Rep: OEB Doc: 129LZ Rev: 0 ONTARIO ENERGY BOARD Volume: 5 11 JUNE 2002 BEFORE: S. HALLADAY PRESIDING MEMBER R. BETTS MEMBER A. SPOEL MEMBER 1 RP-2001-0032 TRANSCRIPT VOLUME #5 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 #5 4 11 JUNE 2002 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel COLIN SCHUCH Board Staff JERRY FARRELL Enbridge Consumers Gas MARIKA HARE Enbridge Consumers Gas RICHARD LANNI Enbridge Consumers Gas HELEN NEWLAND Enbridge Consumers Gas TOM MOUTSATSOS CME MALCOLM ROWAN CME PAT MCMAHON Union Gas DAVID POCH GEC THOMAS BRETT OASBO IAN MONDROW HVAC Coalition TIBOR HAYNAL TransCanada PipeLines ROBERT WARREN CAC MICHAEL JANIGAN VECC JOYCE POON VECC SUSAN LOTT VECC GEORGE VEGH CEED ELISABETH VEGH CEED MURRAY KLIPPENSTEIN Pollution Probe JACK GIBBONS Pollution Probe PETER THOMPSON IGUA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [17] ENBRIDGE CONSUMERS GAS - PANEL 4 [30] CROSS-EXAMINATION BY MR. BRETT: [35] FURTHER CROSS-EXAMINATION BY MR. MONDROW: [544] CROSS-EXAMINATION BY MR. THOMPSON: [578] ENBRIDGE CONSUMERS GAS - PANEL 5 - QRAM [833] EXAMINATION BY MR. FARRELL: [837] CROSS-EXAMINATION BY MR. MORAN: [852] QUESTIONS FROM THE BOARD: [940] SUBMISSIONS BY MS. DEMARCO ON QRAM: [970] SUBMISSIONS BY MR. THOMPSON ON QRAM: [1018] SUBMISSIONS BY MR. HAGGERTY ON QRAM: [1044] REPLY SUBMISSIONS BY MR. FARRELL ON QRAM: [1054] ENBRIDGE CONSUMERS GAS - PANEL 4 - RESUMED [1099] CONTINUED CROSS-EXAMINATION BY THOMPSON: [1104] 10 EXHIBITS 11 EXHIBIT NO. J.4.7 NATURAL GAS PROCUREMENT POLICIES AND PROCEDURES [22] EXHIBIT NO. J.4.9 DOCUMENT ENTITLED "ECG OUT-SOURCING MATRIX" [371] QRAM EXHIBIT NO. 1: QRAM BILL SAMPLE [894] QRAM EXHIBIT NO. 2: UNION GAS SETTLEMENT AGREEMENT [995] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.5.1: TO DETERMINE IF SCHEDULES TO MASTER AGREEMENT CAN BE REDACTED IN A WAY TO DELETE THE COST CONSEQUENCES BUT SILL GIVE THE FUNCTIONALITY ASPECTS OF THE CONTRACT [92] UNDERTAKING NO. J.5.2: TO REVIEW ENBRIDGE COMMERCIAL SERVICES' SCHEDULES AND PROVIDE VERSIONS THAT INCLUDE PRICING INFORMATION [150] UNDERTAKING NO. J.5.3: TO PROVIDE THE TERM DATES OF THE ECS LABOUR RELATIONS EMPLOYEE RECORDS PACKAGE [161] UNDERTAKING NO. J.5.4: TO PROVIDE AGREEMENT THAT ENCOMPASSES ALL SERVICES, IF ONE EXISTS [191] UNDERTAKING NO. J.5.5: TO PROVIDE COPIES OF PRESENTATIONS GIVEN TO BOTH THE ENBRIDGE CONSUMERS GAS MANAGEMENT TEAM AND THE ENBRIDGE INC. CLT ON OUT-SOURCING ARRANGEMENTS (WITH APPROPRIATE REDACTIONS) [685] QRAM UNDERTAKING NO. 1: TO PROVIDE THREE-MONTH CALCULATIONS FOR RIDER C - GAS INVENTORY ADJUSTMENT RIDER [936] UNDERTAKING NO. J.5.6: POWERPOINT PRESENTATION [1377] 14 --- Upon commencing at 9:34 a.m. 15 MS. HALLADAY: Please be seated. 16 Good morning. Before we begin, are there any preliminary matters? 17 PRELIMINARY MATTERS: 18 MR. FARRELL: Yes, I have a response to one of the undertakings of yesterday, Madam Chair. It's J.4.7. This is the natural gas procurement policies and procedures that Mr. Vegh was asking to be filed. 19 And I mentioned, I think, that it had been filed in a previous proceeding. It was, actually, an exhibit in last year's case, so that's why we were able to locate it so readily. 20 MS. HALLADAY: Thank you, Mr. Farrell. 21 MR. FARRELL: I think the convention now is just to mark with the number of the undertaking, so this would be J.4.7. 22 EXHIBIT NO. J.4.7 NATURAL GAS PROCUREMENT POLICIES AND PROCEDURES 23 MS. HALLADAY: Thank you. 24 MR. FARRELL: Copies are at the back. 25 That's all I have, Madam Chair. 26 MS. HALLADAY: Thank you, Mr. Farrell. 27 So who's next? Mr. Brett? Mr. Thompson? 28 MR. BRETT: Yes, I'm next, Madam Chair, Panel. 29 MS. HALLADAY: Thank you, Mr. Brett. 30 ENBRIDGE CONSUMERS GAS - PANEL 4 31 S.McGILL; Previously sworn. 32 J.HOLDER; Previously sworn. 33 F.BRENNAN; Previously sworn. 34 A.PLECKAITIS; Previously sworn. 35 CROSS-EXAMINATION BY MR. BRETT: 36 MR. BRETT: Good morning. Good morning, Panel. 37 MR. BRENNAN: Good morning. 38 MR. BRETT: I'd like to start by asking you to turn up Exhibit I, tab 1, schedule 40. That's Board staff interrogatory 40, page 3. That's the page that has the list of this -- a long list of this series of reallocations of business functions that Enbridge has made over the last three or four years. 39 And before getting into that, though, I just wanted to check. Could someone just advise me, when did Enbridge acquire ECG, the date of the acquisition? 40 MS. HOLDER: Well, we'll have to undertake. I think it was '93 or '94. 41 MR. FARRELL: It was late '94, early '95. If you need something more specific, we can get it. 42 MR. BRETT: No, I think that's close enough for my purposes. 43 And the other general question, I just wanted to confirm your understanding that we are in the final year of a three-year PBR program now, a three-year targeted PBR plan that's targeted to the O&M expenses of the company. So in other words, this -- the PBR plan will end on September 30th of this year; is that right? 44 MS. HOLDER: Yes, that's correct. 45 MR. BRETT: And then next year, in the year 2003, which is the year that starts October 1 -- in your case, October 1, 2002, that will be a cost-of-service year? 46 MS. HOLDER: That's correct. 47 MR. BRETT: And then the year after that, presumably, if all goes according to plan, your consultative process will be the first year of a new so-called comprehensive performance-based rate-making plan which will probably be five years in duration. We don't know the particulars of it yet, but in any event it will start -- it's scheduled to start October 1st, 2004; right? 48 MS. HOLDER: That is correct. And some of the parameters for that proposal have been discussed with stakeholders. 49 MR. MCGILL: I believe that would be October 1st, 2003. 50 MR. FARRELL: Fiscal 2004 is the -- 51 MR. BRETT: All right. Yeah, okay, fiscal 2004. So October 1st, 2003. Yeah. It's always a little complicated to keep track of your fiscal years and calendar years. 52 On this, I just want to start my comments or my questions by asking you a bit about this table. This table -- I start here, because this table lays out the topology. I'm interested in, sort of, the topology of those various arrangements that have been put in place, the categories of them, what parts of the business of Enbridge's business have been effectively shifted to affiliate companies and the sequence over which -- of time over which this has been done. 53 And I want to make sure the Board and the intervenors collectively have their minds around all of these agreements, the schedules to them, that we have a complete record in one place of all of this activity, so that's what I'm getting at here. 54 And I want to start with the ones that we are most familiar with, based on the last couple of days. The energy -- at the bottom, there are 23 of these. If we exclude Niagara Gas transmission on Link pipeline, which I'm not interested in for purposes of this discussion, we are looking at 23 separate business components, or 23 services, depending on how you might wish to look at it. I look at these as parts of a business. 55 In the case of EOSI, that's the Enbridge Operational Services, that contract, Mr. Brennan, could I have the start date of that contract, please? When does that -- when did that start? 56 MR. BRENNAN: October 1st, 2000. 57 MR. BRETT: Okay. So that's October 1st, 2000. 58 And the term of that is what, please? 59 MS. HOLDER: Seven years. 60 MR. BRETT: So October 1st, 2000, to October 1st, 2007. 61 And then the -- and we have that contract filed in this case and we have the schedules filed to it, so we have a fairly complete record of it. 62 My second one is the EI gas supply management contract, and we discussed that at some length. Now, when does that -- when did that commence? 63 MR. BRENNAN: That agreement commenced July 1st, 2001. 64 MR. BRETT: Okay. And that goes until when? 65 MR. BRENNAN: September 30th, 2004. 66 MR. BRETT: Okay. And then the next one is the -- moving up from the bottom, and this -- I'm looking here now at lines 18, 19, 20 and 21. This is the collection of functions which I think is loosely referred to as customer service, and it's the collection of functions that have been transferred to the Customer Works limited partnership; is that right, Mr. McGill? 67 MR. MCGILL: The four functions noted at lines 18 through 21 were originally transferred over to Enbridge Commercial Services effective January 1st of 2000, and then they were subsequently transferred to the Customer Works limited partnership effective January 1, 2002. 68 MR. BRETT: That agreement -- sorry, the term of that agreement with Customer Works is what? 69 MR. MCGILL: It's five years commencing from January 1st, 2002. 70 MR. BRETT: Okay. So this would be January 1st, 2007. Now, that agreement, you have filed the agreement itself but you have not filed the service -- that's in this hearing. You've filed the agreement in this proceeding but you have not filed the service schedules to that agreement. Could we get copies of those? 71 MR. FARRELL: No. 72 MR. BRETT: I'm sorry? I'm asking Mr. McGill, I'm not asking you. 73 MR. MCGILL: Well, I don't believe there's any reason for providing them in this proceeding as the costs flowing out of those arrangements don't have a bearing on setting rates for this test year. 74 MR. BRETT: Well, Mr. McGill, I'm interested in getting, first of all, what's going on under these agreements, what the substance of them are, and from the agreement that you've filed here, I can't tell that. This agreement says nothing about the detail of what services are going to be provided. It says that you have produced interim service schedules that you are operating under and I would like to have those. I don't understand how we can get a full picture of what is happening with respect to the allocation of business functions by Enbridge unless we have a clear idea, first of all, of what exactly are the functions that are going to be carried out by Customer Works. 75 MR. MCGILL: Well, again, first, I don't believe that this is an issue in this hearing. 76 MR. BRETT: Mr. McGill, have you looked at the settlement conference description of this issue? This issue is described in the settlement conference as the implications of the Consumers decision to contract out the gas distribution and gas sales and planning and gas control. And it's clear from the description of that issue in the settlement agreement that intervenors are interested in the broad implications of the pattern of contracting out that has been taking place over the last period of time. 77 We are now at a point where Enbridge Consumers Gas has had reallocated away from it to other companies 55 percent of its total O&M budget in the last three years, and a number of intervenors, myself included, are -- wish to examine the overall implications of this for the regulatory oversight of the utility. 78 Beyond that, we're in a PBR regime, and unless we know the substance of what is being contracted out to third parties, how are intervenors to assess whether or not the regime is working? 79 MR. MCGILL: Well, I believe that within the context of the current PBR, our O&M costs are set by the formula and we have service quality indicators that the company is obligated to meet. And that is the mechanism by which the intervenors or other stakeholders are to determine whether or not the company is meeting its commitments under the PBR arrangement. 80 MR. BRETT: Well, Madam Chair, I don't quite understand this. We have been -- the parties of Consumers has filed the schedules in the case of the gas contracts. In the case of the Customer Works contract, which involves something like 750 employees, they are refusing to file the schedules that would allow us to determine what is being performed by Customer Works. 81 MS. HALLADAY: Mr. Brett, is your issue the functions and what the function -- description of the functions that might be on the schedules as opposed to cost consequences? 82 MR. BRETT: My issue is to understand exactly what these functions are, what is it that's being done. And in the case of the gas services, what I'll call the gas services agreement, for example, they have six or seven schedules which succinctly describe each of the pieces of work that Enbridge Inc. is going to be doing for the utility. And all I want is the same thing here. What are the descriptions of the pieces of work that Customer Works is doing for the -- on behalf of the -- or service they are providing to Enbridge Consumers Gas. 83 MS. HALLADAY: Mr. McGill, is there a problem filing the schedules with the cost redacted? 84 MR. MCGILL: I can go back and take a look and see if we can put together some kind of version that would list out the detail of the services that are provided and bring that forward if that helps. 85 MR. FARRELL: The difference, Madam Chair, between the examples Mr. Brett used, that's Enbridge Operating Services and Enbridge Inc., is that that contract is self-contained, if you will. Last year we filed the master agreements for -- with -- between ECG, rather, Enbridge Services Inc., Enbridge Commercial Services Inc., and Enbridge Inc., but not the schedules, on the ground that the schedules contained cost information, and cost consequences weren't in issue. So this year we filed the master agreement with Customer Works on the same basis. 86 My point is that if we can prepare something that redacts, as you suggested, the cost information, then I think we would meet the company's objection to filing the schedule with that information in. But perhaps the undertaking would be that Mr. McGill will look at the schedules to the master agreement and see whether they can be filed without cost information but still include the type of services that are being performed. 87 MR. BRETT: I have no problem with not getting the cost information. I just want the descriptions of the services. And in each of the gas cases, the gas schedules that we've spoken about, the costs, of course, are redacted. So I don't have a problem getting the schedules on that basis. 88 MS. HALLADAY: Okay. So I think what we have is an undertaking by Mr. McGill to determine if the schedules to the agreements can be redacted in a way to delete the cost consequences but still give the functionality aspects of the contract; is that fair to say? 89 MR. FARRELL: Yes. 90 MS. HALLADAY: Mr. Moran. 91 MR. MORAN: That would be Undertaking J.5.1. 92 UNDERTAKING NO. J.5.1: TO DETERMINE IF SCHEDULES TO MASTER AGREEMENT CAN BE REDACTED IN A WAY TO DELETE THE COST CONSEQUENCES BUT SILL GIVE THE FUNCTIONALITY ASPECTS OF THE CONTRACT 93 MR. BRETT: I guess -- all right, let's proceed on that basis. 94 I think in the event that Mr. McGill were to determine otherwise, I'd like to see if clearly set out, because I don't see any reason why they can't. You've been ... 95 MR. FARRELL: If we can't file it, we'll explain why, Madam Chair. 96 MS. HALLADAY: Thank you. 97 MR. BRETT: All right. Just carrying on. 98 Let's just go back -- and by the way, just to clarify, and maybe we'll save some time here, because I don't want you to be operating under any misapprehension and we don't need to have interventions in my cross-examination every 30 seconds, but I'm not asking for costs here. I take the point that you are not required at this juncture to spell out the costs of these contracts, I may ask you some questions about the principles upon which those contracts were drafted and perhaps the principles underlying the costs, but I don't need the numbers and I won't be asking for the numbers. 99 But what I do want, and I will insist on to the best of my ability, is a clear, complete picture of these agreements that have been put in place over the last several years so we can see, and the Board can see, all in one place where this $150 million has gone. You have $150 million flowing out to other Enbridge companies, which is more than half your total O&M budget, and I think it's high time that people had a chance to look at this in the totality of -- anyway, that's just to show you where I'm coming from here. 100 Okay. Now, moving up the ladder, Mr. McGill, you were -- 101 MR. PLECKAITIS: Sorry, Mr. Brett, can I just ask you a question? 102 MR. BRETT: Yes. 103 MR. PLECKAITIS: You quoted the number $150 million, and I think before you used a percentage of O&M costs. Can you tell me what source -- 104 MR. BRETT: Yes, sure I can. I was going to move to that later on as part of the cross-examination so perhaps I'll just leave that. That's one of my next pieces. I tend to get ahead of myself. 105 Let me just focus quietly and thoroughly on this page here because I want to make sure I don't miss anything. Moving up, then, the scale from the bottom, Mr. McGill, perhaps we'll dwell again on this Customer Works material a little bit more. You had said that it was -- initially, you told the Board that these customer care functions were initially transferred from Consumers over to Enbridge Commercial Services on January 1 of 2000, I believe. 106 MR. MCGILL: That's correct. 107 MR. BRETT: So what's happened, I just want to make sure I understand what's happened here, basically that same chunk of customer care service has been now retransferred, if you like, over to Customer Works. 108 MR. MCGILL: That's correct. 109 MR. BRETT: Okay. But there were also some other functions, am I not right, that were transferred out from Consumers Gas to ECI back on January 1st, 2000. These would be the fleet management and a variety of AT functions or information -- IT functions. And I take it, just for simplicity, those are the functions that are listed in lines 1 through 6 of the table. Is that about right? 110 MR. MCGILL: Well, if you are including fleet and equipment, yes, up to line 5. 111 MR. BRETT: Up to line 5. And those five functions - desktop support, network telecommunications, application maintenance, documentation, fleet management - those were -- those were transferred out as part of the same package as customer care; correct? 112 MR. MCGILL: That's correct. They were transferred out, along with the customer care functions, January 1st, 2000. 113 MR. BRETT: And are those functions still being carried out by ECI? 114 MR. MCGILL: For the most part, yes, there have been some changes. As I indicated yesterday, we are still in the process of trying to complete the planning for those changes, and as of yet I'm not sure exactly to what extent the services will stay in ECSI or perhaps move back into ECG. 115 MR. BRETT: All right. Well, maybe we better deal with that. I was going to deal with that a little later here, but this -- you talked about this a bit with Mr. Mondrow yesterday, and you talked a little bit about this in your evidence-in-chief. 116 But as I understand it, sort of speaking broadly, ESI, Enbridge Services Inc. itself used to provide certain services to Enbridge Consumers Gas, going back a couple of years. 117 If you go back, for example, into the 2001 and 2000 years, it seems to me, unless I misread the financial statements, Enbridge Consumers Gas, the utility, was making certain payments to Enbridge Services Inc.. This is prior to Enbridge Services Inc. being sold to Centrica. 118 MR. MCGILL: Well, there may have been some, but I'm not aware of the details of those transactions. 119 MR. BRETT: All right. Well, I'll come back to that part of it in a minute. 120 But in terms of -- let me ask you this: In terms of these services we're just speaking about, which Enbridge Commercial Services has been providing to the utility for the last several -- the last period of time, are you saying, then, that as -- that they were also providing those services to ESI; is that -- 121 MR. MCGILL: Yes, for the most part. 122 MR. BRETT: Okay. And ESI was sold to Centrica by Enbridge when, roughly? 123 MR. MCGILL: That transaction closed May 7th of 2002. 124 MR. BRETT: Okay. Now, as a result of that sale, I take it that Enbridge Commercial Services would not be providing those services to Centrica anymore; is that -- 125 MR. MCGILL: Well, I'm not certain to what extent. We're in the midst of a transition period right now, and as I indicated, we're trying to sort out what kind of operating model is going to make the most sense going forward. And that's -- that work isn't completed at this point in time. 126 MR. BRETT: Well, then, what are the -- but you said that it's possible that the services that are now provided by ECS, Enbridge Commercial Services, will come back into the utility. 127 MR. MCGILL: That's my expectation, that to some extent -- that some of the functions that they have been providing will move back into ECG. 128 MR. BRETT: When will you know that? 129 MR. MCGILL: I guess some time over the course of the next two to three months, I would expect. 130 MS. HOLDER: Just to make a comment. One of the issues we're having to deal with is there are unions involved in these transactions, so we have to work through the union on what the final decisions as well. So we have to be fairly cautious about what we say here. 131 But I agree that within the next month to two months, we should know the answer. 132 MR. BRETT: Well, now, then, going back to that agreement in 2001, January 1st of 2000, that transferred the functions out, the package of customer care and the package of IT support functions, that agreement, I take it, was made pursuant to -- well, first of all, let me ask you: Is there a separate agreement that deals with that? 133 MR. MCGILL: Are you referring to the Customer Works agreement, the January 1, 2000 -- 134 MR. BRETT: No. No. There's three different agreements here. There is the agreement that you now have with Customer Works, which we just spoke about, and that you are going to have a look at. 135 There is the agreement under which energy -- Enbridge Commercial Services transferred their -- the customer care business over to Customer Works, which I'm not asking about. I take that to be a private agreement between two affiliate companies. 136 And then there is the original agreement, under which the utility sent out the -- out-sourced, if you like, the package of customer care functions and IT functions and fleet management functions to Enbridge Commercial Services. 137 And that agreement, I take it, was signed in and around January the 1st of 2000? 138 MR. MCGILL: Correct. 139 MR. BRETT: And that agreement -- is that agreement available? Has it been filed, or if not, is it available? 140 MR. MCGILL: I believe that we filed the master agreement in last year's evidence. 141 MR. BRETT: You've filed the master agreement. I've looked at those master -- that master agreement quite closely. You did file two or three master agreements in last year's evidence, but they were -- if I can put it this way, well, they were master agreements in the literal sense. They were framework agreements that said nothing about individual services being provided. 142 And for the most part, oddly enough -- well, maybe not so oddly -- they were framed in terms of the utility supplying services to the affiliates rather than the other way around. 143 What I am interested in is the agreement that lays out, just as we spoke a moment ago, whether it's in one agreement with several schedules, or whether it's in the form of several schedules to the master agreement -- you could have done it either way -- but I'm interested in the schedules that set out the jobs that are being done by Enbridge Commercial Services, similar to -- it's very similar to what I was asking a moment ago. 144 I'm not interested in the costs, but I'm interested in a description of what went on. Could you get that. 145 MR. MCGILL: I guess, again, subject to the same discussion we had around the Customer Works service schedules, I can undertake to go back and review the Enbridge Commercial Services schedules and come up with versions with the pricing information. 146 MR. BRETT: I appreciate that. 147 MS. HOLDER: Can I make one other qualifier? I have some concerns, knowing what's in these, about the confidentiality of the information. What we are going to be doing is putting on the record every piece of our business that we have out-sourced and I'm not sure that may not have some sensitivity to it. So with that proviso, I think we can look at that, but I just wanted to --- 148 MR. BRETT: I appreciate your caveat and obviously you can do that. But I would just remind you, though, that it's exactly what you've done in the schedules to the gas management supply agreement and what you've done in the schedules to the agreements with EOS. That's exactly what you've done. You've put in the pieces, the descriptions of the pieces of your business in question. It's no different; I am asking for no greater level of detail. I would be happy with a comparable level of detail to what's in the schedules for the two gas agreements. 149 MR. MORAN: That would be J.5.2. 150 UNDERTAKING NO. J.5.2: TO REVIEW ENBRIDGE COMMERCIAL SERVICES' SCHEDULES AND PROVIDE VERSIONS THAT INCLUDE PRICING INFORMATION 151 MR. BRETT: Okay. And then I think the next part of this is something that you do refer to in your evidence in this case directly, and, Mr. McGill, this is probably -- well, probably you're the best guy here. If you would look at lines 7, 8, 9 and 10. 152 MR. MCGILL: Yes. 153 MR. BRETT: This is your labour relations employee records package that -- and I understand in this case that you put this out October 1st of 2001? 154 MR. MCGILL: That's correct. 155 MR. BRETT: And what is the term of that agreement? 156 MR. MCGILL: Well, again, subject to our review of the services ECS provides, that would have been -- the original agreement with ECS was for five years from January 1, 2000. With respect to these specific items, I would have to check to confirm what the length of the term was with respect to them, whether it ran to the term of the original agreement or whether they ran to some different date. 157 MR. BRETT: Okay. Well, if you could do that, and again I would be interested in -- I take it that's probably done in the form of a schedule of the framework agreement. 158 MR. MCGILL: I expect so. 159 MR. BRETT: If I could get that on the same basis, I would appreciate it. 160 MR. MORAN: That would be J.5.3, Madam Chair. 161 UNDERTAKING NO. J.5.3: TO PROVIDE THE TERM DATES OF THE ECS LABOUR RELATIONS EMPLOYEE RECORDS PACKAGE 162 MR. BRETT: I think the only remaining area is the area of the various functions that EI has taken upon itself to provide to the utility, and these are listed in numbers 11, lines 11 through 17 on that table. And first of all, I wanted to check, you don't show on here anything to do with the capital markets functions. I understand -- my understanding has always been, listening to Mr. Boyle and others testify here, that EI also conducts the capital markets function on behalf of the utility. 163 Now, I take it that's probably under treasury, is it? That's what's contemplated by treasury? 164 MR. MCGILL: Yes, that's correct. 165 MR. BRETT: Okay. So that's -- so is this list complete, then, in your judgement? Is there anything else? Apart from this issue that Mr. McGill and I were discussing about ESI, Enbridge Services Inc., which I'll come to in a second, is this a complete list of the functions that have gone outside the utility, or is there anything else? 166 MS. HOLDER: No, there's quite another relatively extensive list which we are providing as an undertaking from yesterday where we out-sourced to third parties, parties that aren't related to Enbridge. But there's -- 167 MR. BRETT: Okay. That's fair enough. That's a different subject, from my point of view. I'm not as much interested in that. Those are -- I described those as one-year construction contracts, for example; Mr. Pleckaitis made reference to those. I think we all know and understand that you use outside contractors to help you build your pipeline from time to time. These contracts are -- that I've been looking at are long-term contracts, all of them long-term with affiliates. The operative words, from my point of view -- from my interest, long-term and affiliate. 168 So I think what I would like to do is just, before we leave this, and you were asking me a moment ago about -- well, I was asking you about Enbridge Services Inc., and if you go to Exhibit I, tab 1, schedule 1, appendix B, this is the Consumers Gas 2001 annual review and financial statement. There's just one entry in here I wanted to ask you about. It's really an information point as much as anything. 169 MS. HOLDER: Sorry, I think I have the right binder. Can you give us the reference again, please? 170 MR. BRETT: It's the -- the technical reference in the hearing is Exhibit I. It is an interrogatory response. Tab 1, schedule 1, appendix B. What it is is your 2001 annual review and financial statements. 171 MS. HOLDER: Right. 172 MR. BRETT: If you turn to page 32, there is a footnote 10 to the financial statements on related party transactions which I use as a sort of very rough guide to what's going on here. If you look down under -- I'm going to come back to this later for another reason, but for purposes of just this, my question really is -- what's interesting to me is the services Enbridge, the utility, may have been purchasing or was purchasing from Enbridge Services Inc., which is the retail company, for lack of a better high-level expert description. If you look down under affiliates, the second entry "Enbridge Services Inc., provision of consulting and other services." Oh, I see what we've got here. 173 This is -- these are expenditures. They paid out 5.5 -- it looks like the utility paid out 5.5 million in 2000 and 1.1 million in 2001. And I expect the 2002 statement would probably show zero here, but could you comment on this? 174 MR. MCGILL: I'd like to take a look at it. 175 MS. HOLDER: One of the reasons for transfer of funds from Enbridge Consumers Gas to ESI is through a DSM initiative. So it is the payment to ESI, as we would any other HVAC organization for DSM. 176 MR. BRETT: So you're saying that all of those -- are you saying that those, the totality of those numbers are DSM? 177 MS. HOLDER: That would be my only explanation. I can't think of anything else. 178 MR. BRETT: All right. But I guess it's fair to say that in any event, at the moment, I mean, we all know the history of ESI. It's now been sold. It's owned by Centrica. 179 Presumably, you're not -- is it fair to say you are not paying ESI any money now for any service they would be providing, apart from any role they might have as a DSM contractor for you? 180 MS. HOLDER: I think that's fair. 181 MR. BRETT: Now, going back to the schedule 40, you have this cluster of services that EI have been providing, and, I mean, a number of us are familiar with these to some degree because they have been the subject of discussions in earlier hearings under the cost-of-service regime, to some degree, I guess, ad nauseam. 182 But is there one single agreement that encompasses all of these services? Does anybody know? Are these the subject of each separate schedules to an agreement? I take it they would be done pursuant to the -- they may be done pursuant to the master agreement that we discussed earlier? 183 My recollection is some of these services started even earlier, though, back in '97, '96, '98 framework. 184 MR. MCGILL: Well, some of them go back for a considerable period of time. The management fee and treasury, they were transferred out I'm not sure when, well before our fiscal 2000. 185 Government relations, supplier management, risk management, audit and tax, I believe they were all transferred out either in late '99 or in 2000. 186 With respect to the agreements, I believe some of these things are subject to schedules to a master agreement and some of them are stand-alone arrangements. 187 MR. BRETT: All right. Well, if it would be possible for me to get any of those that are readily available, that would be appreciated on the same basis. 188 MR. MCGILL: Yeah. 189 MR. BRETT: Okay. 190 MR. MORAN: That would be J.5.4, Madam Chair. 191 UNDERTAKING NO. J.5.4: TO PROVIDE AGREEMENT THAT ENCOMPASSES ALL SERVICES, IF ONE EXISTS 192 MR. BRETT: I'm sorry, I'd like to ask you just briefly about a couple of comments -- well, just to make sure we understand the -- what's happened here as far as the employees. 193 In your evidence, in your three pages of evidence here, the tab -- Exhibit A, tab 16, schedule 2, and then on the gas supply it's A.14, schedule 3. These are the pages that we discussed a great deal yesterday. You talked about the gas services agreement with EI. Now, you talk about transferring 13 positions but only one employee. I just want to make sure I understand that. 194 That, first of all, what -- that tells me you had 13 people working in this area, Mr. Brennan. 195 MS. HOLDER: At the time, there was 13 positions. One was vacant, so there was actually 12 -- 196 MR. BRETT: So you had 12 people working. You transferred one; 11 didn't go. Where did they go? Did they just do something else, or are they still doing this work in Toronto? 197 MS. HOLDER: They are not doing this work in Toronto. Some of them left the company. Some have found other jobs in other functions within the company. 198 I should also add, by the way, there were two other positions. In gas supply at the time, there were 15 positions, two stayed behind, one being Frank Brennan. 199 MR. BRETT: Well, that's good. You need somebody to oversee it; right? 200 MS. HOLDER: And that was the purpose of his role, or is the purpose of his role. 201 MR. BRETT: Well, Frank stayed behind, and are you the only one here, then, on the gas supply side of these 15 positions? 202 MR. BRENNAN: There is one other individual but not on a full-time basis. It's not his full responsibility. 203 MR. BRETT: And some -- and the one that went to Calgary, is that Serpanchy? 204 MS. HOLDER: Yes, it is. 205 MR. BRETT: Pardon me, Serpanchy. I get -- 206 MS. HOLDER: Serpanchy. 207 MR. BRETT: My apologies. That's not an easy name to -- 208 MR. FARRELL: Tell it to the record. S-e-r-p-a-n-c-h-y. 209 MR. BRETT: Okay, now that means, then, the Calgary operation has to staff up to EI's operation. Did they have the people there, or did they have to go out and hire? 210 MS. HOLDER: They did have some personnel, and then they went to, as we say, the streets and hired new personnel. 211 MR. BRETT: But your agreement with them, presumably, does it reflect -- effectively reflect the same complement of people? 212 MS. HOLDER: Not necessarily, no. We asked them to perform the functions that are in the agreement you have presented, and they are doing that in the best way that they can provide those functions. 213 MR. BRETT: Okay. So if they are -- if they can provide it with ten people, then effectively you are saying that that's fine. They provide the function. They do it the best way they can. 214 MS. HOLDER: That's correct. 215 MR. BRETT: And I take it in that event, if they were to do it with ten people, and I'm going to get into this in a little more detail later, then I take it your agreement would only pay them for ten people. 216 MS. HOLDER: No, that's not necessarily true. The agreement, as we've stated here, is based upon costs which is not their costs, our cost. 217 MR. BRETT: The agreement is based on your costs? 218 MR. BRENNAN: The cost to do that similar function within the utility. 219 MR. BRETT: Why should it be based on your cost, why shouldn't it be based on the cost of the party that's actually doing the work? I'm not speaking now in relation to any regulatory economics or anything like that. But just in terms of general business principles, why would it you -- why would you -- 220 MS. HOLDER: I think one of the two issues is we are not in the business to micro-manage their business, we are in the business of managing our own. We have, through agreements and contracts, the necessary governance or covenants to ensure that they are doing the job in the way that we see the job needs to be done. 221 I think the second comment is it's very difficult if you out-source anything, whether it be to your affiliate or even to another third party, for them to say what are their costs of performing it specifically for us. 222 For the example of ESI, they may be -- sorry, Enbridge Gas Services, they may -- there is some efficiencies most likely to be gained in their organizations and they should be able to benefit from those efficiencies. 223 MR. BRETT: Did you put this contract out to tender, competitive tender? 224 MS. HOLDER: No, we did not. I had had discussions, as well as Ms. Beattie during her tenure as vice-president of gas supply, with a number of organizations who were seeking this part of our business and who were providing this type of business to -- types of businesses to other gas industry companies as well as, in some cases, electric. 225 Our view was that -- two things: It was very difficult to tender this part of the business. It's very -- this type of business is very unique to the company situation. For example, I don't think we could send out a tender that -- for Enbridge Consumers Gas that would even look similar to a tender that Union Gas would send out, for example, because the circumstances are very unique to the company. It's also -- it tends to be a type of agreement where you actually negotiate. You don't tender, you would negotiate. 226 The second point I want to make is, in our view, we believe that we had this type of expertise within Enbridge and why would we want to give this business, which we do agree is fairly critical to the distribution company, to somebody like an Enron or a KeySpan or somebody who we had absolutely no relationship with. 227 And the other point is those types of organizations truly are marketers in the sense that a lot of people have been referring to in the last couple days or last day. Enbridge Inc., as we've stated, is not a true marketer, so they're not out there to make the market. 228 MR. BRETT: Well, I'm sure Enbridge would see it, from their point of view, as something that they would wish to have a first-call on. You mentioned that they had some expertise but they had to go and staff up to complement the expertise that they had. You're aware that in certain states, notably Texas as an example, any out-sourcing of this kind of service has to be done by competitive tender. 229 MS. HOLDER: I'm not aware of that. I think that -- I should point out here, remember this is an agency agreement, this is not a true out-sourcing agreement. 230 MR. BRETT: Well, it's a -- yes, it's an agency agreement of a very peculiar nature that allows the agent to compete with you in a variety of circumstances, it seems to me. But in any event, I'm not going to debate what the word "agency" means. That's a legal point that Mr. Farrell and I can have fun with in argument. 231 But the Affiliate Code basically says -- I'm struck by this thing about costs, because the Affiliate Code says, as I look at it, it says: "In purchasing a service, a utility shall pay no more than the fair market value. For the purpose of purchasing a service, a valid tendering process shall be evidence of fair market value." 232 It doesn't say, of course, that you have to tender. But it goes on to then say: "Where a fair market value is not available, the utility shall pay no more than a cost-based price. The cost-based price shall reflect the costs of producing the service or product, including a return on the invested capital." 233 Then they go on to say that the return component can't be too high, can't be higher than the utilities approved rate of return. It seems to me that's got to be -- isn't what's relevant here the cost of the person providing you the service? 234 MS. HOLDER: No, I believe this would be the cost that the utility would incur if they were providing the service. 235 MR. BRETT: I don't think so, but I guess we'll argue about that. That to me means that, effectively, if you are saying the utility takes 15 people to provide this service, and Enbridge takes 10, that Enbridge cannot provide the service one-third more efficiently than you. And just anecdotally, and I'll come back to this, this leads to what Mr. Bauer calls an export of savings under a PBR regime. Effectively, you export the savings to your affiliate by giving them a contract that's equivalent to your own costs, and then he proceeds to do the service for a third less and puts the money in his pocket, rather than the savings being realized by the utility by being more efficient, when presumably those savings can be shared with its ratepayers if it's under a reasonable long-term PBR regime. 236 MS. HOLDER: But you've said a lot of things there in your statement so I'm going to try to focus on at least two that I've heard, and then I'm going to have to get you to repeat what you've been saying because I'm not sure I picked up on everything. 237 One of the things around the efficiency, first of all, with respect to Enbridge Gas Services and the gas control, we could not have gained any efficiencies in our own operations. The efficiency that is gained, if it is even gained outside of Enbridge Consumers Gas, is gained because they can provide the service to other parties. 238 MR. BRETT: You are speaking of operations now or -- I'm speaking of the gas supply and gas acquisition service. 239 MS. HOLDER: I'm talking about both. 240 MR. BRETT: That they do only for you. You're answering a different question. 241 MS. HOLDER: No, I'm -- 242 MR. BRETT: First of all -- 243 MS. HOLDER: I'll talk about gas services. 244 MR. FARRELL: Just a second. Mr. Brett made the statement that this is a service that Enbridge Inc. is only providing ECG, that's the premise of his question. 245 MR. BRETT: I was about to -- I'm not quite sure what that is about. The gas supply service is provided to ECG only with the exception of the New Brunswick company which is just getting off the ground. 246 MS. HOLDER: That's not totally true. So first -- okay, I will -- first of all, I will clarify that Enbridge Gas Services provides services to St. Lawrence Gas, to Gas New Brunswick, to Enbridge Consumers Gas, and also provides services to themselves. 247 Now, my point is that if we left gas supply within the utility, it would cost within the utility the 15 people. There was no way of gaining efficiencies within the utility unless we were to go and provide services to other third parties, but that, as we all know, is very difficult to do under the current undertakings. So the efficiency gain is not -- we could not have captured that gain within the utility. 248 The second part I want to comment on in your assumptions is that if they save two people, they can do this with two people less, so they're saving themselves $150,000 a year that we couldn't save within the utility, that we should get that benefit. 249 What you're forgetting is that there's other values to out-sourcing this, and that is the value in the acquisition of our natural gas and the reduction that they should be able to capture in contracting for natural gas that we can't capture because we don't have the same types of expertise within the utility. 250 MR. BRETT: That's very hard to understand and to contemplate. You've been in the natural gas acquisition business for 25 years. Enbridge is an oil company; it's the only last five years that they've become a gas company. And you are telling me that you are expecting this Board to believe that Enbridge has greater expertise than Enbridge Consumers Gas in gas acquisition? You can't be serious. 251 MS. HOLDER: We are serious. 252 MR. BRETT: You are in the liquids business and the oil business. 253 MR. FARRELL: She gave you an answer. 254 MR. BRETT: And I'm challenging the answer. 255 MR. BRENNAN: Maybe I can give you an example. As an example, we talked over the last couple of days about the contracts that we signed up for Alliance and Vector, in particular Alliance, where we talked about these new services, AOS, for example, and the fact that Alliance can move higher -- or rich gas, if you like, with higher heating content. 256 To manage that ourselves within the utility when it was Toronto would have been difficult. We didn't have the expertise to do it. So when we entered into those contracts, we also -- in terms of arranging supply, we had some of our suppliers manage those pipeline systems for us, that capacity for us, particularly on Alliance. So they would manage the AOS and the heat content. So to the extent that there was a difference in price between moving AOS, the value of that AOS, on any given date, there was a sharing mechanism. There was a sharing mechanism for both the AOS and the heat content, and -- between us and the supplier. 257 Now, as time has gone on, and particularly going into next year, we expect that with the experience that they have, that these new employees have, and the expertise they have in Calgary, we will be able to do that function ourselves and therefore not have to share any of that AOS and rich gas savings with those parties, therefore, benefitting the ratepayers and lower costs of gas acquisition. That's a prime example. 258 MR. BRETT: With respect to your gas supply agreement, this is your -- the agreement that we discussed yesterday, the gas supply agreement you were just speaking of now with Enbridge Inc.. Would you turn that up, please, and particularly turn up in the schedule, the -- this was your services schedule, two pages, page 5, section 3.5. 259 MS. HALLADAY: Excuse me, Mr. Brett, could you give me the complete reference? 260 MR. BRETT: I'm sorry, Madam Chair and Panel. It's -- it is the -- filed -- 261 MR. FARRELL: If I could help Mr. Brett. It's Exhibit I, tab 3, schedule 44. The attachment is the agency agreement, and then Mr. Brett is referring to what we've called the services schedule which is an attachment to the attachment, if I can put it that way. 262 MR. BRETT: Yeah, it's the blue pages, page 5. 263 MR. BRENNAN: I have that. 264 MR. BRETT: Okay. And I just have a couple of questions here that -- mainly of a clarification nature. They were discussed yesterday, so I will be brief with this. 265 This section 5 -- section 3.5 talks about -- these are the duties of the service provider, and it says here, 3.5: "Conduct all or part of each storage program previously approved by the services recipient..." The services recipient in this contract is Enbridge Consumers Gas. "... and to this end, negotiate agreements or amendments of agreements, or both, in accordance with the storage program." 266 Now, the storage program is defined in this material, and it's defined on page 21. Maybe I will just read it to save you flipping all over the place. The storage program is defined as: "A program to increase the storage capacity by means of one or more agreements for the purchase of storage with a designation of one or more storage areas ..." and so on, "... to store gas therein, to construct related facilities." And I was left a little uncertain with the scope of the activities of the services provider, reading this. 267 Is the service provider going to actually get involved in the oversight of the design and construction of the storage facilities, or is the role going to stop at analyzing the requirement, signing contracts to procure storage from others? 268 The way those definitions are drafted led me to think that one of the services that he was going to provide was the design and construction of the storage itself. I was -- just wanted to clarify that that was not the case. Or if I'm wrong, what is the case? 269 MR. BRENNAN: No, that's not the case. Maybe I can explain a little bit. 270 The service provider, in this case Enbridge Inc., will come forward as part of their long-term planning to indicate to the utility, ECG, whether or not there's a need for additional storage. 271 Once the utility is in agreement with that, the service provider will help by doing computer simulations demonstrating the need and the type of storage that we need in terms of how much space, what sort of deliverability. 272 And to the extent that something -- depending what our requirement is, if it's for a long-term storage arrangement, of course, that agreement would have to be executed by ECG. And all those other functions as far as bringing that storage, if it is new storage that the utility is developing, it would be responsible for the utility to bring that forward in terms of an application to the Board, in terms of designation and those types of issues. 273 The only thing that Enbridge Inc. would be doing would be assisting us in determining the need for it and the type of service that we'd be looking for. 274 MR. BRETT: Okay. Thank you. 275 Now, I notice that the -- if you look at the same agreement, if you go to 6.17, paragraph 6.17, the same schedule. That's in the section dealing with services, transactional services. 276 There -- I'm sorry, that is -- I think my question there is this: You are authorized, obviously, to execute transactional services. Does that -- am I to understand that the Enbridge board, Enbridge Consumers board, approves each and every one of the transactional services, or do they simply give you a blanket authority -- give EI a blanket authority at the beginning of the program to conduct the transactional services as the -- according to some broad guidelines? 277 MR. BRENNAN: No, that's not the case. 278 What's referred to here in relation to the board of directors has to do with signing authority by certain individuals, whether they're within ECG and -- or within EI. 279 In this particular case -- maybe I should step back a bit. Those signing authorities are with Enbridge Consumers Gas's board of directors. 280 Now, in this agreement, we have authorized the service providers, in this case Enbridge Inc., to execute some of those contracts, depending on the duration of the contract and the value of that contract, but they do not have a blank cheque. They do have restrictions as to what type of contracts they can sign and, again, going back to the duration and the value of those contracts. 281 MR. BRETT: When you say they don't have a blank cheque, you will give them the guidelines that we're familiar with for what constitutes transactional services, what are eligible transactional services, and you've given them, I see, in the contract a guideline that no one contract, no one peak storage contract can be greater than a certain amount of money or a certain volume. 282 But subject to that sort of thing, they have the right to -- and they have the obligation to file, make certain filings with the Board, ERO. 283 But subject to that, they have the right to execute these contracts themselves without bringing them on a contract-by-contract basis back to the utility? 284 MR. BRENNAN: That's correct. And if there are storage contracts, of course, they have to be filed with the Board. 285 MR. BRETT: Now, this contract refers to -- the same contract refers to performance measures, but there are no performance measures, as I understand it, in there at the moment. 286 I take it performance measures are being developed, are they? When will they be available? And I gather these are measures by which you and, presumably, the Board, in due course, can judge the performance of EI under this mandate you're giving them. 287 Are these available? These are not available at the moment, as I understand it. 288 MR. BRENNAN: No, they are not available at this point. We've had several discussions as to what those performance measures should be. 289 Part of it -- and we've agreed on some of them. What has to be done as part of including those performance measures was to make one amendment to the service level agreement, which would not only capture these changes but any changes to the protocols. For example, there are a lot of things that have to be updated, the relationship between EI and EOS as well, so all those were going to be done at one time; that was the intent. But those performance measures have been discussed. 290 MR. BRETT: When do you expect those will be completed? 291 MR. BRENNAN: I would say over the next two or three months. 292 MR. BRETT: Will they be available? Will they be available to the Board and to -- will they be filed in a subsequent proceeding? I guess it would be next year's proceeding. 293 MR. BRENNAN: I don't see any reason why they wouldn't be. I mean, it would be an amendment to the service level agreement that could be filed with the Board. 294 MR. BRETT: Okay. Thank you. 295 The fees that you -- we spoke of earlier, Ms. Holder, they're -- that would be paid under this agreement and pursuant to other agreements, but particularly this one, this agreement with EI, there are no incentive fees of any sort to EI for this type of activity? No commissions, no special arrangements? 296 MR. BRENNAN: No, there are not. 297 MS. HOLDER: And I think the incentive would be in the future, under a comprehensive PBR scheme if we are sharing the benefits between ourselves and ratepayers. So there will always be an incentive for us to look for ways of reducing cost to all our affiliate out-sourcing arrangements as well as third parties. 298 MR. BRETT: Well, you know, it's interesting -- you're getting ahead of me, Ms. Holder. I have a section of my examination dealing with the impact of reallocation of these services in the context of PBR, but these are long-term contracts under which you have established, one way or another, your definition of cost, a series of annual payments that will flow out to the contractor. And now you'd agree with me, I think, that if we were under, let's say, a price cap plan, going forward, and let's assume that, like your proposal for a comprehensive performance-based rate-making scheme, it has an energy scheme in it, that's not a big assumption. Ninety percent of them do in the world. 299 MS. HOLDER: You mean in earnings? 300 MR. BRETT: I'm sorry, an earnings sharing mechanism. I think you'd agree with me in that hypothesis that if you were doing this function yourselves -- the reason for PBR, of course, or one of the main reasons, is to encourage -- as I think everybody knows, is to encourage the utilities to innovate but also to organize themselves more efficiently to reduce costs. And those reductions in costs are shared with the ratepayers usually on a 50/50 basis. 301 If you had this service, this gas supply service, and any of these other services we're talking about, they remained in the utility. Just assume that you hadn't sent them out, that they remained in the utility. You sign a long-term comprehensive PBR agreement, five years, with 50/50 sharing, and then you work diligently to reduce your costs. Those cost reductions would be shared through earnings reactions -- earnings gains, as a result of those cost reductions, everything else held equal, would be shared with the ratepayers; correct in that scenario? 302 MS. HOLDER: In that scenario -- sorry. However, there is a key assumption there with respect to energy or to EI and EOS, that there could be -- those functions that we've out-sourced to those two business units, that we could capture efficiencies within the utility without having to out-source. 303 I think my evidence is, and my position is, that if we kept those functions with -- inside the utility, the only way we could get any benefits would be to out-source them. 304 MR. BRETT: My question is a litter broader than that. I take that answer, but my question -- I don't accept it, I take it it's your answer. My question had to do with all of the other thousand people that you out-sourced in January 1 of 2002. 305 Now, Mr. McGill will probably tell me, well, we couldn't make those efficiencies in the utility either. But let's -- I'm not going to ask Mr. McGill that question, I'm just going to say that -- let's just take your answer and then let's compare that with the second situation where you do this out-sourcing, as you've done. We're into a performance-based rate-making regime. These contracts go for the duration of the -- for five or six years, so they go on through the term of that agreement. 306 MS. HOLDER: Sorry, I don't think that, in all cases, is true. 307 MR. BRETT: Well, they go on for a substantial period of time, and I think what -- and my question to you then is: The affiliates who now have these businesses, these growing businesses, whether they are a gas supply business or the customer care business, which they want to grow and offer to everybody, they're going to make reductions and savings, they're going to make reductions in staff, operate as efficiently as they can. The difference is they are going to realize economies of scale by spreading those costs around with a bunch of people. And bear in mind they started with a transfer -- well, never mind. I'll leave that for now. 308 In that case, those savings are going to be realized by those affiliate companies. In other words, they are going to be realized by Enbridge at the top. The top company gets the money; the ratepayer gets nothing. Is that not true? 309 MR. PLECKAITIS: Mr. Brett, well, again, there were a number of statements that you've made there and let me try to see which ones were questions. 310 But first of all, there seems to be the proposition in the way you've worded your question that the utility should wait until some period of time before it does anything innovative or creative in terms of how it adjusts its services, wait until another form of comprehensive performance-based regulation comes about and then do these activities at that time, and then everyone benefits. I'm not aware of any rule by this Board that has suggested that we need to do that. 311 In terms of the benefits, whenever we out-source any activity, whether it's to an affiliate or to a third-party provider, my assumption is that that third-party provider or affiliate is doing it for their own business reasons as well, that they see an advantage to it. 312 Obviously, there usually is a profit motivation to that as well, and I see nothing wrong with whether the affiliate -- an affiliate achieves that profit opportunity or whether a third party. 313 Enbridge Consumers Gas, as you've outlined in reviewing the evidence, has chosen to out-source some of these activities to its affiliates. And we believe in all cases that we can justify that the ratepayer is not harmed, and in fact, the requisite level of service that is being provided is fully consistent with what was provided before. 314 In fact, as Ms. Holder has testified, there are, we believe, advantages to out-sourcing to our affiliate. In some cases, we would be reluctant to out-source to a third party. 315 In fact, in previous decisions of this very Board, the Board themselves have ruled that there's nothing inherently wrong with the utility out-sourcing these -- in terms of damaging the customer, in terms of out-sourcing these activities to affiliates, as long as the requisite level of service is provided. 316 In fact, one of the decisions in response to that or -- that I'm basing that on is the Reasons for Decision from this Board, dated June 29th, 2000, and I'm referring to page 15 of that decision, section 4.7, where the Board says, and I'm reading, quote: "The Board notes that the customer care information technology and fleet management functions must still be performed for the efficient operation of the utility. Utility customers should be indifferent as to whether these services are performed within the utility by utility employees or by a third-party affiliate, as long as they are performed to the requisite standard." 317 And what you've heard today, and you may not agree with it, but what you've heard today in our evidence that's been put forward is we believe we can demonstrate that the customer is not harmed and that the requisite standard that's been established is maintained and in some cases improved by out-sourcing it to an affiliate. 318 MR. BRETT: Your evidence -- what's the reference for that, please. What's the date of the decision? 319 MR. PLECKAITIS: The date of the decision is June 29th, 2000. 320 MR. BRETT: What's the title of the case? What case is that? 321 MR. MCGILL: It's RP-1999-0001. 322 MR. PLECKAITIS: And it was page 15, section 4.7. 323 MR. FARRELL: It was the motion for review and variance by the Industrial Gas Users Association and Consumers' Association of Canada and the Vulnerable Energy Consumers Coalition, which was under the Board file number RP-1999-0001. 324 MR. BRETT: I guess the question that I'm going to have is that it's clear to me again why Enbridge would wish to do this. Enbridge is seeking to build in the case of Customer Works a large international or national company to provide customer care to a variety of customers. You say in your evidence that they are going to provide customer care to municipalities, to other utilities, to marketers. 325 One of the things -- one of the reasons that utility groups reallocate their functions in the way they do is precisely to be able to build large, unregulated entities in certain parts of the business. 326 So I see Enbridge's rationale very clearly, and I see their rationale very clearly in the gas -- in the gas supply and transactional service and gas management and storage area. They cannot only build a business there, but they can build a business that's competitive with their own client. 327 My questions to you are: What's in it for you, the utility? 328 Now, you tell me, oh, well, we couldn't do this efficiently. We couldn't supply gas. We couldn't buy gas as efficiently as Enbridge, when I've been listening to Consumers executives talk about gas purchase plans for 20 years. 329 I can see maybe the shadow of a case with EOS, because you've got a gas control function that's controlling operations on various pipelines. But you know, Mr. McGill, what's in it for Consumers -- what's in it for the utility to shove off a thousand people into Enbridge Commercial Services and have them build a business? 330 I guess my -- my -- you know, as I say, we'll come to the numbers in a few minutes. But you are at the point now where you're paying -- more than half your O&M budget goes toward paying someone else to do jobs for you that you used to do. That's a fact. That's in your statements. 331 Now, what's in it for you to run your business that way? How can that help the utility? 332 It helps Enbridge, clearly -- 333 MR. FARRELL: We don't need the editorial comments. Just ask a question. 334 MR. BRETT: No. No. Well, I'm asking the question now, but I'm setting now the stage. I like to set the stage is what I'm trying to do. 335 MR. FARRELL: You're giving evidence to set the stage -- 336 MR. BRETT: No, I'm not. I'm not giving evidence any more than you people do and have done for years. 337 MR. FARRELL: We do it through witnesses -- 338 MS. HALLADAY: Mr. Brett, do you have a question? 339 MR. BRETT: Yeah, the question is: What's in it for Enbridge Consumers Gas, Mr. McGill? 340 MR. MCGILL: Well, in terms of the relationship with Customer Works, I think the major benefit to Enbridge Consumers Gas is that we have the opportunity to acquire services from a large entity that's trying to build a presence in North America. They've already been successful in acquiring the business of B.C. Gas, one of the largest gas distribution companies in the country. 341 They are providing services to ESI, and there's no way that Enbridge Consumers Gas could generate the kind of benefits of scale and scope inside itself that an organization designed to perform those services to a broad base of customers can deliver. The undertakings preclude us from doing those services for others. 342 MR. BRETT: So you had a thousand people in-house doing this sort of stuff, and you transferred them over -- you had a thousand trained people that you transferred over to, first of all, Enbridge Commercial Services to give them a head start in life, and then they transferred into Customer Works and they're going to grow this business, as you say, into a major business. 343 Now, do you get to benefit from that? Do you get to -- do you get, in your fee structure that you have with them, we can't talk about detailed cost today, we will talk about detailed costs at the unbundling -- at the next hearing. In the details of your fee structure, do you get to benefit from any of these extra pieces of business that Enbridge Commercial Services get? You started them; it was your trained people. My ratepayers paid to train your people; right? 344 MR. MCGILL: Well, I think the company paid to train the people. 345 MR. BRETT: They trained them and everyone paid for them, the shareholder and the ratepayers. Then when they are trained up, the company whistles them over to ECS and says, all right, that's your base now, not the company Enbridge. Enbridge said, we are going to transfer this, Enbridge makes the decisions; right? You all report up to Enbridge. So you now transfer this big block of trained staff over in here and their task is to build a huge company to sell to municipalities, to marketers to other utilities. My question is: How does the utility -- does the utility get -- what do you get from that? Do you get most-favoured -- do you get a chance to get the best deal? If they offer somebody else a better deal, do you get that or do you get credit in some fashion for -- I mean, I haven't seen these agreements; nobody has seen these agreements. We don't know what the hell they are. We have framework agreements that are broad, ten-page agreements that talk about -- 346 MR. FARRELL: Do you want to know what they are? Try a question. 347 MR. BRETT: The question is: What is the -- the question is: What is the benefit that the utility gets from the ongoing business created by ECS? 348 MR. PLECKAITIS: Mr. Brett, one of the things that I -- because I believe that there is a continuing desire by -- certainly by Enbridge and I believe by the regulator to try to find ways of simplifying regulation. I believe that performance-based regulation, and hopefully comprehensive performance-based regulation, is, again, a movement in that direction of less hand control, day-to-day control of the utility or oversight and establishing performance standards and targets to ensure that the utility is continually incented to provide those services as efficiently as possible to customers while maintaining the level of service. 349 If we are granted, for example -- to your question, how does the ratepayer benefit, if the utility is granted an acceptable comprehensive performance-based regulatory -- regulation formula, we will be incented, in terms of reducing costs, all costs, not just the costs that are not out-sourced but all O&M costs, including those that are performed by the utility. And those are out-sourced to as low as possible because we, the shareholder, will benefit to 50 percent of those benefits and the ratepayer is the other part. 350 So there will still be the same incentive mechanism in place. 351 MR. BRETT: The only way that would happen, Mr. Pleckaitis, is if your agreement -- and I've asked Ms. Holder this, I will ask you or Mr. McGill this. Maybe we might want to take a break along the way here. But does your agreement actually with Customer Works, for example, state that as their unit costs go down to provide this service that your costs go down? Or do you pay them a fixed agreement -- fixed payments over time escalated by inflation, by perhaps the number of people served? 352 MR. MCGILL: We have several different pricing mechanisms that are embedded in the agreement. Some are unit based; some are flat fee. There's an opportunity within the agreement to revisit pricing based on changes in scope, either in terms of the nature of the service being offered or the volume of the service being acquired. 353 I think the way I see the situation is that sometime, I assume over the course of the next six months, I'm going to be back here to defend the costs that arise through the -- as a result of the services that are delivered by Customer Works. 354 Based on what the Affiliate Relationships Code says, I believe that I'm going to have to demonstrate that those prices are either reasonable market prices or reasonable cost-based prices. And to the extent that that pricing methodology brings back benefits to the ratepayers, the benefits are going to enjoy them. 355 MR. BRETT: When you went out to -- Mr. McGill, when you transferred the functions, the customer care and IT and fleet management functions, over in 2000 to the Enbridge Commercial Services, did you have a tender then? Did you go to tender for those? 356 MR. MCGILL: At the time we transferred them? 357 MR. BRETT: Yes. 358 MR. MCGILL: We didn't go to tender but we did conduct benchmarking surveys in an effort to determine what reasonable prices were to pay for the services that we were acquiring. 359 MS. HALLADAY: Mr. Brett, is now a convenient time to break. You mentioned it before. 360 MR. BRETT: Yes, it would, Madam Chair. 361 MS. HALLADAY: We will break now and reconvene at quarter after 11:00. 362 --- Recess taken at 10:55 a.m. 363 --- On resuming at 11:22 a.m. 364 MS. HALLADAY: Please be seated. 365 Mr. Brett? 366 MR. FARRELL: Before Mr. Brett starts, Madam Chair, we have now for filing Exhibit J.4.9, which is a response to Undertaking J.4.9 given to Mr. Mondrow yesterday. It's entitled "ECG Out-Sourcing Matrix." You should have copies there. There will be copies at the back of the room. 367 MS. HALLADAY: Thank you, Mr. Farrell. 368 Mr. Mondrow? 369 MR. MONDROW: And I note, Madam Chair, that it's all on one page, so kudos to the company. It's actually very helpful in respect to the questions I asked. Thank you very much. 370 MS. HALLADAY: Thank you, Mr. Mondrow. 371 EXHIBIT NO. J.4.9 DOCUMENT ENTITLED "ECG OUT-SOURCING MATRIX" 372 MS. HALLADAY: Mr. Brett? 373 MR. BRETT: Thanks, Madam Chair. 374 Panel -- 375 MR. BRENNAN: Excuse me, Mr. Brett. I wonder if I could interrupt you before you get started. 376 Prior to the break you were asking whether or not there is an opportunity within the agreements to be able to renegotiate, or is there some favoured nations clause in these agreements, and I thought I would just like to point out a couple areas in the contract that may help you. 377 MR. BRETT: Yeah, which contract are you speaking of? 378 MR. BRENNAN: Let's begin with the Enbridge Inc. one, which is found at Exhibit I, tab 3, schedule 24. And here I'm looking at the agency agreement. 379 MR. BRETT: The -- sorry? 380 MR. BRENNAN: The agency agreement at the front. So it's Exhibit I, tab 3, schedule 44. 381 MR. BRETT: Right. 382 MR. BRENNAN: And if you go to page 3 of that agency agreement, under "Price Adjustment," section 7, 7(a) in particular, the last sentence says: "At a minimum, the parties agree to review the subject fees and available market pricing benchmarks every two years and to amend the fees accordingly if market pricing benchmarks support such amendments." 383 And then if you carry on to 7(b), just below it, it says: "The services recipient shall get the benefit of, and this agreement shall be amended to give the services recipient the benefit of, more favourable pricing of services subsequently negotiated in any service agreement between the service provider and other service provider affiliates." 384 So that's what's contained in the Enbridge Inc. agreement, if you like. 385 MR. BRETT: All right. Just before you move on, can I just -- I appreciate that clarification. 386 Can I call your attention, because I read this with some interest earlier, a little later down in that paragraph, the next sentence. I'd like to read out: "Any such change in fees will be conditional upon all material terms of the proposed relationship between the service provider and the service provider's affiliate, as the case may be, being comparable in all material respects to the terms in effect between the service recipient or the services provider," and then this part here, "including, without limitation, nature of service, term of agreement, business volumes, functionality, procedures employed, service levels, and terms and conditions of the agreement respecting the relationship." 387 Would you agree with me that while you -- what you say is correct, technically, they have -- they have circumscribed this very, very closely. In other words, in order to be required to offer the same deal, the actual terms of the other commercial arrangement would be -- have to be exactly comparable -- 388 MR. BRENNAN: I don't say it's exactly -- 389 MR. BRETT: -- in all of these respects to qualify? 390 In other words, the draftsman has been clever, properly so, I guess, but they've said, yes, we'll offer you the same deal that we offer somebody else if it's a better deal, but only if you compare -- only if the deal that I am alleging is a better deal than the one I have is exactly the same in all these various respects, or the phrase being used, comparable in all material respects. And then they list the whole series of things here. 391 So, for example, if the term is one year different, if we have a six-year deal, and you give a four-year deal to the next fellow, and I come to you and say, Frank, you have given that deal for ten cents less per -- or half a cent less per gigajoule of gas, you can say to me, well, but you have a six-year contract and he has a four-year contract. 392 So I'm not disputing what you say, but I'm asking you to agree that it's fairly tightly circumscribed, the circumstances upon which that would be available. 393 MR. BRENNAN: I'm saying that it says here that it's being comparable. Not exact, but comparable. 394 And I think between those two sections that I've read to you, I think should give some assurance that there is, at least, an opportunity at some point to be able to renegotiate the contract. 395 MR. BRETT: Well, I appreciate the point -- 396 MR. BRENNAN: And just to carry on, the same language is also -- can be seen in the agreement between Enbridge Consumers Gas and EOS as well. And that can be found at Exhibit I, tab 3, schedule 54, which is the intercorporate service agreement between The Consumers Gas Company and Enbridge Operational Services. 397 And again, if you go to page 2, section 7, it talks about the price adjustment. And there that talks about the benefit of most favourable pricing. 398 And if you then flip to the service schedule attached to that agreement as -- I believe it's -- 399 MR. BRETT: What page are you on there now of the service agreement? 400 MR. BRENNAN: The service schedule? 401 MR. BRETT: Yes. 402 MR. BRENNAN: It's service schedule A, and I'm on page 7, section 8.3. 403 MR. BRETT: Right. 404 MR. BRENNAN: And the statement there says: "The parties agree to review the above fee schedule and available market pricing benchmarks every two years and to amend the fees accordingly if market pricing benchmarks support such an amendment." 405 MR. BRETT: Can I ask you -- and thank you for that -- what are the market pricing benchmarks referred to there? 406 MR. BRENNAN: I would say that the benchmarks would be whether or not we can get these services out on the -- out in the market, similar services, whether it's -- 407 MR. BRETT: So you would ask for quotations from other suppliers. 408 MR. BRENNAN: Potentially, or other individuals to see if there is an opportunity to get a better deal or get better pricing. 409 MR. BRETT: You'd agree with me, though, that if it's clear -- in the business world generally, if it's clear that you intend to carry on with your existing supplier, or if your existing supplier has a legal or de facto right of first refusal on your business, and you go out to other parties and ask them for quotes, that it's difficult often to get real reliable quotes on what market price is. 410 MS. HOLDER: That's true. That is an issue that we've experienced. However, we can rely on consultants who can -- an independent consultant to provide information on what services are provided to other organizations for what fees. 411 MR. BRETT: Right. 412 Is that it, Mr. Brennan? 413 MR. BRENNAN: Yes, it is, thank you. 414 MR. MCGILL: In a similar vein, I just take you to Exhibit I.1, tab 39, which is the ECG Customer Works agreement. 415 MR. BRETT: Okay. Just a minute, please, while I find this. Okay. 416 MR. MCGILL: Now, I'll just read to you the second paragraph of 4.1 which deals with pricing. "The parties agree that, as part of the process of preparing annual the forecast, defined in section 9.1, they shall meet annually to consider any joint opportunities available to them to reduce costs and related fees and/or improve performance standards. Additional meetings in this regard will be held as required. Any such opportunities will be considered as scope changes under section 12.1." 417 Then I go to page 13 of the agreement, 12.1. Do you have that? 418 MR. BRETT: 12.1, yes, I do. 419 MR. MCGILL: 12.1 of this. I will just read a couple of pieces from that: "For the purpose of this agreement, scope change shall mean and include," the first item, "the identification by a party of the need to modify elements of services or service schedules, including to add or discontinue services." Item 2, "Modifications to performance standards requested by ECG under section 1.3." And then the sixth item, "There is material changes to pricing in the marketplace or industry standards for services substantially similar to the services hereunder." 420 MR. BRETT: Thanks, Mr. McGill. In that connection, are we going to at some point -- is the Board and the intervenors going to be able to see the costs of those contracts, the actual cost data? Does that come next year in our -- 421 MR. MCGILL: I believe so. I think that's going to be part of what we need to do in order to justify our costs in 2003. 422 MR. BRETT: So those costs will be laid out in your submissions next year. 423 MR. MCGILL: Yes. 424 MR. BRETT: And you're aware, are you, I think, that the Board may be aware that in the case -- the most recent case before the British Columbia Utilities Commission having to do with the -- one of the issues had to do with the formation of Customer Works, and B.C. Gas filed with the Commission in that case its proposal to join Customer Works, including its costs. Do you know that? 425 MR. MCGILL: Yes, I'm aware of that material. 426 MR. BRETT: So you have that material. 427 MR. MCGILL: Yes. 428 MR. BRETT: Okay. While we're on the subject of clauses and contracts, I'd like you to turn over that same agreement, the Customer Works agreement, to page 11 and have a look with me at section 11.3(b). 429 This section, Madam Chair and Panel Members, has to do with the renewal terms of this contract. This is a long-term contract, as we discussed. It runs from January 1st of 2002 to December 31st, 2006, so it runs well into the PBR period for a period of five years. 430 And in that section (b), a couple of points I just want to highlight toward the beginning: "ECG may, in its sole and absolute discretion, elect to solicit third parties to provide one or more services or issue a request for quotation to third parties. And then I'd like to highlight the next section: "Customer Works shall have the option of matching the quotation chosen by ECG from the responses to the requests for quotation. Where Customer Works matches such quotation and service levels, content, and price, this agreement shall be renewed for an additional term, subject to this term and specific fees set out." 431 Now, that, effectively, is what is known in the business world as a right of first refusal; correct? 432 MR. MCGILL: I believe so, yes. 433 MR. BRETT: And effectively makes this a perpetual contract in practical terms, does it not? In other words, if you have a right of first refusal in the contract, it is highly unlikely that knowledgeable business parties are going to go to a lot of time and effort to place competitive bids to you if you were to ask for them, should you wish to do that? 434 MR. MCGILL: Well, I think that's a presumption you make. We have gone through an RFP process with respect to the package of customer care services acquired from Customer Works. We did that through a third party anonymously, and we were able to get quotes back of all of the services that Customer Works provides to us. 435 MR. BRETT: I'm sorry. You actually conducted a -- when you gave the business to Customer Works, did you say -- I thought you had told us a while ago you did not do a competitive bid. 436 MR. MCGILL: We didn't do a competitive bid, per se, but part of our benchmarking activities was to initiate an RFP process through a third-party consulting organization. And they did that anonymously on our behalf, and we were able to test the prices that Customer Works -- well, at that point in time, it was ECS we were dealing with, not Customer Works. But we were able to test the pricing. 437 MR. BRETT: So you did this, sort of a shadow exercise, with no intention of actually taking up -- any of the parties up on their transaction? 438 MR. MCGILL: Not at the time, no. 439 MR. BRETT: All right. 440 I want to turn back -- I spoke briefly about this financial passage. I'd like you to turn back to your financial statement. This is at Exhibit I, tab 1, schedule 1, appendix B. I think we were looking at this a little while ago. 441 MR. MCGILL: Excuse me, Mr. Brett, there's one other thing I'd like to point out about the contract at 11.3, section B. And that is that this right of first refusal, if you will, is on a service-by-service basis. So it doesn't necessarily mean that Customer Works would retain the complete package of services. They would have to be willing to compete on a service-by-service basis. So, for example, if we were able to come out and get a quote for, let's say, the call centre service, and they didn't want to meet that quote, then we would be free to take that business to a third party. 442 So it doesn't necessarily deal with the entire scope of the agreement. 443 MR. BRETT: Thank you. 444 Going back to this exhibit, related party transactions, it's page 32 of this annual report. It's appendix -- Exhibit I, tab 1, schedule 1, appendix B. And you filed two of these, actually, one for the year 2000 and one for 2001. 445 I'm looking at 2001. It summarizes the information for both. 446 I just want to check here on this note, footnote 10 at page 32. You show in 2001 payments to Enbridge Commercial Services for customer care information and peak management of 145.7 million, and that's up from 104 million in 2000. 447 Now, I take it it's up, because the 2000, effectively, is reporting nine months of payments, and 2001 is a full year's payments; is that about -- 448 MR. MCGILL: Yes, that's part of it. And the other part of it is the fact that the -- we weren't paying the full fee for the CIS service in 2000. 449 MR. BRETT: Is that likely to be about the same this year, the 145? Or are we looking at substantial jumps? 450 MR. MCGILL: In terms of a ballpark figure with respect to everything that's acquired from Customer Works and ECS, depending on what happens with the services that ECS is performing, that's a reasonable estimate, I guess, or -- in terms of a -- like I said, a ballpark figure. 451 MR. BRETT: And your same document, on page 20 you -- this is the financial statement itself, consolidated statement of earnings. Under "Expenses," you show operating and maintenance as 277.0 million in 2001. 452 And I take it that the 147.5 is part of the 277.0; is that -- 453 MR. MCGILL: I would expect that, yes. I didn't compile those statements, but -- 454 MR. BRETT: That's where my 54 percent comes from. 455 Okay. If I could move on, then, I'm sure you will be pleased to know I'm going to pass through some pages here that were covered off earlier. 456 I'd like to ask you, Mr. Pleckaitis, you're -- in Consumers Gas, you're responsible -- you report to Mr. Schultz, first of all, the president? 457 MR. PLECKAITIS: That's correct. 458 MR. BRETT: And what areas are you responsible for? 459 MR. PLECKAITIS: Gas supply, gas control. So basically Frank Brennan reports to me. Market research, customer research, marketing. DSM is part of marketing. And research and development -- 460 MR. BRETT: And I know you have some other responsibilities outside the utility, but I don't really want to -- I'm just talking about the utility responsibilities. 461 MR. PLECKAITIS: That's the basic scope. 462 MR. BRETT: Now, in the R&D area, do you still maintain a lab of sorts to test equipment and so on? 463 MR. PLECKAITIS: Well, the research function that we perform is primarily related to either gas technologies, end-use equipment, or operational technologies, such as installation techniques that we have. And most of that is, in fact, out-sourced to third-party labs. 464 MR. BRETT: Other than yourself and Ms. Holder, is there anybody else -- and Ms. Hare, does anybody else report to Mr. Schultz directly? 465 MR. PLECKAITIS: Yes. Let's go through the list, then. Jane Haberbusch, director of human resources; Debbie Boukydis, director of government public relations; Scott Player, VP, finance and business services; and Marika Hare, director of regulatory affairs. 466 MR. BRETT: Ms. Holder, what about you? 467 MS. HOLDER: And also Paul Dalglish, who is the vice president of IT, or a vice president of ECS, sorry. 468 MR. BRETT: Of ECS? That's the affiliate? 469 MS. HOLDER: Yes. 470 MR. BRETT: But I meant people working for the utility. Does he do both jobs? 471 MS. HOLDER: No, he doesn't work for the utility. I think you asked the question who reports to Mr. Schultz. 472 MR. BRETT: I'm sorry. I meant to say, who's working for the utility. 473 MR. FARRELL: Paul Dalglish and Mark Boyce, who is the associate general counsel. 474 MR. BRETT: And, Ms. Holder, what other areas are you responsible for? 475 MS. HOLDER: I'm responsible for large-volume sales; responsible for customer attachment functions, which we also refer to as sales; pipeline maintenance; some service; pipeline construction; storage operations and construction; natural gas for vehicles. I think that should cover it. 476 MR. BRETT: Okay. Regional offices, who -- 477 MS. HOLDER: That's my responsibility. That's where the customer growth type functions, such as construction and sales, exist as well as the maintenance and construction. 478 MR. BRETT: Can you tell me very roughly, how many employees do you have now in the utility? 479 MS. HOLDER: In the utility, I think the number is about 1,500. 480 MR. PLECKAITIS: Fourteen or 15. 481 MR. BRETT: And how would that compares, again roughly, with what you had, say, in 1998/1999? 482 MS. HOLDER: With the unbundling, the number was probably closer to around 4,000. Thirty-six or 3,700. 483 MR. BRETT: You -- is it, in your view -- we talked a bit about reallocation of functions today among the Enbridge companies, and I guess my question to you is: Is there any function that -- any single function that you think is not susceptible to being reallocated out of the utility to some other entity? 484 MS. HOLDER: I don't think we'd ever out-source the governance and the management function. 485 MR. BRETT: In other words, the senior management group. There would always be a senior management group. 486 MS. HOLDER: The function we perform, you mean? 487 MR. BRETT: Right. But you could conceive of a utility operating with just what I'll call a virtual utility. Just a senior management group that effectively spends their day administering a web of contracts, in other words, a list of contracts a bit longer than the list on that page? 488 MS. HOLDER: Well, I think if you look at this list that we handed out in J.4.9 -- 489 MR. BRETT: I haven't had a chance to see that yet, but go ahead anyway. 490 MS. HOLDER: I would say just about every part of our business today, a component is out-sourced. 491 MR. BRETT: I don't think anyone disputes that. But I think the issue is what meaning to ascribe to out-source and to distinguish between, for example, a contract to buy a thousand pencils or a contract to hire some contractor, an Alfred to help you with a small piece of pipe, which I'll call transactional contracts, contracts that take short duration, specific tasks clearly which evolve from activity. And within the utility what you design to manage the construction of the -- of your plant, you have, as I understand -- you hire outside contractors to assist you in the construction of certain of your capital assets. 492 But my question, I come back to you, my question to you is: Given the kinds of contracts we've discussed this morning, long-term contracts which really place the responsibility for conducting the business function, an entire business function, or the delivery of an entire business function with third parties who are, in this case - and I'd like to stress this - all affiliates -- 493 MS. HOLDER: I think -- 494 MR. BRETT: Is there not -- my question to you is -- I know what you want to talk about. You want to come back and say, Tom, we have a thousand contracts. We do this all -- but my question to you is: Is there any function that you see in the utility that you couldn't -- that is not susceptible to reallocation in the manner that these 22 functions are that we discussed this morning, gas supply, gas control, IT, employee payroll, customer care, including meter reading, massaging of data, billing, all of that? 495 What else -- is there anything that can't go that way, in your view? That's my question. 496 MS. HOLDER: I think I answered that question previously, and I was showing -- using Exhibit J.4.9 as an example to my answer. 497 You were referring to out-sourcing of buying of pencils. This undertaking, J.4.9, refers to the core businesses and the functions within our core businesses and what of that is already being out-sourced either to an affiliate or an unrelated service provider. 498 We out-source close to 95 percent of our construction. We are talking $150 million, $170 million a year. I wouldn't call that a pencil out-sourcing or buying pencils outside, I would see that as significant in dollars and more significant in dollars than out-sourcing gas control to EOS. 499 So I'm using this to say that we already are out-sourcing just about all of what we consider our core functions of the business. 500 MR. BRETT: Do you plan your construction? Do you design your physical plant in-house? 501 MS. HOLDER: We do some, not necessarily all. 502 MR. BRETT: How many engineers in-house doing that work? 503 MS. HOLDER: I don't know that answer, but we have hired external consultants or engineers to do design work for us -- 504 MR. BRETT: But you do the bulk of your engineering in-house, do you not? 505 MS. HOLDER: We do the bulk of our engineering, but not the bulk of the work. 506 MR. BRETT: But you don't do the bulk of your gas supply work in-house. That's the difference. 507 MS. HOLDER: I think I have responded to your answer. I think Mr. Pleckaitis might have something he would like to add -- 508 MR. BRETT: Well, I don't know that you have answered my question, but I'm not sure I'm going to get you to answer it -- 509 MR. PLECKAITIS: Mr. Brett, can I just embellish a little bit on your -- I think you were asking a policy question, which is -- 510 MR. BRETT: Just before you do, I guess there is one last thing I would like to ask you: Your construction contracts that you sign to have people build the pipe with you -- for you, or -- can you give -- what's an average length of term for those contracts? 511 MS. HOLDER: Currently, they're one year, and we'll be starting negotiations this fall with those contractors. And I expect that they will be considerably longer than that, as has been the case with Union Gas construction contracts. 512 MR. BRETT: Okay. 513 MR. PLECKAITIS: Mr. Brett? 514 MR. BRETT: Just a moment, please. I just want to finish up here. 515 But the question, really, I was asking was: Is construction -- is design and construction of facilities a function that you could contract out in total? In other words, you could go to a -- someone like a Bechtel or a Fluor or not -- let's pick one inside the Enbridge empire. It would have to be an engineering firm. 516 Let's assume for the moment Enbridge had an engineering and design firm as some of the big pipeline groups do, and they go and do engineering work and help build pipelines and power plants all over the world on an unregulated basis. Let's assume that's the case. It isn't, I don't think with Enbridge, but let's assume -- whether it is or not, I don't know. 517 But do you view the function of design and construction management of all of your construction programs as a function that you could contract out to a party like that? If you had an engineering company within Enbridge firm, a Bechtel-like party, you -- or do you view that as something you would need to keep control of within the utility and do, at least in significant part, in a hands-on manner within the utility, as you now do? 518 In other words, where you do much of the design, and you do the contract construction management. You bring in a whole bunch of contractors, but you oversee the thing on a day-to-day basis. Do you see the distinction I'm trying to make on contracting out the entire design and construction function, just as you've contracted out the entire customer care, call centre, meter reading function? 519 MS. HOLDER: My answer would be, yes, provided we have within the utility the appropriate resources, such as Mr. Brennan is in the gas supply, to oversee those contracts. 520 MR. BRETT: Mr. Pleckaitis? 521 MR. PLECKAITIS: Your question, your basic question was one of policy direction, and did we envision that there were certain functions that might not be out-sourced ever. 522 And I think one of the things that -- the energy industry is changing fundamentally. It has been changing over the past five to ten years fundamentally. It is probably one of the most rapidly changing industries in the world. No one knows for sure where -- when this will stop or what ultimate direction the utilities will take in terms of what they in-source, what they out-source, and how they will be structured. But clearly consolidation is one of the trends, further deregulation. 523 And I certainly don't view as a -- your term -- virtual utility, where the utility is a relatively small group of people potentially using Consumers Gas, 60 to 100 people that are -- that manage the core activities, provide the governance, and everything else be out-sourced. 524 And some may look at that and say, that is bizarre that you would consider that as a viable operation. However, I think that if you look five years ago, people would not have considered out-sourcing call centres or would not have considered out-sourcing things such as accounts payable and accounts receivable, IT functions. 525 The reality is with technology changing, with the world changing, with companies specializing in more and more core competencies, there is very little that I can see on the list of what we consider to be services that we provide, essential services, that we would say, no we could never do that, as long as we retain the management, oversight, control, policy direction of that activity. 526 MR. BRETT: And as long as they are out-sourced to your affiliates. 527 MR. PLECKAITIS: No. 528 MR. BRETT: These all are, though. 529 MR. PLECKAITIS: Well, these are, but in the -- 530 MR. FARRELL: What do you mean by "these"? 531 MR. BRETT: All 17 -- all 22 on the page -- on IR 40. 532 MR. PLECKAITIS: That's correct, but we also indicated that we have the ability to change those over time. As Mr. McGill indicated, on Customer Works, we have the ability to go out to tender on all or portions of that. We have also submitted, as part of the undertaking in J.4.9, a list of activities that are out-sourced to other companies that are not affiliated with Enbridge. 533 MR. BRETT: Do you have any analyses internally, in written form, where you've discussed the pros and cons of doing this, out-sourcing more functions to affiliates or having -- reallocation of the functions within the utility to the Enbridge group outside the utility, that the Board would find helpful or that you could share with us any time? 534 MR. PLECKAITIS: There are no plans right now that I'm aware of, and maybe other members of the panel will add to that, where Enbridge at this stage has plans to -- or Enbridge Consumers Gas has plans to out-source further activities to its affiliate. It doesn't mean that it won't happen, but I'm not aware of any plans or discussions in that regard. 535 MS. HOLDER: I may want to just add to that, because the obvious one that maybe we don't think of out-sourcing that is out there in the public is the storage assets. 536 MR. BRETT: Why does that not surprise me. 537 Those are my questions. Thank you very much. 538 MS. HALLADAY: Thank you very much, Mr. Brett. 539 Mr. Thompson, I assume you're next. 540 MR. THOMPSON: Yes, I'm going to move up there. 541 MR. FARRELL: I think Mr. Mondrow has a question of clarification on the exhibit we filed with response to the undertaking given to him, J.4.9. 542 MS. HALLADAY: Thank you. 543 Mr. Mondrow. 544 FURTHER CROSS-EXAMINATION BY MR. MONDROW: 545 MR. MONDROW: Thank you, Madam Chair. 546 Just while Mr. Thompson is changing seats. Witness panel, thank you very much for this. It is very helpful to me. I wonder if I could ask you - and if you don't have the answer you could get back to me - in the Enbridge Inc. agreement services schedule, which is Exhibit I, tab 3, schedule 44, the second attachment, the services schedule, there are three sections that indicate to me that some of the growing the market function - this may be for you, Mr. Pleckaitis - is, in part, out-sourced to EI. And those sections would be 2.12, 5.2, and 3.5, all of the services schedule. So I wonder if you could just -- 547 MR. FARRELL: Give me them again. 548 MR. MONDROW: Yes. 2.12, 5.2, and 3.5. And rather than hold Mr. Thompson up, if you might just look at those over the break and just get back to me. My question is: If any part of growing the market function is out-sourced to EI or shared with EI, if you could just get back to me on that, I would appreciate it. 549 MR. BRENNAN: I think I can probably answer that now. I would say the answer to that is no. 550 MR. MONDROW: No. 551 Can we just look at one of these, then, and you can explain to me why. 552 MR. BRENNAN: Certainly. 553 MR. MONDROW: 2.12. 554 MR. BRENNAN: Maybe it has to do with our definition of growing the market. 555 MR. MONDROW: Yes, it may be. If we can look at section 2.12 of the services schedule. 556 MR. BRENNAN: Yes, I have that. 557 MR. MONDROW: It says: "Evaluate the supply portfolio," which is a defined term, "and the storage capacity," also a defined term, "periodically in light of the foregoing, as well as supply, transportation, storage and related services that are available in the marketplace, and make a proposal for a supply program or a storage program, or both, for review by the services recipient." 558 So when I read that section, I see embedded in there proposals from the services provider for either a new or revamped or revised supply program or storage program, and I would have thought that that would be in the nature of growing the market, expanding services offered, evaluating what the market wants, responding to that. 559 MR. BRENNAN: I would characterize it as looking at additional requirements. Whether we -- it's for supply or for storage to meet -- it could be incremental growth, it could be just replacing a contract that we already have to meet existing customer needs. 560 MR. MONDROW: Okay. But if it's incremental growth that would be a part of expanding -- growing the market function, wouldn't it? 561 MS. HOLDER: I think what we mean by "growing the market" is actually growing the demand for natural gas. I think -- 562 MR. MONDROW: At the customer level? 563 MS. HOLDER: Pardon me? 564 MR. MONDROW: At the customer level. 565 MS. HOLDER: At the customer level. The actual consumption. The section you're referring to refers to how would we meet that growing demand. It's not intended to grow the demand as much as it's how we meet the growth in demand. 566 MR. MONDROW: So the growing-the-market function, as you, Ms. Holder, phrased it to me yesterday, was really a market -- I'm never sure of the term, whether it's market push or market pull, but getting out to the end-users and getting them to use more gas. 567 MS. HOLDER: We would use both methodologies of pulling and pushing. 568 MR. MONDROW: And the clause I took you to in -- the services schedule I took you to and the other two I referenced would be just figuring out ways to meet this hopefully growing demand; is that fair? 569 MR. BRENNAN: Yes, that's correct. 570 MR. MONDROW: Thank you very much. 571 Thank you, Madam Chair. 572 MS. HALLADAY: Thank you, Mr. Mondrow. 573 Mr. Thompson, we're committed to a time certain for the QRAM at 2:00 this afternoon. 574 MR. THOMPSON: Yes, I understand that. 575 MS. HALLADAY: So I anticipate breaking at 12:30; is that convenient for you? 576 MR. THOMPSON: Yes, that's fine. Is it the plan to resume after QRAM or come back tomorrow morning? 577 MS. HALLADAY: To resume after QRAM. 578 CROSS-EXAMINATION BY MR. THOMPSON: 579 MR. THOMPSON: Panel, the first area that I want to cover off - it's been touched on quite considerably - is what I call the then-and-now with respect to operational services and gas services; the "then" being the way it was within the utility and the "now" being the way it is with the out-sourcing. 580 The best place to start is Exhibit A, tab 14, schedule 3, so perhaps you could turn that up. That's the pre-filed evidence with respect to gas and operational services. Does the panel have that? 581 MR. BRENNAN: Yes. 582 MR. THOMPSON: In the answer to question 1, we have the phrases defined, both gas services and operational services, and then in questions 2 and following, or paragraphs 2 and following, we have a brief description of when these services were moved out of the utility. 583 Starting first with operational services, these are defined as gas-control nominations, scheduling and reconciliation; am I correct? 584 MS. HOLDER: Yes. 585 MR. THOMPSON: And these were moved out of the utility under the auspices of a contract that has a date, October 1, 2000. 586 MS. HOLDER: Yes. 587 MR. THOMPSON: When were the functions physically moved out of the utility? 588 MS. HOLDER: The actual -- there was a transition where there was an overlap, where we had operations both in Edmonton, Alberta, and operations in Toronto. So there was a period of time that there was an overlap. I believe it was the first week of November that we sort of flicked the switch and only operated from Edmonton. 589 MR. THOMPSON: In your response to IGUA question 28 - this is Exhibit I, tab 8, schedule 28 - you make reference to a letter that you apparently sent to Mr. Laughren at the Board describing the plan to out-source these functions to an affiliate in Edmonton. What's the date of that letter? 590 MS. HOLDER: I don't recall. Actually, I had a copy of the actual letter and I didn't bring it with me, so I'll have to undertake to tell you what the date is. 591 MR. THOMPSON: Is it before or after October 1, 2000; do you know? 592 MS. HOLDER: It was before, is my recollection. 593 MR. THOMPSON: Can you help us, Mr. Farrell? 594 MR. FARRELL: Yes. The letter is dated August 1st, 2000, and the re line is Enbridge Consumers Gas Gas Control Centre. 595 MR. THOMPSON: And I don't recall this move of these functions being the subject matter of an application to the Board, i.e., described in pre-filed evidence. I think that letter was actually filed during the course of a settlement conference, perhaps. But can you help me: Was this plan to move these functions to Edmonton described in any detail in pre-filed evidence in prior cases? 596 MS. HOLDER: No, it was not. 597 MR. THOMPSON: Why not? 598 MS. HOLDER: I don't believe it was relevant to any of the issues that were being addressed in any of the prior applications. 599 MR. THOMPSON: Okay. Was that -- was it considered as to whether it should be disclosed in a forthright, up-front and advanced manner to customers on the Board and then decided we don't need to, or was this just a different approach? 600 MS. HOLDER: Well, your first statement was false. 601 At the time that the decisions were made when you were moving forward, we did send this letter to the Board notifying them of our intentions. 602 MR. THOMPSON: That's a letter to Mr. Laughren. But was that sent to interested parties and that kind of thing, or do you know? 603 MS. HOLDER: We did not forward to interested parties. There was a letter that would have been sent to all our shippers and -- with respect to the change happening as well, in order to notify our customers that they needed to nominate or send their nominations to Edmonton as opposed to Toronto. 604 MR. THOMPSON: Now, was this -- was this step of out-sourcing, these particular functions, was this part of some master plan, or was this just a one-off out-sourcing arrangement? 605 MS. HOLDER: This was a one-off. 606 MR. THOMPSON: And what prompted it? 607 MS. HOLDER: There were -- I think I had mentioned earlier, probably -- I think I've mentioned two issues. Probably I dropped one, missed one. 608 At this period in time, we were looking to replace our SCADA system. As I had mentioned, it had outdone its useful life by some time, and so we knew we needed to invest some capital. 609 We also were recognizing that we were running a -- in an environment that was uncomfortable for many of us who were managing it, in that we had a minimal amount of resources providing these functions. And it was very tough to get supervisory oversight, for example, for night shifts and day shifts without hiring a number of other people. And there really wasn't a lot for them to be doing other than just watching somebody else work at night or during the day. So that wasn't an alternative to us. It also would have increased costs. 610 The third component is that the DOT in the United States has been discussing for quite some time changes in operating -- operator, I should say, requirements, which would include in -- changes in the way that they are trained, changes to having access to training on simulators. And that in itself would incur cost to us to implement those sort of procedures. 611 The fourth component was -- is that Enbridge was looking at consolidating their Liquids Control Centre into one. They had many control centres. 612 And so when I had heard that they were consolidating theirs, to me it made a lot of sense that we could get some of the synergies and oversight that we needed by consolidating with Enbridge. 613 MR. THOMPSON: When was Enbridge's targeted PBR approved? 614 MS. HOLDER: I don't know the date. 615 MR. THOMPSON: Well, Mr. Farrell had an excerpt from a motion. When was that motion argued? 616 MR. FARRELL: I'll have to get that for you. I just had the excerpt with the Board's ruling on the motion, so I don't -- the date of the decision was June 29th, 2000. I believe the motion was heard earlier in June of 2000 or, perhaps, May. 617 MR. THOMPSON: All right. Let me come at it this way: In terms of this plan to out-source operational services, what corporate approvals were required for a plan of that nature? 618 First of all, was this your baby, Ms. Holder, from beginning to end? 619 MS. HOLDER: From conception to end with a one-year-off period in the middle where Ms. Beattie was taking the lead. 620 So because SCADA systems take -- 621 MR. THOMPSON: Let me just interrupt. When was this plan conceived? 622 MS. HOLDER: That's what I was just going to say. 623 Because it required the development of a new SCADA system, a lot of changes in the communication protocols, this is not something that was invented overnight, as you may say. 624 I'm trying to figure out where -- my date line here. It would have been, probably, late 1998 when we started looking at our options with respect to SCADA systems and managing gas control. The final decision would have happened during 1999, as far as looking at an out-source option. 625 MR. THOMPSON: Okay. And then the final decision was made by whom? 626 MS. HOLDER: The final decision was approved by the CLT, which is the corporate leadership team of Enbridge. 627 MR. THOMPSON: And that consists of -- or consisted of what individuals? 628 MS. HOLDER: Pardon? 629 MR. THOMPSON: That consisted of what individuals at that time? 630 MS. HOLDER: That would have been -- I won't be able to get them all right, but Brian McNeil would have been the CEO at the time; Rudy Riedl, representing the distribution company. 631 MR. PLECKAITIS: Mel Belich, Richard Bird, Pat Daniel, Bonnie Dupont. 632 MR. THOMPSON: And how many of those are Enbridge Inc. people? Are the majority of them Enbridge Inc. people? 633 MS. HOLDER: Yes. 634 MR. THOMPSON: All right. 635 MS. HOLDER: Now, sorry, prior to that, though, there would have been approval by our executive team within the utility. 636 MR. THOMPSON: Okay. So did this transaction require board-of-director approval? 637 MS. HOLDER: No, it did not. 638 MR. THOMPSON: All right. 639 MR. FARRELL: Can I just make sure what entity we're talking about here. When Ms. Holder mentioned the CLT, she was talking of Enbridge Inc., so then you asked her about -- I think she mentioned -- 640 MR. THOMPSON: The majority of these are Enbridge Inc. people which is not surprising because it's an Enbridge Inc. leadership team; is that what you are saying, Mr. Farrell? 641 MR. FARRELL: No, I'm saying that's the Enbridge Inc. leadership team -- I will wait until they are finished so if I state it improperly, Ms. Holder can correct me. ECG has an executive management team, an EMT, I think she told you, or that the EMT had approved it before it went to the CLT. 642 MS. HOLDER: I apologize for that. 643 MR. THOMPSON: Is that right? 644 MS. HOLDER: Yes. It's the executive team reporting to Rudy Riedl who was the president of Enbridge Consumers Gas who would have approved this. From the Enbridge Consumers Gas perspective and then, as we were handing the ball over to Enbridge Inc., Enbridge Inc. needed to approve that. 645 MR. THOMPSON: So there would be presentations to both the Enbridge Consumers Gas management team -- that's EMT, is it? 646 MS. HOLDER: Yes. 647 MR. THOMPSON: And also to the Enbridge Inc. gang, which is CLT. 648 MS. HOLDER: Correct. 649 MR. THOMPSON: And is that correct? And I assume those would be in writing. Are they in writing? 650 MS. HOLDER: Yes, there are two documents in writing. 651 MR. THOMPSON: Could we have those produced, please. 652 MS. HOLDER: I will struggle with the one document because the one document is actually an Enbridge document. 653 MR. THOMPSON: That's fine. You have it in your possession? 654 MS. HOLDER: Yes, but it does include strategic information so I don't believe it's appropriate to be presented here. 655 MR. THOMPSON: Well, this presumably would contain the rationale that the utility management considered appropriate for deciding this was a good move for utility stakeholders; does it contain that rationale? 656 MS. HOLDER: It's been a while since I read it, but it would include that. But the majority of it would also include the strategic direction of Enbridge which I don't believe is appropriate to be presenting to public record. 657 MR. THOMPSON: Enbridge Inc.? 658 MS. HOLDER: Yes. 659 MR. THOMPSON: Why would the CMT -- 660 MS. HOLDER: You mean the EMT, the executive management team. 661 MR. THOMPSON: Yes. Why would the EMT, in considering the out-sourcing of this function, be influenced by the strategic direction of Enbridge Inc.? 662 MS. HOLDER: Sorry. This document didn't go to the EMT for approval. 663 MR. FARRELL: There are two documents. 664 MR. THOMPSON: Is there an EMT document? 665 MS. HOLDER: The EMT document -- or the Enbridge Consumers Gas document, not the EMT document-- the Enbridge Consumers Gas document is a risk-mitigation plan for the implementation of such initiative. I am not -- and I will tell you my concerns on that one. It's not that it is only confidential, it actually gets into some very sensitive matters with respect to where a gas company's weaknesses are, and since September 11th we've been very cautious about releasing this type of information. 666 I think what you're really looking for, probably, is a document presentation that was given to the EMT. That would have been done in -- 667 MR. THOMPSON: I'm looking for both, actually, because it never got final approval until CLT; is that right? 668 MS. HOLDER: Well, it needed -- it got approval from Enbridge Consumers Gas's perspective by the management of Enbridge Consumers Gas. But there needed to be approval by Enbridge Inc. to accept this business. If I was to say to Edmonton, you need to take this, here it is, we've decided you take it, they couldn't just say, yes. They had to look at their proposals and what it meant to them and how it would fit with their strategic direction. 669 Where I can only undertake to do is see if what I can find with respect to a presentation that was given to the EMT in 1999 which was under the direction of Ms. Beattie who has left. So I'm not -- I don't have a document that Ms. Beattie presented to the executive team of Enbridge Consumers Gas for approval. 670 MR. THOMPSON: Do you have the other two documents that you have described in your possession? 671 MS. HOLDER: Yes, I have. 672 MR. THOMPSON: And you're refusing to produce those, as I understand it; are you? 673 MS. HOLDER: I'm refusing to produce the Enbridge document. It's an Enbridge document, it's not an ECG document. I have concerns about producing the other document into public record because of the sensitivity around the protocols, et cetera, and the weaknesses of -- you know our vulnerable points, let's put it that way, in a gas distribution system. And that relates to my concerns since September 11th. Now I can look at that -- sorry, I was just going to say, I will review that document again and see if there's some way that we can alleviate my concerns. 674 MR. FARRELL: I was going to suggest that we -- Ms. Holder can look at it if she has concerns, and then what we would do, at least initially, was to produce a redacted portion and explain what had been deleted. If that satisfies Mr. Thompson, then it's the end of it; and if it doesn't, then I guess we have further things to deal with. 675 MR. THOMPSON: Let's try that. I think if we can solve this on an applicable basis, that's the desirable course. 676 MS. HALLADAY: Fine. I think we need an undertaking number. 677 MR. MORAN: Just for clarification, this would relate only to the Enbridge document? 678 MS. HOLDER: Yes. 679 MR. MORAN: The ECG document? 680 MR. THOMPSON: Well, sorry, for me it's both documents. If your grounds for refusing the Enbridge Inc. document are simply, it's an Enbridge Inc. document, it's in your possession, or do you have confidentiality concerns about the contents of that document as well? 681 MS. HOLDER: I think from a strategic nature there's confidentiality concerns, and it is a confidential document. 682 MR. FARRELL: Why don't we treat them both the same way and see if we can produce something. If Mr. Thompson's satisfied, that will be the end of it; and if he's not, we will have to discuss it further. 683 MS. HALLADAY: Thank you, Mr. Farrell. 684 MR. MORAN: That will be undertaking J.5.5. 685 UNDERTAKING NO. J.5.5: TO PROVIDE COPIES OF PRESENTATIONS GIVEN TO BOTH THE ENBRIDGE CONSUMERS GAS MANAGEMENT TEAM AND THE ENBRIDGE INC. CLT ON OUT-SOURCING ARRANGEMENTS (WITH APPROPRIATE REDACTIONS) 686 MR. THOMPSON: Now, in either of these documents, are the ratepayer benefits quantified? 687 MS. HOLDER: To the extent that it does explain the value of the oversight of the gas controllers, the supervision oversight, the value of the increased number of controllers available to perform the functions, so there are benefits spoken about for the ratepayer, yes. 688 MR. THOMPSON: Dollar benefits? 689 MS. HOLDER: I don't believe any of those are possible to be quantified in dollar terms. 690 MR. THOMPSON: Does this document describe the benefits to Enbridge Inc. of out-sourcing these arrangements to it at ECG's avoided cost? 691 MS. HOLDER: That was the discussion at the time. I don't recall from the document, but the discussion was to out-source at our avoided cost. So I would have to check to see what's in the document. I haven't read it in a few years. 692 MR. THOMPSON: I'll follow up when we've dealt with the concerns we have about these documents. 693 Moving on with this particular transaction which is described in Exhibit A, tab 14, schedule 3, starting at page 7 -- sorry, starting at paragraph 7. You've mentioned this to other questioners. This resulted in, you've told us, a transfer of 12 positions to EOS; is that right? That's in the -- I find that in -- 694 MS. HOLDER: I'm sorry, counsel, I couldn't -- yes. 695 MR. THOMPSON: Paragraph 8. How do you transfer a position? 696 MS. HOLDER: In this case, we actually -- I think it's just terminology that we used. What we did is we deleted 12 positions within the utility, and there were positions created in EOS. 697 MR. THOMPSON: Were there, or do you know? 698 MS. HOLDER: Were there positions created in EOS? 699 MR. THOMPSON: Yes. 700 MS. HOLDER: Definitely. In fact, we trained all those positions. 701 MR. THOMPSON: I see. So EOS was a new start-up; right? 702 MS. HOLDER: Yes. 703 MR. THOMPSON: And the utility personnel trained the people? 704 MS. HOLDER: Yes. 705 MR. THOMPSON: To staff the EOS positions; is that what you're saying? 706 MS. HOLDER: Well, EOS staffed their positions. They came to Toronto for training on our system. Many of these were gas controllers from the industry but had not had hands-on experience with our own system. 707 So they came to Toronto for a period of time. We trained them. Then some of our gas controllers, more than the three mentioned here, went to Edmonton and worked in Edmonton with the new controllers on our system -- not necessarily new controllers to the business, but new controllers on our system for that winter. 708 MR. THOMPSON: It sort of goes to Mr. Betts' point that they came here for training. They didn't go out west. The geniuses weren't out there in terms of managing gas, they were here? 709 MS. HOLDER: I think that's unfair. I think what we've found was in the market, there were many gas controllers. 710 But each gas control system is somewhat different than -- to provide the appropriate oversight and ensure myself, as well as the rest of the executive team at the time, that we would be ensuring safe, reliable natural gas. 711 We wanted to be sure we had comfort that not just the controllers understood our system, but also that the new SCADA system, the new simulater system, actually did work. Remembering we were not just introducing a new group of individuals. We were introducing new -- a new system at the same time. 712 MR. THOMPSON: EOS didn't exist before this deal? 713 MS. HOLDER: Sorry, what's that? 714 MR. THOMPSON: EOS did not exist before this deal? 715 MS. HOLDER: It did, but not by this name. 716 MR. THOMPSON: Sorry, what name was it, then? 717 MS. HOLDER: It was the Liquids Control Centre. 718 MR. THOMPSON: I see. 719 So they had no experience in natural gas functions here, gas control nomination, scheduling, and reconciliations; is that correct? 720 MS. HOLDER: They would have had experience in scheduling and reconciliations, not for the gas industry. 721 MR. THOMPSON: Okay. And now EOS provides services to ECG and some other affiliates, as I understand it. Is Gaz Affaire one of them? 722 MS. HOLDER: To some extent, yes. 723 MR. THOMPSON: And I think you mentioned St. Lawrence? 724 MS. HOLDER: Yes. 725 MR. THOMPSON: And you mentioned -- 726 MS. HOLDER: Gas New Brunswick. 727 MR. THOMPSON: Gas New Brunswick. And I think you mentioned a couple of entities that were not affiliates; is that correct? 728 MS. HOLDER: That's correct. 729 MR. THOMPSON: On the gas side? On the -- 730 MS. HOLDER: Yes. 731 MR. THOMPSON: Now, on the "then" situation, we apparently had 12 positions in operational services prior to this deal in the utility? 732 MS. HOLDER: Yes. 733 MR. THOMPSON: Were they filled? 734 MS. HOLDER: What, in the utility? 735 MR. THOMPSON: Yes. 736 MS. HOLDER: Yes. 737 MR. THOMPSON: So these were all -- 12 FTE -- 738 MS. HOLDER: Yes. 739 MR. THOMPSON: Is there a concern about that, Mr. Brennan? You seem to be shaking your head one way, and Ms. Holder is going like that. 740 MR. BRENNAN: No, the only reason I'm doing that is because I know that there is sometimes where there is turnover, I guess, of some of the gas controllers, whether or not they are all filled at the time, I guess. 741 MS. HOLDER: In this case they were, at this time. 742 MR. THOMPSON: Yeah, okay. Well, but generally speaking, full -- 12 FTEs in the utility performing these functions? 743 MS. HOLDER: Yes. 744 MR. THOMPSON: All right. And I wasn't clear on how many FTEs there are in EOS now performing these functions; do you know? 745 MS. HOLDER: I don't know exactly. I believe there's more. 746 MR. THOMPSON: Well, wouldn't you two check the reliability of EOS to perform the service that you've out-sourced, ascertain how many people are performing it? 747 MS. HOLDER: I know you can't do it with less than 12. It's physically impossible to cover the shifts that are necessary to run this size of operation, so they are not doing it with less than 12. 748 MR. THOMPSON: Well, are you stating that as a fact? Do you know that as a fact, or is that -- 749 MS. HOLDER: I ran the business, and I could not do it with less than 12 people and we've actually had to extend the working hours of the nominations scheduling group to meet the changes in the industry. 750 MR. THOMPSON: All right, well, when you said to Mr. Brett it could be 10 -- 751 MS. HOLDER: We were referring then to gas services at Enbridge Inc.. 752 MR. THOMPSON: All right. So I'm on the wrong company. As far as EOS is concerned, then there has been no transfer of efficiency gains -- there's been no efficiency gains. If it takes more than 12 to do it now, there's been no efficiency gains; is that right? 753 MS. HOLDER: From the perspective of head count. There is the operating and maintenance of your SCADA system and your IT systems; I'm not sure what would have occurred there. 754 MR. THOMPSON: All right. And did you tender that work? 755 MS. HOLDER: Sorry. 756 MR. THOMPSON: There was a discussion about tendering this out-sourcing; I think that was in reference to EI again. 757 MS. HOLDER: Yes. 758 MR. THOMPSON: Was it contemplated that there be a tender of this work? 759 MS. HOLDER: No, there was not. We didn't believe there was anybody in the market at the time that would do these services. 760 MR. THOMPSON: We probably share that view. Now, in terms of the contract and the costing of it, the contract, and this will be my last area, I guess, before we break, but the contract for this work is in -- I think it's CEED 54. 761 MS. HOLDER: Yes. I just want to -- sorry, can I go back to my last answer, Mr. Pleckaitis reminded me with that that one of the other ways that efficiencies could be gained within Enbridge is if they are sharing those resources with other -- if there is part-person that can be somehow shared to perform other functions where they might have been idle doing that job within the utility for a period of time. 762 MR. THOMPSON: I'll come back to, if you will, gains through consolidation, I guess is what you were describing earlier. 763 MS. HOLDER: I somehow expected you would. 764 MR. THOMPSON: Just on this contract at CEED 54, the intercorporate services agreement, at page -- where are we here, I guess it's 6, sorry, schedule A, services, and then down at 8.2, we have the cost schedule at least the fee schedule which is blank in this document; correct? 765 MS. HOLDER: Yes. 766 MR. THOMPSON: But when -- in your evidence in chief yesterday, you were telling us that one of the things that the Board should have concerns about was the cost consequences of these arrangements. 767 MS. HOLDER: Yes. 768 MR. THOMPSON: Do you recall that? 769 MS. HOLDER: Yes. 770 MR. THOMPSON: And you said there were none for this year because of targeted PBR. 771 MS. HOLDER: Yes. 772 MR. THOMPSON: But this contract goes for seven years. 773 MS. HOLDER: Yes. 774 MR. THOMPSON: All right. And am I correct that there are numbers in the original document for fiscal 2001 to 2007? 775 MS. HOLDER: Yes. 776 MR. THOMPSON: All right. And am I correct that the number for fiscal 2001 is ECG's avoided costs of providing this function in the utility? 777 MS. HOLDER: Including capital -- replenishing capital and overheads, yes. It's not just the value of those 12 employees. 778 MR. THOMPSON: All right. Well, what it is is it's an extraction from the utility of all of the avoided costs -- 779 MS. HOLDER: Yes. 780 MR. THOMPSON: -- related with this function and it's plugged into that contract. 781 MS. HOLDER: And included -- added to that is the capital, the value of the capital that was needed to be invested by Enbridge Inc. as the other scenario would have been that we would have invested that capital. 782 MR. THOMPSON: So this wasn't any negotiated amount, it was simply taking the utility allowance and plugging it into the document. 783 MS. HOLDER: I think there was some negotiations, though. 784 MR. THOMPSON: What? 785 MS. HOLDER: There were negotiations. 786 MR. THOMPSON: About what? 787 MS. HOLDER: Well, I think Enbridge Inc. would have liked to have more money. 788 MR. THOMPSON: Oh, and you hung tough, did you, by sticking with your avoided costs? 789 I mean, are you serious? 790 MS. HOLDER: Yes, I'm serious. 791 MR. THOMPSON: Now, for 2002, am I correct that it's the same number plus the impact of the PBR escalation factor. Sorry, the -- 792 MS. HOLDER: No. 793 MR. THOMPSON: All right. Well, tell me in words what's in the 2002 number. 794 MR. FARRELL: Why do we need to get into this? 795 MR. THOMPSON: Because the cost consequences of these long-term arrangements are something that we're told the Board should have concerns about. 796 MS. HOLDER: For 2003. 797 MR. THOMPSON: Well, starting in fiscal 2003. But this is a seven-year contract; right? 798 MS. HOLDER: Yes. 799 MR. THOMPSON: The cost consequences of this document are expressed in it now. 800 MS. HOLDER: Yes. 801 MR. THOMPSON: And so should we not have -- if we're to -- if the Board is to consider the cost consequences of this arrangement, should they not have some idea of how it works, going forward? 802 MR. FARRELL: I object to the question, Madam Chair. We're not asking the Board to consider the cost consequences in this particular case. The cost consequences have no rate-making implications in the test year. The cost consequences will be demonstrated next year when they will have rate-making implications. 803 MR. THOMPSON: Well, my position, Madam Chair, is that these seven-year contracts have cost consequences. I take the point that the dollar amount for 2002 is not going to affect the PBR allowance. 804 But the mechanics for determining the dollar amounts in 2002 and thereafter goes to the issue of the cost consequences of the arrangements for their duration. 805 And I submit that you should have some awareness of what's being put forward -- in front of you to consider an issue that the company says you ought to consider in reviewing these arrangements, and whether any conditions should be attached in your order pertaining to them. 806 MR. MONDROW: If I might, before Mr. Farrell responds, Madam Chair, listening to the exchange, from my client's perspective, part of this issue that we're here talking about is how regulatory oversight should and needs to be or need not be exercised in respect of these arrangements. 807 What Mr. Thompson is asking about are the costing components rather than the figures. And it seems to me that what costing components were used by the utility may well be relevant to argument in respect of what the Board need and need not look at, going forward, in respect of regulatory oversight of these transactions. 808 So we'd support Mr. Thompson's request for the components rather than the dollar figures in this proceeding. 809 MR. FARRELL: My only comment in reply, Madam Chair, is that Ms. Holder, as I heard her speak both now and earlier, was saying the Board should have -- should consider the cost consequences in fiscal 2003, not now. 810 So to the extent that Mr. Thompson has suggested that Ms. Holder was saying the Board should consider the cost consequences now, I disagree that that was her evidence. 811 MS. HALLADAY: Thank you. I think now might be a convenient time to break. 812 Before we rule on this, we will break, and we'll reconvene at two o'clock to deal with the QRAM, and then we'll proceed on. 813 --- Luncheon adjournment at 12:35 p.m. 814 --- On resuming at 2:05 p.m. 815 MS. HALLADAY: Please be seated. 816 Before we begin the QRAM, are there any preliminary matters? 817 Mr. Farrell? 818 MR. FARRELL: Yes, Madam Chair. I should point out that due to an inadvertent -- due to inadvertence, rather, the appendix A and appendix B to the QRAM application were not included in the filed document. Appendix A, you might recall, is just the text of the settlement of issue 2.2 in the RP-2000-0040 settlement proposal. And the appendix B was the list of interested parties. 819 I can confirm that the application was served on the list of interested parties that was attached to the previous QRAM application. 820 But I apologize for that. Thanks to Ms. DeMarco, I have copies of appendix A, which is the text of the settlement proposal in case anyone wants to refer to it, including the Board members. I can distribute it if necessary, or I can distribute it now, according to your wish. 821 MS. HALLADAY: Mr. Moran appears to be distributing it. 822 MR. FARRELL: Okay. I have extras here if anyone wants them. 823 MS. HALLADAY: Mr. Farrell? 824 MR. FARRELL: So the witnesses that are appearing have appeared in the other case, so I won't go through the niceties of introducing them, since it's on the same record. 825 But closest to the Board is Mr. Bourke, next to Mr. Bourke is Ms. Duguay, and next to Ms. Duguay is Mr. Small. 826 MS. HALLADAY: Thank you. 827 MR. FARRELL: They've all been sworn in the main case, so I don't think we need anything more for the purposes of this application. 828 MS. HALLADAY: Thank you. 829 Did you want to make any preliminary comments, Mr. Farrell? 830 MR. FARRELL: No, I don't. I think that perhaps I would just ask Ms. Duguay to summarize or just to explain in summary form the variation on the agreed-to methodology that ECG is proposing in this case, including the reason for it, because I think that's the controversial part of this particular application. 831 MS. HALLADAY: Thank you. 832 Ms. Duguay? 833 ENBRIDGE CONSUMERS GAS - PANEL 5 - QRAM 834 D.SMALL; Previously sworn. 835 P.DUGUAY; Previously sworn. 836 R.BOURKE; Previously sworn. 837 EXAMINATION BY MR. FARRELL: 838 MS. DUGUAY: Certainly. 839 The ECG indicated to the Board in both its application as well as in evidence that it had exceeded the pre-set threshold that was agreed upon last year as part of the RP-2000-0040 settlement proposal; (a), with respect to the utility price; and (b) with respect to the adjusted forecast year-end balance in the PGVA. 840 So ECG has followed in the July QRAM application the rules as prescribed by the settlement proposal with regard to the treatment of the utility price; however, with regard to the treatment of the adjusted year-end 2002 PGVA balance, rather than using a three-month period to design the rate rider that would, in this particular instance, refund $35 million to system gas as well as buy/sell customers over the corresponding three-month period, being July 1st through to the end of September, the company has proposed to use a six-month period, that is, July 1st through to the end of December, in order to refund that $35 million credit to system and buy/sell customers. 841 And the reason underlying this proposal is outlined in evidence at Exhibit Q.4.2, tab 4, schedule 1, at paragraph 9. 842 And it -- essentially, the company had two concerns with the level of the forecast PGVA year-end balance of $35.1 million. 843 But the fact that this fairly large credit balance would be amortized over three months, and those three months represents summer months where consumption is fairly low, the resulting credit using a three-month period on average is approximately 10.6 cents per cubic metre. 844 Under ECG's proposal, that is, to spread it over six months, the credit is largely diminished, given that it's spread over a longer period of time, including consumption in the shoulder month and one month of the winter months. And the average goes down to, essentially, 3 cents per cubic metre. 845 So in terms of -- the reasons for that departure from the methodology prescribed in the settlement proposal is that the utility was concerned or wanted to ensure that there's no confusion in terms of the market price signal that are being sent into the marketplace and the fact that commodity, at least based on the forecast underpinning the QRAM, are now on the rise. 846 Whereas, if you take the new utility price, which is, essentially, 21 cents per cubic metre, apply the rider, being amortized over three months, you get a resulting net commodity price which will appear on the bill, which unit price will be lower than the gas supply charge underpinning the most recent QRAM, that is, the April 1st, 2002 QRAM. 847 So from that perspective, the company thought that using an amortization period of six months was preferable, and the company was also concerned to smooth -- if gas prices stay at the level we anticipate them to be for the next year, if we give a 10.6 cent credit for three months, the jump coming October could be fairly significant. 848 MR. FARRELL: Thank you. 849 Nothing further. 850 MS. HALLADAY: Thank you, Mr. Farrell. 851 Mr. Moran? 852 CROSS-EXAMINATION BY MR. MORAN: 853 MR. MORAN: Thank you, Madam Chair. 854 Let me start off with the commodity price increase, which is about 31 percent, as I understand it? 855 MS. DUGUAY: That's right. 856 MR. MORAN: I wonder if you could just help the Board understand, from an overview perspective, what's happening in the marketplace to explain that large increase. 857 MR. SMALL: I guess my first question would be, just to clarify, are you asking why prices in particular have been increasing since we would have implemented our April 1 QRAM? 858 MR. MORAN: That's right, yes. 859 MR. SMALL: Well, there's a number of things that people within the industry believe are the reasons behind those price increases and still coming back to people's -- their speculation of where prices should be, there's a number of things pertaining to gas and storage balances throughout North America, what their expectation of what winter demands are going to be next winter, and possibly what summer demands could be this coming summer, possibly for cogeneration needs. 860 So there's a number of contributing factors for prices increasing since we last did our QRAM. 861 MR. MORAN: Perhaps, maybe, you could discuss those items that you just mentioned with a little bit more detail. Again, we are just trying to get an overview to understand what's behind the increase. 862 MR. SMALL: Well, like I said, a lot of it is speculation. I mean, all we've tried to do is track whatever those daily prices are reported in the number of different publications that we identify within the evidence at Q-4 to tab 1, schedule 1, where we'll track on a daily basis the NYMEX prices, for example. 863 Also, we'll be able to track various prices at different receipt points - AECO, Dawn, and Chicago, for example. And we'll just continue to track those on a daily basis, and then we'll just take the -- whatever that market consensus is for that day's price, going forward, and take whatever that 21-day average is and apply it to our test year volumes. 864 MR. MORAN: Okay. Thank you. Let me move to the rate-rider issue, then, and I have a few questions there. In last year's settlement -- do you have a copy? 865 MS. DUGUAY: I do. 866 MR. MORAN: As I understand the settlement, on issue 2.2, there's a QRAM methodology that's set out in quite a lot of detail there and if we turn to page 3 of 6 on that issue, under the heading -- 867 MS. DUGUAY: Sorry, 3 of 6 of which document? 868 MR. FARRELL: It would have been what should have been appendix A. 869 MR. MORAN: -- Using your QRAM exhibit number. 870 MR. FARRELL: Let me hand her a copy of what you're using. 871 MR. MORAN: Thank you. If you just turn to the part at the top of the page, it says "PGVA" and it's the third page of that issue. 872 MS. DUGUAY: I have that. 873 MR. MORAN: The fourth bullet point. 874 MS. DUGUAY: Mm-hm. 875 MR. MORAN: And there's a clear statement beginning in the second sentence, beginning on the fourth line: "If the further adjusted year-end balance, when translated into cents per cubic metre based on forecast consumption for the remainder of the test year, would exceed .5 cents per cubic metre, the further adjusted year-end balance would be cleared during the remainder of the test year by means of a rate rider." 876 MS. DUGUAY: Yes. 877 MR. MORAN: And that is a reference to the remaining three months of the test year; correct? 878 MS. DUGUAY: That's correct. 879 MR. MORAN: Which is different from the proposal that you have before the Board, which is six months. 880 MS. DUGUAY: That's right. 881 MR. MORAN: If you flip over a couple more pages to the sixth page, under the heading "Implementation Schedule," the second, I guess, sub-bullet under the bullet: "The new methodology, including the .5 cents per cubic metre adjustment and clearance thresholds, will be examined thoroughly in light of the eight principles enumerated earlier in this settlement. This examination will occur in ECG's next rates case following fiscal 2002 or, instead, in a proceeding held for the purpose subsequent to fiscal 2002." 882 So, in effect, this is the agreement of parties, including ECG, on how the methodology would work. I take it you haven't had sign-off from the other parties for the proposed change that you are making, to move it from three months to a six-month period for this rider; is that correct? 883 MS. DUGUAY: That's correct. 884 MR. MORAN: Now, the next QRAM date, as I understand it, is October 2002. 885 MS. DUGUAY: That's right. 886 MR. MORAN: So theoretically, there could be another rate rider at that time; right? 887 MS. DUGUAY: There could be another rate rider and there could be as much as three rate riders throughout a given fiscal year. That would not be unusual, to have two rate riders. 888 MR. MORAN: That rate rider might be positive, it might be negative; right? 889 MS. DUGUAY: Yes. 890 MR. MORAN: So in the context of trying to provide some clear indication of what's happening on prices overall, the effect of your proposal or the advantage of your proposal could well be lost as of October 2002, depending on what's happening with QRAM at that time; right? 891 MS. DUGUAY: , Well, I would agree with that in the sense that come October, there would be a new recalculated utility price and potentially a rate rider. The chances of the rate rider or the unit rate being as large as what we see today in terms of the probabilities would be much lower given that the adjusted 2003 at that point, PGVA year-end balance, would be spread over 12 months, including the winter months, therefore minimizing or diluting the resulting unit rates. 892 MR. MORAN: To understand the price signal issue, then, maybe I'll get you to look at an example of a bill. 893 Madam Chair, perhaps we could mark this as an exhibit, just to assist the discussion. I'm not sure what I should call it. QRAM Exhibit 1, perhaps, might be the best way to deal with it. 894 QRAM EXHIBIT NO. 1: QRAM BILL SAMPLE 895 MS. HALLADAY: I assume, Mr. Moran, the Board are going to get copies of the exhibit before it is totally lost at the back. 896 MR. MORAN: All right. If we look at this example of a bill, after the numbers, there's an explanation. Your gas supply charge includes the following components, and then there's two lines, "Gas supply rate effective January 1, 2002," and then there's a price, "18.1396 cents," and then underneath that there's storage surcharge, effective September 1, 2001, "5.1909 cents." 897 Now, the effect of the current QRAM proposal is to change that second line into a storage credit; right? 898 MS. DUGUAY: That's correct. 899 MR. MORAN: And then the gas supply rate, that will be reflected separately, and that number is changing as well? 900 MS. DUGUAY: That's correct. 901 MR. MORAN: And if I understand the concern about the price signal, it's because people might subtract the credit from the gas supply rate and think that gas is really cheap. 902 MS. DUGUAY: That's right. And I think the concern is that I think people in this room know what the new gas supply charge here means, that is, the price that is reflective of most current market conditions and that the gas in storage, in this particular case, debit, is a result of the storage revaluations. But from a customer's perspective, the company is not sure that they know exactly what they're looking at, and at the end of the day, in relation to other choices in the marketplace, what people look at in terms of comparisons are the unit rates. 903 And I'm surprised here that on that bill we don't see the net of the two, because I have with me another Enbridge bill that shows the effective gas supply unit rate. That requirement was part of the ADR proposal last year and this is found -- 904 MR. FARRELL: Page 5. 905 MS. DUGUAY: Page 5? At page 5, under the pricing information paragraph, in the first bullet, in the first sentence. 906 MR. MORAN: All right. Perhaps if we could just stay with this exhibit for a moment. 907 To the extent that there might be some price signal confusion, based on the way the information is presented here, if we go back to what led to those particular numbers, the price was coming down at that point, was it not? That 18 cents reflected a decrease in commodity price at that time. 908 MS. DUGUAY: That's correct. 909 MR. MORAN: And there was a surcharge that was being added on to that. So it's exactly, I guess, the opposite of the current situation, prices coming down and there is a surcharge which brings the price back up, as we see on this bill, compared to the situation we're looking at today where the price appears to be going up and there is a credit which would reduce the overall price; right? 910 MS. DUGUAY: Well, I guess in this specific case, the surcharge stems from the gas and inventory revaluation as of September 1st of 2001, and that was just a carry-over, given that it was essentially in effect for seven months. 911 MR. MORAN: I guess all I'm suggesting is, to the extent that there's the possibility of price signal confusion today, there was also the possibility of price signal confusion back then for similar reasons, even though the numbers are different and moving in the opposite directions. 912 MS. DUGUAY: Yes, in this specific case, I guess what I'm trying to say is that the net would be the differential in the market prices, per se. The rider was the same as of September, so it made no difference in terms of the -- the resulting, if you want to call it, market prices or net commodity prices. 913 MR. MORAN: If I wanted to see if I had an advantage in signing up with a retailer, it would be the first number that would be important for that purpose; right? 914 MS. DUGUAY: It would be. But I'm -- I'm not sure whether that's the price that was compared to in terms of comparing different options. 915 MR. MORAN: The point is the second number is a temporary number. 916 MS. DUGUAY: That's right. I agree that the first -- the number that the people should be looking at is the level of the gas supply charge. 917 MR. MORAN: Right. So in terms of ensuring that people understand properly the price signal about customer prices increasing, maybe it's just a customer communication issue, is it not? The bill insert could explain -- 918 MS. DUGUAY: Yes, the bill insert does explain it. We have information on the web site as well where the customer rate notices are there. We typically produce a Q and A, or a question and answer, that did explain, for example, in this instance, the gas and inventory surcharge stemming from these September 1st gas cost decrease. However, it's just a question of ensuring that people understand the material that they are looking at. 919 MR. MORAN: Yes. And when they're actually looking at the bill, perhaps it could be made a bit clearer that that second price is a temporary price. The way it's worded right now, it just says: "Storage surcharge effective from September 1," but it doesn't suggest that it's only for the next seven months, or whatever it turns out to be. 920 MS. DUGUAY: Yes, that's right. But that information is contained in the customer rate notices. 921 MR. MORAN: Which you may not have in the second bill or third bill or the fourth bill. 922 MS. DUGUAY: Correct, but I think there is a lot of information on the bill as it is. The web site has it as well. 923 MR. MORAN: If we were looking at the current rider that's being proposed and it was going to be done over three months, we could actually put on that line that it's for three months; right? And then people would understand that it's a temporary thing and there is a real price above it. 924 MS. DUGUAY: I would have to check on that. I don't know whether there's some constraint or -- 925 MR. MORAN: Fair enough. Okay. 926 MS. DUGUAY: It could be probably done. 927 MR. MORAN: Just the last area I want to quickly touch base with you is in relation to the rider itself, which is in the schedules at the back of the QRAM filing. I think it's the third last page in the binder. At the top, it says, "Rider C - Gas Inventory Adjustment Rider." 928 MS. DUGUAY: Yes. 929 MR. MORAN: What we see here is a reflection of the six-month proposal; right? 930 MS. DUGUAY: That's correct. 931 MR. MORAN: But we don't have the back-up calculations that give rise to that number? 932 MS. DUGUAY: I have -- oh, okay. I could provide that. Sure. 933 MR. MORAN: And in the event that the Board might decide that it's more appropriate to do this over three months, I'm wondering if you could also give me the calculations for three months instead. 934 MS. DUGUAY: Yes. Certainly. 935 MR. MORAN: I guess that would be QRAM Undertaking 1. 936 QRAM UNDERTAKING NO. 1: TO PROVIDE THREE-MONTH CALCULATIONS FOR RIDER C - GAS INVENTORY ADJUSTMENT RIDER 937 MR. MORAN: Those are all my questions. 938 MS. HALLADAY: Thank you, Mr. Moran. 939 Ms. Spoel has a question. 940 QUESTIONS FROM THE BOARD: 941 MS. SPOEL: When you do the rate rider over a three-month period, in effect, July, August, and September, is it on a volumetric basis? 942 Does that mean that the residential customers who use natural gas only for space heating purposes and not, say, for hot water or cooking or so on, would they, in fact, not benefit to the same extent from a three-month rate rider? 943 Or maybe I should phrase it this way: When it's for the three months -- and I just really want to clarify this. When it's for the three months, is it applied to the volumes actually consumed by each customer during those three months? 944 MS. DUGUAY: That's right. So on the one hand, the derivation of the rider would be based on the forecast volume at the rate-class level. 945 MS. SPOEL: Right. 946 MS. DUGUAY: To derive the appropriate unit rate, because the unit rate does vary on the rate-class basis. But you're right. Once the rider is in effect, it will be applied to actual consumption over the period that the rider would be applicable. 947 MS. SPOEL: Thank you. 948 MS. HALLADAY: Ms. Duguay, I guess the Board is equally concerned with price transparency and also with rate shock. 949 Is the question about the price transparent rate shock, does that relate more to the methodology for revaluating the inventory in storage? 950 MS. DUGUAY: Well, I think what we see in this specific case, if you were to break out the $35.1 million credit that -- you're right; there are two components. 951 There are three gas and inventory adjustments; one for the period of January, the January QRAM, the April, as well as the July. And there are as well deemed commodity variances in the PGVA. 952 I do have the separation of the two numbers, and the most significant variance is the commodity variance in the PGVA, not the net gas in inventory debits and credits. 953 MR. SMALL: Just to clarify, too, the -- what we're proposing here is just the time period that we're planning to clear that balance, not how we calculate the year-end balance. 954 MS. HALLADAY: No, I appreciate that. 955 But we seem to -- in each QRAM, because there's a re-adjustment in inventory, we always seem to be going at cross-purposes. 956 I remember when gas commodity prices were increasing because of the re-evaluation of the inventory. There are credits to the customer when gas prices are decreasing because of the inventory re-evaluation. There are debits to the consumer. 957 And it seems as though historically it's been an issue that prices are going up, and we're issuing rate riders. And we can guess -- I can guess that ultimately we'll reach a point when the commodity prices start going down again, and the inventories revalued will have the same problem. 958 And we're not giving clear price signals to the consumer about the direction that the commodity costs are going. 959 MS. DUGUAY: Yes. 960 Just to clarify your point that the inventory revaluation will always work in the opposite sense of gas prices. 961 MS. HALLADAY: Right. 962 MS. DUGUAY: So going back to what I was saying before, if you were to apportion the $35.1 million credit between the net inventory adjustment and the deemed commodity variances in the PGVA, the total for the inventory adjustment is a credit of $7.6 million; whereas the balance, the 27.5, is projected commodity variances in the PGVA. 963 We were discussing, I'm sorry, alternatives to the existing methodology, and that there's really -- in order to avoid having either debits or credits to rider C, we could use, essentially, staggered start-up dates where an effective rate change would be -- it could, for instance, start on the first of the month for a residential customer, and for another rate class, it would be delayed for a few weeks or a month, depending on load factor, primarily. But that's very confusing. 964 And another alternative would be not to revalue the gas in inventory, meaning that the new utility price would be a blended price. It would no longer be at the time that the forecast is struck, be truly reflective of the market as of that date. 965 MS. HALLADAY: Thank you, that's been very helpful. I think that these proposals are beyond the scope of this particular QRAM application. However, your thoughts have been very helpful. 966 Before we proceed on, the Board has received a letter from CAC supporting the proposal except for the implementation of the QRAM over -- the rate rider C over the six months rather than three months -- sorry, they support the existing methodology. 967 MR. FARRELL: I've distributed copies of the letter. 968 MS. HALLADAY: Okay. I just wanted to make sure that everyone had that. 969 Moving on. Ms. DeMarco, did you have some comments? 970 SUBMISSIONS BY MS. DEMARCO ON QRAM: 971 MS. DEMARCO: We do. 972 I'm here on behalf of The Coalition for Efficient Energy Distribution and I do have some written submissions that will accompany our oral submissions. And I believe that Mr. Moran has some and Mr. Farrell has some, and I guess I've got a stack here for ... 973 Madam Chair, I guess the past discussion about alternatives to an approved methodology that was reached through a consensus-based settlement process is really the basis of CEED's submissions. This sort of activity raises several concerns on the part of CEED, and one would think, in the context of this particular application, that it would be in the interest of marketers to implement the revised process and have higher system gas prices as contained -- or would result from the application, but there's a much greater issue at stake here; namely, we should be asking ourselves: Should we deviate from a Board-approved process that was reached following a systemic consensus-building process a year ago? 974 CEED's submission is that the Board should answer that question in the negative. The Board should require Enbridge to comply with the approved methodology, and CEED's making this -- or taking this position on the basis of four main submissions. 975 The first is that the application does deviate from and is not in accordance with an approved system gas methodology. 976 Secondly, the non-compliant methodology proposed by Enbridge in this case is contrary to the spirit and intent of the methodology and requires speculation on where gas prices are going for six months hence. 977 Thirdly, the deviation proposed by Enbridge will obfuscate and potentially invalidate the agreed-upon review that, again, was part of the settlement agreement reached through consensus of the parties. 978 And finally, if the Board were to allow Enbridge's proposed deviation from a consensus-based settlement, the Board's settlement and ADR processes could be both frustrated and compromised. 979 Starting first with the actual methodology and what is required. Mr. Moran has taken the Board and stakeholders through the essential elements of the settlement agreement where the required process is laid out. And just for reference, Exhibit Q.3.1, tab 1, as handed out, at schedule 1, appendix A, pages 1 through 6, and particularly on page 3, bullets 4 and 5, the required clearing mechanism is set out; and on page 4, the first bullet. Suffice it to say that Enbridge's current application indicates clearly that it is not complying with this approved methodology. 980 Specifically, at Exhibit Q.4.1, tab 1, schedule 1, at paragraph 2 Enbridge indicates that: "The application and supporting evidence were prepared substantially in accordance," not in accordance, "substantially in accordance with the approved methodology." And similarly, at Exhibit Q.4.2, schedule 1, at page 3 of 6, Enbridge indicates that it is of the view that: "Strictly applying the methodology prescribed in the settlement proposal as it relates to the disposition of the adjusted 2002 PGVA year-end balance yields undesirable results in this specific instance." 981 Further along at Exhibit Q.4.2, tab 4, schedule 1, it suggests an alternate methodology to what was an approved, agreed-upon methodology. 982 CEED is of the view that the prescribed methodology is an approved and agreed-upon methodology and should not be open to change outside of the agreed-upon review process, particularly in instances where, as Enbridge, in its own words, states, it is not -- or it yields an undesirable result to Enbridge. 983 CEED submits that the prescribed system gas methodology is current and should not be open to changes. 984 In addition, the underlying purpose of this methodology was to remove subjectivity, was to rely upon an objective methodology free from interpretation and manipulation that sets out 45-day system gas prices based on a strip and relies upon those prices. On this basis alone, CEED submits that the ECG application does not comply with the approved methodology and should not be approved. 985 Moving on to our second main submission which relates to the spirit and intent of the methodology. ECG appears to be attempting to justify its alternate, non-compliant methodology on two bases: The first is Enbridge's estimation or forecast of six-months prices, or prices going out for six months; and the second is Enbridge's interpretation of the underlying spirit and intent of the agreed-upon methodology. 986 I'll refer you to Exhibit Q.4.2, tab 4, schedule 1, at page 4 of 6. Specifically, in the first paragraph, Enbridge indicates that the basis for the deviation is its concern about gas prices remaining at a higher level or -- sorry, gas prices remaining the same or increasing over the next six months. The methodology again stipulates that this objective mechanism is based on three months. The Board-approved methodology was implemented to avoid the speculation about where prices are going six months out, and specifically the 21-day strip creates a mechanism put in place to avoid that sort of speculation. 987 In terms of the spirit and intent of the methodology, contrary to Enbridge's subjective assessment and submissions, CEED also submits that the spirit and intent of the approved methodology is also compromised by the deviation. Specifically, CEED would submit that the proposed change to the approved methodology would first yield a rate rider that is not reflective of the PGVA balance that is now owing to customers. 988 Secondly, increased customer confusion by adding yet another change to an agreed upon and approved methodology. 989 Third, decreased customer awareness about the constituent parts of the system-gas price, the transparency of the approved methodology, and finally, gas market forces. 990 Fourth, the deviant methodology would increase the regulatory burden of the Board in attempting to approve a non-compliant mechanism and depart from the agreed-upon methodology. 991 And finally, CEED submits that the proposed change would increase inter-generational inequities that were sought to be eliminated through the revised methodology. 992 Moving, then, to our third main submission which is that the proposed deviation will both obfuscate and invalidate the required review as agreed upon in the settlement proposal. Mr. Moran has referred the Board to the necessary requirement, or the element of the proposal as set out on page 6 of 6 in the settlement agreement, which essentially requires a review of the current methodology -- not some derivation thereof, but the actual current methodology within one year, or in fiscal 2003. 993 Moreover, I believe that the Board has, through Mr. Moran, the settlement agreement reached in the Union customer-review process which -- should it be exhibit number -- 994 MR. MORAN: QRAM 2, I think. 995 QRAM EXHIBIT NO. 2: UNION GAS SETTLEMENT AGREEMENT 996 MS. DEMARCO: -- which also addresses the pricing of system gas in the context of Union's most recent customer review. 997 I'd like to refer the Board to page 26 of that agreement under issue number 12. In the fourth paragraph down where you see settlement was reached on largely the same basis that Enbridge undertook to reach its settlement on; that is, Union also agreed to address system gas pricing rather than on an ad hoc basis but in a generic proceeding or a larger proceeding looking at these issues, and specifically it's stated: "Parties accept Union's proposal in respect of inventory revaluation subject to Union's participating in a future review of system gas. This review will consider Union's system gas pricing, the QRAM process, inventory revaluations, and triggers, and this re-describe is expected to occur in conjunction with the next Enbridge Consumers Gas rate case following ECG's fiscal 2002, or in a generic proceeding held specifically for that purpose subsequent to ECG's fiscal 2002." 998 If we are now to depart from the agreed-upon process, the review agreed upon not only by Enbridge but by Union is compromised. 999 This undesirable consequence is entirely avoidable by requiring Enbridge to comply with the existing methodology, letting the process proceed for another three months as agreed and allowing Enbridge to raise any associated concerns with the methodology in the agreed-upon review process in fiscal 2003. 1000 Finally, moving on to our last submission in this regard, CEED submits that if the Board were to allow Enbridge's deviation from the approved methodology, there would be very serious and negative ramifications for both the Board's settlement and hearing processes. 1001 Again, the approved system gas methodology was the product of a very long and detailed process involving stakeholders, including ECG. The Board-approved settlement on this issue was reached with the understanding and intention that it would be adhered to by the parties and upheld by the Board. If the Board were now to allow the proposed deviation from the agreed-upon methodology that was achieved through a consensus-based settlement, it will undoubtedly compromise the efficacy of future settlement processes by sending a clear message that the Board is willing to subsequently invalidate an agreed-upon solution and settlement agreement. 1002 Moreover, in this case, if the Board is willing to do so, to the benefit of the utility and detriment of other stakeholders, CEED respectfully submits that the Board should avoid such a result and let the methodology and review proceed as agreed. 1003 In summary, then, CEED submits that the deviation proposed by Enbridge is not, number one, in accordance with the approved methodology; number two, not in accordance with the spirit and intent of that methodology; and number 3, would challenge both the required review and future settlement processes. 1004 As a result, CEED requests that the Board require Enbridge to amend the application to conform with the approved methodology and refuse to issue an order approving the application until such a time that the rates comply with the approved methodology. 1005 MS. HALLADAY: Thank you, Ms. DeMarco. 1006 Ms. DeMarco, is it your view that the Board has no jurisdiction to amend the methodology, even though it's being approved in a -- even those it's being proposed in a settlement proposal that was accepted in whole by the Board? 1007 MS. DEMARCO: We have not specifically addressed the Board's jurisdiction in this regard, only the impact and effects of the Board overruling, in effect, an approved methodology prior to the end of its course. 1008 MS. HALLADAY: So if this Board were to determine that, based on its public interest mandate, that, in fact, a methodology should be modified during the term of a settlement proposal, then the Board would have jurisdiction to do that. 1009 MS. DEMARCO: To the issue of public interest, certainly. CEED's submissions were clear that the approved -- that the requested methodology is not, in CEED's view, in line with the public interest in this regard. 1010 MS. HALLADAY: I understand. I'm dealing with our jurisdiction to do it if we so chose to do it. You mention that the proposal, Enbridge's proposal, was to the company's benefit and to the other stakeholders' detriment. Could you tell me how the company is going to benefit from this proposal? 1011 MS. DEMARCO: My reading of the proposal is that Enbridge is not required to pay credit PGVA amounts owing over the three-month period and would have a longer period to pay out such amounts owing. 1012 MS. HALLADAY: The rate rider would be in effect for six months rather than three months, but ultimately, the overall credit balance in PGVA is subject to a true-up and would have to ultimately be paid or credited one way or the other. 1013 MS. DEMARCO: There are two elements, Madam Chair, first the short-term benefit and secondly the long-term benefit. And certainly CEED is of the view that all stakeholders benefit from a long-term methodology that reflects market forces, accurate prices, and transparency therein, and to the extent that we are citing an ad hoc solution, it is to the detriment of all stakeholders. 1014 MS. HALLADAY: I'm not disagreeing with the fact that there is benefit to an approved methodology. My question was: Why does this particular proposal -- how does this particular proposal benefit -- you said it benefited the utility, and I guess I am trying to get at what is the specific benefit to the utility, other than they've deviated from the methodology that was accepted in the settlement proposal? 1015 MS. DEMARCO: In terms of the short-term benefit to customers, I believe CAC would be best placed to address the financial impact. In terms of the long-term benefit to the system, CEED certainly is advocating quite strongly that we should follow the proposed methodology as it has long-term benefits for all customers, for all participants in the market, and to the extent that we deviate from that, there is a detriment to those stakeholders. 1016 MS. HALLADAY: Thank you, Ms. DeMarco. 1017 Mr. Thompson? 1018 SUBMISSIONS BY MR. THOMPSON ON QRAM: 1019 MR. THOMPSON: Thanks. 1020 My client has only asked me to make submissions on the proposal to revise the formula and I'll try and be brief. 1021 Certainly, I agree you have power to override any contract and you can do so in this case if you feel it's in the public interest to do so. 1022 The formula was established in the settlement agreement after some long and hard negotiations, and I submit and recognize that it may have some flaws because it contemplated a review at the end of a particular time frame. I think Mr. Moran referred to it in his examination. I think the review, though, is not now, but it's at the end of the 2002 fiscal year. And I think it's clear that the formula may have some flaws. 1023 In my submission, though, the time to address those flaws and the consequences that have flowed from those flaws is on the occasion of the review contemplated by the agreement; and to the extent the formula has conferred benefits, that it wasn't intended to confer, deprive people of monies; it wasn't intended to deprive them of -- I would submit you can correct that by some clearance of a PGVA balance at that time. 1024 So the problem here, from my client's perspective, is a problem of principle. It's unfortunate that the proposal to modify the formula couldn't have been tabled during the settlement conference in this case, or that the signatories to the settlement agreement could have discussed possible solutions. It's clear from Ms. Duguay's evidence that staged start-up dates is one way of accommodating clearance of higher or lower cost storage in inventory; that may be the way to go. 1025 From my client's perspective, the PGVA credits were supposed to be cleared to the people that paid them, and I'm not so sure that that's going to follow from the formula. But there again that's something that can be corrected later. 1026 What we have here is a request by one party to override an agreement. The request is provided in the context of a QRAM application which, by its nature, is of short notice. No opportunity to explore alternatives or to ask questions, to present options, in my submission. And you should be reluctant to override settlement agreements on a summary application of this type. 1027 So in closing, I just wanted to indicate that I read Mr. Warren's letter. He's expressed it far more articulately than I can, and I agree entirely with the last two paragraphs of that letter where he says, "Although CAC sees some logic in ECG's approach, CAC sees greater value in committing to the methodology set out in the settlement agreement." 1028 Those are my submissions. 1029 MS. HALLADAY: Thank you, Mr. Thompson. 1030 Any further submissions? 1031 Yes, sir? 1032 MR. BRETT: Pardon me, Madam Chair. I don't have any further submissions, but I did wish to make you aware, Mr. Higgin said to me that VECC would have written submissions in this case. 1033 MS. HALLADAY: I have not received the written submission -- 1034 MR. MORAN: We don't have it yet, I don't think, unless it's with the Board secretary. 1035 MS. HALLADAY: We'll check. 1036 Thank you for bringing that to our attention, Mr. Brett. We'll check with the Board secretary. 1037 Yes, sir? 1038 MR. HAGGERTY: Yes. Jerry Haggerty on behalf of Superior Energy Management. 1039 MS. HALLADAY: Yes, Mr. Haggerty. 1040 Mr. Haggerty has submitted a letter for late intervention. 1041 MR. FARRELL: No objection. 1042 MS. HALLADAY: Thank you. 1043 Mr. Haggerty. 1044 SUBMISSIONS BY MR. HAGGERTY ON QRAM: 1045 MR. HAGGERTY: Thank you, Madam Chair. 1046 We strongly believe that the methodology that was approved in the settlement should be adhered to, and I'm in agreement with Ms. DeMarco and Mr. Thompson on their submissions. 1047 Two other points that I would like to make is that we have a concern if there is an adjustment that is going to be made over six months and then a subsequent one that could be made over three months, and they tend to overlap and go in different directions. We feel that that could be very confusing to the customer. And the methodology is clear and should be followed in order to avoid that confusion to the customers. 1048 And secondly in that customers rely very much on the information that is provided them on the methodology, and they also rely on their advisors and, in many cases, their gas supplier to determine how that system gas price is going to be determined. 1049 If we continuously change the methodology, that is going to result in a lack of credibility for anyone that is providing such advice to customers. And if it is subject to change on a periodic basis, then the customers will not have any clear direction to know that there is a system gas price and that there will be a quarterly true-up that will -- if necessary, with a rider. 1050 If it tends to be over longer or shorter periods of time, then the customer has a very difficult time in trying to make their gas purchasing decisions. And at least if the system is consistent, the customer will know exactly what they are dealing with. If the system is flawed, then we'll have to try to fix that, but the methodology should be maintained. 1051 MS. HALLADAY: Thank you, Mr. Haggerty. 1052 [The Board confers] 1053 MS. HALLADAY: Mr. Farrell? 1054 REPLY SUBMISSIONS BY MR. FARRELL ON QRAM: 1055 MR. FARRELL: Thank you, Madam Chair. 1056 I just want to deal with one of Mr. Haggerty's points first while it's still fresh in my mind. I didn't make a note of what to say about it. 1057 He talked about the confusion that could evolve from overlapping rate riders. As Ms. Duguay said to you or said to Mr. Moran, I think, during his examination of her, by definition there could be overlapping rate riders, because a QRAM operates for the balance of a test year. So if you have an October 1st followed by a January 1st and so on, it's inherent in the system that there could be overlapping rate riders. 1058 So the proposal made by the company in this case would not cause something that otherwise would be avoided. 1059 Mr. Thompson mentioned -- or perhaps alleged bad faith or, at least, implied it by saying it was unfortunate that this proposal wasn't tabled during the settlement conference. 1060 The last day of the settlement conference was May 13th. Mr. Small didn't do his 21-day strip until at least the middle of the month, because it has to be 45 days from the end of June. So there was nothing to table during the course of the settlement conference. 1061 Now, I'm going to deal with Ms. DeMarco's arguments last. I'd just like to point out in the CAC letter -- in the first -- on the first page in the second paragraph, I just want to correct something as a matter of fact. 1062 He says, Mr. Warren does: "ECG is proposing to modify the methodology agreed to in the settlement agreement for calculating the year-end balance in the PGVA and the consequential rate rider." 1063 As Mr. Small said, we're not changing anything in terms of calculating the year-end balance in the PGVA. What we're proposing is a rate rider of longer duration, so I just wanted to correct that for the record. 1064 CEED, I should just say, and it should be obvious from the company's filing that we had no intention of trying to hide this modification. It was clearly identified in the transmittal letter. It was clearly identified in the application. It was clearly identified in Ms. Duguay's evidence. 1065 Now, turning to one other aspect before I get to the Chicken Little arguments that you heard, that she said you should require ECG to amend the application and not to approve a rate order before then. 1066 The settlement proposal from RP-2000-0040 at -- and this is at the bottom of page 4 of the appendix. 1067 The last line on that page says, and I quote: "The Board would thereafter issue an order approving the applied-for" -- that's hyphenated -- "utility price, gas supply charges, gas distribution and load balancing charges, and rate rider, if any" -- then underscore the next one -- "or modifying them as required" -- "them" being the charges -- "effective as at the beginning of the quarter." 1068 So if you choose to reject the company's proposed modification, we don't need to refile if you have the information, which Ms. Duguay is going to provide for you in the response to the undertaking. 1069 You can simply modify what we have applied for and issue an order accordingly. We are not suggesting that you do that, but the settlement clearly gave you the power to do that, if your hands weren't tied, in other words, by what we applied for. 1070 Now, in making her submissions, Ms. DeMarco referred to the written submissions of the The Coalition for Efficient Energy Distribution, I take you to paragraph 5, on page 3. 1071 In paragraph 5, there are five assertions. The first is: "Yield to rate rider that is not reflective of the PGVA balance owing to customers." I don't understand that because the balance, whatever it is, will be cleared. It's just a question of the time frame over which it's cleared and hence the size of the rate rider or the unit amounts in the rate rider. So certainly the rate rider will reflect the PGVA balance, it will just reflect it over a different time period than the one specified in the settlement agreement -- excuse me, proposal. 1072 The next one is "Increased customer confusion by adding yet another change to an agreed-upon methodology." I'm willing to bet a lot of money that if you stopped a gas customer on the street and said, "Do you think you are going to be confused by yet another change to the agreed-upon methodology?" that they would wonder what in the world you were talking about. What the customer gets is a bill. It has lines on the bill; that's what the customer sees. I'm sure customers really care more about what the charges are than what the methodology is. 1073 She then said it would decrease customer awareness and transparency and so on. We disagree with that for the same reason. She said it would increase the regulatory burden in deviating from an approved methodology and attempting to apply an ad hoc rate mechanism. Well, the burden is now, we're here. 1074 And five is "Increased intergenerational inequities in the system," and I concede that that may be a point at the rate class level, as Ms. Duguay explained. But as she also told Ms. Spoel, if you look at the customer level, I'm not too sure that it does a lot for intergenerational equities or otherwise, depending upon what you use gas for in the summer months. 1075 But the point I think that bothers us the most is the suggestions of obfuscating and invalidating the required view and in threatening, if you will, the settlement proposal. 1076 This particular modification is not the first modification that ECG has proposed. Issue 2.6 in the main case is changes to the QRAM adjustment to include the introduction of large corporations tax and capital tax. And the text of the settlement provides you the history of ECG's then-proposed modification which was accepted perhaps without realizing that it was there. But certainly when this issue was raised and it was the subject of settlement discussions, it too was a modification of the approved-upon settlement. It didn't seem to affect the parties' ability to reach this settlement. So all of these things -- that's why I called it the Chicken Little argument: The sky is falling, the sky is falling. Simply, I don't see coming about by virtue of the proposed modification. We've had the modification before; the settlement process arrived intact. 1077 Those are my submissions. 1078 MS. HALLADAY: Thank you, Mr. Farrell. 1079 Thank you very much. And thank you to the panel for providing us with the information, and providing it to Board staff. Thank you very much. You are excused. 1080 We think that now might be an appropriate time to have a 15-minute afternoon break. That will give an opportunity for the panels to change places and then we will proceed on with the main rates base and -- 1081 MR. FARRELL: I should make an observation. If and when we receive the letter from the Vulnerable Energy Consumers Coalition, I may want to -- depending on what they say, I may have something further to say about their letter. But if it's along the vein of what we've heard already, then I will just inform the Board of that and my reply will apply to VECC's submissions as well as to the others. 1082 MS. HALLADAY: That was another question I wanted to ask you, Mr. Farrell, just to clarify the fact that under the approved methodology, that -- 1083 MR. FARRELL: We have deviated again. 1084 MS. HALLADAY: Exactly, that we have deviated from -- the company has a week to respond to any concerns raised by the intervenors. I assume that -- assuming that VECC raises no new arguments, that you have responded; is that fair enough? 1085 MR. FARRELL: That's what I'm saying. And if they do raise something new, I'm proposing to take a moment tomorrow, assuming we get their letter today, and just to reply to it so, you know, you're not waiting for the company's responses. But if their position is in opposition on the same grounds that we have heard today, then I will simply inform the Board that my reply applies to VECC's submission as well. 1086 MS. HALLADAY: Or perhaps it supports your application, Mr. Farrell. 1087 MR. FARRELL: That's why I said "if." 1088 MS. HALLADAY: Thank you very much. We'll reconvene at 3:30. 1089 --- Recess taken at 3:15 p.m. 1090 --- On resuming at 3:35 p.m. 1091 MS. HALLADAY: Please be seated. 1092 Before we begin, are there any preliminary matters? 1093 MR. FARRELL: I just indicate, Madam Chair, that -- I don't propose to mark what I'm about to describe as an exhibit because it's actually in the exhibit list. But it was a list that I gave to Mr. Schuch so the panel has copies of what the K -- formerly the F, now the K series of exhibits are and shows the number, the former number and briefly describes that -- we plan to keep this up to date, maybe not on a daily basis but certainly before the hearing is over. And we plan to do something similar with the undertakings. For our own purposes, we had attempted to show not just the renumbering but, rather, generally what it was and where the response was, because in some cases there have been responses given orally by the witnesses, and in other cases they have been documents marked as exhibits. So in due course, when we have a moment or two, we will try to do that before the hearing is over so everyone knows where the responses to the undertakings are for the purposes of preparing argument and having proper references. 1094 MS. HALLADAY: Thank you. That will be very helpful, Mr. Farrell. 1095 MR. FARRELL: That's all I had. Thank you. 1096 MS. HALLADAY: Thank you, very much. 1097 Mr. Thompson? 1098 MR. THOMPSON: Thank you. 1099 ENBRIDGE CONSUMERS GAS - PANEL 4 - RESUMED 1100 S.McGILL; Previously sworn. 1101 J.HOLDER; Previously sworn. 1102 F.BRENNAN; Previously sworn. 1103 A.PLECKAITIS; Previously sworn. 1104 CONTINUED CROSS-EXAMINATION BY THOMPSON: 1105 MR. THOMPSON: Panel, when we broke, we were discussing the contract with EOS, which is attached to CEED 54. 1106 Just to backtrack a little bit, I did check to determine when the Board's targeted PBR decision was rendered. And if you would take this subject to check, it was rendered on April 24, 1999. And the decision on the motion, Mr. Pleckaitis referred to was June 14th, 1999. 1107 So it would appear that the planning to out-source operations, which I understand started in 1998, Ms. Holder, started before those decisions had been rendered? 1108 MS. HOLDER: Yeah, that's fair. 1109 MR. FARRELL: Excuse me just a second. I'm not objecting to the question or the answer. 1110 Would you just repeat the date, Mr. Thompson, that you gave for the motion. 1111 MR. THOMPSON: I thought it was June 14, 1999. 1112 MR. FARRELL: My copy is dated June 29th, 2000. It was after, I think, the RP-1999-0001 decision. It had that docket. 1113 There was another -- there was a CAC motion -- it's now coming back to me that it might have been in June of 1999. 1114 MR. THOMPSON: Okay. Sorry. So your date was, sorry? 1115 MR. FARRELL: June 29th, 2000. 1116 MR. THOMPSON: The date that I was more concerned about was the date when the PBR base was established, and that was in April 29, '99. And the planning started before rather than after. That was really what I was driving at, the planning for EOS. 1117 MR. FARRELL: Could you just wait for a second. I just want to check something. 1118 MR. THOMPSON: I went to the Board library and pulled out 49701 decision, and on the cover I thought it said April 29, 1999. 1119 MR. FARRELL: Yeah, I'm not disputing that, Mr. Thompson, but I think that the O&M base was actually established as such in the RP-1999-0001 decision, and that's why I'm checking the index, just so we get our -- oh, I'm sorry. 1120 MR. THOMPSON: No, that was to reflect the -- that was the removal of the -- 1121 MR. FARRELL: I'm sorry. Mr. Ladanyi is correcting me. 1122 MS. HALLADAY: The base was not set, Mr. Farrell -- 1123 MR. FARRELL: Okay, well, I'm confused, and I apologize. 1124 MS. HALLADAY: -- in that 0001 case. I know. I sat on that case. 1125 MR. FARRELL: I remember you did. 1126 MS. HOLDER: Maybe I can assist here. 1127 When you're saying that we were planning, we were looking at our options clearly as early as 1998. It was not a decision -- the decision wasn't made at that time. 1128 MR. THOMPSON: No, I understand that. But again, with -- let me come at it this way, straight on. 1129 Dr. Bauer in the 49701 proceedings, and Mr. Brett referred to this, in effect warned -- those are my words -- people that one of the impacts of a targeted PBR would be a utility trying to transfer efficiency gains to affiliates. And I've asked the Panel to check Dr. Bauer's evidence and his cross-examination. 1130 I don't have the exact passage here, but subject to check, that's my paraphrase of what he said was one of the possible consequences. 1131 And what I was trying to establish is as far as EOS is concerned, that planning started before we really got into targeted PBR. Am I right, or did targeted PBR have some influence on the decision to out-source EOS? 1132 MS. HOLDER: Targeted PBR did not have any influence on our decision to out-source EOS. 1133 MR. THOMPSON: Thank you. 1134 MS. HOLDER: One of the other things that -- maybe I want to straighten my record earlier is I realize that we may have had some confusion over when I said I had a document in my possession. 1135 When I meant my possession, I meant in my office, in my files, not personally on me. So just to be clear, when I talk about "my possession," it means that I have it but not here with me. 1136 MR. THOMPSON: Yes, fine. Mr. Farrell explained that to me, and we'll have to, therefore, discuss -- what we might be able to do with that after you've gone back and examined it, and he's had a chance to review it. 1137 MR. PLECKAITIS: Mr. Thompson, your comment or question, Did PBR trigger the utility to do things differently, plan differently, for example, act differently than may otherwise have done, it is my understanding that one of the incentives of PBR is, in fact, to incent the utility to do -- to operate more efficiently. 1138 And I went back, actually, during the break and checked the Board's decision in 49701. This was the decision that approved PBR. 1139 And, in fact, in the Board's decision, a couple of things: One thing, if I refer to section 303 of that decision, it says: "The Board anticipates the unbundling of monopoly and competitive services will continue in the gas sector, and the remaining monopoly functions will be regulated by a move towards the use of incentive mechanisms such as PBR." 1140 And secondly, with respect to whether it was anticipated by the regulator that there could be enhanced productivity levels beyond what was contemplated by the utility in that hearing, the Board clearly heard from -- as I am interpreting this from the evidence given, because at 3015 of that Board's decision, it says: "Accordingly, the Board finds that the proposed productivity factor of 0.63 is not acceptable for the forward three-year period of the PBR plan. The Board will require addition of a stretch factor to better reflect opportunities of future efficiency gains and to provide a challenge to the company's management." 1141 So I interpret that as the Board saying because the 6.3 was based on a historical productivity levels that the Board believed that the utility would, in fact, do things differently than they would have done historically. And in my mind, things like out-sourcing would have been things to reasonably contemplate. 1142 MR. THOMPSON: All right. Well, I'll come back to a moment in a historical context, but I just wanted to finish up with the then and now with respect to EOS. The governance of EOS is -- Ms. Holder, you mentioned, or at least I thought you said, you set it up, or ran it, or something to that effect. 1143 MS. HOLDER: No, I didn't run it. I think you asked me at the very beginning who started with the seed or the concept and I had said that I also -- in my introductory comments said that I was responsible for the final negotiations of that agreement. 1144 MR. THOMPSON: Well, the governance of EOS, are there any ECG people that are officers of EOS? 1145 MS. HOLDER: No. 1146 MR. THOMPSON: Are there any ECG personnel that are in the management group of EOS? 1147 MS. HOLDER: No. 1148 MR. THOMPSON: All right. So from the perspective of the control of the people, where you had control of the people on the -- in the before scenario, they were employees of ECG; under this new regime, the control of the people performing the functions rests in EOS. 1149 MS. HOLDER: However, there is a contract that governs their activities which is a responsibility of Mr. Brennan's. 1150 MR. THOMPSON: The mechanism that ECG has to influence their behavior is the contract. ECG people have no part to play in the governance or operations of EOS; have I got that straight? 1151 MR. PLECKAITIS: I would add that Steve Letwin, who is a group vice president of energy and distribution, is a member of the CLT. The CLT is the most senior executive group within Enbridge Inc., and as an officer and as a member of a senior executive group, he can influence, through his being part of that group, the direction that EOS or Enbridge, in fact, makes on any matters. 1152 MR. THOMPSON: But he is not an officer of ECG; is that right? 1153 MR. PLECKAITIS: Yes, he is. 1154 MS. HOLDER: Yes, he is. 1155 MR. PLECKAITIS: He is an officer of ECG as well. 1156 MR. THOMPSON: Okay. 1157 Well, then, just -- 1158 MR. FARRELL: I think Mr. Pleckaitis's answer about Mr. Letwin being an officer of ECG we'll take subject to check. 1159 MR. THOMPSON: Okay. Maybe we've given him a pleasant surprise. 1160 Now, in terms of these business activities, gas control, nominations, scheduling and reconciliations, is it fair to characterize these as gas utility operations? 1161 MS. HOLDER: I think to some extent that's fair. We've actually called it a distribution service within our own definition, and it provides -- it's a necessary function in order to ensure safe operation of the system. 1162 MR. THOMPSON: And is this the range of activity or functions that EOS performs for the other ECG affiliates and non-affiliates? 1163 MS. HOLDER: Definitely for the affiliates, such as St. Lawrence Gas, Gaz Affaire, and Enbridge Gas New Brunswick. I'm not sure what other services, what types of services they provide to other third parties. 1164 MR. THOMPSON: Now, are the third -- what I'm going to get at is, are the third parties utilities? In other words, what I'm trying to find out, is EOS essentially an unregulated ECG affiliate providing utility monopoly services to a group of utilities? 1165 MS. HOLDER: EOS is a control centre that provides liquids control, gas control, to liquid pipelines gas transmission lines, gas utilities, and other -- and potentially other third parties, and we also potentially include gas gathering, but to many different types of regulated businesses both in the liquid side and the gas side. 1166 MR. THOMPSON: Okay. Well, let's move on. 1167 In terms of the EOS relationship with your EI relationship EI has committed to provide regulatory support, I'm not entirely clear what that means, but has EOS committed to provide regulatory support? 1168 MS. HOLDER: In the sense that we may need information in order to present an appropriate -- or to present evidence to this Board, they would provide us with information. 1169 MR. THOMPSON: All right. What does the -- so that is an unwritten obligation, or implicitly understood as part of the contract relationship? 1170 MS. HOLDER: Well, it would be implicitly understood, I am not -- I can't recall if it's actually in the contract. 1171 MR. THOMPSON: I couldn't find it in the contract, quite frankly, but it doesn't mean it's not there. 1172 MR. FARRELL: No, it's not in the contract. I can confirm that. 1173 MR. THOMPSON: Okay. Thank you, Mr. Farrell. 1174 MS. HALLADAY: Mr. Thompson, any questions concerning the contract I think you should address to Mr. Farrell. 1175 MR. THOMPSON: He'll answer them even if I don't address them to him. 1176 MR. FARRELL: I'm trying to save you time, sir. 1177 MR. THOMPSON: Now, what is your understanding of the commitment to provide regulatory support? Let's just talk about -- you have that commitment from EI. What does it mean? 1178 MS. HOLDER: I think they will provide us with any information that we believe is necessary in order to defend our case before this Board. 1179 MR. THOMPSON: All right. Does it mean that the Board will have access to EI witnesses in a regulatory proceeding if they wish it or if the intervenors wish it? 1180 MS. HOLDER: You're now asking this layman to make some calls on what the regulatory process or this Board can do or not do. I would say that if we believe that we needed to have a witness from Enbridge Inc. to support our case, we would bring that person forward. I don't believe it should be necessary. 1181 MR. THOMPSON: No, but what I'm driving at is do you believe that you have a contractual commitment from EI to provide a witness in a regulatory proceeding before this Board, either if you ask for it or if the Board tells you to ask for it? 1182 MS. HOLDER: Again, I'm a layman. I would say that if we were asked by this Board to provide a witness, we would say yes. 1183 MR. THOMPSON: All right. And do you believe that you have a contractual commitment from EI to provide documents to this Board if the Board -- you either think they're necessary -- that's their documents -- if you either think it's necessary or if the Board says get them. 1184 MS. HOLDER: I would again -- you're treading into what I think is legal territory and it always makes me nervous. But I would say this if those documents relate to the businesses of Enbridge Consumers Gas, then we would provide them and they would provide them to us and we could provide them to this Board. If you are asking us to provide information that's totally irrelevant to the business that they are performing for ECG, such as their overall costs of running a control centre, I don't believe that is appropriate. 1185 MR. THOMPSON: I should have qualified it by saying as relevant to ECG's regulatory -- the regulatory oversight of ECG's activities. 1186 So just to nail this down, there will be -- not in this case, but obviously in the next case, this great debate about the costs that EI incurs to provide the services that it provides to ECG. You're aware that that debate will be coming. 1187 MS. HOLDER: I gather -- you have just told me that. 1188 MR. THOMPSON: Is that a surprise? I mean, a lot of parties have referenced this. 1189 MS. HOLDER: I guess where we struggle with that is, as I mentioned today, we out-source $170 million a year of construction. I assume that we do not have to come forward and show the costs that those construction companies are incurring in order to perform the business on our behalf. I don't see this out-sourcing as any different than any other out-sourcing. 1190 MR. THOMPSON: We're talking about affiliate out-sourcing, okay, and affiliate out-sourcing is governed by the Affiliate Relationships Code and the code provides that where something can be provided at fair market value it shall be provided at cost. 1191 MR. MCGILL: No, it doesn't say that. It says it should be acquired at a cost-based price. 1192 MR. THOMPSON: Acquired at a cost-based price, and it says a cost-base price shall reflect the cost of producing the service or product. That's Affiliate Relationships Code 2.3.3, including -- 1193 MS. HOLDER: Yes, that's the language. 1194 MR. THOMPSON: Okay. And I understand you people to be saying well, in our view, that means our avoided cost. 1195 MS. HOLDER: I think that was the position that I stated earlier, yes. 1196 MR. THOMPSON: But you can appreciate others will say no, it doesn't mean that at all, it means the costs being incurred by the service provider. 1197 MR. PLECKAITIS: Mr. Thompson, the argument -- is that what you are asking, for a response to that proposition? 1198 MR. THOMPSON: I'm saying that to protect the interests of ratepayers, we have to be assured that we will have access to information pertaining to the costs being incurred by the service provider. That's why I'm asking these questions about your contract. Do we have that protection in the regulatory support provisions in the contract? 1199 MR. PLECKAITIS: Mr. Thompson, in that basis then, what you would also want is, as Ms. Holder indicated, that it's likely that the -- because the whole -- one of the whole concepts of bringing some of these services into Enbridge Inc. is to be able to offer these services to multiple affiliates and to be able to achieve efficiencies, economies of scale, leading edge competencies in that area. 1200 So if you get into the cost -- a cost analysis, then, of the affiliate, then you start talking about, well, not just trying to understand the pure costs of a one department or the eight people that are dedicated to providing that service, but all of the allocated costs that might go along with that as well. 1201 And our view is that that becomes inappropriate. The appropriate way of allocating or determining fair cost is to determine what was the avoided cost within the utility, because it's simpler to do, or is there a market-based price, or can you use both? 1202 MR. THOMPSON: Well, all I'm suggesting to you is that's not the way others interpret this rule. 1203 And to assure we're going to have the information that we need to, at least, argue the other point of view, we have to, in my submission, make sure the contractual arrangements are adequate to make sure that information finds its way to this Board. 1204 And if the correct contractual arrangements aren't adequate, then conditions should be imposed by the Board to make sure we have access to that information. 1205 So that's where I'm coming from, okay? 1206 MR. PLECKAITIS: And if I can just say, and my opinion is that if that type of rule was imposed, it would create a situation, I believe, where the affiliate would be reluctant to provide any type of shared service to its affiliated companies. 1207 MR. THOMPSON: Well, that may be so. 1208 MR. PLECKAITIS: Which I believe would be counter to the -- again, the interests of setting up an integrated energy company. 1209 You would be saying that Enbridge Inc. should be precluded from taking its various entities and operating those entities in an efficient manner because of rules established by one particular regulated entity within that. 1210 And I believe that would be to our disadvantage as a whole, because it would discourage Enbridge from doing anything like that within Enbridge Consumers Gas. 1211 MR. THOMPSON: On the other hand, Mr. Pleckaitis, what is it you are going to prove under your theory of cost for 2003? 1212 For example, just to -- you're -- are you going to come in here in terms of gas services and say, Well, if we were still providing these services, we would have "X" people, and these "X" people would cost us "Y" dollars. And therefore, that's what you, the Ontario Energy Board, should allow us for this item. Is that the plan? 1213 MR. PLECKAITIS: I think that's one approach. I think the preference would be, and I believe that the Board's preference even in the affiliate code is to look at market-based pricing. 1214 And as we've already testified today, on the three contracts that we've spoken to, there are clauses in the contracts that allow us to, in fact, look for market-based pricing or have a market-based pricing mechanism imposed on the contract. 1215 So that's already been thought about in terms of trying to do that where a market-based pricing mechanism is there. 1216 MR. THOMPSON: Well, market base -- the last point I'll make in argument on this issue is market-base pricing is really derived from the cost being incurred by competitive service providers. 1217 MR. PLECKAITIS: Sir, I don't -- I disagree with you. That's not always the case. 1218 MR. THOMPSON: We'll -- 1219 MS. HALLADAY: Can we leave this matter for argument. 1220 MR. THOMPSON: Yes, let's do that. 1221 MS. HALLADAY: Thank you, Mr. Thompson. 1222 MR. THOMPSON: But coming back, then, to regulatory support and EOS, the contractual commitment from EOS to provide regulatory support is not present, but you believe you have some implied commitment from EOS to provide regulatory support; is that fair? 1223 MS. HOLDER: I think that's fair, and I think one of the reasons it's fair is Enbridge has as much interest as Enbridge Consumers Gas in ensuring that this Board has sufficient information to make an appropriate ruling. 1224 MR. THOMPSON: Right. 1225 Let's just move then quickly to day-to-day operations of the gas control nomination, scheduling, and reconciliations then and now. And there was a question asked of you in the IGUA interrogatories that may help us here. 1226 I think it's Exhibit I, tab 8, schedule 29. And you refer us back to Exhibit I, tab 8, schedule 27. 1227 So perhaps someone could just briefly describe the way it worked before you out-sourced to EOS and the way it works now. 1228 MS. HOLDER: Can you explain what you mean by "way it works"? How -- 1229 MR. THOMPSON: Well, no, because I'm not in the gas business. I'm a smart-ass lawyer. 1230 MS. HOLDER: I think you've been here more than I -- or longer than I have. 1231 MR. THOMPSON: Well, that proves nothing. 1232 MR. FARRELL: Perseverance. 1233 MR. THOMPSON: Yeah. That's what one of the P's in my initials stand for, perserverance. 1234 MS. HOLDER: There's a lot to this whole activity. I guess I'm questioning what sort of detail. Maybe that's better. 1235 MR. THOMPSON: Well, at a high level you had, I think, 12 people before, and you say it takes at least 12 now. Just, how does it work on a day-to-day basis then and now, and what are the risks associated with having your 12 people out in Alberta in a different company compared to what it is today or what it was before. 1236 MS. HOLDER: I'll give you a high level first. Seven of those 12 people were responsible for gas control, they are actually monitoring the pressures and flows of our system. They are the ones that are changing flow controls to increase flow to meet demand. They are there 7 days a week, 24 hours a day, so that's the 7 individuals. 1237 One of those 12 individuals is a supervisor or manager, is I guess a better way of putting it, and the others are responsible for the scheduling and nomination which is, again, not 24 hours a day, but it tends to be a 12-hour day as opposed to a 8- or 10-hour day, and 7 days a week. Now, that's sort of where all the people fit in and I'll let Mr. Brennan explain sort of what all they did. 1238 MR. BRENNAN: What they'll do on a day-by-day basis is take a look at the forecast that they get from the weather source, and once they have that weather information they will look at what the demand is for the day based on their forecast and then they will schedule the appropriate supplies, for example, how much gas is going to be coming from direct purchase customers, what they have to nominate to our system suppliers. In addition to that, they will look at what gas they have to either inject or withdraw from storage and make those -- quotas made available to Tecumseh and Crowland for storage withdrawals. So they will look at the total system in terms of what gas we have to move to meet the market throughout the day, and throughout the day we may have more than one forecast. We have an update to the forecast throughout the day, then the whole process would repeat itself in looking at what we have to -- do we have to increase our nominations, for example, on our storage transportation services, do we have to -- withdrawal or inject more gas in and out of storage? 1239 So that's done throughout the day to meet the market demand. 1240 MR. THOMPSON: So do I understand that to mean that the -- again, high level, the type of functions that are being performed are the same as they were before? 1241 MR. BRENNAN: Absolutely, yes. 1242 MR. THOMPSON: And the number of people performing them are about the same as they were before. 1243 MR. BRENNAN: Maybe even a few more, yes. 1244 MR. THOMPSON: Few more. And that the flow of information from company officials to these people is about the same as it was before, it's just now going from one corporate entity to another? 1245 MR. BRENNAN: There is some differences in that some information is going from ECG to Enbridge Operational Services and there is some information going from EI to Enbridge Operational Services because EI is doing some of the functions that were normally done within the utility. 1246 MR. THOMPSON: Yes, the EI thing was layered on subsequently. 1247 MR. BRENNAN: That's correct. But at the time, you were right, it was just ECG. 1248 MR. THOMPSON: At the time, one learned Board member at one point in its history described something as "shuffling the deck chairs," and this is what I have sort of as a concept here is that the deck chairs were in the utility and you basically had moved them to Edmonton, but people are sitting in them doing the same things and the information is coming the same way as it used to. 1249 MS. HOLDER: The only way I would add to your analogy is I think the deck chairs improved. 1250 MR. THOMPSON: They are high-quality deck chairs. Love Boat stuff, okay. Now, well, that's it for EOS, thanks. I understand that much better. 1251 Before I turn to gas services and EI, what I wanted to do is just back up a little to put this affiliate transactions topic in a bit of historic perspective because the regulatory oversight of the utility's involvement in affiliate transactions is not something new; you'd agree with that? 1252 MS. HOLDER: Yes. 1253 MR. THOMPSON: This goes way back. It's been a thorn in the sides of people for years. And let's -- in terms of historical context, would you take, subject to check, that there was a report that the Board provided in 1996. I think it was entitled: "Advisory Report to the Minister of Environment and Energy on Utility Diversification" that talked about affiliate transactions. 1254 MS. HOLDER: Yes. 1255 MR. THOMPSON: Okay. And would you agree with me that at that time, the utilities were, this may not be the right word but lobbying is my word, the government for permission to diversify into what we're called designated business areas; do you recall that? 1256 MS. HOLDER: I actually have a copy if you want to refer me to the section. 1257 MR. THOMPSON: Well, it's throughout the paper. 1258 MS. HOLDER: Sorry, maybe I don't have a copy. Sorry, I got the wrong advisory report. 1259 MR. THOMPSON: Okay. They want to get in the water business and stuff like that and this -- and the prior Board approval requirement of the undertakings was perceived to be an impediment. Do you recall that as a high-level description of what was going on at that time? 1260 MR. PLECKAITIS: I do. 1261 MR. THOMPSON: And so the Board looked at possibly changing the undertakings to allow for this diversification into so-called designated business areas without prior Board approval and the report discusses some of the complications associated with affiliate transactions. The point I wanted to make was this, that at that point in time, mid-'90s, ECG was operating under the auspices of undertakings with the provincial government. 1262 MS. HOLDER: Yes, and we still are. 1263 MR. THOMPSON: And the under -- the version of the undertakings that prevailed at that time and, again, I'm paraphrasing, as I recall it, prohibited affiliate transactions having a value of $100,000 or greater without prior Board approval. Would you take that subject to check? 1264 MS. HOLDER: Without prior Board approval, yes. 1265 MR. THOMPSON: Yes. Okay. So as of 1996, you could not have entered into these transactions with EOS or EI without prior Board approval; correct? If we were operating under that -- 1266 MS. HOLDER: If they were over $100,000 a year, yes, that's correct. 1267 MR. THOMPSON: And there were certain tests that the Board would apply to determine whether approval should or should not be granted which I won't go into at the moment. But by the end of 1998, December 1998, these undertakings changed; do you recall that? 1268 MS. HOLDER: Yes. 1269 MR. THOMPSON: Okay. And there are a number of events leading to that change that I just wanted to share with you to see if you agreed with them. First of all, there is a lot of pressure on utilities like ECG and others to go to a pure utility model, get rid of competitive businesses; do you recall that? 1270 MS. HOLDER: If you're referring to the retail part of the business, yes. 1271 MR. THOMPSON: Rental and all that stuff, merchandise. Okay. And grand debate over cost allocation associated with keeping those activities in. 1272 And then concurrently with that, we had the proposals tabled by the Ontario government to deregulate the electricity industry; do you recall that? 1273 MS. HOLDER: Yes. 1274 MR. THOMPSON: And I don't know if you have the OEB Act here, but one of the features of the draft bill that I -- that eventually got passed was -- and I'll read it and I don't know that you need to turn it up -- it was section 71 of the OEB Act which says that, "Subject to subsection 7 and subsection 9, a transmitter or distributor other than a public utility commission or municipal corporation shall not, except through an affiliate or affiliates, carry on any business activity other than transmitting or distributing electricity." 1275 You recall that as being part of the -- that being this notion that electricity utilities would be pure utilities -- as being part of the electricity initiative in this province? 1276 MS. HOLDER: I have to be honest, I didn't think a lot about the electricity side of things, but I'll take your view. 1277 MR. THOMPSON: My understanding is that that proposal, with respect to electrics, prompted the gas utilities to say, well, we should be treated the same. 1278 MS. HOLDER: Yes. 1279 MR. THOMPSON: And that, in turn, then led to the amendments to the undertakings; is that -- 1280 MS. HOLDER: I think that's right. That's fair. 1281 MR. THOMPSON: So in terms of the undertakings that currently prevail, I have -- there's a copy in my -- in the IGUA motion record which I don't know if people have handy but I don't think you need to turn it up. 1282 MS. HOLDER: I have a copy of our undertakings. 1283 MR. THOMPSON: It's under Tab H. At page 99 is the clause of the current undertakings. I just wanted to draw your attention to put this into context because there we have the promise -- and these undertakings were from Consumers Gas Company Ltd., a number of other companies including Enbridge Inc. and the undertaking was "Consumers shall not, except through an affiliate or affiliates, carry on any business activity other than the transmission, distribution, or storage of gas without the prior approval of the Board." Do you see that? 1284 MS. HOLDER: Yes. 1285 MR. THOMPSON: And so I'm suggesting that that was an attempt to put gas utilities on the same footing as electricity utilities with respect to this pure utility concept. Do you see it that way? 1286 MR. PLECKAITIS: I would say yes. 1287 MR. THOMPSON: Okay. And the way I read that undertaking commitment is that Consumers Gas will carry on the pure utility business; do you read it that way? 1288 MS. HOLDER: Yes, I was going to say -- 1289 MR. PLECKAITIS: I was going to -- 1290 MR. THOMPSON: Hope you get it right. I guess no would be perfect. 1291 MR. PLECKAITIS: The way I interpreted the legislation of that Act was to limit or prohibit the utility from getting into areas outside of the scope of the natural -- pure monopoly being the distribution of natural gas, as opposed to if you are interpreting it as staying within a certain pre-defined bounds and not shrinking less than that. 1292 MS. HOLDER: I think what I was only going to add to that is that it does not preclude us from out-sourcing any of our business. We are still responsible for them through our contractual rights -- or obligations and rights in the contracts, but we still have the responsibility. 1293 MR. THOMPSON: Yes, okay. Well, the expectation of others may have been that the non-monopoly would go out, the monopoly-type activities would stay in, but that's not exactly the way you see it. 1294 MS. HOLDER: Sorry, can I just make a comment? That would be -- at the time that these undertakings were in place, we were already out-sourcing a big chunk of our business. I don't recall anybody at that time saying we needed to bring all that back into the utility. 1295 MR. THOMPSON: You weren't out-sourcing a big chunk of your, what I would call, core utility functions to affiliates. 1296 MS. HOLDER: Not necessarily to affiliates, but we were out-sourcing. I don't think this -- 1297 MR. PLECKAITIS: Mr. Thompson, just one other thing, if I could add. The fact that we have out-sourced gas control and gas supply to an affiliate and centralized that activity within Enbridge Inc., I would contend that that activity is going on throughout the world. If you accept the proposition that consolidation is going on in the energy industry, when a gas company in one jurisdiction buys a gas company in another jurisdiction, I can almost assure you that they will centralize their gas control and gas supply functions. 1298 It would be logical for me to say that two companies, one company acquires another in a different jurisdiction, geography, and that the parent, whoever it is in that transaction, would simply say, keep everything the same. The first thing that they would do, in fact, in designing the acquisition would be, how do we centralize those activities, because there's no need for them to be in each of the utilities. So if you're -- again, if the proposition that this is somehow inherently wrong, it must reside within each company, we'd disagree with. 1299 MR. BRENNAN: As a prime example of that would be one where -- when Union took over Centra Gas. Centra Gas used to have its control centre in North Bay; that control function is now being done out of Chatham by Union Gas. 1300 MS. HOLDER: That was prior to the merger of the two organizations. 1301 MR. THOMPSON: Well, the company is in Ontario and it's doing its utility function in Ontario. 1302 MS. HOLDER: They were two separate companies at the time that the gas control function was being performed by one of those entities out of Chatham. 1303 MR. THOMPSON: But they were owned by the same parent. 1304 MS. HOLDER: So they were affiliated. 1305 MR. THOMPSON: Anyway, let's -- I guess my point is this: Out-sourcing is perhaps not inherently bad and whether it's going on throughout the world or not throughout the world doesn't mean it's good. Enron was a great out-sourcer but that doesn't necessarily make it good. The question is: Is it what you are doing in the interests of ratepayers? That's where I'm coming from. 1306 MS. HOLDER: And yes, it is. 1307 MR. THOMPSON: Well, we'll test that in a little more detail. But in terms of, again, historical context, just at the changes in the undertakings and concurrently we've got going on at this time, late '98 into '99, the decision was rendered in 1999, the targeted PBR proposal; correct? 1308 MS. HOLDER: Sorry, I think I missed a step in that process. 1309 MR. THOMPSON: The ability to enter into affiliate transactions without prior Board approval you obtained for the first time in December 1998. 1310 MS. HOLDER: Yes. 1311 MR. THOMPSON: All right. On the table at that time or shortly thereafter was the targeted PBR O&M proposal. 1312 MS. HOLDER: Yes. 1313 MR. THOMPSON: And the Board's decision was rendered in that application, 49701, EBRO 49701, on April 22nd of 1999. Would you take that subject to check? 1314 MS. HOLDER: Yes. 1315 MR. THOMPSON: All right. And would you take, subject to check, that Dr. Bauer, in his testimony, indicated that the adoption of a targeted PBR for O&M could lead to the utility transferring efficiency gains to affiliates? 1316 MS. HOLDER: Can you -- that's not exactly how I read it. 1317 MR. THOMPSON: Well, Mr. Pleckaitis, as I say, I don't have it. I asked you people to review it. 1318 MR. PLECKAITIS: Yes, that was one of the -- one of the propositions that Dr. Bauer put forward. 1319 He also said there is little, at least -- and I'm quoting from section 1084: "There is really little, at least that's how I see it, that the Board could currently do to avoid" -- I presume the missing word is "this" -- "given the new undertakings that the government engages in affiliate transactions that shift some of these efficiency gains out of the utility to the affiliate." 1320 MR. FARRELL: You said the "government engages." I think you meant to say the "company engages." 1321 MR. PLECKAITIS: The company engages, yes. Sorry. 1322 MR. THOMPSON: That's transcript 1084 in the 49701 proceedings. 1323 Mr. Farrell, can you -- 1324 MR. FARRELL: Yes, it is. 1325 MR. THOMPSON: So that's as of April of 1999, and the PBR -- targeted PBR was to commence, as I recall it, on October 1, 2000; is that right, Mr. McGill? 1326 Sorry to wake you up. 1327 MR. MCGILL: It was actually October 1 of 1999. That was the beginning of the 2000 fiscal year. 1328 MR. THOMPSON: Okay, sorry. Fiscal. Fiscal 2000. 1329 And then we have this, I guess, summarized in Mr. Brett's examination in reference to the Board's IR number 40, there is, after April of 1999, some significant out-sourcing activity to affiliates; is that correct? 1330 MR. MCGILL: That's correct. 1331 MR. THOMPSON: Okay. And was there a master plan for that activity? 1332 MS. HOLDER: No, there was not. 1333 MR. THOMPSON: Do you mean to tell me all this took place just ad hoc? Business by business went out without some sort of overall plan? 1334 MS. HOLDER: I think that's fair to say. 1335 I personally was the one who raised the concept of centralizing our control functions with the Liquids Control Centre. I was the one who raised the issue of the gas supply moving to Enbridge Inc. 1336 That was -- neither one of those were part of a master plan associated with Customer Works, which I think is the other major part of our out-sourcing that you're referring to. 1337 MR. PLECKAITIS: And I would just add, when you say "master plan," I -- I don't have any reason to challenge what Ms. Holder had said. 1338 But clearly, the master plan would have been to capitalize on the PBR mechanism, the targeted PBR mechanism that existed in terms of trying to maximize efficiencies within the utility without compromising safety or delivery of service, which are measured by the performance standards. 1339 MS. HOLDER: And I think my evidence would add one other component to that, and that is to improve the effectiveness of the businesses that we are performing. 1340 MR. PLECKAITIS: And again, I would add that I think everyone that was party to the PBR process anticipated and wanted the company to do that, well, those that supported PBR conceptually. 1341 MR. THOMPSON: Well, let's just take them one by one. Which went out first, customer care -- sorry, it was -- was it customer care, Mr. McGill? It was a whole lot of people that went out -- 1342 MR. MCGILL: Well, the lines 16 and 17, the management fee and the treasury fee had been out for some time. I couldn't tell you exactly when, but as long as I can remember. 1343 The other components of customer care, meter reading, had been out-sourced to third parties for a number of years before the start up of ECS. 1344 So the other items, with respect to what Customer Works is carrying out now, they were out-sourced initially to ECS in January of 2000. 1345 MR. THOMPSON: Okay. Well, were they out-sourced -- again, just going to Dr. Bauer's point about where will the efficiency gains be; will they be recognized? Were they out-sourced at prices that were lower than the O&M cost? Again, I'm not interested in the dollars. I'm just interested in the effect as to whether the efficiency gains that you say you were achieving by out-sourcing, were they being shown -- realized on the utility's books or somewhere else? 1346 MR. MCGILL: Well, all I can talk to is the way the prices were set and negotiated at the time. And the way that was done was that where we had relevant market benchmarks, we used those prices. And where we didn't, we based the pricing on our, if you want to call it, avoided cost. 1347 MR. THOMPSON: Okay. Well, when prices are based on avoided costs, there's no gains being realized in the utility; correct? 1348 MR. MCGILL: Not necessarily, no, and probably not. Not in terms strictly of the price at the point in time you do it. 1349 MS. HOLDER: Maybe I can add, in that the situation of EOS, in that, if you recall, I mentioned that the SCADA system had ended its life, and we were replacing it. 1350 The fact that that has been replaced and is not included in rate base due to the targeted PBR, there's actually a cost to the Enbridge shareholder providing this service outside of the utility during our targeted PBR time frame. 1351 MR. THOMPSON: Well, we'll see whether it's been efficient or inefficient, a cost -- a benefit or a burden, I suppose, when we get to rebasing, assuming we get to the right amounts. But coming back to the affiliate transaction activity post-EBRO 497-01, on any view of it, it's been busy. 1352 MR. MCGILL: That's true. 1353 MS. HOLDER: Like the rest of the industry. 1354 MR. MCGILL: But just in terms of the timing and what was going on at that point in time, it was October of 1999 that we split out the competitive retail businesses into ESI. Given what the undertakings said, we knew it wasn't going to be practical for the utility to continue to provide services to the unregulated affiliate. We had to do something. So the course of action we chose at the time was to create ECS. 1355 MR. THOMPSON: Well, we were one of the intervenors advocating getting rid of the competitive businesses but what we see is happening is you've taken this affiliate transaction activity to a new art form and we're now very concerned that what we see as core utility functions are being out-sourced. So that's where I'm coming from, and in terms of the big picture, we understand storage is next. You're going to transfer that to an affiliate. You need Board approval for that, thank God. 1356 MS. HOLDER: It is our intention, as you are very well aware, that we are proposing to separate the storage assets from the rest of the distribution assets of Enbridge Consumers Gas. 1357 MR. THOMPSON: And so are we witnessing what I would describe as a progressive evisceration of the utility as we knew it. 1358 MS. HOLDER: No. 1359 MR. THOMPSON: What is it if it isn't that? 1360 MS. HOLDER: Well, I think the storage is an entirely different situation, and I struggle to put storage into the same camp as out-sourcing. Our reason for wanting to separating the assets has to do with the fact that we don't believe the regulatory environment for storage fits the regulatory environment for gas distribution system, and in order to help simplify our incentive regulation, we believe the separation of these two assets will help that. 1361 MR. THOMPSON: Okay. Well let's come back to gas services with that contextual background and gas services is defined in your Exhibit A, tab 14, schedule 3 as gas-supply planning, gas-supply acquisition, risk management, transactional services and regulatory support. Correct? 1362 MS. HOLDER: Correct. 1363 MR. THOMPSON: And before -- well, let me come back to the concept level. Whose brainchild was this to out-source gas services to EI? 1364 MS. HOLDER: It was, again, mine. 1365 MR. THOMPSON: And had EI been in this activity itself before you saw the light? 1366 MS. HOLDER: Not to the same extent. They did have employees on staff who performed similar -- were starting to perform these types of functions. 1367 MR. THOMPSON: All right. So did EI have any input at the conceptual level, did you have to get their approval to the concept? What was your concept for EI? 1368 MS. HOLDER: For both the gas control and gas supply, those were concepts that I had developed and I presented to EI as an opportunity for enhancing the businesses for Enbridge Consumers Gas as well as, no question, there should be some benefits on their side. 1369 MR. THOMPSON: Was that a written presentation? 1370 MS. HOLDER: There was a presentation, I believe it would have been PowerPoint-type presentation. 1371 MR. THOMPSON: Do you have a copy of that? 1372 MS. HOLDER: No, but in anticipation of your question, I will undertake, which I am undertaking to see if I can find that presentation. 1373 MR. THOMPSON: And when was that done roughly? 1374 MS. HOLDER: I'm assuming it was early 2001. 1375 MR. THOMPSON: Can we have a number for that, Mr. Moran. 1376 MR. MORAN: Undertaking J.5.6. 1377 UNDERTAKING NO. J.5.6: POWERPOINT PRESENTATION 1378 MS. HOLDER: It will also have some caveats as I gave earlier around some of the strategic nature. 1379 MR. THOMPSON: Just describe your concept to us, the big picture. What was it that you were telling EI that would be good for it in this concept? 1380 MS. HOLDER: From the perspective of EI in that they were having to hire staff in order to manage the upstream transportation on Alliance-Vector on their own behalf, acquire natural-gas supplies in the province of Alberta for those contracts, we were also, at that time, knowing that we would need to find those similar type supplies and recognized, as Mr. Brennan had said earlier, that we didn't have that expertise in-house. That was probably the primary driving force for thinking about -- we were both managing the same type of assets, why don't we just have one Enbridge entity manage those assets. 1381 MR. PLECKAITIS: I would add to that that I presume that Enbridge Inc. would have also -- Enbridge Inc.'s strategy continues to be one of its core businesses, gas distribution, and so we are continually looking -- or Enbridge Inc. is continually looking at opportunities to either acquire other gas utilities that might fit into its overall business strategy. 1382 MR. THOMPSON: What is it that Enbridge Inc. is managing on Alliance and Vector? 1383 MS. HOLDER: They have their own transportation on both Vector and Alliance, they also own gathering systems and transmission systems south of the border. 1384 MR. THOMPSON: So they're shipping gas to markets in Chicago; is that what you're saying? 1385 MR. BRENNAN: They have capacity in those two pipelines. Where it's going, I can't tell you. 1386 MR. THOMPSON: Again, I'm a little puzzled because in the Alliance-Vector portion of this proceeding, you were implying that your decision to acquire Alliance-Vector was a prudent one and presumably you had the expertise to operate it and you had a lot of experience in upstream transportation. Does Enbridge Inc. have more? 1387 MS. HOLDER: No, I think what I was saying, what I've just said, is Enbridge Inc. had their own transportation on Vector and Alliance; therefore, we needed their expertise in order to buy that gas and manage those contracts on those pipelines. We also had capacity on Vector and Alliance, and as our evidence has stated, there is an added complexity to providing gas into those systems, and that's why we chose a particular methodology of buying that gas for a transition year while we actually gained some more knowledge and expertise on how AOS, for instance, would work. 1388 The -- I think what I was trying to say is both of us were doing exactly the same thing in having the same type of expertise in both camps. In order to gain synergies, it was recommended that we combine this business at the Enbridge Inc. level. Recognizing we weren't in a position to do that within the utility, we could not provide this as a resource or provide this business to Enbridge Inc. due to the undertakings. 1389 MR. THOMPSON: Sorry, why couldn't you provide this to Enbridge Inc., because it's not a utility business? 1390 MS. HOLDER: That's correct. It's a utility to business to do it on our own behalf, but it's not a business that we are in a position to go out and sell to others. 1391 MR. THOMPSON: That's the way you interpret the undertakings, you can't provide transmission or distribution or storage functions for a third party? 1392 MS. HOLDER: Yes, but I don't believe gas supply is a transmission function or distribution function. It is a business outside the boundaries of a pure utility. 1393 MR. THOMPSON: Okay. Let's come back to the concept of EI having space on Alliance and Vector. Is this as a marketer? 1394 MS. HOLDER: Not in the true sense of a marketer as we -- 1395 MR. THOMPSON: Well, what are they doing with their space? Are they holding it on spec, are they shipping it to -- tell me what it's for. 1396 MS. HOLDER: They are -- I don't know what they are doing with it, I think is the answer. I'm saying I assume they are marketing the capacity. It's just that I have a different definition of the word marketer, but they will be marketing that capacity to third parties. 1397 MR. THOMPSON: Or using it to ship gas which they are selling to third parties; is that right? To perform competitive market functions. 1398 MS. HOLDER: We're not aware of what they're doing on that pipeline. 1399 MR. THOMPSON: Well, how can you be unaware if you're making a presentation to them as to how to synergize the performance of activities? 1400 MS. HOLDER: I didn't make a presentation to them on how they should run their operation, I made a presentation on the value to Enbridge Consumers Gas and also that it would help -- there should be some synergies. I did not present to them what their -- those synergies should be on their behalf. 1401 MR. PLECKAITIS: And to clarify, based on my knowledge, Enbridge Inc.'s strategy with respect to capacity or the marketing activities that they undertake are not in the basis that Enbridge Inc. wants to become a gas marketer like an Enron or a Dynergy or Aliant. The only reason that it is in the marketing of natural gas, for example, is really as a part of its overall objective of optimizing utilization of its assets. So it was in the pipe business, it was required to take transportation capacity, I assume, as part of its commitment to the Alliance or Vector project and it has to, therefore, market the gas as part of that transaction. But it is not in the competitive marketing business, so to speak, as a business driven purely for its own means. 1402 MR. THOMPSON: Okay. Let's just go back to the concept. Have you fleshed out the concept that you had in mind at the conceptual stage, Ms. Holder? If not just give us the details. 1403 MS. HOLDER: I think that's pretty much the concept. 1404 MR. THOMPSON: Well, you out-sourced gas supply planning, gas supply acquisition, risk management, transactional services, and regulatory support. And the rationale for this is Enbridge had some space -- Enbridge Inc. had some space on Alliance-Vector; have I got that correct? 1405 MS. HOLDER: No, sorry, that's -- hopefully I didn't leave that -- that was the only reason. 1406 I was saying that there was some synergies to be gained, that -- sorry, I'm forgetting who's been asking me what questions. I'll back-track. 1407 One of the others key reasons for out-sourcing this was that we continued to struggle within the utility and -- on attracting individuals into this area of the business that had this type of expertise in the city of Toronto. 1408 It is an expertise that exists within the province of Alberta, and that was another one of the other reasons for moving -- for recommending moving gas supply to Calgary, under the EI portfolio, in that we could enhance the quality of the individuals that we have to run this part of the business, which I think is to the benefit of the ratepayer. 1409 Not only do you enhance the skill set of the employees, you put them in the environment where the actual trading of natural gas is taking place and where more of the counter parties exist from a transactional services point of view, therefore, again, delivering to the utility lower gas costs. 1410 MR. THOMPSON: Well, let's just run -- gas supply planning. My understanding is that in -- for the utility, ECG involves assessing your demand? 1411 MS. HOLDER: Yes, and if you were -- why we didn't separate out -- we could have just sent pieces of this, but then we would have lost any hope of synergies within the utility. 1412 If you start piecemealing this business, when you are talking about 12 people doing multiple functions, into some functions staying here and some functions moving, then that would be very inefficient. Because gas supply planning -- I'll use that as the example -- may not be a full-time job, you know, for every day of the year for an employee, the gas supply planning may do other parts of the business. It did not make sense to separate these functions out. 1413 MR. THOMPSON: I take that point, but Enbridge Inc. would have no greater expertise in gas supply planning than Enbridge Consumers Gas, gas supply planning for a distribution utility operating in Ontario. 1414 MS. HOLDER: No, but the resources that they can attract in the province of Alberta, in Calgary, would have a greater skill level to do those functions than we could attract here. 1415 MR. THOMPSON: Gas supply acquisition, I suggest to you, Enbridge Inc. wouldn't have anybody with greater experience in acquiring gas for a distribution utility operating in Ontario than Enbridge Consumers Gas? 1416 MS. HOLDER: Well, I'm not sure that's fair in that some of the people that we're referring to at Enbridge Inc. have fairly extensive gas supply backgrounds. 1417 MR. THOMPSON: Well, is buying gas that tough? I thought you would go out to market, and you make your deals. But I -- I mean, for years we've been told, We've got an excellent gas supply acquisition group at ECG, and we're now to understand they were second-class to the parent? 1418 MS. HOLDER: No. No, and I don't think they were second-class to the parent. I think what I'm saying is that we were struggling to maintain the expertise here in Toronto. I have moved on out of the gas supply group, Uri Otsason has moved on, Joel Shenfield, all of these people who you are well aware of. Frank Brennan is, thankfully, still here with us. 1419 But the transactional services employees who were continually moving out to other businesses other than Enbridge, we were losing -- we did lose our risk management expert to another organization. And when we try to replace these roles from a talent pool within Ontario, it's not as easy as filling those roles from the talent pool within Alberta. 1420 I think it's fair to say people move on. They don't want to -- I mean, yes, we were great at this, but we have to continually replace and replenish the talent pool, because people don't want to do these jobs, interestingly enough, for 25 or 30 years. 1421 MR. THOMPSON: Well, transactional services, again, that business activity is using ECG's assets, primarily their storage assets as I understood it, to effect transactions of the gas loan type, gas exchange. There's quite a long list of them. Are you suggesting the Enbridge Inc. people had more experience in that line of business than ECG people? 1422 MS. HOLDER: I think the people that you'll find -- that are running this business today actually do have more expertise in that area than we do. 1423 We had -- recognizing -- or may not be aware. One of the vacancies that we referred to was in transactional services when we transferred this business to Enbridge Inc.. One of these employees was very new to this end of the business when we transferred these employees to Enbridge Inc. 1424 MR. THOMPSON: All right. What part did the targeted -- well, backing up, it's clear from the contract that this activity was priced at your avoided cost. I think that's what you've told others. 1425 MS. HOLDER: Fully, yes. Fully loaded avoided cost, yes. 1426 MR. BRENNAN: Fully allocated cost. 1427 MR. THOMPSON: Yes, fully allocated -- avoided costs? 1428 MR. BRENNAN: Yes, that's correct. 1429 MR. THOMPSON: All right. And so if -- in the blue sheets contract, there is, again, a -- there is a cost clause with blanks in it. That's at -- I think it's CEED 44, if I'm not mistaken. 1430 MR. BRENNAN: Yes, Exhibit I, tab 3, schedule 44. 1431 MR. THOMPSON: Right. 1432 MR. BRENNAN: And you are looking at the appendix? 1433 MR. THOMPSON: Yes, schedule to the -- is that right? Schedule to the agency agreement, page 14; have I got that right? 1434 MR. BRENNAN: Yes, that's correct. 1435 MR. THOMPSON: And there are -- and in the -- is this contract signed, by the way, been executed now? 1436 MR. BRENNAN: The original one? Certainly, the original one was signed, because a copy of the signed one is here. The amendment has not -- has been forwarded to Enbridge Inc. for execution. We have not executed this end yet. 1437 MR. THOMPSON: But the page 14 of 26, there are amounts that are specified as monthly fees and I -- my understanding is that in the unexecuted, complete version of this document, there are actually amounts in each of those clauses; is that correct? 1438 MR. BRENNAN: Yes. 1439 MR. THOMPSON: All right. And for -- my understanding is that from what you've told me and others is that the amounts are the fully allocated avoided costs of ECG providing this service? 1440 MR. BRENNAN: Yes. If the cost of ECG performing this function is -- of all these functions are, I guess, functions remain within the utility. 1441 MR. THOMPSON: And just to then understand that, again from a -- not so much a numbers perspective but components perspective, in Exhibit A, tab 14, schedule 3, you tell us in paragraph 3 that you transferred 13 positions to ECG but only one employee -- ECG transferred 13 positions to EI with respect to gas services but only one employee. 1442 MR. BRENNAN: Yes, that's correct. 1443 MR. THOMPSON: Is that right? 1444 And I think you indicated to me earlier and perhaps to others that the manpower that's actually performing the functions may well be less than 13. 1445 MS. HOLDER: Yes, we don't know the actual number; it could be. 1446 MR. THOMPSON: And I'm curious as to why you don't know the actual number. Are you not dealing with these people on a daily basis? 1447 MS. HOLDER: Yes, but we don't -- I haven't sat down and counted all the individuals. 1448 MR. THOMPSON: Well, it can't be that tough if it's a total of 13 positions, how many people do you deal with at Enbridge Inc. with respect to this gas-services function? 1449 MR. BRENNAN: On a daily basis, I deal with anywhere between one to three people, on a daily basis. 1450 MR. THOMPSON: All right. So if we take for illustrative purposes the number at three, the fully-allocated cost that we're talking about in the contract would represent the fully allocated-cost associated with 13 positions. 1451 MR. BRENNAN: When I say I deal with one to three people, there are more people that are doing that function over there. 1452 MR. THOMPSON: Okay. Let's assume it's less than 13. I'm just trying to make a point of principle and then we'll try and fill it in with the facts to the extent we can. But to the extent it's three or a number less than 13, a fully-allocated cost we're talking about in the agreement are the fully-allocated costs associated with the 13 positions; do I understand that correctly? 1453 MR. BRENNAN: Yes, that's correct. 1454 MR. THOMPSON: All right. Now, when we were talking about EOS, there were also some capital carrying cost add-ons as I understand it. Is there anything like that in the EI contract? 1455 MR. BRENNAN: No, there's capital involved in the EI contract. 1456 MR. THOMPSON: So let's assume just for the sake of illustration that the fully-allocated costs associated with each position is $100,000, then you would be paying to EI $1.3 million under the contract; correct, under that assumption? 1457 MR. BRENNAN: $100,000 times 13, is that what you're saying? 1458 MR. THOMPSON: 13, $1.3 million. And if 3 people are providing the service at $100,000, then the difference between the two is a million dollars. 1459 MR. BRENNAN: The point is that there's not three people doing it, there's many more people doing that job. 1460 MR. THOMPSON: Make it five, make it seven -- 1461 MR. BRENNAN: Could make it 15. 1462 MR. THOMPSON: Well, bear with me. Assume it's less than 13, then what we have as a result of this contract is the kind of thing Dr. Bauer was suggesting, where the savings that have ensued from having fewer people provide the service, assuming it's fewer people, are flowing into EI, not to ECG. 1463 MS. HOLDER: I think there's -- on the surface and you can create a hypothetical situation where that is true. 1464 I think in reality, if we are talking about less employees, we're talking possibly one. We're also not taking into consideration that the market price for these employees, to capture good employees could be higher in the province of Alberta than it is here, in fact, we couldn't attract any might have been due to our pay bans; doesn't take into account the overheads that they will be incurring out there which could theoretically be higher than we are paying here. So if you were to take just people for people, assume that there is no other costs in running this business and there's one less, your hypothetical situation would be $100,000, but I think we're missing a number other factors that will influence this. 1465 MR. THOMPSON: All right. Well, when you were making your presentation to EI of your concept, did you address this possibility in the concept? 1466 MS. HOLDER: In the concept, we were transferring the 13 people and we were assuming the 13 people would be in the EI performing these functions. We believed at the time that we had created all the efficiency we possibly could within this function within the utility and assumed that there would be no efficiencies gained. I made no assumptions on efficiencies that would be gained by transferring this to Enbridge. 1467 MR. THOMPSON: So I think you're telling me that in any presentation you made to EI, you did not put forward as a benefit to EI the possibility that they could provide these services at less than ECG's fully-allocated cost for the positions it was transferring; is that what you're telling me? 1468 MS. HOLDER: I think what I'm telling you is what I presented to EI was that I believed that they could capture some synergies. I did not ever identify what those synergies were and I never led them to believe that they could run the business with less than 13 people. 1469 MR. BRENNAN: Mr. Thompson, I've had a chance while you were talking to go through the names of the people that I'm aware of at Enbridge Inc.. There are 12 employees now and two vacancies at this point in time, for a total of 14. 1470 MR. THOMPSON: Doing this work for ECG only, is that what you're telling me? 1471 MR. BRENNAN: Not necessarily just for ECG, correct. 1472 MR. THOMPSON: Did you include the janitor in your list? 1473 MR. BRENNAN: No, I didn't. 1474 MR. THOMPSON: Good. Well, let me just ask this and it might be a convenient time to break, because I'm clearly not going to finish today. 1475 It was apparent that the -- at an early stage, ECG recognized that EI would be a competitor or a potential competitor. 1476 MS. HOLDER: No. 1477 MR. THOMPSON: No. 1478 MR. PLECKAITIS: To who? 1479 MR. THOMPSON: Well, ECG, I guess. Sorry -- it would be -- well, I haven't got that right. You recognized the concern that it would be engaging in competitive activities and therefore you would need to address these requirements of the Code. 1480 MS. HOLDER: No. You have me confused. 1481 MR. MCGILL: Are you referring to the undertakings? 1482 MR. THOMPSON: Maybe I'm not articulating it properly. Let me just go to your evidence in answer 5, or paragraph 5. You say, "EI has the right to engage in the following business as principal for its own account: gas acquisition, gas sales, gas supply management, and gas storage." Right? 1483 MS. HOLDER: Yes. But not in competition with us. 1484 MR. BRENNAN: For example -- not in competition. 1485 MR. THOMPSON: No, I'm using the phrase competition wrong. 1486 MR. BRENNAN: Okay. 1487 MR. THOMPSON: But that right, whether they were then engaging in it then or not engaging in it then, and whether they're now engaging in it, is not entirely clear, but that right created some problems for this concept opposite the Affiliates Relationship Code; is that fair? 1488 MS. HOLDER: Not under the agency agreement arrangement we have. 1489 MR. THOMPSON: Well, to come up with this information flow and these protocols and all of this stuff, what were you trying to protect against? 1490 MR. BRENNAN: We were trying to protect a situation where EI itself wanted to bid, if you like, on some of the transactional service assets that we used, such that -- to make it fair to all marketers or people who wanted to bid on that, that EI did not have an unfair advantage. 1491 MR. THOMPSON: It's -- this concept could conceivably put EI in a preferential position - is that a better way to express it - that was recognized? 1492 MR. BRENNAN: Yes, to the extent that they were going to bid either on providing gas to us or providing transactional services or taking up on transactional services in the utility. 1493 MR. THOMPSON: Well, they would have access to information that would help them in their role as principal selling to others, they would have use of your assets. You were obviously trying to protect against something with these contracts and were you trying to protect against the perception that EI was being preferred? What are you trying to guard against? 1494 MR. BRENNAN: As I say, we are trying to protect against Enbridge Inc. having an unfair advantage in terms of providing us with gas supply or bidding on some of the storage assets or the transactional assets that we used. 1495 MR. THOMPSON: Were you trying to protect against Enbridge Inc. gaining an unfair advantage in its own right as principal in activities that it could do in the market? If not, you should have been. 1496 MR. FARRELL: Well, that assumes that Enbridge Inc. -- you're asking the witness to assume, I take it, that Enbridge Inc. would use utility information for its own account and somehow by virtue of that, gain an advantage; is that the premise of your question? 1497 MR. THOMPSON: Well, it has the information; correct? 1498 MR. BRENNAN: It has information. The majority of that -- a good portion of that is an aggregate basis, in any case. 1499 MR. THOMPSON: And it has the right to engage in all these businesses on its own account. 1500 Am I to assume somehow we're going to put a beta blocker in Enbridge's mind that's not going to use the information it has to engage in these businesses? 1501 MR. FARRELL: You're assuming -- just a minute, Mr. Brennan. 1502 I want to make it clear that the assumption that's underlying your question is that the information they get somehow allows them to have a competitive advantage. I don't think that's been established yet. 1503 MR. BRENNAN: Right. And I guess what I was going to follow up, could you give me an example of how they could use that information to their competitive advantage? 1504 MR. THOMPSON: Well, the code talks about restraining the flow of information; correct? I don't think I have to give an example of how it might be used. 1505 I'm suggesting to you that's what it talks about, and the mere access to the information gives the perception of a competitive advantage -- creates a perception of conflict. 1506 All I'm suggesting to you is you seem to have recognized that out of the gate, and you were trying to somehow contractually protect against that conflict from materializing. 1507 Was that the conceptual exercise that you were going to? 1508 MR. FARRELL: He's answered that question twice. 1509 MR. THOMPSON: Is the answer, yes? 1510 MR. FARRELL: No. Section 5(a) is very clear if you read the whole thing. 1511 MR. THOMPSON: 5(a) of what? 1512 MR. FARRELL: Well, the point you're -- you were just using it, the businesses of gas acquisitions, gas sales, gas supply management, and so on. The clause reads on. When you talk about what -- when the services provider Enbridge Inc. is acting as principal for its own account, it refers you to the services schedule, and thus to the protocol. 1513 MR. THOMPSON: I'm talking about paragraph 5 of the evidence. 1514 MR. FARRELL: I'm sorry. I thought you were talking about the agency agreement. My apologies. 1515 MR. THOMPSON: Well, on that note, maybe we should go and have a cold shower. 1516 MS. HALLADAY: On the note of Mr. Farrell apologizing; is that what you're saying, Mr. Thompson, that that's a good time for us to be -- 1517 MR. FARRELL: There will be a transcript correction. 1518 MS. HALLADAY: And on that note, we'll adjourn until tomorrow morning at 9:30. Thank you. 1519 MR. VEGH: Excuse me. Madam Chair, what's the schedule for tomorrow morning? 1520 MS. HALLADAY: Please be seated. 1521 The schedule for tomorrow afternoon? 1522 MR. VEGH: Yes. 1523 MS. HALLADAY: I think that our plan is to continue sitting tomorrow morning and tomorrow afternoon. We realize we are giving up the Board meeting to press on with this case, so we'll just proceed on. 1524 There will be Mr. Thompson. There will be Board staff, I think, is next, as far as this issue is concerned. 1525 And then we proceed on to issue -- 1526 MR. FARRELL: 2.3 and 2.4 together. 1527 MS. HALLADAY: Is that satisfactory for you, Mr. Vegh? 1528 MR. VEGH: Thank you. I just wanted that information. Thank you. 1529 MS. HALLADAY: Anything else before we adjourn? 1530 Mr. Moran? 1531 MR. MORAN: I was just wondering if it would be useful to get an understanding of how many people will be cross-examining on the next panel. 1532 MS. HALLADAY: That would be very useful, and so if you could do a canvass of the people and the approximate times they anticipate that they will take, it would be of assistance to the Board. 1533 Thank you very much. 1534 --- Whereupon the hearing adjourned at 5:00 p.m.