents, I think, as Mr. Brennan was trying to explain, we were referring to the first year, the year 2000. Again, it's not all in one document. But you have to also look at the longer term Alliance has a fixed toll which likely will not change -- or has just some minor escalations in that toll through the 15 years of the contract. If you look at a TransCanada route, which was an alternative force at the time, TransCanada tolls continually increase through time as the pipeline expands. So we can't look at this as just one year which is what that 5 cents was referring to, you have to look at the broad picture and the value of the 15-year contract. 928 MR. WARREN: So am I to conclude then that looking at the value of the contract over 15 years, that the 5 cents more expensive is the correct number? 929 MS. HOLDER: I think what we're saying is the 5 cents only represented one year. We did not believe that that would be the difference between the TransCanada traditional route and Alliance for the longer term. And I think that is the analysis presented on the chart that's attached. 930 MR. WARREN: May I suggest with respect, Ms. Holder, that you are speculating about now, after the fact, about what this memo means; is that not fair? 931 MS. HOLDER: That's not fair. I am not speculating. I was very much involved with this memo and the information at the time. 932 MR. PLECKAITIS: Mr. Warren, if I could add to that, and I wasn't party to this decision, but reading this memo afterwards and talking to the people, I think the memo is very clear, that the recommendation that's being made is a clear one, that the best alternative for ECG is to pursue the Alliance route. 933 MR. WARREN: Mr. Pleckaitis, were you involved in any of the analysis which is reflected in this? 934 MR. PLECKAITIS: No, I was not. 935 MR. WARREN: Thank you very much, Mr. Pleckaitis. 936 Could I then return, Mr. Brennan, to Exhibit F.2.2 to the bottom of the page where you talk about the Chicago-Dawn exchange and you talk about the volatility in price from year to year, as I take it, a concern which made it less attractive than the Vector alternative; is that right? 937 MR. BRENNAN: That was one of the reasons, yes. 938 MR. WARREN: Now, again, if I go to Exhibit I, tab 2, schedule 63, and I look at a memorandum which was done. This is appendix 3 to that, members of the panel. This is a memorandum which was done from the 21st of May, 1999, from Mr. Dan to Mr. Beatty, and I gather that neither of those individuals are any longer with your company; is that right? 939 MR. BRENNAN: That's correct. 940 MR. WARREN: And this analyzes -- if you turn to the second page, it talks about Chicago-Dawn swap and it appears to suggest that a Chicago-Dawn swap is cheaper than the Vector alternative. That's how I read the first paragraph and that's how your expert witness this morning read that first paragraph. Are we reading it correctly? 941 MR. BRENNAN: The table shows that the -- I'm sorry, which -- 942 MR. WARREN: Top of the second page, first paragraph. 943 MR. BRENNAN: Are you looking at appendix 3? 944 MR. WARREN: Yes. 945 MR. BRENNAN: So you are not looking at the table, because the table doesn't include any exchange. Okay. Yes, I see that. Mm-hm. 946 MR. WARREN: Now, it would appear, and this is the way your expert read it this morning when I put it to him, that the Chicago-Dawn swap is less expensive than Vector. 947 MR. BRENNAN: The only thing I'd like to point out, Mr. Warren, is that if you look at the bottom of that page, at the final bullet on that page, it says the swap quotes are only an expression of interest. If they take up, a Dawn basis would likely increase because Dawn is thinly traded. In fact, it may not be possible to swap the total of 96,000 at cost lower than the pipeline tolls. 948 MR. WARREN: And that was a qualification to that first paragraph, but what we have is an analysis by Mr. Dan which suggests that Chicago-Dawn swap is cheaper than Vector; have I read it correctly? 949 MR. BRENNAN: That's what the words say. 950 MR. WARREN: Now, what I'd like you to point out to me, and I've only just reviewed this in the few minutes since your examination-in-chief, is where on this memo it expresses a concern about volatility in price from year to year on the Chicago market. Where in the memo would I find that concern expressed? 951 MR. BRENNAN: It's that point plus the point probably just above that as well. 952 MR. WARREN: I'm reading the second last bullet point. "The Chicago basis will increase too but not as much as Dawn due to the greater pipeline capacity in Chicago than Dawn." So I'm supposed to read that as volatility from year to year; is that right? My problem, sir, is simply -- I don't want to waste a lot of time on it -- is you said it was a major concern, certainly major enough for you to put it in Exhibit F.2.2, but I don't see the word "volatility" in the memorandum that went to Ms. Beatty presumably to assist in the decision on whether to contract on Vector. 953 MR. BRENNAN: It was the same thing in my mind as the basis at Dawn, the same reason. 954 MR. FARRELL: The word "volatility," if we are looking at the same page, is in the last bullet just below the middle hole in the page. "Shippers on a pipeline will be able to take advantage of the basis volatility between Chicago and Dawn." 955 MR. WARREN: And am I wrong in reading that -- panel, I will put it to you that that's listed under the category of advantages that would offset the fact that the Chicago-Dawn swap is more expensive -- sorry, is less expensive than Vector. That's a "pro," to use the words of Mr. Otsason, that volatility. Am I reading that incorrectly? 956 MR. BRENNAN: What it's trying to express there, and this is a letter from Mr. Dan, is that the shippers and the pipeline will be able to take advantage of the basis volatility between Chicago and Dawn to create greater value than the swap differential. This is a case where the differential would be greater than the pipeline toll. 957 MR. WARREN: Mr. Brennan, I asked you if you could -- in light of your expression of concern in chief this morning about volatility, the point of volatility, the concern about volatility in this memo, your counsel, on your behalf, has directed me to the bullet point which talks about volatility. And it appears from my reading of the memo that it is clustered under a heading of advantages that would offset the apparent price difference between Vector and the Chicago-Dawn swap. 958 So as I read it in my simplistic way, this volatility works to the advantage of you. And all my question is, am I reading it correctly? 959 MR. BRENNAN: It can or cannot. It depends. It's uncertain. The point is that it is volatile. 960 MR. WARREN: Now, the final point I want to take up with respect to F.2.2 is the uncertainty around if or when TCPL would expand. 961 Now, we have just within the last month completed the Union Gas customer review process case, and Alliance-Vector was an issue in that case. And the evidence from Union Gas was that they had received a letter from TCPL saying, You cannot get the additional capacity you want effective November 1, 1998. They're cut off. 962 So Union's argument, for better or worse, was they had to look to other alternatives. 963 Is there anything in the record in this case which would indicate that you could not get the capacity you needed from TCPL? In Union's case, TCPL said, No, you're cut off. 964 MR. BRENNAN: We have letters from TransCanada as well. In fact, we have two letters from TransCanada. One was for an expansion in incremental capacity for November 1, '97, where TransCanada indicated that there was going to be a delay in the hearing. They wanted us to execute the TAs, if you like, prior to having the decision. 965 We did not want to do that. That's not -- our typical practice would be you would only sign it once. They receive NEB approval. 966 In addition to that, we also received another letter from TransCanada, and I suspect it's similar to the one that Union received, having to deal with the Nexus expansion, saying that our request for 1998 would not likely be there. It would have to wait until 1999. 967 MR. WARREN: My question was: Are those letters in the record in this case? 968 MR. BRENNAN: Not that I'm aware of, no. 969 MR. WARREN: Panel, I'd like to then return to where I wanted to start, which was just to get a sense of the relief which is sought in this case. 970 Now, if you turn up your pre-filed evidence, which is Exhibit A, tab 14, schedule 4. This is the corrected version at page 16. 971 Do you have that, panel? 972 MS. HOLDER: Yes. 973 MR. WARREN: "ECG accordingly" -- I'm reading at paragraph 40 -- "proposes that the Board make the following findings in this proceeding." 974 First bullet item: "The cost differential recorded in the notional deferral account between ECG's new and traditional transportation paths for the ten-month period preceding the test year is reasonable under the circumstances, and so it is allowed in its entirety for rate-making purposes." 975 What is the amount of money in the notional deferral account? 976 MR. SMALL: 12.45 million. 977 MR. WARREN: And that arises, Mr. Small, how? 978 MR. SMALL: When we compared the cost of acquiring supplies in western Canada and the unit costs of those supplies, adding to it the TCPL tolls, and comparing it against -- the unit rate against the unit cost of acquiring supplies to move them through Alliance and the unit costs of the Alliance and Vector transportation. 979 MR. WARREN: So in the ten-month period using the means of calculation that were set out in the ADR agreement, TCPL was cheaper than Alliance-Vector by some $12.45 million; is that correct? Is that a crude way of putting it? 980 MR. SMALL: Yes, but we went on to qualify that difference for a number of items that we believe to -- 981 MR. WARREN: We'll get to the offsets in due course. I'm just asking about the amount of money and how it was calculated. So for the ten-month period, TCPL was cheaper than Alliance-Vector by $12.45 million; is that right? 982 MR. SMALL: That's fair. 983 MR. BRENNAN: I think I just want to point out, though, that when you are looking at it, we're not talking straight transportation, that the analysis was done based on a delivered cost to the market area. So it includes both commodity and transportation. 984 MR. WARREN: Now, the second item of relief that you are asking for, the cost consequences of the new path for the test year are reasonable under the circumstances, and so they are allowed in their entirety for rate-making purposes. 985 So what is the amount of money that you seek to recover in rates under that category? 986 MS. HOLDER: We are asking to recover all our gas costs in rates. 987 MR. WARREN: Which would include the $12.45 million. 988 MS. HOLDER: Yes. 989 MR. FARRELL: Excuse me. The 12.45 million is preceding the test year. 990 MR. WARREN: Fair enough. 991 MR. SMALL: So the forecast that we would have for Alliance and Vector transportation costs included as part of the 2002 test year, we would be seeking approval for that as well. 992 MR. WARREN: Mr. Farrell, perhaps you can help me on this because your memory is better than mine. Is there a calculation for the test year, the difference between TCPL and Alliance-Vector? 993 MR. FARRELL: Not on the record. 994 MR. WARREN: Can that be done, panel? In other words, if we were to take the notional deferral account which has given rise to the $12.45 million and apply it to the test year, can you tell me what that number would be or undertake to tell me what that number would be? 995 MR. BRENNAN: It would be difficult for one reason in that the test year is not completed yet. 996 MR. WARREN: Can you give us year to date? 997 MR. BRENNAN: Yes, we can. 998 MR. WARREN: Can I get an undertaking to that. 999 MR. SMALL: In anticipation that you would ask that question, we did follow up and continue to calculate it on the same basis from October to the end of April. The comparable number to the 12.45 would be 5.42 million. 1000 MR. WARREN: Sorry, that's October to April? 1001 MR. SMALL: October 2001 to April 2002. 1002 MR. WARREN: I'm sorry, Mr. Small, I just didn't get the number. 1003 MR. SMALL: The 5.42 million. Again, prior to any of the adjustments, similar to the adjustments that we had identified in D.2, tab 2, schedule 4. 1004 MR. FARRELL: But I might add, whatever that number is, that is not the subject of the second bullet, the cost consequences for the test year, because that would be in the forecast of the actual costs on Alliance without reference to any comparator. If you want to know what the cost consequence of the new path are for the test year, that would be different than simply the deferral account. It would be the forecast of the delivered cost of gas through Alliance-Vector. 1005 MR. WARREN: But it would include the $5.42 million; is that not fair? 1006 MR. SMALL: The $5.4 million is a comparison of the actual costs that we've experienced for the 2002 test year. 1007 MR. WARREN: Okay. 1008 MR. SMALL: Similar to how we were comparing the actual costs during 2001. 1009 MR. WARREN: So just to refresh my memory, which lasts about a minute and a half now, the undertaking which I've asked to provide was to provide the -- if you continue the notional deferral account in that ten-month period into the test year, the best you can do is the $5.42 million, or can you bring that up to date even further? 1010 MR. SMALL: At this point in time that is the best that I can do. We wouldn't have received our May invoices, for example, to update it beyond April. 1011 MR. WARREN: Would it be fair on my part, if I were to do what limited capacity for math I have, to annualize that figure, could I do that if I divided it by 12? 1012 MR. SMALL: No, I don't believe that you can because, as Mr. Brennan mentioned before, it's not only just the transportation costs that roll into that unit rate but it's also the commodity. So there could be some differences between the commodity in a number of months that may not materialize later in the year. 1013 MR. BRENNAN: Not to mention the exchange rate as well. 1014 MR. FARRELL: And further, just as a bit of humour, you would actually divide it by seven and multiply it by 12, rather than dividing by 12. 1015 MR. WARREN: I'm reminded minute by minute why Mr. Farrell is so important to all of our lives in so many different ways. 1016 MR. FARRELL: I will remove the spear now. 1017 MR. WARREN: Otherwise known as the "Nightmare on Elm Street." 1018 The final bullet point in terms of the relief that's being requested is a finding by the Board that ECG's management was prudent in taking the actions that gave rise to the cost consequences of new path not only in the ten-month period that's reflected in the cost differential but also in the test year; is that correct? 1019 MS. HOLDER: Yes. 1020 MR. WARREN: Now, if I'd ask you to turn up -- there's an interrogatory delivered by my friend, Mr. Janigan, which is VECC interrogatory 72, which is Exhibit I, tab 2, schedule 72. 1021 MR. FARRELL: Just so the record is clear, I'm just asking Mr. Warren, Madam Chair, if he wanted the witnesses to break out of the forecast of gas costs for the test year, the cost consequences of the new path, and his answer was yes. So I'm not too sure whether the undertaking covered that but we will do that. 1022 MR. MORAN: So I guess that's G.2.2. 1023 UNDERTAKING NO. G.2.2: TO PROVIDE FORECAST OF GAS COSTS FOR THE TEST YEAR, THE COST CONSEQUENCES OF THE NEW PATH 1024 MR. WARREN: Sorry, Exhibit I, tab 11, schedule 72. 1025 MS. HOLDER: Yes. 1026 MR. WARREN: And my friend, Mr. Janigan's client, asked the question: "Please clarify if ECG is seeking Board approval on the cost consequences that arise from the Alliance and Vector transportation path for the full term of 15 years. 1027 And your answer, referring back to the settlement agreement in RP-2000-0040, was that your request for relief is with respect only to the ten-month period and the test year; is that correct? 1028 MS. HOLDER: No, I think -- you've got to look at all three of those bullets of the evidence with respect to the cost consequences for this year. So we're looking for all gas costs for 2002. We're looking for -- 1029 MR. WARREN: The notional deferral account. 1030 MS. HOLDER: Yeah, I think that's right. 1031 MR. WARREN: The notional deferral account is the -- 1032 MS. HOLDER: The notional deferral account. 1033 MR. WARREN: But what I was trying to get at, Ms. Holder, was the implications of a finding by the Board that ECG's management was prudent in taking the actions that gave rise to the cost consequences of the new path. 1034 Do I understand from that that what you want the Board to find is that the decision to contract, to use my friend Mr. Moran's terms, the four contracts, two Alliance, two Vector, were prudently entered into? 1035 MS. HOLDER: Yes. 1036 MR. WARREN: Now, some of what I want to cover now just is chronology, which is covered off in the time line, but I just want to make sure that I've got it correctly. 1037 If you turn up, please, in connection with these questions, two interrogatory responses to questions posed by my client, and they are CAC interrogatories 27 and 33, they are Exhibit I, tab 2, schedule 27, and schedule 33. 1038 MS. HALLADAY: Mr. Warren, are we through with your reference to the VECC interrogatory? 1039 MR. WARREN: Yes, we are. 1040 MS. HALLADAY: Pardon me? 1041 MR. WARREN: Yes. Thank you. 1042 Exhibit I, tab 2, schedule 27 and schedule 33. 1043 MS. HOLDER: I think we have them. 1044 MR. WARREN: As I read the two interrogatories, Ms. Holder, and I'm sure you will correct me if I am wrong, Enbridge Inc. or -- sorry, Enbridge Inc. became an owner, took an ownership position in the Alliance project in May and June of 1996; is that correct? 1045 MS. HOLDER: That's correct. 1046 MR. WARREN: And Enbridge Inc.'s original interest was 10.9 percent, which was increased to its present 21.4 percent; is that correct? 1047 MS. HOLDER: That sounds right. 1048 MR. WARREN: And what I don't have, and it could well be in the evidence, Ms. Holder, but I just haven't been able to put my hand on it, is when that ownership increased from 10.9 percent to 21.4 percent. Was it at the same time period or subsequently? 1049 MR. FARRELL: If I might help, it's the response to CAC interrogatory number 36. At "I," tab 2, schedule 36, I think goes through the increments in the ownership of EI. 1050 MR. WARREN: The first contract for ECG's capacity on Alliance was in November of 1996; is that right? 1051 MR. BRENNAN: That's correct. 1052 MR. WARREN: And at the time that you entered into that contract for capacity on Alliance, the expected start date was when? 1053 MR. BRENNAN: I believe it was late 1998. 1054 MR. WARREN: Late -- 1055 MR. BRENNAN: 1999, sorry. 1056 MR. WARREN: So that just staying with the chronology on Alliance for a moment, at the time that you entered into the contract for capacity, ECG's parent EI already had an ownership interest in Alliance; correct? 1057 MS. HOLDER: At the time that we entered into the agreement, that's correct. If you talk about the time that we were originally evaluating the value of the an alternative route such as Alliance, it actually pre-dates Enbridge's involvement in the pipeline. 1058 MR. WARREN: Is that anywhere in the record, the time line for that, Ms. Holder? 1059 MS. HOLDER: It's probably not in this record. It was part of the record of GH-3-87. 97, sorry. I get my years mixed up. 1060 MR. FARRELL: And that, for clarity, was the Alliance hearing before the NEB. 1061 MR. WARREN: And just to complete the time line, Alliance, in fact, came into operation in December of 2000? 1062 MR. BRENNAN: Yes, that's correct. 1063 MR. WARREN: Now, the Vector pipeline, according to Exhibit I, tab 2, schedules 33 and 27, EI became an owner in December of 1997; is that right? It's Enbridge Inc., I'm sorry. 1064 MS. HOLDER: You said December? Yes. 1065 MR. WARREN: And the original holding of EI in ownership interest was 75 percent, which was subsequently reduced to 45 percent; is that correct? 1066 MS. HOLDER: That's correct. 1067 MR. WARREN: And your original contract for capacity, ECG's original contract for capacity on Vector was in June of 1999; is that correct? 1068 MR. BRENNAN: Yes, that's correct. 1069 MR. WARREN: So EI was already at least -- at least a 45 percent owner at the time of that first contract; correct? 1070 MS. HOLDER: That's correct. 1071 MR. WARREN: Madam Chair, I'm about to move to another area of cross-examination. Would this be an appropriate time for your afternoon break? 1072 MS. HALLADAY: Certainly, Mr. Warren. We'll take a short break for 15 minutes and reconvene at 3:30 p.m. 1073 --- Recess taken at 3:15 p.m. 1074 --- On resuming at 3:30 p.m. 1075 MS. HALLADAY: Please be seated. 1076 MR. WARREN: Panel, I'd ask you to turn up please your pre-filed evidence, Exhibit A, tab 14, schedule 4 on the first page. And in numbered paragraph 1 on that page, you state that: "ECG is looking for -- always looking for opportunities to diversify its portfolio of firm transportation service agreements in a meaningful way and thus to achieve the following gas supply objectives." 1077 Are we to understand that the Alliance and Vector contracts were designed to try and achieve all three of those objectives? 1078 MS. HOLDER: We believe they did achieve the three objectives, yes. 1079 MR. WARREN: Now, I'd like to take, then, the first one, "encourage competition between TransCanada Pipelines and other transporters particularly in relation to tolls," can I presume, Ms. Holder and Mr. Brennan, from what has been produced in response to our interrogatories, that ECG did not undertake any study or analysis of the impact of its contracting for 15 years on Alliance and Vector on TransCanada's tolls? 1080 MS. HOLDER: Well, I don't think we did any formal analysis on the impact of their tolls as it exists today. We do know for a fact, though, that there has been a number of initiatives undertaken by TransCanada since this period of time, since 1996, 1997, anyway, that resulted from the competition that they were either going to be faced or are now facing. 1081 MR. WARREN: Well, but I wanted to stick, if we can, with the period when the decision was being made, the decision -- original decision on Alliance was made in November of 1997; correct? 1996; correct? 1082 MS. HOLDER: Correct. 1083 MR. WARREN: Now, in the period leading up to that, did ECG conduct any studies, produce any analyses, that would indicate that its decision to contract on Alliance would encourage competition on TransCanada in relation to tolls? Did you know -- for example, Ms. Holder, did you predict that it would have the impact of reducing TransCanada tolls over the life of the contract by 5 percent, 10 percent, 2 percent? 1084 MS. HOLDER: We did not look at TransCanada's current system and determine the impact on their current toll if we contracted on Alliance. What we did look at, which is in the evidence, is if we were to contract on TransCanada versus Alliance through, for example, the Nexus system, what the increase in TransCanada's tolls would be. 1085 MR. WARREN: But I want to get to a different point which is, you're saying, was it just at a high level of generality, if there is another pipeline in existence, there's bound to be competition and therefore TransCanada's tolls are likely to come down? Was that the level of the analysis? 1086 MS. HOLDER: Okay, I think I -- sorry, I'm now beginning to understand what you're getting at. Yes, we believed that a high level, as anybody would probably believe, is that if there is competition, there is pressure on the organizations or the management of those competing pipelines, in this case, to better manage their system and therefore it should do a couple things; one is have a downward pressure on their tolls through improved efficiency as well as offer improved services in order to compete with the other pipelines. So it wasn't just a toll issue. I think competition results in better services and pricing. 1087 MR. BRENNAN: I can give you an example of that if you'd like. The example would be the AOS-service that's on the Alliance pipeline system. In the negotiations with TransCanada, in its services and pricing agreement for the period of 2001/2002, stakeholders were able to negotiate with TransCanada an AOS-service in the TransCanada PipeLine systems. 1088 MR. WARREN: Were you one of the stakeholders? 1089 MR. BRENNAN: Yes, I was. 1090 MR. WARREN: Now, can we agree, though, panel, that the competition comes from the existence of the competing pipeline and not from your contracting on that pipeline? 1091 MS. HOLDER: I would agree we didn't have to be a shipper in order to get that type of competition. 1092 MR. WARREN: So you could have achieved, Ms. Holder, one of these objectives without becoming a shipper; fair enough? 1093 MS. HOLDER: It's -- there is a chicken and egg situation. There was -- again, we have a market that we needed to serve. We needed to contract somewhere, so the question was do we contract on Alliance or do we contract on our traditional route TransCanada as one alternative. That, in our mind, the traditional route was not the ideal route for all the reasons we cited here. So if the pipeline had been there, we probably still would have contracted with it. 1094 MR. WARREN: Well, if we look at Mr. Otsason's memo in Exhibit I, tab 2, schedule 73, appendix 1, Mr. Otsason, on the second page of the memo, lists the pros of contracting on Alliance. 1095 MS. HOLDER: Sorry, we get this -- like a car running behind us here. It's the elevator, I guess, so I did not hear your question, I apologize. 1096 MR. WARREN: Mr. Janigan has a button. It's a mute button that he pushes. 1097 MS. HOLDER: Is that because he doesn't like your question? 1098 MR. WARREN: That's a generic rule, Ms. Holder. 1099 Exhibit I, tab 2, schedule 63, appendix 1, which is Mr. Otsason's memo. 1100 MS. HOLDER: Yes. 1101 MR. WARREN: And he lists on the second page the pros. "Alliance will provide an alternative to NOVA-TCPL route thereby creating some competitive pressure on these incumbents." And he then says on the next page, just after the list of cons, "Pros 1 and 2 would be realized whether we contract on Alliance or not as long as the Alliance project proceeds." Correct? 1102 MS. HOLDER: Yes, I agreed with that. 1103 MR. WARREN: Okay. 1104 Now, in terms of competition with TCPL, I take it, Ms. Holder or Mr. Brennan, that the ratepayers of ECG have an interest in getting reductions in TCPL tolls or in avoiding increases in TCPL tolls; correct? 1105 MS. HOLDER: Yes, that is a concern of our ratepayers. 1106 MR. WARREN: And it's a concern which you, in your capacity as a regulated utility, you want to do everything you can to ensure either that they go down or that they don't increase; correct? 1107 MS. HOLDER: I don't think we can just look at the landed price in it's entirety. I think our ratepayers are really looking for safe, reliable, reasonably-priced natural gas. So I think we have to put into the equation the reliability and safety issues. 1108 MR. WARREN: Reliability and safety being equal, being givens, Ms. Holder, I take it from your earlier answer to me that on behalf of your ratepayers, you have an interest in ensuring that TCPL's tolls either are reduced or don't increase; is that not fair? 1109 MS. HOLDER: I think -- no, that's not quite fair, because TCPL tolls have been increasing for many years now partly due to the increase in demand in our own market, which has caused increase in the need for transportation through TransCanada. 1110 So it -- I think what we strive to do is ensure that they are managing their business and expanding their business in a reasonable way, such that the tolls are reasonable. 1111 MR. PLECKAITIS: And, Mr. Warren, if I can add to that, I think that one of the things that was stated by Ms. Holder earlier was that the company continually looks for alternative sources of supply and transportation. 1112 The nature of competition, we believe, by creating a competitive alternative to TransCanada will have long-term, lasting effect on keeping levels of service and price as low as possible in the marketplace as provided by TransCanada. 1113 MR. WARREN: Panel, I'm given to understand that TransCanada has recently completed an application to the National Energy Board for an increase in its tolls to reflect what they hope is an asked-for increase in their ROE; do you understand that? 1114 MS. HOLDER: Yes. 1115 MR. WARREN: And would I be reasonable in my expectation that ECG would have intervened and actively participated in opposition to that request in order to ensure that TCPL tolls did not rise to the detriment of its ratepayers. 1116 MS. HOLDER: We did not actively participate this that application. 1117 MR. WARREN: Ms. Holder, may I suggest that the reason you didn't actively participate in it is that you have pending before this Board a request for an increase in your own ROE? 1118 MS. HOLDER: There is an increase -- we have a request, which was part of the -- originally of this application if I recall correctly for a look at the return, and that has been put into a second phase of this application. 1119 MR. WARREN: And would it be unfair of me to suggest that the reason that you didn't actively participate in the NEB proceeding is that it would have been, to use the old term used by Mr. Justice Laskin, sucking and blowing to have opposed an ROE increase by TCPL while you were seeking a similar ROE increase here? 1120 Is that not the reason you didn't actively participate in that case? 1121 MS. HOLDER: That's not my understanding, but I ... 1122 MR. WARREN: But you certainly would agree with me, Ms. Holder, that in not actively participating, you didn't take one measure that was available to you in order to ensure or try to ensure as best you could that TCPL tolls did not increase to the detriment of your ratepayers; correct? 1123 MR. PLECKAITIS: The company's position is that the rates of return that are being earned by regulated utilities in Canada, including TransCanada PipeLines as the major transportation utility in Canada, are under what they need to be in a North American market. 1124 And we believe in a long run that unless the rates of return of those utilities are enhanced in Canada that capital will not flow to those projects in Canada, including Ontario and including TransCanada to the detriment of Canadians and Canadian customers and flow south of the border, where the rates of return for comparable investments are higher. 1125 MR. WARREN: So if I can just understand that, Mr. Pleckaitis, is a translation of that that your position is that it will be in the long run -- to the long-run benefit of ECG's ratepayers if the ROE for TCPL increases and its tolls increase? 1126 MR. PLECKAITIS: The long-run interest of customers in Consumers Gas's franchise is to ensure that all participants in the industry earn a fair rate of return. And if they cannot earn a fair rate of return that that will hurt the development of the industry in Canada, yes. 1127 MR. WARREN: Now, the third of the objectives, which your evidence indicates that you were pursuing was to enhance ECG's ability to mitigate excess capacity situations. Example: Under-utilization costs on all transportation paths. 1128 MS. HOLDER: Yes. 1129 MR. WARREN: If you wouldn't mind returning to Mr. Otsason's memo, which is appendix 1 to Exhibit I, tab 2, schedule 63. 1130 MS. HOLDER: Yes. 1131 MR. WARREN: And on the second page of that when he -- under the heading "Qualitative Assessment," he lists the pros and cons. And listed under the pros, numbers 5 -- number 5 is: "Contracting on Alliance will allow us to fully utilize our capacity entitlement on the Link pipeline"; correct? 1132 MS. HOLDER: Correct. 1133 MR. WARREN: And Link pipeline is a pipeline which is owned in part by Enbridge Inc.; is that correct? 1134 MS. HOLDER: No, it's owned by Enbridge Consumers Gas, I believe. No. Niagara Gas Transmission, sorry, which is the -- 1135 MR. FARRELL: May I help. When referring to the Link pipeline, there are actually two, one on each side of the border. There's one that's called the A&R Link, which is owned by A&R Pipeline Company, which is now, I believe, a subsidiary of El Paso. 1136 And on the Canadian side is a Link pipeline owned by Niagara Gas Transmission which, in effect, a sister company of Enbridge Consumers Gas. 1137 MR. WARREN: At the end of the day, if you follow the food chain up to the top, Link is owned by Enbridge Inc.. 1138 MS. HOLDER: Correct. 1139 MR. WARREN: And if I look at pro number 5 on the list, "Contracting on Alliance will allow us to fully utilize our capacity on a Link pipeline," I take it or can I -- would it be a fair statement of that pro that contracting on Alliance would confer a benefit on a related company? 1140 MS. HOLDER: No. It would actually refer a benefit on Enbridge Consumers Gas. The Link pipeline is fully contracted to shippers, one shipper being Enbridge Consumers Gas, and therefore the Link pipeline receives its full costs recovered through a fair toll established by the National Energy Board. So if there is increased utilization of the Link pipeline, it will go to the benefit, if it is utilized by Enbridge Consumers Gas, fully to the benefit of Enbridge Consumers Gas; if it is capacity that's used by somebody else, it will go to reducing tolls to all shippers which would include Enbridge Consumers Gas. 1141 MR. WARREN: So number 5 is a benefit to Enbridge Consumers Gas but really it's a benefit to, can I -- is it fair, Enbridge Consumers Gas shareholders because otherwise they have to pay for the under-utilization. 1142 MS. HOLDER: No. The way the tolls are struck for the Link pipeline, all costs of the Link pipeline are recovered through tolls that are paid by shippers. So by increasing utilization, there is no benefit to Niagara Gas transmission or Enbridge Inc.. The benefit goes to the shippers, which is Enbridge Consumers Gas. 1143 MR. WARREN: But am I wrong in assuming, Ms. Holder, that if there is under-utilization, that under-utilization is paid for by the shareholders of Enbridge Consumers Gas. 1144 MS. HOLDER: To date there has been a sharing between the shareholder and the ratepayers for the under-utilization of the Link pipeline. 1145 MR. WARREN: So there's some benefit that would go to the shareholders of Enbridge Consumers Gas; is that fair, Mr. Holder? 1146 MS. HOLDER: In that sense, yes. 1147 MR. WARREN: All right, okay. 1148 Now, number 6: "Alliance won't have the prospects for additional capacity being contracted by third parties on the Link pipeline." And who benefits from that? 1149 MS. HOLDER: All the remaining shippers on the pipeline, which again would include Enbridge Consumers Gas. 1150 MR. WARREN: Now, I want to turn from the stated objectives in your pre-filed evidence to some other considerations that may have affected the decision to contract for Alliance and Vector capacity. 1151 One of the factors that Dr. Foster agreed to this morning, one of the considerations the Board should apply in assessing the reasonableness of these contracts, was least cost, and we have discussed the question of least cost as is reflected in Mr. Otsason's memo. And I take it from our earlier exchange, Mr. Brennan, that you are saying to us that your analysis, as reflected in the table attached to Mr. Otsason's memo, is that Alliance is going to be cheaper over the long term; is that right? 1152 MR. BRENNAN: I think you have to be careful here when you say "least cost," because I believe Mr. Foster referred to something called best cost which may not necessarily be the least cost. 1153 MR. WARREN: But in my cross-examination of him, I used the term "least cost" and he appeared to be nodding when I used the term "least cost." 1154 MR. BRENNAN: It's one of the factors in coming up with best cost. 1155 MR. WARREN: So is it your position that Mr. Otsason's memo, when we cut through its variables, shows us -- showed you that Alliance was cheaper in the long term than TCPL, that it was the least cost of the option? 1156 MR. BRENNAN: Given the assumptions that were placed in that table, yes, that's correct. 1157 MR. WARREN: Okay. 1158 Now, if I go to the next item, appendix -- my next item, which is the memo we've already referred to which is the memo from Mr. Dan to Ms. Beatty, Exhibit I, tab 2, schedule 63, and you and I have already discussed this, Mr. Brennan, it would appear that Mr. Dan is saying that Vector is not the least cost option but rather the Chicago-Dawn swap is the least cost option. 1159 MR. BRENNAN: I think what Mr. Dan is saying is that straight economics would suggest that Vector may not be the least cost, but I think his conclusion is that it's probably the best cost. 1160 MR. WARREN: Now, appendix 5, members of the panel, to that same Exhibit I, tab 2, schedule 63, is a memorandum dated the 31st of May, 1999, from Mr. Serpanchy to Ms. Beatty. In that memo, at page 2, the third full paragraph, the one that begins: "The choice of option B over option A or C brings up the issue of the U.S. 7 cents a decatherm price differential. The Vector alternative is Canadian 3 million more expensive than delivered service. There is a potential risk of non-recovery of this amount because it is not the cheapest alternative." 1161 So looking at least cost most narrowly defined, Mr. Serpanchy appears to be saying that Vector is not the least cost alternative; correct? 1162 MR. BRENNAN: Yes. And to repeat, he goes on to say, though, that may be the best cost because I think you have to factor in other considerations other than straight costs. 1163 MR. WARREN: Now, my apologies for jumping around, panel members and the Board. 1164 Can I just ask you to turn back to Mr. Otsason's memo to see if you can understand an observation he makes on the very last page, page 4 of that memo. He says, and it's the last sentence in the paragraph that concludes at the top of page 4: "In addition, if we have an unregulated merchant function which requires some or all of the LDC's upstream capacity, the greater access to diverse markets which is provided by the Alliance route may in fact provide additional value." 1165 Now, am I right in reading that, that Mr. Otsason sees the Alliance contract being entered into -- that an Alliance contract entered into by ECG might confer a benefit on an unregulated affiliate of ECG in its merchant function? Is that a fair reading of what he's saying? 1166 MS. HOLDER: I think that's fair. If there was an affiliate that was in the merchant function, there could also be benefits. Again, I think it points to the fact that we believe the Alliance-Vector pipeline is a benefit to all of the market in Ontario. 1167 MR. PLECKAITIS: If I could add to that. In reading that paragraph, because I see the linkage between the previous part of that paragraph which says one of the risks might be that the LDCs roll may change and the LDC no longer requires capacity and therefore this risk of stranded assets. However, what it goes on to say is it believes that, given that this is a cost-competitive transportation route, that there will be a market for that, and then it goes on to say, we have an affiliate or we may have an affiliate that could, in fact, be the one. So what I understand this to be is an explanation on how the risk can be mitigated from an overall prospective of this particular route. 1168 MR. WARREN: Now, if you turn up, panel, Exhibit I, tab 2, schedule 32, which is CAC interrogatory 32, the question which was posed was: "At the time it subscribed for capacity on the Alliance system, did ECG believe that its participation as a shipper was required in order for the Alliance project to proceed?" And the answer which was given was: "ECG never believed at the time of subscribing for Alliance capacity, or otherwise, that its participation as a shipper was required in order for the Alliance was to proceed." 1169 Then I go to the second paragraph: "ECG did believe, on the other hand, that its participation as a shipper would assist Alliance in obtaining the requisite regulatory authorization." 1170 MS. HOLDER: Yes. 1171 MR. WARREN: Now, am I wrong to read, panel, that one of the motivating factors in ECG entering into the Alliance contract was conferring a benefit on its parent, EI, in its capacity as an investor in Alliance in obtaining the necessary regulatory approval for its investment? 1172 MS. HOLDER: I think that's not quite fair. 1173 MR. WARREN: Maybe I'm being generous. 1174 MS. HOLDER: I think what the fair interpretation would be is that by us being a shipper, would help Alliance not Enbridge Inc., but Alliance, in obtaining the requisite regulatory authorizations they needed, and again going back to my point that we had a market we needed to serve, we were looking for incremental supplies, the Alliance-Vector route would provide us with those supplies so we would like to have seen Alliance built. I think this relates to the fact that Alliance required, as part of their application to the NEB, is to prove market. So we were there to prove that there was a market need for some of the capacity on the Alliance pipeline. 1175 MR. WARREN: Ms. Holder, do you disagree with me -- let's just take it in baby-steps. Enbridge Inc. has made an investment in Alliance. 1176 MS. HOLDER: Yes. 1177 MR. WARREN: In order for the investment to pay off, it has to get regulatory approval. Its subsidiary, ECG, can help it get that regulatory approval by signing a contract for capacity. Therefore, does it not follow that ECG has conferred a benefit on its parent by contracting for capacity on the Alliance pipeline? 1178 MS. HOLDER: I will say that Enbridge Inc. receives benefit through Alliance. If we assisted in them getting the -- that pipeline built, if we were the sole reason it got built, I would tend to agree with you. I don't think our application was the sole reason why that pipeline was built, but I do see that there is a link between us signing the contract and our parent receiving what would be a fair return through another regulatory process. 1179 But I just -- where I debate here, I apologize, is that your logic is not my logic. My logic is I would start with our need for the transportation. The fact that Enbridge chose to be a partner in Alliance is, in my mind, not relevant at all. In my mind, what is relevant is that the pipeline got built to provide us a transportation route for supply. And I go back to my comment, we actually were involved in this pipeline proposal prior to Enbridge Inc., or at that time IPL, becoming associated with the pipeline. 1180 MR. PLECKAITIS: Just to add, if I could, Enbridge Consumers Gas wanted this pipeline built, and the point is that, again, even if Enbridge Inc. had not been a proponent in this pipeline, we still would have supported the construction of a pipeline under similar terms and conditions as the Alliance and Vector pipelines eventually that were built. We wanted that transportation and capacity, through an alternate route, to find its way into the Consumers Gas market for the benefit of Consumers Gas customers. 1181 Did that -- by this particular case, did that support also benefit Enbridge Inc. in the construction of the pipeline? Absolutely. Do we see anything wrong with that? No, we do not. 1182 MR. WARREN: Ms. Holder, if I look at the next paragraph in Exhibit I, tab 2, schedule 32, you see the statement, "ECG also believed that its participation as a shipper would assist Alliance in obtaining debt financing." 1183 MS. HOLDER: Yes. 1184 MR. WARREN: And the basis for that belief is what? 1185 MS. HOLDER: Again, I believe you are really stretching my not being a lawyer nor being a regulatory expert by any means -- 1186 MR. WARREN: There would be those that would disagree with that latter proposition, Ms. Holder. 1187 MS. HOLDER: My understanding is that pipelines require -- I'm not sure if they require, but it definitely is easier for them to get their financing if they have shippers underpinning their pipeline, which is exactly why TransCanada is going forward with an expansion. They have shippers underpinning that expansion which have creditworthiness behind them. 1188 MR. WARREN: Now, again, you wouldn't agree with my logic, but is it not the case that Enbridge Inc. has invested in Alliance, and it requires debt financing for that project to go forward, and ECG's contracting helps get that debt financing. 1189 Therefore, ECG's contracting has conferred a benefit on EI; do you agree with that or not? 1190 MS. HOLDER: Sorry, again, I didn't -- the last two sentences I missed. 1191 MR. WARREN: Then I'll start at the beginning. 1192 Enbridge Inc. has made an investment in the Alliance pipeline. In order for the investment to successful, it has to obtain debt financing. 1193 ECG, it's subsidiary, can assist in getting the debt financing by signing a contract on Alliance; therefore, ECG by signing the contract, has conferred a benefit on the parent; do you agree with that or not? 1194 MR. PLECKAITIS: Lower debt cost financing for the Alliance pipeline would refer a benefit to all of the shippers in that pipeline, because the debt financing, the debt costs are a pass-through to the shippers and the pipeline. 1195 So by the fact that a shipper, such as Enbridge Consumers Gas results in lower cost to the construction of that pipeline, that benefits us as the shipper. 1196 MR. BRENNAN: Again, it was an attempt to make sure that the Alliance pipeline got constructed. 1197 MR. WARREN: Panel, do you just disagree with me flat out that it didn't confer any benefit at all on Enbridge Inc.? 1198 MR. PLECKAITIS: I said earlier that the fact that we supported Enbridge in this construction of this pipeline did confer a benefit, because we were one of the shippers that supported that. 1199 But I see no -- nothing wrong with us doing that, and I also indicated that we would do that if someone else, and it wasn't Enbridge, was building a competing pipeline under similar terms. 1200 MR. WARREN: Again, Mr. Pleckaitis, you did not participate at all in any of these discussions. 1201 MR. PLECKAITIS: No, but I've reviewed the policy discussions that went into this, and I'm involved with the policy discussions going forward on it. So I expect that we will be discussing similar matters going forward. 1202 And I'm giving you my assessment based on what I understand from the company's material and what the company's policy is as to why that decision was made. 1203 MR. WARREN: So you reviewed the policy what? 1204 MR. PLECKAITIS: Reviewed the policy decision making that went into that. Was the logic that went behind the company's decision in this -- our investment in the Vector pipeline, the Alliance pipeline appropriate? 1205 MR. WARREN: In what form was that policy that you reviewed? 1206 MR. PLECKAITIS: Well, the policy decision being one of what is the overall impact of that alternate route to gas costs to our customers? 1207 MR. WARREN: What is it that you reviewed physically, sir? 1208 MR. PLECKAITIS: I reviewed the evidence that was filed in this case. 1209 MR. WARREN: Can you turn up, please, Exhibit I, tab 2, schedule 35, which is the CAC's interrogatory number 35. 1210 MS. HOLDER: Yes. 1211 MR. WARREN: The question that was posed was: "Was it a condition of EI's entry into the Alliance project as an equity participant that EI or one of its affiliates assume a shipper position on the Alliance system?" 1212 The answer is: "ECG does not have the information necessary to provide on its own a response to this interrogatory. ECG accordingly requested that Enbridge Inc. to provide the information as a means of assisting CAC -- for which let me express my appreciation. And EI has provided the information contained in the following response:" 1213 "There was no formal requirement that EI or an affiliate of EI, such as ECG become a shipper on the Alliance pipeline as a prerequisite of EI acquiring directly or indirectly an ownership interest in the limited partnerships." 1214 "In the result, though, both EI, through a subsidiary other than ECG, and ECG became shippers on the Alliance pipeline." 1215 Now someone with some care, I believe, has chosen the word "formal" to modify the word "requirement." Was there an informal requirement that EI or an affiliate of EI, such as ECG, become a shipper? 1216 MS. HOLDER: I don't believe so. I know there was never a directive from EI for ECG to become a shipper. Again, we were proposing to be a shipper prior to EI being involved, so I do not believe there was even an informal requirement. 1217 MR. WARREN: Now, Ms. Holder, I'm going to put to you, again, baby-steps logic, the only ones that I'm comfortable with. And I'm going to ascribe to this these baby steps what I believe to be common sense, and I'm going to ask you if you agree or disagree; although, I'm confident I know the answer in advance. 1218 A parent company, in this case, EI, is making what I presume is a substantial investment in a pipeline, in this case, Alliance. Its subsidiary, Enbridge Consumers Gas, has the capacity to assist it in making that investment a success. 1219 Would not common sense dictate that the parent would say to the subsidiary, Make it happen, little one? 1220 MS. HOLDER: Well, I think the evidence is very clear about, "make it happen" never did come that statement. I think I want to go back to a comment I made earlier. We were looking at this pipeline route prior to IPL becoming a member of the Alliance or taking an interest in Alliance. As a matter of fact, we were doing an analysis and we took the analysis or our analysis at that time to Enbridge and said this is a good deal, we think you should be actually taking an equity interest in this pipeline. So I think your logic would be right other than we got the chicken and the egg somewhat confused here. We were first, and we brought Enbridge Inc. along and convinced them it was the right thing to do. 1221 MR. WARREN: Are there any records of that process, Ms. Holder? 1222 MS. HOLDER: I went through, I will be honest, I went through my files to determine if there was any letters in my files or the files of Ms. Beatty or Mr. Riedl. I could not find anything other than it is on record in GH 3-97 which was the hearing that we testified at with respect to Alliance. 1223 MR. WARREN: That -- 1224 MS. HOLDER: That statement that we provided recommendation to IPL at the time that they should take an equity interest in the pipeline. 1225 MR. WARREN: Now, if I look at Exhibit I, tab 2, schedule 68, when we asked for -- the CAC asked for copies of all correspondence, memoranda, notes other written materials between ECG and EI with respect to: One, ECG's decision to contract on Alliance and Vector and two, EI's decision to invest in Alliance and Vector including notes and minutes of all meetings between ECG and EI on those issues. And your answer was that it was difficult to find the records and then you said: "From the records readily available to the witnesses." What does it mean records readily available? 1226 MS. HOLDER: That would be records that we, as a panel here, have access to in that as people leave, they throw out their notes, their e-mail gets deleted off of computer systems so what we did was we went through all the files. In my case, I went through my own files dating back to 1996, I went through the files of Ms. Beatty and I went through the files of Mr. Riedl and my understanding, Frank went through -- or Mr. Brennan went through his files. 1227 MR. WARREN: And you could find no written material on the dealings between EI and ECG on this point? 1228 MS. HOLDER: There were no written materials between EI -- in the files that we went through in our offices, there was no -- nothing I found that was correspondence relating to Vector-Alliance between Enbridge Inc. and ECG. 1229 MR. WARREN: Is it possible that there are records which you haven't been able to find or have access to. 1230 MS. HOLDER: No, I've gone through all records that I could possibly get access -- that exist. I have access to everything that exists in the building. 1231 MR. WARREN: So when you use the phrase, "readily available," what you're telling me is you've been through every record that exists. 1232 MS. HOLDER: Yes. 1233 MR. WARREN: Not records in storage that you might get access to? 1234 MS. HOLDER: I believe Mr. Brennan did go to the records and storage. 1235 MR. BRENNAN: Yes, that's correct, I did. 1236 MS. HOLDER: I think the, "readily available" is somewhat a protection just to make sure that there was -- we didn't miss a file that was misnamed. 1237 MR. WARREN: Now, I want to turn from that discussion to the question of the risks involved in this -- certainly in the Alliance investment and again, panel, if you just turn up Mr. Otsason's memo which for the record is Exhibit I, tab 2, schedule 63. 1238 MS. HOLDER: It's getting easier to find; it's tattered. 1239 MR. WARREN: It has the authority of a Talmudic text. If I look under page 3, under the listing of cons. 1240 MS. HOLDER: Yes. 1241 MR. WARREN: Nobody, of course, would ever be conned by anything which is in this document, but number 2: "As a new pipeline, Alliance has considerably higher risks of adverse regulatory treatment," and then the following words I would ask to underscore, "in-service delays and cost overruns." Now, am I right in my understanding that the $12.45 million in the ten-month period is directly attributable to in-service delays -- sorry indirectly attributable to in-service delays? 1242 MR. SMALL: We identified as one of our reasons for the size of the amount that we felt should be discounted was because of the commodity costs that we had to pay during the month of December. 1243 MR. WARREN: It was late coming online and, therefore, you had to go to a spot market and the prices happened to spike that month; is that fair, Mr. Small? 1244 MR. SMALL: We ended up having to buy on the daily spot market. 1245 MR. WARREN: To the tune of in excess of $12.45 million; is that correct. 1246 MR. BRENNAN: No, I don't so. I think my recollection is $10.5 million. 1247 MR. WARREN: $10.5 million, that's fair. Thank you for that, Mr. Brennan. But is it not the case that the $10.5 million is in category of the very risk, the kind of risk that Mr. Otsason identified in his memorandum, a risk attributable to in-service delays? 1248 MR. BRENNAN: I think that's a risk of any pipeline expansion, whether it's TransCanada, whether it's Alliance, whether it's -- you name it. There's always going to be a risk of when those pipeline facilities are going to come into service. 1249 MR. WARREN: Now, if ECG, as it apparently has, having no doubt read thoroughly Mr. Otsason's memo, has entered the contract knowing that risk, why should the ratepayers have to pay for the cost of that risk, which is what you are asking the Board to approve in this case? 1250 MS. HOLDER: I think, because again, that we have to look at what the alternative might have been. Had we not entered into this contract, we still needed to enter into some contract in order to get gas supply to our markets. 1251 And I think it's very difficult for us to sit here and say, If we hadn't done this, what would the world look like, and what would be the cost in that world? 1252 MR. BRENNAN: In addition, you know -- 1253 MR. WARREN: Sorry, can I just stay with Ms. Holder's answer for a moment, Mr. Brennan. 1254 MR. BRENNAN: Certainly. 1255 MR. WARREN: But Ms. Holder, isn't the world that we are in today a world in which Alliance is still more expensive than TCPL? 1256 MS. HOLDER: What I am trying to say is if Alliance had not been built, we would have been contracting somewhere for capacity. It could have been the Nexus project, which would have been even higher again. 1257 MR. WARREN: You don't know that, do you, Ms. Holder? 1258 MS. HOLDER: Just like -- that's exactly what I'm saying. We had to look at the information we had at the time. The information at the time, the Alliance-Vector route was a better alternative than the Nexus route in our minds for all the reasons we stated in evidence. 1259 Had this not happened, I don't know what the world would have looked like. We have to go with the information we had at the time in making our decision. 1260 MR. WARREN: I don't understand, though, the logic of you -- if you voluntarily take a risk, why you now want to off-load the cost of that risk onto ratepayers. You took that risk. Isn't it a price you should pay? 1261 MS. HOLDER: We take a risk every time we sign a contract. We take a regulatory risk every time we decide to spend any money. That's the nature of our business. 1262 We have to just be comfortable with what we are using in making our decisions and ensuring ourselves that we have the appropriate information and that we're making the best use of the knowledge that we have as well as the information that we are being provided and the alternatives before us to make a decision. 1263 And that goes well beyond just signing for transportation on a pipeline. 1264 MR. WARREN: Mr. Brennan, I interrupted you before, for which I apologize. You wanted to add a gloss to the answer of Ms. Holder. 1265 MR. BRENNAN: I would like to just add to that, yes. I mean, if you take the perspective if Alliance wasn't built, and the option out there was the Nexus pipeline, well, the Nexus pipeline was not a traditional build on TransCanada. It was a high pressure line going from right across Canada. 1266 I would -- my understanding would be, or my thinking would be that that could just as well have come -- not been in service on the in-service date of November 1998 as well. 1267 I mean any pipeline that you contract for doesn't necessarily come in on time. And I can tell you that one of the contracts that we have with TransCanada, there was a concern whether or not it was going to be in service on the date that we were anticipating. That was November 1, 1997. 1268 So I think what Mr. Otsason was putting down there was just, sort of, an obvious comment that all pipeline expansion -- there are some risks in terms of when you are actually going to get that service. 1269 MR. WARREN: Mr. Otsason in the same memo says that the most significant risk in his view -- this is the last paragraph on page 3 -- is the risk associated, and I'm quoting him: "...with making a long-term commitment for upstream pipeline capacity at a time when it was unclear what our future role will be in this area. If we as the regulated LDC will no longer be involved in providing upstream transportation to our franchise area, having a new long-term contractual commitment obviously increases the risk of having stranded assets and potentially being at risk for recovering the associated cost." 1270 Now, Mr. Otsason is saying, as I understand it, at the time of the memo in October of 1996, that there is a possibility of your -- to use the popular term -- "exiting the merchant function," and therefore having a long-term pipeline capacity, which you don't need. 1271 To what extent, if at all, was that concern factored into your decision to contract for 15 years worth of Alliance capacity? 1272 MS. HOLDER: Actually, there was discussion around this very issue, and I think at the same -- during the same period of time was when we were working on the market design task force -- I believe that's the terminology. 1273 I think we all flip back and forth, whether we would exit the merchant function or not exit the merchant function. And I know at the time, the OEB was actually concerned about the speed at which Union Gas or ourselves would exit and actually cautioned us or cautioned the industry -- I shouldn't say "us" -- cautioned the industry to be sure that we did not move at a very rapid pace and that we always ensured that the ratepayer would be protected in the end. 1274 I think part of that is, as we honestly believe, and as we still do, reliability and safety is part of that protection. 1275 So when we talk about the merchant function, and in all fairness to Uri, this was not Uri's part of the business, this was my part of the business at this time, is we came to a conclusion that when we refer to the merchant function, we were talking about the commodity only, that we didn't believe the market was ready for us to exit the upstream transportation. 1276 So that we would still be the organization or the company that would stand behind the upstream transportation contracts, the storage contracts, to ensure reliability to our marketplace. So when you talk about the merchant function, which I agree we were at that time, we were really only referring to that commodity component not referring to the upstream. I think we were years away of ever seeing the upstream transportation being commoditized to the point where we would sit back and say we believe the market is working and we believe that the other marketers in the retail business are here to ensure our customers will have safe reliable gas. 1277 So there was -- I remember this discussion actually or it was more than one discussion but I do remember discussing this at that time. 1278 MR. WARREN: So Mr. Otsason raised it, but it in fact was not a concern because you didn't feel that it was a realistic possibility that within the 15-year time frame you were going to exit the merchant function? 1279 MS. HOLDER: I think that this time -- I'll backtrack a bit. I think at this time we were sort of saying five years might have been a realistic time, the commodity, that the upstream transportation and storage would come at a later date. I don't think we ever said whether it would be 15 years or not, but at the time, our -- we didn't have a lot of options we still had a market we had to serve and to be honest there weren't many players bill bellying up to the bar in helping our customers out in signing contracts into the Ontario market. So if the only way you can get gas is signing a long-term contract, we had to sign a long-term contract. 1280 MR. WARREN: Now I want to turn from that issue to the what I might call the planning horizon that existed in 1996. And as I understand the chronology that Mr. Brennan has expressed, you were making planning decisions in 1996 for transportation that was going to be available some time late in 1999; is that right? 1281 MR. BRENNAN: Yes, that's correct. You have to do it that much time in advance just to -- the whole regulatory process, the construction of facilities, you have to be planning that far in advance. 1282 MR. WARREN: And I had this exchange with Dr. Foster this morning and I think Dr. Foster and I were for a brief happy moment in agreement on this, that in making your planning decisions in 1996 it was appropriate to take into consideration first what was likely to happen in the two plus three years before the transportation actually began and secondly, to take into consideration the likely developments in the 15 years of the contract. Do you remember that exchange with Dr. Foster this morning? 1283 MR. BRENNAN: Yes, I do. 1284 MR. WARREN: Do you agree with Dr. Foster on that point? 1285 MR. BRENNAN: To the extent that you can. Yes, you try and factor as much in as you can. 1286 MR. WARREN: Now, can I ask you to turn up -- we're leaving Mr. Otsason's memo and we're going to second of the memoranda in there which is a memorandum from Mr. Dan to Ms. Beatty. This is appendix 3 to Exhibit I, tab 2, schedule 63. It's dated 31st of May, 1999, so it's about two-and-a-half years after the question decision to contract on Alliance was made, but about six months before Alliance was expected to kick in. Have I got the chronology correct? Right? 1287 MS. HOLDER: Yes. 1288 MR. WARREN: Now, in that memorandum, Mr. Dan is talking about assessing the attractiveness of a Chicago-Dawn swap, gas swap. And can we agree, panel, that some two-and-a-half years after the contract you entered into with Alliance, Mr. Dan of your company, as he then was, felt that Chicago was a viable market for the purchase of gas. 1289 MS. HOLDER: Yes. 1290 MR. WARREN: And I don't think we need to turn it up, but you will recall the exchange I had with Dr. Foster this morning in which he agreed and it's reflected in an interrogatory answer of his, that the development of Chicago as a viable market was a foreseeable result of the construction of the Alliance and Northern Border pipelines; do you remember that exchange with Dr. Foster? 1291 MS. HOLDER: Yes. 1292 MR. WARREN: So if -- and it would appear if I read the memo that what Dr. Foster thought was foreseeable had in fact happened by the time of this memo, I want to take you back to Mr. Otsason's memo in which he never talks about, never mentioned the possibility of the development of Chicago as a viable market. Do you agree with that? It's nowhere in that memo. 1293 MS. HOLDER: Yes. 1294 MR. WARREN: And would you then not agree, and it's at this point that I step off the edge of the cliff, would you not agree with the proposition that given that your expert thought it was foreseeable that you have ought to have considered in 1996 the foreseeability, the possibility of Chicago as a viable market to purchase gas in? 1295 MS. HOLDER: I don't believe in 1996 and I'll ask Mr. Brennan to help me out here that the Northern Border expansion was contemplated. 1296 MR. BRENNAN: Northern Border was, but my understanding was that it was fully subscribed, it didn't come into service until August of 1998. 1297 MR. WARREN: But Alliance was being built, there was 2.7 billion was the capacity that was about to come flooding into Chicago, there was a lot of capacity from Alliance and Northern. 1298 MR. BRENNAN: Right. And I believe -- I can't remember if whether it was Mr. Foster or Mr. DeWolf mentioned this morning that there were other pipelines being considered to move some of that gas away from the Chicago market. 1299 MR. WARREN: We've been cautioned by Dr. Foster and others against the use of hindsight so we don't want to do that, but I ask the question: Should it not have been reflected in Mr. Otsason's memo, the possibility of the development of the market, even if he was going to discount it as an option, because of the factors you've just discussed. It's nowhere in his memo at all. 1300 MR. BRENNAN: That we should be buying gas out of Chicago as opposed -- 1301 MR. WARREN: That it was a possibility. 1302 MR. BRENNAN: At that time, it was the company practice not to contract back to a supply hub or enter into swaps per se, or rely on delivered service. It was the company practice to contract for long-term transportation back to the supply basin. 1303 MS. HOLDER: Which is outlined in our evidence. 1304 MR. WARREN: So what you are saying is based on a company policy, it wasn't even a possibility that you considered in 1996. 1305 MS. HOLDER: I think that's fair. 1306 MR. WARREN: And you would not regard that as a failure of reasonable planning in 1996? 1307 MS. HOLDER: No, I would not regard that. Again, I think it's because you would be speculating on what that hub was. It wasn't our practice to buy gas at a hub, it was our practice to buy gas at a supply basin. 1308 MR. WARREN: Now, Mr. Dan's memo that we've just been referring to analyzes the factors that might influence the decision to contract for Vector capacity, and we have agreed that, according to Mr. Dan, anyway, it was not the least cost alternative, looking at "least cost" as narrowly defined. Now, it would appear from the Dan memo, if I'm reading it correctly, that Mr. Dan was foreseeing the development of Dawn as a liquid market. 1309 MS. HOLDER: I don't believe that to be true. As a matter of fact, I think everything that I was aware of at that time, we did not see Dawn as a hub and, as a matter of fact, we don't even sea Dawn as a hub or liquid hub, that is. 1310 MR. WARREN: Can I ask you to turn up appendix Exhibit I, tab 2, schedule 63, and this is a memo from Mr. Serpanchy to Ms. Beatty which was written on the same day to Mr. Dan's memo. If I go to page 2 of that, second to last paragraph, "However, it shoulder be noted that Dawn is not a very liquid market centre. The above comparison is valid in as much as there is adequate supply at Dawn to meet all the future demand. Without the increased supply provided by a pipeline, the prices at Dawn will rise as competition for limited supplies as Dawn increases rapidly. Customers would be exposed to this risk of higher cost." 1311 Do I not -- am I reading that incorrectly that Mr. Serpanchy or the logic of that is that Mr. Serpanchy was saying that if you build the Vector pipeline, Dawn will become a liquid trading centre? And he's saying this six months before you entered into your Vector contract. 1312 MR. FARRELL: The second Vector contract. 1313 MR. WARREN: Yes. One month before you entered into the first Vector contract. 1314 MR. BRENNAN: I'm sorry, could you just go through that one more time because I think we've lost your train of thought. 1315 MR. WARREN: It's Mr. Farrell's fault for interfering so we'll overlook that. It's late in the day, panel, so let's cut to the essence of it, and I'm wondering why it doesn't appear from your reasoning that you considered, when you entered into the Vector contract, certainly Mr. Dan said the Chicago/Dawn swap is the more attractive alternative financially. Mr. Serpanchy seems to be saying that the building of Vector will make Dawn a liquid centre. The question is: Why was Dawn not considered as an option to the Vector alternative? 1316 MS. HOLDER: Mr. Serpanchy may have indicated that there be more liquid, but we knew at that time, as we know today, that Dawn has limited liquidity in the -- from the perspective that if ourselves, Enbridge Consumers Gas, or Union Gas buys gas at that hub, that we will move the market. So if we're moving the market, it's not a place that we want to be buying gas. If there is any hint that either the utilities in Ontario are in need of gas supplies at Dawn, you will see an uptake in the price of the Dawn commodity. So we don't believe it's a true liquid trading point then or now. 1317 MR. BRENNAN: Just to add to that, if I could, because I believe we tried to address that in our interrogatory responses. As know, the Alliance and Vector pipelines didn't come into service until December of 2000 so that one year we had to in-fill, and when we went out to try to in-fill, we were some of these services that we were buying were buying gas at Dawn. And we needed the significant volume, if you like, and when we went out to bid, we did not go for for the full volume. For example, I think we indicated that we needed something like 100 million cubic feet a day. 1318 When you are trying to purchase gas at Dawn or delivered to Dawn, typically, we would not go out for the full 100 million as we definitely think that would move the market. We would go out for a bid of something like 20 million and hope that we would get sufficient bids to be able to make up that 100 million. If we went the other way, again, you would move the market because Dawn is not that -- is not that liquid and we are talking here in the time frame of '98, '99. 1319 MS. HOLDER: And to be more specific to your question, at the time that Mr. Serpanchy's memo, we did, as a matter of fact, it was Mr. Dan went out and asked analysts their opinion with respect to the liquidity at Dawn and whether Dawn was a competitive market, and the analyst came back and said very clearly, Union Gas and ECG do move the market and therefore it is not a liquid market. 1320 MR. WARREN: Sorry, and where is that reflected in the evidence? 1321 MS. HOLDER: It's not in the evidence. I do have the memo here though. 1322 MR. WARREN: I'm sorry? 1323 MS. HOLDER: It's not in the evidence. At the time we filed the memos, it says we are in support of the decision making, we did not file this, I guess we didn't feel it was relevant. I just happen to know I have it. 1324 MR. WARREN: If I can turn up Exhibit F2.3 which is what you filed today, the schematic representation, is the little tube on the left, sorry, on the right-hand side of the page is the pipeline, Alliance Pipeline to Chicago and you've got 75,000 -- sorry, I've got the numbers wrong -- you've got a lot of gas coming down that every day, right? 1325 MR. BRENNAN: 75 million cubic feet. 1326 MR. WARREN: And if I just look at this, isn't it the case, when we cut through it, that the Vector contract had to be signed because you signed the Alliance contract? You just had a lot of gas in Chicago, you got to get rid of that gas up to Dawn, so when we cut through it, Vector was inevitable the minute you signed ... 1327 MR. BRENNAN: No, I disagree because at the time we entered into the Alliance PA, we had another route and it wasn't Vector, it was the A & R MichCon Link alternative. It wasn't until after A & R withdrew that offer that we looked at other alternatives to moving gas from Chicago to Dawn. 1328 MR. WARREN: Sorry, A & R MichCon was another entity in which Enbridge Inc. had an interest; is that right? 1329 MR. BRENNAN: That Enbridge Inc. had an interest in? 1330 MR. WARREN: Yes. 1331 MR. BRENNAN: In A & R MichCon Link? 1332 MR. WARREN: Right. 1333 MR. BRENNAN: Maybe on the Link part, but not the A & R or the MichCon parts. 1334 MS. HOLDER: And again, back, most of that was to the benefit of Enbridge Consumers Gas not to Enbridge Inc.. 1335 MR. BRENNAN: And that was only to move the 50 million. It wasn't capacity to move the full 75 million. 1336 MR. WARREN: Certainly when A & R MichCon and TriState disappeared from the picture, you had to sign a contract on Vector because you had all the gas coming down the pipeline from Alliance, isn't that fair? Isn't that a reasonable conclusion? You had a whole bunch about of gas in Chicago, and you had to get it up here, bingo, Vector contract. 1337 MR. BRENNAN: Yes, looking at the alternatives, we thought that was the best approach. It matched the term of the Alliance capacity. 1338 MR. WARREN: The final area I want to cover with you, panel, is in your pre-filed evidence, Exhibit A, tab 14, schedule 4, if you turn up page 13. 1339 MR. FARRELL: Which page? 1340 MR. WARREN: Page 13. As I understand the evidence which begins at the bottom of page 13, sorry, top of page 13, is reduced to its essence, that the amount in the notional deferral account should be adjusted based on the consideration of four factors. Factor number one is the abnormally high gas costs in December of 2000, which we've already talked about; right? 1341 MR. BRENNAN: That's correct. 1342 MR. WARREN: Factor number 2 is the anticipated level of TCPL tolls. If I understand that argument which appears beginning at numbered paragraph 35 on page 14, it is you anticipate that if TCPL tolls are increased: A, to the level that TCPL has asked; and, B, if it's made retroactive, that you think that retroactive increase should be factored into the calculation of the notional deferral; is that right? 1343 MR. BRENNAN: Almost. We're not expecting it to be retroactive. They will recover those costs going forward, but for the purposes of this analysis, we feel that it should be incorporated into the analysis as if it were recovered over the 2001 period. 1344 MR. WARREN: Then I missed the logic of that, because I thought your argument was that it was likely to be made retroactive. Why should it apply if it's not going to be made retroactive? 1345 MR. BRENNAN: Because it's just a fluke of timing, if you like. TransCanada, it's 2002 now and TransCanada still is on interim tolls for 2001. So if TransCanada had brought its fair return application earlier and received a favorable decision, then those tolls would have been in effect as of 2001. 1346 MR. WARREN: So you're asking this Board, if they accede to that argument, you are asking this Board to do something which you don't expect the NEB which is to make those toll increases retroactive; is that right? 1347 MR. BRENNAN: We're just trying to reflect what we think is the appropriate comparison between the TCPL and Nova versus the Alliance-Vector comparison. 1348 MR. WARREN: And just to refresh my memory, this is the TCPL toll increase which you didn't intervene and actively oppose at the NEB; is that right? 1349 MR. BRENNAN: It was the fair return application. 1350 MR. WARREN: Which you didn't intervene and actively oppose; right? 1351 MR. BRENNAN: We did not intervene, no. 1352 MR. WARREN: Now, the third offset, if I can put it that way, to the notional deferral account are exchange rates, and this appears at page -- paragraph 38 page 15 of 16. 1353 MR. BRENNAN: Maybe if I could just help you there, Mr. Warren, I think the first two items that we talked about, the adjustment for the high gas costs in December of 2000 as well as the adjustment for the TCPL tolls, those are the ones that we are suggesting should be made to the notional deferral account. The latter two, the one that talks about the exchange rate and the fuel ratio were there to give the Board a sense of where we see -- where the possibility of where those factors may enter in over the long term. It's not something that we're necessarily looking for an adjustment today, because you make those first two adjustments, there's nothing else left. 1354 MR. WARREN: Then you'll have to help me, sir, with how I'm supposed to understand paragraph 38. What you're saying is that the comparison between Alliance-Vector and TCPL has to reflect now three factors: Number one, an anticipated increase in TCPL tolls as a result of an NEB decision; right? 1355 MR. BRENNAN: That's one of the adjustments we included, correct. 1356 MR. WARREN: No, but going forward, what you're saying is the comparison between Alliance-Vector and TCPL should reflect, number one, an anticipated increase in TCPL tolls as a result of the NEB decision; correct? 1357 MR. BRENNAN: We're saying that the notional deferral account should be adjusted to reflect TransCanada's tolls that are -- will be final, but are now only on an interim basis. 1358 MR. WARREN: But also if the Board wants to do, according to you, a true comparison of Alliance-Vector versus TCPL, it has to go on a go forward basis, it has to consider the TCPL tolls will be higher; correct? 1359 MR. BRENNAN: Yes. 1360 MR. WARREN: All right. And the second factor is this exchange rate. 1361 MR. BRENNAN: Well, as I said earlier, the exchange rate was there to try and demonstrate that, over the longer term, there is this potential that if the exchange rate does recover, then the Alliance pipeline route would be more attractive than TransCanada. 1362 MR. WARREN: And do I understand -- 1363 MR. BRENNAN: The idea being there is that you can't look in isolation at maybe one or two years whether or not something is in the best interest of the ratepayers. I think you have to look over the longer term, and that's what we've been saying. 1364 MR. WARREN: And I suppose the possibility the mere opposite of that possibility is the exchange rate gets worse. 1365 MR. BRENNAN: Yes. 1366 MR. WARREN: If Mr. Chretien, for example, decides to fire Mr. Manley and has nobody left. 1367 MR. FARRELL: Or even himself. 1368 MS. HOLDER: We have more faith in our government than that. 1369 MR. FARRELL: I should point out -- 1370 MR. WARREN: You are a lonely crowd, Ms. Holder, on that point. 1371 MR. FARRELL: In terms of these, just so Mr. Warren doesn't overlook it, but this is a topic that was also dealt in reply evidence that the treatment that we wanted the rationale for the TCPL toll based on the fair return application and the roll that the two other adjustments played so it's in Exhibit A-14 schedule 9 starting at about paragraph 47. I just point that out. 1372 MR. WARREN: I just want to understand how it is we should -- the Board should regard this exchange rate. What I understood the evidence to be saying, now that you've told me it isn't going to be an offset, what I now understand the position to be is that the Board has to take a look at the exchange rate to arrive at a true comparison between TCPL and what you say is a fair comparison between TCPL and Alliance-Vector; correct? 1373 MR. BRENNAN: If you look at it probably on a going-forward basis over the longer term, instead of isolating them one year, what is that comparison, what could that comparison look like over a longer term over the 15-year life of the contract? 1374 MR. WARREN: Now let's just stay with this for a moment and stay with my doomsday scenario that the exchange rate gets worse, what should the Board do if, year over year, the exchange rate gets worse? Should it, for example, say, "Boy, this decision looks poorer with each passing year." 1375 MS. HOLDER: I think in all fairness to this Board they'll probably wait until that time comes to address it. We're not asking the Board to, at this point in time, to approve the cost consequences of these contracts for future years. We're asking them to approve the rate recovery of the gas costs incurred to date and the prudency issue. 1376 MR. WARREN: How does the exchange rate issue arise, Mr. Holder, or Mr. Brennan, how does it -- or Mr. Small how does it get factored in? 1377 MR. SMALL: I think what we're trying to show is in following how the notional deferral account was laid out, yes, it did show 12.45 million. 1378 Then we recognized that there was the anomaly with the month of December and the potential of the TCPL toll issue, but I think we also wanted to also demonstrate or provide to the Board that at the time that we were making the decision to enter into the Alliance and Vector, we had assumed a certain level of an exchange rate, and what we wanted to demonstrate was that the exchange rates through 2001 did have an impact because they were higher than what the assumption was. 1379 What we've tried to show here is the difference between the exchange rates on a monthly basis versus an exchange rate of $1.50 and that's the same thing we were trying to do with the fuel adjustment. We said okay, back in the time we were assessing the cost consequences or the comparison between Alliance and Vector, we had assumed a certain level for TCPL fuel ratios. Those fuel ratios are a lot lower, and the customers have benefited from that, but when comparing the two routes, we wanted to identify that there might have been some things that we hadn't that you had thought of or had expected to happen. 1380 MR. WARREN: Can you tell me, sir, and I apologize for my profound ignorance on this, you're going to have to help me out, TCPL is an al-Canadian route; correct? 1381 MR. SMALL: Yes. 1382 MR. FARRELL: That's not correct. I'm sorry. If you factor in the Great Lakes portion, the Great Lakes portion which TransCanada uses, then it's not all Canadian. 1383 MS. HOLDER: We will agree it's a Canadian toll. 1384 MR. WARREN: It's a Canadian toll. Because the Alliance-Vector system takes you into Chicago and then Chicago up to here, exchange rates now become a factor in the equation; correct? 1385 MR. PLECKAITIS: That's correct. 1386 MR. WARREN: And because they are a factor in the equation, they are a risk which was voluntarily assumed when you decided to sign the Alliance contract and the contracts and the Vector contracts; correct? 1387 MR. FARRELL: Before the answer is -- just a minute. Before you answer, is the premise of your question that the exchange rate has to effect on TransCanada's tolls; is that the premise you are just making? 1388 MR. WARREN: Well, that's what your panel just told me. 1389 MR. FARRELL: No, they didn't. They said the toll was expressed in Canadian dollars. 1390 MR. WARREN: Does the exchange rate have an effect on TransCanada tolls? 1391 MR. BRENNAN: Yes, it does. 1392 MR. WARREN: Does it have an effect on TransCanada tolls to the same extent that it does on Alliance and Vector. 1393 MR. BRENNAN: I'm not sure I can answer that the TransCanada can contracts with the Great Lakes is what we call a TBO, a transportation by others, so that's a service that TransCanada is contracting in Great Lakes, and I assuming they will be charged U.S. dollars. As to what the dollar amount of that is, I'm not sure. 1394 MR. WARREN: Perhaps you could give me an undertaking to determine that question of the extent to which, on a comparative basis, the exchange rate has an effect on TCPL as opposed to Alliance-Vector costs. 1395 MS. HOLDER: I don't think we are in a position to provide that information. I think that would have to come from TransCanada. 1396 MR. FARRELL: I think we can provide, at a high level, in terms of what factors with TransCanada's cost of service may be influenced by the exchange rate, but I don't know whether we can quantify t Mr. Warren. 1397 MS. HALLADAY: Mr. Warren, I see it's just about 5:00 and I'm wondering if now is an appropriate time to -- 1398 MR. WARREN: Oh, I think an hour and a half ago would have been opportune but, you know, I'm not in the business of retroactive rate making or anything else, so now is a terrific time. 1399 MS. HALLADAY: All right. Before we adjourn for the day, are there any other matters? 1400 MR. FARRELL: I just want to make sure I understand, one, whether we've given an undertaking and, two, the extent of it and -- 1401 MS. HALLADAY: I thought that you had, at a high level. 1402 MR. FARRELL: Well, Mr. Warren didn't indicate whether that was acceptable. 1403 MS. HALLADAY: I apologize. Mr. Warren. 1404 MR. WARREN: I was about to say I want you to get as much information as you can so I can understand the relative importance of exchange rates in Alliance-Vector as opposed to TCPL. 1405 MR. FARRELL: We'll do that. 1406 MR. MORAN: That would be G 2.3, Madam Chair. 1407 MS. HALLADAY: Thank you. 1408 UNDERTAKING NO. G2.3: TO DETERMINE EXTENT TO WHICH EXCHANGE RATE HAS AN EFFECT ON TPL COSTS AS OPPOSED TO ALLIANCE-VECTOR 1409 MS. HALLADAY: Are there any other matters before we adjourn? 1410 MR. FARRELL: I'd just like to advise the Board and the parties here that Enbridge Consumers Gas has filed the responses to the interrogatories on the DEPERMS issue and that they will be served on intervenors by overnight courier, but we do have copies for the intervenors that are here, and the Board should have it. 1411 MS. HALLADAY: Yes, we were excited to see those on our desks. 1412 MR. FARRELL: I can imagine. 1413 MR. WARREN: Madam Chair, Mr. Farrell and I had a discussion at the beginning of the day in which we talked about a follow-up to observations which you made on the opening day about DEPERMS and its role in this case, and it is our desire, that is, the desire of my client to get -- pursue the logic of your observations, wherever it may lead, and we would like an opportunity to do that. 1414 Mr. Farrell said this morning that tomorrow morning would be a better time to do that because the evidence will have been delivered, so I would anticipate that certainly on our behalf, tomorrow morning we would be asking the Board to make submissions to the Board with respect to the issue of whether or not DEPERMS should form part of this case or not. 1415 MS. HALLADAY: So tomorrow morning, you're each going to make submissions -- 1416 MR. FARRELL: Ms. Noland would speak on behalf of the company. Mr. Warren did speak to me this morning, and I had asked him to delay raising it until we made the filing, and the unknown is whether Mr. Thompson is going to be here tomorrow as well, and we're not too sure whether he is or he isn't. 1417 MR. WARREN: My understanding is that Mr. Thompson is going to be here and I also, through the kindness of Board staff, ask that we notify Mr. Vegh who may well have an interest in this. I don't know if the two of them can't be here, but Mr. Farrell has said the file filing has been made and I wanted to let the Board know that that is an issue which we feel needs to be resolved. 1418 MS. HALLADAY: We would encourage the parties to explore the appropriateness of DEPERMS as an issue in this case, whether or not it should be removed from the issues in this case. 1419 A couple of other points, when may we expect the cost consequences of the settlement agreement to be filed? 1420 MR. FARRELL: I'm advised tomorrow. 1421 MS. HALLADAY: Tomorrow, thank you. 1422 MR. FARRELL: May have a moment? 1423 MS. HALLADAY: Certainly. 1424 MR. FARRELL: Yes, Madam Chairman, I'm advised that what we have in hand now are the impact statement number 2 which is an M, as in mother, exhibit, and the second N, as in Norman, series exhibits which would show the effect -- I'm having trouble here -- that are not totally complete because what we are expecting to do is we will file them tomorrow and they will be, at that point, I'm advised, complete. 1425 Mr. Burke has finished some of his, we are waiting for Ms. Dagga to finish some of hers. You know they each this responsibilities for the schedule, so the bottom line is we expect to file the package tomorrow. 1426 MS. HALLADAY: Thank you. My only other point that I'd like to raise is the fact that we have received the QRAM application, and I would point out that under the normal course, intervenors would have until -- have a week, I guess, a week until next Wednesday to make submissions. I just raise that as a possibility as to whether -- any submissions to be made by the intervenors with respect to the QRAM application -- it might make more sense for you to make them in this hearing rather than make them in writing, as would be the norm, of course, in the QRAM application. 1427 MR. FARRELL: That's fine by us. That's actually a very efficient way of doing it. 1428 MS. HALLADAY: If intervenors and, specifically, ones that aren't here and might be reading the transcript have any comments, it was just open for suggestion that oral comments would be acceptable or if people don't want to make oral comments then, obviously, would we would follow the normal QRAM procedure of written comments by that date. 1429 Before we adjourn, any other points? That being the case, then we stand adjourned until 9:30 tomorrow morning. Thank you. 1430 --- Whereupon the hearing adjourned at 5:05 p.m.