Rep: OEB Doc: 12NB5 Rev: 0 ONTARIO ENERGY BOARD Volume: 1 7 APRIL 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER G. DOMINY MEMBER 1 RP-2002-0130 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 Schedule B; AND IN THE MATTER OF an Application by Union Gas Limited for an order or orders approving or fixing just and reasonable rates and other charges for the sale, distribution and transmission and storage of gas as of May 1, 2003. AND IN THE MATTER OF the Quarterly Rate Adjustment Mechanism approved by the Ontario Energy Board. 3 RP-2002-0130 4 7 APRIL 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel CHRIS MACKIE Board Staff HIMA DESAI Board Staff MICHAEL PENNY Union Gas MARCEL REGHELINI Union Gas BRYAN GOULDEN Union Gas MICHAEL JANIGAN VECC ROBERT WARREN CAC JAY SHEPHERD OPSBA VINCE DEROSE IGUA DAVID MACINTOSH Energy Probe JIM HAMILTON OESC DWAYNE QUINN City of Kitchener RANDY AIKEN LPMA BILL KILLEEN Direct Energy TIBOR HAYNAL TCPL GEORGE VEGH Superior Energy, CEED BARBARA BODNAR EGD BARBARA BODNAR EGD 8 TABLE OF CONTENTS 9 APPEARANCES: [17] PRELIMINARY MATTERS: [37] ARGUMENT BY MR. SHEPHERD: [46] ARGUMENT BY MR. PENNY: [74] FURTHER ARGUMENT BY MR. SHEPHERD: [83] DECISION: [95] PROCEDURAL MATTERS: [100] UNION GAS LIMITED - PANEL 4: [137] EXAMINATION BY MR. PENNY: [142] CROSS-EXAMINATION BY MS. LEA: [345] CROSS-EXAMINATION BY MR. JANIGAN: [655] CROSS-EXAMINATION BY MR. WARREN: [848] CROSS-EXAMINATION BY MR. AIKEN: [966] CROSS-EXAMINATION BY MR. KILLEEN: [1057] CROSS-EXAMINATION BY MR. VEGH: [1086] CROSS-EXAMINATION BY MR. SHEPHERD: [1122] CROSS-EXAMINATION BY MR. DeROSE: [1265] CROSS-EXAMINATION BY MR. QUINN: [1295] CROSS-EXAMINATION BY MR. HAYNAL: [1431] QUESTIONS FROM THE BOARD: [1440] RE-EXAMINATION BY MR PENNY: [1479] SUBMISSIONS BY MR. PENNY: SUBMISSIONS BY MS. LEA: [1613] SUBMISSIONS BY MR. VEGH: [1639] SUBMISSIONS BY MR. DeROSE: [1683] SUBMISSIONS BY MR. HAMILTON: [1694] 10 EXHIBITS 11 EXHIBIT NO. D.1: NYMEX NATURAL GAS FUTURES CLOSE, FRONT MONTH [373] EXHIBIT NO. D.2: EXCERPTS FROM DECISIONS FROM EBRO-493-04 and EBRO-499 [683] 12 UNDERTAKINGS 13 UNDERTAKING NO. E.1: TO PROVIDE THE AMOUNTS FOR THE FLEXIBILITY TOTAL AND LOAD BALANCING TOTAL FOR THE PERIODS OF JANUARY TO APRIL AND MAY TO DECEMBER 2003 [927] UNDERTAKING NO. E.2: TO PROVIDE A VERSION OF SCHEDULE 5, PAGES 1 AND 2, THAT WOULD SHOW THE YEAR-END DEFERRAL ACCOUNT BALANCES IF THE RECOVERY OF THESE COSTS WERE RECOVERED THROUGH JULY, AUGUST, AND SEPTEMBER [1006] UNDERTAKING NO. E.3: UNDERTAKING TO PROVIDE: (1) IF CHARGE WAS APPLIED TO ALL CUSTOMERS, WHAT THE CENTS PER CUBIC METRE IS; (2) CALCULATE THE CENTS PER CUBIC METRE IF YOU CLEAR OUT THE 53.858 CENTS STARTING MAY 1ST TO ALL CUSTOMERS FOR EIGHT MONTHS; (3) WHAT THE CREDIT FOR SYSTEM GAS IS IF YOU AT THE SAME TIME GIVE THEM THAT 12.203 MILLION AS A CREDIT OVER THE SAME EIGHT MONTHS [1154] UNDERTAKING NO. E.4: TO PROVIDE WINTER SPOT NUMBER THAT'S BUILT INTO RATES [1351] UNDERTAKING NO. E.5: UNDERTAKING TO PROVIDE THE AMOUNT OF STORAGE THAT WAS RELATED TO THE TOTAL BUNDLED DELIVERY OBLIGATIONS OF UNION AND TO PROVIDE THE AMOUNT OF STORAGE THAT WAS SET ASIDE FOR WITHDRAWAL CAPABILITIES FOR ALL BUNDLED CUSTOMERS FOR THE WINTER OF 2002-2003 BY UNION'S OPERATIONAL PLAN AND HOW MUCH LOAD BALANCING GAS (THE AMOUNT OF WINTER SPOT GAS) THAT WAS PART OF THAT PLAN; A COMPARISON OF THE NUMBER OF DEGREE DAYS USING THE OPERATIONAL PLAN 20-YEAR DECLINING WEATHER FORECAST VERSUS THE TRADITIONAL 30-YEAR AVERAGE FORECAST WHICH WAS EMBEDDED IN RATES [1410] 14 --- Upon commencing at 9:08 a.m. 15 MR. SOMMERVILLE: Good morning, everyone. We are convened this morning in a matter that has been designated by the Ontario Energy Board as RP-2002-0130/EB-2003-0056. This is a matter that arises pursuant to the Union Gas quarterly rate adjustment mechanism in an application made by Union pursuant to that methodology. 16 May I have appearances, please. 17 APPEARANCES: 18 MR. PENNY: Yes, good morning Mr. Chairman. My name is Michael Penny, I'm appearing for the applicant Union Gas Limited. 19 MR. JANIGAN: Michael Janigan for the Vulnerable Energy Consumers Coalition. 20 MS. LEA: Jennifer Lea for Board Staff. 21 MR. AIKEN: Randy Aiken for the London Property Management Association. I've also been asked to register an appearance for Dwayne Quinn on behalf of the City of Kitchener. 22 MR. KILLEEN: Bill Killeen with Direct Energy. 23 MR. VEGH: George Vegh. I'm on the record for two clients in this proceeding. The first is The Coalition for Efficient Energy Distribution. They filed a submission on Friday in this application. I'm here today on behalf on Superior Energy Management. 24 MR. SOMMERVILLE: For both clients, Mr. Vegh? 25 MR. VEGH: Yes, although I expect I'll only be acting for Superior Energy Management. 26 MR. HAGGARTY: Jerry Haggarty, Superior Energy Management. 27 MR. SOMMERVILLE: You're assisting Mr. Vegh, I assume, Mr. Haggarty. Thank you. 28 MR. SHEPHERD: Jay Shepherd, the Ontario Public School Boards Association. 29 MR. DeROSE: Good morning, Mr. Chair. Vince DeRose, Industrial Gas Users Association. 30 MR. HAMILTON: Good morning, Mr. Chair, Jim Hamilton, Ontario Energy Savings Corp. 31 MR. MacINTOSH: David MacIntosh, Energy Probe. 32 MS. BODNAR: Barbara Bodnar, Enbridge Gas Distribution. 33 MS. ANCHETA: Annabelle Ancheta for Union. 34 MR. SOMMERVILLE: Are there other counsel represented today? 35 Thank you very much. My name is Paul Sommerville. I'm the presiding member in this matter. Sitting with me is George Dominy. 36 Are there any preliminary matters? 37 PRELIMINARY MATTERS: 38 MR. PENNY: I believe Mr. Chairman, there are probably two preliminary matters. One has to do with the intervention by Mr. Shepherd's client, the Association of School Boards and I think it's probably worth addressing the issue of argument, perhaps, as well. 39 MR. SOMMERVILLE: Argument in the case as a whole, Mr. Penny? 40 MR. PENNY: Yes. As a whole, yes, I'm sorry. 41 MR. SOMMERVILLE: Why don't we -- the Board does have some material with respect to the intervention made by Mr. Shepherd's client and Union's opposition to that intervention. Are there any other parties that have an interest in that matter at this time? 42 In which case, Mr. Shepherd, I note that you have been copied with the objection that was filed by Union Gas. Are you prepared to address the subject now? 43 MR. SHEPHERD: Mr. Chairman, yes, I am. 44 MR. SOMMERVILLE: What I would propose to do is I'm regarding Mr. Shepherd's client as the proponent, in effect. You will lead argument on the subject, and Mr. Penny, you will have the right to argue as well, and with a right to reply, Mr. Shepherd, residing in you. 45 Would you like to begin, please. 46 ARGUMENT BY MR. SHEPHERD: 47 MR. SHEPHERD: Thank you, Mr. Chairman. 48 I should first note that my friend's objection to our intervention was not served on me correctly. It was served at a different fax number that is contained in our notice of intervention, and as a result, instead of getting it on Friday when I normally would, I got it late last night. 49 However, I'm not taking the position that, as a result, we're entitled as a right to intervene. I'm only noting that as a difficulty that we faced preparing argument between 10 o'clock last night and this morning. 50 Mr. Chairman, the Ontario Public School Boards' Association is an association of school boards. The members are virtually all the public school boards in Ontario. 51 We, normally when we appear on their behalf in this sort of matter, we normally also have the support of the Catholic school boards and the French-language school boards. This was done on very short notice, and we yet haven't got their letters of support, and I don't know whether we will in time, given the short period. 52 Nonetheless, publicly funded school boards are significant users of energy. They are probably the single biggest customer group, in terms of a single purpose, in the province for natural gas. The Ontario Public School Boards' Association is -- its purpose is to allow school boards to act jointly where their interests are consistent, for example, in -- with government, with the public, in the courts and in regulatory matters. 53 This particular application is of concern to public school boards because the impact on a typical board would be probably about $100,000 of additional charges this year. That, as a practical matter, means two teachers. Now, it isn't actually two teachers, because you can't cut teachers. What it actually will probably mean for a typical school board is that two libraries will be closed, because the librarians will have to be terminated. 54 So this is not about general policy differences with the company. This is about whether students get to use their libraries or not, and -- or that sort of thing. 55 The essence of my friend's argument, as I understand it from his submissions, is -- let's leave aside the Ontario Association of School Board Officials for a moment, because that's not really I think what is being challenged here. I think the challenge is that my friend says that the duly authorized representatives of a major customer group, the school boards, should not be allowed to be heard in this proceeding. That, Mr. Chairman, is wrong in law. 56 In the alternative, my friend says we should deny this group the right to select their own counsel. They should be forced to use somebody else's counsel. That is also wrong in law, Mr. Chairman. 57 The only thing that my friend raises that is something worth talking about is the question of duplication. So let's ask the question. If two intervenors represent a closely similar interest, does that mean that one of them cannot have status? 58 I would ask that question, for example, with respect to the CAC, and VECC. Do they have the same interest exactly? I would guess probably not. Are they very closely similar? Absolutely. 59 With a about the Green Energy Coalition and Pollution Probe? Are their interests materially different? I don't think -- anybody who has listened to the DSM debates would say probably not. 60 What about my friends Direct Energy or OESC? Do they have dissimilar interests? Probably not. In the marketplace, they do, but in this hearing room, they probably do not. 61 My friend Mr. DeRose is here representing the Industrial Gas Users Association. If the Canadian Manufacturers Association - not CME but CMA, all of whose Ontario members are probably IGUA members - if the CMA came to this Board and said, We want to participate in this hearing to represent manufacturers, would this Board say no, you're major customers of the utility, but you're not entitled to appear here. 62 Mr. Chairman, the issue of duplication or similar interest is not an interest for status, because the essence of my friend's argument is you should deny someone the right to be heard who has a legitimate interest in being here. It is also not an issue for counsel, because the essence of his argument is if you should deny people the right to select their counsel. 63 There are two areas in which duplication or similarity of interests should be of concern to this Board. One is to control the process, manage duplication on cross-examination, on oral argument, things like that. It is correct that this Board shouldn't allow similar interests to cause a delay or an unnecessary complication of these proceedings. 64 However, none of that has occurred today in this proceeding, so my friend has nothing to talk about. There is no duplication. There has been no duplication so far. There has been no circumstance in which the two intervenors have appeared at the same time, and so I'm not sure where there would be a concern. 65 Now, today, if Mr. Brett appears -- I don't know whether he will, but if he does -- representing the Ontario Association of School Board Officials, he may wish to cross-examine this panel and we may as well. In that case, if our cross-examinations covered the same ground, it is legitimate for this Board to say, You're wasting our time; stop. But it's not legitimate if we're both assisting the Board through our cross-examination to say, Well, you have similar interests, so we won't let you help us anymore. 66 Finally, the second area in which it is legitimate, the issue of duplication, is in the question of costs. In the question of costs, what happens at the time of a status query, a notice of intervention, is to determine whether the intervenor qualifies for cost. At the second level, at the time that a cost claim is made, if there has been duplication, if there has been wasted effort, it is legitimate for Mr. Penny to argue we, Union Gas, shouldn't have to pay costs to two intervenors doing the same thing, representing the same interest, covering the same ground. I absolutely agree with him, and if that happens, he should raise that at that time, but that's not appropriate for this time. 67 Now, I've emphasized, Mr. Chairman, the fact that the Ontario Public School Boards Association are an organization, a collective voice of school boards who are, in fact, customers of this utility, but I don't want to suggest for a minute that we are implying that we are the legitimate representatives and the Ontario Association of School Board Officials should be somehow sent away, because they are not legitimate in some way. That's not our argument. 68 I would give you an analogy, Mr. Chairman. If the Ontario Nurses' Association appeared before this Board for several years, responsibly, participated responsibly in rate hearings because they are concerned with energy use in hospitals, and one day the Ontario Hospital Association shows up and says, We are also interested in the energy use of hospitals, would it be legitimate for this Board to say, Okay, nurses, sorry, the big boys are here, you have to leave now, and the answer is it would not be. 69 It might well be the case that this Board would say, We would like you, two organizations with similar interests, to work together and avoid duplication, prevent delay, prevent unnecessary costs, and we will penalize you if you don't. It is not okay, I don't think, to say -- and it is wrong in law, to say, You do not have status to represent your legitimate interests. 70 Those are our submissions, Mr. Chairman. 71 MR. SOMMERVILLE: Thank you Mr. Shepherd. 72 Mr. Penny. 73 MR. PENNY: Thank you, Mr. Chairman. I'll be very brief. 74 ARGUMENT BY MR. PENNY: 75 MR. PENNY: We did file, as you know, a letter, and I apologize to my friend on the issue of the delivery of it. I was unaware of that, and we will obviously check our fax cover of the letter to make sure that we get the right one for the future, so I do apologize to him for that. I do rely upon the content of my letter and I'm not going to repeat everything that I say in the letter. Let me summarize the point very briefly. 76 I think Mr. Shepherd misapprehends the essence of the argument when he says let's set aside the duplication and the fact that we've got the Association of School Board Officials and the Association of School Boards both seeking intervenor status. What they're really trying to do is deny us status, a person with a legitimate interest, and that's, in fact, not our position as I think is clear from the letter. 77 The essence of the position is precisely the fact that we have two organizations representing the identical interest. They have identified the identical concerns, that is, the rates paid by school boards, because remember, neither of these associations is appearing in their personal capacities. They are appearing purely in the representative capacities, and they both represent the identical customers. And in that sense, it's unlike my friend's analogy to Pollution Probe, Energy Probe, to VECC and CAC, they represent different focuses, different concerns, and indeed different customer groups. There may be some overlap, but they, at their core, are different. So what distinguishes this situation, in my respectful submission, is that these are truly the identical underlying customers, the identical underlying interests and, in this case, we have an indication from the notices of intervention, that they intend to take effectively an identical level of participation in the case, i.e., a full level of participation. 78 That's really what it boils down to. The matter of intervention status, Mr. Chairman, is a matter clearly of discretion for this Board, not a matter of law, a matter of discretion. We have these concerns. We put them before you, and it's really up to you to decide, you know, what -- what's in the public interest, having regard to the resources that need to be devoted to these proceedings, and the costs of these proceedings, and whether the risks of that form of duplication are of concern to you. 79 So I rely upon my letter and the submissions in that letter, and simply say to you that it's a matter for your discretion. We felt obliged to raise these concerns, but ultimately, of course, it's for you to decide. 80 MR. SOMMERVILLE: Thank you, Mr. Penny. 81 Mr. Shepherd. 82 MR. SHEPHERD: Mr. Chairman, I'll be brief. 83 FURTHER ARGUMENT BY MR. SHEPHERD: 84 MR. SHEPHERD: My friend says it is not their position that the Ontario Public School Boards Association should be denied status, but I read from his letter: "Union submits that intervenor status should be denied to the School Boards. 85 It's not complicated. My friend argues that intervenor status is a matter of discretion. With the greatest of respect to a very learned regulatory lawyer, he's mistaken in that. This is a matter of law that this Board is required to hear legitimate interests before it. This Board is governed by the Statutory Powers and Procedure Act, and the principles of audi alteram partem. It is not entitled to say, for no reason, a legitimate interest cannot be here. 86 Those are our submissions. 87 MR. SOMMERVILLE: The Board will retire briefly to consider the arguments on the subject. We will return at 20 minutes to 10, hopefully with a decision on this subject. The Board notes that Mr. Warren has arrived. Mr. Warren, would you identify yourself for the record, please. 88 MR. WARREN: Yes, first, Mr. Chairman, I apologize, we were under the mistaken impression, entirely our own, that we were starting at 9:30 for which I apologize. My name is Robert Warren, and I'm here for Consumers' Association of Canada. 89 MR. SOMMERVILLE: Yes, and Mr. Quinn, Mr. Aiken indicated that you were expected and you have arrived. 90 MR. QUINN: Yes, I am. Good morning, sir. Dwayne Quinn, representing the City of Kitchener. 91 MR. SOMMERVILLE: With that, the Board will retire briefly and return at 20 to 10. 92 --- Recess taken at 9:28 a.m. 93 --- On resuming at 9:40 a.m. 94 MR. SOMMERVILLE: Thank you, please be seated. 95 DECISION: 96 MR. SOMMERVILLE: Having heard the arguments on this point, the Board is prepared to receive the notice of intervention by School Boards and to recognize it. The Board is concerned with the issues raised by Mr. Penny related to duplication throughout the management of the case as a whole, and the Board, in protecting its process and ensuring that the process is as efficient and appropriately managed, will be looking to you, Mr. Shepherd and Mr. Brett, in dealing with the subject matter so that there isn't duplication. And we may make orders in the course of the proceeding in order to manage that subject, and we may make an order at the end of the proceeding that relates to costs, that would also recognize our perception of duplication throughout the course of the matter. 97 So with that, we are prepared to proceed to the case as a whole. Any comment arising from that ruling from either party? 98 MR. PENNY: No, Mr. Chairman. Thank you. 99 MR. SOMMERVILLE: Thank you. Are there any other preliminary matters? Mr. Penny, you indicated argument as an issue. 100 PROCEDURAL MATTERS: 101 MR. PENNY: Yes, Mr. Chairman. There was a discussion before we began at nine this morning about the potential -- and a canvass of people's views on argument. I know our preference, given that we think the issues are quite limited here and that with any luck we will be done the evidence reasonably expeditiously, that Union certainly would proceed directly to argument and it would be my suggestion that parties, on the assumption that we have time, which it looks like we will based on the estimates of cross-examination and so on, that we would proceed directly to oral argument from all parties and try and finish the case today. That was my suggestion. 102 I gather that that hasn't received unanimous support from others, and as I understand it, that there is at least one view out there that some parties would like to file written argument by Wednesday and giving another day or two or whatever to Union to file written reply. 103 The only, I guess, constraint that I think the Board is aware of is that in order for Union to implement any of the matters that it is seeking in this application by May 1, it needs a determination by the 15th of April. So that's part of what was driving our hope that we could wrap it all up today. 104 But I'll let -- perhaps if I've inaccurately described the position or if people have other positions besides the two that I've outlined, perhaps they can speak to that. 105 MR. SOMMERVILLE: If I can characterize, the second option that you've identified which was oral argument from the applicant today, written argument from at least some of the intervenors for Wednesday, and then a day or two for Union to prepare a written reply; that would bring us to Friday, let's say. 106 Thank you. 107 Are there comments, representations on this subject from other parties? 108 Mr. Janigan? 109 MR. JANIGAN: Yes, Mr. Chair, as the proponent of the written argument option, we would suggest that written argument be prepared and sent to the Board by Wednesday noon, at which time the company at its option could either file written argument or an oral response to the written argument as it so chooses within a reasonably tight time frame. 110 We're aware of the fact that this is an application that requires a timely decision. There's a few permutations on what the company is seeking in the context of this application, which we would appreciate some additional time to put our mind to, and to the evidence that's heard today prior to giving argument. As well, we anticipate there may be a couple of brief undertakings that we will request from Union in evidence that might assist us in preparing our argument. So rather than have a circumstance where the argument is either incomplete or has to come in before the undertakings come in, we would sooner leave the option open to be able to file written argument on it before Wednesday at noon. 111 MR. SOMMERVILLE: Thank you. 112 MR. WARREN: Mr. Chairman, could I ask for clarification? I'm not sure I understand what the proposal is. Is the proposal that everybody would have to file written argument on Wednesday or that some people would argue orally? And if some people are going to argue orally, when would that happen? I mean from our selfish perspective, as Mr. Dominy is aware, we have another hearing that's going on and frankly, we just don't have time, given the constraints in that, to prepare written argument. And frankly, our bias would be the same as Mr. Penny's, get it done today, but we understand others have a different view. 113 The question is: If there is going to be a filing of written argument sometime on Wednesday, would the oral argument be Wednesday morning as well, or would it be today? 114 MR. SOMMERVILLE: That's not how I heard the proposal. I heard the proposal to be that -- oral argument today, if possible. If not possible for oral argument, then written argument on Wednesday. 115 MR. WARREN: Thank you, sir. 116 MR. SOMMERVILLE: And I think from the Board's point of view, we would be prepared to accommodate today, trying to get through as many of those oral arguments as people wanted to make today. Are there any other submission on this point? 117 MR. AIKEN: Yes, sir. 118 MR. SOMMERVILLE: Mr. Aiken? 119 MR. AIKEN: We support Mr. Janigan. We believe that the time needed to review some of these issues would take us to Wednesday at noon. 120 MR. SHEPHERD: Mr. Chairman, we agree with Mr. Janigan. 121 MR. SOMMERVILLE: There's a ground swell of support behind you, Mr. Janigan. 122 MR. DeROSE: Mr. Chairman, I'll stand behind Bob Warren. I would much rather do my oral argument today, if we're choosing sides. 123 MR. SOMMERVILLE: It sounds like we're trying to accommodate everyone, so how can we go wrong? 124 Anything else on the subject? 125 The only refinement, perhaps, on the proposal would be that if the applicant wanted to make oral reply argument, Mr. Dominy has some influence with the panel on Enbridge, and would indicate that if oral argument in reply was sought for Friday, that that could probably be accommodated for an hour or so in the context of the Enbridge matter, so that's another option. 126 Is that of any interest to you, Mr. Penny? 127 MR. PENNY: It might well be, Mr. Chairman. I think if we're going to end up in a situation where some of the arguments are going to come in writing on Wednesday, perhaps we could evaluate -- I don't know whether this is feasible from a scheduling point of view, but if we could evaluate at that point whether it appears that we would want to do it in writing or orally. I know my preference would be to do it orally, so I thank you for the opportunity to do that. 128 MR. SOMMERVILLE: We will try to accommodate the choice on Wednesday, but going forward, let's do it on this basis. Those who wish to make argument today, which will include the applicant in argument in chief and those intervenors who want to argue orally today will be given an opportunity to do so. Those intervenor who choose to may file a written argument to be filed no later than noon on Wednesday, and at that point a decision will be made and communicated to the parties as to whether there will be an oral proceeding on Friday to hear reply argument from the applicant, or whether the applicant will file written argument on Friday. The Board will try to accommodate oral argument if that's desired by the applicant, but makes no undertaking to that effect. And with that, we will proceed. 129 The Board notes that Mr. Haynal has appeared. Mr. Haynal, would you identify yourself for the record, please. 130 MR. HAYNAL: Good morning. Thank you very much, Mr. Chair. I am Tibor Haynal for TransCanada PipeLines Limited. Thank you. 131 MR. SOMMERVILLE: Thank you. 132 Mr. Penny, are you prepared to proceed? 133 MR. PENNY: Yes, thank you, Mr. Chairman, we are. 134 The witnesses are available and ready to proceed. They do need to be sworn, although I believe that Mr. Kitchen has already been sworn in the 2002-0130 proceeding. I don't know whether it's necessary for him to be re-sworn or whether we can just proceed. 135 MS. LEA: Why don't we do them all fresh today. 136 MR. SOMMERVILLE: If you could be re-sworn, Mr. Kitchen. 137 UNION GAS LIMITED - PANEL 4: 138 R.BIRMINGHAM; Sworn. 139 M.KITCHEN; Sworn. 140 M.ISHERWOOD; Sworn. 141 D.DENT; Sworn. 142 EXAMINATION BY MR. PENNY: 143 MR. PENNY: Thank you, Mr. Chairman. 144 Mr. Birmingham, since you're a B, why don't I start with you. You're currently the Vice-President of Regulatory Affairs and Business Services for Union Gas. 145 MR. BIRMINGHAM: That's correct. 146 MR. PENNY: And you've been with Union Gas since 1989. 147 MR. BIRMINGHAM: That's right. 148 MR. PENNY: And over the course of that period of time, you've held a variety of positions including Vice-President of Finance. 149 MR. BIRMINGHAM: That's correct. 150 MR. PENNY: Vice-President of Market Management. 151 MR. BIRMINGHAM: Yes. 152 MR. PENNY: And Vice-President of Sales and Customer Support. 153 MR. BIRMINGHAM: That's right. 154 MR. PENNY: And I understand you are a chartered accountant, sir? 155 MR. BIRMINGHAM: I am. 156 MR. PENNY: And you have a Bachelor of Mathematics from the University of Waterloo. 157 MR. BIRMINGHAM: That's correct. 158 MR. PENNY: And you've testified on a number of occasions before this Board, but most recently in RP-2002-0078. 159 MR. BIRMINGHAM: Yes, that's correct. 160 MR. PENNY: And portions of the evidence was prepared by you or under your supervision? 161 MR. BIRMINGHAM: Yes. 162 MR. PENNY: And do you adopt that evidence? 163 MR. BIRMINGHAM: Yes. 164 MR. PENNY: Mr. Dent, I understand you're the Manager of Gas Supply for Union Gas. 165 MR. DENT: That's correct. 166 MR. PENNY: And you've been with Union Gas since 1993. 167 MR. DENT: That's also correct. 168 MR. PENNY: And over the course of that period, you've held other gas supply positions, including long-term Gas Supply Manager and the Coordinator of Risk Management. 169 MR. DENT: That's correct. 170 MR. PENNY: You, I understand, have a Master's of Business Administration from the University of Western Ontario. 171 MR. DENT: Yes. 172 MR. PENNY: You have a Master's of Divinity from the University of Saskatchewan in Regina. 173 MR. DENT: It's actually the Canadian Theological College which is affiliated with the University of Regina. 174 MR. PENNY: Thank you. And you have a BA from the University of Western Ontario. 175 MR. DENT: That's correct. 176 MR. PENNY: And you've appeared before this Board on a few occasions, most recently in RP-2001-0029. 177 MR. DENT: That is correct. 178 MR. PENNY: And the portions of the evidence that were prepared by you or under your supervision, you adopt that evidence, sir? 179 MR. DENT: Absolutely. 180 MR. PENNY: Mr. Isherwood. 181 MR. ISHERWOOD: Yes. 182 MR. PENNY: You're currently the Director for Acquisition of Union Gas. 183 MR. ISHERWOOD: That's correct. 184 MR. PENNY: You've been with Union since 1982. 185 MR. ISHERWOOD: That's correct. 186 MR. PENNY: And you've held positions as Strategic Manager of Industrial Markets, Manager of Industrial Markets and Supervisor of Contract Sales, among others. 187 MR. ISHERWOOD: That's correct. 188 MR. PENNY: And you have a Master's of Business Administration from the University of Windsor. 189 MR. ISHERWOOD: Yes. 190 MR. PENNY: You have a Bachelor of Commerce and a Bachelor of Engineering. 191 MR. ISHERWOOD: Yes. 192 MR. PENNY: And you're a member of the Professional Engineers of Ontario. 193 MR. ISHERWOOD: That's correct. 194 MR. PENNY: And you have appeared before this Board, most recently in RP-2002-0117. 195 MR. ISHERWOOD: That's correct. 196 MR. PENNY: Portions of the evidence were prepared by you, sir, under your supervision or by you? 197 MR. ISHERWOOD: That's correct. 198 MR. PENNY: And do you adopt that evidence? 199 MR. ISHERWOOD: I do. 200 MR. PENNY: And finally, Mr. Kitchen, back to you. You're currently the Manager of Rates and Pricing for Union Gas. 201 MR. KITCHEN: That's correct. 202 MR. PENNY: And you've held a variety of positions since 1993 when you joined the company. 203 MR. KITCHEN: That's correct. 204 MR. PENNY: Including Manager of Product and Service Costing, Manager of Cost of Service and Supervisor of Gas Supply Planning. 205 MR. KITCHEN: That's correct. 206 MR. PENNY: You've also, from 1987 to 1989, worked for Consumers Gas Company, I understand? 207 MR. KITCHEN: That's true. 208 MR. PENNY: You have a Master's of Arts in Economics? 209 MR. KITCHEN: That's correct. 210 MR. PENNY: And as well, a Bachelor of Arts in Economics? 211 MR. KITCHEN: Yes. 212 MR. PENNY: You've testified before this Board and also before the New York State Public Service Commission. 213 MR. KITCHEN: Yes, I have. 214 MR. PENNY: And Mr. Kitchen, portions of the evidence in this matter were prepared by you or under your supervision? 215 MR. KITCHEN: That's correct. 216 MR. PENNY: Do you adopt that evidence? 217 MR. KITCHEN: Yes, I do. 218 MR. PENNY: Mr. Kitchen, perhaps you could start by summarizing for the Board the current application and the proposed changes to Union's rates and charges as a result of this application. 219 MR. KITCHEN: Yes, I can. 220 I think it will be helpful if we turned up the application itself and turned to page 2, part A of Union's application. Union is seeking approval to reflect a 68.32 -- or 235 dollars for 103 increase to its Alberta border WACOG, 2190017 or 007 dollars per 103 m3, which is currently reflected in rates. 221 The increase that Union is seeking approval for in part A is composed of several components. The first component is an increase to the Alberta border WACOG related to the February 1st consensus forecast, that increase is $23.707 per 103 m3. 222 Union is also seeking adjustments to prospectively recover deferral account balances, specifically related to the firm PGVA, the adjustment included within the $68.235 for 103 related to the PGVA is $20.876 per 103 m3, which prospectively recover approximately $24.3 million of firm PGVA debits. 223 Additionally, Union is seeking to recover flexibility-related costs of approximately $41 million, that increase included within the 68.235 related to that is 35.121 per 103. 224 Also Union is seeking to recover inventory revaluation credits which are projected to accumulate within the other purchased gas cost account of $13.3 million. The offsetting charge or offsetting change related to that recovery is 11.469 dollars per 103. 225 Sections B, C, D, and E of the application essentially deal with the changes to reference prices related to the increase in the Alberta border WACOG to reflect the February consensus, as well as the request for recognition of the inventory revaluation credits within the other purchased gas cost account. 226 Sections F and G, Union specifically is seeking the ability to prospectively recover the deferral account balances that I've talked to. Part F -- part G refers to the firm PGVA. Part F refers to the other purchased gas cost account, and I just wanted to note that I already talked about some of the changes we're proposing to the firm WACOG related to recovery of those balances. Union is also seeking approval to adjust its delivery and gas supply transportation rates to recover approximately $42 million or $43 million of load balancing related debits that are projected to accumulate within that account by year end. 227 MR. PENNY: Now, Mr. Kitchen, in your response to that question, you were talking about prospective recovery rather than deferral account disposition. Can you first explain what Union means by prospective recovery and how that relates to the -- to final disposition of the balances in these deferral accounts that you've made reference to? 228 MR. KITCHEN: Yes, I can. 229 Union is proposing to recover the deferral account balances within the firm PGVA and within the other purchased gas cost account, prospectively starting May 1st through to December 31st of 2003. Union is making this proposal in order to minimize the need for out of period, after the fact adjustments. When we would go -- actually dispose of the deferral accounts. 230 Union is not seeking as part of this application approval of the deferral account balances themselves. Those would be the subject of a subsequent proceeding like the 2004 rates proceeding. 231 Union is proposing to track the revenues related to the prospective recovery and true those up on disposition, true up the difference between what Union has recovered through the prospective recovery adjustments and the actual balances that have been occur and allocated. 232 MR. PENNY: Thank you. 233 Mr. Chairman, there are a number of terms that Mr. Kitchen has used that are used in the evidence like the PGVA and the OPGVA, and it would be helpful -- there's obviously a history to all of these issues that goes back, in some cases, quite a few years, so what I was proposing to review briefly the some of the terminology and try and lay the groundwork for some of the evidence. 234 Mr. Isherwood, let's just start with some basics. First of all, can you explain what the purchased gas variance account is or the firm PGVA. 235 MR. ISHERWOOD: The purchased gas variance account tracks all firm supplies that come into Ontario using TCPL pipe. There's three components to that account. There's the commodity cost that are tracked in account 179-08, there are the TCPL toll costs that are tracked on account 179-100, and then there's fuel costs that are tracked in account 179-67. 236 MR. PENNY: How are deferral amounts actually recorded or how do they occur in that account? 237 MR. ISHERWOOD: The PGVA captures all costs that are above or below the reference prices in that account relative to the commodity, the TCPL toll, and the TCPL fuel. 238 MR. PENNY: And the reference price in this context is the Alberta border WACOG? 239 MR. ISHERWOOD: That's correct, and that's for the commodity component. 240 MR. PENNY: How are the amounts in the firm PGVA account allocated? 241 MR. ISHERWOOD: The credits and debits in this account are allocated to sales service customers in the north and south based on how much TCPL capacity and pipe we use to serve those two markets. 242 MR. PENNY: And why are those amounts allocated only to sales service customers? 243 MR. ISHERWOOD: These amounts are -- these costs are actually tracked and allocated to these customers because we're buying and purchasing this gas for this group of customers, and it's actually allocated based on their throughput. 244 MR. PENNY: All right. Then let's turn to the other purchased gas cost account or the OPGCA as it's sometimes called. What is the other purchase gas cost account? 245 MR. ISHERWOOD: The other purchase gas account tracks all other commodity and transportation related costs for all supplies that are non-TCPL. And included in this would be spot gas, for example. This account would track not only the commodity but also the transportation and the fuel costs to get that gas to Ontario using a non-TCPL option. 246 MR. PENNY: So what causes deferral amounts to accumulate in the other purchased gas cost account? 247 MR. ISHERWOOD: Deferral account balances in this account are really divided into a three categories. We have inventory revaluation costs, we have load balancing costs, and we have flexibility costs. 248 MR. PENNY: But how do deferral account -- deferral amounts actually accumulate in that account? Like, what are they being deferred off of, or what variance is being recorded? 249 MR. ISHERWOOD: The reference price in that account is the landed cost of getting the Alberta supply to Ontario using TCPL assets. It's the same reference price used in the PGVA account. 250 MR. PENNY: Okay. And then the three elements that you just outlined, are those the basis which Union uses to allocate the costs that accumulate in the other purchase gas cost account? 251 MR. ISHERWOOD: It's actually a basis that we use to accumulate the cost, and then they're allocated after we accumulate the cost. 252 MR. PENNY: All right. Can you summarize those again? So the basis on which you accumulate the costs are? 253 MR. ISHERWOOD: Inventory revaluation, load balancing costs, and flexibility costs. 254 MR. PENNY: Let's start the with inventory revaluation. First of all, just explain; what is inventory revaluation? 255 MR. ISHERWOOD: Whenever Union Gas changes its WACOG, it's necessary at that point in time to change the value of the inventory that we have on our system at that point in time. 256 MR. PENNY: Just so we're clear, we've been using the term WACOG, but so there's no uncertainty about this, why don't you just tell us what WACOG is. 257 MR. ISHERWOOD: WACOG is our weighted average cost of gas, which is our approved sales rate. 258 MR. PENNY: Coming back to the inventory revaluation, how do you go about calculating the value of the inventory that Union -- the commodity inventory that Union has at any given point in time? 259 MR. ISHERWOOD: On the day that the WACOG is approved to be changed, we follow a very simple formula, multiplying the inventory we have on our system at that point in time, multiplied by the new WACOG. And this would create a new valuation of inventory. 260 In the case of the WACOG increasing, the inventory would be revalued at the higher amount and then exactly the same time, we would put in an offsetting credit into the other purchase gas account offsetting the inventory valuation. 261 This ensures that the system customers, sales service customers, only pay for the gas costs that we incur. 262 MR. PENNY: Just so we're clear, if the WACOG goes up, the value of the inventory goes up, and that results in a credit to customers? 263 MR. ISHERWOOD: That's exactly right. And in the opposite situation where the WACOG goes down, it would result in a debit in the purchased gas cost account. 264 MR. PENNY: And then how do you go about allocating those credits or debits resulting from inventory revaluation? 265 MR. ISHERWOOD: Inventory revaluation debits or credits are allocated to all sales service customers, because essentially we manage inventory almost exclusively for that group of customers, and those costs have been allocated based on their throughput. 266 MR. PENNY: Let's turn to the second of the three items you identified which was load balancing. Again, could you first of all describe what Union means when it describes this set of commodity costs as load balancing costs? 267 MR. ISHERWOOD: Until the winter period, Union provides load balancing service to both the direct purchase customers and the sales service customers and across all rate classes. 268 MR. PENNY: What does that actually mean? What is Union doing that results in those gas costs? 269 MR. ISHERWOOD: We're actually buying supply in the winter rather than the summer. So if we didn't provide the load balancing function, we would be buying that same volume of gas the following summer. 270 MR. PENNY: So how do you calculate the cost of providing that winter gas? 271 MR. ISHERWOOD: Because the load balancing gas is essentially the purchase that's being shifted into the winter, we calculate the load balancing cost based on the summer/winter differential. 272 So for example, when we purchase gas in the winter as spot gas, at the same time we buy the gas and establish the winter price, we also look at the forward summer strip and estimate what the cost is in summertime and establish that cost based on the summer strip. 273 So for example, if we were to buy gas in the wintertime for $8 and calculate the summer strip to be $7, we would allocate of 1 $of load balancing costs. 274 MR. PENNY: It's the winter over summer price premium? 275 MR. ISHERWOOD: Exactly. 276 MR. PENNY: All right. Once you have load balancing cost from your winter purchases, how do you allocate those -- what's the approved basis on which Union has been allocating those costs to customers? 277 MR. ISHERWOOD: These costs are allocated to all sales service and direct purchase customers based on their inventory on March 31. 278 MR. PENNY: So this is a little different from the inventory revaluation which is only allocated to sales service customers. Why are the load balancing costs representing the winter purchases -- the premium for the winter purchases, why are those allocated to all general service customers? 279 MR. ISHERWOOD: As system operator, we provide the load balancing services to all markets including sales service direct purchase. 280 MR. PENNY: All right. Then turning to the third element, those were flexibility costs. Again, why don't you start by describing what Union means when it talks about that segment of the other purchased gas cost account that is represented by flexibility costs. 281 MR. ISHERWOOD: If you take the balance in the other purchased gas cost account and take into account the inventory revaluation and the load balancing costs, the residual or the remainder amount is really what we call flexibility costs. And there's really two cost components that can arise that creates these costs. 282 The first is the difference in cost between our firm TCPL supplies that arrive on TCPL and are tracked to the PGVA, and the other firm supplies we buy using other pipelines; for example, Trunkline. 283 So that's really the first component of flexibility. It's really the difference between our firm supplies on TransCanada relative to our firm supplies on other sources. 284 The second component of flexibility arises from the purchase of spot gas. I mentioned earlier that when we buy winter spot gas we deduct the winter/summer differential to arrive at a summer price. The differential is tracked in load balancing costs. Any incremental cost on the residual amount, the summer purchase price relative to the reference, would also show up as flexibility cost as well. Really two components, spot and the firm supplies. 285 MR. PENNY: It's the non-premium portion of the spot and then the non-TCPL source of the supply? 286 MR. ISHERWOOD: That's correct. 287 MR. PENNY: Thank you. 288 So when did this concept of -- or the need for using this concept of flexibility costs arise? 289 MR. ISHERWOOD: This concept was approved in 1998 as part of EBRO 493/494-06. 290 MR. PENNY: Why was it necessary to use flexibility in the way you've defined it as a basis for allocating costs at that time? 291 MR. ISHERWOOD: By 1998 the industrial market had predominantly all gone direct purchase. So in 1998, the customers that were accessing direct purchase were essentially the general service market. At that point in time, our portfolio was primarily TCPL as well as some other source of gas supply as well. 292 Back in 1998 when customers went to direct purchase, they took with them only TCPL pipe, which at that time was our cheapest source of supply. It was determined at the time that there was an advantage being created to the direct purchase customer by taking the cheapest source with them and leaving the system sales customer with increasing costs based on the mix that was left behind. 293 So to equalize the disparity between the sales service customer and the direct purchase customer, the incremental costs between those two pools of gas were spread across all customers in the general service market. 294 MR. PENNY: And I think you've probably anticipated my next question, so that that was the -- and that was -- based on that history and the purpose of identifying those costs, what is the approved basis on which those flexibility costs have been and are currently allocated? 295 MR. ISHERWOOD: The approved basis is across the entire general service market, both direct purchase and system sales. 296 MR. PENNY: And I gather from -- that something has changed since that methodology was approved. What are the principle changes that have taken place that has caused Union to reassess the appropriateness of coming at it in that way? 297 MR. ISHERWOOD: There have been several changes. I'd like to draw on two, specifically, at the moment. 298 The first is in November of 2001, Union Gas introduced the vertical slice methodology for direct purchase. And using the vertical slice methodology, when a sales service customer goes direct purchase they take with them an exact copy of the assets that we use as -- to serve the sales service customers. 299 So back in 1998 when they were taking TCPL capacity only, there was a discrepancy between the cost to serve the DP market relative to the sales service market. Once you introduce a vertical slice, the cost structure is identical in that the sales service customer costs and the DP general service customer costs are identical. So that has taken away or neutralized, if you want, the discrepancy in cost. 300 The second factor that is important as well, since November 2001 through to December 2002, during that 14-month period, the flexibility costs component had a debit balance of approximately $1.1 million. In the first three months of 2002. That now has a debit of approximately $41.6 million and that primarily happened in February and March of this year. 301 MR. PENNY: Sorry, Mr. Isherwood, you said a few moments ago the first few months of 2002. I think you meant 2003. 302 MR. ISHERWOOD: Sorry. So $1.1 million for the period of '01 to December of '02, and then for the period January, February, March, of '03, the order of magnitude has significantly changed and now 41.6 million is the estimate. 303 MR. PENNY: And what is the reason for the accumulation of that large amount? 304 MR. ISHERWOOD: It was primarily to buy incremental spot gas to serve -- provide -- in this case, to provide gas service to the general service market, sales service market. 305 MR. PENNY: And so as a result of the changed circumstances that you've just described, what is Union proposing in response to those changed circumstances with respect to flexibility costs? 306 MR. ISHERWOOD: Because the -- because of the changes, we are proposing now in terms of flexibility costs to change the allocation methodology and to no longer allocate it to the entire general service market but rather adjust to the sales service part of the general service market. 307 MR. PENNY: How will flexibility costs be allocated under Union's proposal before the Board today? 308 MR. ISHERWOOD: In the proposal before the Board today we will be allocating the costs strictly to the sales service customers in the general service market. 309 MR. PENNY: And based on what measure, in proportion to what? 310 MR. ISHERWOOD: In proportion to their volume of the consumption. 311 MR. PENNY: Right. Thank you. 312 So Mr. Birmingham, perhaps I can ask you, then, with that factual summary and explanation of the terms and the history, what are the features of this application that go beyond the typical QRAM process? 313 MR. BIRMINGHAM: Well, the application is being made under section 36 of the OEB Act, and there's certainly more than a QRAM in that there are a number of different features to it. They are different from the past couple of QRAM applications that Union has made. 314 As the Board knows, in those QRAM applications, we simply applied a mechanistic approach to determining the forward price for natural gas. We are requesting that in this application, but we're also requesting three other things. 315 The first one is the prospective recovery of the projected balance in the PGVA account for true up and a prudence review after the year end in the normal course. 316 The second request is the reallocation of the flexibility costs as described by Mr. Isherwood, whereby the flexibility costs will be recovered from sales service customers only as part of Union's commodity rate, rather than recovering them from all general service customers in Union's delivery rate. 317 And the third one is the prospective recovery of the projected balance in the other purchased gas cost account, which includes flexibility and balancing costs for true up, and prudence review after the year end in the normal course. 318 MR. PENNY: So dealing with -- first with prudence, why does Union feel -- sorry, not prudence, but with prospective recovery, that's the word I was looking for. Why does Union feel that it is appropriate that there be prospective recovery of the projected deferral account balance? 319 MR. BIRMINGHAM: Well, Union is complying with the Board's approved trigger mechanism for deferral accounts whereby disposition should be proposed when the projected balance of the deferral accounts is expected to exceed $20 per customer. But more importantly, Union believes that the charges should be included in the rates now due to the magnitude of the balances and the impact on customers. You can actually see that at tab 1, schedule 7 of the evidence which shows that in the absence of any change, customers could be charged on average between $126 and $151 each after the end of the year. 320 This is the same scale of impact that has upset customers so much with respect to Union's current retroactive charge, and we cannot place our customers, or the company, the regulator, or the government in the position we were in last fall and this winter for the disposition of the 2000, 2001 gas cost deferral accounts. We just can't. 321 MR. PENNY: And with respect to the flexibility change, why does -- in the allocation from all general service customers to sales service customers, having regard to the history that Mr. Isherwood has given, why does Union feel there is a need for a change in the allocation of flexibility costs and why does Union believe that it is necessary for that change to take place now? 322 MR. BIRMINGHAM: Well, as you said, Mr. Isherwood has described the technical reasons for this change, and they are also outlined and described in the evidence at tab 1, pages 17 to 20. 323 But apart from the technical reasons, we believe that the impact on customers means -- customers we have to address this as soon as possible. 324 I think we know that the charges are real, and we know that they're going to have to be recovered from customers subject only to a determination of prudence by the Board. So from that starting point, we looked at the alternatives for allocating the flexibility costs. 325 The first one we looked at is that we could have waited until the 2004 cost of service application and propose the allocation change at that point. That would mean that we would allocate the flexibility costs and recover them from all general service customers, including direct purchase customers. But the flexibility costs were not incurred for them, so they shouldn't have to pay for them, and given the significance of the amount, which is over $40 million, that approach appears to be unfair. 326 The second alternative we looked at is we could have waited until the final disposition of the 2003 deferral accounts next year and propose the allocation change at that point. But that would mean collecting the customers -- the cost from all general service customers now, and then adjusting the amounts next year to collect them only from sales service customers. 327 That approach means that customers' bills would be adjusted by about $20, and that's shown in the response to Exhibit C.1.15, with direct purchase customers receiving a credit with sales service customers receiving a charge at that point. 328 The $20 amount is material, and this is the same level the Board has set to trigger the disposition of the deferral accounts. In addition, changing all the bills seems to be unnecessarily complex for customers and for the company, especially on a retroactive basis. 329 So we know the costs exist and they are material. We know that sales service customers should pay for them as those costs were incurred for those customers. We know that customers don't like large, out-of-period, retroactive charges, which is why we've applied to make the change in the flexibility cost allocation now. 330 MR. PENNY: So if the Board were not to accept Union's proposals in this application, what would the impact be on customers? 331 MR. BIRMINGHAM: I think there's three impacts on customers. The first is that we would look to be recovering the costs after the year end, and subject to a determination of prudence by the Board, those costs are forecast to amount to about $141 million, or about $151 and $126 for each residential customer in Union north and Union south respectively, and that's shown on schedule 7 on line 9 of the pre-filed evidence. 332 The second impact is that customers are going to be very upset that the charges have been allowed to accumulate for a year, and that will generate the same type of nasty letters, calls, and media attention that occurred last fall. A small sample of those customers reactions have been provided in response to Exhibit 25.10. And customers may be even more upset this time, because it will appear we haven't learned from our most recent experience. 333 The third impact, and in fairness, it's not known at this point, is the risks that the balances will be collected during a future period where customers could be paying even higher prices. I think most of the industry publications that we follow would show that the high price environment that we're currently experiencing is not going to abate in the near future and may worsen if we experience a hot, dry summer. So it makes no sense to take that kind of chance, in our view. 334 The deferral account costs are 2003 gas costs that we have a chance to collect in 2003, and then deal only with the prudence review and the true up of the accounts in 2004, and it will serve no one's interest to wait. 335 MR. PENNY: What impact on customers will Union's proposals have, if approved? 336 MR. BIRMINGHAM: Well, customers will pay higher commodity and delivery rates over the period May 1st to December 31st, without the need for a large retroactive, out-of-period adjustment. Customers have told us that this is the preferred approach. 337 MR. PENNY: What will the timing effect of matching costs and paying for those costs be of your proposals? 338 MR. BIRMINGHAM: It will be obviously much closer to the period for when those costs were incurred. I think for roughly the 40 or 45 percent of our customers who are on an equal payment plan, putting them in place now means that the higher costs will be built into their equal monthly payment when they're reset. In addition, customers are still afforded the protection of regulation because there will still be a full prudence review and a true up of the deferral account balances after the year end, it's just that the balances at that point won't be nearly as big as they are now. 339 MR. PENNY: And finally Mr. Birmingham, is Union aware of any legislative or jurisdictional impediment to the Board's approval of Union's proposal in this case? 340 MR. BIRMINGHAM: No, we aren't. In our view the Board has the full statutory power to approve the requested changes to commodity and delivery rates, including the reallocation of the flexibility costs in the context of this application. In addition, there's precedent in Ontario for these types of changes and approving these changes is the right thing to do for ratepayers. 341 MR. PENNY: Thank you, panel and thank you Mr. Chairman. Those are my questions in examination in chief. 342 MR. SOMMERVILLE: Thank you, Mr. Penny. 343 Ms. Lea, I understand that you're going to proceed with cross-examination, first. 344 MS. LEA: Yes, my friends have very kindly consented to that. 345 CROSS-EXAMINATION BY MS. LEA: 346 MS. LEA: Good morning. I have some questions on a number of topics. Many of them are clarifications of the proposal. 347 I'd like to begin with some discussion of the forecast. Thank you for providing in the answer to interrogatory 1.1 the March 2003 consensus forecast. 348 As I understand your proposal here today, however, you are still proposing that the Board approve this application based on the February 2003 forecast; is that correct? 349 MR. DENT: That is correct. 350 MS. LEA: And why is that? 351 MR. DENT: When we made this application, because we knew it was going to take a little bit of extra time, we based it on the February consensus to allow the extra time for everyone to consider it. And we thought that even though the consensus has increased, and that might be reason to re-submit and look at a revised Alberta border forecast. 352 We've also kept an eye on the market at the same time, and in fact, last week the market was about 6.50 at the Alberta border, which is pretty close to the 6.45 that we're applying for. So it seemed like the market and the 6.45 was consistent. 353 Secondarily, if the 6.73 is maintained, then we will have an opportunity in July to come back and to update the Alberta border price based on a -- on the revised forecast. 354 MS. LEA: Okay, thank you. 355 I wanted to delve a little further into the difference between these forecasts. First of all, thank you for your answer to interrogatory 1.2 which was very helpful in understanding the February forecast and the apparent difference in forecast D and where that all came from. I wonder if you could look for me at a proposed exhibit which I believe was faxed to you on Friday. 356 What it is is a NYMEX -- a printout of the energy economics newsletter NYMEX prices for March 31st, 2003, and -- thank you, I think those pieces of paper are being passed out now. 357 Mr. Chairman, with the leave of time Board, I'd like to give this NYMEX forecast printout Exhibit Number D.1, please. 358 MR. SOMMERVILLE: Is there any submission with respect to this -- admission of this exhibit? 359 MR. DENT: This looks like a -- it's not a forecast per se; is that correct? 360 MS. LEA: No, I shouldn't be using that word. It's a graph of the prices, and perhaps it's better if you tell me what it is than I tell you what it is. But I should say for the purposes of the record, this isn't intended to be the most recent pricing. It's simply -- I wanted the shape of the curve you see in this graph for the purposes of my questions. 361 MR. DENT: Yes, this curve looks very familiar. It looks like the NYMEX daily settle over the past number of months. And in fact, the most recent daily close on NYMEX for the May contract has been around the $5 U.S. per MM BTU mark, which is where prices were back in January of this year. So we're still -- in many respects, a winter price for the April/May period. 362 Also, I would note that this is a daily closed price, and the consensus itself reflects a one year futures price. So for example, when we prepared our evidence and had the February consensus -- around the last week of February that was prepared -- the one-year Empress price is about 7.90. And as I just recently, said that one-year Empress price last week was about 6.50. 363 There is a fair bit of volatility, not only in the day price, but also in the one year price going forwards. 364 MS. LEA: Thank you. 365 Mr. Dent, what would be the best three or four words to describe what you're looking at here in Exhibit D.1? 366 MR. DENT: Well, volatility jumps out. 367 MS. LEA: No, what I'm trying to do is label the exhibit. Is it best described as the NYMEX natural gas futures close as it says on the top there? Or day closings for -- 368 MR. DENT: Yes, the NYMEX natural gas futures close, front month is fine, absolutely. 369 MS. LEA: Thank you. 370 MR. PENNY: I think, Mr. Chairman, the reason we got into this is Ms. Lea had described it as a forecast, which it clearly is not. So subject to Mr. Dent's explanation, I have no objection to this being tendered as an exhibit. 371 MR. SOMMERVILLE: This will be D.1. 372 MS. LEA: Thank you. 373 EXHIBIT NO. D.1: NYMEX NATURAL GAS FUTURES CLOSE, FRONT MONTH 374 MS. LEA: Thank you for that clarification. And having never worked on a QRAM application before, I'm quite likely to make a lot of mistakes. You just let me know. 375 What I was interested in respect to this Exhibit D.1 is the spike that's very prominent on the right-hand side of the graph. Is this the spike that you've referred to in your answer to interrogatory 1.2? One of your explanations, as I understand it, for the difference between forecast D in your filed forecast was that it was a later -- that that forecaster had later information and part of the late February spike was included in forecast D. Am I understanding your evidence correctly? 376 MR. DENT: That's correct. There's always a timing difference between when the forecasts are published and produced, and in fact, some of the forecasters, if they see a novelty in the market, they may delay issuing their forecast a day or two to work the most recent information into the their -- into the forecasting models. 377 MS. LEA: Would it be -- given that, would it be true to say that the March average forecast is likely higher due to other forecasters besides forecaster D now including the spike in the forecast? 378 MR. DENT: I think what's happened, when had I looked at the March forecast, is that forecaster D actually came down. So they probably overshot -- they overshot their forecast and said, Oops, things aren't quite as bad as we thought it was at the end of February. They've come down and the other forecasters who maybe lagged the market a little bit, they maybe did an oops about mid March and said, Maybe things are a little bit more robust than what we thought at the about the middle of -- 20th of February, so they've kind of moved up. That type of thing is not unusual with forecasters, both in their regular forecasting, but especially in significant market turns. 379 The key in forecasting is the trend is often easy to see. Where the market turns is a more difficult question. 380 MS. LEA: I guess what I was trying to get at, Mr. Dent, is -- I know that this application is based on the February forecast, but to anticipate any argument that it should possibly be based on the March forecast, would it be true to say that the March forecast is less useful going forward because it contains the effect of this large spike in late February, which appears to my eyes, at least, looking at this graph, to be an outlier? 381 MR. DENT: No, I would disagree with that, because forecasters, they will look at the short-term effect, which is the prompt effect, as you've described in this graph, and they may have a price increase or decrease, say, for the months of March and April. But this -- our forecast is based on May '03 to April '04, and at that point, the forecasters are predicting a more -- if -- for lack of a better term, a more normal market as you look out past the short-term circumstances. 382 Where you have the spike, certainly in this situation, and to some extent in 2000, 2001, where you had the cold weather in early March, storages being depleted, and that -- the prices jump up. It squeezes out some industrial demand, demand gets weakened, and then we have the warm weather happen mid-March and that brought the prices back down. But even if it had stayed cold through the latter part of March and prices had been sustained through that period, you would have expected and, in fact, the forecast would reflect lower prices through the early part of summer and into the fall, just because you don't have that -- that immediacy of the storage crunch affecting you past the March 31 end of withdrawal season situation. 383 MS. LEA: Okay. Now, I understand you're using a 12-month forecast to predict the deferral account balances; is that correct? 384 MR. DENT: That is correct. 385 MS. LEA: As you're proposing to collect the deferral account balances over an eight-month period, would it be better to use an eight-month forecast? 386 MR. DENT: Well, from a cost -- from a rate point of view, you've got the 12-month forecast to set your rate. When we allocate or when we assign cost based on the forecast, we use the individual months, so we don't use an average to forecast cost. We will use the May consensus price, June consensus price, et cetera. So even in a market which is slightly backward and the future prices are lower than prompt prices, you're still capturing a higher forecast from the May to December period and then a slightly lower -- relatively lower forecast into '04. 387 MS. LEA: I guess I was asking you to address whether the period over which the forecast is based has anything to do with the period over which recovery is planned? Is there a linkage between those two periods or is there not? 388 MR. KITCHEN: Maybe I'll try to give an answer to that. 389 What Union is proposing to recover are the year-end balances for -- as of December 31st, 2003. 390 MS. LEA: So that has to be done on a 12-month forecast? 391 MR. KITCHEN: Well, the forecast Mr. Dent is using to calculate the deferral accounts, as he said, is each month's price is used to calculate that deferral account balance as the accumulation to March -- to December 31st that ends up as the December 31st balance. 392 Our recovery is consistent with the eight months remaining in this year, which is consistent with the deferral account balance we're trying to recover. 393 MS. LEA: Sorry, just to step back then. I don't want to belabour this point. 394 So the 12 months whose price you're interested in knowing, which 12 months are those? 395 MR. DENT: The forecast is based on the 12-month period May 2003 to April 2004. That will be the consensus. The volumes that my group are purchasing really do not have as much to do with the volumes that we're recovering -- recovering from, because Mark is looking at the consumption of the customers over that eight-month period. I'm looking at a forecast of purchases over that period as well, but what we purchase and what we consume are generally different once you get into a partial year, because I'm buying more than we consume over the summer period, and then I'm buying less than we consume over the winter period. So there's not an exact match between what our customers consume and what we're buying, because the plan -- the buying plan obviously differs from the consumption profile that the heat sensitive customers have. 396 MS. LEA: Yes, it was really that that I was trying to get at; is there a link or is there not a link? And I think that you've explained that in a way that de-links these two things. 397 MR. DENT: That is correct. 398 MS. LEA: Okay. I wanted to ask you a couple of questions about QRAM applications, I guess, in general. 399 As I understand your approved QRAM methodology, the triggers are a 5 cent change per gigaJoule in the forecast reference price and a $20 per customer impact; is that correct? 400 MR. KITCHEN: For deferral account balances, yes. 401 MS. LEA: For deferral account balances, right. These are two way triggers, that is, either for debits or credits; is that correct? 402 MR. KITCHEN: Yes, I would say that's correct. 403 MS. LEA: But in April 1st, 2002 and October 1st, 2002 you did not apply for a change in the rates, although the price had dropped enough to trigger those triggers, and for the reasons that you gave in letters that you sent to the Board; those letters were dated March 12th, 2002, and August 27th 2002. Is that your recollection? 404 MR. DENT: I have -- 405 MS. LEA: Not of the dates of the letters, but -- 406 MR. DENT: Yes, I have that recollection, yes. 407 MS. LEA: A cynic would look at this and say that Union only applies for a QRAM when it wants more money from customers and not when it has money to give back. I wonder if you could comment on that, please. 408 MR. DENT: Not being a cynic, I would take a slightly different view of that. 409 When I looked at the forecast back -- that previous year, I saw a very significant difference in that full-year forecast. We saw a disconnect between last summer's forecast which was very low because we had a warm winter in 2001 and 2002, lots of gas in storage. The forecast was predicting very low prices through the summer. But then there was a fair bit of uncertainty about this past winter and into this summer for a variety of reasons, such as reduced drilling activity, increased industrial activity, GDP growth, those type of things. 410 So what we saw is a concern that you had -- you had kind of this summer forecast which was relatively low, and then the forecast jumped up. So we did a little by of "what if" analysis, and we said, Well, what if you -- what if you take off say three months of forecast, say July, August, September, and then redo the forecast October 2002 through to September 2003? 411 And when you did that, the dip that you saw at the July period disappeared and you were back up to the consensus forecast that we were already operating on, and in some cases a little bit higher than that. So we were concerned that we would be yo-yoing the customers, bringing them down for an artificial reason, kind of a peculiar summer of 2002 reason only to yo-yo them back up. So we felt it was in the customer's interest and everyone's interest not to yo-yo the forecast down, but to keep it at that sustained level. 412 To my mind, the proof in the pudding was that even with foregoing that decrease, our firm PGVA was actually in 2002 a $7 million debit. So if we were being cynical and trying to gain the system, we didn't do a very good job, because we still ended up with debits at the end of 2002 for our firm account. 413 MS. LEA: Thank you. Mr. Birmingham? 414 MR. BIRMINGHAM: Thank you, Ms. Lea. 415 I just wanted to add one other thing. I think Mr. Dent has described the situation very well. What we were trying to do was take a look forward, and we wanted to mitigate the possibility of any further commodity price increases and to recall that, at that time, we were also going to implement this retroactive charge for the disposition of the 2001 deferral accounts and that was the other consideration around what we were prepared to propose for a commodity price increase. 416 MS. LEA: Mr. Birmingham, your experience with customer reactions, it's clear that customers dislike price increases. Is it also your experience that they dislike a decrease and then a increase to follow, and in fact they'd rather -- would they prefer a refund and a new charge or overall, a new charge but a lower amount of that? 417 MR. BIRMINGHAM: I think it's generally our experience that customers don't like price volatility. Further than that, I think it's also true that customers view charges differently than they view credits, even though they may be of the same magnitude. 418 MS. LEA: Okay. Mr. Dent, Mr. Mackie points out to me, with respect to the credit that you mentioned for the calendar year 2002, that -- I'm looking at the settlement agreement, which is labelled appendix B, page 1 and 2, appendix to the settlement. I'll pass this over if you don't have it with you. 419 The firm supply PGVA did have a positive number -- oh, yes -- that's okay -- of 6.885 million, but at the end of the day there appears to be a credit of 32.745 when you took in the other purchased gas cost account. Do you have any recollection of that, sir? 420 MR. DENT: Yes, I do, and a number of those credits were based on inventory changes -- inventory evaluation of gas that was moved from a direct purchase balancing to system -- to sales service accounts. And so that $35 million was -- came as a result of those activities. 421 But if you're looking just at the gas costs themselves based on the purchasing activity, that $7 million or $6.8 million of firm debits was based on the actual buying activity that included foregoing changes in the WACOG change. 422 MS. LEA: No, I understand that, sir. But I mean with all these deferral accounts, we have credits and debit from various sources and it's the sum total here, for example in this application, that you're asking to collect. You're not pulling out the inventory revaluation for the purposes of this application, and so I thought it was probably relevant for the purposes of past as well. 423 MR. DENT: Well, I'm all in favour of having happy surprises for the customers, but we certainly in our planning, at least on the gas purchasing side of it, didn't anticipate or see those particular credits coming. 424 MS. LEA: I wonder if we could look at load balancing, please, for a moment. 425 I wonder if you could please turn up interrogatory 25.11, please. It's a VECC interrogatory. And I'm looking at Exhibit C.25.11 A and B. And I wanted to clarify that Union is not proposing any change to the allocation of or methodology with respect to the recovery of load balancing costs in this application; is that correct? 426 MR. KITCHEN: That's correct. 427 MS. LEA: Can someone take me to the appropriate schedule to see how load balancing costs are now recovered and illustrate that there is no change, please? 428 MR. KITCHEN: If you can turn to appendix E. 429 MS. LEA: E? 430 MR. KITCHEN: E, yes. 431 MS. LEA: Thank you. Appendix E, yes. 432 MR. KITCHEN: Page 1 of appendix E, it shows the allocation units in column A related to the load balancing costs. Those represent the projected March 31 inbalances or, as Mr. Isherwood said, inventory positions. 433 Those are the same -- not the same magnitude, but the same methodology that was used in setting the EBRO-499 rates. 434 You can see in column B taking the $44.8 million of load balancing costs that are calculated based on the winter/summer spot differential and allocated those using column A. In column C, we've recognized the fact that delivery rates currently recover some portion of load balancing costs. We've deducted those from the amounts allocated to come up with the final amount for prospective recovery of $43 million. 435 If you look from lines 15 through to 21, those represent the amounts currently recovered in rates for customers that are not allocated any of the current load balancing costs. 436 MS. LEA: So the allocators are consistent throughout the -- 437 MR. KITCHEN: Difference in magnitude, but same methodology. 438 MS. LEA: Yes, I understand. 439 Okay. Now, I understand the proposal is that this increase in magnitude for the load balancing, that the recovery will be temporary, that it will go to December 31st, 2003; is that right? 440 MR. KITCHEN: That's correct. 441 MS. LEA: And so there would have to be a Board order removing that amount from rates at the time that you have another rate order. 442 MR. KITCHEN: I'm not sure procedurally what would be required, but when we would implement our 2004 rates, it would be definitely removed. It would depend on whether or not the Board required an order to adjust the rates currently in effect. 443 MS. LEA: Yes, I understand. So the Board could either determine a rate of removal at the time of this application or make a subsequent removal. 444 MR. KITCHEN: That's correct. 445 MS. LEA: There were a couple of things that I didn't understand in the filing. Looking at -- I think it's appendix A, page 9. Just let me check that reference. 446 Oh, yes, okay. So appendix A gives us the various -- they are the rate -- so yes, this is what I was looking for, the rate schedules, and I wasn't understanding why -- if you look at page 9, there seems to be a considerable difference between the M-2 rate change and the M-4 rate change, 1.7431 versus 0.5603. 447 Can you explain the reason for the difference in that rate change? Is that part of the allocation methodology that exists or what's the reason for it? 448 MR. KITCHEN: I think if we flip back to appendix E. 449 MS. LEA: Yes. 450 MR. KITCHEN: Page 2. 451 MS. LEA: Yes. 452 MR. KITCHEN: That page shows -- 453 MS. LEA: Page 2, yes, sorry. 454 MR. KITCHEN: -- the derivation of the rate impacts related to recovering load balancing charges. I think for the most part it's a function of the allocation of the load balancing debits themselves. There's less being allocated to M-4 than there has to M-2 on a proportional basis. 455 MS. LEA: And that isn't a change in this application, it's the same allocater? 456 MR. KITCHEN: No. It's really a function of the mathematics. 457 MS. LEA: Thank you. 458 Also I saw it in appendix A a difference between the northern and eastern customers and the southern operations area customers. The northern and eastern operation area customers appear to be paying the load balancing charges through an increase in transportation service rates as opposed delivery rates. Is there a reason for that? 459 MR. KITCHEN: The difference is that in the south, load balancing and flexibility costs are currently recovered within delivery rates. 460 In the north, gas supply related costs as well as storage costs are recovered in gas supply transportation rates charged to bundled customers. It's really a function of where they are recovered in which rate. 461 MS. LEA: So again, it's history rather than anything to do with the application. 462 MR. KITCHEN: That's right. 463 MS. LEA: Turning to the question of flexibility costs then, thank you for your evidence in chief which helped me understand a little better about these flexibility costs. 464 I understood there were two components that were mentioned, I think, by Mr. Isherwood, and there was a difference between firm TCPL and other firm supply, and also a difference between summer price of -- well, I'll let you tell me what the second difference was because I think my notes are wrong, but I wanted to talk about the first one. 465 The firm TCPL versus the other firm supplies. On the Alliance pipeline, for example, is the cost of the supply that comes in on that pipeline, is it a fixed contract, is it an index contract, what's the situation there? Or does it depend on the contract? 466 MR. DENT: You're referring to the commodity itself? 467 MS. LEA: Yes. 468 MR. DENT: The commodity it itself on the Alliance Vector contracts are -- initially, they start to be an index contract. I think our average cost for this year with Alliance is approximately AECO minus 4 cents, and then as we do with our other supplies, we do some hedging on that by capping that type of thing, so we were layering in our hedging program. So over the course of time, there's a balance between an index and a hedged price. 469 MS. LEA: When you mentioned AECO, what's that? 470 MR. DENT: AECO is the generic term for the NOVA inventory transfer price. 471 MS. LEA: How do you spell it, or is it an acronym? 472 MR. DENT: It's spelled A-E-C-O. It's based on the old Alberta energy storage facility, but if you look at the Canadian Gas Price Reporter, the AECO monthly index is now really a generic or trade term, and it really refers to the monthly or the daily, for that matter, price on the NOVA inventory transfer system. 473 MS. LEA: And when you then -- when you referred in your evidence in chief, then, Mr. Isherwood, to other firm supply, would the sort of thing that Mr. Dent has been describing be included in that category? 474 MR. ISHERWOOD: Absolutely. 475 MS. LEA: What would not be included in other firm? 476 MR. ISHERWOOD: Other firm essentially includes the Alliance-Vector component you mentioned, as well as the Trunkline gas component that's also part of the portfolio. Those are the other two firm sources of gas that we have. 477 MS. LEA: Okay. And the second source of discrepancy which might be accumulated in the deferral account that you mentioned was a difference between WACOG and the summer price of spot; no? 478 MR. ISHERWOOD: Right. 479 MS. LEA: Of spot gas, yes? 480 MR. ISHERWOOD: That's correct. 481 MS. LEA: Okay. And tell me a little bit more about that, please. 482 MR. ISHERWOOD: Essentially, any winter spot gas that we purchase we eliminate or remove the winter/summer differential and treat that as load balancing costs. So the residual costs that we use or comparative is really a summer value of that gas. And likewise, if we buy any spot gas in summer, that also has a summer value as well. So the other component in the flexibility is the summer valuation of our spot gas, and that will be compared back to the reference point. 483 MS. LEA: What were the drivers of the large magnitude of the flexibility costs for this year? 484 MR. ISHERWOOD: The drivers? 485 MS. LEA: Mm-hmm. 486 MR. ISHERWOOD: Essentially, there are two drivers to it. One is a shared name to the volume we're buying, as well as the -- as well as the price differential in the summer spot differential relative to the reference price. 487 MS. LEA: All right. So you bought a lot of gas and it cost a lot. 488 MR. ISHERWOOD: Essentially. 489 MS. LEA: And the reason for the buying a lot of gas was the temperatures this winter largely? 490 MR. ISHERWOOD: Primarily. 491 MS. LEA: Was there any other reason? 492 MR. ISHERWOOD: There was also some industrial throughput that was slightly higher. 493 MS. LEA: Those industrial throughputs, those are direct purchase customers, aren't they? 494 MR. ISHERWOOD: They are. 495 MS. LEA: So your proposal is that they not pay for any of these flexibility costs, as I understand it. 496 MR. ISHERWOOD: Actually, in the table that Mr. Kitchen referred to it did show some cost allocated to the rate 5 class, and that would be the class where you saw an incremental throughput. 497 MS. LEA: For flexibility costs? 498 MR. ISHERWOOD: Sorry, load balancing. 499 MS. LEA: Okay, I'm getting a little -- perhaps I'm mixing it up. 500 For flexibility costs, then, were there any direct purchase customers that caused you to increase your flexibility costs or perfected the magnitude? 501 MR. ISHERWOOD: No, there is none. 502 MS. LEA: So it was load balancing, then, with respect to the rate costs you just mentioned? 503 MR. ISHERWOOD: The industrial class, that's right. 504 MS. LEA: And the price differential driven by demand, uncertainty, political uncertainty, those sorts of factors? 505 MR. ISHERWOOD: I'm sorry? 506 MS. LEA: What caused the price differential this winter that led to this very large increase in magnitude? I'm presuming it is demand because of the cold winter. 507 MR. ISHERWOOD: Certainly. 508 MS. LEA: Political uncertainty? 509 MR. ISHERWOOD: Certainly. 510 MS. LEA: Other factors? 511 MR. ISHERWOOD: Also a supply demand perception in the market, that there's more demand than supply. So that also is supporting prices to be higher. 512 MS. LEA: Thank you. 513 In several interrogatories, Staff at interrogatory 15 and 16 and also interrogatory 16.5 and 16.15, people are asking you why you're proposing to -- just a moment, sorry. I think I want to start with interrogatory 1.16. 514 The proposal is to not change the rates to remove the flexibility recovery that is presently recovered in rates; is that right? 515 MR. KITCHEN: That's correct. We're not proposing to adjust delivery rates and force that amount currently. 516 MS. LEA: I got the magnitude of that was about $1.63 million? 517 MR. KITCHEN: That was included in the EBRO-499 rates. 518 MS. LEA: I understand your proposal is to refund this amount to direct purchase customers if the Board approves an allocation of these cost of sales service customers? 519 MR. KITCHEN: They would be refunded on disposition, yes. 520 MS. LEA: Okay. Looking, then, at interrogatory 16.15, and I'm looking at part B and also the last paragraph, I think, of that one. 521 Okay, first of all, just the last line of part B, what's the load balancing flexibility directive? 522 MR. KITCHEN: I have to think how far it goes back. In EBRO-493 or 4494-06, Union first proposed -- was responding to a directive of the Board from 493, 494 itself. In doing so, they brought forward the proposal related to load balancing and flexibility. 523 At that time, the Board accepted Union's proposal but directed it to bring forward, I think, further proposals. I'm not sure of the exact wording of the directive, but further proposals related to load balancing and flexibility. We'll be bringing forward the response to that directive in the 2004 case. 524 MS. LEA: Okay, so is this application and re-allocation part of the response to that directive? 525 MR. KITCHEN: Union has been working on the directive over the last six to seven months, and in the flexibility piece, Union feels that it's at the stage where it can bring forward that part of the proposal to change the allocation. It is expected that we will be bringing forward the change in 2004. 526 MS. LEA: What change? 527 MR. KITCHEN: The change of the flexibility piece that we're proposing here. 528 MS. LEA: Sorry, I don't get you. You're asking in this application that the allocation be changed; is that right? 529 MR. KITCHEN: That's correct. We're asking for the allocation to be changed, but it's consistent with what we would be asking for when we bring forward the full response to the load balancing directive in 2004. 530 MS. LEA: I see. 531 I think Mr. Birmingham may have answered this, at least in part, but what would happen if the Board said as a result of this application -- the Board says, Recover the deferral account balance for flexibility costs through rates as it's presently -- as they're presently structured, until the next rates case. 532 Can you tell me what the magnitude of the out-of-period adjustment would be, presuming your forecast balance is reasonably accurate? 533 MR. BIRMINGHAM: I would just have to ask you about one assumption that may be in your question, Ms. Lea. If the Board said to use the existing methodology by which to recover flexibility costs and recover that prospectively now, and when you go to dispose of the actual deferral accounts during the true up and disposition methodology in the normal course, and there was no change to that allocation, then there wouldn't be a large out-of-period adjustment. 534 MS. LEA: You are correct. I was making an assumption that it was merely a waiting period, and the Board in it's next rate case would consider this proposal for reallocation and grant you what you sought. 535 MR. BIRMINGHAM: If they changed for the disposition of the 2003 deferral accounts, then the impact would be about $20 per customer. 536 MS. LEA: That is the impact that you talked about earlier, then. 537 MR. BIRMINGHAM: That is correct. 538 MS. LEA: Okay. Thank you. 539 You indicated, Mr. Birmingham, that this is more than a QRAM application. Has Union, or are you aware has Enbridge made an application for this type of change in a QRAM application before? 540 MR. BIRMINGHAM: They have had changes to both their commodity and delivery rates in the context of their commodity rate adjustments. I understand that they are also going to be bringing forward an application to deal with the disposition of their projections of their deferral accounts based on their year-end balances, which I think the last I saw was something in excess of $200 million. 541 MS. LEA: I understand though that the changes to Enbridge's rates were consequential on changes in the cost of the commodity as opposed to an attempt to change a methodology or an allocation within an application for a QRAM; am I understanding you correctly? 542 MR. PENNY: Sorry, Mr. Chairman, perhaps it's a definitional issue, but we're being pretty up front about this, that this isn't just a QRAM application. One of the components of the application is the approval for QRAM piece, and we recognize that reallocation is not part of the approved QRAM methodology. That's why we're bringing this application as well under Section 36 of the Act. 543 So the premises of the question, I think, is incorrect, that we're not trying to shoehorn something else into a QRAM application, rather it's a couple of different applications brought in one legal proceeding, if you will, before the Board. 544 MS. LEA: Are you aware that Union or Enbridge has taken that approach in the past? 545 MR. BIRMINGHAM: Where we have made applications to the Board to deal with a variety of changes to our rates? 546 MS. LEA: Yes -- no. What I'm trying to get at, sir, is that as part of a QRAM proceeding, and I recognize that Mr. Penny said it's more than that and the applicant isn't trying to be saying it isn't more than this, but in general, we see changes to rates in allocation in rates proceedings. 547 Have we seen it in the context of a proceeding whose main purpose, or at least half of the purpose, is a quarterly -- is a QRAM application? I don't think we have, and again, if I'm wrong, tell me. 548 MR. PENNY: Again Mr. Chairman, this is a rates proceeding. We've brought this application under Section 36 of the Act. 549 MS. LEA: Yes, okay. I guess, then, the issue Staff had originally with notice is the one that raises its head at this point. If this is a rates proceeding, is it Union's position that notice was adequate? 550 MR. BIRMINGHAM: Yes, it is, that the notice in the evidence has been served on all of the intervenors to our past application and -- by direction of the Board. We believe that that is appropriate notice and is adequate for the Board to make the decisions that we request. 551 MS. LEA: How does that compare with the notice that the Board requires of you when you bring a rates application? 552 MR. BIRMINGHAM: If you're talking about a rates application, in the context -- or for instance, the 2004 application, then it would be a brand-new proceeding and it would be publication of notices in newspapers and the like. 553 MS. LEA: But publication has not been undertaken for this proceeding? 554 MR. BIRMINGHAM: That's correct. 555 MS. LEA: Okay. 556 Mr. Chairman, I'm turning to a new topic. I probably have another 20 minutes of questions. I wondered if you want to take a break now or wait until I was finished. 557 MR. SOMMERVILLE: Why don't we break now. We'll reconvene at 20 minutes after 11:00 Thank you. 558 --- Recess taken at 11:03 a.m. 559 --- On resuming at 11:23 a.m. 560 MR. SOMMERVILLE: Thank you very much. Please be seated. 561 Ms. Lea? 562 MS. LEA: Thank you. 563 Gentlemen, I wonder if I could take you to tab 1, schedule 3, please. The right-hand side of that chart, I understand, we see the adjusted Alberta border WACOG and dollars per 103 m3 and dollars per gigaJoule. And then under that we see the amounts added and subtracted to achieve the total that you wish to recover -- yes. So we get the new reference price is 7.663 per gigaJoule at that point. 564 MR. ISHERWOOD: That's correct. 565 MS. LEA: Are we looking at the same schedule? 566 MR. ISHERWOOD: Yes. 567 MS. LEA: If you look at the dollars per 103M3 column, if you subtract the proposed adjusted WACOG of 287.242 and if you take that number and subtract from it the $242.714, when we subtracted it, we got an amount of $44.528 per 103M3. Does that seem a reasonable calculation? 568 MR. ISHERWOOD: That's correct. 569 MS. LEA: And that gives us a 4.4528 per m3, dollars per m3 amount; is that correct? 570 MR. ISHERWOOD: Cents per m3. 571 MS. LEA: Pardon me? 572 MR. ISHERWOOD: Cents. 573 MS. LEA: What's an order of magnitude between friends, as we used to say in school. 574 Could you implement this incremental amount through a rate rider from May 1st to December 31st, 2003? 575 MR. KITCHEN: Union currently doesn't have the ability within its billing system to implement a rate rider and have it appear on the bill. 576 When -- in the past, when we've implemented rate riders, such as the inventory rate rider that was in effect November 1st, 2001 through to March 31st of 2002, Union did at that point call it a rider but then wasn't able to show it on the bill, and that created a bit of customer confusion. So our proposal is not to propose something that we can't actually put on the bill. 577 MS. LEA: Just going back to that previous experience, then, there was a rate rider but it didn't appear on the bill as a rate rider. Am I understanding you correctly? 578 MR. KITCHEN: That's correct. It was buried within the gas supply rate. 579 MS. LEA: And I understand you had a customer notification that a rate rider had been applied but it wasn't visible on the bill itself. 580 MR. KITCHEN: That's correct. 581 MS. LEA: What were customer's reactions to that? 582 MR. KITCHEN: There was customer confusion around, I've seen a notice that I'm getting a rate rider but I can't find that on my bill. I don't know. I don't have the statistics on the number of calls that were received. I know there were a number. Clearly not as many as we received for the 2001-2002 implementation, but a number of calls that the customers were confused. 583 MS. LEA: I guess we were interested in a rate rider for a couple of reasons which I'd like to discuss briefly with you despite the answer you've just given. 584 Would not a rate rider be more transparent about the temporary nature of this increase, if you had the capability of putting it on the bill? 585 MR. KITCHEN: I think I could, again, acknowledge that it would be clearer if you could put it on the notice, put it on the bill. It would be -- it would be clearer. Although, I'm not sure the customers appreciate what's meant by a rate rider. 586 I think to a certain extent, customers prefer to look at what they pay as a bottom line -- on the bottom line of the bill. 587 MS. LEA: Just a moment ago you told me that customers were confused because it was aggregated and you felt that wasn't a good thing. Did I not hear you indicate that in your past experience when you had a rate rider, the fact that it did not appear separately on the bill was an issue? 588 MR. KITCHEN: All I was doing was adding to the point -- I'm not sure if customers necessarily want to see a rate rider. I think that they're more concerned about what they're paying as a bottom line for natural gas. I don't think it changes my original answer. 589 MR. PENNY: In fact, Mr. Chairman, what Mr. Kitchen said was that the confusion arose because there was a notice that said there was a rate rider and then you couldn't find anything that so designated something on the bill. That's the confusion he was referring to. 590 MS. LEA: All right. So I understand you to be saying that the preferred thing is either to have both notice of a rate rider and a rate rider visible on the bill, or no notice of a rate rider, and no rate rider visible on the bill. 591 MR. KITCHEN: That's correct. 592 MS. LEA: I see. Mm-hmm. 593 I guess the other piece of transparency that would be accomplished by a rate rider is about -- it would be more transparent about what the actual current commodity costs is disaggregated from the recovery of deferral account balances. 594 MR. KITCHEN: There would be -- I agree that it will be more transparent. Again, it goes back to my original statement. If you can't put it on the bill and you have it in the notice, it will generate confusion. 595 MS. LEA: In interrogatory 1.6, you talk about the fact that you're investigating increasing the functionality of your billing system to accommodate rate riders. Do you have any idea yet of what the cost would be to provide this functionality? 596 MR. KITCHEN: Actually, I don't have any information upon what it would cost. I'm not sure whether it would be ongoing or one-time. 597 MS. LEA: Do you have any idea of the timing you're contemplating in getting this functionality available? 598 MR. KITCHEN: No, I don't. Given that we're investigating it at this point, I'm not sure what's required to put the functionality in. I know that it would require programming, I'm not sure how much. I'm sure that would be reflected in the cost. 599 MS. LEA: How long have you been investigating it? 600 MR. KITCHEN: I think really the investigation started -- when we had our stakeholder conference and first indicated -- 601 MS. LEA: I'm sorry, which stakeholder conference? 602 MR. KITCHEN: Relative to this proceeding. 603 MS. LEA: I see. At the time, then, when you had to impose a rate rider and gave notice of it, and had confusion from your customers, you did not consider at that time increasing the functionality of your billing system to make the rate rider transparent? 604 MR. KITCHEN: Not to my knowledge, no. 605 MS. LEA: Hm-mm. You're telling us it's impossible to do with respect to this proposal, in any event? 606 MR. KITCHEN: That's correct. 607 MS. LEA: You provided some examples of customer notices in appendix D, and in those notices, unless, perhaps, I only -- I looked at the wrong sample, you did not indicate that this is a temporary increase. Perhaps you could assist me with respect to that. 608 Oh, yes, you say collected from May 1, 2003, to December 31, 2003; is that correct? 609 MR. KITCHEN: That's correct. 610 MS. LEA: All right. And that time frame applies to all the matters you're seeking recovery of in this particular proceeding? 611 MR. KITCHEN: That's correct. 612 MS. LEA: Thank you. 613 With respect, then, to customer impacts, I'm very afraid that this goes back to the discussion I had with Mr. Dent with respect to timing and months; however, I'll give it a try. 614 I was looking at tab 2, page 23. Table 3 appears there. I was also looking at interrogatory 16.14 and 25.12, and I'm starting with -- just a second, I'll find that. Starting with 25.12, but the other IRs and references I suppose are relevant. I didn't want you to be unaware of them. 615 25.12, the interrogatory in 25.12, the first question is: "Please confirm how the flexibility related deferral amount is derived over a 12-month period of consumption." And then I think this is what Mr. Dent was clarifying earlier this morning, that the deferral amount is not derived over a period of consumption but over a period of actual and forecast purchases of non-TCPL supplies. 616 Is that what you were trying to tell me about earlier today, Mr. Dent, in a way? 617 MR. DENT: Yes, that is correct. That was the difference there. It really isn't -- when I'm buying, I'm not -- we're following a buying plan, but as we get through the year the buying and the consumption aren't necessarily the same. 618 MS. LEA: Okay, but I understand as is asked in part B of Exhibit C.25.12, that the amount would be collected over an eight-month period. Can you please, then, explain to me how the customer impacts that we see at tab 2, page 23, table 3, have been calculated? On the basis of what volumes? 619 MR. KITCHEN: The volumes that are used to calculate impacts assume an annual consumption -- 620 MS. LEA: I'm sorry? 621 MR. KITCHEN: Assume an annual assumption of 2900 cubic metres for the typical residential customers. 622 MS. LEA: Okay. 623 MR. KITCHEN: That said, the impacts are based on the May through December period, which has a lower consumption, and that volume -- let me turn up to it. 624 MS. LEA: Where do I see that volume? 625 MR. KITCHEN: It appears in a number of places, but tab 2, page 16 of 24. 626 MS. LEA: Page 16 of 24. One moment, please. Okay. 627 MR. KITCHEN: You can see that at the second paragraph. You see that Union's southern operations area consuming 2,900 cubic metres per year, 1,660 cubic metres from May 1st through to December 31st. 628 MS. LEA: Okay. All right. So then, if we take that number for the southern operations area, is that the -- are those the volumes that are used -- I've lost the other reference -- that we see on page 23? 629 MR. KITCHEN: Yes, this is really a summary of each of the impacts that's detailed in the -- prior in the evidence. 630 MS. LEA: For southern operations it's 1,660 m3, and for northern and eastern its 1,320 m3 . 631 MR. KITCHEN: That's correct. 632 MS. LEA: Okay, thank you. Over that eight-month period? Okay, thank you. That's helpful. 633 There was an interesting question and answer given in interrogatory 16.13 which relates to possible inequities for customers who are not primarily heating season load customers. Can you just tell the Board a little bit about the information you've given in part C of 16.13? 634 MR. KITCHEN: Yes. 635 To the extent that we're recovering -- doing the prospective recovery over the May 1st through to December 31st time period, customers that are summer peaking or higher load factor customers, sales service customers, would end up paying, perhaps, more than their share of the costs that were incurred over the winter. 636 What we're proposing as part of the actual disposition would be to keep track on an individual customer basis the amounts paid by customers with respect to the prospective recovery adjustments, and on disposition, calculate what would need to be recovered over the January through to March 31st time period, which is the time period over which the majority of the costs were incurred. 637 In that case, a customer that is a summer peaker would pay the current rates and then be credited back based on their winter consumption any difference. 638 So if I was a farmer, a grain dryer, for instance, I may pay a thousand dollars over the prospective recovery period, but when the actual disposition is done it may be determined that my winter consumption only justified a $500 recovery and I would be receiving a $500 credit. 639 MS. LEA: Okay, so if you were giving back some money to people who have a summer peak, will you have to take more money from those people who have a winter peak, if you're truing this up at the end? 640 MR. KITCHEN: Part of the true up will be that customers will pay for that shift. Now, to the extent, though, that there's a limited number of summer peaking customers, relative to the number of heat sensitive customers within the general service market, those impacts will be small. 641 MS. LEA: Yes, I was just -- you know, we talked about trying to avoid out-of-period impacts. Have you got any idea of the magnitude? When you say small, is it going to be like a dollar or -- 642 MR. KITCHEN: I would say less than $5. 643 MS. LEA: Less than $5. Thank you. 644 Now, I understand this application is based on the February 2003 forecast data and the customer impacts are based on that as well, but -- I'm sorry, I don't have a reference for you. 645 At one point you were asked, I think in an interrogatory, what the customer impact would be if you used the March data, and the difference was only, I think, one cent. Do you recall that question and answer? Does anybody recall it? I should have made a note of it, sorry. 646 Yes, it's Board Staff -- at least a change of 1 cent in the reference price of Board Staff IR number 1, C.1.1. No. Yes, there's a big -- it was a big answer. There was an explanation ... 647 MR. KITCHEN: Is it C.1.2, where we calculate the deferral account balance would be? 648 MS. LEA: Yes, I think that must have been it. And the difference wasn't very great, and I was just -- well, I think that I'll just let the question lie, because, you know, if I can find the reference, I can let you know, but I don't think it's particularly material. 649 Thank you. One moment. 650 Thank you very much. Those are my questions. 651 MR. SOMMERVILLE: Thank you, Ms. Lea. 652 Have the intervenors established among themselves an order of proceeding? 653 MR. JANIGAN: Yes, I think I'm going to be proceeding first, Mr. Chair. 654 MR. SOMMERVILLE: Thank you, Mr. Janigan. 655 CROSS-EXAMINATION BY MR. JANIGAN: 656 MR. JANIGAN: Thank you. 657 Now, as you indicated in testimony and your answers to question from Ms. Lea, Union is seeking a change to the allocation methodology for the flexibility-related costs in this proceeding; correct? 658 MR. ISHERWOOD: Correct. 659 MR. JANIGAN: And according to tab 2, page 2 of your evidence, the flexibility-related debit balance that is accumulated by December 31st is forecast to be 41.655 million in the other purchased gas account; is that correct? 660 MR. KITCHEN: That's correct. 661 MR. JANIGAN: And this accumulation amount of 41.655 million for flexibility-related cost is for January 1st, 2003 to December 31st, 2003; am I correct on that? 662 MR. DENT: That is correct. 663 MR. JANIGAN: And according to interrogatory C.16.1, interrogatory to London Property Management Association, the flexibility balance from January 1st, 2003 to April 30th, 2003 is a projected 53.858 million debit. 664 MR. DENT: That is correct. 665 MR. JANIGAN: Now, I believe your evidence in chief and your evidence at tab 1, page 16, indicated that the flexibility cost is the residual in the OPGCA account once the load balancing charges are removed. 666 MR. ISHERWOOD: That's correct. 667 MR. JANIGAN: So obviously, how the load balancing cost is derived has an impact on the quantum of flexibility cost. 668 MR. ISHERWOOD: Okay. True. 669 MR. JANIGAN: Now, according to your evidence in this proceeding, Union isn't proposing a change to the load balancing methodology in this proceeding. 670 MR. ISHERWOOD: That's correct. 671 MR. JANIGAN: And the load balancing methodology that you were using was the one which was approved in EBRO-493-04, 494-06? 672 MR. KITCHEN: That's correct. 673 MR. JANIGAN: And the flexibility allocation methodology was also approved in the same decision? 674 MR. KITCHEN: Correct. 675 MR. JANIGAN: Now, I wonder if you could take a look at the material for cross-examination that we've distributed. 676 MS. LEA: Yes, I don't think that's been given an exhibit number, now. What does it consist of, Mr. Janigan? 677 MR. JANIGAN: It consists of two decisions. 678 MS. LEA: So it's excerpts from decisions? 679 MR. JANIGAN: Yes. 493-04 -- one decision. Excerpts from decisions, and the 499 decision is also -- 680 MS. LEA: Let's label that Exhibit D.2 for identification, please. 681 MR. SOMMERVILLE: D.2? 682 MS. LEA: Please. 683 EXHIBIT NO. D.2: EXCERPTS FROM DECISIONS FROM EBRO-493-04 and EBRO-499 684 MR. JANIGAN: Now, as I understand from reading the decision, the Board accepted the load balancing and flexibility allocation as an interim measure; do you agree with that? 685 MR. PENNY: Is there a particular passage you're referring to, Mr. Janigan? 686 MR. JANIGAN: Well, perhaps 4.2.21 would be helpful. 687 MR. SOMMERVILLE: That's page 7 of your materials, Mr. Janigan? 688 MR. JANIGAN: That's correct. I'm sorry. 689 MR. BIRMINGHAM: I believe, Mr. Janigan, the paragraph you're referring to is 4.2.21, which talks about 14.508 million of remaining costs which I understand to be flexibility costs, because they talk about load balancing in the paragraphs just before that. 690 The Board states that: "It is prepared to accept the company's proposal in view of its interim nature and the fact that the whole methodology must be reconsidered." 691 MR. JANIGAN: And it would appear that in paragraph 4.2.17 on the previous page, page 6, that the Board reviewed the load balancing and flexibility as a total package in that proceeding. 692 MR. BIRMINGHAM: Sorry, I don't read that, Mr. Janigan. I see that they're talking about the load balancing and the flexibility. I don't know that they're seen as a whole package, but clearly there are two issues that they see as being somewhat interrelated. 693 MR. JANIGAN: And the methodology was to refer to both load balancing and flexibility. You'd agree with me on that? 694 MR. BIRMINGHAM: Sorry, was there a question? 695 MR. JANIGAN: We can agree that the methodology that was to be proposed was to deal with both issues? 696 MR. BIRMINGHAM: That they were looking at the allocation of the load balancing and flexibility costs; that's correct. 697 MR. JANIGAN: And as part of the decision, the Board directed that certain analyses -- as part of the methodology was to come forward, the Board directed that the company carry out a number of analyses. And I wonder if I could refer you to paragraphs 4.23, 4.24 of the decision -- 4.2.23 and 4.2.24 on page 8. And I just want to read those: 698 "In preparing its new proposals, Union should consider a model that would work in conjunction with Union's gas supply demand planning and tracking activities, and be designed to highlight the causal factors resulting in the acquisition of load balancing or other short-term supplies. The Board expects Union's new customer information system will incorporate sufficient flexibility to implement such a model." 699 And goes on in the next paragraph: "A possible model might include the following features: Preparation of a monthly supply/demand/inventory forecast for each type of service; calculation of monthly differences in the supply/demand balance; comparison of monthly actual results to forecast amounts, to isolate variances by type of service at the end of the forecast period; and, a 'true up' mechanism." 700 Now, have you set out any of these -- any of these factors in bringing forward your request in this proceeding to change the methodology with respect to flexibility? 701 MR. BIRMINGHAM: What we have set out in the evidence, Mr. Janigan, is the causal factor that relates to the purchase of flexibility supplies. Mr. Isherwood has outlined that in his evidence at tab 1, pages 17 to 20. It deals with the causal factors related to flexibility gas, and as Mr. Kitchen indicated, in 2004 we'll be dealing with the load balancing piece of this. 702 MR. JANIGAN: So the whole thing will be done as part of the next year's rate case, 2004 rates case? 703 MR. BIRMINGHAM: The other component, being load balancing, will be dealt with in 2004, that's correct. 704 MR. JANIGAN: So flexibility, in your view, has been dealt with by -- would be dealt with by this proceeding? 705 MR. BIRMINGHAM: That's correct. 706 MR. JANIGAN: Now, just in terms of the timing for this application to change the methodology. As you noted in testimony, this is not a QRAM application. 707 MR. BIRMINGHAM: It is a QRAM and includes rate changes for other purposes. So it's both. 708 MR. JANIGAN: Okay, it's not simply a QRAM -- 709 MR. BIRMINGHAM: Not simply a QRAM; that's right. 710 MR. JANIGAN: And this was filed on March 17th? 711 MR. KITCHEN: That's correct. 712 MR. JANIGAN: And March 19th, a stakeholder meeting was held? 713 MR. KITCHEN: That's correct. 714 MR. JANIGAN: And did all stakeholders make this meeting? 715 MR. KITCHEN: All stakeholders -- all intervenors of record were invited. I don't think that all were there, no. 716 MR. JANIGAN: March 20th, you proposed an oral hearing; is that correct? 717 MR. BIRMINGHAM: March 20th we wrote to the Board requesting an oral hearing; that's right. 718 MR. JANIGAN: And April 7th, today, we are having an oral hearing. So from the date of the first filing to the oral hearing, inclusive of the interrogatory processes, is approximately three weeks. 719 MR. BIRMINGHAM: That's right. 720 MR. KITCHEN: That's correct. 721 MR. JANIGAN: Now, is it your experience that the Board generally addresses issues such as allocation methodology changes within a time frame of three weeks? 722 MR. BIRMINGHAM: I think the Board is -- has dealt with cost allocation issues over a variety of time frames. 723 In this particular case, because of the magnitude of the costs that have accumulated, it's important that the Board deal with the prospective recovery in the cost allocation changes now and then deal with the true up of the accounts and the final disposition later on. 724 One thing I will add, Mr. Janigan, is to the extent that we had not incurred the types of flexibility and load balancing costs that we did this winter because of the very cold weather, we wouldn't be proposing this change. 725 MR. JANIGAN: Are you aware, Mr. Birmingham, that the time limits to -- in this proceeding that you've proposed has prevented any intervenors, if they chose to do so, from presenting any evidence on the topic of cost allocation methodology? 726 MR. PENNY: Mr. Chairman, I don't know how Mr. Birmingham could possibly answer a question like that. There has been no such evidence, but neither has there been a request to file such evidence or indeed any request for an adjournment or anything of that nature. 727 MR. JANIGAN: Let's put it this way. There's been no process for intervenor evidence in this case; would you agree with me? 728 MR. BIRMINGHAM: There has been no procedural order issued by this Board that would allow for the filing of intervenor evidence. 729 But I would add, Mr. Janigan, that this is a prospective recovery, not a disposition of the account. Those accounts will be addressed after the year end, and the cost allocation of these amounts will still be one of the issues that is outstanding. To the extent that parties want to file evidence at that time, they can. 730 MR. JANIGAN: But the allocation methodology for flexibility would, in your view, be settled by this proceeding. 731 MR. BIRMINGHAM: That's our proposal, yes. 732 MR. JANIGAN: Now, Union's proposal in this application, according to -- I'm looking at appendix A, page 8 of 20. And Union's proposal in this application will result in an increase to the commodity price of 6.9615 cents for m3, of which 4.428 cents per m3 will be for the prospective recovery of the firm PGVA and prospective recovery of the flexibility account balance. 733 MR. KITCHEN: That's correct. 734 MR. JANIGAN: And if I were to remove the 4.428 cents per m3 from the 6.9615 cents per m3, we would have an increase to the commodity rate of 2.5335 cents per m3. Am I correct on that? 735 MR. KITCHEN: I'll accept the math. Yes, that's correct. 736 MR. JANIGAN: Now does this approximate 2.5 cent per m3 increase plus the current commodity price, in total, represent the forward 12-month forecast price for natural gas? 737 MR. KITCHEN: Would you repeat the question? Sorry. 738 MR. JANIGAN: Doesn't this approximate 2.5 cents per m3 increase plus the current commodity price, in total, represent the forward 12 month forecast price for natural gas? In effect, this commodity price, the 2.5 cents plus the current commodity rate of 23.23 cents per m3 equals 25.7717 cents per m3, the equivalent of February 2003 consensus forecast of 6.45, -- $6.45 a gigaJoule? 739 MR. DENT: Well, in my view, the $6.45 represents the one-year forecast. That's really what the foundation is and the incremental is related to the prospective recovery. The forecast is still $6.45 a gigaJoule. 740 MR. JANIGAN: And the two together, the 2.5 cent increase of current commodity price, plus the current commodity rate, bring you up to that level; am I correct? 741 MR. KITCHEN: Yes. Yes. 742 MR. JANIGAN: Now, I want to deal with the evidence and the testimony earlier received concerning the effect of retroactive adjustments. 743 And I believe we've been to school on this through the proceeding last year, where there were a number of additional amounts that were added to customer bills for a previous time period that caused considerable commotion, both inside and outside the Ontario legislature; is that fair? 744 MR. BIRMINGHAM: Well, certainly, there was a reaction from customers as well as many of the representatives that were felt by the company, by the regulator, and by the government officials, yes. 745 MR. JANIGAN: Now, in answer to the complaints of customers and politicians last year, it was frequently stated that this procedure was an ongoing policy of the Board to true up actual prices of gas with the amounts that were put -- that were set out in rates, and some years it results in a rebate, and some years it results in a bill to the customer; is that correct? 746 MR. BIRMINGHAM: That certainly wasn't the way we described it to customers, Mr. Janigan. We described it as charging them for the actual cost of the gas that they had consumed during that period. 747 MR. JANIGAN: And if the cost of the gas was less than what you had projected, they would be getting a rebate? 748 MR. BIRMINGHAM: That's correct. 749 MR. JANIGAN: And this was a policy that was in place for a number of years before its application in 2002; was it not? 750 MR. BIRMINGHAM: That's correct. We have tracked our actual costs of gas through the deferral account mechanisms and disposed of them in the following year over a number of periods, yes. 751 MR. JANIGAN: And there was no change in methodology or policy that took place in the -- in the middle of the year that caused the customers to be assessed more gas costs than they ordinarily would have. 752 MR. BIRMINGHAM: Sorry, Mr. Janigan? 753 MR. JANIGAN: Last year, on the amounts that were collected, that represented a policy -- that represented collections under policies that been in place under a number of years, it hadn't been changed in the context of the individual rates proceedings, had it? 754 MR. BIRMINGHAM: Certainly, the practice of accumulating the gas costs -- actual gas costs into a deferral account against a reference price was not changed. The disposition of the accounts in advance -- during that proceeding we had actually requested that we try for an interim rate change and that was not approved. 755 MR. JANIGAN: But in terms of the policy of having ratepayers be responsible for the costs of the actual gas they consumed, there was no changes to that policy. 756 MR. BIRMINGHAM: No, customers pay for the actual cost of the gas they consume. 757 MR. JANIGAN: Now, with respect to your change in the methodology associated with flexibility, you were not only requesting a change in that methodology, but you were also requesting that that methodology be applied on a retroactive basis, are you not? That new methodology. 758 MR. BIRMINGHAM: Let me just follow this through, Mr. Janigan. We aren't proposing a change in the methodology around how we determine flexibility costs. 759 MR. JANIGAN: Yes. 760 MR. BIRMINGHAM: We are proposing a change in who pays for those flexibility costs. 761 MR. JANIGAN: Yes. 762 MR. BIRMINGHAM: And we are requesting that change on the basis that those costs are incurred for sales service customers and that sales service customers should pay for them. 763 The other change is that we are looking for a prospective recovery at this time because of the magnitude of forecasted balances, and we will go through a true up and disposition of the accounts later on. 764 MR. JANIGAN: And when does that change in your -- in the flexibility methodology take effect for system sales customers? 765 MR. BIRMINGHAM: The change in the allocation of flexibility costs to be paid for only by sales service customers would take effect May 1st. 766 MR. JANIGAN: But what amounts? Is it recovering for any amounts prior to May 1st? 767 MR. BIRMINGHAM: It's recovering for the costs we've incurred for 2003, so beginning January 1st. 768 MR. JANIGAN: So effectively for system sales customers, they began to pay increased amounts for flexibility as of January 1st, 2003, and it is picked up through the different billing mechanisms that you're proposing. 769 MR. BIRMINGHAM: They are going pay for the costs over the period May 1 to December 31st in our proposal for the costs that we have incurred and we project to incur for the period January to December of the same year. 770 MR. JANIGAN: Now, if someone was knocking on the door of a -- if a broker was knocking on the door of a residential customer, let's say back in the fall of this year, would the expectation of the residential customer be that they should compare what they're getting in system sales with your new allocation methodology to what they would be getting with the broker, or do you think they should -- they would be just comparing what they are getting now with system sales and what they were getting then with system -- 771 Let me take that again. Supposing last fall when a broker came to the door of a residential system sales customer and gave him an offer with respect to supplying him gas in the future. In that case, would a residential system sales customer be able to compare what he would be getting with the direct purchase broker, using your new flexibility -- your new flexibility allocation methodology, or would he have been aware of it at that time? 772 MR. BIRMINGHAM: Well, last fall they would not have been aware of it because the allocation methodology proposal hadn't been made and we hadn't incurred any of the flexibility costs at that point. 773 MR. JANIGAN: So for any of the system sales customers that contemplated change or were in the market for -- comparing what they were getting under system sales to what they were getting under direct purchase brokers, the first time that they would get any information about this change in costing methodology will be when this is announced to them in their bill insert? 774 MR. BIRMINGHAM: They will see the effect of the cost allocation change flexibility costs in the commodity rate of $7.63. 775 MR. JANIGAN: And are they going to be advised that this is something that has taken effect or is an add-on to their bills from January 1st to December 31st as a result of a change in an allocation methodology that occurred mid-year? 776 MR. BIRMINGHAM: That's not our proposal. Our proposal is to simply notify them of the change and of the effective period. 777 MR. JANIGAN: But effectively, no system sales customer would have been in a position to avoid the application of these new costs, at least between January 1st and May 1st, because of the retroactive change in the methodology. 778 MR. BIRMINGHAM: Well, they shouldn't avoid them, Mr. Janigan, because they were the customers that caused us to incur them, so they shouldn't be in a position to try to avoid them. 779 MR. JANIGAN: But if they were in a position to compare what they would have been paying under a direct purchase offer with what they were paying under a system sales offer, they may have opted for the direct purchase offer given that additional knowledge. We don't know, but they might have. 780 MR. BIRMINGHAM: Well, I think there's a number of things that go into customer decisions about who they are going to buy their gas from. I suspect that one of them is price, but another one will be the types of stability that they could get from a marketer rather than from a utility. 781 And in addition, the last time I looked, even under our proposal with the additional costs added into a our commodity rate, our price was still less than some of the offerings that were being made in the marketplace at the time. 782 MR. JANIGAN: But this is one piece of information they would not have had if they were comparing what they were getting with Union and whether [inaudible] direct purchase brokers, at least for a five-month period. 783 MR. BIRMINGHAM: The fact that the sales service customers are going to pay for all the flexibility costs rather than just a portion of the flexibility costs is something that they wouldn't have been aware of. 784 MR. JANIGAN: Now, do you recall, Mr. Birmingham, in the last Union Gas rates proceeding that had been decided in RP- -- 785 MR. BIRMINGHAM: Is that the for the 2003 case? 786 MR. JANIGAN: No, 2001-0029. I guess the last decision in a Union rates case. 787 Do you recall that Union proposed a failure to deliver charge? 788 MR. KITCHEN: Yes, that's correct. 789 MR. JANIGAN: And do you recall that you proposed to make it retroactive to capture those amounts that -- those amounts of costs that Union had been forced to incur as a result of failure to deliver? 790 MR. KITCHEN: We proposed to change the methodology such that we would be recovering those costs from those customers that were at a balance prior to the decision, yes. 791 MR. JANIGAN: To be applicable for the year previous to the decision. 792 MR. KITCHEN: Yes. 793 MR. JANIGAN: In the context of that decision, the Board indicated that it did not believe that a retroactive charge was appropriate. 794 MR. KITCHEN: The Board approved Union's proposal on a going-forward basis. 795 MR. JANIGAN: And the retroactive amounts would not be recovered. 796 MR. KITCHEN: It's not that they would not be recovered -- 797 MR. JANIGAN: -- in a failure to deliver charge. 798 MR. KITCHEN: Right. 799 MR. JANIGAN: They would be recovered in the PGVA. 800 MR. KITCHEN: Right. 801 MR. JANIGAN: System sales customers, in effect, paid for that in -- 802 MR. KITCHEN: I'm not sure if they were in the PGVA or the other purchased gas cost account. I think they were in the other purchased gas cost account, in which case depending where they were in there, they would be recovered from all general service sales customers. 803 MR. JANIGAN: People paid for it that weren't the cause of it? 804 MR. KITCHEN: Correct. 805 MR. JANIGAN: And do you recall that the Board's decision was essentially on the basis of fairness. Would you agree with me? 806 MR. KITCHEN: I'd have to take a look at the Board's decision, but -- 807 MR. JANIGAN: Did you consider that decision in deciding to make a retroactive change in methodology and to apply it from -- in the way you did? 808 MR. KITCHEN: I don't -- I don't look at this as being a retroactive change in methodology. The costs that we've incurred related to flexibility were costs incurred on behalf the sales service customers. We're proposing to prospectively recover those on the basis of how those costs were incurred. Did I consider the decision? No, because for me the underlying cause of those costs are for sales service customers and as a result those costs should be visited upon them. 809 MR. JANIGAN: It's a change in methodology you're proposing, and you're proposing that it's going to have retroactive impact upon those customers. 810 MR. KITCHEN: The impact it has is the impact of allocating the costs to them that they caused us to incur. 811 MR. JANIGAN: Yes, but those costs weren't being borne by those ratepayers prior to this change. 812 MR. KITCHEN: Yes, they were being borne by those rates. 813 MR. JANIGAN: To the same extent? 814 MR. KITCHEN: We've been -- we've been recovering the costs. 815 MR. JANIGAN: Yes, I realize that, and there will be a change in the amounts that -- and the extent that it will be recovered by general service sales customers as a result of this change. 816 MR. KITCHEN: The amount that we've been recovering from sales service customers in rates related to flexibility has been small. Why we're here is because the amounts became so large and material, and that's why we're proposing to change the allocation methodology. To recover the cost from customers that didn't cause us to incur those would be wrong. 817 MR. JANIGAN: According to Exhibit C.1.15, the Board Staff interrogatory 15, if the present methodology was used for the recovery of flexibility costs and that remained unchanged for 2003, the impact to the residential customer would be approximately $20. 818 MR. KITCHEN: That's correct. 819 MR. JANIGAN: And otherwise it's in the $40 range? 820 MR. KITCHEN: The -- Union's proposal would yield approximately a $40 impact for residential sales service customers. 821 MR. JANIGAN: Now, according to Exhibit 16.4: "Union isn't seeking pre-disposition of the deferral account balances. Union will track the revenue related to the prospective recovery and credit those amounts to the firm PGVA and OPGCA and true up the allocation of deferral account balances. Union will allocate deferral account balances related to flexibility related costs to general service customers and true up amounts collected from sales services customers in other rate classes." 822 And your Exhibit 16.3.C explains the true up mechanism in more detail: 823 "And on disposition, Union will ensure that the customers pay only their share of the final 2003 deferral account balances through the true up mechanism, and Union will achieve this by tracking the actual dollars recovered via the prospective recovery by individual customer accounts for the period May 1st to December 31st 2003, calculating the actual amount owed by individual customer accounts based upon the final 2003 gas deferral account balances and disposing of these total year-end deferral balances over January 1st to March 31st, 2003." And then, "on an individual customer account basis, Union Gas will refund the collective difference between amounts recovered and amounts owing." And notes that the amount should be -- the net balance should be small in most cases. 824 I wonder if it's possible by way of an undertaking to provide a numerical example to illustrate exactly how this true up mechanism will work for an individual residential customer, and in particular, what we're looking at is how -- we want to understand the concept of how these balances will be disposed of over the January 31st to March 31, 2003 volumes. 825 MR. KITCHEN: I think in my answer to Ms. Lea I provided that information. To the extent a customer is -- prospectively charged for these deferral account dispositions -- deferral account balances, what we'll do is we'll track that amount, and when we actually look at the disposition, we will compare the amount that we should have recovered if we were disposing of it over the January 1st to March 31st time period. 826 In which case, if a customer, in my example, paid $1,000 through the May to December time period and when we actually looked to the disposition over their January 31st to March 31st volumes we determined that customer should have paid $500 for their winter consumption, then they would receive a credit of $500. 827 MR. JANIGAN: I think the problem is the $1,000 apparently is the full-year cost rather than the month cost, is that it? 828 MR. KITCHEN: No, the $1,000 I was referring to in my answer would be the May to December cost related to the prospective recovery of the deferral account balance. 829 MR. JANIGAN: Now, according to interrogatory response C.16.6, Union wouldn't know the March 31st, 2003 balances until the end of May, 2003 -- did I say May or March -- the March 31st, 2003, balances until the end of May 2003, in effect, being a two-month time lag; is that correct? 830 MR. ISHERWOOD: That's correct. 831 MR. JANIGAN: So at what date would Union be able to carry out this true up process on the 2003 actual consumption usage? 832 MR. KITCHEN: Our proposal is to true up on disposition. 833 MR. JANIGAN: And that -- so the true up for prior year's consumption will be finalized outside the fiscal year end? 834 MR. KITCHEN: Yes. 835 MR. JANIGAN: Just a brief question with regard to forecasting. In Board Staff interrogatory C.1.2 you indicate that: 836 "Union does not see a significant difference between market prices and consensus forecasts as currently constituted as a predictor of future prices." 837 My question that arise from that is: Why don't you use the futures forecast rather than going to this consensus forecast? 838 MR. DENT: We've used a consensus, approved as noted. The original intent of that was to have an arm's length from Union. There's always, I think, some concern expressed that if you're using a market strip you've got basis differentials, et cetera, which may create some type of human or Union input into that. But having said that, as I look at either a consensus or a market strip, I don't really see a difference between the two, and I don't think Union would object to moving to a market strip. 839 MR. JANIGAN: What are you currently paying for -- to do these consensus forecasts? 840 MR. DENT: The cost is approximately about $35,000 per year. 841 MR. JANIGAN: Thank you. 842 Thank you, panel. 843 Thank you Mr. Chair. Those are all my questions for this panel. 844 MR. SOMMERVILLE: Thank you, Mr. Janigan. 845 Who's next from the intervenors? 846 MR. WARREN: I am, sir. 847 MR. SOMMERVILLE: Mr. Warren. 848 CROSS-EXAMINATION BY MR. WARREN: 849 MR. WARREN: Panel, my sense of listening to -- certainly of reading the pre-filed evidence and your responses both in chief and cross-examination this morning is that one of the major drivers for the proposal to change the method of allocating the flexibility cost is a concern about the reaction of customers and their proxies to retroactive rate charges; is that fair? 850 MR. BIRMINGHAM: Yes, that is clearly one of the drivers, Mr. Warren. 851 MR. WARREN: And Mr. Birmingham, can you and I agree, at least at a hypothetical level or theoretical level, that while keeping that a legitimate concern, there is a risk, is there not, in responding to that concern at the risk of a fuller and more considered -- a fuller consideration of all of the factors that would bear on a change in the -- in a proposal to allocate indicate costs; is that fair? 852 MR. BIRMINGHAM: I wouldn't agree with that Mr. Warren. I think the evidence clearly lays out that the reason we want to recover the flexibility cost from sales service customers is because we incur the cost for them. Direct purchase customers shouldn't pay for those because they will be paying for similar types of costs in the cost of supply from their supplier. 853 MR. WARREN: Mr. Birmingham, I have a recollection, and it's -- I apologize. I haven't had the time to track this down. 854 I have a recollection in the last couple of rate proceedings that there has been an understanding, if not an undertaking, that Union would provide a study of some kind with respect to the appropriate method for allocating load balancing and flexibility charges; is that consistent with your recollection? 855 MR. BIRMINGHAM: Well, I think that's the outstanding directive that Mr. Janigan was covering in the materials that he gave us for cross-examination, now Exhibit D.2. 856 MR. WARREN: And in the ordinary course, you would respond to that directive by producing, I presume, for the 2004 rates case what? A full study supporting your proposal for any changes in the method of allocating both the flexibility charges and the load balancing charges; is that fair? 857 MR. BIRMINGHAM: It would have been a response to the directive to deal with both the flexibility costs and the load balancing costs in the 2004 application, and that certainly was our intention. And if our flexibility costs were coming in this year at or around the amount that's in rates, that is the attack that we would have taken, but given the magnitude of the changes and the amounts accumulating in the flexibility costs and the fact that we know what our proposal is going to be for 2004, we have accelerated the introduction of that in the regulatory forum. 858 MR. WARREN: I wanted to follow up just in that context, Mr. Birmingham, to a question Mr. Janigan asked, and I'm not sure I understood the answer. 859 Is it possible, Mr. Birmingham, that any changes you might propose in the method of calculating and allocating load balancing charges might have an effect on the amount that's attributed to flexibility? 860 MR. BIRMINGHAM: I'll have to take that in a couple of pieces, Mr. Warren. I think I've got the question. 861 The first part of it is: Is there anything that could change the amount of the flexibility cost, and those amounts, on an absolute basis, could change somewhat, depending on the actual cost of those supplies through the remainder of the year? 862 So we've already accumulated almost $54 million inflexibility costs. We are expecting that over the balance of the year, compared to the reference price, that balance will come down to around $41 million, depending on what the actual cost of those supplies is, that amount could change. 863 MR. WARREN: But would it change -- what I'm driving at, Mr. Birmingham, is would it change at all or is there a possibility it might change as a function of whatever you may recommend to the Board for the 2004 rate case with respect to the calculation allocated in the load balancing charges? 864 MR. BIRMINGHAM: No. 865 MR. WARREN: Now, if you would turn up, panel, in your pre-filed evidence at tab 1, page 17 of 23. 866 Mr. Isherwood, I should premise my questions by thanking you for your examination-in-chief, which was for at least this dumb audience the first lucid explanation of flexibility charges that I've ever heard. 867 MR. SOMMERVILLE: What was the reference, Mr. Warren? 868 MR. WARREN: Tab 1, page 17 of 23, sir. 869 Mr. Penny has just advised me I should have thanked him as well, and for that neglectful -- 870 MR. PENNY: Let's give credit where credit is due. 871 MR. WARREN: I'm so desperate to understand this stuff, I'll thank anybody who comes along. 872 In citing the factors or rather the rationale for the proposed change in methodology, I'd like to look at factor 2, if I could please, and that is, and I quote: 873 "Since the introduction of the vertical slice transportation allocation method on November 1, 2001, customers migrating to direct purchase pay a comparable transport rate to sales service customers." 874 Now, I apologize if I get this wrong, Mr. Isherwood, but as I understood what's being said there, and as you've said in your examination-in-chief, the old method of allocating flexibility costs was there in part to ensure that there was a fair allocation of the non-TCPL charges to the -- the customers that were migrating to direct purchase; is that fair? 875 MR. ISHERWOOD: It was to ensure that the cost differential between TCPL and non-TCPL supply was shared equally between system sales customers and DP customers. 876 MR. WARREN: Now, the vertical slice was implemented on November 1, 2001. 877 MR. ISHERWOOD: That's correct. 878 MR. WARREN: Now, at some point in the period from November 2001 to today's date, somewhere in that time period, there came a point where Union felt it was no longer necessary to charge the direct purchase customers for the non-TCPL supply; is that fair? 879 MR. ISHERWOOD: We've never charged the DP customers for the non-TCPL supply. The purchased non-TCPL supply is only for the benefit of the general service, sales service customers. 880 MR. WARREN: But at some point, you felt -- I'll put this as awkwardly as I'm capable of putting it -- the vertical slice had the effect of no longer making it necessary in your view to charge flexibility -- to allocate the flexibility charge to the direct purchase customers; is that correct? 881 MR. ISHERWOOD: That was one of the considerations, that's right. 882 MR. WARREN: How can we know where on the time period from November 1 to today's date that took place? 883 MR. ISHERWOOD: It took place on November 1, 2001. But when it first took place, the point I made this morning, was when the order of magnitude of the flexibility costs was fairly insignificant. Between November 1 of 2001 and December 2002, it -- that flexibility cost deferral account had approximately $1.1 million debit in it. It wasn't really until February or March of this year that we saw the order of magnitude jump up to the 41.6 million forecasted number. 884 MR. WARREN: Is it fair, then, for me to conclude from that answer, Mr. Isherwood, that from November 1, 2001, on you could -- you could have brought forward an application for approval of the change in the methodology for allocating the flexibility costs; fair? 885 MR. ISHERWOOD: We could have. 886 MR. WARREN: Is there a reason why you didn't do it, sir, and waited until today? 887 MR. ISHERWOOD: I think the order of magnitude was part of it. As well, we actually did not complete the work on the load balancing initiative until fairly recently. 888 MR. WARREN: Sorry, and the relevance of not completing the work on the load balancing initiative to a proposal to change the method in allocating flexibility costs is what? I thought what I heard from what Mr. Birmingham said was there was no connection between the changes in load balancing methodology and the flexibility methodology change? 889 MR. ISHERWOOD: That's true. Going forward into the 2004 rate case, a proposal we're coming forward with will address the load balancing primarily. It also confirms -- that work is confirmed in the proposal we're doing today in terms of flexibility. 890 MR. WARREN: Now, I want to get to the magnitude of the -- first of all, can I understand the flexibility component of this as the -- is this in a sense an analog -- the PGVA records the TCPL costs in relation to a reference point; is that fair? 891 MR. ISHERWOOD: That's right, that's fair. 892 MR. WARREN: What you've got in the flexibility costs are non-TCPL charges of various kinds; is that fair? 893 MR. ISHERWOOD: Yes. 894 MR. WARREN: So to that extent, they're roughly parallel accounts, if you will; is that fair? 895 MR. PENNY: Just for clarity, it's the other purchased gas account, not the flexibility per se. The account is the other purchased gas account and the flexibility is in that account. 896 MR. WARREN: Thanks for the clarification. I'm trying to get to a definition -- I'm trying to get to a definition, to an understanding of the pure flexibility account and what's in it. 897 Now, in the period from January 1 of 2003 to March 31, there was a significant increase in the amount of gas purchases that were non-TCPL; is that fair? 898 MR. ISHERWOOD: That's fair. 899 MR. WARREN: Why were they non-TCPL? 900 MR. ISHERWOOD: They were essentially spot purchases. 901 MR. WARREN: And that was attributable to factors you articulated and expressed to Ms. Lea that were largely weather-related and some geopolitical factors; is that fair? 902 MR. ISHERWOOD: Primarily the weather was causing the volume change. Geopolitical and other factors were causing the pricing change. 903 MR. WARREN: Okay. And it's your evidence that those purchases were made for the accounts of sales system customers only; is that right? 904 MR. ISHERWOOD: Maybe it might help if I start my example at the beginning here, just to clarify the point. 905 DP customers do not cause any flexibility costs whatsoever, and that's the fundamental part of the proposal today, is that flexibility costs are incurred only on the account of the sales service customer. 906 When we buy spot gas in the wintertime, it's to provide load balancing service for all markets, and as I mentioned this morning, we take off the summer/winter differential and we get that price adjusted down to essentially a summary price. 907 Had we not provided the load balancing service in the wintertime we would have bought the same volume of gas in the summer, so we would view it as essentially a loan. We're loaning gas we would have bought in the summer for the sales system customer we would have normally bought in summer. We're loaning it in the winner to the entire market to provide load balancing. 908 The cost of doing that loan is essentially a summer/winter differential, and so when you eliminate somewhere in your differential off the price of spot gas, what's left is essentially the summer price of gas -- 909 MR. WARREN: Which is the $41 million; is that right? 910 MR. ISHERWOOD: That's correct. 911 MR. WARREN: Now, Mr. Birmingham or Mr. Isherwood, when the Board comes to do a prudence review at the end of 2004, will it be looking at whether or not these flexibility costs were prudently incurred in customers? 912 MR. BIRMINGHAM: After the end of 2003, when the Board does its prudence review, they will be looking at whether these costs were prudently incurred, yes. 913 MR. WARREN: Now, finally, panel, I just have a couple of questions that are sort of mechanical in nature in the sense that I want numbers. And I apologize in advance, these may be in the record, I just can't find them. 914 Can you divide up, for purposes of clarity, first the flexibility amounts and the load balancing amount. Can you tell me what the -- what the amounts would be in each of those two categories, first, for the period January 1 to April 30th, and then from May to December? You don't need to do it now. If it's convenient, you could do it over the lunch break. It doesn't matter, Mr. Birmingham. 915 MR. KITCHEN: Are you looking for the actual deferral account balances? 916 MR. WARREN: Yes. 917 MR. DENT: Yes, we can calculate that over the lunch break. 918 MS. LEA: Would you like, Mr. Warren, if we gave it an undertaking number just to keep track? 919 MR. WARREN: As long as you don't ask me to repeat, Ms. Lea. 920 MS. LEA: Maybe one of the witnesses can repeat Undertaking E.1, then. 921 MR. DENT: As I hear it, we're looking for the January to April flexibility total and then we're looking for the May to December 2003 flexibility total. 922 MS. LEA: Because I thought I had seen the first component of that in the evidence. 923 MR. DENT: You had. 924 MR. WARREN: As I said, Ms. Lea, it may be in there. I think there is a interrogatory response to my friend, Mr. Aiken. And the other one was load balancing. Can you do it for those two periods, for load balancing as well. 925 MR. DENT: Absolutely. 926 MS. LEA: Okay, for both load balancing and flexibility. 927 UNDERTAKING NO. E.1: TO PROVIDE THE AMOUNTS FOR THE FLEXIBILITY TOTAL AND LOAD BALANCING TOTAL FOR THE PERIODS OF JANUARY TO APRIL AND MAY TO DECEMBER 2003 928 MR. WARREN: And the second component of numbers panel and, again, this may be in the evidence but I haven't been able to find it, is I'd like to be able to get the numbers in a number of categories rendered in cost per cubic metre, if you wouldn't mind. 929 MR. KITCHEN: Cents per cubic metre? 930 MR. WARREN: Sorry, cents per cubic metre. I'll give you the following categories, and you don't need to give me the numbers. If we took the March 1 estimated gas supply cost in cents per cubic metres. 931 MR. KITCHEN: Gas supply commodity rate? 932 MR. WARREN: Yes. 933 The impact of the February forecast on WACOG in cents per cubic metre. 934 MR. KITCHEN: Yes. 935 MR. WARREN: The PGVA in clearance amount in cents per cubic metre. 936 MS. LEA: PGVA clearance amount? 937 MR. WARREN: Yes. 938 The inventory revaluation amount, the flexibility amount, and the load balancing amount. Could you just give those in cents per cubic metre? 939 MR. KITCHEN: Would you like to do that right now? 940 MR. WARREN: Whenever it's convenient to you. 941 MR. KITCHEN: Probably easy right now, if I can get you to turn to the pages. Go to tab 2, page 21. Hopefully start there, I'm going to have to take you back a little bit further, probably. 942 Just to get your first -- the current Alberta border WACOG is -- make sure I get the units right. 943 MR. WARREN: If you would prefer to do this over the lunch break, Mr. Kitchen, that's fine with me. 944 MR. KITCHEN: It's actually probably fine to do it now, if you're willing to just let me find the paper. 945 MR. WARREN: Yes. 946 MR. KITCHEN: The current Alberta border WACOG is 21.9007 cents per m3. 947 MR. WARREN: Okay. 948 MR. KITCHEN: To that, Union is proposing to add for the increase in WACOG, 2.3707 cents per cubic metre. For the prospective recovery of the firm PGVA, that is 2.088 cents per cubic metre. I may not be giving them in the order you've asked for, but for the prospective recovery of inventory revaluation is a credit of 1.1469 cents per cubic metre. For the prospective recovery of the flexibility, 3.5121 cents per cubic metre, and I believe all that's left is the load balancing piece. 949 MR. WARREN: Yes. 950 MR. KITCHEN: Which is 1.7431 cents per cubic metre. 951 MR. WARREN: Panel -- this, Mr. Chairman, is my last question for this panel, and the question is this: Mr. Birmingham, can you help me out with this? You are -- Union is -- I forget the exact chronology, but it's toward the end of its PBR period; is that correct? 952 MR. BIRMINGHAM: The trial PBR period ends at the end of 2003. 953 MR. WARREN: Do the -- if I can call it the rules for the PBR period have an impact on: (a) the way this application is framed; and, (b) the relief you're requesting? Are there constraints within the trial PBR rules? 954 MR. BIRMINGHAM: No, there aren't. There are no constraints with respect to the allocation of deferral accounts. In fact, they are expressly mentioned in the Board's decision as something we need to bring forward on an annual basis, and the allocation and disposition are determined at that time. 955 MR. WARREN: Thank you, Mr. Chairman. Those are my questions. 956 MR. DENT: Mr. Chairman, I could clear up the other question that Mr. Warren had, if that would be advisable. 957 The January to April flexibility debit as listed in the IR 16.1 is a debit of $53.858 million. For May to December the flexibility credit would be $12.203 million. Load balancing for the period January to March is probably more correct, because there can't be any load balancing in the summer period. That amount is $44.837 million, and for the period April through December or May through December is zero. 958 MR. WARREN: Thanks. 959 MR. DENT: You're welcome. 960 MR. SOMMERVILLE: The second number you gave, Mr. Dent, the credit figure from April to December, what was that? 961 MR. DENT: The credit figure in flexibility April to December was $12.203 million. 962 MR. SOMMERVILLE: Thank you. 963 Mr. Aiken, are you next in line? 964 MR. AIKEN: Yes, I am. 965 MR. SOMMERVILLE: Please proceed. 966 CROSS-EXAMINATION BY MR. AIKEN: 967 MR. AIKEN: Ms. Lea and Mr. Janigan and Mr. Warren have covered a lot of the questions I had originally intended to ask, so I'm apologizing in advance if I jump around. 968 If I could have you turn to Exhibit C.16.13. On the second page of that interrogatory response Union talks about tracking the actual dollars and doing a true up on an account-by-account basis. Was this methodology included anywhere in the pre-filed evidence, the true up on an account by account basis? 969 MR. KITCHEN: No, it wasn't. This was -- we didn't go into the details in the pre-filed. We just talked about the true up itself. 970 MR. AIKEN: In appendix A on page 8, and I don't know whether you have to turn it up because we've talked about these numbers before, there's approximately 4.4 cents over the 30.2 cent commodity in fuel charge as related to the prospective recovery in the firm PGVA and flexibility and other purchased gas charges. 971 Two questions: First, how will customers know what the real gas commodity charge is that they're paying if they're only going to see a 30.2 cent figure on their bill? 972 MR. KITCHEN: The notice itself will describe what adjustments Union is making in terms of the fact that they're paying for increased costs, not in detail. What they will see is the 30.2 cents, which is the cost they are paying for gas that they have consumed largely in the winter of 2003. 973 MR. AIKEN: My second question, then, is how will the customer be able to knowledgeably compare offers from gas brokers? 974 MR. BIRMINGHAM: They can use that price, Mr. Aiken, as a comparison to whatever offer is being made. As I mentioned before, I think customers look at price as well as a number of other things when choosing whether they're going to use Union Gas as their gas vendor or whether they're going to use somebody else. 975 In addition, there's always been, as you're probably aware of, some difference between the offers that are being made out in the marketplace, because those offers contain a number of other things including, in the case of multiyear offers, premiums to deal with the long-term supply. Because we use a consensus forecast methodology, that will just by its nature not necessarily agree to what other market offers might be. 976 MR. AIKEN: If I can have you turn now to schedule 5 at tab 1. 977 MR. BIRMINGHAM: I'm sorry, Mr. Aiken, could you give that to me again? 978 MR. AIKEN: Schedule 1, tab 5. 979 MR. BIRMINGHAM: Thank you. 980 MR. AIKEN: Looking specifically at page 1 and page 2, and on both of those pages, the column labelled "interest." And it would appear if you add column G on page 1 and column I on page 2, that over the May through December period there's about $400,000 on average of accrued interest charges on the firm PGVA and the other purchase variance account. Am I correct in adding those two numbers up? 981 MR. KITCHEN: I just missed what you said, actually. 982 MR. AIKEN: Sorry, there's approximately $400,000 in interest charges per month when you add up the two accounts, the firm PGVA on the first page and the other purchased gas cost deferral account on the second page, the 400 being the May through December period. 983 MR. KITCHEN: That's correct. 984 MR. AIKEN: Now, if the Board approves your proposal, would the incremental revenue related to the firm PGVA and the various components of the other purchased gas variance account be credited to these accounts on a month-by-month basis? 985 MR. BIRMINGHAM: That's right. The prospective recovery will be credited into these accounts, and because of that will draw down those interest amounts. So what you're seeing here, Mr. Aiken, is the amounts that we would record as interest on those accounts without the prospective recovery. Obviously it would be a lot lower as prospective recovery comes into place. 986 MR. AIKEN: Do you have any idea how much lower the December balances would be? Just an aggregate of the two accounts? 987 MR. KITCHEN: Well, to flip back to schedule 4, and I hope this is answering the question, but if you look Union is proposing to recover from the two accounts -- from the two accounts at line 8, that equals 89.941 million. And after the recovery in the account itself -- in those accounts themselves would be credits totalling 2.494 million. 988 Some of those credits are credits that will go to non-sales service customers, but -- 989 MR. AIKEN: Okay, thank you for that. 990 How is Union currently recovering the retroactive charges that came out of the 2001, 2002 customer review process? 991 MR. KITCHEN: We started recovering those amounts effective January 1st of 2003, and it's through six monthly installments. 992 MR. AIKEN: It's not a per cubic metre charge, it's a monthly charge? 993 MR. KITCHEN: It's a fixed monthly charge based on consumption. 994 MR. AIKEN: Why is Union not proposing a similar charge to recover the costs from this proceeding? 995 MR. KITCHEN: I think that -- that customers have indicated to us that they don't like lump sum, in some ways. They also -- the fact that we started recovering this in May, at the same time, we're also recovering a -- the retro-charge from the prior case. We would be doubling up those amounts for at least the May through June time period. Then we continue those, let's say, for another, let's say six months, whatever we chose to do. It would appear as though we weren't actually taking those -- we weren't removing that adjustment from the prior case. 996 MR. AIKEN: If I look at tab 2, page 20, table 1, it would appear that the impact on the southern operations area residential sales service customers is a charge of approximately $72 that would be recovered from the deferral account balances. Could Union recover this charge over, say, a three-month period starting in July after the current fixed additional charge is over? So that would be $24 a month for July, August, and September. 997 And wouldn't that be of benefit to residential customers who would have a low volume consumption at that point in time, rather than making those customers susceptible to larger volumes in November and December time frame? 998 MR. KITCHEN: We could do that. However, we don't believe that our customers would appreciate that, given that they would be just finishing up paying an approximately $20 charge and we would continue it. 999 In addition, for our budget billing customers, we wouldn't be able to pick that up through -- pick up those adjustments for them. 1000 MR. AIKEN: Don't you think customers would appreciate a lower overall cost when the true up happens some time next year, and a lower additional cost being driven by the interest? 1001 If you're going to recover your entire amount by September through a $24 a month charge, rather than continuing to recover it through to December, I'm assuming your interest charges would be, again, lower than what's currently projected. 1002 MR. KITCHEN: I think that certain customers may appreciate the nuance, but I'm not sure that the mass necessarily would. I think they would view it as a continuation of a retroactive adjustment from 2001, 2002. I think our call centre would be barraged with calls as to why it hasn't stopped. 1003 MR. AIKEN: Could I have you undertake to provide a version of schedule 5, pages 1 and 2, that would show the year-end deferral account balances if the recovery of these costs were recovered through July, August, and September, so we can see the magnitude of the decrease in interest charges? 1004 MR. KITCHEN: We can prepare that. 1005 MS. LEA: That will be Undertaking E.2, please. 1006 UNDERTAKING NO. E.2: TO PROVIDE A VERSION OF SCHEDULE 5, PAGES 1 AND 2, THAT WOULD SHOW THE YEAR-END DEFERRAL ACCOUNT BALANCES IF THE RECOVERY OF THESE COSTS WERE RECOVERED THROUGH JULY, AUGUST, AND SEPTEMBER 1007 MR. AIKEN: Back on table 1 -- 1008 MR. KITCHEN: Are we still in tab 1? 1009 MR. AIKEN: Yes. Yes. Tab 2, table 1, pages 20 and 24. 1010 We've confirmed before that line 6 shows a total customer impact for an average residential sales service customers in Union's proposal. Can I take it that line 5 would be the total impact of Union's proposal on a residential direct purchase customer, the $20 and the $19 figures? 1011 MR. KITCHEN: Yes, because those costs are recovered from all -- all the general service customers. 1012 MR. AIKEN: Now, you may have answered this before, but if the flexibility related charges are maintained as delivery related charges, as they are under your current methodology, and I'll just look at the southern operations column here, would that change effectively remove the $41 charge at line 2 and replace it with approximately a $20 charge under line 5 or in conjunction with line 5? 1013 In other words, there would be half the impact spread over twice the volumes, roughly? 1014 MR. KITCHEN: Approximately. 1015 MR. AIKEN: Would the same thing apply to an average commercial sales customer? In other words, are they roughly 50 percent direct service, 50 percent system gas? 1016 MR. KITCHEN: I'm not sure. If it was approximately 50/50, then the impact would be -- would be similar. 1017 MR. AIKEN: Okay. Back at Exhibit C.16.13, part C specifically again, the three bullet points, Union is proposing the prospective recovery of the four items, those four being the firm PGVA, the inventory revaluation credit, load balancing, and flexibility. When the true up occurs, will the true up be for each of these four items? 1018 MR. KITCHEN: Yes. 1019 MR. AIKEN: The second bullet point indicates that you will dispose of the actual deferral balances over the January to March 2003 volumes. I want to look at each of these four items. 1020 First of all, on the firm PGVA deferral account balance at year end, 2003, wouldn't it -- wouldn't those deferral account balances be cleared based on the entire 2003 volumes, not just January through March? 1021 MR. KITCHEN: I -- I think that when we came up with this proposal, what we were trying to do was to recognize the fact that the majority of our costs we were trying to recover relate to load balancing and flexibility, and those costs were incurred over the winter period. And that's really what we're proposing here, to shield customers who have a peaking load or have a higher base load. We looked at the recovery in total in coming up with this proposal. 1022 MR. AIKEN: My recollection on one of the schedules is that there is a $24 million debit at the end of 2003 for the firm PGVA, but at the end of March or April it was approximately 22 million. 1023 So are you saying that the full 24 million would be based on the January through March period and that there would be no true up for any variance in gas costs, effectively, after May 1st? 1024 MR. KITCHEN: Based on what we have here, that was our proposal, yes. 1025 MR. AIKEN: What would happen if you come in for a July 1st change? Would that have some impact on your proposal as to what period of volumes would be used? 1026 MR. KITCHEN: To the extent that there was a significant change in the deferral account balances, I suppose that we could -- we could look at the disposition methodology. 1027 We're trying to do this to set a disposition methodology that best matches the cost incurrence to each customer now, without the benefit of actually knowing what the balances are. 1028 MR. AIKEN: So if I look back on schedule 5 in tab 1, page 1, I see that the March firm PGVA debit is $16 million and the April debit is $22 million. Given that this would be a May 1st price increase, wouldn't it be more appropriate to recover the 22,158 rather than a projected 22,481 that is a December year-end number, if you're only going to allocate it based on the first few months' volumes? 1029 MR. KITCHEN: The -- schedule 5, page 1, the April increase in the deferral accounts are still forecasts. To the extent that we did see something different happening, we could propose a change in disposition methodology. 1030 But at this point, we're still looking at a significant amount of the dollars related to flexibility and the load balancing costs which have occurred and won't -- won't go down over the remaining course of the year. 1031 MR. AIKEN: I guess the point I'm trying to make is, don't you think it's appropriate that the amount recovered be tied in to the time period when those costs are incurred and the volume that drove that cost to be incurred? In other words, if you're going to recover a year-end balance it should be based on the entire year's volumes. 1032 MR. KITCHEN: I acknowledge that it's best to recover costs in the period in which they were incurred. That said, the majority of the costs that we're looking to recover, approximately 90 or 80 million of them were incurred over the January to March time frame. 1033 MR. AIKEN: If we move over to the flexibility costs, a similar type of question. I think Mr. Dent gave us numbers just a few minutes ago about a $53 million debit at the end of April, and then a $12 million for the May to December period. And again, I'm assuming that your proposal is that you will recover the net $41 million based on January through March volumes. 1034 MR. KITCHEN: The net -- sorry? 1035 MR. AIKEN: Net $41 million debit to be recovered over the January through March volumes. 1036 MR. KITCHEN: For flexibility? 1037 MR. AIKEN: Yes. 1038 MR. KITCHEN: Yes. 1039 MR. AIKEN: You gave the example to Ms. Lea, I believe it was, about the grain dryer or tobacco customer that would get a $500 credit on their bill. Those type of customers generally only use gas in the summer or fall, so would that customer end up paying, in your example a $1,000 extra and then get a $500 credit on his bill which he would not be able to utilize until he actually consumed gas six to eight months later, or would Union actually send out a rebate cheque to that customer? 1040 MR. KITCHEN: He would get a credit on his bill. 1041 MR. AIKEN: So he would be out of pocket by the thousand, and wouldn't get the benefit of the rebate until he actually started consuming gas again in the summer or the fall? 1042 MR. KITCHEN: If there was no consumption through the other part of the year, yes, but he would get the credit that was due him and only be paying for the gas that was attributable to his consumption through the winter. 1043 MR. AIKEN: Yes. 1044 If the Board were to determine in this proceeding that it's not appropriate to make the change on a retroactive basis for the flexibility allocation to the particular group of customers that you're proposing, would you accept that the $53 million debit that's in place at the end of April be allocated based on the current methodology and then the credit going forward as effective May 1st when you change your rates be allocated based on your proposed methodology? 1045 MR. KITCHEN: I think we'll respond to the Board's decision, whatever that decision is. 1046 Our proposal is to recover the amount for all these deferral accounts based on the projected year-end balance over the May to December time period. 1047 MR. AIKEN: So if the Board were to determine that it would accept your proposal but not on a retroactive basis, you wouldn't have a problem with making the allocation of the $53 million incurred to the end of April based on the current methodology and then making the $12 million that accrues in the May through December period on your proposed methodology, if accepted by the Board? 1048 MR. KITCHEN: To the extent that the Board is uncomfortable with the proposed methodology, I think our preference would be to do it on the current methodology and deal with in at disposition, the allocation change. 1049 MR. AIKEN: Thank you, gentlemen. Those are my questions. 1050 Thank you, Mr. Chairman. 1051 MR. SOMMERVILLE: Thank you, Mr. Aiken. 1052 One moment, please. How many intervenors will have questions for this panel? 1053 I propose to go through to 1:30. Who's next in line. 1054 MR. KILLEEN: I'll jump to the front of the queue. 1055 MR. SOMMERVILLE: Thank you. 1056 MR. KILLEEN: I only have five minutes of questions, perhaps even less, depending on the answers. 1057 CROSS-EXAMINATION BY MR. KILLEEN: 1058 MR. KILLEEN: A number of the interrogatories and some of the discussion earlier today indicate that some parties might be suggesting or taking the position that the proposed changes of the cost allocation methodology, that's moving the flexibility costs from the delivery rates to the system gas supply rates should await the next rates filing. We've had a considerable amount of discussion today that you've done a lot of work to address these issues already. 1059 I was just wondering, based on the work that's been done to date on the cost allocation of the load balancing and the flexibility, is there any potential change to the allocation methodology whereby you would see the costs going the other way, and by that I mean, do you see any of the costs moving from system gas supply rates back to delivery rates? 1060 MR. BIRMINGHAM: This is specifically with respect to flexibility costs, Mr. Killeen? 1061 MR. KILLEEN: Flexibility and/or the load balancing. 1062 MR. BIRMINGHAM: No, we don't. 1063 MR. KILLEEN: Is any part of the work in respect of these proposed changes yet to be done? Is the work complete? 1064 MR. BIRMINGHAM: The work is not yet quite complete on the load balancing proposal, and that will be coming forward in the 2004 application. 1065 MR. KILLEEN: Thank you. 1066 Can you see any reason to wait to implement the flexibility change that you've proposed within this application? 1067 MR. BIRMINGHAM: None. I don't believe it will serve anyone's interest if we wait. 1068 MR. KILLEEN: Am I correct that the vertical slice that's currently allocated to direct purchase customers as they leave the system supply, that would include flexibility costs similar to those that you are now proposing to move from delivery rates to system gas supply rates; is that fair? 1069 MR. ISHERWOOD: Ask the question one more time, if you would. 1070 MR. KILLEEN: The vertical slice is currently allocated to DP customers when they switched to that type of service. By virtue of them being allocated a vertical slice their costs would include flexibility costs similar to those that you are now proposing to move from delivery rates to the system gas supply rates. 1071 MR. ISHERWOOD: Both a system sales customer and the DP customer going direct purchase would have very similar costs because they're taking an identical version of the portfolio with them. 1072 MR. KILLEEN: So if you didn't propose to change the allocation of the flexibility costs, direct purchase customers would effectively be paying for flexibility benefits twice? 1073 MR. ISHERWOOD: If you look at this that way, in terms of vertical slice, absolutely. 1074 MR. KILLEEN: Thank you, and just a brief question that I don't believe has been asked yet today. In Board Staff interrogatory 1, where it talks about the Alberta border price forecast increasing by roughly 30 cents a gJ based on the March consensus, all else being equal, what would be the impact on the sales rate if the March consensus was to be used? 1075 MR. DENT: The sale the rate would increase about 29 cents per gigaJoule. 1076 MR. KILLEEN: Right, but in cents per cubic metre, your proposed sales rate is roughly 30.2 cents, and I'm just wondering, all else being equal, what that would rise to if the March consensus were to be used? 1077 MR. DENT: I think 1 cent per cubic metre is about 26.5 cents per gJ. So roughly a cent per cubic metre. 1078 MR. KILLEEN: Thanks. 1079 Can you also confirm that in this filing using the February consensus forecast it was filed earlier than usual and largely given the large deferral account balances that have been approved over the last few months? 1080 MR. DENT: That's correct. We did file it earlier to give everyone a chance to digest it. 1081 MR. KILLEEN: And normally, a May 1 QRAM following the "normal" procedures would have used the March consensus. 1082 MR. DENT: That's correct. 1083 MR. KILLEEN: Thanks. That concludes my questions. 1084 MR. SOMMERVILLE: Mr. Vegh? 1085 MR. VEGH: Thank you, sir. 1086 CROSS-EXAMINATION BY MR. VEGH: 1087 MR. VEGH: Thank you, panel. Just a couple of areas I wanted to address with you. The first is -- there are two areas. The first is a relationship between load balancing and flexibility costs that was addressed by Mr. Janigan and by Mr. Warren, and then I want to address with you the transparency issue raised by Mr. Aiken. 1088 First on the load balancing and flexibility interrelation issue. I don't want to put words in Mr. Janigan's mouth, but I took the gist of his questions to be aimed at exploring whether or not load balancing and flexibility are really two sides of the same coin and therefore have to be addressed together or in fact, whether or not you can isolate them and address them separately. So that's the point I would like to address with you. 1089 First, in terms of the status quo, I take it that since the Board's February 1989 decision that you were referred to, 494-03, 494-06, load balancing and flexibility costs have been set out separately as separate components of the other purchased gas cost account; is that right? 1090 MR. DENT: That's correct. They are separate components of the other purchased gas variance account. 1091 MR. VEGH: So in every rates case you've come to before the Board when you set your forecast rates for a year, they have been set out separately in that account. 1092 MR. DENT: Whenever we had a forecast of gas cost and have a forecasted winter spot, we would have an allocation for load balancing and there would also be a credit or debit for flexibility. 1093 MR. VEGH: Whenever you come in front of the Board to deal with a PGVA variance issue, those accounts are set out separately, load balancing and flexibility? 1094 MR. DENT: Yes, they are always separated. 1095 MR. VEGH: And has anyone raised the issue before that -- or to question the methodology by which those are set out separately? 1096 MR. DENT: Not to my knowledge. 1097 MR. VEGH: And just further on that, Mr. Birmingham, it's nice to see you. I haven't seen you I think since the unbundling case which I believe was back in 2000, and it did strike me, as I was recalling that, that in the unbundled service, Union does provide the opportunity for some non-contract customers or marketers serving non-contract customers to provide, effectively, their own load balancing service; is that right? 1098 MR. BIRMINGHAM: To the extent that they selected the unbundled service on behalf of those customers and they were managing their own demand and supply and storage, that's right. 1099 MR. VEGH: So in that case, those marketers are no longer buying a load balancing service from Union. 1100 MR. BIRMINGHAM: Well, they don't buy a load balancing service from us now, it's simply included in the bundled rate, but they would be taking on that obligation themselves. 1101 MR. VEGH: That's right. And the cost component of that bundled rate that reflects the load balancing cost; that's removed from unbundled rate, isn't it? 1102 MR. BIRMINGHAM: That's correct. 1103 MR. VEGH: So the Board has, in fact, already identified load balancing costs as discrete and isolated and for rate purposes and removed them from some rates, haven't they? 1104 MR. BIRMINGHAM: They've identified that component of our costs and have removed that from rates to the extent that they were included in the rates. 1105 MR. VEGH: To that extent, at least, the Board has distinguished load balancing on the one hand and flexibility costs on the other. 1106 MR. BIRMINGHAM: Yes. 1107 MR. VEGH: Now, in terms of the transparency issue, Mr. Aiken asked rhetorically, I guess, how a customer can compare a price of 32. -- 30.2 cents to a marketer's price. Let me sort of put that question on its head. 1108 If a prospective clearance of the flexibility cost are not directed by this Board, then I guess customers will have to compare a marketer's price to Union's system price, and then anticipate a later one-time adjustment to that price; is that right? 1109 MR. BIRMINGHAM: I think that's a fair statement, Mr. Vegh, yes. 1110 MR. VEGH: And in your view, in which of those two scenarios would a customer be able to make a more intelligent comparison of the system gas price to the price offered by a marketer? 1111 MR. BIRMINGHAM: Well, as to the extent that a price for utility supply determined through a consensus forecast is comparable to whatever the marketers are offering to them. I think it's our view that customers are better off knowing the all-in cost for what their supply is going to cost them in 2003. 1112 MR. VEGH: And I take it that the comparison the customers make, to the extent that price an issue, they would look at the unit price as opposed to potential variance accounts. 1113 MR. BIRMINGHAM: Among other things, they would like to know the unit price that they would find on their bill. I think that's right. 1114 MR. VEGH: You mentioned the price being on the bill. Union also posts its commodity price in some areas; doesn't it? I am thinking in particular of energyshop.com which is a popular spot. 1115 MR. BIRMINGHAM: Yes, we do. 1116 MR. VEGH: Would the plan be to post the all-in commodity price of 30.2 cents as your comparative? 1117 MR. BIRMINGHAM: Yes, it would. 1118 MR. VEGH: Thank you, those are my questions. 1119 MR. SOMMERVILLE: Thank you, Mr. Vegh. 1120 Mr. Shepherd. 1121 MR. SHEPHERD: Thank you, Mr. Chairman. 1122 CROSS-EXAMINATION BY MR. SHEPHERD: 1123 MR. SHEPHERD: I wonder if I could start by just asking a couple of questions about this flexibility payment. 1124 MS. LEA: I'm sorry, sir, we couldn't hear. As unaccustomed as you are to public speaking, we couldn't hear you. 1125 MR. SHEPHERD: Panel, you talked with Mr. Aiken just a few minutes ago about a 50/50 split between direct purchase and system gas in residential customers, do you recall? It's true, isn't it, that in non-residential customers it's about 90/10 for direct purchase, something like that? 1126 MR. KITCHEN: I think it was a hypothetical that we responded to for Mr. Aiken. I'm not sure exactly what the amount is. 1127 MR. SHEPHERD: It is true, isn't it, that approximately 26 percent of your load is system gas? I think that's in the evidence somewhere, if you wanted me to take you to it. 1128 MR. BIRMINGHAM: If your question, Mr. Shepherd, is are the non-residential contract classes predominantly direct purchase, the answer is yes. 1129 MR. SHEPHERD: Well, I'm actually going towards the math, so my understanding is that -- actually, I guess it's 22.6 percent. I'm looking at C.25.9. 1130 MR. KITCHEN: We have it. 1131 MR. SHEPHERD: Page 2, and 26.6 percent is the system gas component of your load. 1132 MR. KITCHEN: Yes, for the 12 months ended March 1st. 1133 MR. SHEPHERD: And that's, in fact, continuing to shift in favour of direct purchase; isn't it? 1134 MR. KITCHEN: Based on the information that's here, it shows a move from system to direct purchase. 1135 MR. SHEPHERD: Are you anticipating an acceleration of this after the spikes this winter? 1136 MR. KITCHEN: I'm not sure, actually. I'm not sure how customers will react to the spikes from this winter. 1137 I think we're more concerned about alternate fuel threats than shifts between system and direct purchase customers. 1138 MR. SHEPHERD: You've said that the impact to flexibility is 3.5121 cents per cubic metres this application; correct? 1139 MR. KITCHEN: Yes. 1140 MR. SHEPHERD: Will you confirm that if it was applied to all customers instead of just the system gas customers it would be approximately 0.85 cents per cubic metre? 1141 I'm going to ask for a number of calculations, Mr. Chairman, and I wonder if I could do one undertaking for all of these. 1142 MR. SOMMERVILLE: Would it serve your purpose to formulate those requests over the break and enable the panel, perhaps, to digest them and perhaps meet them in that way? 1143 MR. SHEPHERD: I can actually make them right now if you'd like. 1144 MR. SOMMERVILLE: That's great. 1145 MR. SHEPHERD: And it will give them a chance over the break to respond. The first is if this charge was applied to all customers, would you tell us what the cents per cubic metre is, please. And then the second is, the suggestion has been made that if you don't make the change retroactive the result would be that you would clear out 53.8 million as of the end of April or now, for all customers, and then you would for the rest of the year apply the credit only to system gas customers. In effect, your new rule would come in May 1st. And could you calculate, then, what the cents per cubic metre is if you clear out the 53.858 cents starting May 1st to all customers for eight months, and what the credit for system gas is if you at the same time give them that 12.203 million as a credit over the same eight months. Do you understand what I'm asking? 1146 MR. BIRMINGHAM: Yes. 1147 MR. SHEPHERD: Wonderful, thank you. 1148 MS. LEA: Might as well give that an undertaking number, just for reference, please. E.3 -- 1149 MR. PENNY: I thought we were going to try and list them all and do it all at once. 1150 MS. LEA: That's right. 1151 MR. SHEPHERD: That's right; that's all of them. 1152 MR. SOMMERVILLE: E.3? 1153 MS. LEA: E.3, please, yes. 1154 UNDERTAKING NO. E.3: UNDERTAKING TO PROVIDE: (1) IF CHARGE WAS APPLIED TO ALL CUSTOMERS, WHAT THE CENTS PER CUBIC METRE IS; (2) CALCULATE THE CENTS PER CUBIC METRE IF YOU CLEAR OUT THE 53.858 CENTS STARTING MAY 1ST TO ALL CUSTOMERS FOR EIGHT MONTHS; (3) WHAT THE CREDIT FOR SYSTEM GAS IS IF YOU AT THE SAME TIME GIVE THEM THAT 12.203 MILLION AS A CREDIT OVER THE SAME EIGHT MONTHS 1155 MR. SHEPHERD: Let me turn to another area. In your earlier cross-examination, I think it was Mr. Dent -- I could be wrong, but somebody anyway said this is a follow on the 2002-0130 proceeding; is that right? This is part of that proceeding? 1156 MR. KITCHEN: Procedurally, I think it's attached to that proceeding, but it's -- it's its own rates proceeding. I'm not really sure. 1157 MR. SHEPHERD: Either it's part of that proceeding or a new one -- 1158 MR. KITCHEN: QRAMs typically get the -- the applications are made in this was get the docket of the last case as the RP-, as the rates proceeding, and then have an Energy Board proceeding after that. 1159 MR. SHEPHERD: What's the status of the 2002-0130 proceeding? Is there a rate order in there yet? 1160 MR. KITCHEN: We are still waiting for the Board's decision at this time. The hearing itself just finished up approximately a month ago. 1161 MR. SHEPHERD: Do I understand that this is, in effect, a continuation of that hearing? 1162 MR. KITCHEN: I'm not sure I would characterize it as a continuation of the hearing. The QRAM or rates application that we have brought forward here addresses specific gas cost items. It doesn't address other items. 1163 MR. SHEPHERD: Well, no, okay. I understand what a QRAM is, and that's separate from the rate hearing, and I understand that. But as I understand what you're doing, you're asking, actually, for new rates under section 36; am I right? 1164 MR. KITCHEN: We're asking to adjust the rates based on our proposals. 1165 MR. SHEPHERD: So, and maybe it's unfair to ask you but I will anyway, is it the company's position then that after a hearing is completed, a rates hearing is completed, it can come back to the Board and ask for additional rate changes within the same proceeding? 1166 MR. KITCHEN: This is a separate application from the application that was made for the 2003 process, rate setting process. 1167 MR. PENNY: It's in part a legal question, I think, Mr. Chairman. The fact is that the QRAM process contemplates commodity rate changes being flowed through, and if certain trigger levels are hit, 5 cents on the Alberta WACOG or the $20 on the deferral account -- the deferral impact, that the company is obliged indeed to come forward with those. So to that extent, the process contemplates that, and the only thing that's different from that in this application is the allocation of the flexibility. And that, we say, is subject to our Section 36 application, but it's all commodity related, is the point. 1168 MR. SHEPHERD: Mr. Chairman, I'm just having some confusion in following up on Ms. Lea's questions, because if this is a QRAM there are only certain things that can be dealt with. If it's something different than a QRAM, and that's what I've heard it is, there are certain rules that follow, such as public notice, et cetera. It sounds like the company is trying to have their cake and eat it to. I shouldn't make argument now and I'm not trying to, but I'm trying to drive at what the intention is of the company in this application, and I am still, frankly, confused. 1169 MR. PENNY: I think it is a matter of argument. 1170 MR. SOMMERVILLE: I was going to say, Mr. Shepherd, you can argue that point this afternoon or Wednesday, depending on the form you choose. 1171 MR. SHEPHERD: Okay, let me turn to another question, witnesses. 1172 You have described how the true up is supposed to work, and I take it that what's happening is you're sort of making an estimate as to who is going to ultimately bear those particular deferral account clearances. You're guessing at it, but you're being fairly precise about it. Collecting it over the period, and then later on actually allocating it to whoever should pay it in the end, and you're hoping they're going to be roughly the same; is that fair? 1173 MR. KITCHEN: It sounds a little bit more from the way you've characterized it, as shot in the dark. I think what we're trying to do is to minimize significant out-of-period adjustments through the prospective recovery and acknowledge the fact that there will be shifts once we dispose of the deferral accounts and true them up. 1174 But the true up is less -- should be less than the trigger that we're currently seeing, and in fact, will be. 1175 MR. SHEPHERD: Is this true up approach, is this part of the approved QRAM methodology? 1176 MR. KITCHEN: Well, we're not -- truing up for deferral account disposition is, I would say, a matter of course when you have a prospective recovery. In this application we've said that this is more than a QRAM. So I would say that to the extent that we're proposing to recover deferral account balances prospectively and then true them up, it's not contemplated within the simple written process that's normally undertaken for QRAM. 1177 MR. SHEPHERD: That was another area of confusion that I had. 1178 I looked at the Board's decision in the last QRAM -- I can't even find it now -- and my understanding of that was that the Board was saying prospective clearance of the deferral accounts is not part of the QRAM methodology. Do I understand that right? 1179 MR. KITCHEN: I think the Board's decision in that case, those are the exact words, but I think given the part of the QRAM methodology is the deferral account trigger amounts of $20 and the requirement by Union to bring forward proposals for the disposition that makes it part of the QRAM. 1180 MR. SHEPHERD: So you're contemplating, then, that the prospective recovery of these deferral account balances is, in fact, in compliance with the mandated QRAM methodology? 1181 MR. KITCHEN: Once we exceed the trigger, we are required to bring forward proposals for disposition or report it to the Board at the very least. 1182 MR. SHEPHERD: And has the company ever prospectively recovered deferral account balances using a trail mechanism like this before? 1183 MR. KITCHEN: When we had a prospective recovery of deferral accounts related to inventory revaluation for the firm PGVA that was in place for November 1, 2001 to March 31st, 2002, the revenues related to that prospective recovery were tracked and there was -- there was a true up. 1184 MR. SHEPHERD: Is that the same methodology as you're proposing here? Is that an analogy or are these actually the same thing? 1185 MR. KITCHEN: In terms of crediting the revenues to the deferral account, that's the same thing. I think what is different here is that we are proposing to recover the winter deferral amounts over winter volumes when we dispose of them. 1186 MR. SHEPHERD: My understanding of your evidence is that the reason you're doing this is because the numbers got so high this winter; isn't that right? 1187 MR. KITCHEN: The reason we're here is because we exceeded the trigger of $20, and part of that is the numbers are high, yes. 1188 MR. SHEPHERD: I thought I heard you say that you wouldn't have been here at all if the numbers had been much lower, or even if they had exceeded the trigger. It was because there was 141 million that there's a problem. Did I misunderstand that? 1189 MR. BIRMINGHAM: You may have, Mr. Shepherd. I think that was my testimony and what I was saying was I think the amounts in our deferral accounts were roughly the amount we had in our rates -- so in the example of flexibility costs, we have 1.63 million currently in rates. If that's roughly what we were incurring or a little bit more than that, we would not be proposing any prospective recovery of those amounts. 1190 MR. SHEPHERD: It sounds very much to me like -- you tell me whether I'm just misunderstanding this -- like there are some problems with this QRAM methodology. It doesn't work as cleanly as you would like in a price spike situation, which is why you're asking for some adjustments to it this time; isn't that right? 1191 MR. BIRMINGHAM: I think you have to break it down into a couple of components. The methodology by which we determine the forward price for the commodity works fine. We have the consensus forecast that gets looked at and then ultimately included in rates by the Board. 1192 Further than that, though, in price spike situations those can create deferral account balances whereby the Board has set out a trigger mechanism for us to propose disposition of those, and that's what we've done. So it's not that the methodology for setting the price is somehow wrong, but we have a number of mechanisms, and they have come together in this application. 1193 MR. SHEPHERD: How much of a problem is the need for gas this summer for Ontario electricity needs? Have you identified whether that's an impact on these forward price estimates? 1194 MR. DENT: It's not necessarily the demand for electricity in Ontario itself, it's a North American demand for electricity. We're living in a North American market, not an Ontario market. When it comes to natural gas purchasing and electric generation or -- demand for natural gas for electric generation continues to increase, and so you are competing for gas to refill storage with the hydro -- or the electric generators throughout North America. 1195 MR. SHEPHERD: Correct me if I'm wrong, but if that's an ongoing impact, that's going to tend to reduce both load balancing and flexibility costs; isn't it? It's going to reduce your peaking, your seasonal differentials. 1196 MR. DENT: There can be a squeezing of differentials summer to winter depending on the period and the circumstances due to a variety of factors, but electric generation itself for a summer price is not necessarily the key driver. The key driver from this past winter and even two winters ago was the sustained cold weather which drove up the price of the winter where the summer price stayed relatively the same or increased, but not as much. That's a phenomenon not related necessarily to electric -- demand for electric generation, although there might be an overall impact in the market. That's really a specific demand related to weather-related demands within a winter period itself. 1197 So as long as supply and demand is tight or fairly close to being tight, then you will have circumstances where volatility creases and it shows up in a short-term price. 1198 Mr. Chairman, I have about another five minutes. Would you like --- 1199 MR. SOMMERVILLE: Why don't we carry on and complete that, Mr. Shepherd. 1200 MR. SHEPHERD: Witnesses, I wonder if you could turn to Board Staff number 3, I guess this is, Exhibit C.1.3. It has this wonderful chart comparing the forecasts to the first monthly settled; do you have that? 1201 MR. ISHERWOOD: Yes. 1202 MR. SHEPHERD: Just so that I understand this, the line that says consensus, is that the year earlier number for those forecasters? 1203 MR. DENT: No, the consensus itself would be the forecasts that we would be using at the time that the rate was changed. So, for example, in December 1999 we changed the rate using the consensus and so that price of roughly 330 was a one year -- one year consensus price using the forecasters. 1204 MR. SHEPHERD: So that's what they were estimating for the following 12 months; right? 1205 MR. DENT: That is correct. 1206 MR. SHEPHERD: So then if we look at these lines on a month-to-month basis, they're not really comparable, are they? Even the forecasters wouldn't be saying that. 1207 MR. DENT: Which lines are you referring to? 1208 MR. SHEPHERD: For example, if you take the consensus for any given month and look at the Empress monthly settled for that month, those two are not actually comparable numbers, are they? 1209 MR. DENT: No. In order to get a comparable number, you need to average the 12 month settles to give you a bit of a comparable number. The more comparable number would be the pink line which shows the one-year futures price at Empress for the same period, so you're comparing an apple to an apple in that case. 1210 What the bars show are the extreme short-term volatility that we see in the marketplace over the past -- well, certainly since January 2000. The significant increase in volatility in the natural gas market shows up in the bar graphs, which are illustrative of the Empress monthly settled. 1211 MR. SHEPHERD: Now, the last time we had a major spike in the winter of 2000/2001, it looks to me like the forecasters lagged the spike but then had much higher forecasts relative to what actually happened to monthly prices; is that right? They lagged both the upside and the downside? 1212 MR. DENT: I think that's, in general, a fair characterization, that the forecasters do have a tendency to lag or -- lag the market both up and down. Just remember there is a slight difference between what a forecast is and what the futures -- futures one-year strip is. 1213 The futures one-year strip is where you can transact at any given point in time. What the forecaster is trying to say is they're trying to look forward and say where they think the overall average settlement of the next 12 months would happen to be. So they are looking at slightly different things, but to the point there is -- there does seem to be a lag effect. 1214 MR. SHEPHERD: And so if we look at the current spike, it would be reasonable to assume that there would be a similar lag on the downside. If there's a downside in the monthly settled, we would expect the forecasters to lag it. 1215 MR. DENT: Just let me make one clarification on the chart itself. The pink line or the red line, which shows the future price, it actually looks to me like there was a data point missing, and that pink line really should be -- should be up around 7.35, which is where the -- which is where the futures market was when we finalized the consensus. So I apologize, there does seem to be a bit a data point missing there for the futures market. 1216 What we've seen, to the point of the question though, is that the futures price itself has gone from 7.90 on February the 24th down to about 7.55 the first week in March, and now currently it's about 6.50. The consensus forecast which, by definition, only changes once a month has gone from 6.45 in February up to 6.74 for March. And again when we get the April consensus, we'd expect to see some change. 1217 There will, by definition of what a forecast is, be some change in variation both up and down. 1218 MR. SHEPHERD: Could you turn to Exhibit C.1.2. There's a discussion there about forecast D, which appears to be the high forecast. And you did a recalculation of the consensus price without D, and -- but then you recalculated what you thought your forecast deferral account balances would be, and it was still almost the same as in your original evidence. 1219 Do I understand that's because you left forecaster D in calculating your monthly projections for the next eight months? 1220 MR. DENT: No, we didn't do that. We took out forecaster D for that exercise, and what we came up with, the 591 was applied not only for the reference price as far as what we would receive from customers, but also that lower amount became what the forecast suggested we would have to pay for that supply. So in effect, by excluding forecaster D, you've lowered the reference price, but you've also lowered what you expect to pay for gas on a going-forward basis. 1221 Therefore, the debits are roughly the same, because you've got not only a lower reference price to collect from customers, you've got a lower estimated forecast of what you'd have to pay for those supplies. 1222 MS. LEA: That was the question I had forgotten. Sorry. 1223 MR. SHEPHERD: Well it sounds to me then like your debit balance is not sensitive to forecast. If you move the forecast up and down a big amount, it doesn't change your projected debit balance; isn't that what you just said? 1224 MR. DENT: I mean, there's two issues there. Number 1, just because the reference price has changed May 1 doesn't do anything to address the debits we have for January, February, March, and April, so a lot of those debits are already sunk. 1225 But in answer to the interrogatory itself, we were just following our normal methodology and the caveat we would put is that if you exclude a high forecaster and you end up with a relatively lower price than you expect to pay, and up end up paying more for it. The market right now is 6.50 -- whereas that forecaster assumes you're only paying $6 for your gas for the next year forth, then you're going to guarantee yourself additional debits. 1226 MR. SHEPHERD: So that means that if you used a reference price and a consensus price of $9, you'd still get roughly $90 million of deferral account balances; right? 1227 MR. DENT: In the current methodology that would be correct. That would be the same if we used a market strip on February 24 of 7.90. We would assume that we would receive 7.90 revenue from customers, but the cost would be 7.90 going forth. Oops, two weeks later that reference price for that market strip is 7.55. We would assume a lower reference price, bus also a lower cost of the supply. 1228 MR. SHEPHERD: This is my last question. In your complaints you received from customers last year, which made fascinating reading I might add -- I'm sure for you too -- many asked the question, Weren't you planning for this? Weren't you using risk management methods to try to maintain less volatility in the gas prices? 1229 I presume that what you're proposing to the Board now is after your risk management activities; isn't that right? 1230 MR. ISHERWOOD: That's correct. 1231 MR. SHEPHERD: And those risk management activities have presumably reduced your volatility substantially; is that also fair? 1232 MR. ISHERWOOD: It would have an impact on reasonable volatility; that's correct. 1233 MR. SHEPHERD: Is there also an amount in the PGVA for risk management losses? 1234 MR. ISHERWOOD: You have to be careful how you define losses here. There's benefits in the PGVA for risk management as well. 1235 MR. SHEPHERD: But you actually had some significant costs associated with risk management transactions in this period, didn't you? 1236 MR. ISHERWOOD: But the benefits exceeded the costs. 1237 MR. SHEPHERD: Okay. Do you know how much the risk management costs were as a component of the PGVA currently? 1238 MS. LEA: I think it appears at tab 1, schedule 2, if that's of assistance. 1239 MR. ISHERWOOD: The -- perhaps an easier answer to the question. The net benefit on the firm PGVA account was approximately $11 or $12 million during those -- that same period. That was net of cost. 1240 MR. SHEPHERD: Mr. Chairman, those are my questions. Thank you. 1241 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 1242 We'll adjourn now until 2:30. 1243 --- Luncheon recess taken at 1:43 p.m. 1244 --- On resuming at 2:38 p.m. 1245 MR. SOMMERVILLE: Thank you very much. Please be seated. 1246 Mr. DeRose? 1247 MR. DeROSE: Thank you, Mr. Chair. 1248 MR. PENNY: Before we start, Mr. Chair, I thought I heard from one of the witnesses at the lunch break that there was a correction or a clarification to be made about one of the numbers -- or some of the numbers that were given just prior to the break, with your leave. 1249 MR. DENT: Yes, I be I believe Mr. Warren had asked for the balances of flexibility for load balancing for January to April and May to December and I mixed some interest costs into the May to December period, which I think should be taken out to be consistent with the Jan to April numbers. 1250 So to correct -- or to give you the full numbers on the four, the Jan to April flexibility is a debit of 53.858 million as noted in number C.16.1. The May to December flexibility credit is 15.248 million and then load balancing January to April, a debit of 44.837 million, and December -- or pardon me May to December a zero balance for load balancing. 1251 MR. PENNY: That may engender another hour, perhaps, of examination from Mr. Warren, but we'll see. 1252 MR. WARREN: He says, full of hope. 1253 MR. SOMMERVILLE: I had previously noted those figures to represent from January until April, and then from April until December, and then January to March. You've just changed the -- 1254 MR. DENT: What I changed was the flexibility number May to December. Rather than 12.203 million it's 15.248. And my other point, which is probably minor, is that the load balancing can really only happen in the November to March period, so therefore I just made that small distinction. 1255 MR. SOMMERVILLE: Thank you. 1256 MR. WARREN: Mr. Sommerville, may I, with your leave, just ask one follow up question on those numbers, because I was the one would asked for them in the first place? 1257 MR. SOMMERVILLE: I think that's fair enough. 1258 MR. PENNY: Absolutely. 1259 MR. WARREN: It's just the addition and subtraction, sir. The proposal, as I understand it, was to clear 41.6 million in flexibility costs, and if I just did the subtraction of the numbers you gave me it's about 38.1. 1260 MR. DENT: That's correct. The difference really is the interest that's in the account as well, so the 44 -- 41.65 million is really a total of deferral account plus the interest. 1261 What I did prior to the break is in C.16.1, I made that calculation with no interest impact, and then my calculation for the May to December period was made with an interest impact. So I wanted to back out the interest impacts so you could compare adequately the balance in the deferral account without any interest impact. 1262 MR. WARREN: Thank you, sir. 1263 MR. SOMMERVILLE: Mr. DeRose. 1264 MR. DeROSE: Thank you. 1265 CROSS-EXAMINATION BY MR. DeROSE: 1266 MR. DeROSE: Good afternoon, panel, I will not be too long with you. I just have a number of clarifications just to make sure that our understanding is the same. 1267 If I can first of all address the load balancing cost issue. If I can have you turn to appendix E of tab 2, page 1, and I just -- just so that I can confirm that our understanding is the same. 1268 First of all, as I understand it, the only rate classes that will have an impact -- or which will be impacted by the load balancing costs are rates 1 and 10 in the northern and eastern operations and rates M-2, M-4, and M-5 A in the southern operations area; is that correct? 1269 MR. KITCHEN: There's actually no rate impact at this time on M-5. 1270 MR. DeROSE: And that's because the load balancing revenue and recovered in rates is sufficient? 1271 MR. KITCHEN: That's correct. 1272 MR. DeROSE: And then with respect to the larger rate classes, which are shown at lines 15 to 20, so that's rates 20, and then I guess from 18 to 20, that's M-7, M-9, and M-10. I take it that the load balancing revenue already recovered in rates is sufficient for those rate classes? 1273 MR. KITCHEN: There's actually, at this time, no load balancing costs allocated to them. 1274 MR. DeROSE: Is that because those classes have balanced so far this winter? 1275 MR. DENT: Based on our forecast, that's correct. Again, when we true up our actuals that might change, but the best information we had when we put this together, that indeed was the case. 1276 MR. DeROSE: And just based on your past experience it will be, I take it, a real surprise if one of those rate classes suddenly had a significant balance charge; is that fair to say? 1277 MR. DENT: There's no doubt that weather was really the big driver this winter, the colder than normal. But -- and so based on that information, that's probably correct, that we wouldn't expect to see significant changes in those other rate classes. 1278 MR. DeROSE: Thank you. 1279 Now, with respect to the flexibility costs issue, if I can have you turn to tab 1, page 12 of 23. And again, our client just wants to understand who is paying for flexibility costs right now and who will be paying for flexibility costs if the Board accepts the proposal. 1280 And as I understand it from paragraph 7.2.2, currently, flexibility costs are incurred by general service customers, both sales and direct purchase; is that right? 1281 MR. ISHERWOOD: That's right. 1282 MR. DeROSE: That would include M-2, rate 1 and rate 10 only? 1283 MR. ISHERWOOD: That's correct. 1284 MR. DeROSE: And the last sentence of paragraph 7.2.it says: "Union is proposing to recover these cost from sales service customers only." 1285 Does that mean that you are seeking recovery from only the general service sales service customers or will it also include sales service contract customers? 1286 MR. KITCHEN: That would be just the general service sales service. 1287 MR. DeROSE: Okay, so it would only be M-2, rate 1 and rate 10 sales service customers. 1288 MR. ISHERWOOD: That's correct. 1289 MR. KITCHEN: Just to clarify. To the extent that there are currently a small number a contract class system sales customers, they would pay the current -- proposed commodity rate, and as a result would contribute to that's recovery, but those amounts would be credited back on true up. 1290 MR. DeROSE: Okay. 1291 Thank you, those are all my questions. 1292 MR. SOMMERVILLE: Thank you Mr. DeRose. 1293 Mr. Quinn? 1294 MR. QUINN: Thank you, Mr. Chair. 1295 CROSS-EXAMINATION BY MR. QUINN: 1296 MR. QUINN: We understand most customers deliver to Union about the same amount of gas on a daily basis but consume gas in an unequal pattern throughout the year; is that correct? 1297 MR. ISHERWOOD: You're referring to direct purchase customers? 1298 MR. QUINN: Yes. 1299 MR. ISHERWOOD: Direct purchase customers typically would deliver gas on a constant, daily basis. 1300 MR. QUINN: I'm just trying to get clarification around proper wording so I can address it properly, but we, as a utility, call our acceptance of gas and out -- gas when it's unequal to the pre-delivery requirements as load balancing. What does Union Gas call it in providing that service? 1301 MR. ISHERWOOD: I'm not sure I understand the question, Mr. Quinn. 1302 MR. QUINN: Well, either for direct purchase or system sales customers, if approximately the same amount of gas is being received on a daily basis but is being redelivered to customers on an unequal basis throughout the year, what does Union Gas call that? How do you embed those costs into your delivery rate? What is that service called? 1303 MR. ISHERWOOD: I think the terminology Union used for load balancing really covers off the fact that we're buying gas in the wintertime to provide load balancing services. So probably the words we use and the words that City of Kitchener uses are slightly different. In fact, in the type of load balancing you're discussing or talking about, customers typically would rely upon storage and other assets to do that type of balancing. 1304 MR. QUINN: So we can be specific in what I'm asking about, what would Union call that, then? 1305 MR. ISHERWOOD: I don't necessarily know that we have a name for it. Load balancing, for the context of this proceeding and in the context of our evidence, really refers to us buying, on a loan-type basis, inventory to balance the system relative to where they were planning to be. 1306 MR. QUINN: Well, I'm seeking a word so that I can use the right word in the line of questioning so you can answer it in context. Would redelivery variability work for you, or do you want to find something simpler to call it so we can move forward? 1307 MR. ISHERWOOD: We can work with that, yes. 1308 MR. QUINN: In considering redelivery variability, would you agree with me that the main asset that is used to perform this function is storage? 1309 MR. ISHERWOOD: We would agree that storage is the main asset, and attached to that, I guess, would be the storage deliverability. 1310 MR. QUINN: Storage and storage deliverability? 1311 Thank you. So in considering this service, does Union set aside an amount of storage to manage all of its unbundled customers' redeliverability variability for the winter? 1312 MR. ISHERWOOD: Did you say unbundled customers? 1313 MR. QUINN: Bundled. 1314 MR. ISHERWOOD: Bundled customers. Union does set aside storage to service in-franchise bundled customers. 1315 MR. QUINN: How does it establish the amount to be set aside? 1316 MR. ISHERWOOD: The storage planning and storage number set aside is essentially calculated based on a five-year plan that we complete once a year, and the five year plan would take into account both the system demands as well as system supplies and arrive at a storage requirement. 1317 MR. QUINN: You refer to system supply and system. You mean total bundled system; is that correct? 1318 MR. ISHERWOOD: The total bundled system, that's correct. 1319 MR. QUINN: So if the weather is colder than the forecast that is used, how does Union ensure that it has enough gas to meet its redelivery obligations? 1320 MR. ISHERWOOD: For example, going into the most recent winter we had in our winter plan to purchase 6 petaJoules of spot gas. To the extent that we need more gas than that for providing the flexibility and load balancing, we would essentially buy more spot gas. 1321 MR. QUINN: So load balancing gas is part of the solution, then, for variability in weather? 1322 MR. ISHERWOOD: To the extent that our in-franchise customers are burning more gas than they were forecasted to burn, we would essentially purchase an incremental spot gas in the wintertime rather than buying that same volume of gas in the following summer. As I had mentioned earlier, it's essentially a loan type arrangement. We loan the gas in the winner time to the customer groups that are actually over-consuming, and those groups, as they were direct purchase, pay that volume back to us in the following summer as they balance their own accounts. 1323 MR. QUINN: Those are the direct purchase customers. But for the system gas customers, it's not really a loan on actual usage, is it not? 1324 MR. ISHERWOOD: For system gas customers -- for sales service customers, it's actually spot. From the point of view that the load balancing costs were calculated based on a summer/winter differential, from a cost consequence point of view and flexibility, it becomes really a summer supply. 1325 MR. QUINN: Can you help me with that? What do you mean it essentially becomes a summer supply? I don't understand what you mean. 1326 MR. ISHERWOOD: We buy the volume of gas in the wintertime ahead of when we would have normally have bought it. We would have bought that gas otherwise in the summer. 1327 To the extent that we're -- we have higher consumption than we had forecast, we're actually buying it in the wintertime in advance of when we would normally buy it. To allocate or calculate the load balancing cost we calculate the winter summer differential, subtract that from the price of gas we paid in the winter as spot, and the residual amount that's left over is essentially a summer value. 1328 The example I gave this morning was if we paid $7 for winter spot and the summer price was $6, load balancing would be $1. So we've essentially taken the $1 and allocated that as a load balancing cost, and the $6 then is the true summer cost would have been. 1329 MR. QUINN: So you're referring to it basically as an advance purchase for the recovery later. 1330 MR. ISHERWOOD: In the case of direct purchase, it is recovered later. In the case of system -- sorry sales service, we're buying it in advance but allocating the load balancing costs is sort of a loan payment. 1331 MR. QUINN: So given this last winter, if Union would have proceeded on its plan in spite of volumes of consumption that they recognized, would Union have had sufficient gas to have met its delivery obligations to customers as of March 31st? Would there be enough gas in storage for Union to continue to meet its delivery obligations? 1332 MR. ISHERWOOD: Assuming normal weather? 1333 MR. QUINN: No, assuming the winter we just had. If Union had have purchased the same amount of gas as was in plan, would Union have had enough gas to meet its delivery requirements as of March 31? 1334 MR. ISHERWOOD: I think the total volume we purchased is approximately 24 petaJoules and going into the winter our plan was to buy 6, so in essence we purchased 18 petaJoules more than we planned because of the high throughput caused by weather, primarily. 1335 MR. QUINN: So if the 18 petaJoules were not purchased would you have had enough gas in storage to meet your March 31st obligations for redelivery? 1336 MR. ISHERWOOD: No, obviously not. 1337 MR. QUINN: Okay, thank you. 1338 I don't think you need to turn this up, but on tab 2, page 2, Union states the load balancing costs were $2.313 million that were already embedded in rates; is that correct? 1339 MR. KITCHEN: That's the amount that we're -- that's embedded in rates that we're offsetting those load balancing debits with, yes. 1340 MR. QUINN: In which proceeding were those generated and approved by the Board? 1341 MR. KITCHEN: The rates that would be used to calculate load balancing costs currently recovered would have been approved in EBRO-499. 1342 MR. QUINN: Thank you. 1343 And what was the volume? Do you know what the volume would have been approved for that rate? 1344 MR. KITCHEN: You mean consumption volume for that rate class? 1345 MR. QUINN: The volume of load balancing gas that generated the 2.1 -- $2.3 million load balancing cost in rates? 1346 MR. KITCHEN: No, I don't know the volume. 1347 MR. QUINN: Would you be able to check on that? 1348 MR. KITCHEN: The -- I don't think that there is -- I'm not sure you can say there's a volume associated with -- our methodology for calculating the total load balancing cost built into rates is to take the summer/winter spot differential times winter spot. So if it's the winter spot that you're referring to that's built into rates, that's a number we can give you. 1349 MR. QUINN: Then that number would be helpful, thank you. If you could take that as an undertaking. 1350 MS. LEA: I would -- that would be -- where is my list here -- E.4. 1351 UNDERTAKING NO. E.4: TO PROVIDE WINTER SPOT NUMBER THAT'S BUILT INTO RATES 1352 MR. QUINN: Through the last two customer review processes, Union has submitted proposals for change in its weather methodology. Kitchener's understanding is that Union argued that they were changing the weather methodology for operational purposes and it would have no rate impact. Is that a correct characterization of what has happened the last two customer-review processes with weather methodology? 1353 MR. KITCHEN: Could you repeat that, please, Mr. Quinn. 1354 MR. QUINN: In the last two customer review processes, Union has submitted proposals for a change in weather methodology. Kitchener's understanding is that Union argued that they were changing the weather methodology for operational purposes and it would have no rate impact. 1355 MR. KITCHEN: The rates that have been addressed in the 0029 case and the latest proceeding are all based off of the 1999 rates, and those rates that underpin those haven't changed. 1356 MR. QUINN: Which weather methodology was used for the 1999 rates? 1357 MR. KITCHEN: That would be the 30-year. 1358 MR. QUINN: Thank you. 1359 So that we make sure we're speaking the right vernacular again, what is your new weather methodology called? 1360 MR. KITCHEN: I believe it's the 20-year declining trend. 1361 MR. QUINN: Thank you. 1362 When Union developed its gas supply plan and storage balance requirements for the winter of 2002/2003, which weather methodology would have been used? 1363 MR. ISHERWOOD: The 20-year declining trend. 1364 MR. QUINN: What percent of annual volume requirements of the M-2 class were set aside in storage? 1365 MR. KITCHEN: Sorry, let me just play it back to you. You're asking how much of this storage in the winter of 2002/2003 plan was set aside for M-2 customers? 1366 MR. QUINN: Maybe a better question would be what percent of the annual volume requirements of the M-2 class was deemed to be allocated as storage space so the redelivery requirements would be made up of withdrawal capacity in the traditional withdrawal season? 1367 MR. KITCHEN: The -- when Union operates its system, it operates it on an integrated basis. It doesn't identify -- it doesn't identify the amount of storage for a particular rate class on the -- for planning purposes. 1368 MR. QUINN: If that is a difficult question because of the rate class implication, maybe a broader categorization would be the amount of storage that was related to the total bundled delivery obligations of Union. 1369 MR. KITCHEN: We don't have that number -- if we gave you a number. 1370 MR. QUINN: You will provide that? 1371 MR. KITCHEN: Yes, we will undertake to provide that. 1372 MS. LEA: E.5. 1373 MR. QUINN: Possibly leave that open, if it pleases the Board, because the other question I have was how much load balancing gas was predicted in that plan. So what percent of those redelivery obligations during the winter, how much was made up of load balancing gas and how much was made up of storage withdrawal capability? So if you put those two together, can you come up with a number? 1374 MR. KITCHEN: So you're looking for the space set aside for meeting the bundled requirements of Union's customers, as well as the amount that was required for load balancing? 1375 MR. QUINN: The amount that was required for load balancing. I think 6 petaJoules was already offered, but if you just want to, subject to check, put that in also, because for ease of reading, if you put in a table and project if you'd used the 30-year average winter methodology, what those numbers would have been. 1376 MR. KITCHEN: I think it's probably possible to do. I'm not sure how long it will take to do it. I'm not sure what it gets to in terms of the changes we're proposing. 1377 MR. PENNY: My understanding, Mr. Chairman, that would involve redoing the whole gas supply plan would be a task that would take weeks. I'm not sure why we would -- in any event, why we would want to undertake to do that. I'm not sure how this would aid this process in the least. 1378 MR. SOMMERVILLE: Mr. Quinn? 1379 MR. QUINN: Yes, thank you. What I guess -- I would differ from Mr. Penny in terms of his judgment of how much time that would take. Union has excess over average methodology which it uses for allocation of storage needs which was part of the 99-0017 presentation. And a gas supply plan that projected April to November and then November to March requirements wouldn't have a simple calculation of those needs. It would just be a case of what they expected in terms of 30-year average winter versus 20-year trend declining trend line would produce, and I believe there would be a significant difference in the amount of load balancing gas that would be required based upon those two different methodologies. Given Union's previous testimony that this was not a rate issue, I would like, in the public interest, this to be determined -- if it is a rate issue, and if this is the proper proceeding to hear something like that. 1380 MR. SOMMERVILLE: You're reading my mind, Mr. Quinn. What occurs to me is the argument you're making is an argument related to prudence, not necessarily the structure of this aspect, and it has to do with whether the utility has appropriately provided for storage in order to meet the foreseeable requirement. 1381 And it seems to me that that may well be an issue that is of considerable relevance in the -- at the time the disposal of the deferral account is considered and not necessarily now, when that's not what we're considering. 1382 MR. QUINN: Mr. Chair, you are correct in that it would come down to the prudency issue. However, if those numbers are available, maybe the Board in terms of implementation issues -- there's been considerable discussion as to when is the right to recover these costs. Having that information may allow the Board to choose a different implementation schedule which has the flexibility not to insert additional costs in rates only to be basically credited back to the customers outside of the period, because the original incorporation in the rates was significantly inaccurate. 1383 MR. SOMMERVILLE: In which case, what I would be influenced by is some idea as to the genuine complexity of providing the information and balancing those two factors somehow. I guess my question is: What is the difficulty related to responding to Mr. Quinn's inquiry? 1384 MR. ISHERWOOD: I believe Mr. Penny was correct when he said it involves redoing the gas supply plan. It goes beyond storage only. If you had a different assumption other than a 20-year declining trend, you also have to be looking at the upstream assets, the pipe assets as well as storage. So it is pretty complex to do that. 1385 MR. SOMMERVILLE: I guess the point is sooner or later that may be an exercise that you will be required to engage in. And I guess, given that answer, Mr. Quinn, what I'm inclined to do is to support Mr. Penny's objection to the undertaking on the grounds that it basically -- your question really does go to the question of prudency, but with the caution that is a subject that is going to be exceedingly relevant in the consideration of the deferral account -- or the disposal of the deferral account when that occurs. 1386 Please proceed, Mr. Quinn. 1387 MR. QUINN: I understand and respect that. I have another way of going about it that may be helpful. 1388 Could Union provide the original request, and that was the undertaking, of how much is allocated, as opposed to redoing it, to substantiate how much volume was set aside and the amount of load balancing gas that was in the plan? So there's no recalculation, there's just a -- recording that for the record. 1389 Then what I would ask is if you would provide the number of degree days projected by the plan in the November 1st to March 31st period by their 20-year declining trend plan and then provide a similar number of days that would have been expected -- degree days expected using a 30-year average winter. Those numbers, I may submit, could be done with a spread sheet and 20 minutes of time. 1390 MR. SOMMERVILLE: That's a purely theoretical exercise? 1391 MR. QUINN: Yes. 1392 MR. ISHERWOOD: Yes, we can do that. 1393 MR. QUINN: Thank you. 1394 MR. SOMMERVILLE: Ms. Lea, did you capture the nuance of the latest request? 1395 MS. LEA: No, I'm sorry, I don't think so. Did the witnesses capture it? 1396 MR. KITCHEN: I hope so. 1397 MR. SOMMERVILLE: Mr. Quinn, perhaps you could restate it. 1398 MR. QUINN: Thank you, and please feel free if this is not to Union's satisfaction. 1399 MR. SOMMERVILLE: I'm sure they will, Mr. Quinn. 1400 MR. QUINN: What I'm requesting is the amount of storage that was set aside for withdrawal capabilities for all bundled customers for the winter of 2002-2003 by Union's operational plan, how much load balancing gas was part of that plan, and then a comparison of the number of degree days using their operational plan 20-year declining weather forecast versus the traditional 30-year average forecast, which was embedded in rates. 1401 MR. ISHERWOOD: That's how we have it as well. 1402 MR. BIRMINGHAM: Just one small clarification, Mr. Quinn. When you say the amount of load balancing gas what you mean is the amount of winter spot gas that we were planning for. 1403 MR. QUINN: Yes, that's correct. 1404 MS. LEA: This is still Undertaking E.5 as well? 1405 MR. QUINN: Yes. How would you differentiate it, Mr. Birmingham? 1406 MR. BIRMINGHAM: Load balancing is only a portion of the cost of the cost of winter spot, so I assume you're looking for a volume measure which is winter spot supply. 1407 MR. QUINN: That's correct. I am looking for the volume. 1408 MR. BIRMINGHAM: All right. Thanks. 1409 MR. SOMMERVILLE: Thank you. 1410 UNDERTAKING NO. E.5: UNDERTAKING TO PROVIDE THE AMOUNT OF STORAGE THAT WAS RELATED TO THE TOTAL BUNDLED DELIVERY OBLIGATIONS OF UNION AND TO PROVIDE THE AMOUNT OF STORAGE THAT WAS SET ASIDE FOR WITHDRAWAL CAPABILITIES FOR ALL BUNDLED CUSTOMERS FOR THE WINTER OF 2002-2003 BY UNION'S OPERATIONAL PLAN AND HOW MUCH LOAD BALANCING GAS (THE AMOUNT OF WINTER SPOT GAS) THAT WAS PART OF THAT PLAN; A COMPARISON OF THE NUMBER OF DEGREE DAYS USING THE OPERATIONAL PLAN 20-YEAR DECLINING WEATHER FORECAST VERSUS THE TRADITIONAL 30-YEAR AVERAGE FORECAST WHICH WAS EMBEDDED IN RATES 1411 MR. QUINN: Let me jump over a couple here. 1412 Given the scope of what you entertained at this time I'll defer other questions to a subsequent proceeding, but I wanted to ask one final question in the area. The area of equal monthly payments was touched on before, that part of Union's consideration and certainly City of Kitchener's consideration is impacted on customers at the time of rate change. 1413 If your proposal was approved as currently submitted, how would a customer on an equal billing payment plan who renews July 1st be treated in terms of the deferral account prospective disposition? 1414 MR. BIRMINGHAM: Certainly, on our system, Mr. Quinn, the equal payment plan is reset every September, so I'm not sure we could give you an answer with respect to July. Typically what happens is the equal payments go all the way through to the month of July. In August is the true up of their individual accounts, and then we reset the monthly amount in September going forward. 1415 And then we take a look at the equal payments that they are remitting, and roughly in the middle of winter season we take a look and see if there's any need for an adjustment at that point. 1416 MR. QUINN: Okay, thank you for that clarification. Could you give us how the deferral account, in respect of the disposition, affects the September 1st renewal customer? All things being equal, and assuming there as no volume or consumption effects that would change their bill, if they were on track to have the same equal billing payment for the next year, what would the impact of this disposition create for them in terms of additions to their payment plan? 1417 MR. BIRMINGHAM: On the basis that our approval is proposed by the Board -- sorry that was approved by the Board, the customers on the equal payment plan in September would have their equal payments set based on their consumption but at the higher rate, and that would carry on for the period to the end of December. And we would get to the mid-winter and of course, at that point things would be reset and we would likely adjust their equal payment amount at that time. 1418 MR. QUINN: So you would attempt recovery in the first four months, if I'm reading your answer correctly? 1419 MR. BIRMINGHAM: We would adjust their equal payment to reflect the higher cost through the prospective recovery, yes. 1420 MR. QUINN: Are you anticipating that post -- the mid-year true up would yield a reduction of the amount that was initially embedded? 1421 MR. BIRMINGHAM: All of the things being equal, we would look at that mid-winter resetting of the equal payment amount. It's not a true up of their account, it's just taking a look at where they may end up and whether there's a need for adjustment. And all other things being equal, we would go into the mid-winter review and reduce it by the amount of prospective recoveries. 1422 MR. QUINN: Thank you for those answers. Those are all my questions. 1423 MR. SOMMERVILLE: Thank you, Mr. Quinn. 1424 Mr. Hamilton. 1425 MR. HAMILTON: Thank you, Mr. Chair. I have no questions at this time. All of our issues have been adequately canvassed. 1426 MR. SOMMERVILLE: Thank you. 1427 Mr. McIntosh. 1428 MR. MacINTOSH: No questions, sir. 1429 MR. SOMMERVILLE: Thank you. 1430 Mr. Haynal. 1431 CROSS-EXAMINATION BY MR. HAYNAL: 1432 MR. HAYNAL: Thank you, Mr. Chair. 1433 Originally, I did have every intention to ask questions, but as a follow-up to City of Kitchener's question, I just want to ask Union: Is it Union's answer that by switching from the 30-year methodology, weather methodology, to the 20-year declining weather methodology, is it Union's position that there is absolutely not any rate impact? 1434 MR. BIRMINGHAM: No, that's not right, Mr. Haynal, and it may have not be clear in the explanation. I think what Mr. Quinn was asking was with respect to the past couple of proceedings, what were the outcomes of those proceedings? The outcomes were that Union had proposed a change in the weather methodology for planning purposes as well as for rate purposes, but that change has been implemented for demand and supply planning. It has not been implemented for rate purposes. We have two different weather methodologies, one in rates and one used for operational purposes. 1435 MR. HAYNAL: Thank you very much. 1436 MR. SOMMERVILLE: Are there any questions from Enbridge? 1437 MS. BODNAR: No, thank you. 1438 MR. SOMMERVILLE: Thank you. 1439 Mr. Dominy? 1440 QUESTIONS FROM THE BOARD: 1441 MR. DOMINY: I was looking at your customer notice, and particularly with regard to gas supply costs. Let's take the M-2 residential notice. It's the sales notice I'm looking at, residential sales. 1442 And as I understand from what I've heard, you're proposing to have a temporary increase in rates to reflect the recoveries from the projected deferral account balances, and many of them are being charged through the gas supply costs line. 1443 When I look at your notice, I notice that with regard to delivery charges there is an element which indicates that the adjustment will be collected from May the 1st to December the 31st, 2003, but there is no such comment with regard to the gas supply costs which have been increased to 30.2 cents, whereas they were -- I think if you didn't have it, it would be about 24. I can't remember the exact number. 1444 So I was wondering how would the customer that received this notice know that the 30 is only a temporary gas supply cost as opposed to one that they can see a projected into the future until there's a gas supply cost change or a WACOG change, whatever you call it? Perhaps you could respond. 1445 MR. KITCHEN: I think I would have to agree with that with respect to the gas supply cost. There is no -- there is no wording to the effect that it is there from May 1st to December 3 of 2002. 1446 MR. DOMINY: Is there something you would suggest how this could -- 1447 MR. KITCHEN: We could insert that into the notice. Another option is to put a footnote on the bill if there is space for that, but probably the easiest way is to insert the wording into the notice. 1448 MR. DOMINY: Thank you. 1449 I then had a comment, and I wasn't quite clear. There was a discussion about the change in the methodology for flexibility cost recovery, and it wasn't clear to me because you were proposing in the year 2004 or for rates 2004 to bring forward a study dealing with load balancing, but you presumed that you -- this hearing would have solved the flexibility methodology change. 1450 Is that what your assumption is, or are you saying that we would like to recover our costs, assuming a methodology change of flexibility, but that the matter will be fully discussed at the 2004 rates along with load balancing? Could you explain to me what exactly is the approval issue? 1451 MR. BIRMINGHAM: It's the former, Mr. Dominy, and that is, the Board has encouraged us to come forward with a proposal dealing on flexibility and load balancing as soon as we can. We are doing it, in fact, in two parts and we've brought forward the flexibility piece here and will be dealing with the load balancing piece in the 2004 case. 1452 MR. DOMINY: I think you made a comment that the load balancing would not have effect on the flexibility claim. I think you have made a comment along that line. 1453 Now does that -- is that what you propose? Or what you think you're thinking of proposing for load balancing will not affect the flexibility? Or what I was wondering, since the flexibility is, in fact, the balancing of the other gas cost purchase account minus the amount that's assigned to load balancing, if there was any change in the methodology for load balancing, surely it would affect the quantum available for flexibility or subject to flexibility? 1454 MR. BIRMINGHAM: We wouldn't be proposing a change in how the load balancing winter/summer differential premium is determined. 1455 MR. DOMINY: So your answer is that, We're not intending to propose a load balancing change, and that's why you're confident that it wouldn't lead to some change in the flexibility numbers; is that correct? 1456 MR. BIRMINGHAM: With respect to the costs that get allocated to customers, that's right. 1457 MR. DOMINY: I also heard that the increase in the flexibility and load balancing was because of the purchases of spot gas, the large number that has resulted, and this is purchased for all customers. And I was wondering if you then make an adjustment to transfer from the other purchased gas costs to load balancing based on the summer/winter price differential, and I assume that's on all the volume that was purchased, all the -- 1458 MR. ISHERWOOD: That's correct. 1459 MR. DOMINY: Is there any way to determine what portion of the volume is purchased for system sales and what sales customers -- what portion of the volume is purchased for the other -- say the direct purchase group? 1460 MR. ISHERWOOD: I guess from the point view of the methodology, if the gas wasn't purchased in the wintertime it would be gas that's purchased in the summer for the sales service group. So that's why we deduct off from the top the load balancing cost first, and then all that's left really is the summer price of gas, which we would have paid anyways for the sales service customers. 1461 MR. DOMINY: So when you come to balancing at the end of the year, because you said you were going to true it up as I understand it, what are the actual prices that are used for the true up? Is it the actual summer price or the forecast summer price? 1462 MR. ISHERWOOD: In terms of the load balancing cost, it would be based on the price that we calculated at the time of the purchase. That's the most appropriate price to use. And the true up really comes in terms of how we allocate the load balancing costs across the various rate classes. We've used our best estimate at this point in time in terms of March 31 inventory, and that will be trued up sometime towards the end of May, early June. 1463 MR. DOMINY: And so -- is the March 31 inventory plus or minus a 4 percent tolerance or is it just the March inventory level? 1464 MR. ISHERWOOD: It's the inventory level. 1465 MR. DOMINY: You see what was going through my mind and it probably works out is if you had a forecast of gas prices and now you got another set of forecasts, and the whole line has shifted up. As I understand the calculation, it's the difference between the summer one in the new forecast and the winter one in the new forecast is the basis on which you calculated your load balancing cost. 1466 MR. BIRMINGHAM: It's actually the -- at the time that we purchased the spot gas, it's the actual winter price compared to the forward summer price at that time. So to the extent that the price changes later on, that amount gets locked in at the time that we actually make this -- the winter spot gas purchase. 1467 MR. DOMINY: Is there any possibility of gain or loss if the actual summer purchase price is higher or lower than the forecast you made at the time of the purchase? 1468 MR. BIRMINGHAM: No. We don't adjust those prices. 1469 MR. DOMINY: But is there actually -- is there a probability that a -- either system because of the direct purchase group would be winning or losing because of the change in the price between the forecast and the actual price? 1470 MR. BIRMINGHAM: I guess on a theoretical basis there is, but at the time we're saying we're buying the gas ahead and it's comparing the summer price at that time, and of course, load balancing is paid by both the sales service and the direct purchase customers. 1471 MR. DOMINY: And in fact, if you are a direct purchaser and you are taking or having to use the gas from the company in order to supply your customer, because you haven't got it on-line, then Union does, in fact, ensure that it has collected that additional gas from that direct purchase customer or his agent. 1472 MR. BIRMINGHAM: From the end user. 1473 MR. DOMINY: Or the customer? 1474 MR. BIRMINGHAM: Yes, from the customer himself. Yes, that's right. 1475 MR. DOMINY: Thank you. Those are my questions. 1476 MR. SOMMERVILLE: I have no questions. 1477 Mr. Penny, redirect? 1478 MR. PENNY: Yes, just two areas Mr. Chairman very briefly. Thank you. 1479 RE-EXAMINATION BY MR PENNY: 1480 MR. PENNY: First of all, Mr. Birmingham, there was some examination from Ms. Lea and one or two others about the issue of notice. And with respect to the rate allocation issue, I simply wanted to confirm whether Union is asking for any final determination of rates in this case? 1481 MR. BIRMINGHAM: No. In fact, for 2003, this would represent an interim rate change with the final rates to be issued by the Board as a result of our customer review process. 1482 MR. PENNY: So is Union asking for any final disposition of deferral account balance in this case? 1483 MR. BIRMINGHAM: No, those will be done in the normal course, after the end of 2003 and most likely during the 2004 cost of service application. 1484 MR. PENNY: Thank you. 1485 Then with respect to -- I think it was Mr. Janigan who first raised this, it's the so-called retroactivity of the flexibility cost reallocation. Perhaps, Mr. Birmingham, you could address this as well. Were there accumulated unbundling costs in the deferral account in the enabling unbundling case, EBRO-2000-0078? 1486 MR. BIRMINGHAM: Yes, there were; $15.7 million. 1487 MR. PENNY: Sorry, I think that was RP. 1488 And was the allocation of those costs determined after the costs were incurred? 1489 MR. BIRMINGHAM: Yes, they were. 1490 MR. PENNY: And was there in that case an existing methodology in place for allocating prior to that case coming before the Board? 1491 MR. BIRMINGHAM: There was an initial allocation of the first phase of those costs, yes. 1492 MR. PENNY: Did the allocation that was determined in the course of RP-2000 matter 78 use the allocation methodology that had been used in the initial round or did it change -- that allocation methodology change as a result of the decision? 1493 MR. BIRMINGHAM: It did change. 1494 MR. PENNY: And so was the new allocation methodology applied to deferred costs that had already been accumulated? 1495 MR. BIRMINGHAM: Yes. 1496 MR. PENNY: Thank you. Those are all my questions, Mr. Chairman. 1497 MR. SOMMERVILLE: We will take a short break, following which we will have oral argument from those who choose to make it. Can I get some indication from the parties as to which parties intend to make an oral argument? 1498 Mr. Penny, I understand that you will. 1499 MR. PENNY: Yes. 1500 MR. WARREN: I do, sir. 1501 MR. DeROSE: As do I. 1502 MR. SOMMERVILLE: We will reconvene at about a quarter to four, and hear argument-in-chief at that point. 1503 Thank you. 1504 --- Recess taken at 3:28 p.m. 1505 --- On resuming at 3:50 p.m. 1506 MR. SOMMERVILLE: Please be seated. Thank you. 1507 Mr. Penny, I omitted to thank the witnesses for their very willing and able testimony, and would you communicate that on my behalf? 1508 MR. PENNY: Yes, I will. Thank you very much, Mr. Chairman, and we took the liberty -- I took it upon myself to excuse them after we rose. I hope that was all right. 1509 MR. SOMMERVILLE: Indeed. Are you ready to proceed? 1510 MR. PENNY: I am. Thank you, sir. 1511 MR. WARREN: Mr. Chairman, just before Mr. Penny begins. I don't mean this in any sense as an insult to my friend, but I've -- in discussion with my client, we've decided that we would like to look at the transcript overnight and look at a couple of undertaking responses. And so with your permission, we will deliver a brief written argument on Wednesday morning, and with your permission, if I can withdraw now and put my mind to that which Mr. Dominy and I have to do tomorrow. 1512 MR. SOMMERVILLE: Thank you, Mr. Warren. 1513 MR. WARREN: Thank you. 1514 MR. SOMMERVILLE: Mr. Penny. 1515 MR. PENNY: Yes, thank you, Mr. Chairman. 1516 SUBMISSIONS BY MR. PENNY: 1517 MR. PENNY: In my submission, there are really only two issues of any kind of controversy in this case. The first is whether there should be a prospective clearing of the forecast deferral account balances or projected deferral account balances of 90 million, that's net of the WACOG change and a reference price change. Union says that there should be prospective recovery in order to avoid significant out-of-period adjustments. 1518 And the second issue is whether there should be a change in the allocation of flexibility cost from current allocation to all general service customers to just sales service customer, and Union says that this change should take place and that it should take place now, again, to avoid significant out-of-period adjustments to rates of the general service customers. 1519 I'll start, though, with a brief overview of the application, what Union is seeking and why, but most of the components of this application are a relatively straight forward application of existing methodologies for WACOG adjustments in commodity rates and the reference point adjustments in the commodity-related deferral accounts. So I won't spend much time on that and will go quickly to the two major issues. 1520 As you've heard, Mr. Chairman, from me and from the witnesses, this is, of course, not just a QRAM application, although it is in part a QRAM application. The application has, I would describe, four components. First, it is an application under the Board-approved quarterly rate adjustment mechanism for a change in the Alberta border WACOG used to set rates. The trigger of 5 cents per gJ has been met, and in order to avoid the further build-up of large debit balances, Union has brought this application for an adjustment to the Alberta border WACOG to set rates using the February consensus forecast. And based on the February consensus forecast, Union is seeking an Alberta border WACOG of $6.45 per gJ or an increase of 63 cents. 1521 This is also an application under the approved deferral account methodology for gas supply deferral accounts to change the reference prices used to determine the variances which are recorded in these accounts. Union is proposing that a similar increase takes place in the reference prices of the relevant gas supply accounts. That is, in essence, an increase of 63 cents in the firm PGVA and an increase of 66 cents in other purchased gas cost accounts. The 3 cent differential, I should note by the way, is simply to recover the cost of the upstream compressor fuel, which is one of the items that is recorded in that account. And the reason why it needs to be recorded in that form is because the customers don't consume the fuel, and therefore it can't be recovered volumetrically, it has to be adjusted to the amounts that they do consume in order to recover it. 1522 Related to these changes, Union, as part of this, is also seeking an order to reflect the inventory revaluation credit which results from the two changes that I've just referenced. These two changes are designed to reduce the further accumulation of large deferral balances, but they do not address debits which have already accrued due to a combination of high demand -- due to a colder than normal winter and accumulations due to higher costs in the winter months, obviously two related issues. 1523 Accordingly, to avoid carrying a large debit until past year-end and then having to recover it in some form of lump sum after the fact, Union is proposing to recover prospectively, spread over the remaining 8 months of the year commencing May 1, the projected year-end balances so as to achieve as near as reasonably possible a net balance of zero in the gas supply commodity accounts. 1524 These first three requests are, in my submission, really uncontroversial, as well as being supported by prior precedent and practice, but nevertheless we recognize that the prospective recovery may raise some issues for the Board and so I will spend some time on this issue. 1525 And then of course there is the fourth component of the application which is the change to flexibility to the allocation used to recover flexibility costs. And though this is an economically significant segment, it is, of course, just one segment of the total costs, and that's -- of course, those costs that are related to or that have been described as flexibility or diversification costs, and I will explain later the basis upon which Union is proposing to reallocate those costs and why. 1526 But in summary, Union's proposal is based on principles of cost causality, and seeks to change the current practice of recovering flexibility cost from all general service customers to the recovery of these particular cost from only the sales service customers. And this results in a change due to the vertical slice methodology in how this category of costs is caused, and therefore, from whom they should be recovered. 1527 And really, in my submission, this fourth aspect of the application is the only unique feature of this application, and so I will also, of course, spend some time on that issue in argument as well. 1528 Let me then turn to the issue of prospective recovery of forecast deferral account balances. Two factors have contributed to a sharp increase in the projected year-end balances in the commodity-related deferral accounts. First, there has been a significant increase in the Alberta border price from the price that was previously embedded in rates, and secondly, there has been a significant increase in demand due to colder than normal weather in this past winter, and what is obviously, from looking outside, this continuing winter. 1529 As things currently stand, according to the evidence, if no change -- if no change at all is made, there will be a combined deferral account debit to customers of over 140 million by year end, and that you can find at tab 1, page 9, and also at tab 1, schedule 4. And if only the WACOG and reference price changes are made for rates going forward, that is with no prospective recovery of accumulated balances, then there is still a projected combined year-end deferral debit of all the accounts of approximately $90 million, and that you can find at tab 2, page 3, and also at tab 1, schedule 4. 1530 So even if the WACOG is changed in rates and the reference price is changed in the deferral accounts but nothing is done to recover the accumulated balances to date, there will be, based on the best information available today, an out-of-period debit owing from customers or an under-recovery of actual commodity costs of about $90 million by the end of 2003. 1531 And this is a number not that different from the out-of-period adjustments that had to be made last fall which generated so much customer adverse reaction. 1532 So Union's proposal in this application is to forestall that huge accumulation for year end, and then the necessary out-of-period adjustment by recovering it in rates prospectively over the balance of the year, subject to, of course, a final true up when the accounts are cleared in the usual way following in 2003. 1533 The avoidance of the problems of last fall, that is the avoidance of the significant and after the fact recovery and commodity increases, is what is at the heart of Union's proposal in this application, and it is what is at the heart of the Board's prior deferral methodology for the avoidance of large deferral balances. So Union is not asking for anything new or radical in its request for prospective recovery of projected deferral account balances. 1534 As noted in the evidence, the deferral account triggering process, that is, the process for adjusting the reference price for determining the variances that would accumulate in these deferral accounts, was first approved in EBRO-493/494. The original trigger amount required a change in the forecast -- required a change if there was a forecast imbalance of $15 or more on an average general service customer's annual bill, and that has since been amended to a $20 threshold. 1535 But in approving the process for doing this, the Board commented on the underlying rationale for making these kinds of changes, that is the avoidance for the need of significant after-the-fact adjustments that might occur if these steps were not taken. During the period, I emphasize, as opposed to after the fact to avoid the build up of large credits or debits. 1536 And if you would turn up the evidence in tab 2, starting at page 4, the pre-filed evidence quotes from the Board's decision in the EBRO-493/494 case, and starting on page 4, you'll see that it cites a passage that starts: 1537 "The Board is prepared to accept $15 for a typical residential sales service customer either on an accumulated base or forecast year-end balance as the PGVA trigger for Union and the gas supply related variance accounts trigger for Centra in the 1997 test year adjustments." 1538 However, it directs the utilities to monitor customers' reactions to the little of retroactive adjustments resulting from this decision. Further, in order to deal with its ongoing and increasing concerns about volatility in gas costs and retroactive adjustments, the Board expects the companies, once the $15 trigger is reached, to "immediately apply for the clearance of the debit and credit balances in gas supply related variance accounts in order to avoid the accumulation of large balances in these accounts as have resulted over the past year." 1539 And then through similar affect in 1999 -0017, the Board said on page 5 of the pre-filed evidence: 1540 "The Board accepts Union's proposal to continue the use of the QRAM to change the trigger and to provide the suggested information packages to customers. The Board directs Union to notify the Board if the trigger of $20 --" by then amended, of course "-- for residential customers is exceeded, and bring forward any proposed changes to rates, associated deferral account reference prices and disposition of deferral account balances." 1541 And as the evidence goes on to say: "Union is required to bring forward proposals to address not only the deferral account reference prices but also to address the disposition of those deferral account balances when the approved trigger amount of $20 is exceeded." 1542 And so it is, therefore, Union's proposal in this application we say is consistent with the Board's requirements as part of Union's approved deferral account trigger process. Union's projected gas supply related deferral account balances, based on February 2002 consensus forecast, exceed the approved $20 target by approximately $57 in the south and $66 in the north. 1543 So as the evidence noted as well, the Board has on two prior occasions approved prospective recovery of Union's gas supply deferral accounts in two prior QRAM applications, EB-2001-0053 and EB-2001-0788. In both cases, the Board approved increases in the commodity and transportation rates and approved a prospective recovery of the forecast balances in the firm PGVA and of inventory revaluation in the other purchased gas cost account, and you can find that information at tab 2, page 2. 1544 The Board has also approved prospective recovery of forecast deferral account balances for NRG as recently as February 24 of 2003 in its decision in EB-2003-0007, and that reference you can find at tab 2, page 8. 1545 The Board also approved a prospective clearing of forecast deferral balances for NRG in a prior case, EB-2002-0029 and you can find a reference to that at tab 1, page 9. And finally, the Board has approved on at least two prior occasions prospective clearing of forecast deferral account balances for Enbridge, and that can be found in Enbridge's case EB-2001-0419 which is from August of 2001, and EB-2002-0064, which is from June 26th, 2002. 1546 So it's clear that steps to dispose of large anticipated deferral account balances have been a feature of the QRAM reference price adjustment process since its inception, and there is ample precedent, in my submission in both Union's case and in the cases of Enbridge and MRD for doing so. 1547 Now, in Union's last QRAM application, EB-2003-0016, the forecast annual impact of the proposed WACOG change was only about $10 per residential customer. So accordingly, it was well below, roughly only half of the specified threshold for triggering a reference price change or a prospective recovery. But Union had nevertheless requested a prospective recovery of a forecast of roughly $9 million, but it was denied. 1548 And the Board, this was alluded to in one of the cross-examinations earlier in the day, said in that case that prospective recovery of the deferral account balances was not part of the QRAM process and that an adjustment like this was better left to the comprehensive review of Union's QRAM methodology. 1549 But I think we have to say, with the greatest of respect to the Board in that case, that that was not correct, and that -- not only had it been done on numerous occasions before, but not a week earlier -- sorry, a week later, exactly this type of prospective recovery was approved by the Board in the previously mentioned MRD case, EB-2003-0007. 1550 Now, as I said, in Union's last QRAM the change only involved a $9 million forecast with only a $10 customer annual impact so the Board was well within its rights to reject that application on the basis of materiality. But I say again with the greatest of respect, that the Board was not correct in saying that this has never been part of the request QRAM process. It's been part of the QRAM process from its inception. 1551 Anyway, the real issue is that now, as a result of the most recent consensus forecast, the February forecast, the projected deferral account balances combined for all of the commodity-related accounts, even after adjustment for the new WACOG going forward, is still almost $90 million, which translates into a forecast annual impact of about $77 for a customer in the south, and $86 for a customer in the north, and you can find that evidence at tab 1, page 10. 1552 These are now amounts which are four times the threshold trigger amounts of $20. So the last QRAM adjustment was well within the threshold at only $10, and as I said, the Board was well within its rights having regard to the methodology to decline to approve a prospective recovery of that amount, but now it is a very different story, because of the size -- the very material size of the projected year-end balances. 1553 Just to put this in perspective, the combined effect of the 2000, 2001, and 2002 balances last year that generated such adverse customer reaction was about $120. So on an all-in basis at least we are already over that at $140 million total or roughly $125 annual impact, and getting close to that amount, even with the WACOG change producing that $90 million total and the roughly $80 annual customer impact. 1554 No one wants these huge after-the-fact adjustments. I think the evidence is clear about that, and the customers certainly have made that plain, and you can see that -- both in references to that in Union's evidence at tab 2, pages 10 and 11 and with the excerpts that have been provided at C.25.10 which contains a number of the customer concerns as a result of the problems last fall. 1555 Further, in the settlement of the 2003 rate case, the parties agreed that deferral account balances should be cleared at least annually, or indeed the settlement agreement said more frequently in order to minimize significant after-the-fact commodity-related charges, and you can find that in the settlement agreement in RP-2002-0130 at page 13, issue 5.6. 1556 So it's for these reasons that Union is proposing in this application to increase its gas supply commodity rates to reflect the increase in the Alberta border WACOG and to recover prospectively, through further WACOG adjustments, the projected year-end balances in the firm PGVA and the other purchased gas cost account. 1557 And as I've said, the reason really is that -- what's driving all of this is the avoidance of visiting on customers after-the-fact, after-the-period in which -- after, indeed, the calendar year in which the costs were incurred, sometime in 2004 -- and perhaps not until the 2004 or even 2005 rate case, the disposition of these accounts. 1558 We want to avoid large surprises at the end of the year, and we want to avoid out-of-period adjustments by recovering these cost from customers in the year in which they were actually incurred. 1559 Union urges this prospective recovery on the Board as the only prudent course in the circumstances, the only way to avoid substantial year-end debits, and the only way to roughly match the rates paid in a time frame roughly approximate to when the costs were incurred. 1560 Let me turn then to the second and what, in my submission, is the only unique feature of this application, and that is the proposal for the change in the method of allocation of the flexibility costs. That change, of course, is recovery from all general service customers, including direct purchase, to recovery from only sales service customers. And the reason for this request which is made under Section 36(1) of the Act, as well as the QRAM and deferral account methodologies previously approved, is dealt with in the evidence at tab 1, pages 13 and pages 16 to 20, tab 2, pages 14 to 16 and at C.1.15, C.16.15, C.28.8 and C.28.1. 1561 Let me start with, first of all, what are flexibility costs. Flexibility costs arise out of the other purchased gas cost account. Remember the other purchased gas cost account records variances from all non-TCPL sources of supply. That includes gas in inventory as a result of valuations, winter spot purchases for increased demands, and the landed price of all supply arriving on non-TCPL such as Trunkline, Panhandle or Alliance. 1562 The concept of flexibility related costs first arose in the 1990s in EBRO-494/494-06, and it's important to remember that by that time Union was serving sales service customers with a diversified upstream portfolio, but effectively all contract customers had gone to direct purchase, and so the only new -- effectively the only new direct purchase was coming from the general service customer group. 1563 When new sales customers migrated to direct purchase, the existing Board methodology at the time, and this remember was pre-vertical slice, required Union to allocate only TCPL transportation and none of the other diversified sources of supply. And this created an inequity, because at the time TCPL supplies were landing at about a cost of about $21 million a year less than the non-TCPL supply. 1564 What was happening was what was then the cheapest component of the portfolio was being allocated for the new direct purchase customer, and what were then the more expensive portions of the portfolio were being left to serve remaining sales service customers and over time, of course, that meant that fewer customers were paying for more expensive assets. 1565 And so the Board was of the view that all general service customers, direct purchase sales and sales service benefitted from the diversified portfolio and, as a result, the concept was formed of allocating the cost over or under TCPL of all other sources of supply to all of the general service customers and that concept was approved to act, in effect, as an offset to the benefits that new direct purchasers were getting through the allocation of 100 percent TCPL and the -- leaving behind of the alternate sources of supply. 1566 So what is called the flexibility component of the other purchased gas cost account is really what is left in the variance account after inventory revaluation or load balancing, and winter purchases are netted out. 1567 Now, as the Board knows, how the load balancing and flexibility costs are incurred and allocated has been a matter of continuing concern between the direct purchase, the direct purchase community, and those representing sales service customers for some time, and there is, of course, an outstanding directive from the Board to reassess how these costs are incurred and whether there continues to be justification for the existing allocations to direct purchase as well as sales service customers. 1568 And indeed, as recently as in Union's enabling unbundling case, RP-2000-0078, the Board encouraged Union to deal with these issues as soon as practicable and if possible during Union's 2003 customer review process, and reference to that can be found at C.25.8. 1569 Now, I'll come, in a moment, to the fact that that didn't happen, but in my submission, the fact that the Board contemplated, as recently as enabling the unbundling case which, of course, took place post PBR -- post PBR application. That really represents a complete answer to the suggestion that there can't be any allocation changes to deferral account balances during PBR. In my submission, it's always been contemplated, and indeed my friends such as George Vegh urged upon Union to do these changes as soon as possible. 1570 And it's really been as a result of resource problems that Union has not been able to tackle this issue. 1571 So it turned out that it was not practical nor, indeed candidly, were the balances sufficiently large enough that there was an urgent need to tackle that problem. But now, however, with the run-up in price as evidenced by the February consensus forecast, there are large balances projected for year end, and indeed roughly 40 million -- I think it's closer to 41 million for flexibility costs. And because Union is asking for prospective recovery to avoid large, after-the-fact adjustments, Union wants the allocation of that recovery to reflect Union's proposal for appropriate recovery of flexibility costs. 1572 And put simply, Union's evidence is simply that the recovery of the flexibility segment of the other purchased gas cost account from direct purchase customers can no longer be justified. And the rationale for this is summarized at tab 1, page 17 of the pre-filed evidence. And if you would turn up page 17 at tab 1, you'll see there's a list of five points there, and the first four address the why question, and number 5 addresses the why now question, and I'll deal with those in a bit more detail. 1573 You'll see first of all that the point is made that Union's gas supply portfolio has changed substantially since the allocation method was improved and of course it is more diversified. 1574 Further, and most importantly, since the introduction of the vertical slice transportation allocation method on November 1, 2001, customers migrating to direct purchase do pay a comparable transportation rate to system sales customers. That's because, unlike under the old system where they got to take 100 percent TCPL and TCPL was the cheaper source of supply, now they have to take a proportionate share of all of the upstream assets used to serve all of the sales service customers, so that discrepancy no longer exists. Therefore the underlying justification for the recovery of that cost no longer exists. 1575 Point 3: Customers that migrated to direct purchase prior to the introduction of the vertical slice have since had the ability to achieve a diversified portfolio similar to Union's portfolio. And that's due to the expiry, as you've heard on prior cases, of a number of the TCPL contract terms and the ability to turn back TCPL contracts as they come due, which then enables those customers to go out and get whatever source of supply they want. 1576 Point 4: The combination of vertical slice and load balancing and costing method eliminates the need to collect flexibility cost from direct purchase customers. That's really the conclusion from the above points. And then, finally, the flexibility cost impacts are significant and need to be managed now rather than refuse retroactively in order to ensure that their disposition reflects actual cost responsibility. 1577 Remember that the whole issue arose from the perceived inequity of having the cost of a diversified portfolio recovered from sales service customers when direct purchasers were allocated 100 percent TCPL -- what was then a cheaper and more desirable component in the portfolio. 1578 And direct purchasers simply no longer have that advantage. They do not receive 100 percent TCPL supply, and have not done so since the -- since the putting into effect in 2001 of the vertical slice methodology. 1579 Customers who migrated to direct purchase prior the vertical slice -- to the extent that customers who have already migrated to direct purchase prior to the vertical slice are in issue. They, as a practical matter, are not in issue because as I've said, they have diversified portfolios because of the ability to do TCPL turnback. The TCPL capacity they were assigned has come to term, and as a result of that ability to turn back to the TCPL capacity, based on evidence in prior cases, you'll recall that up to 50 percent of these customers' upstream obligations have expires and been replaced with a diversified portfolio. 1580 So the rationale for recovering flexibility costs and delivery rates as opposed to commodity rates was that this was at the time the only practical way to charge both sales service and direct purchase customers for the costs associated non-TCPL supply. But with the approval and functioning of the vertical slice methodology in which all upstream supplies are effectively displaced, not just TCPL, there is no longer any basis to charge flexibility costs to direct purchase customers. 1581 Put another way, to the extent that they now take their pro-rata share of non-TCPL source and supply with them when they go to direct purchase, they no longer cause any disproportionate cost, and you can see that evidence at tab 1, page 19. 1582 So it's Union's submission, based on the evidence, that the remaining non-TCPL costs, net of inventory and load balancing winter purchases, are a system sales supply cost that is appropriately recovered from system sales customers as a component of WACOG. And as a result, Union is proposing to reclassify the projected balance of 41 million of projected flexibility-related debits in the other purchased gas account as gas supply commodity related instead of gas supply delivery related, and to recover those amounts as, for example, is done with a firm PGVA, over the remaining eight months of the year from May to December 2003 through the gas supply charge. 1583 Now, I said I'd come back to the question of why now, and one may well ask given that Union has been working on the load balancing and flexibility directive for a while, why does this particular change need to be made now. 1584 And I would say that the answer to that is two-fold. Although it has taken a while, it has also required, in my submission, some practical experience with the vertical slice. The vertical slice was originally applied for in -- as I recall, 499 was turned down. It was applied for again in RP-1999-0017 and was accepted but not accepted in time to put it into effect in 2000. So it wasn't even in place effectively for 2001, so there's only been 2001 and 2002 to show any experience with the process. 1585 And that experience has, I think, demonstrated that direct purchases are neither advantaged nor disadvantaged vis-a-vis the system sales customer by the allocation of a pro-rata share of all upstream supplies used by Union to serve existing sales service customers. 1586 Let me back up. The other thing I would say and that you've heard from the witnesses earlier today was that the -- that as a result of the relatively small amounts that were involved previously, there was no urgency in dealing with it and resources were tight, and there were other issues. As the Board knows we've been engaged in a number of applications over the last while. And it wasn't until recently, as you heard earlier today, that Union did turn its mind to these issues and frankly, this is the flexibility proposal. There isn't anything else coming down the pipe. You've heard Mr. Birmingham testify to this and Mr. Isherwood that this is it. This is the proposal. We filed our evidence on this proposal. Nothing that's going to come along later in dealing with load balancing that is going to change the fundamental proposition that flexibility costs should not be recovered from direct purchase customers because they are not causing those costs. 1587 So there is no -- with respect to the notion that this should be punted to a future case for more in-depth consideration, in my submission, there's just no evidence of that. This is not, with respect to this issue, an interim or a stop-gap measure. This is what Union proposes to do with the flexibility costs, and nothing -- nothing that might happen in the next rate case is going to change that. 1588 The second step -- I said it was two-fold. The second step is given that this is what Union proposes to do with flexibility costs, the fact that there is a large debit balance forecasted in the other purchased gas cost account, as I say about $41 million for this issue alone, that has really put -- put the issue squarely on the front burner, particularly having regard to the concerns arising out of last fall. 1589 And in my submission, the only way to achieve Union's objective of minimizing out-of-period or after-the-fact adjustments, and be consistent with cost causality principles is to resolve the appropriate allocation methodology now, not at some point in the future, before the costs are actually recovered. 1590 So in effect, there are really three choices. Choice number one would be no prospective recovery at all. That avoids having to decide now whether both sales service and direct purchase should pay, but in 2004, when these accounts are cleared someone will be hit with a significant out-of-period charge to recover that debit. So in my submission, no prospective recovery at all is not a viable option. 1591 The second possibility is prospective recovery on the current basis. Now, again, this avoids having to decide the issue now, whether the reallocation proposed is appropriate, but merely puts off the decision, since Union will be proposing this reallocation in any event even if it is deferred in this hearing. 1592 And this is also highly undesirable in my submission, because if Union were to recover prospectively the flexibility related debits from all general service customers under the current methodology for now, but later, on disposition and true up have recovery based on what Union believes and what the evidence, in my submission, shows in this case is an actual cost responsibility basis, the result would be that sales service customers would be hit with an additional one-time charge of roughly the other half of the flexibility cost that would have already been recovered from direct purchase customers. And then there would have to be, of course, a comparable refund to direct purchase customers in the order of about $20 per average residence customer as you heard, which, of course, is within the trigger mechanism that the Board has set out for disposition of deferral account balances. 1593 So Union is saying: Why go through an exercise which is almost assuredly to generate what we know will be a balance that will trigger the threshold for coming before the Board to make adjustments to dispose of those balances? 1594 It is -- and of course, then, the third possibility is to deal with the issue now, having regard to the evidence, and not defer the issue but determine, based on the evidence, whether or not the Board agrees with Union that the cost causality of flexibility costs now lies exclusively with the system sales customer. And if the Board does agree with that proposition to make that change, and it is only that -- it is only that proposal that both achieves the proper alignment of cost causality and the avoidance of significant out-of-period deferred adjustments. 1595 There is, as I've said earlier, no reason and no basis to defer the decision on this issue. There is no further evidence going to be coming on it. This is it. There is an evidentiary basis upon which to approve this request, and it is properly constituted as an application under Section 36 with, I submit, adequate notice to representatives of all interested parties. 1596 And in that regard, let me say that first of all, it is, of course, a matter of discretion for the Board what notice is required. The Board knows from the past few cases that virtually all -- in fact, I would say all conceivable and interested rate groups and interested parties have been participating in Union's rate cases. The list of intervenors in Union's case goes on for page, and so in the Board's discretion, it is, of course, entitled to say that notice to existing intervenors is sufficient. 1597 In any event, I say, that it is not necessary to go down the notice path in the context of rate adjustments or using the rate case model, because as you've heard from Mr. Birmingham, and I think as a matter of law, what Union is seeking with respect to deferral account disposition, that is prospective deferral account disposition, is in the nature of an interim order. Since all deferral account balances -- all deferral account balances, as they always are, are subject to final disposition and true up following the end of the year. 1598 So this is not in the nature of a final order that's being sought here, and therefore, no final -- therefore, no interest is being disposed of on a final basis. And it's for these reasons that Union therefore seeks an order on the proper allocation of flexibility related costs now, so that significant out-of-period adjustments with respect to that category of cost can be avoided in the future. 1599 So in conclusion, Mr. Chairman, I say most of -- with respect, most of Union's requests are ordinary course. The Alberta border WACOG change based on February consensus forecast exceeds the trigger for a QRAM change of 5 cents. Similarly, the Alberta border WACOG change causes the deferral account impacts to exceed the $20 impact required for a reference price adjustment and for a proposal of deferral account disposition. 1600 All of these changes and the flow-through to the accounts and into the categories of costs including inventory revaluation, load balancing, flexibility, these are all ordinary course. They are uncontroversial, in my submission. There is precedent for prospective recovery of these deferral account balances. Indeed, I say it goes beyond precedent. I say, with respect, that the passages I read to you from the Board's earlier decisions, original decisions on this, virtually call for a proposal for deferral account disposition. And certainly in the current circumstances, the only way to dispose of these deferral accounts, to avoid the landing of large out-of-period balances on the customers, is to do so prospectively. 1601 So in the circumstances, prospective recovery, subject to final true up, is the only way -- the only way, practically, to achieve the avoidance of those large out-of-period adjustments. 1602 And finally, the reallocation of flexibility costs is something that has been within parties' contemplation for some time in connection with the load balancing and flexibility directive. There is no bar to this change, because of the fact that Union is under a PBR or because it involves a change in the allocation of rates. All deferral -- I would submit to you that all deferral accounts are subject on disposition to proposals to reallocation, and certainly, a recent precedent makes clear that this has been done before, and that Mr. Birmingham gave evidence about the enabling unbundling case in which there had been -- there had been unbundling costs accrued. They had on a preliminary basis been disposed of on a certain methodology. 1603 After those costs, after the remaining costs were incurred, they were left to be both determined as to prudence and determined as to the allocation methodology, and that allocation methodology changed. And changed, if you will, in Mr. Janigan's language, at least -- not that we accept this characterization-- but they changed, if you will, retroactively or after the fact, after the cost had been incurred. That is in the nature, I submit, of deferral account balances. It's precisely because they are deferred that those issues get dealt with after the fact. So it's actually not proper, in my submission, and not accurate to talk about those kinds of adjustments as retroactive because it is in the very nature of a deferral account that those issues come up: On an after-the-fact basis, but not legally, in legal terms, not retroactive. 1604 The order, as I say, that we're seeking is interim in nature. All parties with an interest are represented. There is no prescribed form of notice under the Act. The type of notice is up to the discretion of the Board. These are deferral accounts. Union is not seeking final disposition of these accounts. The work on the flexibility costs has been done. The proposal for dealing with the flexibility portion of the directive has been done. The proposal is before you now. The evidence is clear, in my submission, that there is no longer any justification for recovery of flexibility costs from direct purchase customers. This ended with the advent of the vertical slice, and in order to avoid additional out of period adjustments due to a change on disposition of these balances, which would probably not occur until some time well into 2004, Union simply seeks an order deciding the issue of flexibility now. 1605 The evidence is there. There's nothing further that's going to happen, and in order to avoid out of period adjustments, the issue should be resolved now. 1606 Therefore, Mr. Chairman, Union asks that its application be approved in the terms -- on the terms in which it is brought. 1607 Thank you, those are my submissions. 1608 MR. SOMMERVILLE: Thank you, Mr. Penny. 1609 Mr. Vegh? 1610 MS. LEA: Oftentimes parties like to hear from me in case they want to respond to that. It's totally up to you -- I don't see any hands. 1611 MR. SOMMERVILLE: Ms. Lea. 1612 MS. LEA: Thank you. 1613 SUBMISSIONS BY MS. LEA: 1614 MS. LEA: I had four issues that I wanted to touch on, two very briefly, two in a little more depth. 1615 The first issue that I wanted to touch on is the forecast. Union is proposing to have the Board make any changes it decides to approve on the basis of the February 2003 forecast. Staff would ask parties to consider Union to address if it chooses the use of the March forecast. It is the most recent forecast, although it does -- would have an upward effect or upward impact on the amount that customers had to pay in. 1616 Exhibit C 1.1 and 1.2 suggest that that impact would be quite small, very small. If I'm incorrect about my understanding about Exhibit C.1.2, then that's something that perhaps Union could address, but when I look at the differential between the -- the differential that is produced between the deferral account balances as a result of the differentials in the price per gigaJoule in Exhibit C.1.2, that suggests that the use of the March forecast, which has a smaller differential from the February forecast, would not create a large impact. 1617 Staff suggest that Union consider returning to a quarterly adjustment that actually occurs quarterly. That is, that Union come in for an adjustment at the quarter of the year, if either of the triggers is exceeded in either direction. 1618 And that if Union is not planning to come in, that it communicate to the Board earlier than it has in the past with respect to that intention. The Board needs enough time, in staff's view, to consider whether or not it will require Union to come in, and that period of time is some weeks, in excess of four weeks, before the time that the -- that the adjustment would have to be implemented, so I'd ask Union to consider that. 1619 The third issue I wanted to address is flexibility costs. As a preliminary statement to that, given the cost impacts that are discussed in this case and Union's desire to manage them, staff accept that prospective recovery is probably appropriate in this particular case; however, we would like to raise some issues with respect to the flexibility costs. 1620 As Mr. Penny indicated, and as was obvious through cross-examination, there is some issue with respect to whether sufficient notice has been given or whether those who had notice had sufficient opportunity to review the issue of the change in allocation of flexibility costs. 1621 Now, staff notes that the only change to the rates schedules that is to be made for the implementation of this request for a change in the allocation of flexibility costs would be to the commodity rate. Union is not seeking a change to any other part of the rate schedule, as I understand it, and that commodity rate changes are the sorts of changes that one might expect to see in a QRAM application. 1622 Whether that solves the problem of notice or not I don't know. I think from what I heard from parties is that it does not solve the problem. 1623 The way staff views this issue, I see four possibilities here. The Board can approve the proposed change as requested as a permanent change in the allocation methodology. I think the risk there is, the Board is taking some risk that there may have been insufficient notice or insufficient time to review, that the Board has insufficient information before it from other parties. I've heard what Union said about the fact that it has put all its evidence on the record with respect to this matter, but it appeared from cross-examination today that other parties might have contemplated some evidence or additional information with respect to the issue. 1624 Second option is the Board could deny the proposed change, and the risk there is of a later need for refunds or additional charges, depending on whether you're a direct purchase customer or a sales service customer, and I gather that the quantum of that is about $20 on the average for the average residential customer. 1625 A third possibility is that suggested by Mr. Aiken, and in the absence of a transcript, I'm not going to put his suggestion on the record in my submissions. I trust that he'll do so in his argument and it will be on the transcript. 1626 A fourth possibility and I'd ask parties or Union to consider addressing this, is that the Board allow Union to recover the flexibility cost in the manner proposed. However, that the Board make clear that this is an interim or -- trial run isn't quite right, but an interim approval of this methodology for recovery, and that the issue will be revisited in the 2004 rates case when parties do have more opportunity to review the proposal, ask interrogatories, file evidence and that kind of thing. 1627 With respect to that scenario, there is still some risk of a need for a credit, in this case, to sales customers for an additional charge to direct purchase customers if the Board changes its mind in the 2004 rates case with respect to that allocation methodology. 1628 So I'd ask parties and Union to consider those options as possibilities and to address them if they think it's relevant to the issues that their clients are interested in. 1629 The fourth issue I wanted to address briefly is the one that we raised in cross-examination, and it initially is the rate rider issue. The evidence is that Union cannot presently put on the bill a rate rider, and further, that some notice of a rate rider to customers without it being broken out on the bill is undesirable. 1630 However, I would ask Union to consider the possibility that arose in the questions from Mr. Dominy, and that is to make it clear on the customer notice that the increase not only in delivery rates, but also the increase in the commodity price is temporary for a fixed time period. 1631 And to make clear the amount of the increase that is due to the deferral accounts. I mean, use whatever language you think would be appropriate for customers, but to make sure that customers understand how much of the increase is temporary, and for what period that temporary increase will be in effect for. 1632 I'd recommend a consideration also of making this plain if there is an indication of Union's commodity cost on energyshop, which will also assist with transparency, so I'd ask in terms of transparency for customers, if the rate rider is not possible, that Union consider those measures and the Board consider requiring Union to take those measures to increase transparency with respect to any increase that the Board chooses to approve. 1633 Pardon me Mr. Chairman, if you would. 1634 MR. SOMMERVILLE: Not at all. 1635 MS. LEA: Thank you. Those are my submissions. 1636 MR. SOMMERVILLE: Thank you, Ms. Lea. 1637 Mr. Vegh. 1638 MR. VEGH: Thank you. Thank you, sir. 1639 SUBMISSIONS BY MR. VEGH: 1640 MR. VEGH: As I indicated, the group of clients I'm representing have some submissions on this issue on Friday in support of Union's proposal. I won't be addressing those. Those are the CEED submissions. The submissions I'm about to make are on behalf of Superior Energy Management, and these submissions are also in support of Union's proposal. 1641 As has been mentioned by the panel and raised a few times that this is not a run-of-the-mill QRAM application and that's true. This is a rapidly developing issue dealing with unexpectedly high demand and unexpectedly high gas costs this year, and for that reason, Union asked the Board to show some flexibility to hold a one-day hearing to deal with some of the unique issues, and the Board has been able to do that. 1642 And the hope is that the processes that the Board does have in place can accommodate these sorts of issues as they arise, even if they were not run-of-the-mill QRAM issues. 1643 The reason we're holding this one day hearing is there are really two unique issues that arise in this application, and the first is whether Union should be taking steps to prevent the accumulation of a $40 million deficit account reflecting flexibility costs by collecting these costs over the course of the year, and if it does take these steps, then the question is from whom should these costs be collected? And I'd like to address both of those questions, which as I say are -- to me, at least, are the real questions that are joined in issue in this application. 1644 So the first question is should there be an attempt to avoid the accumulation of a $40 million deficit, which is another way of saying should we be trying to avoid the payment -- the one-time payment of a $40 million charge, and it seems to me that to ask this question is to answer it. 1645 I submit that there is absolutely no policy reason to not prevent the accumulation of a deficit, especially of that size. The evidence is clear that customers do not like it. 1646 Also beyond that, to allow these deficits to arise simply frustrates transparency and does not empower customers to make intelligent choices about their gas supply options. The fact of the matter is if a customer is deciding the benefits and risks of being on system gas or being on direct purchase, we need transparent signals that allow them to make that decision, and if we have a unit price out there, which does not reflect the fact that there is a huge deficit building up at the end of the day, then the customer will make the decision in ignorance of that fact, and will not be empowered to make -- will not have all the information necessary to make a proper decision. It's just not realistic to expect customers to be aware of the complexities of rate design and appreciate that there is this account sitting there that will be staring at them a year from now. 1647 So on the question of whether we should be taking these steps to proactively avoid the accumulation of this one-time charge, I submit the answer is obvious that we should be doing that. 1648 Then the question becomes one of who should pay these amounts? Union's evidence was unequivocal that the beneficiaries of flexibility costs now are system gas customers. Direct purchase customers do not benefit from flexibility costs, and this is because direct purchase customers must manage their own source of diversified supply. 1649 Now, they've had to do this since November 2001 when the vertical slice was put into place, and so from cost causation principles, direct purchase customers should not really have had to pay anything in flexibility costs since that time, you know. But the fact is they have been paying these costs since the end of 2001 and throughout 2002. 1650 Now Union's evidence on this, and their position throughout this period whenever this issue would come up, was that this really was a diminimus sort of issue. From Union's perspective, it's a matter of priorities. There's a lot of priorities, there's a lot of issues to address, and I think, frankly, they describe it as a million dollar issue and they had a lot of bigger issues to address. 1651 Whether that is right or wrong I guess is now besides the point because Union is now prepared to address this issue. My submission is that it's long overdue. 1652 Many people have raised the question, or you can expect that parties may raise the question, of whether or not this is an appropriate time or appropriate place to deal with this issue, and I acknowledge that it's a fair question. In fact, every time my clients have raised the issue, we're always told this is not the appropriate time or the appropriate place. So you can always ask that question. 1653 What that also demonstrates is that we rarely have the perfect time and the perfect place to deal with these sorts of issues, and the question therefore is what should the Board do now, in this case. 1654 It is my submission that the Board decision in this application should result in a balance that leads to more just rates and more reasonable rates than would otherwise be the case, and Union's proposal does lead to more just rates and more reasonable rates than is currently in place, currently the situation. 1655 So their solution is a good one; it's not a perfect one. And this process is a good one; it's not a perfect one. But I submit that the difference between good and perfect does not provide a reason for turning down the application. 1656 But we should address some of these specific process concerns, because as I say, I do think they're fair ones. There are a couple. The first is the notice issue, and that this application would not have received the publication that a stand-alone originating application would have raised, and that's true. As a practical matter, though, everyone who I've seen around the rates process the last few years is here. All the usual suspects were informed of this, have participated, and I don't believe as a practical matter there's any prejudice harm to the public interest in terms of notice. People you would expect to hear from are, in fact, here. 1657 The other point just on that is when we ultimately do deal with the final disposition of these accounts, there will be more widespread -- more widely circulated notice. 1658 The second issue around process is a more subtle one which I'm sure the parties are all here, but this is a complex issue. The relationship between flexibility costs and load balancing, for example, is somewhat nuanced and perhaps it would be better if we had more time to think some of these issues through a little bit further. 1659 In response to that, I would say first that this is not the most rushed issue I've seen addressed in front of this Board. There are circumstances of time that do put us in that situation. Sometimes you're forced to address fairly complex issues on an accelerated timetable. 1660 The second is that load balancing and flexibility costs are well-known to this Board. These are not new categories. They -- the components of each of them have been around since the Board's 1998 decision, and they haven't changed, and Union is not proposing that they change here, so there's a -- you know, it's not something that's perhaps top of mind to everyone, but they're certainly well-known to the Board and well-known to clients and intervenors who are particularly interested in this issue. 1661 There has been the suggestion that the two components of load balancing and flexibility are so intertwined that you can't really remove one component from distribution rates without a sort of root cause or root fundamental review of the other, so that you shouldn't be addressing flexibility costs here because there's something out there called load balancing; we have to be able to address that more fundamentally as well. 1662 And again, I acknowledge that there is a nuance in the relationship between the two, but the fact is that the Board has done this in the past. So when the Board established the availability of unbundled rates, the Board did that by effectively allowing unbundled customers to no longer contribute to load balancing costs. They still, under the rate design, do contribute towards flexibility costs. But the point is the Board was capable of looking at one without the other, and the two were not so intertwined that you couldn't address it that way. 1663 So when you look at the accumulated weight of procedural concerns, my suggestion is that they are pretty light. And when you weigh them against continuing with the rate design that is fundamentally unfair, because it does have a direct purchase customers contributing twice to the cost of the diversified supply, when you weigh the two against the other, the balance is really on a cost causation base, the balance is in favour of Union's proposal. 1664 Let me just address perhaps a couple of points that have come up as well. 1665 In the alternative, if the Board does not provide Union with Union's main proposal, Superior's submission would be that, as an alternative, Union's alternative proposal be accepted as well, that is that there be a clear tracking of costs paid as flexibility costs by direct purchase customers throughout the course of the year so that when we have a final disposition of this account for the -- at the end of the -- at the end of the year, all amounts paid since January 1, 2003, can be disposed of in accordance with the final decision. 1666 So that all amounts paid throughout 2003 by direct purchase customers be made clear and by system customers be made clear, and if we do have to reshuffle around payments later, we at least have the evidentiary record that allows that tracking. And I understand that's, as I say, consistent with what Union proposes. 1667 Perhaps I'll just address, Ms. Lea, some points she made, first on a March forecast as opposed to a February forecast, I think that's acceptable as well. 1668 A mandatory quarterly adjustment is something that Superior strongly supports. In fact, Superior this summer appeared in an Enbridge case to oppose a quarterly adjustment that would actually have led to an increase in system -- or A departure from a mandatory quarterly approach that would have led to an increase in system gas costs, so -- so Superior has been consistent whether the price is going up or the price is going down. The formula should be formulaic and remove discretion, so Superior supports this suggestion. 1669 In terms of the rate rider issue, notification that this is temporary and due to deferral account seems appropriate as well. 1670 Just to address one further point, Ms. Lea noted that the only party that had the opportunity -- did file evidence in this case was Union. I do note that no one else has actually said that they have proposed to file evidence and wish they had further time to do that. People did point out the limitations of the fast process, but there was no one that actually said that there was evidence that they wanted to file. 1671 Thank you, those are my submissions. 1672 MR. SOMMERVILLE: Thank you, Mr. Vegh. 1673 Mr. DeRose, I think you are the last -- 1674 MR. DeROSE: And I will be quick. 1675 MR. SOMMERVILLE: -- person to argue orally, or Mr. Quinn, I'm not sure. 1676 MR. QUINN: I would appreciate the opportunity to file written on Wednesday. Thank you. 1677 MR. SOMMERVILLE: Thank you, Mr. Quinn. 1678 Mr. Hamilton? 1679 MR. HAMILTON: I'm prepared to go orally. 1680 MR. SOMMERVILLE: Thank you. 1681 Mr. DeRose. 1682 MR. DeROSE: Thank you, Mr. Chair. 1683 SUBMISSIONS BY MR. DeROSE: 1684 MR. DeROSE: IGUA is here in to support Union's application. In this regard, I intend to address two issues, the first with respect to the flexibility-related costs, and the second with respect to prospective recovery. I will try not to go over the same ground which Mr. Vegh has just ploughed, but there may be some overlap. 1685 First of all, with respect to the flexibility-related costs, it is IGUA's submission that the evidence proposed and put on the record by Union clearly establishes that although at one time it was appropriate for all general service customers to pay for the flexibility-related costs, that is no longer the case. The flexibility costs are now incurred exclusively for sales service customers, and there are no costs incurred with respect to the flexibility-related costs for direct purchase customers. In our submission, the evidence is uncontradicted in that regard. 1686 Given this, it is our submission that it is appropriate to allow the flexibility-related costs to only be collected from those sales service customers, and it is not appropriate to collect from direct purchase customers into the future. In that regard, it would be inconsistent with the principles of cost causation. 1687 With respect to the prospective recovery, again, IGUA generally supports the timely mitigation of retroactive charges, and in this case, we would submit that there's two important points for the Board to keep in mind when considering this application. The first is that the prudence of the costs in this case will be disposed of at a later time, and in this regard, there are two aspect which this should provide comfort to the Board over. 1688 The first, which Mr. Vegh has gone over, is that the accelerated time frame of this hearing, although in the normal course, should be of concern to the Board. In this case, we would submit that as final disposition will be occurring at a later date, there should be comfort in the Board that the accelerated time frame will not prejudice any parties in the future. 1689 Similarly, the notice provisions, although not followed in the regular course with respect to a full rates application again, similarly, they will not prejudice customers or client groups or intervenors. As again, they will have an opportunity at a later date to fully argue the issue. 1690 Secondly, it's IGUA's submission that this is a unique year. Again, as the evidence has shown in the past, the flexibility-related costs have described -- as described by the witness panel have been a million-dollar issue. This year it's a $40 million issue and this changes the nature of the impact which it will have on customers at disposition, and there will be substantial debits in both the PGVA and the OPGCA, and given the quantum of the debits which are anticipated, it is appropriate in this case for recovery to be made on a prospective basis. 1691 So in the submission of IGUA, it is our position that Union's application for prospective rate collection is appropriate and should be accepted by the Board. 1692 MR. SOMMERVILLE: Thank you, Mr. DeRose. 1693 Mr. Hamilton. 1694 SUBMISSIONS BY MR. HAMILTON: 1695 MR. HAMILTON: Yes, thank you, Mr. Chairman. OESC is also here in support of the application as filed by Union. OESC will not go over the ground previously ploughed by Mr. Vegh or Mr. DeRose, but we are -- we would like to bring to the Board's attention one additional item of concern not covered by either of those arguments, and that is it flows from the comments of Ms. Lea earlier and in her comment that the Board Staff would like to see QRAMs conducted quarterly. 1696 I think generally that that would be a move in the right direction from OESC's perspective, but more specifically, OESC believes that the QRAM methodologies for both utilities need to be examined generally and to, as I think Mr. Shepherd has said in the Enbridge case, if they ain't broke, don't fix them, but if they are broke, replace them with something that functions properly. And if it's determined that they are not broken, they ought to be adhered to and ought not to be manipulated on a situation-by-situation basis. 1697 Having said all that, we understand the need for the approach that Union has taken in this case, but generally, we believe that that kind of need can be alleviated by examining and designing and implementing a truly workable commodity cost review process, and with that, those are my comments subject to any questions you may have. 1698 MR. SOMMERVILLE: Thank you, Mr. Hamilton. 1699 Does any other party wish to make oral submissions in this case? 1700 Those wishing to file written argument may do so. They are due Wednesday noon. We would expect that Union's reply argument would follow on Friday noon. 1701 MR. PENNY: Mr. Chairman, just before we break today, I can tell you and provide to you and to the parties who remain in the room that we have answers to three of the transcript undertakings that were given today and we hope to have answers to the balance of them tomorrow. We have one answer to Mr. Aiken's question, Mr. Shepherd's question, and an answer to one of Mr. Quinn's questions. 1702 MR. SOMMERVILLE: Thank you, Mr. Penny. 1703 Will these be communicated to those who are not here? 1704 MR. PENNY: Yes. 1705 MR. SOMMERVILLE: Thank you. 1706 Mr. Quinn. 1707 MR. QUINN: Just a question on that matter, sir, is the timing on the remainder and how they will be distributed. With the tight time frames to filing final argument, I'm just trying to figure out how we would get the information for the rest of the undertakings. 1708 MR. PENNY: If Mr. Quinn wants to let us know where he's going to be tomorrow morning, we'll be happy to make sure it gets directed to wherever he is. 1709 MR. QUINN: At Mr. Ryder's office tomorrow morning, Mr. Penny. Thank you. 1710 MR. SOMMERVILLE: Thank you. With that, the evidentiary portion of this proceeding is concluded and a good portion of the argument the concluded as well. Thank you all for your assistance, and we will stand adjourned. 1711 MR. PENNY: Thank you, Mr. Chair. 1712 --- Whereupon the hearing concluded at 5:06 p.m.