Rep: OEB
Doc: 129M2
Rev: 0













ONTARIO ENERGY BOARD

Volume: 7

14 JUNE 2002


BEFORE:



S. HALLADAY

PRESIDING MEMBER

R. BETTS

MEMBER

A. SPOEL

MEMBER



1
RP-2001-0032 TRANSCRIPT VOLUME #7

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 #7


4
14 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]





CONSUMERS' ASSOCIATION OF CANADA - PANEL 1

[80]




EXAMINATION BY MR. WARREN:

[84]





CROSS-EXAMINATION BY MR. JANIGAN:

[197]






PROCEDURAL MATTERS:

[257]





CONSUMERS' ASSOCIATION OF CANADA - PANEL 1 - RESUMED

[284]




CROSS-EXAMINATION BY MR. FARRELL:

[286]






PROCEDURAL MATTERS:

[693]





DECISION ON QRAM:

[716]





PROCEDURAL MATTERS:

[719]





10
EXHIBITS

11

EXHIBIT NO. K.7.1: BOOKLET OF MATERIALS FOR CROSS-EXAMINATION - ISSUE 2.1

[31]









EXHIBIT NO. J.6.4 LEGAL OPINION ON THE STRUCTURING OF THE OUT-SOURCING ARRANGEMENT WITH ENBRIDGE INC

[271]









EXHIBIT NO. J.4.1 COPY OF RELEVANT PAGE FROM APPENDIX B WITH THE UNDERTAKING NUMBER WRITTEN IN THE RIGHT-HAND MARGIN WITH CORRESPONDING REPORT ATTACHED

[274]










EXHIBIT NO. J.4.2 RESPONSE TO UNDERTAKING J.4.2

[276]









EXHIBIT NO. J.4.3 RESPONSE TO UNDERTAKING J.4.3

[277]









EXHIBIT NO. J.4.4 RESPONSE TO UNDERTAKING J.4.4

[278]









EXHIBIT NO. J.4.5 RESPONSE TO UNDERTAKING NO. J.4.5

[281]









12
UNDERTAKINGS

13

14
--- Upon commencing at 9:44 a.m.
15
MS. HALLADAY: Please be seated.

16
Before we begin, are there any preliminary matters?

17
PRELIMINARY MATTERS:

18
MR. FARRELL: Yes, I have a few.

19
First of all, I'd like to advise the Board, with Mr. Schuch's prompting, that we have completed the revisions to the settlement proposal. There are something like ten pages that incorporate the typograph -- corrections to the typographical errors and the comments that you made, Madam Chair, I think about issue 2.1, about an affirmative statement of the proposal. And we anticipate those will be available later this morning for filing, so then the Board would have the complete -- revised -- settlement proposal.

20
We also have some responses to undertakings that we should have available later today with the aim of getting as much as we can in the hands of parties today, so that when Monday comes, that we can bring back our witnesses to either orally respond to other undertakings or to explain what has been -- what we're going to file today, that people will have had a chance to look at it. That will improve the process.

21
MS. HALLADAY: Mr. Farrell, is it your intention to just file written materials this afternoon, or is it your intention to produce witnesses to answer undertakings today?

22
MR. FARRELL: The intention is to file written material, and we also thought that Mr. Brennan has some responses, and I thought I might have him explain it today with the hope that we would get those into the hands of Mr. Vegh, and, perhaps, he would have an opportunity to look at the transcript and see the explanation, which might facilitate his questions, if he has any, on what is filed. But it would just be Mr. Brennan today.

23
MS. HALLADAY: Just Mr. Brennan. That's fine. Thank you.

24
MR. FARRELL: I have placed on the dias and put copies in the public file and left copies for Mr. Moran and Mr. Schuch and provided to Mr. Warren a booklet that has a cover page that's "Materials for Cross-examination - Issue 2.1," marked P. Stauft. And these are the materials that I plan to use in my cross-examination of Mr. Stauft.

25
I should point out, if you turn to tab 3 and go to the second page of tab 32, it should have a box at the bottom that's entitled, "Eastern Zone Toll"; do you see that?


26
MS. HALLADAY: Mm-hmm.

27
MR. FARRELL: For some absolutely inexplicable reason, that page is in a number of booklets, and a different page 11 is in the balance of the booklets. So, for example, the copy that's in the public file has a clipped-in insert with the right page. So those people who get the black-and-white version of this page, ignore the one that's cerloxed and use the one that's paper-clipped.

28
And we'll bring substitutes if anyone wants a colour version on Monday. I have no idea how that happened.

29
MR. MORAN: That will be Exhibit K.7.1, Madam Chair.

30
MS. HALLADAY: Thank you.

31
EXHIBIT NO. K.7.1: BOOKLET OF MATERIALS FOR CROSS-EXAMINATION - ISSUE 2.1

32
MR. FARRELL: And finally, I'd like to make a transcript correction on the record with an apology. At volume 6, at paragraph 1296, during my re-examination of the witness panel for issue 5.3, I referred to Mr. Janigan's cross-examination. That was an error, and I apologize to Ms. Lott. It was Ms. Lott who cross-examined on that issue. So would you please make the changes that are required, and I thank Dr. Higgin for pointing out my faux pas.

33
That's all I have.

34
MS. HALLADAY: Thank you, Mr. Farrell.

35
Mr. Warren?

36
MR. WARREN: Madam Chair, with apologies in advance, I'd like this morning to make some preliminary submissions to the Board in the hopes that I can get some direction from them.

37
As the Board will be aware, I've had to live my life vicariously over the past week reading the proceedings only in the transcript and not seeing it live. But my review of the transcript has given rise to a number of concerns about the level and quality of the disclosure that has been provided in this case and the prejudice that has accrued, in my respectful submission, to at least this intervenor and perhaps others.

38
I will put this in the context somewhat later of the problems arise -- the problems arise under the ancient but still valid rule in Brown v. Dunn.

39
There are three examples of the phenomenon, Madam Chair, and the first relates to an exchange which took place last Friday after I had to leave for personal reasons, something as mundane as getting my daughter at school.

40
You will recall, and I would like if the Board would turn up the transcript for last Friday's proceedings, which is volume 3, on June 7th, 2002.

41
If you would begin, Members of the Board, at transcript paragraph or line 124. This is my examination or cross-examination of Ms. Holder.

42
At line 24, I put to Ms. Holder the following: "Now, could you describe for me, Ms. Holder, at the time when the decision -- at the time, what the decision-making line was, if you could."

43
And then two lines down, I asked the question: "Would Mr. Riedl have had to take that to anyone further up the chain in the ECG system before getting approval to sign it?"

44
Now, the response comes back from Ms. Holder in which she says what would have occurred, not what was required to be done, but what would have occurred, and then the third paragraph of Ms. Holder's response at paragraph 129 is: "So I would have initialled that contract, handed it to Mr. Riedl. Mr. Riedl would have signed it and then taken it to another officer in the company at the time, which was our senior vice president of finance and regulatory, Mr. John Aiken."

45
Now, if you contrast that, please, by turning to your own questions, Ms. Halladay, at transcript volume 3, paragraph 1126. Now, at 1126, the -- sorry, 1189, I apologize. Ms. Halladay, you were asking a number of questions about the paper trail, and you said about five lines down from 1189, you said, "What were the steps that would be taken to make the decision to sign the first tranche of the Alliance contract, for example?" And the answer which appears down just below 1192 is the following: "There were discussions about these contracts at the board, I believe; however, it would not require -- sorry, our board of directors, but did not require board-of-director approval, so we never did receive board-of-director approval to sign these contracts. It was not a requirement."

46
Now, the third piece of response from Ms. Holder again to you, Ms. Halladay, appears at transcript -- I'm sorry, Mr. Betts, it's in response to your questions, begins at 1302, the response -- question from Mr. Betts is, just below 1302: "This is not a decision that would normally be reviewed by the board; am I right in saying that?" And the response from Ms. Holder, at paragraph 1304, is: "But pretty much all major initiatives that we undertake, including something like DWAMS, would have a discussion at the board."

47
Now, my respectful submission, Madam Chair, allowing for the fact that our questions, the questions that you asked and I asked, have very slight variations in them, the information which Ms. Holder gave to me, in my respectful submission, was not a full, complete, candid answer to my question.

48

Ms. Holder says, and I would refer you to an answer she gave at answer 1304, in answer to Mr. Betts, but she also said in response to you, at paragraph 1200: "I don't know. I asked the question to confirm, prior to coming here, whether they were reviewed by the board and the answer I got back was, yes. I did not ask if it was the complete board or just a subset of the board."

49
Now, when I asked what the decision-making line was, and I got an answer that it was taken up as far as Mr. Aiken, Ms. Holder knew at the time that it was taken further than that, it was taken to the board.

50
Now, I appreciate that the practice of this Board is to try and have as complete a record, and one of the functions of the Board asking questions is to complete that record. But the Board will also appreciate that this system functions perhaps to an unhealthy degree on the adversarial system. And the difficult is I cannot cross-examine Ms. Holder on answers that she gives to you, nor is it your function, as recognized by the courts, to engage in aggressive cross-examination of Ms. Holder. That's not your job. But in my respectful submission, Ms. Holder had that information and didn't give it to me, and I am now disadvantaged by that.

51
Now, if this were a stand-alone phenomena, then I'd go back and slap myself on the wrist and say, you jerk, you didn't ask the right question, you weren't rasor sharp in your questions, and we'll leave aside the question of whether or not, with all that information in her pocket, she should have answered in any event. If it were a stand-alone, that might been one thing. But it isn't a stand-alone phenomena because on the same day, there is an exchange which appears at the same volume, paragraph 1250.

52
Now, this is a series of questions that again, Ms. Halladay, you're putting to Ms. Holder on the context of due diligence. And Ms. Holder says, beginning at 1250, "We did approach our large-volume customers through the association of IGUA, Industrial Gas Users Association, who also at the time were expressing similar concerns about TransCanada, the lack of competition, the lack of diversity and route, and they did provide us a written letter saying that they would support us signing the contract. I believe at this time it would have been for the 75 million cubic feet a day on Alliance."

53
Now, if you look at that answer in the context of our interrogatory, Exhibit I, tab 2, schedule 63, Ms. Halladay, elsewhere in the transcript, you characterize that as a very narrow question and I'm going to, with respect, disagree, because what the question asks is and I quote: "Please provide all studies, reports, notes and any other written material, whether internal to ECG or otherwise, relied on, considered in relation to, or in support of the following: 1) the decision in November 1996 to acquire firm transportation service from Alliance pipeline limited partnership to Alliance pipeline LP."

54
Now, surely, even on the most restrictive wording of that question, the IGUA letter should have been produced in response to that interrogatory. It was clearly a piece of paper, a note, or any other written material considered in relation to the Alliance contract. Now, had that letter been produced, then I, and perhaps my friend, Mr. Janigan, but certainly I would have cross-examined on that letter to ask what was the purpose in eliciting IGUA's support, what did it mean in the context of, for example, who has to pay for this. But I can't do that now.

55

So in my respectful submission, there has been an incomplete answer to an interrogatory and it begs the question, what else is out there? What kind of fine parsing of these questions is going on? But in my respectful submission, it's difficult to parse that interrogatory request to produce something less than everything that was considered.

56
Now, the final example of it is when my fax machine began to hum the other day with nearly 100 pages of material that comes in to be used in the cross-examination of Mr. Stauft this morning, and to my surprise, I find virtually half of it are Foster Reports on, among other things, Alliance and Nexus and Northern Border.

57
Now, again, I go back to the interrogatory response, which is interrogatory number 69, Exhibit I, tab 2, schedule 69: "Please provide all studies, reports, analyses, notes and any other written material prepared by Mr. Foster with respect to gas supply options for natural gas utilities in the United States and Canada for the period from 1995 to present."

58
That question, in the context of a case that's considering, among other things, Alliance and Vector and the relevance of the Northern Border pipeline, I ask the question rhetorically, why was that material not provided in response to the interrogatory.

59
Now, it's -- I apologize if I betray a note of frustration in this, Madam Chair, but this, what my friend Mr. Janigan so eloquently refers to as regulatory striptease, has the effect of disadvantaging the intervenors because we don't have full disclosure in advance; we can't ask the proper questions. But the ultimate victim is the quality of the decision-making process. The Board relies on cross-examination for the -- it produces the truth, is hopefully designed to produce the truth, and if we can't ask those questions of all of the relevant material, we're put at a disadvantage.

60
Now, the -- it also psychologically, I must say, puts us at a disadvantage when you have to sit here and listen to me whine on a Friday morning when we should be dealing with more substantive matters. I don't like whining any more than anybody else does, but I feel it incumbent upon me to raise these points because, as I pointed out before, the Board relies on the adversarial process in order to arrive at the truth.

61
The rule in Brown and Dunn, as certainly you will be aware, requires that a party to a proceeding who is going to challenge the credibility of a witness, put the question, the basis of the challenge, to the witness in order to allow them to respond. And that rule has been expanded at its perimeter over the years so any question which is really adverse in interest of the witness, in fairness, has to be put to the witness.

62
Now, had I had this information, I would have put to Ms. Holder a number of questions about it, but I can't do that now. And if I raise it, these issues in argument, my friend, Mr. Farrell, will no doubt promptly say I violated the rule of Brown and Dunn.

63

Now, the fulcrum issue at the end of the day, after all of this whining, is what relief can I ask the Board for. I could ask, for example, that all of these Foster Reports that were to be put to Mr. Stauft this morning -- and I should say, preface my remarks on relief, is that I understand that this Board, as a regulator, has a higher obligation than simply to resolve lis inter partes; that your obligation is the statutory obligation to determine just and reasonable rates, and that you have to look beyond that. And I understand that it is, historically, the preference of this Board to have a complete record however it arrives, even if it arrives in the form of the dog's breakfast.

64
But the reality is that there are interests that are being prejudiced by this, so what is the appropriate relief. I could ask, for example, that this material from Mr. Foster be struck from the record. I'm not sure much would be accomplished by that. All I can say is -- ask the Board to direct Enbridge Consumers Gas to provide full and timely and complete disclosure so that it's in the hands of the parties that will be cross-examined and adequately represent the interests of our clients, and in addition to that, provide what we hope is the best record for the Board.

65
Those are my submissions. Thank you.

66
MS. HALLADAY: Thank you, Mr. Warren.

67
Mr. Farrell.

68
MR. FARRELL: Yes, I think that we could have saved about 20 minutes of hearing time if Mr. Warren had had the courtesy to advise me he was going to say -- or at least raise this topic.

69
On Friday, we discussed the responses to undertakings and we advised the Board - I realize Mr. Warren wasn't here - but we advised the Board that we intended to respond to some of those undertakings orally. And for that purpose, if I didn't say it then, I can say it now: We intend to recall, among others, Ms. Holder. So Mr. Warren will have his opportunity, if he wishes, to take it.

70
Secondly, the Foster Reports that are in the booklet that you have are not reports in the sense of being prepared by Dr. Foster necessarily, they are excerpts from a trade magazine that's called the Foster Report, or the Foster Natural Gas Report, similar to the trade publications that Mr. Janigan used in his cross-examination of our witnesses. They are not, and I can say this subject to check, but I don't believe Dr. Foster writes the Foster Report. People go and report on developments in the natural gas industry and the only purpose, as you'll see as my cross-examination unfolds, of putting items like this there is to provide a convenient vehicle, if you will, for me to ask Mr. Stauft questions about what the TransCanada organization was doing in response to the competition posed by the Alliance project. No more; no less.

71
MS. HALLADAY: One moment.

72
[The Board confers]

73
MS. HALLADAY: Thank you.


74
Mr. Warren, the Board shares your concerns with respect to timely and full disclosure by the applicant. We note that Mr. Farrell has said that Ms. Holder will be present next week to be cross-examined and available for cross-examination on the material that is being presented in response to the undertakings. We would also extend that to include the additional material that was disclosed during the course of the Board's examination of Ms. Holder that was subsequent to your cross-examination of her. So you will be able to ask her questions not only about the additional material that is being disclosed in the undertakings, but the material that has been disclosed subsequent to your cross-examination.

75
With respect to the Foster Report, you will have the opportunity during Mr. Farrell's cross-examination of Mr. Stauft, if you feel that he is using this material inappropriately, to address your specific concerns at that time.

76
MR. WARREN: Thank you, Madam Chair.

77
MS. HALLADAY: Thank you.

78
MR. WARREN: May I call Mr. Stauft, please.

79
MS. HALLADAY: Thank you.

80
CONSUMERS' ASSOCIATION OF CANADA - PANEL 1

81
M.STAUFT; Sworn.

82
MR. BETTS: The witness is sworn in.

83
MS. HALLADAY: Thank you.

84
EXAMINATION BY MR. WARREN:

85
MR. WARREN: Mr. Stauft, you have prepared certain pre-filed evidence in this proceeding, the exhibit number of which escapes me, but I'm sure Mr. Schuch can tell me what it is.

86
MR. FARRELL: Exhibit L, tab 2.

87
MR. WARREN: Thank you. And on the first page of -- the first two pages of that, you describe your background and work experience, Mr. Stauft, and I'd like to review those, please.

88
You are a lawyer by training, having received a Bachelor of Law degree in 1985; is that correct?

89
MR. STAUFT: Yes, sir.

90
MR. WARREN: And thereafter you were employed in various capacities with, first, TransCanada Pipelines and subsequently with TCPL; is that correct?

91
MR. STAUFT: Yes, initially with what eventually became TransCanada Gas Services and then later with TransCanada PipeLine.

92
MR. WARREN: Now, I wonder if you would describe for the Board the nature of your responsibilities and your experience in those work capacities.

93
MR. STAUFT: These are described, first of all, in our response to interrogatory number 3 to CAC, so there's a more expanded summary or a description of my activities with TransCanada Gas Services and TransCanada.

94
Really, the relevant portion, I think, is when I was working with TransCanada Gas Services from around -- well, during the period from 1991 until I left there to go to the pipeline. In 1999, I was responsible in various capacities for managing and directing TCGS's participation in regulatory proceedings all over North America and certainly in Canada at the NEB and the EUB and in the U.S. at the FERC.

95
TransCanada Gas Services is a large marketing -- was -- it no longer exists as a separate entity -- but was at the time a large gas marketing firm that was a shipper on many pipelines in Canada and the U.S. and supplied gas to shippers on other pipelines.

96
And it was always evaluating transportation options and various gas supply marketing options.

97
The economics of that business were heavily dependent on pipeline toll and tariff and capacity issues, and it was -- since, as I said, it was my job to direct the company's activities in regulatory proceedings, having to do with those, as part of -- in order to do that, I needed to understand and have complete as possible an understanding of how pipeline transportation markets and gas commodity markets work, and also how they interact with each other. So in the course of my job, I did acquire that knowledge, and I applied it in my work.

98
An example of that, actually, oddly enough, is raised by one of the pieces of material that Mr. Farrell circulated yesterday for cross-examination purposes. One of the Foster Reports that Mr. Warren was talking about has a lengthy discussion, lengthy description of protests that were filed by various companies, including TransCanada Gas Services in the U.S. FERC-Alliance certificate docket.

99
And just as an example, I was responsible for not writing, but certainly organizing and working with counsel on that protest. And again, that pleading was commercially motivated by pretty much the same concerns that I talk about in my testimony in this case. But that's just an example.


100
But that is certainly the kind of thing that I did all through the 1990s.

101
MR. WARREN: And as a result of having those positions and having those responsibilities, were you called upon to testify before various regulatory agencies across North America, and is there attached to your pre-filed evidence a list of your various appearances before regulatory agencies?

102
MR. STAUFT: Yes, I have testified before a number of tribunals, and a list is attached as Exhibit 1 to my testimony.

103
MR. WARREN: And finally, sir, are you responsible for the preparation of Exhibit L.2 and various interrogatory responses that were delivered to you by Enbridge Consumers Gas?

104
MR. STAUFT: I am, yes.

105
MR. WARREN: The various interrogatories were termed I.12, I'm told by Mr. Farrell.

106
MR. STAUFT: Yes, I prepared those as well.

107
MR. WARREN: And, finally, just on this point, are there any corrections to your pre-filed evidence that you'd like to make?

108
MR. STAUFT: Yes, there is one area I should discuss.

109
At page 37 through 39 of my pre-filed testimony, it's in the context of a discussion about the notional deferral account sheet that ECG provided. It is, I believe, Exhibit D.2, tab 2, schedule 4, page 1 of 1.

110
In any event, in the course of preparing my testimony, I prepared exhibits that mimic that more or less, and there is a discussion at this part of my testimony about two potential adjustments that I'm proposing.

111
One had to do with the question of what -- a particular line in ECG's table that was called "Transportation Savings," and the other had to do with what I -- appeared to me to be a mismatch in the volumes.

112
In its rebuttal testimony, ECG, I think, chided me gently for not having asked about those in interrogatories. And it's fair enough; I take the point, and -- but the fact of the matter is, I just didn't see the issue until after the date for interrogatories had passed. So I addressed it in my written testimony.

113
Having seen ECG's rebuttal evidence and the corrected table that they provided, I think I'm satisfied that the concerns I raised in that passage of my testimony were groundless.

114

I have to confess, I'm not sure I understand all of the adjustments that were made for the purposes of creating the replacement table, but at the same time, I have no basis for doubting that they accurately reflect what ECG was doing with their capacity.

115
On that basis, I think the points that I raised are now moot, and they don't need to be dealt with or considered.

116
MR. WARREN: Madam Chair, I would ask the Board accepts Mr. Stauft as an expert. The question of the nature of the expertise of all of Mr. Foster, Dr. Foster, Mr. DeWolf, and Mr. Stauft, I think, is an interesting one, as the Board will be aware from the jurisprudence of the Supreme Court of Canada.

117
And historically, the function of deciding whether or not these contracts were prudently entered into is yours and not theirs.

118
And so the -- I would ask that the Board to accept Mr. Stauft as an expert, one knowledgeable in the issues that give rise to the debate about the contract and able, on the basis of his experience, to draw an inference as to whether or not these contracts were reasonably entered into.

119
At the end of the day, that decision is yours, and the weight that you give to the testimony is, obviously, entirely yours. But under the circumstances, I would ask that Mr. Stauft be accepted as an expert.

120
MS. HALLADAY: Any problems, Mr. Farrell?

121
MR. FARRELL: No. Mr. Warren has indicated that the weight to be attached to any expert's opinion flows from the quality of the evidence and the quality of the opinion rather than being labelled an expert as such. So we are prepared to accept Mr. Stauft's ability to give an opinion and draw an inference. We don't agree with his opinion or his inferences, but I'm not going to waste time, sort of, trying to challenge his credentials for this purpose.

122
MS. HALLADAY: Thank you, Mr. Farrell.

123
MR. WARREN: I have two areas, hopefully brief, of examination-in-chief, Members of the Panel, and they are really designed to try and crystallize for the Board the areas of difference between the position of Mr. Stauft and those of the ECG witnesses.

124
And I'd like to begin, Mr. Stauft, if you would, please, very briefly summarize the principal points of your testimony.

125
MR. STAUFT: Yes.

126

Obviously, the issue that my testimony addresses is the reasonableness of ECG's Alliance and Vector arrangements.

127
In my testimony, I identify four alternatives that ECG had for meeting incremental requirements, particularly in the context of the first tranche that they've talked about.

128
Those alternatives were the combined Alliance-Vector route that they, in fact, elected to take; secondly, incremental TransCanada capacity; thirdly, what I called the supply -- or the Chicago option, which was a matter of acquiring supply in the market area in Chicago and transporting it using Vector capacity that ECG would hold to southern Ontario.

129
And finally, what I have called the Dawn option, which would have involved simply purchasing the necessary supply in the market area at Dawn or somewhere else in the TransCanada eastern zone.

130
As a matter of fact, the Alliance-Vector option that ECG elected to take on has probably turned out in an economic sense to be the worst. Again, it probably costs more than any of the other options would have.

131
Now, obviously, retrospective examination of -- like that doesn't tell us -- isn't answering the question in this proceeding, but I think it does raise the question legitimately of whether -- what ECG did was a bad decision, or was it just bad luck, or what was going on there?

132
The conclusion in my testimony, shortly put, is that it basically was a bad decision and that just about any of the alternatives -- in fact, any of the alternatives would have been better.

133
I analyze that question in terms of three criteria: First of all, overall delivered cost; secondly, what I call the strength of the market; and thirdly, total fixed cost exposure.

134
These are, in fact, similar, I would say, to the criteria that Dr. Foster identified in his testimony. He, I believe, said that he used two criteria; one being least cost and second being security of supply.

135
I would say that my criteria are basically the same, just a -- variations on the same theme. Actually, Dr. Foster did not identify minimization of total fixed costs as an objective or a criteria, which is -- I don't think a major difference because, in my view, it's not a major consideration anyway.

136
I would summarize the overall analysis as follows: The building of the Alliance system, and earlier before that the Northern Border expansion extension in 1998, and later the building of Vector, created an obvious opportunity for ECG to access competitive supply in the downstream market areas of either Chicago or Dawn. Both of those options were presented.

137

The most likely scenario, I believe, from the perspective of 1996, given what information was available to ECG at that time, the most likely scenario is that either Chicago or Dawn would have resulted in the lowest delivered cost over, at least, the initial several years; would have been viable and secure supply options; would have offered supply basin diversification that the Alliance-Vector option did not; and finally, would have been more consistent with ECG's then-held view that it would be exiting the merchant function over a relatively short period.

138
My testimony also includes as exhibits quantitative analyses of the different options for fiscal 2001 and 2002, which show just in general terms, at least, the types of cost differences that are at issue here.

139
Finally, my testimony addresses issues related to the notional deferral account that I referred to earlier and, in particular, the reasonableness of some of the adjustments that ECG proposes in relation to that table.

140
MR. WARREN: Mr. Stauft, one of the points that Ms. Holder and others have made at a number of times, but my specific point of reference is in volume 2 of the transcript, at paragraph 1107, is about security of supply. And I wanted just to join issue on the security of supply issue.

141
At that particular paragraph, Ms. Holder, in response to a question from me, makes the following observations: "I don't think we can just look at the landed price in its entirety. I think our ratepayers are really looking for safe, reliable, reasonably-priced gas, but I think we have to put in the equation the reliability and safety issues."

142
Now, I'd like you to put into the equation the reliability and safety issues and indicate, if you would, how either the Chicago or the Dawn options would have affected the reliability of safety issues.

143
MR. STAUFT: Okay. There are a couple of senses in which Ms. Holder may have been thinking about reliability and safety issues in that passage. If it is a matter of the reliability of a particular supply source, be it Dawn, Chicago, or Alberta, either into NOVA or into Alliance, then I think the real issue is, for my purposes here, the comparison between the viability of Chicago as a workable market centre versus the receipt points available to Alliance shippers.

144
My view is that, from the perspective of 1996, in particular, Chicago should have been seen as at least as good an option and likely a far better option for purposes of acquiring supply on a reliable basis. As I say in my testimony, at that time, it was pretty clear that the Northern Border pipeline extension -- expansion/extension project would go ahead, and ECG was clearly assuming that the Alliance project would go ahead; otherwise, they wouldn't be analyzing the economics of doing that.

145
Given all of that, and those two projects together represented about 2.7 Bcf a day of new incremental supply into the Chicago area, I think the only reasonable conclusion at that time would have been that that additional supply would have made Chicago fine as a supply source.

146

In my testimony, I also discuss Alliance and point out that, in fact, it -- the supply market available to Alliance shippers is much more limited. It consists basically of 30-odd gas plants in Alberta plus, as Mr. DeWolf pointed out, I think, some interconnects with the ATCO system. I wouldn't say that it is a terrible or, rather, not a workable supply source for ECG. Obviously, they buy their gas from the producers connected to Alliance without any trouble and they seem to get it at a reasonable price. But, directionally, I think it is still worse than Chicago and it wouldn't be fair to say that Chicago was worse, from a security of supply perspective, than Alliance, even in 1996.

147
The other sense that -- well, that I thought Ms. Holder may have been considering these issues in, was one of the risks of the availability of pipeline facilities over time. I know that some mention has been made about the uncertainties surrounding TransCanada expansions at the time, which is fair enough, but the fact is that there was uncertainty as well about when and if the Alliance and Vector projects would go ahead, and when they would be completed.

148
As it happened, the Alliance project was delayed for an entire year beyond what ECG initially thought and -- well, another aspect of that is that at the time ECG signed up for its Alliance capacity, it didn't appear, at any rate, to have a firm plan about how it was going to get the supply that it transported on Alliance from Chicago into its market area.

149
An interesting -- I think it's interesting to think about in this context and in the context of Ms. Holder's claims that ECG is - I am sure it's a truthful claim - they are concerned about security of supply; but the fact of the matter is that ECG did accept timing risks in relation to Alliance, some of which materialized, and they did accept quite large, I would say, availability and timing risks in relation to the Vector system.

150
As it turns out, they handled those risks fine and I don't think it was unreasonable for them to do that. But I don't think it's fair for ECG to say that they had to be very conservative or very narrow in their view because of the need to be concerned about security of supply. They took reasonable risks in that area just as any other commercial firm would.

151
MR. WARREN: Finally, just before I turn to joining issue with the Foster and DeWolf, we have tended, and perhaps I'm the one most at fault in this case, to run together consideration of Alliance and Vector, and I'm wondering, Mr. Stauft, whether or not, in your view, they can be treated separately by the Board.

152
MR. STAUFT: Yes, I believe they can, and that, I think, is reflected in my written evidence. I agree that it is kind of a mish-mash at the end of the day with schedules all over the place and numerous contracts, but I think it is quite possible and advisable to consider them separately.

153
In part, it depends on, I think, what the perspective is that we're taking for purposes of -- in the sense of making comparisons between the options that I've identified. If the issue is purely one of Alliance-Vector versus TransCanada, then in that case, obviously the Alliance and Vector capacities have to be treated as a unit, as an integrated unit, and the evaluation has to be done on that entire path. So you can't separate them in that context.

154

On the other hand, my testimony says, well, that wasn't really the relevant comparison to begin with. What they should have been doing was looking at Dawn or Chicago. When you look at it in that way, there are, I think, obvious distinctions between the Alliance arrangements and the Vector ones. If it is felt that the Chicago option was the best, in some sense, then that -- for ECG, that basically assumes that the Vector arrangements are reasonable. The Vector arrangements are just part of that arrangement. The only case in which one can -- in which the reasonableness of the Vector arrangements comes up for question is where the claim is that what ECG should really have done is just bought all of the supply at Dawn or somewhere in the eastern zone, it shouldn't have bought either Alliance or Vector.

155
Now, my view is that, at a minimum, the Chicago option should have been preferable, and that under just about any analysis, therefore, the Alliance capacity didn't make much sense for ECG. However, I do think that it was a much closer call between Dawn and Chicago.

156
In my evidence, I said that I thought that, from the perspective of 1996, Dawn was likely a lower cost option, but I acknowledged, I think, that the strength of the market or security of supply, as Dr. Foster would say, was questionable relative to Chicago.

157
So I acknowledged in my testimony that there was a balancing that had to be done there, and, as I say, I agree that it was a close call. I still think overall Dawn probably would have been a better idea, but, as I say, it could easily have gone either way.

158
So in that case, if that's the -- if the determination is that Chicago really is what they should have been looking at, then the question of Vector really goes away.

159
MR. WARREN: The final area, sir, if you could just briefly indicate for the Board what are the principal points of difference between Foster and DeWolf, on the one side, and Stauft, on the other.

160
MR. STAUFT: Sure. The first sort of category of differences I would describe as differences with respect to the criteria or factors that ECG should have considered, or the process that they should have used in considering the Alliance and Vector arrangements and their options at the time, one issue is with the timing horizon or planning horizon. I don't dispute it at all. I think I've already said that the relevant question is information that was available to ECG at the time it made the decision. Hindsight is not appropriate, obviously, because -- and I don't disagree with Dr. Foster on that.

161
At the same time, I think that it is reasonable, if we are looking at 1996, the perspective that ECG had in 1996, it is reasonable for us to expect the utility to have some forward-looking view of the market and how options would turn out by the time the decisions they were then making actually took effect in 1999 or, as it turned out, 2000.

162
I raise this because I think there is some suggestions in -- not explicit, perhaps, but there is some suggestions in Dr. Foster and Mr. DeWolf's testimony that all ECG really had to do is look at what the market was in 1996, for 1996 transactions, for the purpose of evaluating their options.

163
I think the more reasonable way to look at it is that what they should have been doing is looking in 1996 and taking account of whatever reasonable expectations they had at the time for how the market would evolve by the time these arrangements were to come into place.

164

The second point in this general area is -- that I've really already mentioned, is the apparent failure of ECG to consider, in a serious way, either the Chicago or the Dawn options. My testimony suggests that there were predictable effects on the market that would have made those options viable, and it appears that ECG didn't really seriously look at them at all, at least in relation to the first tranche.

165
With respect to the second tranche of Vector capacity, the situation is different because, in fact, the Chicago option and the Dawn option were really the only ones they looked at. They didn't look at incremental Alliance or TCPL capacity for those.

166
The third point in this general area, again, it's just noting something from my testimony, is the anomalousness, in my view, of ECG's decision to go ahead with these very long-term arrangements given that they were, themselves, intending to exit the merchant function pretty much as quickly as they could. I understand, and I take Ms. Holder's point when she was asked about this, that there were subtleties about whether it was the merchant function or the upstream pipeline capacity management function as well. But I think the fact remains that at the time, one wouldn't have guessed, based on what ECG was saying, that they would have anything to do with upstream transportation or gas supply within a few years.

167
So Dr. Foster, I think, raised this in context or in his -- some of the testimony that Mr. Warren discussed with him before the Georgia TSC, and he made essentially the same point in relation to Atlanta Gas Light. As he said -- and the situation was slightly different, because in that case it was a statutory mandate almost for Atlanta to get out of the merchant function. But that's a difference in degree, I think, not in kind. So I think it was a factor that ECG should have considered more seriously.

168
The other areas where I think I have disagreements with Dr. Foster and Mr. DeWolf are related primarily to the viability of what I have called the Chicago option. I've already talked about, and discuss in my testimony, the viability of Chicago as a supply point, the liquidity and depth of that market as it would have been seen in 1999 from 1996, I've already discussed that, and as well as the comparison of that with Alliance.

169
The other point which is, I think, a serious one relates to differences in my views about the price effects of the pipeline construction activity that was being undertaken at the time. Again, in my evidence, I make the claim that it was foreseeable that the addition of large increments of new exit capacity from Alberta would have the effect of making downstream Chicago or Dawn purchases more attractive than buying gas in Alberta and holding long-haul transportation.

170
Creating that effect, in fact, was the producer objective in promoting and pushing forward the Alliance project in the first place. That's why the Alliance project existed, was to create that effect. Dr. Foster and Mr. DeWolf take issue with me on that, I hope I'm not unfairly paraphrasing them, but I think basically saying that the best assumption is that in the long run, the value of pipeline capacity should roughly equal its cost, in which case there's really no predictable advantage.

171
And the effect that I claim should have been apparent to ECG either wasn't predictable or was a minor short-term thing that could easily -- or could properly have been ignored.

172

I agree that in a sort of academic or high-level or very long-run sense, on average, over all of the pipelines in North America, what Dr. Foster and Mr. DeWolf were telling you is probably true.

173
At the same time, I don't think that that is -- is really a very interesting observation for real-world companies that are looking at the market and trying to minimize their delivered gas costs. Both Dr. Foster and Mr. DeWolf acknowledge that mismatches of productive capacity for gas and transportation capacity would lead to the result that I was talking about. But then, as I say, they seem to dismiss that as basically an inconsequential factor.

174
For me, those mismatches are the whole point. That is why you are analyzing these issues when you look at different supply and transportation strategies.

175
In this business, in the pipeline business, short-run effects can last for many, many years, and we've seen that in Alberta in the past. And it's -- in fact, it's going on right now in relation to Alberta and excess capacity out of Alberta.

176
So I mean, I continue to believe that the collapse of the Chicago-Alberta price differential was completely predictable, and it was predictable that it would last for some period, some considerable period.

177
Mr. DeWolf, in his testimony, said that that effect seems to be more severe and is likely to last longer as a result of a gas supply response from Alberta that was less robust than probably was expected in 1996, and I think I agree with him on that. I don't dispute that TransCanada has said that.

178
At the same time, I mean, really, the effect of that is probably to drag the effect that I am saying was predictable in 1996 out for quite a long period of time, potentially. In TransCanada's recent cost-of-capital case, it basically -- its analysis basically was that the excess capacity situation that we have now will last maybe another ten years. You can take that with whatever grain of salt you need to, given the source. But still, that is their analysis.

179
So anyway, I mean, I don't think it -- accepting that means that my essential point is not still valid. The sort of behavioural evidence that the market expectation is -- was, as I have described it - again, I say this in my testimony - was that when you look at who the shippers on Alliance were, they were, with possibly one or two explainable exceptions, exclusively affiliates of Alliance.

180
What that says to me is that of the entire universe of non-affiliated shippers out there who were, presumably, evaluating this transportation opportunity on the stand-alone economics of it, basically none of them took it up.

181
The people that took it up were the people who were -- who had affiliates who got the offsetting benefits associated with having an ownership position in the pipeline. Yet I can't claim, and I won't claim, that that's sort of inclusive smoking-gun type evidence, but I think it is, at least, a very, very weird coincidence that in an open season process that is open to the entire universe, only affiliates of the pipeline elected to step up to the plate and take on capacity.


182
There's one other issue where I had, I think, a -- probably a minor dispute with Dr. Foster in particular. One of the observations in my evidence was that similar to the last -- the point I just made, Union and ECG were the only LDCs that signed up for Alliance capacity, whether affiliated or not.

183
And in my evidence, I said that a reasonable inference to draw from that is that the universe of LDCs in the U.S. midwest that could have taken advantage of this opportunity looked at it and didn't want to. They evaluated it as not an attractive option.

184
Dr. Foster -- sorry, to back up a second. Again, that is not, obviously, smoking-gun evidence of what was going on in the minds of the managers of those LDCs, but I would characterize it again as a very weird coincidence, that of all the LDCs in North America, only ECG and Union picked it up.

185
Dr. Foster, in his rebuttal evidence, makes that point, and I think that's fair enough. I take his point on that, that I don't really know what those utility managers were thinking at the time.

186
However, having said that, at the end of Dr. Foster's rebuttal testimony, he attaches a table that sets out new pipeline infrastructure and transportation arrangements that have been entered into by a number of U.S. LDCs in the recent past, in the last couple of years. And some of those -- well, some of those involve People's Gas Light & Coke and NyCor and Northern Indiana Public Service, all of which are Chicago area LDCs, and also Wisconsin Gas, which is just in -- obviously, in Wisconsin.

187
But the table shows all of those companies contracting in aggregate for about 1.3 Bcf per day of new pipeline capacity on short-haul systems that go from Chicago and Joliet into their own LDC facilities in the Chicago area. That was the Guardian and Horizon and Northern Border 2000 projects.

188
My point simply is that all of those projects are essentially analogous to the Vector system. All of those LDCs ended up doing pretty much the same thing by acquiring their supply in Chicago and making new short-haul arrangements to get gas from that source into their own facilities. And none of them did what ECG and Union had done.

189
Again, I mean, obviously that observation and inference is subject to Dr. Foster's observation that I can't tell what was really going on in those utilities' collective brains. But again, it's an even weirder coincidence, I think, that all of them were concentrating on the Chicago market and short-haul options away from it.

190
MR. WARREN: Those are my questions. Thank you.

191
MS. HALLADAY: Thank you, Mr. Warren.

192
Mr. Janigan, did you have questions of this witness?

193

MR. JANIGAN: Yes, I do, Madam Chair. I was wondering if you were -- I was wondering if you wished to take the morning break at this time. So you want me to push ahead?

194
MS. HALLADAY: How long do you think you will be?

195
MR. JANIGAN: Fifteen minutes.

196
MS. HALLADAY: Then I think we might as well push ahead.

197
CROSS-EXAMINATION BY MR. JANIGAN:

198
MR. JANIGAN: Thank you.

199
Mr. Stauft, I wonder if you could turn up page 20 of your evidence, and I'd like to refer to lines 5 to 20 where you state the following: "How, in fact, did the capacity react to the commencement of service on the new capacity out of Alberta?" Answer: "The market reacted exactly as had been predicted, commencing with the in-service date of the Northern Border expansion extension project in November of 1998. Alberta prices rose dramatically and price differentials between Alberta and downstream market centres, i.e., Dawn and Chicago, collapsed, and this is shown by the analysis in part 4."

200
And then you go on to say, "As a result of those pricing developments, the market value of TransCanada capacity and most other long-haul capacity out of Alberta collapsed as well. In May of 1999, TransCanada received non-renewal notices for about 300 terajoules per day of eastern long-haul transportation service to be effective November 1st, 1999. In May of 2000, TransCanada received non-renewal notices for a further, approximately, 900 terajoules per day of eastern long-haul service to be effective November 2000."

201
Now, in relation to that comment, I wonder if you could turn up on the VECC Exhibit F.2.1, page 3.

202
MR. FARRELL: It's actually now K.2.1.

203
MR. JANIGAN: Okay.

204
MR. STAUFT: I'm sorry, would you give me the reference again?

205
MR. JANIGAN: Page 30 of that exhibit.

206
MR. STAUFT: Right. Yes.

207

MR. JANIGAN: Page 30 contains some comments reported from Michel Scott, the vice president of marketing and business development for Newmac Energy. And about halfway down the page there is a paragraph that begins with, "Scott expects".

208
"Scott expects the Northern Border expansion to fill very rapidly to its full capacity, and he believes the incremental volumes would exert downward pressure on Chicago-area prices. 'Competition in Canada for space on the pipeline also could push prices down as volumes outstripped capacity once again,' he added. 'We kind of did it to ourselves in California and that has been kind of ugly.'"

209
Now, do these comments of Mr. Scott more or less match the predictions that were in the market in 1996 at the time that the Alliance decisions were being undertaken by ECG?

210
MR. STAUFT: The first point that Michel makes, Mr. Scott makes, relates to downward pressure on prices in Chicago arising out of Northern Border. I noted in my written evidence that that was a concern at the time. Mr. Scott talks here about just Northern Border, but obviously when Alliance was piled on top of that, the concern -- people were worried that, yes, we would end up tanking the Chicago price tremendously as a result of adding all this incremental capacity.

211
In the end result, it didn't -- there is a floor on Chicago prices related to Gulf Coast prices, and similarly that incremental capacity has stuck the price pretty close to that floor. So the -- and there has been some downward effect, but it wasn't maybe as bad as was expected. But, as I say, at the time, that was a real concern.

212
The second point he's making here, I'm not sure I quite understand it, I think he's talking about -- he seems to be kind going in the opposite direction in relation to Alberta saying that, "'Prices...'" I take it in Canada "'... could get pushed down as volumes outstrip capacity once again.'" I think what he's talking about there is whether the potential for basically a refill of the excess capacity created by the Northern Border project, and I don't quite understand where he was going with that in that I didn't -- there was a question about whether the Northern Border project, on its own, would be sufficient to relieve the capacity bottleneck that was artificially holding down Alberta prices at the time. And, you know, it may be or maybe wasn't. Certainly, I would say that the -- when you pancake the Alliance project on top of that, it was virtually certain that it would be enough. But Northern Border, maybe; maybe not.

213
MR. JANIGAN: I don't want to take you through all of these articles, Mr. Stauft, but I wonder if you could just push ahead to page 35, an article taken from the Oilgram -- Platts Oilgram news. "Battle Lines are Drawn for Canada's Gas." And some comments from TransCanada president, CEO George Watson, and the date of this article is October 23th, '96. He is reported to have said that: "I do think there was a market problem. He said of Alliance, "'You are just taking a bunch of gas to Chicago and dumping it without a market take-away strategy. It just doesn't seem prudent to me.'"

214
Now, notwithstanding the fact that Mr. Watson was obviously a competitor of the Alliance at this time, is his point of view one that was frequently expressed in the market at that time, to your knowledge?

215
MR. STAUFT: I would say so. I mean, it's consistent with the point we just talked about in relation to what Mr. Scott said, and it was a concern.

216
Sorry, on a more technical point, I don't know that Mr. Watson was thinking it technically. But in the early stages of the Alliance project, there was concern about whether it would have adequate connections to the rest of the pipeline grid in the Chicago area. Obviously, if you build a pipeline to Chicago and don't connect it to anything else, it's useless. That, as well, was a concern and there were disputes going on between Alliance and some of the pipelines in that area that ultimately, I think, were sorted out okay. But it was a problem at the time.

217
MR. JANIGAN: Okay. Now, I'd like to turn to the second part of the passage that I quoted to you referring to the turn back of capacity on TCPL.

218
Now, do you know where the shippers went if they returned to firm -- that they returned firm capacity on TCPL on May in 1995. In particular, is it likely that the 300 terajoules per day went into long-term contracts with other pipelines or to purchases in the downstream market?

219
MR. STAUFT: It would have been purchases in the downstream market.

220
My understanding is that -- and I'm pretty sure of this -- is that a lot of that -- most of that capacity was turned back by the eastern Canadian LDCs, basically on behalf of industrial customers of theirs. So that's not exclusively true, but I think that's the bulk of it.

221
And what was happening was that the industrials have elected to purchase their supply in the market area primarily at Dawn.

222
MR. JANIGAN: I'd like to skip ahead in your evidence to page 26 where you make the following statement: "I do not believe that, as a group, Alliance shippers ever believed, or at least should have believed, that Alliance capacity was economically attractive on a stand-alone basis." And I wonder if you could turn up page 39 of the VECC Exhibit K.2.1.

223
MR. STAUFT: Okay.

224
MR. JANIGAN: And it's an article from "Inside FERC" of December the 2nd, 1996, with the headline: "You Ain't Seen Nothing Yet, Report Says of Revamped Pipeline Business."

225
And on the second page of this article, it's noted about three-quarters of the way down the page that: "'Investors in new projects are likely to be only those who need the capacity for more strategic purposes, such as producers and capacity merchants, where the overall product is profitable, even if the pipeline piece is not. Currently proposed expansion into the midwest from Canada and the Rocky Mountains is an example of this phenomena. Producers are the major underwriters in efforts to find new premium markets for their gas,' the report observed. It also noted that distributors and end-users are likely to remain the primary subscribers for segments downstream of market centres or storage, while marketers and capacity merchants should control a growing share of overall pipeline capacity."


226
Now, can you comment on the possible implications of this opinion expressed in the Hagler Bailey report in 1996 for what transpired with respect to ECG?

227
MR. STAUFT: I think -- I'm just looking to see who -- I think the observation that investors in new projects "are likely to be only those who need the capacity for more strategic purposes," where the overall project is profitable, even if the pipeline piece is not, I think that whole passage is consistent with, and it's saying the same thing as my analysis, of what was going on in the construction of the Alliance -- the sponsorship and construction of the Alliance project. So, yes, I mean, I agree with that analysis.

228
It also goes on to say that: "Distributors and end-users are likely to remain the primary subscribers for segments downstream of market centres."

229
Again, that is consistent with what has actually happened, as I discussed earlier, of the downstream LDCs letting producers and marketers take the risk on the long-haul upstream capacity where they have an equity interest, but -- and then the downstream customers confining themselves to relatively short-haul, local-type transportation in the market area.

230
Again, that has happened, and the economic incentives for that to happen were there in 1996 as well.

231
MR. JANIGAN: Now, Mr. Stauft, the -- I don't think you need to have this exhibit, but it's F.2.5. It's the ECG timeline of decision-making that indicates by June the 1st, 1999, ECG executed the Vector PAs, and six or seven months later in the year, on December the 22nd, 1999, the company executes the PA for the second tranche of Vector.

232
Now, it seems to us, and perhaps, you could be -- you could indicate whether you agree or disagree that ECG must have considered Chicago to be a viable hub by, at least, December the 22nd, 1999; otherwise, the company would not have flipped its one-year renewable contract on TCPL with a fixed-year deal, fixed five-year deal with Vector sourcing the gas from the Chicago hub; would you agree?

233
MR. STAUFT: I agree with that, and I would say that based on the memos that were produced, infamous memos, it doesn't look like by that time they were even thinking about Alliance capacity as an option. The choice seemed to have been narrowed down by that point to one between Dawn and Chicago.

234
That may not be quite fair. I guess they were looking -- they still had the option, obviously, of renewing their TransCanada service, but I think it looked like they had pretty much determined they were not going to do that, so they would be -- they were agonizing about whether they wanted to go with Dawn or Chicago.

235
MR. JANIGAN: Is there any reason that you would be aware of that would have caused ECG to have a different opinion between the six to seven months from signing the first Vector deal to the next Vector deal concerning the viability of the Chicago market?


236
MR. STAUFT: No, I can't think of anything that would have changed.

237
MR. JANIGAN: Is one of the reasons that Chicago was a viable hub, at least in June of '99, due to the fact that Northern Border had already created a greater flow of gas into Chicago by 1998?

238
MR. STAUFT: Yes, I agree with that. That's true.

239
MR. JANIGAN: And I wonder if I could ask you to turn up an article from the Energy Report, which is on page 45 of Exhibit K.2.1.

240
This article is entitled "Gas Market Centres to Grow and Prosper as More Pipelines Develop." And I'd like to ask you to turn to the comments that are reported at a meeting, I guess, of the The Industrial Gas Users Association from Mr. Otsason. And those comments appear about halfway down the page.

241
It indicates: "Meanwhile, the storage-rich Dawn hub with some 130 billion cubic feet of capacity, and other hubs should develop as good places to buy and sell gas that come east from Alberta and Chicago,' Otsason said. 'Parkway, which is closer to Toronto and Niagara than Ontario, is a good prospect for becoming a vital new hub.'"

242
Now, what implications do the views expressed by Mr. Otsason have for what subsequently occurred with respect to the contracting of ECG?

243
MR. STAUFT: With respect to ECG's first tranche of Alliance capacity, I would have to say, in fairness to ECG, that in 1999 this would be -- this observation from Mr. Otsason would be pretty much irrelevant because they already had gas being taken to Chicago that they had to get to Dawn, and they needed something. If it wasn't going to be Vector, it had to be somebody else.

244
Certainly as to -- in relation to the second tranche, where, as we just discussed, they seem to be -- ECG seemed to be thinking hard about whether Dawn or Chicago would be a better option, if -- Mr. Otsason's advice here suggests they should have considered Dawn as an option pretty seriously. I think that was generally true by that time. As I said before, all these industrials that basically bailed out of the TransCanada system, their alternative was to go to Dawn.

245
MR. JANIGAN: And the -- in terms of the gas supply sources that can feed Dawn, there's obviously the Chicago hub feeding the Dawn hub and I assume there's also the TCPL source at Dawn as well; am I correct in that?

246
MR. STAUFT: Yes, TCPL can deliver -- well, does deliver to Dawn. One can also get gas into Dawn through the Great Lakes system, and then a small little piece of TransCanada. That happens. Other transactions can actually get gas to Dawn from TransCanada export points.

247

MR. JANIGAN: And finally, Mr. Stauft, I'd like to take you to page 47 of Exhibit K.2.1, the final article in this exhibit, which is from Oil Week of November 1st, 1999, with the headline, "Gas Supermarket," and it starts with the statement: "Dawn pipeline junction rises as a trading hub on a continental scale in southwestern Ontario." And if you turn over to page 49, there are some statements concerning the vital statistics of Dawn, which commence about halfway down the page that: "Each step of the way, and especially in the more recent stages, the importance of Dawn as a hub has been increased. The role shows in the institution's vital statistics. The volume of gas traded at Dawn has shot up by 1.8 billion cubic feet per day to 3.2 billion in just four years. The role of Ontario and Quebec markets has been growing fast. In 1995, only 169 billion cubic feet destined for central Canadian buyers changed hands at Dawn. Three years later, the volume was up nearly seven-fold to 1.1 trillion cubic feet. That figure rivals the appetite of Chicago."

248
It later quotes Lynn Galbraith, the Union Gas marketing manager who observed that: "'Chicago hub receives about 8 billion cubic feet per day, but only half of it is available for trading because so much of it is drawn off for local use. Dawn can be considered to be much more purely a trading destination. Not having to feed a huge city, Dawn only receives 1 billion cubic feet per day but sees 3.2 billion changing hands.'"

249
Now, are these comments and statements indicative of the market knowledge that you were aware of in 1999 concerning the viability of Dawn as a hub?

250
MR. STAUFT: Yes, they are. Again, that's consistent with the discussions we've already had that certainly by that time, people were -- all kinds of people were looking to buy gas at Dawn, and did.

251
MR. JANIGAN: Okay. Thank you, Mr. Stauft. Those are all my questions.

252
MS. HALLADAY: Thank you, Mr. Janigan.

253
Now might be an appropriate time for our morning break. We will reconvene at 25 to twelve.

254
--- Recess taken at 11:15 a.m.
255
--- On resuming at 11:47 a.m.
256
MS. HALLADAY: Please be seated.

257
PROCEDURAL MATTERS:

258
MS. HALLADAY: We apologize for being late. The Panel had other Board matters that we had to attend to.

259
Mr. Farrell.


260
MR. FARRELL: Yes, before I begin my cross-examination of Mr. Stauft, I have left on the dias copies of the filing which will -- the Board will receive in hard copy as well of the replacement pages for the settlement proposal. And copies are at the back. This doesn't need to be given a number because these are just pages replacing an existing exhibit. I just wanted to make sure the Board was aware that we made my deadline that I mentioned this morning.

261
MS. HALLADAY: Excuse me, Mr. Farrell, do you have a black-lined copy? Would that be too much to ask for the changes?

262
MR. FARRELL: I don't. I could, after the break, just walk you through it because I've got my marked-up copy with me, but not here in the room.

263
MS. HALLADAY: I understand, yes. We'd appreciate that, thank you, if you could do that.

264
MR. FARRELL: They're not -- I won't take very long because some of them were just number changes. And I could take you to the one where the text change took place, which was to implement your observation on issue 1.1, but the other things are relatively minor and probably will take us less than ten minutes, if that.

265
MS. HALLADAY: That's fine.

266
MR. FARRELL: I do have another filings I would like just to make now. These are responses to undertakings.

267
And maybe what I can do is I can come to a closer microphone. Copies of what I'm about to file are -- maybe I will just stay here and have a chat.

268
MR. WARREN: Boy, that wakes us up.

269
MR. FARRELL: The first -- these are all responses to undertakings, so the -- and then they are in no particular order.

270
The first is -- would be Exhibit J.6.4. This was the -- I think it was described as the legal opinion on the structuring of the out-sourcing arrangement with Enbridge Inc.. It's actually in the form of a memorandum from me to Mr. Grant.

271
EXHIBIT NO. J.6.4 LEGAL OPINION ON THE STRUCTURING OF THE OUT-SOURCING ARRANGEMENT WITH ENBRIDGE INC

272

MR. FARRELL: And the next are a series of undertaking responses that were given to Mr. Vegh when he was taking Mr. Brennan through appendix B to the services schedule that's attached to the intercorporate services agreement at Exhibit I, tab 3, schedule 54.

273
So the first is Exhibit J.4.1. And when you get this document, Madam Chair, you'll see that we've just -- the front page is a copy of the relevant page from appendix B with the undertaking number written in the right-hand margin. And then attached to it would be the report that corresponds to the description. That was J.4.1.

274
EXHIBIT NO. J.4.1 COPY OF RELEVANT PAGE FROM APPENDIX B WITH THE UNDERTAKING NUMBER WRITTEN IN THE RIGHT-HAND MARGIN WITH CORRESPONDING REPORT ATTACHED

275
MR. FARRELL: The next is J.4.2. The next is Exhibit J.4.3. The next is Exhibit J.4.4.

276
EXHIBIT NO. J.4.2 RESPONSE TO UNDERTAKING J.4.2

277
EXHIBIT NO. J.4.3 RESPONSE TO UNDERTAKING J.4.3

278
EXHIBIT NO. J.4.4 RESPONSE TO UNDERTAKING J.4.4

279
MR. FARRELL: And there's nothing attached to this, and when Mr. Brennan explains these on the record, he will explain that these reports are not reports that go to Enbridge Inc., and that's the -- but just to keep track of the paper, we're just filing it so you know what the -- what we don't have, this is in response to.

280
And the final one is Exhibit J.4.5.

281
EXHIBIT NO. J.4.5 RESPONSE TO UNDERTAKING NO. J.4.5

282
MR. FARRELL: Thank you, Madam Chair.

283
MS. HALLADAY: Thank you, Mr. Farrell.

284
CONSUMERS' ASSOCIATION OF CANADA - PANEL 1 - RESUMED

285
M.STAUFT; Resumed.

286
CROSS-EXAMINATION BY MR. FARRELL:


287
MR. FARRELL: Mr. Stauft, on page 1 of your pre-filed evidence, which is Exhibit L, tab 2 - and I won't identify it again in that fashion - you describe yourself as an independent regulatory consultant. Can you tell me what you mean by that term.

288
MR. STAUFT: Well, I don't think there's any special meaning to it. When I worked in the TransCanada PipeLines organization, my various jobs had to do primarily with regulatory things.

289
So after leaving TransCanada, I -- since leaving TransCanada, I have consulted on a contract or hourly basis with various people on energy regulatory issues, amongst a few other things.

290
MR. FARRELL: So, in effect, you are self-employed, and your business is providing consulting services in terms of regulation of the natural gas industry?

291
MR. STAUFT: Yes. Amongst other things, but primarily that, yes.

292
MR. FARRELL: And you became an independent regulatory consultant after you left TransCanada Pipelines?

293
MR. STAUFT: Yes.

294
MR. FARRELL: And as you went through in your examination by Mr. Warren, you were employed in the TransCanada organization for roughly 15 years.

295
MR. STAUFT: Yes, sir.

296
MR. FARRELL: And during that time, though, as I understand it, you were neither a buyer -- your job function didn't include buying and selling gas?

297
MR. STAUFT: Not directly, no.

298
MR. FARRELL: What do you mean by "not directly"?

299
MR. STAUFT: Well, no, sorry. You're correct. I didn't. I -- obviously, I worked closely with people who did, but you're right. That was not my function.

300
MR. FARRELL: And you also didn't prepare supply and demand studies for natural gas utilities.

301
MR. STAUFT: No, sir.


302
MR. FARRELL: And Mr. Warren took you through your testifying history, if I can put it that way, and he pointed you to Exhibit 1, where you list the proceedings in which you have been a witness.

303
And I take it that the -- all of the cases that you mention in Exhibit 1 to your pre-filed evidence, except the first two on the first page, were -- you were appearing as a witness on behalf of the TransCanada PipeLines organization in one capacity or another?

304
MR. STAUFT: In one capacity or another, yes. Most of them with TCGS, yeah.

305
MR. FARRELL: You mean the pipeline company?

306
MR. STAUFT: No, the last two or three, I think, were with the pipeline itself. The earlier ones at the FERC and so on were all with TransCanada Gas Services.

307
MR. FARRELL: Okay. Thank you.

308
Now, in the first two on the list, the 2001 case, which was ECG's RP-2000-0040, you prepared evidence for the The Coalition for Efficient Energy Distribution or CEED, but you did not appear as a witness.

309
MR. STAUFT: That's right.

310
MR. FARRELL: Now, my recollection -- well, let me just point you to a response to an interrogatory, that's ECG's interrogatory 4, and it's item C where you mention the prepared or the filed testimony in RP-2000-0040 as the exception to the fact you have not previously filed testimony or appeared as a witness in a case that involves a prudence review of a utility's gas costs.

311
MR. STAUFT: That's correct, yes.

312
MR. FARRELL: And is it fair of me to characterize your written evidence on behalf of CEED that it didn't so much go to the prudence or reasonableness of ECG's gas costs as opposed to the reasonableness of the contractual arrangements that ECG had entered into with Alliance and Vector?

313
MR. STAUFT: If you read the CEED testimony, it is styled in that way, that's correct. I would say that as a matter of substance, the analysis and the conclusions drawn are kind of -- certainly concerned with the same issue. Again, even in this testimony, when I am using the word or saying that this or that was prudent or not, and I appreciate that that's a conclusion for the Board to draw and there's probably legal issues around that. I don't see a huge distinction between what I did here and what I did in the CEED case.

314
MR. FARRELL: Well, in the CEED case, you didn't recommend the disallowance.


315
MR. STAUFT: No, they didn't -- yes, that's true, I wasn't asked to comment on that aspect of the situation.

316
MR. FARRELL: And the other hearing you mentioned where you testified as an independent regulatory consultant was the TransCanada fair return hearing under National Energy Board, or NEB, hearing order RH-4-2001.

317
MR. STAUFT: That is correct, yes.

318
MR. FARRELL: And you provided a copy of your written evidence in that proceeding in response to ECG's interrogatory number 4.

319
MR. STAUFT: Right.

320
MR. FARRELL: And you were a witness for Mirant.

321
MR. STAUFT: Yes.

322
MR. FARRELL: That's M-i-r-a-n-t. And the area that you wrote about and testified about was, if I can try to summarize it, TransCanada's business risk.

323
MR. STAUFT: Yes, that's fair.

324
MR. FARRELL: And TransCanada filed reply evidence in that proceeding; correct?

325
MR. STAUFT: They did, sir, yes.

326
MR. FARRELL: And I have provided you with a copy of it at tab 1 of Exhibit K.7.1. And am I correct that questions and answers 16 through 21 of that document starting on -- the first question, question 16, appears at the bottom of page 14 and it runs through.

327
MR. STAUFT: Yes, that's right. That's true. Yes, that's correct.

328
MR. FARRELL: And is it the essence of this reply evidence, Mr. Stauft, that TransCanada was saying that your evidence on behalf of Mirant was directly contrary to your views when you were employed by TransCanada?

329

MR. STAUFT: That was the claim they were making, yes. What TransCanada did was quote in this reply evidence passages from a much longer document that I had prepared when I worked for the pipeline and claimed that -- showed that my views, as expressed in my Mirant evidence, were inconsistent with what I told TransCanada.

330
I was quite prepared to explain that and I don't believe that they were inconsistent, in fact, and I was prepared to explain that to the Board and speak to it. But as it turned out, TransCanada relied on the confidentiality of the document that they were quoting excerpts from to say, no, we don't want to hear Mr. Stauft's explanations. So the net result was that they had quoted relatively small bits out of a document to use against me, but it invoked their own privilege of confidentiality rights to prevent my giving an explanation of them. So I don't know what the Board will do with all of that. I would say this, that they shouldn't do much in the end, but that's the way it played out, yes.

331
MR. FARRELL: When you referred to Board, did you mean this Board or the national --

332
MR. STAUFT: Sorry, the National Energy Board, sorry.

333
MR. FARRELL: Could you turn to CAC's response to ECG's interrogatory number 9. Do you have that, Mr. Stauft?

334
MR. STAUFT: Yes, I do.

335
MR. FARRELL: In the second paragraph of the response, you mentioned that you did not specifically review decisions of the Board or other economic regulatory tribunals in order to define prudence more precisely, and then you state, which I think you've already stated, "Mr. Stauft's view is that prudence is an issue of fact and that more precise standards or definitions are not necessary or practical." Correct?

336
MR. STAUFT: That's what it says, yes.

337
MR. FARRELL: And this is your first appearance as an independent regulatory consultant in a prudence review?

338
MR. STAUFT: Yes, sir.

339
MR. FARRELL: Now, could you turn to your pre-filed evidence and go to page 7.

340
MR. STAUFT: Okay.

341
MR. FARRELL: The question at near the bottom of page 7, starting at -- or the questions on line 20: "Please summarize your conclusions and recommendations on these issues," and you then talked about dealing with Alliance and Vector costs separately.

342

And if we go to page 8, you deal with Alliance at lines 2 to 9; correct?

343
MR. STAUFT: Yes.

344
MR. FARRELL: In a summary fashion.

345
MR. STAUFT: Yes.

346
MR. FARRELL: And you allege that the Alliance capacity is fundamentally uneconomic relative to the alternatives that were available to ECG?

347
MR. STAUFT: Yes.

348
MR. FARRELL: And I take it that it's your evidence that the Alliance capacity would have been seen to be fundamentally uneconomic in the fall of 1996.

349
MR. STAUFT: Yes, I think that's a fair summary. Yes.

350
MR. FARRELL: And Alliance was a project to deliver gas from the western Canadian sedimentary basin to the U.S. midwest with a terminus at a point near Chicago.

351
MR. STAUFT: Yes.

352
MR. FARRELL: And your former employer, the TransCanada organization, wanted to compete with Alliance; isn't that correct?

353
MR. STAUFT: They did, indeed, yes.

354
MR. FARRELL: Now, in response to ECG interrogatory number 11, you mentioned on the second page of that response, in item B, TransCanada's Nexus project.

355
MR. STAUFT: Yes, sir.

356
MR. FARRELL: Do you know when the Nexus project was announced?

357
MR. STAUFT: I don't. I'm afraid I don't have a firm grasp on that timeline.

358
MR. FARRELL: Sometime in 1996.

359
MR. STAUFT: Yes, that's true. I'm sure it's in evidence somewhere. I believe it was after the Alliance project was -- at least had become public knowledge.

360
MR. FARRELL: Okay. So sometime after June of 1996, before the fall, somewhere in that area?

361
MR. STAUFT: I believe so, yes. Again, I'm sure it's somewhere in ECG's evidence, the timeline.

362
MR. FARRELL: Well, actually, it's not. And we have an undertaking to provide that date, and I was hoping you could help me.

363
MR. STAUFT: I'm sorry. No, you would be better off to rely on your own sources for that, I'm afraid.

364
MR. FARRELL: Okay. We'll do that.

365
Could you turn to tab 4 of Exhibit K.7.1.

366
MR. STAUFT: This is my --

367
MR. FARRELL: This is ECG's materials for cross-examination.

368
MR. STAUFT: My bundle?

369
MR. FARRELL: Your bundle.

370
First of all, I just want to make sure, Mr. Stauft, if you could turn to tab 3 and check, does the last sheet you have say "Eastern Zone Toll" in the bottom box?

371
MR. STAUFT: Yes, I have the correct version.

372
MR. FARRELL: We'll come back to that later. There were others that had something about the Kyoto protocol. I don't know how that got in there. Anyway, tab 4.

373
MR. WARREN: Jack Gibbons tampered with it.

374
MR. FARRELL: I think I'll leave that one alone.

375
Do you recognize this brochure as something TransCanada published?

376
MR. STAUFT: I don't have a specific recollection of this, but it says TransCanada on it, so it certainly looks like something they would have produced.

377
MR. FARRELL: And it was a project -- if you look down into the -- where it says -- it gives the derivation of the word "Nexus" at the bottom of the fold-out part.

378
It says: "X-panding Market"; do you see that?

379
MR. STAUFT: Yes.

380
MR. FARRELL: And it talks about market -- the second bullet point talks about market diversity and access to, among others, the U.S. midwest markets?

381
MR. STAUFT: Yes.

382
MR. FARRELL: And if you look up under "Novel Project," you will see it was designed to accommodate 2.3 billion cubic feet per day.

383
MR. STAUFT: Yes, that's --

384
MR. FARRELL: That's about a billion cubic feet more than Alliance.

385
MR. STAUFT: About that, yes.

386
MR. FARRELL: And the capital cost, well, it's -- excuse me. The 1998 capital expenditures in the same box is about 1.2 billion.

387
MR. STAUFT: Yes.

388
MR. FARRELL: And under "Unique Tolling," there was a fixed toll option; do you see that, Mr. Stauft?

389
MR. STAUFT: Yes.

390
MR. FARRELL: And it looks like the longer you contracted, the more years you got of a fixed toll, so you would know your costs.

391
MR. STAUFT: Yes, it appears that's what the deal was.


392
MR. FARRELL: And TransCanada was proposing not just 10-year contracts, but 15- and 20-year contracts.

393
MR. STAUFT: Yes, they were.

394
MR. FARRELL: One of -- then just to take you through some of the material, starting at page -- excuse me, at tab 5. But before I do, you're familiar with the Foster Report?

395
MR. STAUFT: Yes, it's an industry periodical.

396
MR. FARRELL: It's a trade publication.

397
MR. STAUFT: Trade publication.

398
MR. FARRELL: You would agree with that?

399
MR. STAUFT: Yes.

400
MR. FARRELL: And do you still have a copy of the document that they gave you at the break that's just the first two pages without the studies attached of ECG's response to CAC interrogatory number 69?

401
MR. STAUFT: I do, yes.

402
MR. FARRELL: And do you see the question was: "Provide all studies, reports, analyses, notes and any written material prepared by Mr. Foster with respect to gas" -- I'll slow down -- "supply options for natural gas utilities." Do you see that?

403
MR. STAUFT: Mm-hm.

404
MR. FARRELL: Is the Foster Report, as indicated by the various excerpts in this, something you would have expected to be filed as relating to gas supply options for natural gas?

405
MR. WARREN: Objection, Madam Chair. I mean, why is this question being asked of this witness, the question of the expectancy on whether or not something should be filed. Surely that's a matter of argument that Mr. Farrell and I can take up. This is not within this witness's -- I can't --

406
MR. FARRELL: Fair enough. I think I've made my point.

407

The next -- tab 5, Mr. Stauft, this is the first reference we were able to find to Nexus '98 and it's under the title -- the title is about two-thirds of the way down the page. And this is a national fuel announcement, but it talks about, in the second sentence, national fuels: "Open season is scheduled in September to coincide with TransCanada Pipeline Ltd.'s open season during September for its expansion project called Nexus '98."

408
And the report is dated September 5th, so that's why I was suggesting to you it was sometime prior to September that Nexus might have been announced. Does it jog your memory, or am I still going to have to do my own investigations?

409
MR. STAUFT: I think you'd better still look at your own sources on that.

410
MR. FARRELL: Okay. Now, I want to just use these, as I had indicated earlier, just to trace through TransCanada's efforts to compete with Alliance, or whether they were competing with Alliance or not, to move gas into the Chicago area, the U.S. midwest market. So at tab 6, it refers to TransCanada in a report dated October 3rd, 1996: "Reported to have received bids for natural gas, beginning in November 1998, well above the 2 Bcf per day anticipated prior to the recent open season." Correct?

411
MR. STAUFT: Yes, yes.

412
MR. FARRELL: And it quotes George Watson who was then TransCanada's president and CEO as, and I quote, "'We believe this is a strong market-driven response to the need for additional pipeline capacity out of Alberta.'" Do you see that quote, the first paragraph?

413
MR. STAUFT: I do, yes.

414
MR. FARRELL: And then at tab 7, along the same lines, there's a Foster Report dated February 27th, 1997, and the article on TransCanada appears about two-thirds of the way down the first page. And it talks about TransCanada issuing precedent agreements for approximately 1.4 Bcf new capacity.

415
MR. STAUFT: Yes.

416
MR. FARRELL: And then if you go to tab 8, there's an article entitled: "Great Lakes Announces $2.5 Billion Expansion Project." Great Lakes is owned 50 percent by TransCanada?

417
MR. STAUFT: It is, yes.

418
MR. FARRELL: And this, if I understand it properly, figuratively, or if we look back at the Nexus brochure, part of the route was along the right-of-way of Great Lakes. So this is a project that would accommodate Nexus.

419

MR. STAUFT: I assume so, yes.

420
MR. FARRELL: And then if we go to tab 9, again in May 1997: "TransCanada still pursuing the first phase of Nexus." That's what it says in the first sentence?

421
MR. STAUFT: Yes.

422
MR. FARRELL: And in the third paragraph, it talks about the types of facilities that TransCanada was proposing, and would it be fair to me to try to summarize them without getting into how many kilometres of pipeline and so on, that this was a means of expanding the system through Nexus plus expansions of the existing system, in other words, integrated capacity? Is that how you interpret that?

423
MR. STAUFT: Yes, I think that's fair.

424
The reason I'm hesitating is that I know there was some discussion with Mr. Brennan about, at least, one version of this -- the Nexus project that involved the high-pressure pipe that was not really very integrated. And --

425
MR. FARRELL: Like a bullet line?

426
MR. STAUFT: A bullet line type of concept, presumably mimicking the Alliance approach.

427
And again, I -- keep in mind, I didn't work for TransCanada Pipelines at this time, so I wasn't --

428
MR. FARRELL: You are not a facilities guy.

429
MR. STAUFT: I'm not a facilities guy, and I wasn't the least bit concerned with knowing about what competitive plots they were hatching.

430
So I'm losing track of the -- but time line -- but this -- yes, I mean, you are characterizing. This looks like a conventional expansion.

431
MR. FARRELL: We'll get to that in a moment, but if you go to the second page of this tab, in the first paragraph on the page, in the second sentence, it refers to: "TransCanada's analysis of long-term expansion indicates that Great Lakes is more economic than the central section."

432
And just confirm for me, first of all, the central section is TransCanada's route through northern Ontario.

433
MR. STAUFT: Yes, I understand that.


434
MR. FARRELL: And Great Lakes was more economic, at least according to this report. I guess Great Lake's toll is expressed in U.S. dollars?

435
MR. STAUFT: Yes, it is.

436
MR. FARRELL: Now, if we go to tab 10, there is just a brief -- this is July 10th, 1997. If you look down at the -- about the middle of the page between the two sets of stars, in the third paragraph, it still -- TransCanada, based on this report, is still -- seems to be pursuing Nexus; correct?

437
MR. STAUFT: Yes.

438
MR. FARRELL: And then if we go to tab 11. Now, this is July 17th, 1997, and under the TransCanada -- title "TransCanada's Revised 1998 Expansion Plans," this is -- I would ask you to agree with me -- a report on the switch from Nexus to what you called a conventional expansion.

439
MR. STAUFT: Right. Yes.

440
MR. FARRELL: I should indicate, just for the record, that someone -- not me -- has written "233 miles" in the margin. That's how the report came to me from Foster Associates Inc. So, no idea why that was done.

441
And then at tab 12, just to tie this off, on July 24th, there was a report that Great Lakes had suspended its own plans for this thousand-mile expansion, because Nexus had been abandoned by TransCanada; correct?

442
MR. STAUFT: Yes.

443
MR. FARRELL: If you turn to the next tab, Mr. Stauft, tab 13, the abandonment of Nexus apparently didn't end TransCanada's pursuit of the U.S. midwestern market. This report deals with a project that came to be known as Viking Voyageur.

444
MR. STAUFT: Yes.

445
MR. FARRELL: If we go to the next tab, tab 14 --

446
MR. STAUFT: The Viking -- I just wanted to point out that the tab 13 that we were just talking about, where -- I think the first reference we've seen to the Viking Voyageur initiative actually pre-dates the --

447
MR. FARRELL: Yes, you're quite right. I should have --


448
MR. STAUFT: -- the July report, the earlier one.

449
MR. FARRELL: I should have indicated to you that, as I did in the -- and I apologize for that -- as I did in the table of contents, at tab 13, there is a series of reports, starting in January of 1997 that deal with Viking Voyageur.

450
So I should have changed my question. I take it from your comment, that while Nexus was still alive, the Viking Voyageur project was added to TransCanada's plans.

451
MR. STAUFT: I think, as Mr. Brennan -- I think he indicated the term "Nexus" was kind of a flexible term for TransCanada. They, as I said, had all kinds of competitive initiatives out there, and that was, sort of, the catchy phrase that they used to refer to them generally.

452
But I think it's also fair to say that it was a pretty plastic term as it evolved over time.

453
MR. FARRELL: Thank you for that.

454
So if we go to tab 14, this is a report in April of 1997, and it provides some more details of the Viking Voyageur project. And it's described a billion dollar project to transport up to 1.2 Bcf per day to U.S. midwest markets.

455
MR. STAUFT: Yes. Viking Voyageur was much more obviously a direct competition with Alliance, the earlier Nexus -- well, the stuff we were discussing earlier seemed like sort of a North America-wide series of things and this Viking Voyageur, on its own, was more directly targeted at Alliance.

456
MR. FARRELL: Right. And this, at the time, was a project in the States - and we'll come to Trans-Voyageur in a minute - that would have gone from Emerson to a point somewhere near Chicago?

457
MR. STAUFT: Yes.

458
MR. FARRELL: And it was to be owned -- or was to be owned 50 percent by TransCanada and 50 percent by Viking Gas Transmission.

459
MR. STAUFT: Yes, Northern States Power, but same corporate entity.

460
MR. FARRELL: The parent was Northern States Power, of Viking.

461
MR. STAUFT: Yeah.

462

MR. FARRELL: And the next tab is tab 15. Again, some detail in this report on this entity now called Viking Voyageur Gas Transmission, and they were announcing an open season to take place. So my point here is that at this point, we are in June of 1997, and TransCanada is still in hot pursuit of a pipeline to take it -- gas to the U.S. midwest, the same area as Alliance, and that you've described as, "a fundamentally uneconomic project and known as such in 1996."

463
MR. STAUFT: TransCanada was doing these things with Viking Voyageur, yes.

464
MR. FARRELL: And if we go to tab 16, this is just an announcement that another partner had joined the Viking Voyageur project, a company called NyCor

465
MR. STAUFT: Yes.

466
MR. FARRELL: And NyCor, as I understand it, is the parent company of a Chicago-area LDC.

467
MR. STAUFT: Yes, it is. That's correct.

468
MR. FARRELL: And then if you go to tab 17, this is in August now of 1997, TransCanada -- the headline, if you will, is: "TransCanada Announces New West-to-East Transportation Link Replacing Nexus: Plans November 1999 In-Service Date." And if you look at the first paragraph, it says: "The company will build" -- this is the second sentence: "The company," that is TransCanada, "will build one new pipeline in Canada and buy into two new pipelines in the U.S. while retaining its existing interest in the fourth new pipeline."

469
And the -- do you see that?

470
MR. STAUFT: Yes.

471
MR. FARRELL: And the -- this is probably a misquote, but it says: "The newest chain in the Link," I would have thought it might have been the newest Link in the chain, but besides that, "is Trans-Voyageur transmission and that was a high-pressure line from Empress to Emerson," Emerson, Manitoba, being on the border with the U.S. at the point where Great Lakes takes off.

472
MR. STAUFT: Yes, that's correct.

473
MR. FARRELL: And the second item is the -- what we've been talking about that was called Trans-Voyageur advance transmission. And the second item in that paragraph talks about Viking Voyageur transmission; do you see that?

474
MR. STAUFT: Yes.


475
MR. FARRELL: And then the other two initiatives involve, this is now the third paragraph, Vector and Millennium; do you see that?

476
MR. STAUFT: Yes.

477
MR. FARRELL: And it talks about TransCanada acquiring a 35-percent share of Vector.

478
MR. STAUFT: Mm-hm.

479
MR. FARRELL: And then I was interested in the quote that's in the second-last paragraph on this first page, and I'll quote it: "'We are the common thread uniting four major stand-alone pipeline initiatives into what we envision will become one seamless, low-cost, west-to-east transportation Link to bring incremental supplies of western Canadian natural gas to multiple markets across North America, including Chicago.'" And that quote is attributed to George Watson in his role as president and CEO of TransCanada.

480
And then he goes on in that quote, "'Our actions are an endorsement of the projects that we think are best positioned today,'" this is in August 1997 "'to bring western Canadian gas to market at an affordable price and to bring clarity to the 1999 expansion situation.'" Do you see that quote?

481
MR. STAUFT: Yes.

482
MR. FARRELL: What did you, or the market to which you refer, know that the CEO of TransCanada Pipelines didn't know?

483
MR. STAUFT: Keep in mind that what we are seeing here through this whole series of reports is the world of pipeline competition for the construction of facilities. It involves press releases and optimistic reports from CEOs and various things -- well, regulatory skulduggery and a whole bunch of other things of that nature.

484
I don't think I've ever disputed -- in fact, I've said there was clearly a need for new capacity out of Alberta. There was enormous economic pressure for that just on the producers, because the producers were the ones that were being hurt economically by the constraints that existed. Certainly, Northern Border was an initial response to that and Alliance came along a little bit later, also in response to that, those economic forces. And what TransCanada was doing with all of these projects was competing to be the builder of this capacity that I think everybody agreed needed to be built and eventually would be built.

485
The point that I'm -- and it was, it was a very complicated situation. There was all kinds of competitive agendas. If we want to go through the rest of your tabs, we can talk about on the part of U.S. pipelines and TransCanada versus Alliance and so on. But at the end of the day, all that's going on here is a scrap amongst pipeline companies to build this capacity that was going to get built anyway.


486
The point I was making in my testimony was that even though that capacity was necessary from -- particularly from an Alberta producer point of view in order to rebalance the market, the side effect of that for some period was going to be the collapse in differentials that I've described.

487
And that would have happened, you know -- I mean, if both -- any of these TransCanada schemes and Alliance had gone forward, there would have been instead of 2 1/2 Bcf of excess -- or of incremental capacity, and, you know, some smaller but still large amount of excess, it would have been that much bigger. And you know, it just would have made the supply market that much tighter and increased prices that much more. And the effects that we've seen from Alliance that I have said were predictable would have been exaggerated.

488
And you know, I mean, whether George Watson knew about that or not, I don't think is relevant. His concern was just to build this capacity. That's what he was after, and it was going to get built anyways, so he just wanted a share of it. The subsidiary effects of the market, I think, were, as I said, predictable.

489
MR. FARRELL: So I want to come back to part of your answer, but you're not suggesting, are you, when you say that in 1996, ECG ought to have known, because other people knew that Alliance would be fundamentally uneconomic, that the NEB certificated a fundamentally uneconomic pipeline?

490
MR. STAUFT: Maybe the difficulty is my use of the term "fundamentally uneconomic."

491
MR. FARRELL: It caught our attention.

492
MR. STAUFT: I know. I can imagine it did, and I -- maybe that's a more colourful phrase than I needed to use.

493
All I was saying was when it's explained that it was predictable that the price differentials between the receipt end of that pipeline and the delivery end would likely -- but not just that pipeline, but every other pipeline exiting Alberta as well. I mean, it wasn't confined to them. It was an observation about the general effect on the Alberta supply market more than anything. Nothing peculiar about Alliance in that respect.

494
So I -- that's all I meant by that. I mean, it's not uneconomic in the sense that there are other pipeline projects like -- I shouldn't pick on them, but Portland Natural Gas Transmission, where they are basically not needed at all. And as it's turned out, the prices at the delivery end of the pipeline are lower than the prices at the receipt end. I mean, that's much more, sort of, fundamentally uneconomic, as that phrase would normally be understood.

495
But I apologize if I got my language more colourful than I needed to be, but that's what I intended to say.

496
MR. FARRELL: Now, you've said during the course of a previous answer that the side effect was predictable, and there would be -- I think you used the words "for some period."

497
In 1996 -- well, let me back up for a second. Are you saying that this is something that happens due to what the NEB has referred to in its reasons for decision on Alliance as the "lumpiness" of a new pipeline project and its effect on the marketplace?

498
MR. STAUFT: That's an aspect of it. The other factor in the Alliance case was that -- I mean, all pipeline additions are lumpy. They don't tend to be added in 20 or 30,000 gigajoule-a-day increments. They tend to go -- economic expansions are always several hundred, so they are lumpy in that sense. Alliance was quite a bit bigger than, for instance, the PGT expansion of 1993 or most of the TransCanada expansions over the few years prior to that.

499
And the other thing was that Alliance was pancaked on top of the Northern Border -- Northern Border expansion, so it had a -- between all those factors, it had a far more dramatic effect on the level of excess capacity out of the province than a smaller one would have. It was a cumulative effect of the two.

500
MR. FARRELL: Now, let's take ourselves back to 1996 and this side effect for some period. What was the period of time, as people saw it in 1996 or, at least, those who shared your view, how long was that period expected to be?

501
MR. STAUFT: That was a topic of speculation. As I said, the whole objective of the Alliance project from the producer perspective was to create excess capacity. And so the question is then, if we create this extra huge blob of extra capacity by building Alliance on the assumption that the border expansion goes ahead as well, how long is it going to last?

502
I mean, I don't think I ever said it wouldn't be reasonable to assume that any increment of excess capacity that you create is going to last forever. So it's just a question of really how quickly the "E" and "P," exploration and production, companies work off the excess.

503
But you know, I would say three, four, five years would have been my expectation at the time, a considerable period, anyway. More than -- much longer than the -- the PGT expansion was about 700 million a day, and it had the market tight for a couple of years, and this was just a much bigger increment. So as it's turned out, as I acknowledged in my direct, and as Mr. DeWolf said and Mr. DeWolf pointed out, it's actually lasted longer than that, because the supply response has probably been weaker than was expected at the time.

504
But I still say there was several years -- I would have said at the time that there were -- it would take several years for that capacity to fill back up.

505
MR. FARRELL: Did you, in fact, say it at the time?

506
MR. STAUFT: I probably did.

507

MR. FARRELL: Now, you've used the term "excess capacity." Alliance is fully subscribed, so I take it you are talking about capacity out of the western sedimentary basin on whatever pipeline?

508
MR. STAUFT: Yes.

509
MR. FARRELL: Now, I don't think we need to go through all of the other tabs. They just -- you've looked at them, I assume. There's a reference at tab 18 to the emergence of TriState as a competitor of Vector.

510
MR. STAUFT: Yes.

511
MR. FARRELL: And you've already described what I was going to use, tab 22.4, and that was that -- you described this in your evidence-in-chief and that was that they -- this was a fight among pipelines. So not only was TransCanada for example, proposing its own competing project, but it was seriously fighting against Alliance, at least at the Federal Energy Regulatory Commission.

512
MR. STAUFT: Yes, sir. This article actually characterizes this protest as having been launched by Alliance's competitors, in particular, TransCanada Pipelines Limited, which is true in a sense. But in fact, this protest, as I said, was my idea that I did in conjunction with my U.S. counsel. I do recall that I talked about it with TransCanada, but it was not an initiative that came from the pipeline itself.

513
We had a different issue. We were concerned about Alliance devaluating the Northern Border capacity that we had just signed up for on the expansion extension. So we were trying to protect that rather than the TransCanada main line.

514
MR. FARRELL: So the "we" was TransCanada Gas Services.

515
MR. STAUFT: Right, sorry, yes.

516
MR. FARRELL: And just touch on this if you could, just go to tab 24. This just was intended to be a guide to have you acknowledge that Vector too had its competitors, "too" being "too" as opposed to the second tranche.

517
MR. STAUFT: Sorry, this is --

518
MR. FARRELL: "In your pipeline battles, Viking Voyageur, Vector and Wisconsin Distributors over the details of competing pipelines."

519

MR. STAUFT: Right. I have to say when I read this article I was curious. I didn't recall that ANR opposed Vector; I don't quite understand why they did. I think probably because it was associated at that time with the Viking Voyageur deal, which ANR was deathly opposed to because it went right through the heart of their service territory, they were siding with Alliance in all of this. As a project to take gas out of ANR's market area into Canada, I would have thought they would have liked Vector but apparently not.

520
MR. FARRELL: Well, didn't -- I can't quite find my reference here, but my recollection, in any event, is that ANR was part of a project -- I think they called part of it the Supply Link, and it was the Independence pipeline that might have been an alternative to Vector going east.

521
MR. STAUFT: That would be what their beef was with Vector, yes. That makes sense, too.

522
MR. FARRELL: Okay. Now, could we go to page 12 of your pre-filed evidence. Actually, the question starts at the bottom of page 11, and this is about alternatives, and you describe four alternatives on page 12.

523
MR. STAUFT: Yes.

524
MR. FARRELL: So in 1996, prior to November 1996, acquiring incremental capacity on the TransCanada system, which is your first alternative, would have involved, at the time, the Nexus expansion.

525
MR. STAUFT: I think that's fair in whatever form it existed, whenever you wanted the capacity.

526
MR. FARRELL: I was pointing you to the fall of 1996 and, as we discussed earlier, that was Nexus, it wasn't the conventional expansion that materialized in the summer of 1997. At this point this was the huge project we discussed earlier.

527
MR. STAUFT: Right.

528
MR. FARRELL: Right.

529
MR. STAUFT: Right, yes.

530
MR. FARRELL: And then the next alternative is what you call the Chicago option.

531
MR. STAUFT: Mm-hm.

532
MR. FARRELL: And in 1996, that would have involved some pre-Vector project, correct, whether it was an existing pipeline system, an expansion existing pipeline system. But in the fall of 1996, it wasn't Vector.

533
MR. STAUFT: This is for transactions occurring in 1999, we're talking about?


534
MR. FARRELL: Yes.

535
MR. STAUFT: Sure, at that time, as I think you pointed out to me, Vector had not been announced or fully developed. There had to be some other mechanism.

536
MR. FARRELL: And your third option was Dawn.

537
MR. STAUFT: Right.

538
MR. FARRELL: And in 1996, I think you've mentioned you would agree that Dawn was not a liquid market.

539
MR. STAUFT: Certainly not as liquid as it's become. I think I acknowledged that, yes.

540
MR. FARRELL: Yes. Now, could you go to page 23, and I'm interested in the paragraph that starts at line 6: "As between Alliance-Vector and TransCanada, my view is that TransCanada should have been seen as the more cost-effective option."

541
MR. STAUFT: Mm-hm.

542
MR. FARRELL: Were you expressing that view in relation to the Nexus project because that's what ECG was looking at, or could have looked at, in the fall of 1996.

543
MR. STAUFT: I did not have the Nexus project specifically in mind when I wrote this, I was just -- I was thinking of TransCanada with a conventional expansion.

544
MR. FARRELL: So you were thinking of a conventional expansion when you wrote this?

545
MR. STAUFT: I don't know that I was thinking -- I was just thinking about expansions in general. I can't say that I thought one way or the other about it.

546
MR. FARRELL: You didn't have something the size of Nexus in mind, I take it?

547
MR. STAUFT: , No, that's right. I wasn't taking account of whatever toll effects there would have been with that. I don't, and didn't know what toll effects there would be. For all I know, Nexus -- I mean, in general, you would expect the costs of whatever expansion TransCanada ultimately lands on to display the pattern that has happened over the last decade or so, where they add incremental facilities and their toll kind of creeps up as their rate base increases. But I would have had no idea about the specific increase in toll effects of any project they would have launched to accommodate ECG.


548
MR. FARRELL: And then further down on that same paragraph, line 13, you say, "It is also the case that the cost analysis for Alliance involved considerably more risk in terms of how badly the forecast could turn out to be in error. Alliance tolls were very sensitive to exchange rates and to cost overruns during construction."

549
MR. STAUFT: That's right.

550
MR. FARRELL: Would you have made the same comment about the Nexus project which involved a significant expansion in the Great Lakes system in U.S., that TransCanada's tolls, reflecting the Great Lakes tolls, would have been very sensitive to exchange rates?

551
MR. STAUFT: That's fair. That's true.

552
MR. FARRELL: And would you say that the project the size of Nexus, assuming it was the bullet pipeline as I've called it earlier, would have been likewise exposed to cost overruns during construction?

553
MR. STAUFT: Sure. Yes. But even a traditional TransCanada expansion has some convention for that. What I had in mind when I made that point was that if you are talking about a rolled-in scenario, the effects of cost overruns are masked somewhat into something like TransCanada versus on the Alliance system, where a cost overrun would be just reflected in its entirety and the toll ultimately charged to the shipper. But fair enough. If, in fact, TransCanada had scraped up shippers for 2.3 Bcf of incremental capacity in addition to all this Alliance capacity and in addition to Border and they were doing it with bullet-line technology that they didn't understand very well or have very much experience with, that they would have had the same kinds of exposure that Alliance had and ultimately experienced.

554
MR. FARRELL: You used the term "Border."

555
MR. STAUFT: Northern Border.

556
MR. FARRELL: That was for the transcript, for the reporter's benefit. So when Mr. Stauft calls it "Border," you should put a capital "B" on it.

557
Now, on this topic of cost overruns, I got the flavour from the last answer, as well as your written evidence. That you are suggesting that the risk of cost overruns was borne totally by shippers; is that what you had in mind?

558
MR. STAUFT: As I'm sure you are prepared to point out to me, in Alliance's case, there was a risk-sharing mechanism. I can't recall or quote back to you exactly how it worked, but that's true; there was a scheme in place where if they experienced overruns, their authorized return on equity would be reduced. And, in fact, my understanding is that the effect of the cost overruns that they experienced was to reduced effective ROE over the system to about 11 and a quarter percent from the 12 that shippers had originally signed on for.

559
That didn't -- that effect didn't absorb all of the effect of the cost overruns. The tolls were still higher than I think were indicated to shippers when they signed on, but the owners of Alliance did absorb some of that through that ROE reduction.

560
MR. FARRELL: Did you read the contracts, and in particular the schedules to the precedent agreement that expressed in the Canadian side, toll principles and on the U.S. side, rate principles?

561
MR. STAUFT: I did, but I don't have a copy of them with me.

562
MR. FARRELL: Maybe you can just accept, subject to check, that there was the mechanism that you described. And I'm not going to get into more detail with it, but the Canadian base return on equity was 12 percent, as you mentioned, and would you -- I think you offered up 11.25 percent.

563
MR. STAUFT: I've just been told that on -- sort of on average over the Canadian and U.S. systems.

564
MR. FARRELL: Would you accept, subject to check, that the Canadian rate of return on equity was reduced from 12 to 11.25 percent, and that the U.S. rate of return on equity was reduced from 12 percent to 10.86 percent?

565
MR. STAUFT: I can accept that, subject to check, yes. To tell you the truth, the 10.86 sounds low, but it could easily be right.

566
MR. FARRELL: I may have written my advice down wrong. But if you can take that, subject to check.

567
Now, Mr. Stauft, could you go to pages 45 and 46. Actually, your -- the question and answer appears at page 44, and this is talking about one of the adjustments that ECG made to the notional deferral account.

568
MR. STAUFT: Right.

569
MR. FARRELL: Right. And what you're talking about on page 45 is the adjustment that reflected the fair-return application. And at line 12, you start a sentence that, "It's unlikely that TransCanada will be granted the entire equity return increase that it has requested or that any increase will be effective for all of 2001."

570
Your belief, I take it, is based upon you being a witness and therefore participating in a hearing for an opponent of TransCanada's increase?

571
MR. STAUFT: I think ECG, in its rebuttal, suggested that perhaps my view was a little biased on that question but -- and I will admit there may be some of that. But at the same time, bias or not, I don't believe they'll get anywhere close to 12.5 on 40 percent.

572
MR. FARRELL: Well, we'll all learn soon enough.

573
MR. STAUFT: I think we will, actually. I understand that we can expect a decision this month, and perhaps next week.

574
MR. FARRELL: Then you go on talking about the -- sorry, I'm stumbling over my own words here. At line 20, on page 45, you talk about other factors, and then we get over on page 46, we talk about the interim toll and then you mention a calculation that would reduce the eastern zone toll -- and I'm on line 6 -- for 2001 would have been $1.10, roughly speaking, per gJ.

575
MR. STAUFT: Right, that's my understanding.

576
MR. FARRELL: Could you turn back to the booklet and go to tab 3. On the second page of tab 3, there's two boxes on the page. I'm interested in the lower box, and this is the forecast in the eastern zone toll, and the current interim toll is $1.13 that you had referred to on the first line of page 46.

577
MR. STAUFT: Mm-hm.

578
MR. FARRELL: And then there is a reduction of 1.2 cents, and then an addition of 1.3 cents, and then an "X," i.e., unknown for a fair return.

579
So the illustrative toll for 2002 is $1.133, plus whatever large or small amount of increase if any, TransCanada may achieve in a fair return hearing?

580
MR. STAUFT: Right.

581
MR. FARRELL: So it's $1.13 plus something. Could be zero. Could be one cent, whatever.

582
MR. STAUFT: Right.

583
MR. FARRELL: And then there are adjustments that are made, and we get to illustrative 2003 tolls; do you see that? And we're now up to $1.21 plus a return component.

584
MR. STAUFT: Right. Yes.

585
MR. FARRELL: And if you go back one tab, this is an excerpt from a transcript, volume 1, actually, in the NEB's RH-4-2001 hearing. And attached behind the cover page, there are two pages that capture paragraphs 659 to 679. And Mr. Davies is asking the question, and he was counsel for the Canadian Association of Petroleum Producers or CAPP, as it's known, C-A-P-P.


586
MR. STAUFT: He was, yes.

587
MR. FARRELL: And Mr. Gerling, who was answering the question, I believe, was the chief financial officer of TransCanada Pipelines.

588
MR. STAUFT: He is, yes.

589
MR. FARRELL: And I was interested in -- the question was having to do with competitiveness and whether -- if TransCanada got what it was after, whether its toll to eastern Canada would be more than Alliance and Vector. Basically the question; correct?

590
MR. STAUFT: Right.

591
MR. FARRELL: And Mr. Gerling's answer was that the eastern zone toll could be 7 to 10 cents higher than Alliance, but TransCanada would still be competitive. That's what he said. You may not agree with him, but --

592
MR. STAUFT: Right. He says that, yes.

593
MR. FARRELL: Thank you.

594
MR. STAUFT: That's with the -- I think the assumption there is the TransCanada toll with the 15 cents that he's attributing to the fair return application.

595
MR. FARRELL: Yes, and if -- I'm sorry. Did I cut you off?

596
MR. STAUFT: No, I mean, so -- yes, I mean, Mr. Davies is saying, well -- challenging him saying, Well, gosh, Mr. Gerling, if you prevail in this application, your toll is going to be pretty darn high.

597
And Mr. Gerling, of course, has to say, Maybe, but I think we can still be competitive with that.

598
MR. FARRELL: I'm assuming that when he was testifying, like you're testifying, that Mr. Gerling was giving his best view, and he was testifying under oath and was telling the truth, as he saw it.

599
MR. STAUFT: I'm sure he was.

600
MR. FARRELL: And if it was 15 cents, then if we go back to tab 3 in the box of the list -- the lower box on that second page, the illustrative 2003 tolls, it would be 1.211 cents plus 15 cents if TransCanada got everything it wanted; correct?

601
MR. STAUFT: That's true, yes. The math is correct, but anyway, I'm just --

602
MR. FARRELL: Yes.

603
MR. STAUFT: -- thinking about the additions and subtractions in the bottom half of that slide.

604
Well, it doesn't matter. I mean, I don't know where those come from or whether they fairly reflect what's going on with TransCanada's tolls, is the only point I wanted to make.

605
MR. FARRELL: But this is -- it was a TransCanada presentation?

606
MR. STAUFT: Sure, and I mean, they, presumably, have some basis for saying this, I'm sure.

607
MR. FARRELL: Madam Chair, I have a couple other areas, including some of the things Mr. Stauft was testifying to during his direct examination. I'd like an opportunity to review my notes over the lunch break. We're approaching one o'clock, so this would be convenient for me, if it's convenient to the Panel.

608
MS. HALLADAY: Certainly. Just one moment, please.

609
[The Board confers]

610
MS. HALLADAY: I apologize. Yes, now would be a convenient time to break, and we will break until 2:15.

611
MR. FARRELL: Thank you.

612
--- Luncheon adjournment at 12:58 p.m.
613
--- On resuming at 2:26 p.m.
614
MS. HALLADAY: Please be seated.

615
Mr. Farrell, any preliminary matters?

616
MR. FARRELL: No, Madam Chair.

617
MS. HALLADAY: Thank you. Do you want to continue?

618
MR. FARRELL: Thank you.

619
Mr. Stauft, could you turn to page 41 of the pre-filed evidence.

620
MR. STAUFT: I have that.

621
MR. FARRELL: And actually, at the bottom of page 40, you were discussing why you disagree with the proposed adjustment and that had to do with the gas prices, what ECG called the anomaly.

622
MR. STAUFT: That's correct.

623
MR. FARRELL: And your answer continues on page 41 and over page 42 and so on. But the part that I'm interested in begins at line 18 on page 41, and you say there's no particular reason to buy on a monthly basis, that either daily or monthly is available to ECG and either could be a viable strategy, in principle.

624
And then I'll quote: "Gas traders and marketers often attempt to exploit daily versus monthly pricing variances by anticipating the direction of daily price movements relative to monthly indices. Thus a trader who expects daily price to fall relative to the monthly index will sell gas on a monthly-index basis and cover the physical obligation with purchases in the daily market. If daily prices fall as expected, the trader will profit; if the trader is wrong and daily prices increase, they will lose money."

625
Now, that sounds to me like you are suggesting that ECG should play the commodity market; correct?

626
MR. STAUFT: Well, it sounds like that. I'm sorry, that wasn't what I was trying to suggest. I wasn't suggesting in this passage that that kind of strategy would be something ECG would do or should do. In fact, I wouldn't expect them to do that.

627
My expectation, actually, would be, for the most part, they would buy monthly or even under longer term arrangements and perhaps have some swing capability where they bought on the daily market. I obviously don't know enough about their load profile. But in general, I would say no, you wouldn't expect LDCs to do that kind of -- the kind of trading activity that I described here.

628
MR. FARRELL: Well, perhaps I misunderstood your evidence. But if you go back to the bottom of page 41, at line 20, you seem to be saying "either is a viable strategy, in principle," then you go on to what I thought was to describe the viable strategy, in principle. I take it you weren't talking of a viable strategy for ECG.

629
MR. STAUFT: Well, no. When I said either strategy would be viable, in principle, all I was suggesting was that if ECG really wanted to buy all of its gas on the daily market, it probably could do that; or if it wanted to buy all of it on the monthly market except for its swings, it could probably do that as well. The further comment about trading strategies was not really connected with that point.

630

MR. FARRELL: Okay. We may have obviated the need to ask the next question. But just to be clear, it also sounded - "it" being the passage that I quoted about gas traders and marketers - something akin to dynamic hedging which was the subject of the last tab in the booklet, which was a Manitoba Public Utilities Board decision where the board, and I ask you to agree with my brief summary that the board, that board, the PUB, found that Centra Manitoba had engaged in dynamic hedging and had likened the dynamic hedging to trading and speculation and used words like -- this is at the bottom of page 100, in that excerpt: "They bet the prices would move in a particular direction." That's not what you're talking about.

631
MR. STAUFT: Well, right. That's what I'm talking about when I'm describing this trader strategy. But when I said that ECG could buy on the daily market, I didn't mean to suggest in any way that they would be doing the kinds of things that the Manitoba PUB was talking about there. I wouldn't expect that from the utility.

632
MR. FARRELL: Thank you for that.

633
Just a couple of more areas and then I will be finished.

634
On pages 47 -- excuse me. At the bottom of page 46, you are asked the question: "What is a second adjustment that ECG suggests in relation to TransCanada tolls and" -- oops, that's not where I am. They talk about the exchange rate, and then the final adjustment is the one that I wanted to take you to. This is on page 47, and this was the fuel ratio on TransCanada.

635
MR. STAUFT: Right. Yes.

636
MR. FARRELL: And your point is, as I take it, if the fuel ratio were to go back to the 8 percent range that it was in 1996, it would imply that the TransCanada system had been refilled and therefore would have more contracted volumes which would have an ameliorating effect on the toll.

637
MR. STAUFT: Right, it would drive the toll back down to something closer to its historical level.

638
MR. FARRELL: And when you're talking about refilling TransCanada's system, I take it you are talking about filling not only the central section which, as we discussed earlier, goes from Manitoba through Northern Ontario and back to the eastern zone, but also the Great Lakes system.

639
MR. STAUFT: In effect, yes. I'm really thinking about TransCanada as the integrated system.

640
MR. FARRELL: I just want to make -- I have a question for you and I wanted you to agree that it would include the integrated capacity on the Great Lakes system that TransCanada holds.

641
MR. STAUFT: It would, yes.

642

MR. FARRELL: And I would ask you to accept, subject to check, that TransCanada's rate T-4 capacity with Great Lakes comes up for renewal next year. Will you make that assumption, subject to check, or do you know?

643
MR. STAUFT: Actually, my understanding was that the contract expires in 2005. It may well be, though, that your -- Great Lakes is in a position to give a notice of some kind to TransCanada to either continue or not with the service, so next year may well be correct in that sense.

644
MR. FARRELL: Well, whatever it is, 2003 or 2005 --

645
MR. STAUFT: It's soon, yes.

646
MR. FARRELL: If I may also ask you to assume that that contract either expires, or if there are renewal rates it's not renewed; can you make that assumption for the purposes of my next question? If that is the case, then wouldn't I be correct that the gas that is currently moved through Great Lakes by TransCanada for delivery back into its system, the short stub of its system from the St. Clair River to Dawn, would shift to the Northern Ontario line or the central section?

647
MR. STAUFT: Fair enough. Other things being equal, you could say that. They have to move it and that's the only other way they have.

648
MR. FARRELL: And that shift would then drive up the fuel ratio, even though TransCanada may not have been refilled to the extent that we were discussing earlier.

649
MR. STAUFT: Fair enough, fair enough. You could jam enough gas through the northern route, I suppose, to drive the fuel ratio up.

650
MR. FARRELL: All right. And --

651
MR. STAUFT: Getting rid of the -- sorry. Getting rid of the costs associated with Great Lakes obviously would have a downward effect on the toll as well.

652
MR. FARRELL: Assuming there weren't offsets, such as higher O&M fuel.

653
MR. STAUFT: Right.

654
MR. FARRELL: That sort of thing.

655

MR. STAUFT: And as I said, the major one would be the TransCanada, by shedding the Great Lakes costs, which are a significant chunk of its cost of service, that would have a downward effect on the tolls as well.

656
MR. FARRELL: Subject, I suggest to you, to any increases that may result from reloading or refilling the Northern Ontario line, the central section on its own.

657
MR. STAUFT: If they -- if they had facilities-related costs there to bring compressors on line or something, there could be some of that. But I don't know what the balance would be, obviously, off the top of my head. I couldn't calculate --

658
MR. FARRELL: Fair enough --

659
MR. STAUFT: -- speculate on where that balance would end up.

660
MR. FARRELL: And by definition there would be less physical volumes flowing into Dawn under this scenario.

661
MR. STAUFT: If the Great Lakes capacity was not held by TransCanada at all.

662
MR. FARRELL: Yes.

663
MR. STAUFT: Flowing under TransCanada Services.

664
MR. FARRELL: That's what I meant.

665
MR. STAUFT: Right. I mean, obviously the Great Lakes facilities would still be there and Great Lakes would be trying hard to sell that service. And I think as a physical matter, gas would probably still be going into Dawn through the Great Lakes system originating either at Emerson out of TransCanada or in Michigan, subject to the economics. I mean other things being equal, that would be the tendency.

666
MR. FARRELL: Well, assuming the shippers that were taking TransCanada's place on Great Lakes wanted to move gas into there as opposed to drop it off somewhere along the line.

667
MR. STAUFT: Sure. TransCanada's path goes all the way to Dawn, so that whole path is available to them. If they wanted to drop off upstream of that, they could.

668
MR. FARRELL: I just have a couple of questions that arise from, not from Mr. Warren's direct examination but rather from Mr. Janigan's cross-examination. There's two areas. I just want to make sure I understand what you told Mr. Janigan, or at least I understand the note that I wrote when you were speaking.


669
He asked you about the TransCanada turn-back and where do the shippers go, and you said they were mostly -- most of the capacity was turned back by LDCs on behalf of industrials.

670
MR. STAUFT: That's my understanding.

671
MR. FARRELL: Or words to that effect.

672
MR. STAUFT: That's my understanding.

673
MR. FARRELL: And your former employer, TransCanada Gas Services, is, or perhaps was, the largest single shipper on TransCanada.

674
MR. STAUFT: Yes.

675
MR. FARRELL: And do you know whether TransCanada gas services also turned back a large block of capacity?

676
MR. STAUFT: They did, in fact, yes; which is a fair point, but the capacity that TCGS turned back was primarily at Emerson.

677
MR. FARRELL: Okay. And then --

678
MR. STAUFT: What I had in mind in -- I guess I perhaps wrongly assumed that we were talking mostly about eastern zone capacity. But you're right, TCGS turned back several hundred billion a day, I think, at Emerson.

679
MR. FARRELL: Then Mr. Janigan also asked you, and I think maybe your subsequent answer clarified it, but just to make sure, since I don't have a transcript, he was asking you about the two tranches of Vector. He noted that the first tranche was a contract, a precedent agreement dated June 1st, 1999, and the second was a date which I've forgotten in December of 1999.

680
And I wrote down that his question was: Was there any difference between -- any difference between the beginning of the six-month period and the end? And you had said, according to my note, you couldn't think of anything that would change within that six-month period. And then later you seemed to say that the first tranche of Vector, the June 1999 one, would have been required in any event to complete the path that was started by Alliance. Have I described your answer correctly?

681
MR. STAUFT: I think so, yes, as best I can remember.

682
MR. FARRELL: Thank you, Mr. Stauft.

683
Those are my questions.

684
MS. HALLADAY: Thank you, Mr. Farrell.

685
Mr. Warren?

686
MR. WARREN: No, thank you.

687
MS. HALLADAY: Board staff have no questions. The panel has no questions.

688
Mr. Stauft, thank you very much. You are excused.

689
[The Panel was excused.]

690
MS. HALLADAY: Mr. Farrell, if you don't mind, before we go on with the undertakings and the additional filings, if we could go through the settlement proposal.

691
MR. FARRELL: Yes, I have it right here.

692
MS. HALLADAY: Good. The Board has a few housekeeping matters it would like to deal with.

693
PROCEDURAL MATTERS:

694
MR. FARRELL: Okay. The pages, if you have -- if you just turn up the pages in sequence, I'll go through them.

695
The first revised page is page 7. And the revisions that took place on page 7 is the second-last paragraph on the page. It used to say: "Exhibit N.1, tab 2, schedules 1 through 7 demonstrate the effect of the settlement proposal on rate base, cost of service ..." And so on.

696
And the change was made to reflect the second set of "N" exhibits that reflected the fact that there was a second impact statement. And so what you now see it reading: "Exhibit N.2, tab 1, schedule" -- it should be "schedule" 1, rather than "schedules." If you just take a pen and cross it off, the first one.

697
And: Exhibit N.2, tab 2, schedules 2 through 7 demonstrate the effect of the settlement proposal," and so on.

698

So it was just a change in the exhibit references to accommodate the subsequent filing. And of course, the update at the top of the page, that replaced the word "former update," which was in May. This is now in June. That's the only change on that page.

699
And I would thank Mr. Schuch for pointing that out to us, because we'd previously overlooked it.

700
The next is page 9, and it's the third bullet on the page. It formerly had the volume -- it formerly read from 11,776.3 to -- 11,776.3 million cubic metres to 11,714, and this was the change that Ms. Newland made when we were going through the settlement change, the second volume to 11,723.5. And again, the header was changed to reflect that.

701
Then the next page, page 10, the last two bullets, or the second and third bullet on the page, were changed to the last sentence of the second-last bullet -- was changed to reflect what you pointed out, Madam Chair, that nowhere did it say that ECG proposed or the other parties accept. So that now has been fixed to show that there was a proposal and an acceptance.

702
In the last bullet on the second line, there was -- this wasn't made on -- when Ms. Newland went through, but the second -- the first figure on the second line of the last bullet formerly was 11,714, and that's the one we changed on the previous page to 11,723.5. That was Ms. Hare's catch.

703
Then the second sentence in that bullet point was, again, changed to propose/accept again to reflect your comment on the first day.

704
The next page is page 21. This was just an omission in the original. If you look at the second complete bullet on the page, and you read toward the end of the first line, it now says "27.8 million." It used to just say "27.8 is for," rather than -- so we added the word "million" to correct that error. That was the only change on that page.

705
Next page is 23, and the third bullet, first line of that third bullet. It formerly read mistakenly "RP-2000-0020," so it's now changed to RP-2000-0040, which was the correct file number. That was the only change made.

706
Excuse me. That's not the only change. At the top of the page, we added the interrogatories in response to the DPWAMS. This is the list of the evidence that starts at the bottom of page 22.

707
And at the top of page 23, we added the interrogatories that intervenors asked. So it went from being, for example -- the second line went from being 1-2-16 to 19, to add comma 96 to 111. And similarly, with the other ones, just so that the record will be complete. And that did not change the pagination, fortunately.

708

On page 24 in the first line on the page, this was something that Ms. Newland pointed out. It now reads at the end of the first line "2.0 million." It formerly read mistakenly "2.6 million."

709
And then just in the next line below, there was a reference to an interrogatory response. It formerly said "A-8-15," which is not an interrogatory response, so we put the right reference there. And those were the only changes on that page.

710
The next is page 44. The last bullet on the page, another typographical error on the first line of the last bullet near the end of the line. It formerly read "Test year" with a capital "T" and a small "Y," and we just, sort of, upper-cased the "Y" in "Year" to make it consistent.

711
The next page is page 50, the second bullet under issue 14.1. It formerly read -- on the second line, formerly mistakenly read Exhibit I.1.11. The correct reference is what you see now, Exhibit I.11.1.

712
The last two pages are appendix D. And what was changed here, as you recall Mr. Small gave you this change under the rider C forecast, just about a little more than half the way down the page. There was formerly a, "no value" shown for December, so the 33,758,869 that you see in parentheses was a number Mr. Small provided. And then if you go down to February, there was no change in the value of the 45 million, et cetera. But there was no closing parenthesis of the end of that figure so we just stuck that in there.

713
Then on the next page, if you recall, Mr. Small gave you, it formerly read, "Footnote four: Excludes March consumption billed in April." Then Mr. Small then gave you the value for that consumption; it was $14,272,000. And then he made the comment that that amount would reduce the 2001 actual which is shown on the prior page as $43,297,871 to the 29 million and change figure that you see there. But that did not have the effect of changing the 2001 actuals shown on the foregoing tables when you read the two together. We just changed footnote four to give you that information.

714
MS. HALLADAY: Thank you, Mr. Farrell.

715
I think this is the order I'm supposed to do it in.

716
DECISION ON QRAM:

717
The panel has considered the application of ECG and the submissions made by the intervenors on the subject of the QRAM adjustment to be effective July 1st, 2002. The panel accepts the evidence of the company with respect to the utility price, the gas supply charges, gas distribution and load balancing charges. With respect to the proposed rate rider, the panel notes that this is not in conformance with methodology set out in the settlement proposal and approved by the Board in RP-2000-0040, in that the company is proposing to clear the PGVA balance over six months as opposed to the prescribed three-month period.

718

The panel also notes that settlement proposal contemplates that the methodology will be reviewed after the 2002 fiscal year. The panel prefers any changes be debated and hopefully agreed to in that forum. Therefore, the Board will modify the company's proposal for a six-month rate rider to be a three-month rate rider as prescribed in the approved methodology. The Board will issue a written decision and interim order with respect to the QRAM application to be implemented effective July 1st, 2002.

719
PROCEDURAL MATTERS:

720
MS. HALLADAY: With respect to the settlement proposal, thank you, Mr. Farrell, for walking us through these changes. And I just wanted to confirm that the financial impact statements related to the settlement proposal have been revised, the ones that were revised and filed on June 6 as the N-2 series includes the effects of the July 1st QRAM and the removal of the DPWAMS; am I correct in that --

721
MR. FARRELL: Yes, it does, Madam Chair.

722
MS. HALLADAY: -- understanding? Okay. Then the panel is prepared to accept the financial consequences of the settlement proposal for the purpose of establishing interim rates in fiscal 2002 test year. The Board expects the company to consult with Board staff in preparing and implementing rate order, which, I believe, will include a clearance of the 2001 deferral and variance accounts.

723
Mr. Farrell, do you know if this rate rider -- if this rate order will be effective August 1st or September 1st, depending on the billing system limitations?

724
MR. FARRELL: Just a moment, please.

725
I'm advised that we're still working out the details of whether it would be August 1st or September 1st or perhaps a staggered implementation on both those dates and I will report back as soon as I can as to exactly what that is.

726
MS. HALLADAY: I would appreciate that, thank you.

727
The rates will remain interim at this point as there is the outstanding ROE issue which may impact distribution rates in the test year. As the Board has previously indicated, the ROE issue will be dealt with in a separate phase of these proceedings and the Board will issue a procedural order dealing with this matter shortly.

728
The Board also accepts the party's proposal that the issue of deferred taxes be dealt with in a separate proceeding and the Board will issue a procedural order in this regard in due course. The May 31st, 2002 motion filed by IGUA will be considered in this separate proceeding.

729
Before we proceed are there any further questions, matters, comments? Thank you.

730
Mr. Farrell.

731
MR. FARRELL: I have a couple of more filings and then I'll ask Mr. Brennan to take us through the undertaking responses that I filed this morning, the various reports. Those undertakings were made to Mr. Vegh. We faxed Mr. Vegh a copy of what was filed this morning so he has it this afternoon.

732
MS. HALLADAY: Thank you.

733
MR. FARRELL: Mr. Brennan will be returning on Monday, so when we get to that then Mr. Vegh will have his opportunity, if he needs to have one, to ask questions of Mr. Brennan on these reports, among other things.

734
I also have three documents to file. The first is a response to undertaking J.5.5, this was an undertaking I believe that was given to Mr. Thompson, so we will be faxing this to Mr. Thompson so he has it this afternoon. And, again, he will have an opportunity to ask follow-up questions if he so wishes.

735
We have three copies for the Board, two for Board staff and three copies for the public file. And copies will be at the back.

736
The next is response to Undertaking J.5.6. Again, my recollection is this was an undertaking given to Mr. Thompson. We will be doing likewise with this exhibit.

737
The next is a response to Undertaking J.3.14. This was an undertaking, I believe, given to you, Madam Chair, in relation to Alliance and Vector. There are copies of this at the back of the room as well.

738
We plan to have witnesses available on Monday after we finished the panel for issues 2.3 and 2.4 that can speak to all of these undertaking responses to the extent that people have questions.

739
MS. HALLADAY: Thank you.

740
MR. FARRELL: Now, I thought that we'd now deal with the five undertaking responses that I filed earlier today.

741
Mr. Brennan is responsible for -- these are J.4.1 through J.4.5.

742
So, Mr. Brennan, could you just walk us through. As I mentioned earlier, Madam Chair, the first page in each case is one sheet out of appendix B, which is what Mr. Vegh was using as his road map when he was asking the questions.

743
MR. BRENNAN: So the first undertaking is J.4.1, and here we are asked to provide a sample copy of the send-out report, and that's what we've done in this particular case.

744
This report outlines how we meet our demand on any given day. This is prepared by Enbridge Operational Services.

745
The next undertaking is J.4.2, and here we're asked to provide samples of copies of nomination summaries that EOS provides to EI under the appropriate schedule.

746
And in the response to undertaking, you'll see on the cover page marked -- those reports that are appropriate to this Undertaking J.4.2, those reports, being Union Gas C-1 nomination, TransCanada nomination, NOM 048, ANR monthly nominations. And those are attached.

747
Now, I just want to mention a couple of things. The first one, a lot of these nominations that are being done now, recognizing that when this report was originally generated, it was -- or the schedule, I should say, it was back in October of 2000. And since that time, a lot of nominations are now being done through the web page.

748
So, for example, if you look at the first one, you see that the TransCanada PipeLine nomination is up in the top left-hand corner. You'll see "NRG Web Highway."

749
So these nominations are now being placed over the web, and what I've shown here is just a copy of what is presented in that web page.

750
Likewise, if you flip through a couple of pages, I guess probably the last one, again, is just a copy of the screen for ANR. Again, this is also done over the web. So a lot has changed in just a short time.

751
The next undertaking, J.4.3, we were asked to provide confirmation of what information is covered under the category of receipt function of gas costs provided by EOS to EI.

752
So of the reports that are listed here, the only report that goes from EOS to EI is one called NOVA file. And in particular, that file only -- the only information -- that file is related to the supply, NOVA supply. The rest of it just goes to ECG.

753
MR. FARRELL: Before you move on, Mr. Brennan, I just note, Madam Chair, that if you look at page 1 of 2 in the left-hand column, we have redacted the names of shippers that actually have transportation volumes where there's no volumes shown. We have just left the shipper names in, so you get an idea of who they are. But where there was a volume shown, we thought it better not to disclose those shippers' names.

754

MR. BRENNAN: As far as Undertaking J.4.4, again, we were to provide a sample copy of the gas acquisition reports prepared by EOS for EI.

755
And the two items that are listed are gas acquisition. Neither one of those goes to EI, so there is no attachments to that undertaking.

756
And finally, Undertaking J.4.5, we were asked to provide copies of transportation contract reports prepared by EOS to EI. And again, we've listed three of them, that is, the CDS, which stands for curtailed delivered supply, suspensions, and makeup.

757
And again, if you go to the second document, which talks about makeup, again, we've whited out the company name and the -- the company names.

758
MR. FARRELL: That would be the customer?

759
MR. BRENNAN: Yes.

760
MR. FARRELL: So on this table, Madam Chair, the names of the suppliers' customer would be shown under the title "Company."

761
MR. BRENNAN: And if you go to the final report, the one that's entitled "Suspension Summary," likewise, we have also whited out the customer name as well, as well as the FT capacity assigned to whoever that capacity was assigned to; we've whited out those two columns.

762
So those are all the reports that go from EOS to EI that Mr. Vegh was looking for.

763
MR. FARRELL: That is all we have at the moment, Madam Chair.

764
MS. HALLADAY: Thank you, Mr. Farrell.

765
Thank you, Mr. Brennan.

766
Is that it for this afternoon, Mr. Farrell?

767
MR. FARRELL: I believe it is.

768
MS. HALLADAY: Is that what you're telling us?

769
MR. FARRELL: That's what I'm telling you.

770
MR. WARREN: Try and control your disappointment, Madam Chair.

771
MS. HALLADAY: Thank you very much, Mr. Warren. All right.

772
And on that note, we'll adjourn for today, and we'll reconvene at 9:30 on Monday morning.

773
Have a nice weekend. Thank you.

774
MR. FARRELL: Thank you as well.

775
MR. WARREN: Thank you.

776
--- Whereupon the hearing adjourned at 3:04 p.m.