Rep: OEB Doc: 12KPG Rev: 0 ONTARIO ENERGY BOARD Volume: 1 24 FEBRUARY 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER F. PETERS MEMBER 1 RP-2002-0130 TRANSCRIPT VOLUME #1 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, transmission, distribution, and storage of gas as of January 1, 2003. AND IN THE MATTER OF the customer review process approved by the Ontario Energy Board in the RP-1999-0017 Decision with Reasons. 3 RP-2002-0130 TRANSCRIPT VOLUME #1 4 24 FEBRUARY 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff MARTIN DAVIES Board Staff NEIL YEUNG Board Staff MICHAEL PENNY Union Gas Limited MARCEL REGHELINI Union Gas Limited BRYAN GOULDEN Union Gas Limited ROBERT FRANK CEED BILL KILLEEN Direct Energy JOYCE POON VECC MICHAEL JANIGAN VECC ROBERT WARREN CAC ALICK RYDER The City of Kitchener RANDALL AIKEN London Wholesale Gas VINCE DE ROSE IGUA TIBOR HAYNAL TCPL MARK MATTSON Energy Probe BRIAN DINGWALL HVAC Coalition RICHARD KING Tractebel Power VALERIE YOUNG OAPPA BARBARA BODNAR Enbridge Gas 8 TABLE OF CONTENTS 9 APPEARANCES: [17] PRELIMINARY MATTERS: [44] UNION GAS - PANEL 1 [101] EXAMINATION BY MR. PENNY: [104] CROSS-EXAMINATION BY MR. AIKEN: [161] CROSS-EXAMINATION BY MR. RYDER: [175] CROSS-EXAMINATION BY MR. DEROSE: [326] CROSS-EXAMINATION BY MR. MORAN: [350] PROCEDURAL MATTERS: [369] UNION GAS - PANEL 2 [418] EXAMINATION BY MR. PENNY: [421] CROSS-EXAMINATION BY MR. FRANK: [577] CROSS-EXAMINATION BY MR. HAYNAL: [796] RE-EXAMINATION BY MR. PENNY: [814] 10 EXHIBITS 11 EXHIBIT NO. F.1.1: SERIES OF AFFIDAVITS WITH RESPECT TO THE SETTLEMENT AGREEMENT [54] EXHIBIT NO. F.1.2: MAP OF OPERATIONAL AREA OF UNION GAS [569] EXHIBIT NO. F.1.3 CROSS-EXAMINATION REFERENCE MATERIALS OF CEED [582] 12 UNDERTAKINGS 13 UNDERTAKING NO. G.1.1: UNDERTAKING TO LOOK INTO WHAT TENDERING DOCUMENTS ARE AVAILABLE WITH RESPECT TO CERTAIN CONTRACTS REFERRED TO IN INTERROGATORY 15.11 [202] UNDERTAKING NO. G.1.2: DRAFT AGREEMENT BETWEEN UNION GAS AND DUKE ENERGY GAS TRANSMISSION [294] 14 ---Upon commencing at 9:28 a.m. 15 MR. SOMMERVILLE: Good morning, please be seated. 16 This is a proceeding of the Ontario Energy Board. My name is Paul Sommerville. I'm presiding member. With me is Mr. Fred Peters. This case has been designated by the Board as RP-2002 0130. This is the third and final customer review process in the matter of the PBR plan approved in the 0017 proceeding. Are there any -- could I have appearances first, please. 17 APPEARANCES: 18 MR. PENNY: Yes, Mr. Chairman, my name is Michael Penny, and I'm here on behalf of the applicant, Union Gas Limited. 19 MR. WARREN: Yes, Mr. Robert Warren Consumers' Association of Canada. 20 MR. JANIGAN: Michael Janigan for the Vulnerable Energy Consumers Coalition. 21 MR. AIKEN: Randy Aiken for the London Property Management Association and the Wholesale Gas Services Purchaser's Group. 22 MR. RYDER: Alick Ryder for the City of Kitchener. 23 MR. FRANK: Robert Frank for CEED. 24 MR. SOMMERVILLE: Thank you, Mr. Frank. 25 MR. KILLEEN: Bill Killeen for Direct Energy. 26 MS. BODNAR: Barbara Bodnar, Enbridge Gas Distribution. 27 MS. YOUNG: Valerie Young, the Ontario Association of Physical Plant Administrators. 28 MR. SOMMERVILLE: Thank you. 29 MR. KING: Richard King for Tractebel Power. 30 MR. DINGWALL: Brian Dingwall for the The Heating, Ventilation and Air Conditioning Contractors Coalition. 31 MR. SOMMERVILLE: Mr. Dingwall. 32 MR. DINGWALL: Yes. 33 MR. SOMMERVILLE: Thank you. 34 MR. MATTSON: Mark Mattson, counsel for Energy Probe. 35 MR. SOMMERVILLE: Thank you, Mr. Mattson. 36 MR. HAYNAL: Tibor Haynal for TransCanada Pipelines Limited. 37 MR. SOMMERVILLE: Thank you, Mr. Haynal. 38 MR. DeROSE: Vincent DeRose with the Industrial Gas Users Association. 39 MR. SOMMERVILLE: Thank you, very much. 40 Any other appearances? 41 MR. MORAN: Pat Moran, Board staff. 42 MR. SOMMERVILLE: Thank you, Mr. Moran. 43 Are there any preliminary matters? Mr. Penny? 44 PRELIMINARY MATTERS: 45 MR. PENNY: Mr. Chairman, the only preliminary matter I'm aware of, is that as a result -- and as the Board knows there was a relatively comprehensive settlement of many of if not most of the issues in this case, and as a result it's proposed that we call viva voce evidence in support of those issues. But in order to complete the Board's file what we have prepared are affidavits from people who are responsible for the preparation of that evidence, in which they simply attest to that, so I think it's -- it's the -- usually done, in my experience to file that, just so the Board's record is complete. We have witnesses actually adopt that evidence. 46 MR. SOMMERVILLE: Thank you, Mr. Penny. 47 This is the affidavit of Mr. Birmingham and Ms. Marshall? 48 MR. PENNY: Well, there's a package of them, Mr. Chair. All the people who you won't be seeing. 49 MR. SOMMERVILLE: Thank you, very much. 50 MR. PENNY: Because of the settlement. And with respect to the assignment of exhibit numbers, I'm told that the -- that there was filed on the day that the Board considered the settlement agreement a -- the terms of reference of the risk management project, and it was our understanding that that would have been assigned the exhibit number of F.1. 51 MR. MORAN: Just checking the list, Mr. Chair. Yes, it is, it's F.1. 52 MR. PENNY: So perhaps the affidavits could simply be marked collectively as Exhibit F.2. 53 MR. MORAN: F.2 is a series of affidavits with respect to the settlement agreement. 54 EXHIBIT NO. F.1.1: SERIES OF AFFIDAVITS WITH RESPECT TO THE SETTLEMENT AGREEMENT 55 MR. SOMMERVILLE: Is there anything further of a preliminary nature? 56 MR. PENNY: Mr. Chair, we did, in connection with the remaining issues, we did prepare for the assistance of the Board and the parties, that was sent out last week, a single page document which indicates the remaining issues and what panels are going to speak to those issues and who the witnesses will be, so I simply draw that to your attention. And I have no other preliminary issues, so unless there are others from someone else, we can proceed immediately to the evidence. 57 MR. SOMMERVILLE: Thank you, sir. 58 MR. WARREN: Mr. Chairman, I'm sorry, the CAC's -- the only issue in which we will participate in more or less live form is the DCC issue, the delivery commitment credit issue. And, with your permission, the Enbridge Gas ADR process is taking place next door, and if I could be excused, I will return when the DCC issue arises. I gather that will be the third panel, and I don't know what the timing on it is, but I will reappear whenever that panel comes up, with your permission, sir. 59 MR. SOMMERVILLE: Thank you. 60 MR. DINGWALL: On a similar note, sir, the HVAC Coalition, was a party to the settlement but has no interest in the live issues, so at this point I request that I be excused from the balance of the proceeding, as there is no interest in the live issues. 61 MR. SOMMERVILLE: You're excused, Mr. Dingwall. Thank you very much. Ms. Young? 62 MS. YOUNG: OAPPA is interested in the DCC issue, so we will just hear the discussion of that particular issue. 63 MR. SOMMERVILLE: Very good. 64 It might be appropriate, then, just to touch on some scheduling matters. The Board has a difficulty on the afternoon of the 26th, that's this Wednesday, which will really make it impossible for us to sit on the afternoon of the 26th. 65 I also understand, Mr. Janigan, that you have evidence which must be provided on the 3rd of March, which is next Monday, I believe. 66 MR. JANIGAN: That's correct, Mr. Chairman. 67 MR. SOMMERVILLE: Are there any other comments with respect to timing of the case per se, and perhaps we could talk about argument in a moment, too. But are there any other comments about timing of the day, per se? 68 Mr. Penny, do you see any difficulty in completing, and I understand this is conjecture to some degree on your part, but do you see any difficulty in completing your evidence within the time available this week? 69 MR. PENNY: Thank you, Mr. Chairman. 70 Based on -- we only have the three panels to deal with a limited number of what are largely policy and/or allocation issues, and based on the estimates that -- we have done a little bit of a straw pull, we haven't heard back from everyone -- but based on those timing estimates, we don't anticipate any problem completing the evidence in the kind of time frame you're talking about. 71 MR. SOMMERVILLE: Thank you. 72 MR. PENNY: And I was going to, again partly because of the limited number of issues on the issue of argument, I was going to say that Union is certainly prepared to do argument orally, as it has in the recent past, and the experience of the OPG case, which I know you're familiar with, was I think an interesting one, because I think in that case, the -- all parties were, either prepared oral argument in a reasonably expeditious fashion or if they wanted to file written, it was filed at an early stage in the process. And I was going to offer that up for the consideration of the Board and the parties, if we were to talk about a schedule of that kind. 73 I think we would be in a position to do our argument on Tuesday following, if we just get the afternoon or whatever -- Monday, after Mr. Janigan's panel testifies, I think we would be prepared to proceed Tuesday morning or perhaps afternoon. I'd wanted to think about it. And then if the other parties could -- if the other parties were prepared and the Board was so inclined to have argument proceed reasonably quickly after that, we would be able to finish all this up easily next week. 74 MR. SOMMERVILLE: The Board will take that under advisement, Mr. Penny, and we will advise the parties when we've sort of sorted some of that out over the next day or so. As soon as we possibly can, so everyone has a fair opportunity to comment. 75 Is there any initial comment from intervenors on the kind of schedule that Mr. Penny has outlined, which would basically have, as I understand it, Mr. Penny making his argument in chief on Tuesday the 4th, and intervenor argument to follow either on the 4th or the 5th, and -- reply either on the 5th or the 6th, something like that. Are there any comments from intervenors on that kind of schedule? 76 MR. RYDER: Sir, I would have some difficulty in being available to give argument on the 6th, because I have another commitment. I assume that the original procedural order contemplated the end of this -- the evidence of this case on the 5th and so I scheduled another case on the 6th, thinking that argument would be produced at a leisurely pace after that. But that's my only difficulty is the 6th. 77 MR. SOMMERVILLE: So if you were to give your argument on the 5th, Mr. Ryder, your problem would be if reply argument was to occur on the 6th, that would be a difficulty for you. 78 MR. RYDER: Well, I don't think I need to be here, necessarily, on reply argument, provided Mr. Penny observes the niceties of reply. 79 MR. SOMMERVILLE: Thank you, Mr. Ryder. If you could just consider that as we're going through this, and I'll ask Board staff and Mr. Moran to assist in developing the schedule. 80 Mr. Janigan. 81 MR. JANIGAN: Yes, Mr. Chair, VECC is likely to be offering argument only on one issue of the DCC in this matter. That having been said, I'm not certain whether that issue lends itself to oral argument in the same way as, for example, the issues that were involved in the OPG case lent themselves to oral argument primarily because they were matters of principle with minimal references to the tangible evidence. 82 In this case, it involves questions of principle, but also that run through a number of different elements of evidence and transcripts in previous cases, and that's -- that doesn't mean it's impossible for oral argument, but it just seems to lend itself better to a written argument. 83 MR. SOMMERVILLE: I'll give you a chance to make that argument more fully, perhaps, when we've taken the matter under consideration, and come up with a more detailed proposal. 84 Mr. Frank. 85 MR. FRANK: Mr. Chair, thank you. 86 CEED is here on one issue as well, that being the vertical slice, and I would echo the same comments with regard to written argument, perhaps being the more appropriate method of presenting on that issue. 87 MR. SOMMERVILLE: Okay. Thank you, Mr. Frank. 88 MR. MATTSON: Mr. Chairman, just briefly for my client. We only make an argument on vertical slice. We don't have a concern whether it's oral or written, our only cross-examination will come on panel 3, so we will not be here during panel 1 or 2, although we'll be making argument on panel 2, we'll be here for cross-examination on panel 3 only. 89 MR. SOMMERVILLE: One of the virtues of oral argument of course has to do with the timing of the closure in matters and perhaps as we're considering that, the respective party parties could consider if they want to pursue a written argument, when that written argument could be available, what kind of time frame they would require reasonably to produce that. So if you could factor that into your discussions over the next couple of breaks, I think that would be helpful. 90 For our part, we will consider it as well. 91 Is there anything else on that subject? Failing that, Mr. Penny. 92 MR. PENNY: Yes. Thank you, Mr. Chairman. Then that would bring us -- we will go straight to the evidence, then, on the remaining issues before you in this case. 93 MR. MORAN: Sorry, Mr. Chair. I'm sorry about interrupting Mr. Penny. I just need to make a slight correction to the exhibit list. I was consulting my notes. 94 The exhibit that was entered on settlement day was given the exhibit number SD.1, and that means that the exhibit entered just now is F.1.2. Or 1.1, sorry. 95 MR. SOMMERVILLE: SD, settlement day. 96 MR. MORAN: That's right. 97 MR. SOMMERVILLE: I trust that creates no special difficulties for anyone. 98 MR. PENNY: I think not. 99 MR. SOMMERVILLE: Mr. Penny. 100 MR. PENNY: Yes. Thank you, sir. I was just saying we will move straight to the evidence then on the first panel which relates to affiliate transactions involving Duke and Union's storage and transmission group and the impact on the conduct of S&T marketing. And before you prepared to testify on this issue are Mr. Baker and Mr. Poredos, so perhaps they could come forward to be sworn. 101 UNION GAS - PANEL 1 102 S.BAKER; Sworn. 103 S.POREDOS; Sworn. 104 EXAMINATION BY MR. PENNY: 105 MR. PENNY: Now, Mr. Baker, you, I understand, are currently the Vice President of Gas Supply for Union Gas? 106 MR. BAKER: That's correct. 107 MR. PENNY: And you've been employed by Union Gas since 1989? 108 MR. BAKER: Correct. 109 MR. PENNY: And since that time you've held a variety of positions, including Vice President of Gas Supply Services, Vice President Asset Management and Director of Regulatory Affairs. 110 MR. BAKER: That's correct. 111 MR. PENNY: You also worked for a period of time as a senior staff accountant for Clarkson Gordon? 112 MR. BAKER: Yes. 113 MR. PENNY: And you are a chartered accountant? 114 MR. BAKER: I am. 115 MR. PENNY: And you have a Masters of Accounting and a Bachelor of Arts in Chartered Accountancy Studies, both from the Universities -- University of Waterloo. 116 MR. BAKER: That's correct. 117 MR. PENNY: And you appeared before this Board on numerous occasions, but most recently in RP-1999-0017 and RP-2001-0029? 118 MR. BAKER: That's correct. 119 MR. PENNY: Mr. Poredos, you are currently the Director of Capacity Management for Union Gas? 120 MR. POREDOS: Yes, that's correct. 121 MR. PENNY: And you have worked for Union Gas since 1980 I understand? 122 MR. POREDOS: Yes, that's correct. 123 MR. PENNY: Since that time you've held a variety of positions in asset management, integrated supply and transportation planning, and a variety of marketing sales positions as well. 124 MR. POREDOS: Yes, that's correct. 125 MR. PENNY: Now, I understand that you, sir, have a Civil Engineering Degree from the University of Waterloo? 126 MR. POREDOS: I do. 127 MR. PENNY: And you also have a Bachelor of Commerce from the University of Windsor. 128 MR. POREDOS: I do. 129 MR. PENNY: And you have appeared before the Board on several occasions, but most recently in EBRO-499. 130 MR. POREDOS: Yes, that's correct. 131 MR. PENNY: Thank you. And gentlemen, I understand that the evidence that has been filed relating to this issue, that is the transactions involving Duke and Union's S&T group and the impact on the conduct of S&T marketing, that that evidence was either prepared by you or under your supervision. 132 MR. BAKER: That's correct. 133 MR. POREDOS: Yes, that's correct. 134 MR. PENNY: You adopt that evidence for the purposes of these proceedings? 135 MR. BAKER: I do. 136 MR. POREDOS: Yes, I do, too. 137 MR. PENNY: Now, just briefly by way of overview, can you describe the recent changes to the storage and transmission marketing group that really bring us here today or that form this issue? 138 MR. BAKER: Previously the marketing of Union's S&T assets was done by an S&T marketing group contained within Union Gas. The marketing of S&T services is now being done by Duke Energy Gas Transmission which operates out of Houston. So that will represent and did represent an affiliate service governed by the OEB affiliate code of conduct. 139 MR. PENNY: What is -- first of all, what is the entity Duke Energy Gas Transmission, and then can you explain how Duke Energy Gas Transmission fits into the broader Duke Energy corporate structure. 140 MR. BAKER: Duke Energy Gas Transmission is the entity within the Duke Energy Corporation that holds all of their U.S. regulated storage and transmission assets, and it was Duke Energy Gas Transmission that was the business unit within Duke that acquired Westcoast Energy. 141 Duke Energy Gas Transmission is separate from both a corporate and business unit operating perspective from Duke's unregulated trading and marketing operations, and the Duke -- the DEGT, or Duke Energy Gas Transmission, U.S. assets are largely FERC regulated and they are governed by a FERC affiliate code of conduct, which is very similar in purpose and intent to the OEB affiliate code of conduct. 142 The alignment that is there between Duke Energy Gas Transmission and Union is that we -- is that we both manage and operate regulated assets. 143 MR. PENNY: Please explain why the S&T marketing function was reorganized and consolidated in Houston. 144 MR. BAKER: From the outset of the Duke Energy gas transmission acquisition of Westcoast, there was a belief that the marketing of both U.S. FERC regulated S&T assets and Union Ontario regulated assets should be done in a centralized and coordinated way, and the Duke Gas Transmission approach and experience to marketing was one that involved a common or a consolidated view and a centralized approach in order to drive out both O&M cost efficiencies and to try to drive out or maximize asset value and asset growth over the longer term. 145 As I said, given the alignment that was there between Duke Energy Gas Transmission marketing U.S. regulated assets and Union marketing Ontario assets, a common marketing approach was pursued. 146 MR. PENNY: Now, will this consolidation result in any change to the manner in which Union's storage and transmission capacity which is excess to its in-franchised needs, the manner in which that is released by Union for sale? 147 MR. BAKER: No, there's no change to that process. Union's capacity management group remains accountable for the operation of all Union assets, and the Union process and operation for determining assets that are available for sale to the ex-franchise market has not changed. So Union continues to approve all S&T capacity that's released for sale on the ex-franchise market. 148 MR. PENNY: Does this change in how the excess storage and transportation assets capacity is marketed have any impact on in-franchise customers? 149 MR. BAKER: No the management and the operation of Union's in-franchise customers and sales effort hasn't changed in any way. 150 MR. PENNY: And is there -- does this arrangement for the marketing of that excess capacity change in any way the manner in which revenues from the sale of Union's excess S&T capacity are recorded in Union's financial records? 151 MR. BAKER: No, there's no change whatsoever in the accounting of revenues that flow from the marketing of Union's S&T services. Union's will be marketed by the Duke Energy Gas Transmission Houston sales group, and they will continue to be marketed under OEB-approved rate schedules and tariffs, and any resulting contracts that result from that activity will continue to be Union contracts signed and processed by Union. All the revenues will continue to be recorded in Union's financial records, and that includes all of the revenues and margins that flow out of that activity that are currently recorded in deferral accounts approved by the Board, which under the current mechanism are recorded in deferral accounts and get shared 75 per cent to the account of the ratepayer and 25 per cent to the account of the shareholder. 152 MR. PENNY: Finally for clarification, when you say that the release of excess capacity is determined by Union, and that these are still the ultimate contract -- is a contract with Union, who specifically is responsible for the oversight at Union of both the release of the excess capacity to the market and the approval of the contracts? 153 MR. BAKER: That falls under my responsibility as Union's Vice President of Gas Supply Services. 154 MR. PENNY: Thank you, Mr. Baker. 155 Thank you, Mr. Chairman; those are my questions in examination in chief. 156 MR. SOMMERVILLE: Thank you, Mr. Penny. Have intervenors decided upon an order, or shall I just work my way back? 157 MR. JANIGAN: I think the order of appearance is probably satisfactory. 158 MR. SOMMERVILLE: In which case, Mr. Janigan, you're the ranking member. 159 MR. JANIGAN: I don't have any questions for this panel. 160 MR. SOMMERVILLE: Mr. Aiken. 161 CROSS-EXAMINATION BY MR. AIKEN: 162 MR. AIKEN: I just have a couple of questions for clarification. 163 Mr. Baker, you said you had responsibility for the release of the capacity. Your evidence indicates that the capacity management group reports the DEGT. My question is who do you report to at DEGT? 164 MR. BAKER: I report, I continue to report to the President of Union Gas, which is Jane Peverett. 165 MR. AIKEN: Can you explain then on paragraph 4, I guess it is, or paragraph 3 that -- it says, "Union's capacity management gas control and gas management services group, while continuing to be comprised of Union employees located in Chatham, will report directly to DEG in Houston." Can you explain that statement to me? 166 MR. BAKER: The way we've pursued the organizational changes associated with the Duke Energy Gas Transmission acquisition of Westcoast is Duke Energy Gas Transmission operates under what they call a matrix operational structure, largely where they have like functions report in to a central person. So that those functions that cut across different business units can at least be managed and at least have some oversight on a central basis. 167 So that is the basis by which you see that, what they call a direct reporting line into Houston, in terms of the capacity management group; but in terms of the oversight and accountability in terms of what assets are released and the contracts that ended up flowing from any assets that released, that continues to be my accountability as an officer of Union. 168 MR. AIKEN: You also mentioned about the deferral accounts, and the revenues would continue to be assigned to those deferral accounts. What type of costs are currently put in those deferral accounts? 169 MR. BAKER: The costs that typically go against the revenues in those deferral accounts are costs associated with activity, they can be things like compressor fuel and unaccounted for gas and those kinds of things, so it's costs associated with the activity that we're pursuing. 170 MR. BAKER: Would there be any Duke Energy Gas Transmission costs that would be put in those deferral accounts, or are these strictly Union Gas costs? 171 MR. BAKER: These are strictly Union Gas costs. 172 MR. AIKEN: Thank you. Mr. Chairman, those are my questions. 173 MR. SOMMERVILLE: Thank you, Mr. Aiken. 174 Mr. Ryder. 175 CROSS-EXAMINATION BY MR. RYDER: 176 MR. RYDER: Mr. Baker, in tab 8 of Exhibit A is the Westcoast chart of the Westcoast company. 177 MR. BAKER: Give me a second to turn it up. I've got it. 178 MR. RYDER: I think there are five or six charts there. These don't show -- there's no chart showing the Duke companies, right, apart from those owned by Westcoast? 179 MR. BAKER: I believe that's the case. 180 MR. RYDER: So tab 8 doesn't give U.S. a full view of the extent of the affiliate group that Union is now a part of. 181 MR. BAKER: That appears to be the case. I think the only reference to it is where you see a reference to Westcoast Energy Inc., which is doing business as Duke Energy Gas Transmission, but I take your point that it doesn't show the corporate structure where Duke Energy Gas Transmission resides within Duke. 182 MR. RYDER: I take it that any company controlled by Duke Energy would be an affiliate of Union? 183 MR. BAKER: That's correct. 184 MR. RYDER: And that if we got -- is it possible to obtain -- sorry, what is the name of the parent, the Duke parent. Is the parent Duke Energy? 185 MR. BAKER: The ultimate parent is Duke Energy Corporation. 186 MR. RYDER: Right, and if we got a list -- chart showing all of the subsidiaries controlled by Duke Energy, I take it there would be a vast number of subs on the chart? 187 MR. BAKER: That's probably the case. 188 MR. RYDER: Yes. And now can I get you to turn to interrogatory C.15, number 11, please. And that deals with the transaction by Union's S&T group, and -- but I take it the scope of the interrogatory was understood by you to apply to all of the Duke subsidiaries? 189 MR. BAKER: That's correct. 190 MR. RYDER: And it speaks of seven contracts with Duke Energy marketing? 191 MR. BAKER: That's correct. 192 MR. RYDER: And were these all tendered? 193 MR. BAKER: They were tendered or done at comparable market prices. 194 MR. RYDER: Is it possible for you to produce without difficulty the tendering documents? 195 MR. BAKER: I can look into that. I don't recall exactly all these services or exactly what was done, but we can certainly -- we can certainly take that away and produce whatever we have. 196 MR. RYDER: Could I have me an undertaking for that. 197 MR.. MORAN: Mr. Chairman, that would be Undertaking G.1.1, undertaking to look into what tendering documents are available with respect to certain contracts referred to in interrogatory 15.11. 198 MR. RYDER: And to produce the documents that are available. 199 MR. MORAN: And to produce those documents. 200 MR. PENNY: Perhaps Mr. Chairman we could leave it on the footing that we undertake to find what's available, and if there's an issue about production, we'll come back and raise that before you. 201 MR. SOMMERVILLE: I think that's fair, Mr. Penny. 202 UNDERTAKING NO. G.1.1: UNDERTAKING TO LOOK INTO WHAT TENDERING DOCUMENTS ARE AVAILABLE WITH RESPECT TO CERTAIN CONTRACTS REFERRED TO IN INTERROGATORY 15.11 203 MR. RYDER: Now, other departments provide goods and services to customers besides S&T, supply -- who's responsible -- what department is responsible for supply services? 204 MR. BAKER: For gas supply? 205 MR. RYDER: Yes. 206 MR. BAKER: That's my area. There's no service being provided by Duke Energy Gas Transmission. 207 MR. RYDER: What's the name of the department? 208 MR. BAKER: My department? 209 MR. RYDER: Yes. 210 MR. BAKER: Gas supply services. 211 MR. RYDER: So is the only department that is contracting with a Duke company the S&T department? 212 MR. BAKER: No, there are -- there will be other affiliated transactions associated with the Duke Energy Gas Transmission acquisition of Westcoast. 213 MR. RYDER: What type of affiliate transaction? 214 MR. BAKER: Those would be similar things that we had under Westcoast ownership, so those would be things like treasury service, insurance services. 215 MR. RYDER: Now, your department is gas supply, you said? 216 MR. BAKER: That's correct. 217 MR. RYDER: And I understand that in November of 2000, 2001, 2003 -- 2002, rather, those three years, Union has turned back portions of its TCPL capacity and replaced it with gas purchase from affiliates at Parkway. 218 MR. BAKER: I'm not sure what you're referring to. 219 MR. RYDER: Well, I'm referring to transactions in November of each of those years, 2000, 2001, 2002, in which you turned back your TCPL capacity, and you replaced it with gas purchased from affiliates at Parkway. 220 MR. PENNY: , Mr. Chairman. We seem to be pretty far afield from issue here. The Duke transaction didn't take place until March of 2002, so a transaction in November of 2001 could not possibly have any bearing on an affiliate transaction involves Duke and Union's S&T group. So we seem to be far outside the scope of the issue for your consideration. 221 MR. SOMMERVILLE: Mr. Ryder, what's your comment? 222 MR. RYDER: Well, I'm asking also about 2002, so what can you say, Mr. Baker, about 2002? 223 MR. SOMMERVILLE: You can proceed with that question, I think, Mr. Ryder. 224 MR. BAKER: We haven't turned back any TransCanada capacity in 2002. The next available time we have capacity that's available for turn back is -- I believe it's this November, 2003, and then some in January of 2004. 225 MR. RYDER: I'm trying to get at what I understand is the practice of turning back portions of your TCPL capacity and replacing it with gas purchased from affiliates at Parkway. 226 MR. BAKER: We don't purchase any gas from affiliates. 227 MR. RYDER: Now, given that your S&T change is now a service which is -- which will, I guess after April the 1st, be conducted by Duke in the States. 228 MR. BAKER: It was fully transferred over effective February 1st of this year. 229 MR. RYDER: If I could just have a minute Mr. Chair, to sort out my notes here. 230 MR. SOMMERVILLE: Take your time, Mr. Ryder. 231 MR. RYDER: I wanted to just address the impact of that on your T-service customers. T-service customers have, if I remember, transportation and storage space under their contracts with Union and they could apply to Union for incremental storage and transportation. 232 MR. BAKER: That's correct. 233 MR. RYDER: After February 1st of this year, then, they must now join -- they must line up at Duke's door as opposed to Union's door? 234 MR. BAKER: No, the operation of the in-franchise T-service customers are still managed by Union's in-franchise sales group, not the S&T marketing group operating out of Houston. 235 MR. RYDER: Are they applying for capacity that is being released to the S&T group? 236 MR. BAKER: Well, they could do either. To the extent that they were looking for incremental storage on a longer-term basis, I'd suggest that they would deal through Union's in-franchise sales group. If they were looking for something on a short-term basis in a market, they might go through the ex-franchise S&T group, but I would say in most cases -- even thinking about it, I think all cases they would probably go through their in-franchise sales representative. 237 MR. RYDER: But are they looking for -- other then applying for capacity that has been released to the S&T group? 238 MR. BAKER: The difficulty I'm having with your question is I'm not quite sure the context that you're asking it in. To the extent that a T-service customer is looking on a plan basis for an incremental amount of capacity, that would be -- that would be something that they would request through their sales representative, and we would address that request and the capacity through the planning process. 239 It typically wouldn't be waiting and trying to acquire assets that have been released and are now be marketed by the S&T marketing group. 240 MR. RYDER: For those assets that have been released to the S&T marketing group, a Union customer would have to go to Houston for -- to obtain S&T space or services? 241 MR. BAKER: Are you suggesting they would physically go to Houston? 242 MR. RYDER: No, but they have to apply to the S&T department, which is now a Duke department. 243 MR. BAKER: They have a contact with a representative in Houston, that's correct. 244 MR. RYDER: So insofar as an in-franchised customer wanted S&T services from Union, they would be standing in line at Duke as opposed to in line at Union? 245 MR. BAKER: Again I think the way practically it would happen is that they would request the service from their in-franchise sales rep, and the in-franchise sales rep would make the connection if they needed to between the S&T group in Houston. 246 MR. RYDER: But when your asset management group releases space and transportation to the S&T group, it will now be releasing it to Duke for sale? 247 MR. POREDOS: If I could, Mr. Ryder. The asset -- capacity management group, when we release the asset, we release it, and we have it on our book so to speak as Union and the S&T sales reps will use those assets to sell in the market plate. 248 If an in-franchise customer requires that asset or is willing to pay market for it or the tariff rate that the OEB sets, then the in-franchise customer would work through their in-franchise sales rep, who is still a Union employee, in the same manner they do today. Nothing would change. The only issue would be is that the transaction would happen through an S&T sales representative, who is, in fact, located in Houston. 249 MR. RYDER: And the reality is that now the in-franchised Union customer is competing with all of Duke's customers for that S&T space or service? 250 MR. BAKER: That's not correct. There has been nothing -- there has been nothing that's changed in terms of the market or Union's storage and transportation services. The market is the market, and that hasn't changed, aside from everything that we've seen happen in the energy industry over the last year, but the market for those services hasn't changed. 251 MR. RYDER: Well, except we're now in a line with all of Duke's customers, whereas -- 252 MR. BAKER: The customers for Union's S&T services haven't changed. It's not as if Duke Energy Gas Transmission has suddenly brought 10 new customers that weren't looking at Union's services as part of the acquisition. 253 MR. RYDER: But it's Duke's S&T department that will decide who gets the space or the transportation on Union's system. 254 MR. BAKER: They will market those services under OEB-approved tariffs and in conjunction and in recognition of the fact that we have an affiliate code of conduct. 255 MR. RYDER: I act for the City of Kitchener as a service under your T-3 rate schedule, and the T-3 contract that I'm sure this is the same for all of your contracts says that request for additional or incremental S&T are subject to Union's approval, and if approval would not be unreasonably withheld; is that a similar contractual provision that applies to the T-1 contracts as well? 256 MR. POREDOS: I believe that's correct. 257 MR. RYDER: And so, after February 1st of this year, does Duke or does Union have the obligation to approve requests for incremental service? 258 MR. BAKER: We're operating in the exact same way that we've operated in the past. 259 MR. RYDER: That means that even though -- who will give the approval? 260 MR. BAKER: Union Gas. 261 MR. RYDER: So that the request for incremental S&T will go to Union and not to the S&T department in -- 262 MR. BAKER: As we've tried to state earlier, they will continue to go through their Union in-franchise sales rep in the same way that they have in the past. 263 MR. RYDER: What does the sales rep -- does the sales rep then forward their request on to the S&T group in Chatham -- sorry, in Houston? 264 MR. BAKER: Again, we're dealing with two circumstances. If something arose where an in-franchise customer were looking for, as an example, additional storage capacity at a certain period of time in a season, and hadn't planned on it, that would be something -- they would be competing against other people for that service at market-based rates. To the extent they were looking for something on a planned basis in order to manage their operations, that longer lead time planned capacity would be done through their in-franchise S&T route. 265 MR. RYDER: I'm dealing, then, with incremental capacity that is requested and hasn't been planned for. That would go to the S&T department in Houston? 266 MR. BAKER: Well, to the extent that there are assets available, those assets would be being marketed by the S&T group in Houston and therefore they would be competing against -- the same way they would have competed previously. 267 MR. RYDER: Who would make the decision as to whether or not the capacity requested would be given? Would it be Duke, S&T, or would it be some people in Chatham? 268 MR. POREDOS: The -- 269 MR. BAKER: To the extent that they were willing to pay the market value for the service, I see no reason why they wouldn't get the service. 270 MR. RYDER: Yes, but who decides? I mean, it's either Duke in Chatham -- sorry, Duke in Houston or Union Gas. 271 MR. BAKER: I think what would drive the decision is who bid by the most for the service. 272 MR. RYDER: Who carries the decision-making authority? 273 MR. POREDOS: Mr. Ryder, the asset, if it is available, would be sitting as we call it on the shelf and available for sale to anyone in the market that's willing to pay for it. If an in-franchise customer came and said, I needed this type of asset, that asset would be sold to that customer if they were willing to pay the market or the tariff rates. 274 MR. RYDER: Who has the power of decision here? 275 MR. POREDOS: The sale would be made by the S&T sales rep. The final deal approval and decision that it's at the adequate rate and so on and so forth would go through Mr. Baker. Union Gas still approves all of those contracts. It is still a Union Gas contract, and everything is done at Union Gas. 276 MR. BAKER: What I was trying to say that we would certainly be aware as Union Gas if we had an in-franchise T-service customer that was looking at capacity, we would be aware of that request. 277 MR. RYDER: And who resolves the disputes between -- competition between customers for space, when there's limited amount of space available? 278 MR. BAKER: The price that's bid. 279 MR. RYDER: Now, is there a protocol or is there a contract that applies to the movement of the S&T department to Houston? 280 MR. BAKER: There will be a service level agreement that captured that relationship and service. 281 MR. RYDER: And can that be produced? 282 MR. BAKER: We can certainly produce a draft of the agreement. It has not yet been finalized, particularly with respect to the amount of the charge for the service. 283 MR. RYDER: I take it that that's a contract between Union and Duke, DEGT? 284 MR. BAKER: That's correct. 285 MR. RYDER: At a fixed price? 286 MR. BAKER: Again, we have not finalized the agreement yet, but at this point in time, the price will reflect the actual services provided at a fully loaded cost. 287 MR. RYDER: And so any efficiency gains under that contract, they would go to the benefit of Duke? 288 MR. BAKER: No, I would not agree with that statement. 289 MR. RYDER: I thought that you said -- was it a fixed price? 290 MR. BAKER: No, said the price charged will be based on the actual services provided at the provider's fully loaded cost. 291 MR. RYDER: Can that be an undertaking then, that you will provide the version of the arrangement between Union and DEGT, as it now stands? 292 MR. PENNY: Yes, Mr. Chairman. Mr. Baker said that we could produce the service level agreement that contemplated this transaction, but with the proviso that it's still in draft form. 293 MR. MORAN: Undertaking G.1.2. 294 UNDERTAKING NO. G.1.2: DRAFT AGREEMENT BETWEEN UNION GAS AND DUKE ENERGY GAS TRANSMISSION 295 MR. RYDER: Now, I've got some questions relating to Duke's approach to disclosure as revealed by recent events. I take it the -- that Duke Power Company is a subsidiary of Duke Energy? 296 MR. PENNY: Mr. Chairman, just before we embark upon this, perhaps we could seek some clarification on what this has to do with affiliate transactions involving Duke and Union's S&T group, because it -- if it's Mr. Ryder's intent upon embarking on a general Royal Commission about Duke Energy and Union Gas, then I will have some submissions on the appropriateness of that. 297 MR. SOMMERVILLE: I'll take that submission as an objection Mr. Penny. 298 Mr. Ryder, do you have a comment? 299 MR. RYDER: Yes, I'm trying to get at recent events in North and South Carolina where the Duke-owned utilities are regulated and the regulator appointed an independent auditor to examine the independent contracts of the two utilities. 300 MR. SOMMERVILLE: I don't want to interrupt, Mr. Ryder, but you may want to ask a preliminary question as to whether either of these gentlemen would be in a position to know anything about that that would be useful. 301 MR. BAKER: Certainly I'm generally aware of the inquiries, but certainly not in any detail at all. I mean, that's not my area. That's not the company I work for. That's not what I follow and do day-to-day. 302 MR. POREDOS: I'm also not aware of any of the details. 303 MR. SOMMERVILLE: I think that's an important consideration in my determination Mr. Ryder about this line of questioning. 304 MR. RYDER: Could I just have a minute Mr. Chair, to sort this out here. 305 MR. SOMMERVILLE: Of course, take your time. 306 MR. RYDER: My question relates to the enlarged scope of the affiliate family that we are now confronted with, given Duke's acquisition of Union. And my concern arises out of events in North and South Carolina where there was a dispute between the regulator and the Duke-owned utilities as to the -- you know, as to whether revenues received in relation to utility operations, should it be recorded. 307 And so I would just like to ask Mr. Baker some questions on that. 308 MR. SOMMERVILLE: Well, the -- I think, if I may Mr. Ryder, I think asking questions about the allocation of costs and revenue as they concern Union Gas is perfectly appropriate. I am yet to be convinced that it's appropriate to ask questions about Duke from witnesses who are not in a position to speak for that company. That's my difficulty. Can you work within those confinements? 309 MR. RYDER: Well, perhaps I can ask the witnesses if they're aware of the disputes that was arisen in North and South Carolina with respect to the reporting of earnings of insurance rebates by the two utilities there. 310 MR. PENNY: Mr. Chairman, maybe Mr. Ryder is not listening, but he's asked the same question now three times. It involves an event that took place in the United States, involving a company that isn't before you, that he's conceded has absolutely nothing to do with the transaction that is before you today. 311 In my submission, it's entirely outside the scope of the issues, and as the witnesses have already said, they don't know anything about this, and that should be the end of it, in my respectful submission. 312 MR. SOMMERVILLE: Mr. Ryder, as I've indicated, my difficulty is I think the questions to these witnesses with respect to the treatment, recording, allocation of revenues and costs as between Union Gas and Duke Energy is a fair and useful line of questioning. That's not what I hear your question to be. 313 MR. RYDER: Well, I won't press it. 314 MR. SOMMERVILLE: Thank you, sir. 315 MR. RYDER: Those are my questions, thank you. 316 MR. SOMMERVILLE: Mr. Frank. 317 MR. FRANK: We have no questions for this panel. 318 MR. SOMMERVILLE: Ms. Bodnar. 319 MS. BODNAR: No questions, thank you. 320 MR. SOMMERVILLE: Ms. Young. 321 MS. YOUNG: No questions, thanks. 322 MR. SOMMERVILLE: Mr. Haynal. 323 MR. HAYNAL: No questions, thank you. 324 MR. SOMMERVILLE: Mr. DeRose. 325 MR. DeROSE: We have a few very short questions. 326 CROSS-EXAMINATION BY MR. DEROSE: 327 MR. DeROSE: Mr. Baker, in your evidence you indicated that seven positions -- that the change will displace seven roles in Chatham? 328 MR. BAKER: That's correct. 329 MR. DeROSE: Have those seven individuals been transferred to Houston? 330 MR. BAKER: No. 331 MR. DeROSE: So the work is now being done by people who I assume were employees of Duke Energy prior to the transfer? 332 MR. BAKER: That's correct, and the transition, working on that transition really happened over basically the year since the acquisition took place. 333 MR. DeROSE: Were there any particular problems that you were trying to address within Union's S&T marketing group? 334 MR. BAKER: No, there were no problems. As I stated earlier, it was a belief in a direction in terms of what we wanted to do as a company, which was to have a consolidated marketing function for all of the U.S.- and the Ontario-regulated assets. 335 MR. DeROSE: Did you consider whether there were any in-house solutions whereby you could have that, an integrated approach, and still having the marketers as employees of Union working in Toronto? 336 MR. BAKER: Well, they weren't working in Toronto, they were working in Chatham, just to clarify that. 337 MR. DeROSE: Sorry. 338 MR. BAKER: I think there were discussions on that. We're not talking about a lot of -- a lot of S&T marketing folks in total, so I think to split it up between the Houston marketing group and the Chatham marketing group just wasn't deemed to be the best way to pursue them. 339 MR. DeROSE: Okay. Were any studies undertaken to demonstrate the provision of the services by Duke Energy would be superior to the services being provided by Union? 340 MR. BAKER: No. We -- as I said, it stemmed from -- the changes that were made to the S&T marketing group stemmed from a belief that was early on in the acquisition that we wanted to have a common S&T marketing function across the U.S. and the Ontario regulated assets, and that was to drive out some O&M and cost deficiencies and as well, as to look at additional value longer term in terms of looking at all of the assets that are being marketed within Duke Energy Gas Transmission. 341 MR. DeROSE: Then I take it there was also not a study produced or undertaken to determine that there would be benefits for ratepayers by this transfer? 342 MR. BAKER: No, there was no study, because as I said, our view was there was an alignment of interest, and that Union's interest was and still is to optimize the value of the assets that we have and are placed into the S&T market. Duke Energy Gas Transmission has that same objective in terms of their U.S. assets. The objective is the same. There's alignment there, and as we said earlier, all of the revenues and the margins that flow from those transactions will continue to flow into Union's accounts, and will continue to go back, under the current construct, 75 per cent to ratepayers. 343 MR. DeROSE: I take it from that answer there was no study that showed there would be a benefit to ratepayers by the transfer? 344 MR. BAKER: No, other than we knew definitely that there would be cost efficiency savings from pursuing it in that manner. 345 MR. DeROSE: And all of those cost efficiencies would be put back to Union and the ratepayer? 346 MR. BAKER: The charge for the service will be based on Duke Energy Gas Transmission's fully loaded cost, which I think is in accordance with our interpretation of the Board's decision in the Enbridge case. 347 MR. DeROSE: Thank you. Those are my questions. 348 MR. SOMMERVILLE: Mr. Moran. 349 MR. MORAN: Thank you, Mr. Chair, just a couple questions. 350 CROSS-EXAMINATION BY MR. MORAN: 351 MR. MORAN: You described the relationship that you have entered into with the affiliate, Duke Energy Gas Transmission, and you also indicated that the SLA is still in draft form. Is it usual to enter into this kind of a relationship in the absence of such an agreement? 352 MR. BAKER: I think the context of the agreement is well known between parties. As I mentioned, the outstanding provision right now is the costing of the service. 353 MR. MORAN: All right. Are there other affiliate relationships that Union is in right now? 354 MR. BAKER: Yes, there will be a number of affiliate services associated with the Duke acquisition. 355 MR. MORAN: You said that there will be; are there any right now? 356 MR. BAKER: Yes. 357 MR. MORAN: Are you in a position to tell U.S. what those are? 358 MR. PENNY: Again, Mr. Chairman, the issues list in this case was formulated many months ago. The issue relating to affiliate transactions is Duke and Union's S&T group in the conduct of S&T marketing. The evidence that was filed addressed that issue. The interrogatories that were asked were only asked about that issue. We've had no party indicate that -- we had no party, including Board staff indicated that it was seeking to expand this issue. Mr. Baker testified already that he is here to speak to the S&T piece because that is his responsibility, his and Mr. Paredos. 359 We're under a PBR regime. The evidence is clear, on the material before you, that the affiliate relationships issue has no impact whatsoever on 2003 rates or on 2002 deferral account balances. And so the question about the totality or the complete scope of affiliate relationships, in my submission, is not properly before you. It's not on the issues list. It's a matter that will come up, as you know, in the 2004 rate case, which will be the first cost of service case, and if we want to get into that, then, you know, we might as well settle, then, because we could be here for days talking about the totality of the affiliate relationship. 360 MR. SOMMERVILLE: Mr. Moran, could you have do you have a comment? 361 MR. MORAN: I only asked the question to get information. I'm in your hands, Mr. Chair, if this information comes out at this point. I didn't think it would take very long. I expected it could end up in an undertaking to file some information, but I'm in your hands. 362 MR. SOMMERVILLE: I'm inclined to agree with Mr. Penny on this question and note that with respect to the 2004 rate setting case, that this will be an issue, as it has emerged in other cases before the Board will be an issue of considerable issue, and I take the point that we have an issues list in this case that did limit the scope of the issues to the one that Mr. Baker and Mr. Paredos are here to discuss. On that understanding, I agree with Mr. Penny and perhaps you could move on. 363 MR. MORAN: That's fine, Mr. Chairman. Those are all my questions. 364 MR. SOMMERVILLE: Any redirect, Mr. Penny? 365 MR. PENNY: No, Mr. Chairman, thank you. I have none. 366 MR. SOMMERVILLE: There are no question from the Board. Let me just indicate that I think it will be our practice generally to ask the Board questions following an opportunity for redirect and give all parties an opportunity for questions arising from Board questions. Prepared to hear submissions on that when it comes up, but that's the process that I think may be best. 367 In which case, I suppose we will adjourn. Mr. Penny, do you have the second panel available to proceed? 368 MR. PENNY: We do, sir. 369 PROCEDURAL MATTERS: 370 MR. SOMMERVILLE: Why don't we take our morning break and reconvene at 11 o'clock and proceed accordingly. 371 MR. RYDER: Mr. Chair, before we break, I wonder if you could tell the rest of U.S. about the Board's plans to proceed with the third panel, if the first panel -- or the second panel doesn't take any longer than the first panel. We may reach the third panel by -- before the day is done. 372 MR. SOMMERVILLE: We are certainly aware Mr. Ryder of the fact that there are a couple of participants in this case who have expressed a pointed interest in that subject matter who don't happen to be here at this moment, so we would expect that before the third panel takes the stand, that there would be a full opportunity for those persons to be back in the room before we did that. 373 Is your comment directed to something more than that? 374 MR. RYDER: Well, I just didn't know whether those who are interested only in the third panel should be required to stay, and I think perhaps we should, out of an abundance of caution, not leave. 375 MR. SOMMERVILLE: As far as I know Mr. Ryder, we can't compel you to stay, at least not without further process. 376 Mr. Penny, do you have a comment that might help Mr. Ryder? 377 MR. PENNY: Well, I think maybe the best thing, Mr. Chairman, is if we confer at the coffee break and just see what the availability of the third panel is and so on and then I would be able to address that either privately with Mr. Ryder or on the record after the break. 378 MR. SOMMERVILLE: We may be victims of success, to some degree. 379 MR. PENNY: Absolutely. 380 MR. SOMMERVILLE: As we said, we will reconvene at 11 o'clock, and thank you. 381 --- Recess taken at 10:39 a.m. 382 --- On resuming at 11:00 a.m. 383 MR. SOMMERVILLE: Please be seated. Thank you. 384 MR. PENNY: Mr. Chairman, just on the scheduling, issue, I said that we would confer at the coffee break, and the third panel is in Toronto and is available -- would be available after lunch, so the -- based on estimates of time for this panel, I don't think we will be lengthy. I believe there's only one, perhaps two parties that have questions on the vertical slice, so our expectation is that we could be in a position quite easily to begin the third panel this afternoon, perhaps not finish, but at least begin. 385 MR. SOMMERVILLE: Okay. Did you get some feedback from other parties Mr. Penny? 386 MR. PENNY: I'm sorry, I didn't have the opportunity to -- 387 MR. SOMMERVILLE: Let's take that under advisement. I'm inclined to think that it may be better to deal with that third panel -- give everyone some administrative simplicity if we were to deal with it starting tomorrow morning. 388 MR. PENNY: That is also possible. We are prepared to go either way on that. I just wanted you to know that we could proceed. 389 MR. SOMMERVILLE: I do appreciate that, Mr. Penny. I think we will proceed in the manner where we will proceed with the third panel tomorrow morning so we have continuity dealing with that, parties who are interested, not here. We will communicate to them that going forward, so ... 390 MR. PENNY: That's fine, then. 391 MR. SOMMERVILLE: Anything else of a preliminary nature. 392 MR. FRANK: While we're talking about procedural matters, I'm just wondering when we might expect to hear from the Board with regard Mr. Penny's submission that argument should be dealt with orally. Because a number of players here may not be around very much. 393 MR. SOMMERVILLE: Thank you, Mr. Frank. My inclination is that at the pace that we're proceeding, which is reasonably expeditious, and given Mr. Janigan's unalterable March 3rd date for his panel, what I may be thinking of is a written argument process, but one that is -- that takes place within roughly the same kind of time frames that we would be thinking of for the oral presentations. I'm not sure that the issues in this case would profit particularly from an extended interval between the time of evidence and the production of written argument, so I'm thinking that what we may be shooting for. 394 And this is thinking out-loud more or less Mr. Frank, and does not represent our final word on this subject, but I'm thinking that we would be looking to some filing dates, say the 4th and 5th of March being written argument days. 395 Now, the complexity that is created is the -- the reply argument side of things, and that we may look to the 4th and 5th and then a short period for the reply argument and hope to be finished all of those filings by the end of next week. Does that sound like a manageable time frame? 396 MR. PENNY: That certainly works for Union Gas, Mr. Chairman. 397 MR. SOMMERVILLE: Mr. Janigan, you expressed an interest in the written format. Now this may be a time frame that you hadn't contemplated, but it seems to be one that I think may be not inappropriate. 398 MR. JANIGAN: I think one day after another might be a little bit tight to maintain, because we're going to have to get the transcripts, try to weave some -- some of Mr. Penny's argument in chief into the thread of the intervenor argument. 399 I was thinking possibly a schedule that would be -- if Mr. Penny is prepared to present on the Tuesday, that possibly intervenor argument be delivered on Friday; and then reply -- 400 MR. SOMMERVILLE: In a written form no later than Friday, then a reply argument say the following Tuesday, something like that, would that work? 401 MR. PENNY: That would work, Mr. Chairman, but if that were done -- if that were done on the Thursday, I think we would be in a position to proceed with reply on Friday, and then we could do it all, finish it by next week. 402 MR. SOMMERVILLE: We will take that under advisement, and Mr. Peters and I would like an opportunity to discuss that with Board staff as well to make sure that all of the conveniences are taken into account and we will determine that before we leave this today. 403 Mr. Penny, your second panel. 404 MR. PENNY: Thank you, Mr. Chairman -- 405 MR. SOMMERVILLE: Sorry Mr. Ryder. 406 MR. RYDER: My two bits' worth, sir, on the timing. I think the quality of the intervenors submissions would be somewhat improved if we could go with Mr. Janigan's timetable as opposed Mr. Penny's. I think Mr. Penny's would result in a hurried productions from ... 407 MR. SOMMERVILLE: Thank you Mr. Ryder. 408 MR. FRANK: If I could just add, I'm not sure of the rationale for Mr. Penny's race to the finish that everything be done by the following Friday. I don't see a great difference, and I would also support Mr. Janigan. 409 MR. PENNY: Of course, Mr. Chairman, it's not a race to the finish, but the sooner that the decision comes out, the sooner that the rates get implemented and this is of benefit to ratepayers in this case because we're talking about credits and reductions. 410 MR. FRANK: We're also talking about a three-day difference. 411 MR. SOMMERVILLE: Thank you, Mr. Frank. I welcome your remarks. Thank you. 412 Is there anything else on that subject? 413 Thank you. 414 Mr. Penny. 415 MR. PENNY: Thank you, Mr. Chairman. Before we swear the witnesses, both this issue relating to the vertical slice and the next issue -- or at least one of the next issues for the third panel, the DCC, when we were thinking about this, we thought that both of these issues require a certain amount of understanding of how Union's system physically works. And given that Mr. Peters has not had the pleasure with Union Gas before and, in any event, just to assist in the understanding of this issue, what I've proposed to do is to spend a little bit of time at the beginning of this examination with what will be very uncontroversial facts, and I believe facts that are known to most of the participants in the room, but will provide the Board with just a fundamental understanding of what Union's system is and how it works, which will enable you to then put in context some of the issues relating to the composition of the vertical slice and then also, a bit later, the avoided cost issues that come up around the DCC. 416 So that's the purpose of the map, and I will ask Mr. Simpson, in due course, some questions about how the system operates. With that, perhaps these witnesses could come forward to be sworn. 417 MR. SOMMERVILLE: Thank you, Mr. Penny. 418 UNION GAS - PANEL 2 419 D.SIMPSON; Sworn. 420 D.NEWBURY; Sworn. 421 EXAMINATION BY MR. PENNY: 422 MR. PENNY: Mr. Simpson, you're currently the manager of asset acquisitions? 423 MR. SIMPSON: That's correct. 424 MR. PENNY: And I understand you've been employed by Union Gas since 1987. 425 MR. SIMPSON: Yes, I have. 426 MR. PENNY: And you've held during that time a variety of positions, all largely in the industrial marketing and sales -- or industrial planning areas? 427 MR. SIMPSON: Correct. 428 MR. PENNY: And you, sir, have an Engineering Degree from the University of Western Ontario? 429 MR. SIMPSON: Yes, I do. 430 MR. PENNY: You're a member of the Professional Engineers of Ontario. 431 MR. SIMPSON: Yes. 432 MR. PENNY: And you've testified previously before this Board on a number of occasions, but most recently in the 0017 case and the 0029 case? 433 MR. SIMPSON: Correct. 434 MR. PENNY: Mr. Newbury, you are the manager of integrated supply planning for Union Gas? 435 MR. NEWBURY: That's correct. 436 MR. PENNY: I understand that, other than a brief stint with Union Energy, you've been with Union Gas since 1994. 437 MR. NEWBURY: 1998 -- 438 MR. PENNY: I'm sorry. 439 MR. NEWBURY: '88, I'm sorry. 440 MR. PENNY: '88. My apologies. And in the course of your employment with Union, you've held positions as gas sales representative? 441 MR. NEWBURY: Correct. 442 MR. PENNY: Doing project management for industrial markets of various kinds? 443 MR. NEWBURY: That's correct. 444 MR. PENNY: Strategic planning -- 445 MR. NEWBURY: Yes. 446 MR. PENNY: -- leading up to your current position as manager of integrated supply planning? 447 MR. NEWBURY: That's correct. 448 MR. PENNY: Now you, sir, have a -- also have an Engineering Degree from the University of Windsor obtained in 1988? 449 MR. NEWBURY: That's correct. 450 MR. PENNY: And I gather that this is -- you have the pleasure of this being your first appearance as a witness before this Board? 451 MR. NEWBURY: That is correct. 452 MR. PENNY: All right. Thank you, Mr. Newbury. Gentlemen, could I ask you, please, to confirm that the evidence that's been filed in this matter that relates to the composition of the vertical slice and the issues that are before the Board was either prepared -- was prepared by you or under your supervision? 453 MR. SIMPSON: That's correct. 454 MR. NEWBURY: That's correct. 455 MR. PENNY: And you adopt that evidence for the purposes of these proceedings? 456 MR. SIMPSON: Yes, we do. 457 MR. NEWBURY: Yes, I do. 458 MR. PENNY: Thank you. Now just turning to the overview of Union's operations, perhaps Mr. Simpson, you could give a brief overview of Union's operations and its physical structure. 459 MR. SIMPSON: Certainly. I trust that everybody currently has a map, as I do, a coloured map, that is an exact replica of the board that's behind me that I thought might help visually. I'll point out a few key areas or aspects of our operations. Union has over a million end-use customers, it's approximately 1.1 million end-use customers, and in terms of their location, I will just point to the map. We have what we referred to as a northern and eastern operations area, and this on the map spans from the far west, to put a name to it, somewhere west of Thunder Bay stretching completely across Northern Ontario and into Eastern Ontario into Cornwall. That is our northern and eastern operations area. 460 And our southern operations area is right down at the bottom, truly Southwestern Ontario, from about Windsor spanning towards Oakville area. Those are the two operational areas that I will refer to quite a bit in today's discussion. 461 MR. PENNY: Mr. Simpson, historically, how were pre-merger -- how were those different components of Union's system aligned? 462 MR. SIMPSON: The northern area as I mapped it out is largely running along the TransCanada northern system, so TransCanada's transportation system effectively runs from Empress, which is in Alberta, which is off-scale from this particular map, but does enter into the western end of our system, stretches completely across the north and into the east. 463 The northern operations area is primarily off of TransCanada, and there are several different delivery areas referred to in TCPL's tariffs. As an example, there's what's called the western delivery area obviously in western Ontario, northern delivery area, Sault Ste. Marie delivery area, and a few others that stretch off of the T-scale system. 464 MR. PENNY: And Mr. Simpson, is that northern area is what was historically the Centra system and the southern area is historically what was known as the Union system? 465 MR. SIMPSON: That's correct. 466 MR. PENNY: You've described how gas arrives in the northern and eastern area. Can you describe for U.S. how gas arrives into the southern or traditionally the Union service area? 467 MR. SIMPSON: Certainly. The -- again, this TransCanada system which serves the north does have a point of entry into our southern area, at Parkway, which is the most easternly point or the entry point from TransCanada to our Union southern operations area. 468 MR. PENNY: Mr. Simpson, where is Parkway in terms of the nearest local municipality. 469 MR. SIMPSON: Certainly. It's very close to Oakville area, east end Kirkwall, end of our system. 470 Coming into the more southern point of Union's southern operation system, there's a few different pipelines that come in from the Gulf of Mexico, again coming up from the southern gulf, which is off scale on this map, but it does come up the Trunkline system directly from the Gulf of Mexico into the Windsor area, as does the pan handle system, that comes from the mid continent and enters into our system, again in the Windsor area. 471 As well, Alliance, which brings gas from Western Canada to Chicago and joins up with Vector in Chicago has access to our southern operations area in the western end of our system. 472 MR. PENNY: Now, just to complete the picture, we've heard already today some discussion about storage and transportation -- or transmission, I could say. Could you show U.S. first on the map where Union's storage facilities are, and then could you also explain where Union's transmission system is? 473 MR. SIMPSON: Certainly. If on your coloured graph you look at the blown up oval section, that is highlighting the locale of our Dawn storage facilities, which is located in the township of Dawn-Euphenia, again close to the most westerly point of our system. 474 And the transmission system that Mr. Penny referred to virtually runs the 401 corridor from Dawn towards and continuing through to the Parkway location I mentioned where TransCanada joins into our operations. 475 MR. PENNY: All right. That's transmission, then. 476 Could you describe where Union's storage facilities are. 477 MR. SIMPSON: Yes. Sorry. It is that oval, and it is located at the township of Dawn-Euphenia. 478 MR. PENNY: Now, turning to customers and the terminology that's used, first of all, can you explain what you mean when -- what Union means when it is talking about a sales customer? 479 MR. SIMPSON: A sales customer would be someone or a business or homeowner that has a facility or home in our franchise area that utilizes Union effectively for all and complete services, ranging from the procurement of molecules themselves, the acquisition of transport, storage of gas, and distribution on our system. All of the -- or all of the mechanics that I've drawn out in terms of our operations would be used to provide service to that customer, as well as balancing, of course. 480 A homeowner doesn't use gas, same amount every day, so storage and balancing is a critical part of the service we provide. 481 MR. PENNY: So how does Union serve sales customers? 482 MR. SIMPSON: On the pipelines that I drew, whether it be TransCanada or Alliance-Vector, there are up-stream acquisitions of transport that are arranged by Union Gas for our sales customers. We would procure or buy molecules in those field zones. So if it was trunk lines, we would be buying gas in the gulf of Mexico, and if it was TransCanada, we would be buying gas in Western Canada. And then we transport it to our operations area, and serve the customers through both our transmission and distribution system to get to their meter, and of course use the Dawn storage facility in terms of balancing both daily and seasonally to provide a firm service to our sales customers. 483 MR. PENNY: Can you explain the seasonal balancing. 484 MR. SIMPSON: Seasonal balancing -- and perhaps an example is best. A homeowner, as I mentioned, will consume gas on a more seasonal nature, of course, consuming a lot of gas in the winter and very little in the summer. Transport contracts arrange for even daily deliveries to our operations area. 485 So the first function of storage is just to manage the fact that there will be more consumption used in the winter than an average day and less in the summer. And then the storage facilities itself provide further balancing role, if, for example, in the winter, consumption is in excess, in a cold winter, and is consuming more than expected. There would be a further draw, an unplanned draw from storage. 486 So storage serves several functions. 487 MR. PENNY: Now, that's the sales customer side. Can you now describe what Union means when it talks about a bundled direct purchase customer. 488 MR. SIMPSON: Certainly. A bundled direct purchase customer, in its simplest sense, is a customer that has elected to migrate, if they were an existing customer, migrate from sales service provided to Union to direct purchase. 489 And with that choice comes a responsibility of providing their own molecules, so they would, effectively, acquire and procure molecules in the field zone, and as such, they would be supplied effectively to Union. 490 And on an annual basis, supplies would have to equal demands, and throughout the course of the year and the transmission and storage and distribution functions and responsibilities that Union has for its sales customers, are the same for a bundled customer, a bundled direct purchase customer. 491 So the key difference really is there's a contract to the effect that the supplies from this bundled direct purchase customer will, on an annual basis, approximate their annual consumption. 492 MR. PENNY: Of the molecule? 493 MR. SIMPSON: Correct. 494 MR. PENNY: All right. So what percentage of your customers are bundled direct purchase customers? 495 MR. SIMPSON: Today, in fact, on a volume basis it's quite significant. It's approximately 80 per cent of the volume consumed within Union's franchise areas equates to approximately 80 per cent that is bundled direct purchase. 496 MR. PENNY: And so how does Union actually serve bundled direct purchase customers and how, if at all, is it different from the way in which you serve sales service customers? 497 MR. SIMPSON: Again very little difference from a sales customer perspective. There will be arrangements. The bundled direct purchase customer does provide their own molecule, does get an allocation of transport from Union to get it to the franchise area, and then again, our storage facilities plays the same role that it does for a sales customer, because at that point their needs are the same. 498 MR. PENNY: Does the combination of gas from the upstream pipelines that you've described or from storage as you've described meet all of the demands of Union's customers? 499 MR. SIMPSON: No, in many cases they don't, and I think I've tried to elaborate on the fact that when, for example, weather is colder in the winter, the homeowner, whether they be on sales service or bundled direct purchase, is not reacting to that weather in their supply arrangements, and Union will have the responsibility to balance and make sure that the integrity of the storage operations is maintained, and the balancing in that fashion is applicable then provided by Union for both sales and bundled customers. 500 MR. PENNY: And how do you achieve that balancing? 501 MR. SIMPSON: If required, that would entail the purchase of some incremental supplies on a, perhaps, very short-term basis. Again they would be at our discretion, and it would be a function of the overall operations. 502 But in order to maintain firm service to all of those customers, it would perhaps require that incremental supplies were purchased over a time span of a week or a few weeks or a month. 503 MR. PENNY: With that background let's turn more specifically to the issue before U.S., what first of all is the vertical slice? 504 MR. SIMPSON: The vertical slice is the Board-approved methodology for allocating upstream transportation from Union to a customer that is migrating from sales service that I described to a direct-purchase arrangement. 505 So it has been in place since November of 2001 and would allocate, then, the upstream transport arrangements that Union has set forth underpin sales service arrangements so that when they transfer to direct purchase they take an allocation of those assets with them. 506 MR. PENNY: How is the vertical slice determined? 507 MR. SIMPSON: Union, in setting its vertical slice arrangement, which is applicable in the southern operations area only, and I should perhaps clarify that. The northern operations area, being quite largely served by TransCanada, does not have a vertical slice per se. 508 So in the southern operations area, we would establish what would be the portfolio for the upcoming November to serve our sales customers, and effective that point for a one-year period, the allocation would be established on a pro-rata ways basis, meaning that an equal share of the assets just as we have them in our portfolio would be allocated to the direct purchase customers. 509 MR. PENNY: You mentioned the difference between the south and north. What happens in the north? 510 MR. SIMPSON: The north quite simply is dominated by TransCanada, as you can appreciate from their geographic location, so the allocation methodology at this point continues to be 100 per cent TransCanada PipeLines capacity. 511 MR. PENNY: Let's now turn specifically to the issues before U.S.. There are two; one relates to the assignability of the TCPL capacity from the north, and the second relates to whether there should be delivered supply or spot gas in the 2003 vertical slice. 512 Turning to the first issue, why are you including northern TransCanada Pipeline capacity in the 2003 vertical slice? 513 MR. SIMPSON: The -- perhaps I can point to the diagram again, or your paper copy. 514 Fundamental to this decision is to look at our system on an integrated basis, and by that, I mean this TransCanada capacity that spans the northern area has the ability to connect to Parkway. So very specifically as an example, a northern delivery area in the WDA or in the NDA, like Sudbury, as an example, we would hold TCPL capacity effectively to the NDA takeoff on the TransCanada system, of which Sudbury, as a point of reference, is in that area. 515 And we hold enough capacity and enough services to manage all the firm requirements in that delivery area during peak conditions. 516 However, in the summer or in non-peak conditions, clearly, the assets that we're holding are in excess of the average daily need for that location, so what we physically do is divert or send gas that would have otherwise been destined for the northern delivery area or Sudbury, we'll send those molecules right through to Parkway and that can be achieved through what is known as a diversion. 517 The benefit that that provides is, it's now utilizing this asset on a 365-day basis, rather than just during peak conditions. 518 Perhaps one of the key notes is, these diversions to get the transport connected all the way through to Parkway are an interruptible arrangement on TransCanada. As we request them, there is not a guarantee that it's a complete firm arrangement, so there's some significant management on Union's part to operate on a wholly integrated system. 519 The molecules, then, that are diverted form a key element of our sales needs or the sales molecules for our customers in the southern operations area. 520 MR. PENNY: Now, you mentioned in your earlier description of the vertical slice that you would normally assign that capacity to the new direct purchase customer as that customer moves to direct purchase, but the -- this issue is on the issues list because there is an issue about the fact that Union is not proposing to assign this northern TCPL capacity. 521 Why is Union not proposing to assign that capacity to the direct purchase customer as it has done with other upstream capacity in the past? 522 MR. SIMPSON: Again, to point to the map, because I do think it helps is in my NDA or Sudbury example, this integrated benefit, if you will, is really a function of old Union and old Centra becoming one. As they have merged, this has become an option to, in fact, take whatever is otherwise excess capacity on most days from Sudbury and send it down to Parkway to serve the south. 523 The reason that it cannot be assigned, per se, is that in order for Union to manage that diversion and enact the molecules to Parkway, we have to be the holder of that capacity. 524 So as to assign this capacity to another party would then degrade from the ability to operate in this integrated fashion. 525 MR. PENNY: And what is the most obvious occasion on which you would need to -- need access to that capacity? 526 MR. SIMPSON: Clearly, I think I mentioned earlier, on a peak conditions, all of the transport that goes to the northern delivery area is required in the northern delivery area. To the extent that was assigned to a party that's sole purpose was to have it at Parkway 365 days a year, we would lose the capacity benefit into the northern delivery area, so the north would effectively be short molecules in peak conditions. 527 So by allowing Union to retain the operational control, there's a few benefits that are served. Firstly is, we are able to manage the peak day requirements of our firm customers, which is paramount, as well as the flow through to Parkway on non-peak conditions allows U.S. to get molecules to the south for our sales customers, and within the vertical slice, we have effectively made this entire arrangement a firm arrangement, so the direct purchase benefit, if you will, is they make arrangements at Empress, which is the supply point, on a firm basis, which is more cost effective than making them on an intermittent or interruptible basis. 528 MR. PENNY: You may have anticipated my next question or perhaps even answered it, but how does the assignability, non-assignability affect the actual direct purchase customer that is receiving this capacity as a portion of his allotment in the 2003 vertical slice? 529 MR. SIMPSON: I think the net impact to the direct purchase customer is that there isn't an impact. 530 Again, if anything, there's a benefit, because what we have done and have been doing since November of 2002 when this vertical slice was put into place, and it has been allocated since then to migrating customers, is they are able to make firm arrangements to supply gas at Empress and Union then takes over management control, determining the needs of both the peak conditions in Sudbury and the firm arrangements to get it to Parkway for that direct purchase customer in the south. 531 MR. PENNY: So if you need it for the north on a peak day, does that have any effect on what the direct purchaser customer can do? 532 MR. SIMPSON: No. By operating in the fashion that we are, I'm, as Union, able to meet the peak day conditions of our northern customers and the direct purchase customer in the south is able to supply 365 days evenly at Empress. 533 MR. PENNY: What would happen or what will be the consequences if you actually did have to physically assign that capacity? 534 MR. SIMPSON: I tried to allude to the fact that when you assign capacity, you assign the operational nature of that capacity. 535 So if I assign the capacity that we're speaking of to a southern direct purchase customer, two things in my mind -- at least two things that would be detrimental would be that a southern customer would now be hold being NDA capacity into Sudbury, but that southern customer is in fact located in the Windsor to Oakville corridors. There's a mismatch of that pipe and the location of their facility. 536 And secondly, the fact that I no longer retain that capacity, then I would no longer have it at my disposal for meeting the peak day conditions of the northern customers in Sudbury ... 537 MR. PENNY: What would you have to do in order to meet the peak day requirements of the northern customers? 538 MR. SIMPSON: We would have to attempt to purchase a spot arrangement, however, with firm customers, certainly, we want to be in a position that we have firm arrangements to serve the firm demands of our customers. 539 MR. PENNY: All right. Well, let's then finally turn briefly to the second issue dealing with why there is no delivered supply in the 2003 vertical slice. 540 First of all, what do you mean by spot gas or delivered supply in this context? 541 MR. SIMPSON: What I mean by spot gas, and I alluded to this somewhat in an earlier point about the role of balancing that Union plays for sales and bundled customers. 542 Spot gas is the most variable component of Union's portfolio and it is discretionary, so to the extent that we need to purchase it, we will, to the extent we need to purchase some, we have that ability, and in some cases if we need to purchase none, we will purchase none. 543 And by my definition, it's something that I alluded to, could be arranged literally in the course of a day or a week or perhaps a month, so it is a very time-specific purchase of molecules. 544 And the function, again, that balancing gas plays, I alluded to, is to account for when consumption perhaps takes off in colder than normal weather, and there's supplemental requirements to purchase or bring molecules into the storage area. 545 MR. PENNY: So, then, how does spot gas fit into the 2003 gas supply plan? 546 MR. SIMPSON: Again, spot gas, not being an even daily arrangement, so it is not 365 days of the year that this balancing or spot gas is acquired, it will -- the gas plan isn't laid out as a daily plan, so a requirement for spot gas in total will be identified to balance the needs of all customers, and it will supplement the transportation arrangements that are made, but it is separate and distinct from the transportation arrangements which are evenly, daily, 365 days of the year arrangements to combine an overall plan to meet the needs of our customers, and then we would manage the spot gas contained or identified within the plan as actions and seasons and weather unfold. 547 MR. PENNY: So why are you not allocating a spot gas component in the 2003 vertical slice? 548 MR. SIMPSON: The vertical slice is an allocation of upstream transportation, and spot gas, as I have defined it, is a balancing tool that serves the daily, monthly, or seasonal balancing requirements of sales and bundled customers, and it's the balancing responsibility that Union provides. 549 So Union, as the operator, requires that component of our portfolio to manage sales and bundled balancing requirements as they unfold. It is not an upstream transportation arrangement, and as such, it is not included in the vertical slice. 550 MR. PENNY: So, finally, how would a new direct purchaser acquire flexibility in their own arrangements under your vertical -- and by flexibility, I mean flexibility that's comparable to what you would get through delivered supply or daily supply component. How does a new direct purchaser get flexibility in their own arrangements under your proposal? 551 MR. SIMPSON: To answer that question, I have to come back to the difference I pointed out earlier between a sales and a bundled customer is principally a contract for supplies to equal demands. 552 Some of the elements of that contract are that they only have to equal once a year at contract expiry or renewal if they wish to continue on. So once a year, the total consumption taken by that bundled direct purchase customer must match their supplies and that is a very flexible arrangement, because what it allows for is a bundled customer again in the winter to consume at great paces above perhaps anything forecasted or expected and not have to balance supplies to demands until the end of the year. 553 And often, of course, the economics would drive the timing of their decision to bring in, now, these incremental molecules, but Union's operations are driven by when it actually occurs, not the balancing provision that -- we don't have the balancing provision that a bundled direct purchaser has. 554 So that annual balancing is one provision and it actually has a tolerance, so they can be plus or minus 4 per cent. They don't have to have a hundred units of supply and a hundred units of demand. They have a tolerance or bandwidth of 4 per cent on either side. 555 And as well, something that is beneficial is that after the course of the most recent 12 months and the bundled direct purchasers come up for contract renewal, their allocation of upstream transportation will be adjusted to reflect their consumption. 556 So an example would be if a small commercial facility had decreased, for whatever economic downturn, their upstream allocation would be decreased to align with that change, so that again, the intent is for supplies and transport arrangements as such to equal annual consumption. 557 The few other smaller notes, although not small in nature, is credit arrangements. When we're dealing with actual transport companies, TransCanada, or Panhandle or Trunkline, they like many businesses have credit requirements to do business on their transportation route, and Union, if you will, plays the role of ultimately being obligated or responsible for the payment of these customers that we do allocate transportation to. So there's a credit function that Union is responsible for -- 558 MR. PENNY: Okay, Mr. Simpson, but what percentage of the -- if we take the upstream components of the 2003 vertical slice, what percentage of those contracts expire within the first year? 559 MR. SIMPSON: The vertical slice for this November, there is approximately 23 per cent. So this is an additional -- my last point, perhaps, on flexibility of direct purchase customers. 560 Within the vertical slice there's a contract on Trunkline that was arranged for one year and will expire this coming October 31st, 2003. 561 MR. PENNY: How does that provide future flexibility to a new direct purchase customer? 562 MR. SIMPSON: When that contract expires, the obligation by the direct purchase customer to that allocation also expires, so what effectively it converts into is the opportunity for a marketer or an end-use customer or a retail energy marketer to make their own arrangements to provide those molecules to the point that was articulated in the contract into Union's system. 563 And again, this year, that's 23 per cent, and as an example, in the first slice, November 2001, there was approximately 50 per cent of the contracts expired. So the marketer would have the flexibility to acquire molecules how they deem appropriate to arrive at that entry point into our system. 564 MR. PENNY: All right. Thank you very much, Mr. Simpson. 565 Thank you, Mr. Chairman. Those are my questions. 566 MR. SOMMERVILLE: Thank you, Mr. Penny. 567 MR. PENNY: I wonder if perhaps that map could be marked as the next exhibit. 568 MR. MORAN: Exhibit F.1.2. 569 EXHIBIT NO. F.1.2: MAP OF OPERATIONAL AREA OF UNION GAS 570 MR. SOMMERVILLE: Mr. Janigan. 571 MR. JANIGAN: I have no questions for this panel, Mr. Chair. 572 MR. SOMMERVILLE: Mr. Aiken. 573 MR. AIKEN: I have no questions for this panel. 574 MR. SOMMERVILLE: Mr. Ryder. 575 MR. RYDER: Neither do I, thank you. 576 MR. SOMMERVILLE: Mr. Frank. 577 CROSS-EXAMINATION BY MR. FRANK: 578 MR. FRANK: Mr. Chairman, I've passed up copies of some cross-examination reference materials, and they have been circulated throughout the room and I believe the panel should have copies as well. 579 MR. SIMPSON: Yes, we do. 580 MR. FRANK: It's a booklet. Just for ease of reference, perhaps we could mark it as well as an exhibit. 581 MR. MORAN: Exhibit F.1.3, Cross-examination Reference Materials of CEED. 582 EXHIBIT NO. F.1.3 CROSS-EXAMINATION REFERENCE MATERIALS OF CEED 583 MR. SOMMERVILLE: Thank you. 584 Mr. Frank, it's my thinking that we would go to 12:30, if that's of any assistance to you. 585 MR. FRANK: I don't think I'll be any longer than that, and possibly shorter. 586 MR. SOMMERVILLE: In saying that, I'm just trying to give you some guidance as to where we might break. 587 MR. FRANK: Thank you, Mr. Chair. 588 If I could ask the panel to turn to Tab 2 of the reference materials, and I understood the evidence that the vertical slice was to include various upstream transportation. If I could ask the panel, I'm going to read line 17, and this is at page 15 of 87, and just to make this clear, this come from the original proposal in the evidence filed by Union in 1999-0017. 589 And I'm reading at line 17, "The vertical slice will include all portfolio components consisting of all of the various upstream transportation contracts and spot gas, i.e., component of portfolio not underpinned by assets." 590 And I would ask the panel to please comment as to the evidence earlier, that the portfolio was to include upstream transportation contracts alone. 591 MR. SIMPSON: I think the best way to respond to that question is to step back and look at even line 6 on the page that was referenced, so tab 2, page 15 of 87, in this case. 592 So 6(a) defines an arrangement or an obligation to provide 365-day service as part of the allocation. 593 As I went through my introduction, I was describing spot gas and the role which it plays for Union to provide service to sales and bundled customers, and that definitely was not a product that was delivered, even dailies, 365 days of the year. 594 So perhaps what this is pointing out is drawing towards the flexibility, line 19, as was discussed, and I also described the flexibility that a direct purchase customer has had in the first year of the vertical slice and does have in this year of the vertical slice, and that is that when our short-term upstream transport contracts expire, the bundled customer now has the complete control over what arrangements upstream may be made to fulfill their obligation 365 days a year to Union at that point. 595 They may wish to contract for pipeline space. They may wish to arrange for an exchange, or they may buy gas, spot gas at that point. That becomes the direct purchase customer's choice. 596 But what is not included in this vertical slice and shouldn't be included is the balancing gas, which is, again, the discretionary non-even daily acquisitions made by Union to provide service to sales and bundled customers. 597 MR. FRANK: You're not subjecting that all of the spot gas that's currently forecasted is for balancing purposes? 598 MR. SIMPSON: Well, what I'm suggesting is that the spot as I've defined it presents a balancing tool to Union such that, in conditions of much colder than normal weather, that and more could be purchased; and in conditions of warmer than normal weather, less could be purchased to avoid transport costs or unabsorbed demand -- transport costs. 599 MR. FRANK: But it's true that not all of the forecasted spot gas is planned to be used for balancing system flexibility; correct? 600 MR. SIMPSON: I'm not sure I understand the context of your question. 601 MR. FRANK: Well, there is presently forecasted spot gas; correct, in certain components? 602 MR. SIMPSON: That's correct. 603 MR. FRANK: Have you produced that forecasted amount? Do you know what that forecasted amount is? 604 MR. SIMPSON: Yes, that's been proofed in IRs. It's approximately 10 Bcf on an annual basis. 605 MR. FRANK: And not all of that spot is projected to be used for balancing, is it? 606 MR. SIMPSON: It certainly could be. If customers -- again, if customers are in extreme warm conditions, we would need the management ability to purchase none of that, and in extreme cold conditions, we would need the ability to purchase that and more. 607 So via that, I would offer that it is all used by Union as a balancing tool. 608 MR. FRANK: Well, let's take a step back. 609 I understand that the rationale for not including spot gas in the vertical slice is that spot gas supplies do not flow on a 365-day per year basis; correct. 610 MR. SIMPSON: That's correct. The spot gas that I have defined does not flow on a 365-day basis. 611 MR. FRANK: The TCPL FT that you described earlier that's diverted from the northern and eastern operations, that is proposed to be part of the vertical slice; correct? 612 MR. SIMPSON: That's correct. In fact, if I would, that is part of the vertical slice and has been functionally operational since November 1st, 2002. 613 MR. FRANK: Okay, and that TCPL FT that's diverted from the north and east is required to meet peaking requirements in the north and east; correct? 614 MR. SIMPSON: It is required for northern peaking conditions, and as I outlined in my opening, it is also required and part of the plan for southern sales customers on an annual basis. 615 MR. FRANK: Okay. In other words, it is delivered to the south, as it's available; correct? 616 MR. SIMPSON: With Union controlling that capacity, it is used in the northern delivery area as required, and as not required, it is diverted down to Parkway to serve the southern sales customers. 617 MR. FRANK: Now, it's fair to say that it will not be diverted to the south on peak days for the northern and eastern operations area; correct? 618 MR. SIMPSON: Correct. 619 MR. FRANK: So it will not be available to the southern operations area 365 days per year; correct? 620 MR. SIMPSON: That would depend, and I think we have to step back and recognize that there's a very significant volume within this diversion component of the vertical slice. So true on an extreme peak day design condition, all of that capacity would be responsible or required in the northern delivery area. 621 However, during cold days or semi-cold days, it is possible that not all of it is required, so I think to answer the question, would almost depend on the weather conditions and requirements of the northern delivery area and how much capacity or diversions have been assigned out through the vertical slice. 622 MR. FRANK: Okay. So all or part of the northern diverted supply would therefore not be available 365 days a year. It's required for peaking; correct? 623 MR. SIMPSON: Right and Union -- again Union managing the consumption arrangements and supply arrangements to meet them in the northern delivery area is, through this vertical slice arrangement, doing two things: It is going to meet the peak day requirement of the north, and through our supply arrangements, we have brought forward an ability to provide a firm service at Empress to the southern direct purchase customers. 624 MR. FRANK: But that wasn't the question. The question was quite simply whether or not the northern diverted supply is available 365 days per year in the southern operations area? The answer is no; correct? 625 MR. SIMPSON: Well, what I'm trying to differentiate as far as a direct purchaser customer in the south is concerned, it is available 365 days a year. That is again back to the role that Union is playing is we will provide a 365 day a year service from Empress to Parkway via these diversions. 626 And as far as the management of the diversions and the peak day, Union is playing that role and is taking on that management responsibility. So I think I needed to put into context that from a direct purchase customer's perspective in the south, it is available firm 365 days a year. 627 MR. FRANK: Well, how is that possible if it's not diverted to the south and it's being used for northern customers? 628 MR. SIMPSON: The -- that gets to the heart of the role that Union is playing in this arrangement, and the ability to divert gas to Parkway, if it was needed in the north, what Union would be effectively doing is taking molecules that had already arrived or gotten to Parkway on non-peak conditions and effectively deemed them to be those of the direct purchase customer. 629 So if all capacity was used in the northern delivery area on a day, even though the molecules would have been provided by a southern direct purchase customer is indifferent, because the molecules that they provide will be consumed, and the molecules will effectively be replaced in our southern operations area. So that is the function, because we are an integrated operation that we are able to provide. 630 MR. FRANK: Well, you're saying that the reason it's available 365 days is because you're using volumes that were diverted on a previous day. My question is: On the day when it is required in the north for peaking requirements, it will not be diverted to the south; correct? 631 MR. SIMPSON: That's correct. 632 MR. FRANK: And so those molecules from that day are not available in the south; correct? 633 MR. SIMPSON: Yeah, and I believe I just explained that -- 634 MR. FRANK: Is that a yes? 635 MR. SIMPSON: The molecules that the southern direct purchase customer provides at Empress on a peak day condition will be consumed in the northern delivery area and that is exactly how Union serves its integrated sales customers today. 636 So today, absent direct purchase, we have molecules that fill that northern pipe and arrive in the northern delivery area in peak days. In the non-peak days, they're diverted to the southern operations area, and that is a key element of our portfolio. That's why it's in the vertical slice. 637 As a customer goes to direct purchase, their physical colour-coded molecules, if you will, will work in much the same fashion. 638 What Union is providing, however, is an ability for those molecules by the south direct purchase customer that arrive at Empress to be operationally treated evenly on a 365-day basis. 639 MR. FRANK: The portfolio is determined as of November 1st of the relevant year; correct? The portfolio for the purpose of the vertical slice? 640 MR. SIMPSON: For purposes of the vertical slice, a projection of the upstream assets for each November 1st is established. Clearly that's established prior to November 1st for planning purposes and informational requirements by the marketers. 641 In fact, I believe the arrangement for November 1st of 2002 was communicated to marketers and the Board approximately the end of August. 642 MR. FRANK: But it's fixed as of November 1; correct? 643 MR. SIMPSON: Correct, it's fixed as of November 1st, as it was last year, and is in place for a 12-month period, at which point again the cycle would be to reevaluate the upcoming November portfolio and set it, once again, for a 12-month period. 644 MR. FRANK: And Union isn't bound operationally by this forecast; correct? 645 MR. SIMPSON: I'm not sure what you mean. 646 MR. FRANK: Well, for example, if there's a -- and there has been an unusual rate of return to the system, that would not be reflected in Union's gas supply plan on a forecast basis, would it? 647 MR. SIMPSON: Perhaps what you're pointing out to is in between a summer, June/July time frame where we're trying to establish or project what the November asset mix would be of upstream transport. That is a projection. 648 So between that point and November, circumstances could change, including return to system by customers or more aggressive levels of migration away from our system. There are factors that would alter that. 649 MR. FRANK: But there are also factors that can alter things post November 1st correct, such as an unusual return to system? 650 MR. SIMPSON: Well, in terms of our portfolio, it changes monthly, and again, the -- a couple of the key functions that change it, are not necessarily acquisitions by Union, but activity by direct purchase customers. 651 So it is true there is activity every month that is either returning customers to sales service or migrating customers away from direct purchase. 652 MR. FRANK: And the vertical slice doesn't take that into account, those changes for that year; correct? 653 MR. SIMPSON: The vertical slice as approved by the Board was to be set each November to reflect the projected assets to be in place for that November, and I believe the intent of freezing them for one year, if you will, was to provide some certainty to the marketplace of what that upstream allocation would be for their business planning purposes, and that's why there's a cycle of every year rather than every five years, in an extreme, that is reset. 654 So every year, changes that was taken place, -- and there could be many: Migration to sales, migration to direct purchase, new acquisitions, contract expiries -- all of those are taken into account on a prospective basis for the next November's setting of the vertical slice. 655 MR. FRANK: The question was it does not take it into account for that year, correct; changes that occur during the year? 656 MR. SIMPSON: Correct. By nature, as I've described it, it's set for one year, so there can be a multitude of changes that will wait until the prospective November 1st and be taken into account as we describe our forward-looking vertical slice. 657 MR. FRANK: Now, we said that spot gas is a forecasted component of Union's 2002/2003 portfolio; correct? 658 MR. SIMPSON: Well, I want to describe, again, spot gas is a tool, a tool that is used by Union. It is not a component of our upstream transportation portfolio, but it is a component of our larger portfolio of tools and assets and pipe to use to serve our sales and bundled customers. 659 MR. FRANK: So it's a forecasted component of that; correct? 660 MR. SIMPSON: Correct. 661 MR. FRANK: And in 2001, there was also no spot gas on the vertical slice; correct? 662 MR. SIMPSON: There was no gas that was available 365 days per year without underpinning transportation. 663 MR. FRANK: The question was whether, in 2001, there was any spot gas in the vertical slice. 664 MR. SIMPSON: Are you describing this as the balancing tool that I've alluded to. 665 MR. FRANK: I'm asking whether there was any spot gas in the vertical slice in 2001 and the answer is no; correct. 666 MR. SIMPSON: I'm trying to be clear with definitions, because I think that's part of why we're discussing this topic. 667 Spot gas wishes to be defined as an arrangement with no underpinning transport, the answer is no, there was none of that. 668 Balancing tool, in terms of incremental supply, time specific for balancing reasons, I believe there was. 669 MR. FRANK: Well, you're suggesting that in 2001 there was spot gas included in the vertical slice? Not as you've defined it, but can you explain what portion of the vertical slice had what you are saying is akin to spot gas? 670 MR. SIMPSON: Well, again, the answer to what portion of the November 1 vertical slice would ultimately have transport expiring that would be replaced at the marketer's discretion with whatever tools they wished for was approximately 50 per cent. 671 MR. FRANK: So what you're suggesting is that if transportation expired at the -- or would expire for a portion of any transportation-backed assets would expire, that's your definition of a spot gas type component from the vertical slice? 672 MR. SIMPSON: No. Again, this may be easiest to not use the word spot gas. 673 MR. FRANK: What term would you use? 674 MR. SIMPSON: the portion of a vertical slice that has a contract that expires will then have no underpinning transportation arrangement to it. To the extent that that's in the hands of the direct purchase customer, they may make whichever arrangements they feel appropriate to meet their contractual obligations. 675 So without giving that a name, they now have no upstream transport in their portfolio, and in November '01, that turned into 50 per cent of their portfolio would not have upstream transport. And this November, November '02, 23 per cent of their allocation is going to have no transport arrangement underpinning it as the Trunkline contracts expire at the end of October 2003. 676 MR. FRANK: Right. But as -- before they expire, they obviously have a transportation component. 677 MR. SIMPSON: Correct. 678 MR. FRANK: Now, if we can go back to page 15 at tab 2, line 17, can you explain what spot gas is referred to -- I should say at line 19, in the explanation of the vertical slice methodology. 679 MR. SIMPSON: That, as I've described, and the line does read: "All of the various upstream transport contracts and spot gas (ie. component of the portfolio not underpinned by assets)". And the further definition is that that would be on a 365-day per year basis and in November of '01, as in this November of 02, Union's sales portfolio to serve our sales customers does not have an arrangement for even daily volumes to be supplied to our area on a 365-day basis and that is why it's not -- has that definition in the vertical slice. 680 MR. FRANK: The northern and eastern operations area has always had TCPL FT capacity in excess of its annual demand; correct? 681 MR. SIMPSON: I think the -- I think you are correct, that the TCPL capacity into the north, even pre-Union when it was just Centra, given the physical locale of their areas has had to maintain higher levels of FT than is required on an average day basis. 682 MR. FRANK: That was true both before and at the time of the Union/Centra merger? 683 MR. SIMPSON: I believe it was. I'm certainly not an expert on Centra days pre-Union, but as part of an integrated operations, Centra and Union merged to one -- we have had that circumstance to deal with, and it has provided as I've outlined, the integrated benefit that we see today. 684 MR. FRANK: And more specifically, for the period beginning November 1, 2000, the TCPL FT capacity used to serve the north and east operations was in excess of the forecasted annual demand for that operations area; correct? 685 MR. SIMPSON: Did you say for November 1, 2002? 686 MR. FRANK: 2000, for a period beginning -- it was the case back in November 1, 2000, that there was an excess in the north; correct? 687 I mean this has existed for some time, and it existed for the period beginning November 1, 2000; correct? 688 MR. SIMPSON: Right, I believe I agreed that there has been excess capacity. I just wasn't sure if you had a frame of reference for your question. 689 MR. FRANK: I'm just giving some specific period. So it was the case for the period beginning November 1, 2000; correct? 690 MR. SIMPSON: Correct. 691 MR. FRANK: And for the period beginning November 1, 2001; correct? 692 MR. SIMPSON: Yes. 693 MR. FRANK: The northern TCPL FT contracts that are in Union's proposed vertical slice have assignment provisions? They are capable of being assigned; correct? 694 MR. SIMPSON: There was an interog and I'll go to it if required, but contracts on a pipeline, like TransCanada or Alliance and Vector, are trunklined, are able to be assigned. So from a legality perspective, contracts may be assigned from one party to another. The distinction that's very important is even though that legal ability exists, because of the integrated operations I've reviewed a few times, we won't be assigning the capacity in order to retain the integrated benefit of providing peak day service to firm's customers, as well as providing molecules to serve our sales customers in the south. 695 MR. FRANK: And the contracts we're talking about, the northern TCPL FT contracts and Union's proposed vertical slice, have turn back rights; correct? 696 MR. SIMPSON: What do you mean by turn back rights? 697 MR. FRANK: Meaning rights that allow under Union's turn back policy to terminate the contract or to turn back? 698 MR. SIMPSON: Well, the northern TCPL contracts do have what I refer to as a renewal date, and that date -- that date represents a point in time when the life of the contract has come to an end, and the shipper, being Union, has the choice to continue with the contracts as they are at that level or reduce them to some level less than the original contracted amount. 699 MR. FRANK: So those -- the contracts in question have those rights; correct? 700 MR. SIMPSON: The northern contracts do; that is correct. 701 MR. FRANK: Now, for the period beginning November 1, 2000, the northern and eastern operations area excess capacity was, in fact, diverted to the southern operations area; correct? 702 MR. SIMPSON: Right, it would have been. 703 MR. FRANK: And that diverted capacity formed part of Union's south system portfolio for the period beginning November 1, 2000; correct? 704 MR. SIMPSON: Yes, the diversions are not a new concept, so I hope that much I've made clear. The amount that these diversions represent to other portfolio to serve south sales customers has changed, and that again shouldn't be a surprise, because as customers migrate from sales arrangements to direct purchase arrangements, they've taken an allocation of the upstream transport that served the south sales customers. 705 So as the total direct purchase is now approaching or beyond 80 per cent, the sales portfolio is becoming smaller and smaller, so the diversion component is now quite significant. 706 And it's really that point that led to it to be included in this year's vertical slice, that Union looked at this November, and I looked at this coming November, being November 2002, and rather than look at the vertical slice as an isolated contractual perspective, meaning, were they old Union or old Centra contracts, and only on an isolated contractual basis would review the allocation methodology, we determined that given the order of magnitude of diversions, that we needed to look at it on an integrated basis. 707 How do we on an integrated basis serve those customers? And these diversions represent 30 per cent of how we serve southern sales customers. So it's an evolution, in effect, and order of magnitude change that has led to the inclusion in this year's vertical slice. 708 MR. FRANK: Okay. So the question is whether it in fact happened for the period beginning November 1, 2000, and it did, the diversion. 709 MR. SIMPSON: Correct, I agree. 710 MR. FRANK: It happened even though it wasn't included in the vertical slice; correct? 711 MR. SIMPSON: That's correct. 712 MR. FRANK: And by doing so, Union was able to avoid UDC charges, for example, correct; by diverting? 713 MR. SIMPSON: By diverting, it's not Union that is avoiding -- 714 MR. FRANK: Well, UDC charges were avoided; correct? 715 MR. SIMPSON: What is happening when we divert and, again, use this transport on non-peak conditions is that we are optimizing the overall operations, and the Board has made, in previous decisions, it clear that Union should attempt to facility transport operations or options, and reduce or minimize stranded cost. 716 So this is definitely a key element of our integrated operations and we have, by doing that, saved customers money by optimizing the available assets. 717 MR. FRANK: The question is whether you were able to do that and you were able to do that; correct? Even though the northern TCPL FT was not included in the vertical slice for November 1, 2000; correct? 718 MR. SIMPSON: If your question is were we able to do diversions without it being in the slice, absolutely we were able to do that. 719 MR. FRANK: Okay, and the same thing for November 1, 2001; correct? 720 MR. SIMPSON: That's correct. And again, the vertical slice is an allocation methodology. If in theory no customers migrated to direct purchase -- so we had to allocate absolutely nothing, we would operate our system as best we can on an integrated basis for the benefit of all customers. 721 And what the vertical slice in November 2002 is taking into account is that those diversions are representing a significant portion. And even though, on an integrated basis, it's northern capacity serving southern customers, we felt it was important to bring it forward for inclusion this year, because, again, stepping away from a contractual outlook on the portfolio and thinking of it on an integrated basis, it represented a significant portion. 722 MR. FRANK: The evidence -- pre-filed evidence suggests that if the northern TCPL FT was not included in the vertical slice, they will lead to unabsorbed demand charges; correct? 723 MR. SIMPSON: What is your point of reference? I'm sorry? 724 MR. FRANK: The evidence -- 725 MR. SIMPSON: What page. 726 MR. FRANK: You want me to take you to it directly? 727 MR. SIMPSON: Yeah, please. 728 MR. FRANK: You can go to tab 4, Exhibit C.5.2. 729 MR. SOMMERVILLE: Sorry Mr. Frank, could you repeat that reference please? 730 MR. FRANK: Tab 4 of my reference materials. Exhibit C.5.2, answer to question C and I'm just looking at the end of the first page, page 1, and we've heard you say "Union's management of the capacity in this fashion would be diverting to the south is the basis upon which Union has been able to optimize the load factor in the north", and then it states, "to cease operating in this fashion and to replace the north diverted volumes with incremental south delivered supplied will lead to stranded pipeline demand charges in the north." 731 And my question is, there's nothing to prevent Union from attempting to sell that northern TCPL FT on the secondary market in order to avoid or at least mitigate any potential UDC charges; correct? 732 MR. SIMPSON: Well, I really wish to step back from that comment, and suggest that the vertical slice that we've presented has been constructed with fully integrated operations in mind. It's been constructed with complying with the Board's decision to minimize or reduce stranded cost and by operating in the fashion we have, we have done that to a full degree. 733 To depart from that, which is the tone that I believe in question is outlining, while possible, is something that I think would be a step backwards in terms of operating in an integrated fashion. 734 We did go, as you can see in part E of this interrogatory that was referenced, C.1.18 or Exhibit C.1.18. Without turning to it, it is an interrogatory that we did put in a great amount of detail to a Board staff question to outline exactly why this is possible and why it makes sense to operate on an integrated fashion. 735 So I would not suggest that we depart from fully integrated operation. 736 MR. FRANK: But I understood your answer to be that, of course, there's nothing preventing from Union from going to the secondary market to avoid or mitigate any potential UDC charges? Without commenting on whether you think it makes sense -- 737 MR. SIMPSON: Again, this transport capacity into the northern delivery area, and this example is needed during peak conditions, so it is not up for selling in terms of capturing any sort of value. It is required, without question, to serve our firm demands in peak conditions. 738 And our ability to optimized it is simply by filling in in those non-peak conditions during the remainder of the year. And in that case, we incur no unabsorbed demand charges, no market cost recovery reduction of the cost of that transport. 739 MR. FRANK: We're working, here, sir, on the assumption that, according to your evidence or the evidence supplied by Union, that there would be stranded pipeline demand charges in the north if Union ceased operating in the fashion that it's operating now; correct? That's what it states -- 740 MR. SIMPSON: That's right. 741 MR. FRANK: At C.5.2, and the question is assuming that, because that's Union's evidence that there would be stranded pipeline charges, isn't it true that Union could then take steps to avoid or mitigate those? 742 MR. SIMPSON: Well, I think whenever there's a case that Union's faced with regarding diversions or vertical slice or anything, our efforts are to mitigate costs. 743 MR. FRANK: And you would agree that at any given time a secondary market could be above or below tariff, could it not, obviously. 744 MR. SIMPSON: Again, I'll bring everybody back to how theses assets are used to answer that question. These will be used in peak conditions. So in non-peak conditions, and to no surprise, one would find that the market puts very little value on non-peak condition assets, although there would be an ability to mitigate costs, the market value would be rather minimal and avoiding any cost reduction -- recovery reduction at all is what we've suggested is the best formula, and that is to divert the gas to Parkway to be used by southern sales customers and during peak conditions leave it in the north, and there is absolutely no unabsorbed demand charge, whether it be full, partial, or minimal toll that isn't recovered. 745 MR. FRANK: Well, for the UDC cost to occur, there would have to be a net loss of system customers to direct purchase; correct? 746 MR. SIMPSON: I don't follow that question. 747 MR. FRANK: Well, the assumption here is that there's transport that isn't being used; correct? 748 MR. SIMPSON: No, today -- today we use all of that transport. That's my point, whether it be peak day for the north or non-peak conditions for the south, we use that transport that was put into the vertical slice 365 days a year. That's why it's a key component of the vertical slice. 749 MR. FRANK: But, again, sir, we're working on the assumption here that Union or the Board does not allow Union to divert or continue in this fashion with respect to the vertical slice; correct? 750 Now, in that case the evidence -- 751 MR. SIMPSON: Well, can I pause. I think that was a question. The issue is not necessarily we divert or don't divert, this issue appears to be whether that is included in the vertical slice. 752 MR. FRANK: And the evidence seems to be that if you -- or is that if it's not included in the vertical slice, it will lead to stranded pipeline demand charges. 753 MR. SIMPSON: No, the evidence says to cease operating in this fashion. 754 So the point I'm trying to make is that if one were to leap to a non-optimal solution and suggest that we take three steps back in time and draw a wall between old Centra and old Union, that you would have excess assets in the north that would not have an integrated ability to mesh with the south sales customers. 755 So in that case, there could very well be stranded cost but -- sorry, just to finish, what we have brought forward is to work very much on a meshed integrated operational basis to the benefit of all customers. I believe this is a benefit to direct purchase customers to the south, because we will manage this such that they can have arrangements at Empress 365 days a year, and north customers will not have stranded cost, because we will be diverting it to Parkway, so the tolls will be fully recovered. 756 MR. FRANK: Your comment earlier, though, was that on the secondary market you said that the value would be minimal. In fact, in the present market isn't it the case, given the net gain -- or the net return or the unusual return to system of direct purchase customers as a result of Bill 58, that that is causing Union to be short on transportation? 757 MR. SIMPSON: Well, forgive me, but you'll have to break that question down into a couple parts, because we started off with market value and ended with Bill 58. So what was your specific question. 758 MR. FRANK: Well, the question is: Isn't it the case that Union, as a result of the unusual return to system, is short on transportation? 759 MR. SIMPSON: Regardless of Bill 58, I elaborated earlier on there is always activity on a monthly basis that will take customers from sales to direct purchase or direct purchase to sales. Bill 58 is a catalyst that has resulted in some customers returning to system service, so the marketers or their customers have elected to come back to Union's service. 760 And as they do, we manage that, and on a prospective basis, we will plan for that. And to take to the second part of the question, to suggest that we will have a transport shortfall, again, Union manages the entire portfolio to service sales customers both on a projected basis for November 1st, as well as an intra-year basis, regardless of the time or the activity that's taking place in the direct purchase community. 761 MR. FRANK: Well, if there's a net return of direct purchase customers, Union has to -- or may have to go and get transportation for those; correct? 762 MR. SIMPSON: May or may not. Again, I'm not going to prejudge what tools Union will use to accommodate the return to system of some customers. Transportation is an option. Purchasing gas is an option. Utilizing storage is an option, and there's probably several other I haven't remembered at the moment. 763 MR. FRANK: If I could just have a moment, Mr. Chair. 764 MR. SOMMERVILLE: Take your time, Mr. Frank. 765 MR. FRANK: I believe your evidence was that the net impact of including the northern TCPL FT on direct purchase customers is that there isn't, in fact, and you said in fact a benefit because it allowed a direct purchase customers to make firm arrangements to supply gas at Empress; correct? Do you recall stating that? 766 MR. SIMPSON: If we're back to the vertical slice for this November '02 and the functionality of diversions; is that your question? 767 MR. FRANK: No, the question -- you made a statement -- you were asked how non-assignability affected a direct purchase customers, and you said that there was no impact -- there isn't an impact, and in fact, there's a benefit, because it allows those customers to make firm arrangements to supply gas at Empress? 768 MR. SIMPSON: Correct. 769 MR. FRANK: Well, if those customers did not have this transportation included in the vertical slice, they would have the benefit of making arrangements to supply their gas anywhere they wanted; correct? 770 MR. SIMPSON: Absolutely not. The vertical slice is an allocation of upstream assets that we use to serve our sales customers in the south, and on many occasions, I've noted the role that the FT from the north plays in that upstream port folio. 771 To exclude them would simply result in the other upstream transportation components taking on a larger percentage. However, we are dealing with, at this point, hypotheticals in my opinion, because the mandate of the vertical slice allocation methodology was to allocate upstream transport that is used to service sales customers in the south. That's why it's included. 772 MR. FRANK: Well, you stated earlier that, for example, some of the balance of the portfolio has been expired in one year, so if there was a greater percentage of that included in the vertical slice, then that would give greater flexibility to the direct purchase customers sooner, for example, particularly, given that there's no assignability or turn-back within TCPL FT. 773 MR. SIMPSON: We're bouncing around a little bit in terms of discussing flexibility, so I'll say again, within the slice, vertical slice that's been in place since November 1st of 2002 is firm transport arrangement at Empress that sales customer migrating to direct purchase have been taking. They will provide 365 days evenly volumes at Empress. 774 In comparison, a component of the vertical slice, as well in place since November 1, 2002, is Trunkline capacity. That Trunkline capacity actually has an end date. It is not what I call a renewal provision, so is it does expire. There is not an option for Union to continue on with that arrangement, so it expires, and future negotiations will need to take place. 775 But as it expires, as a customer that has gone direct purchase has taken some of that capacity, that arrangement also expires, so their obligation will then be 365 days a year to provide supply in that percentage at Union's delivery point. 776 We should not confuse a contract on Trunkline and its expiry on October 31st, and the function that it plays, with the role on an integrated basis that diversions play on northern peak days and southern sales volumes on an annual basis. 777 MR. FRANK: That wasn't the question. The question was whether in terms of flexibility for the direct purchase customers if a percentage of the vertical slice includes either spot gas, for example, or transportation back supply that expires at a certain time or has turn-back rights, that direct purchase customer has flexibility with respect to those volumes immediately for spot gas; correct? 778 MR. SIMPSON: I'm sorry, I'm just having trouble following your question. If you're trying to suggest that a direct purchase customer has some options, or that they could choose, that is not what the Board approved as an allocation methodology. That was an option brought forward by an interested party, but that was not the ultimate Board-approved allocation methodology. 779 MR. FRANK: Well, let me put it this way. Let's assume the portfolio includes some Trunkline, as you stated. Direct purchase customer gets a portion of that, and that expires. At that point, I believe you stated that there is flexibility for the direct purchase customer to do as it pleases with regard to supply of that volume; correct? 780 MR. SIMPSON: That's correct. And if I may -- 781 MR. FRANK: And for the TCPL FT -- 782 MR. SIMPSON: -- sorry, if I may just finish, with the Trunkline example, two important points to remember. That capacity is assigned to the direct purchase customer. It does not serve a dual, integrated benefit similar to the northern capacity. So Trunkline capacity from the Gulf of Mexico, since November of '01 and in November or '02, is assigned to the direct purchase customer. So it becomes their choice, given, the second point is, the contract does expire. 783 MR. FRANK: And TCPL FT does not give that flexibility; correct? 784 MR. SIMPSON: That's correct. The TCPL capacity in the north is not been assigned, for reason I've described, to operate on an integrated fashion, and it does not have the same end date or termination date as the Trunkline example. 785 MR. FRANK: I have nothing further. Thank you. 786 MR. SOMMERVILLE: Thank you, Mr. Frank. 787 I was going to take a break now. Ms. Bodnar, do you have questions for these witnesses? 788 MS. BODNAR: No questions, thank you. 789 MR. SOMMERVILLE: Ms. Young. 790 MS. YOUNG: No questions, thank you. 791 MR. SOMMERVILLE: Mr. Haynal. 792 MR. HAYNAL: I may have some questions, but I don't think it's worth to hold the panel up for those. I can get those questions satisfied if I just approach Mr. Simpson. 793 MR. SOMMERVILLE: That's a choice that you can make. If you want to place your questions now, you are entitled to do so and you have this opportunity. 794 MR. HAYNAL: If I may ask the questions, then I'll proceed. 795 MR. SOMMERVILLE: Please, Mr. Hanal. 796 CROSS-EXAMINATION BY MR. HAYNAL: 797 MR. HAYNAL: Mr. Simpson, am I right that the eastern area is along the TransCanada Pipeline, let's say between Port Hope and Cornwall? 798 MR. SIMPSON: Yes, roughly speaking. As I pointed to earlier, and just for the Board's benefit, in speaking to the eastern area we are talking about Eastern Ontario which is again part of our northern and eastern operations area served largely off of the TransCanada Pipelines system. 799 MR. HAYNAL: And then what is the gas supply portfolio to the customers in the eastern operational area? 800 MR. SIMPSON: Similar to all of the northern and eastern operations area, there would be a significant component of TransCanada FT capacity as well as supplementary services like TransCanada's STS service, which is a service that provides ability to get gas to and from storage location. 801 MR. HAYNAL: Is there any vertical slice arrangement for the cosmetics in the eastern operational area? 802 MR. SIMPSON: No. The vertical slice I alluded to in my opening is for southern sales operations customers. So customers in our northern and eastern operations areas migrating from sales service to direct purchase would get an allocation of 100 per cent TransCanada capacity. 803 MR. HAYNAL: Thank you, very much. 804 Mr. Chairman, these were my questions. 805 MR. SOMMERVILLE: Thank you, Mr. Hanal. Mr. DeRose. 806 MR. DEROSE: I have no questions for this panel. 807 MR. SOMMERVILLE: Mr. Warren, I take it that your geographic position indicates your interest in asking questions at this point. 808 MR. WARREN: It's a reasonable conclusion, sir. 809 MR. SOMMERVILLE: I had indicated that the Board would deal definitively with the question of the argument schedule, but it seems to me that the best way to go about this is probably through Board staff to have discussion this afternoon among the parties. The Board certainly has some dates in mind, but we'll put those to the parties through Board staff, and allow that discussion to occur and we can deal with it first thing tomorrow morning. It seems to me that that may be the best way, and of course we'll receive any submission on that tomorrow morning. 810 Mr. Moran, do you have any questions of this panel? 811 MR. MORAN: No, sir. 812 MR. SOMMERVILLE: None from the Board. 813 Any redirect Mr. Penny? 814 RE-EXAMINATION BY MR. PENNY: 815 MR. PENNY: Just two questions purely for factual clarification. Mr. Simpson, the first is: Notwithstanding where the gas that flows on the northern TCPL is delivered, is that northern supply flowing 365 days of the year? 816 MR. SIMPSON: Yes, it is. 817 MR. PENNY: And just a second factual clarification, on a peak day in the north, when all the northern TCPL capacity is being used to serve the north, how do you get the molecules -- how do you get -- physically get the molecules to the southern direct purchase customer who would otherwise be being partially served by those northern diversions? 818 MR. SIMPSON: To best answer that, you really have to colour code a molecule for a minute and on a peak day condition when all of our northern pipe is required in the north, whether we're filling as Union the gas -- or the pipe at Empress or the direct purchase customer that's gotten some of the vertical slices filling at Empress, that colour-coded molecule is destined for the north. 819 So to ensure that the bundled direct purchase arrangement accommodates that physical reality, it would merely be a molecule that was delivered on a different day that was effectively transferred at Dawn into their bundled account, so it is recognized as being received by Union. 820 MR. PENNY: But where are you physically getting the gas on the date that you need it. Is it from storage at Dawn? 821 MR. SIMPSON: Correct. 822 MR. PENNY: All right. Thank you. Those are all my questions. 823 MR. SOMMERVILLE: We will adjourn until 9:30 tomorrow morning. Without further ado. Thank you. 824 --- Whereupon the hearing adjourned at 12:42 p.m.