Rep: OEB Doc: 12N9N Rev: 0 ONTARIO ENERGY BOARD Volume: 2 25 FEBRUARY 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER F. PETERS MEMBER 1 RP-2002-0130 TRANSCRIPT VOLUME #2 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 #2 4 25 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 THOMAS ADAMS Energy Probe BRIAN DINGWALL HVAC Coalition RICHARD KING Tractebel Power VALERIE YOUNG OAPPA BARBARA BODNAR Enbridge Gas 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [15] UNION GAS - PANEL 3 [28] EXAMINATION BY MR. PENNY: [31] CROSS-EXAMINATION BY MR. JANIGAN: [219] CROSS-EXAMINATION BY MR. DeROSE: [742] CROSS-EXAMINATION BY MR. AIKEN: [778] CROSS-EXAMINATION BY MR. HAYNAL: [995] CROSS-EXAMINATION BY MR. WARREN: [1072] CROSS-EXAMINATION BY MR. RYDER: [1169] CROSS-EXAMINATION BY MR. MORAN: [1448] RE-EXAMINATION BY MR. PENNY: [1556] 10 EXHIBITS 11 EXHIBIT NO. F.2.1: PANEL 3 - EXAMINATION PACKAGE [35] EXHIBIT NO. F.2.2: BOOK OF MATERIALS FOR CROSS-EXAMINATION BY VECC [300] EXHIBIT NO. F.2.3: EXCERPT FROM TRANSCRIPT FROM RP-1999-0017 PROCEEDING [683] EXHIBIT NO. F.2.4: REFERENCE MATERIALS FOR CROSS-EXAMINATION FILED BY LONDON PROPERTY MANAGEMENT ASSOCIATION [848] 12 UNDERTAKINGS 13 UNDERTAKING NO. G.2.1: LETTERS SENT TO Union BY CUSTOMERS [748] UNDERTAKING NO. G.2.2: TO ADD A COLUMN TO SCHEDULE 1 of EXHIBIT B, TAB9, AND PAGE 2 OF EXHIBIT C.4.47, THAT SHOWS A NET IMPACT THAT WOULD BE EMBEDDED IN RATES UNDER THE TWO DIFFERENT APPROACHES AND TO BREAK THE M-5, M-7 AND T-1 RATE CLASSES INTO FIRM AND INTERRUPTIBLE COMPONENTS [825] UNDERTAKING NO. G.2.3: TO PROVIDE UNION'S COST RECOVERY PLAN [845] UNDERTAKING NO. G.2.4: TO PROVIDE AN ESTIMATE OF WHAT THE ANNUAL IMPACT OF UNION'S PROPOSAL IN DOLLARS IS ON EACH OF AN AVERAGE-SIZED RESIDENTIAL, COMMERCIAL, AND INDUSTRIAL CUSTOMER SERVED UNDER THE M-2 RATE CLASS [895] UNDERTAKING NO. G.2.5: TO PROVIDE THE APPROXIMATE DELIVERY MARGIN TO Union ON THE 600 10 3 M 3 OF INTERRUPTIBLE GAS [907] UNDERTAKING NO. G.2.6: TO PROVIDE STATUS OF SECOND LOOP SECTION [1010] UNDERTAKING G.2.7: TO PROVIDE THE M-12 TRANSPORTATION REQUIREMENTS FOR 2002/2003 OR FOR 2003/2004 [1039] UNDERTAKING NO. G.2.8: THE REVENUE TO COST RATIO RESULTING FROM THE APPLICATION OF THE INTERVENORS' POSITION [1295] 14 --- On commencing at 9:31 a.m. 15 PRELIMINARY MATTERS: 16 MR. SOMMERVILLE: Thank you, please be seated. 17 This is the second day of proceeding in the customer review process arising from the PBR plan approved in the 0017 rate case. 18 My understanding is that there have been some discussions between the parties with respect to a schedule for argument, which has resulted in a consensus that a schedule that would have the applicants' argument in chief due on the 6th of March, the intervenors' argument due on the 14th, and the reply argument from the applicant due on the 14th of March, that that is a workable schedule -- I beg your pardon, 11th for the intervenors and 14th for the reply argument; I beg your pardon. So that's the 6th, 11th and 14th. Is that an accurate reflection of the consensus of the parties on that subject? 19 MR. PENNY: That's my understanding, Mr. Chairman. Mr. Moran went around and did the canvass. Perhaps he could speak to that. 20 MR. MORAN: That's correct. 21 MR. SOMMERVILLE: We will go forward on that basis. For administrative clarity, we will consider five o'clock on each of those days to be the effective deadline for delivery. 22 Are there any preliminary matters for this morning? Mr. Penny, do you have any? 23 MR. PENNY: Mr. Chairman, the transcript undertakings from yesterday are not quite ready, but they will be ready by mid-morning, so we will be able to pass those out after the break. 24 MR. SOMMERVILLE: Thank you for that. 25 Any other preliminary matters? 26 In which case Mr. Penny, are you prepared to proceed with the third panel? 27 MR. PENNY: Yes, this is the third panel, which will consist of Mr. Kitchen and Ms. VanderPaelt. They will be speaking to the DCC issue, as well as the various Kitchener issues that were remaining from -- so if they could come forward to be sworn. 28 UNION GAS - PANEL 3 29 M.KITCHEN; Sworn. 30 S.VANDERPAELT; Sworn. 31 EXAMINATION BY MR. PENNY: 32 MR. PENNY: Now, Mr. Chairman, as I indicated the other day that the witnesses would be in a position to provide a certain amount of overview of the operation of Union's system, because both the vertical slice issue and, frankly, the DCC issue involve -- require an understanding of how Union's system operates. 33 And so I've provided by, in e-mail form to the parties last evening and then in hard copy this morning, a small package of material that consists of a map of Union's southern operations area, a design day flow diagram, a two-page table, and then two graphs, and the witnesses will be speaking to those -- to those matters. If that could be marked as the next exhibit, which I think would be F.2.1. 34 MR. MORAN: That's correct, Mr. Chair; F.2.1. 35 EXHIBIT NO. F.2.1: PANEL 3 - EXAMINATION PACKAGE 36 MR. SOMMERVILLE: The Board has that material. 37 MR. PENNY: Ms. VanderPaelt, let me start with you. You're currently, as I understand it, the manager of product and service development for Union Gas Ltd.? 38 MS. VANDERPAELT: That's correct. 39 MR. PENNY: You've been with Union Gas since 1991? 40 MS. VANDERPAELT: Yes. 41 MR. PENNY: And you've held a variety of positions, including positions in cost allocation and rate design, and also in gas supply nominations -- S&T nominations and gas delivery products and services. 42 MS. VANDERPAELT: Yes, that's correct. 43 MR. PENNY: I understand that you're a Certified General Accountant? 44 MS. VANDERPAELT: Yes. 45 MR. PENNY: You have a Masters of Business Administration and a Bachelor of Commerce? 46 MS. VANDERPAELT: That's correct. 47 MR. PENNY: You've previously testified before this Board in RP-1999-0017 and in 0493-04. 48 MS. VANDERPAELT: That's correct. 49 MR. PENNY: Mr. Kitchen, I gather that you are currently the manager of rates and pricing for Union Gas Limited? 50 MR. KITCHEN: Yes, that's correct. 51 MR. PENNY: You've been with Union Gas since 1993? 52 MR. KITCHEN: Yes. 53 MR. PENNY: And over the course of your employment you've held positions in gas supply planning, cost of service analysis, and product and service costing? 54 MR. KITCHEN: Yes. 55 MR. PENNY: You, previous to working -- I see previous to working with Union were also an employee at one time of Consumers Gas? 56 MR. KITCHEN: Yes. 57 MR. PENNY: And you worked there in the field of gas sales revenue and gas costs? 58 MR. KITCHEN: Yes. 59 MR. PENNY: And I understand you have auto Masters in Economics from the University of Waterloo? 60 MR. KITCHEN: Yes, that's correct. 61 MR. PENNY: And also a Bachelor of Arts in Economics from the University of Waterloo? 62 MR. KITCHEN: Yes, I do. 63 MR. PENNY: And you have previously testified before the New York State Public Service Commission, and as well the Ontario Energy Board, most recently in RP-2001-0029? 64 MR. KITCHEN: Yes. 65 MR. PENNY: Than you. 66 Ms. VanderPaelt, Mr. Kitchen, could you confirm that the evidence that has been prepared in the proceedings that relates to the issues that panel 3 is dealing with were prepared by you and/or under your supervision? 67 MR. KITCHEN: Yes, they were. 68 MS. VANDERPAELT: That's correct. 69 MR. PENNY: Do you adopt that evidence for the purposes of these proceedings? 70 MR. KITCHEN: Yes. 71 MS. VANDERPAELT: Yes, I do. 72 MR. PENNY: Mr. Kitchen, turning to the Exhibit F.2.1 and the map, I wonder if you could begin with an overview description of Union's storage and transmission facilities in the southern operations area and how they work and how they are designed. 73 MR. KITCHEN: The map in your package provides, basically, a schematic of Union's key assets with respect to storage and transmission. 74 You can see at the west end of the Union system between Sarnia and Chatham, we have the Dawn facility, and it's at Dawn that Union interconnects with upstream pipelines from TransCanada as well as Vector, and it's also where Union interconnects with its own storage facilities and the storage facilities of Enbridge Consumers Gas. 75 Leaving Dawn and heading easterly towards Mississauga is the Dawn-Trafalgar Pipeline. It's a transmission facility that runs approximately 230 kilometers, and off that transmission -- off the Dawn-Trafalgar transmission facility are a number of pipeline laterals which are used to serve Union's in-franchise distribution requirement demands, and also meet the demands of ex-franchise customers. 76 Along the Dawn-Trafalgar, Union interconnects with TCPL at Kirkwall, which is approximately 190 kilometers along the length of the pipeline, and also at Parkway with Enbridge Consumers Gas and TCPL. 77 MR. PENNY: Who are principally the ex-franchise customers that utilize your transmission facility? 78 MR. KITCHEN: When I refer to ex-franchise customers I'm referring to M-12 shippers, that would be Enbridge, TCPL, GMI, St. Lawrence. Those are the major shippers and also some C-1 shippers that would ship cross franchise. 79 MR. PENNY: How does Union meet its operational and contractual requirements using these facilities? 80 MR. KITCHEN: If you would turn now to -- let me change -- if you turn to the design day flow diagram, Union's facilities are sized, designed to meet all of its firm demands both in-franchise and ex-franchise under design day conditions, and Union's rates -- 81 MR. PENNY: Perhaps you can explain what design day conditions are. 82 MR. KITCHEN: Union's rates are in turn -- also reflect those design day conditions. 83 Design day assumes that Union is experiencing a 44 degree day, and that all of its firm obligations are at its maximum. It also assumes that on design day, the loads of interruptible customers would be curtailed. 84 So on a physical basis, on design day, gas arriving at the west end of Union's system at Dawn via upstream transport and also the gas being withdrawn from storage, from both Union's storage and Tecumseh storage move easterly along the Dawn-Trafalgar to meet the demands of Union's in-franchise customers, the demands of ex-franchise customers at Kirkwall, and a portion of the demands at the east end of the system related to ex-franchise customers as well as Union's northern and eastern operations area. 85 So on the schematic, that flow from Dawn is represented by the red arrow, and there's approximately 4.9 million GJs flowing out of Dawn on design day, and that means 1.6 million GJs of in-franchise demand, 1.6 million of ex-franchise demand at Kirkwall which leaves the system, and then 1.7 of the demands at the east end of the system. 86 If you notice, the demands actually at the east end of the system are higher than the 1.7 that is showing up there and shipped on the Dawn-Trafalgar. 87 On design day, Union also expects that there will be deliveries arriving at Parkway, and those deliveries are composed of Union's firm -- firm deliveries, as well as the obligated deliveries of direct purchase customers. 88 In addition to those requirements at Parkway, this schematic shows an additional requirement of 100,000 GJs of a facilities options such as winter peaking service. Those supplies, along with winter peaking service, go to meet the demands of ex-franchise -- the remaining demands of the ex-franchise markets at Parkway. 89 If Union did not have the deliveries showing up at Parkway on design day, in order to meet those demands, the number -- the volume that is shipped from Dawn, that 4.9 million, would have to increase, and the only way to allow for that increase would be to increase the facilities along the Dawn-Trafalgar, and that would result in higher rates for all in-franchise and ex-franchise customers. 90 MR. PENNY: When you say they would have to increase, they would have to increase by the amount of the -- of the Parkway deliveries? 91 MR. KITCHEN: Yes, they would have to increase enough to make -- to meet whatever demands are required to replace those demands, essentially, at Parkway. 92 MR. PENNY: All right. So what, then, does that mean for customers in terms of the delivery rates that they pay, in-franchise customers? 93 MR. KITCHEN: As I said, the fact that we can rely on deliveries at the east end of the system means that the facility's requirements are less than they otherwise would be. 94 In addition to that, Union recognizes in its rate design and cost allocation the benefits of east end deliveries in terms of the rates that in-franchise customers pay. And how we do that is that the costs related to Dawn-Trafalgar transmission are allocated between in-franchise and ex-franchise customers based on the distance weighted design day demand, and what distance weighted design day demand means is that we weight the demands at each of the laterals that I talked to on the first slide by the distance that the gas actually has the travel. 95 So to the extent that we have deliveries arriving at the east end, the distance that the gas flows is measured from Parkway westerly back to the lateral, which is a shorter distance than the gas would have to flow from Dawn. 96 In essence, then, the in-franchise customers receive a distance credit, and that was last reviewed, I believe, in 49394, and the distance credit itself is fairly significant in EBRO-499 rates, even though in-franchise customers account for approximately 28 to 30 per cent of the demands on the Dawn-Trafalgar, they're only allocated 12 per cent of the costs. 97 The ex-franchise rates are deemed to -- even though the demand or the supplies at Parkway are used to meet ex-franchise demands, the in-franchise demands are deemed to go the entire distance of the Dawn-Trafalgar. 98 MR. PENNY: You meant the ex-franchise rather? 99 MR. KITCHEN: Sorry, the ex-franchise demands. 100 MR. PENNY: All right. Then with that background, Mr. Kitchen, how does this relate to the current DCC mechanism by which customers receive payment in respect of those obligated deliveries? 101 MR. KITCHEN: The current DCC mechanism was established in EBRO-499 in response to a Board's direction to examine payments made in respect of obligated deliveries. 102 That methodology is based on an avoided cost of facilities, and the avoided cost of facilities, the facilities that I've talked about, they're avoided by having east end deliveries. We've calculated -- 103 MR. PENNY: Just so we're clear about that, the avoided cost of facilities -- let's be very clear about this, are what facilities and what cost? 104 MR. KITCHEN: Those are avoided transmission -- Dawn-Trafalgar transmission facilities, as well as the avoided storage facilities that result from obligated deliveries at Dawn as well. 105 MR. PENNY: What are the nature of the avoided costs? 106 MR. KITCHEN: The avoided costs are -- the avoided costs are costs that are facilities costs that are not required, because we have the obligated deliveries showing up at Parkway. 107 MR. PENNY: Okay. Thank you. 108 MR. KITCHEN: The calculation of the avoided cost is based on the embedded cost of Union's storage and Union's transmission as represented by the M-12 rates. That generated approximately $27 million dollars in costs which were recovered and allocated from in-franchise customers based on design day demand consistent with how those facilities would be allocated had the facilities been in place to meet those -- to replace those east end requirements. 109 MR. PENNY: Now, you mentioned EBRO-499. Are there prior Board decisions that was had an impact on the development of the [indiscernible]. 110 MR. KITCHEN: DCC and obligated deliveries and delivery points have been the subject of a number of hearings. There is a summary in Exhibit B, tab 9, appendix A, but just to be helpful, I think it might be worthwhile to talk a bit about some of those decisions. 111 In the late '80s with the development of direct purchase market Union raised concerns around system integrity as it related to its ability to rely on deliveries at its east end, and at that point, Union proposed to mandate -- contractually mandate the deliveries of direct purchase customers at a particular delivery point. 112 The Board found in that case -- and that was EBRO-412 -- that Union could not contractually mandate a delivery point and that the delivery point itself was a matter of negotiation between the customer and the LDC. 113 The reason that the Board cited for this finding was that they were concerned about the development of competitive supply options into Ontario. If Union mandated a delivery point, then it would basically limit any development of other delivery options into Ontario, such as delivery options into Dawn. 114 In EBRO-4123, the Board reaffirmed that -- its prior decisions with respect to delivery point, but, in that hearing, established buy/sell pricing mechanism. It recognized that customers that obligate their deliveries pay the weighted average cost of Union's firm supplies, which was at that time a premium to the weighted average cost of all supplies, which was paid to unobligated customers. 115 So at that point, the -- the financial recognition of the delivery commitment was a -- was recognized, and that was later extended to bundle T-service customers in order to ensure there was quality between the services -- between the direct purchase options. 116 That methodology for determining the DCC was essentially in effect until EBRO-493-94, at which point the Board found that the appropriate buy/sell pricing mechanism for all customers would be the Alberta border price. That effectively eliminated the means by which Union had calculated the DCC in the past, and in response to that Union brought forward a proposal to continue to pay the DCC based on -- based on what had been paid to -- what was being paid to bundled D- and T-service customers. 117 In that decision, although the Board changed the methodology, there was no indication that the requirements of prior decisions were no longer valid and that still the delivery point obligation was still a matter of negotiation between the utility and the customer. 118 In 49 -- when we brought forward the proposal to pay the DCC to buy/sell customers and essentially maintain the quality between the direct purchase options, the Board directed Union at that point to bring forward in its next case evidence that would -- evidence to the nature of payments for obligated deliveries and Union did that in EBRO-499 and which established the current mechanism. 119 MR. PENNY: All right. 120 Now then, in Union's last case, 0029, the Board concluded that the settlement agreement from the 17 case was ambiguous on the question of what revenue neutrality meant as a means of eliminating the delivery commitment credit and directed Union to -- because that controversy arose around what the meaning -- what had been agreed to, the Board directed Union to come forward with more evidence on how the delivery commitment credit should be eliminated. 121 So what is Union's proposal now with respect to the elimination of the DCC? 122 MR. KITCHEN: Union's -- Union is proposing to eliminate the DCC payment and the related recovery from delivery rates, such that the impact on individual customers pre and post DCC elimination is minimized. 123 Union's approach will recognize that there is a continued benefit of having the obligated delivery at Parkway, and essentially eliminate the need to have a system whereby we collect in delivery rates a -- the avoided cost and then turn around and payout the DCC as a payment to customers. 124 In terms of the contractual obligations or the obligations of Parkway, those would remain with Union's proposal. 125 MR. PENNY: Now, can you describe the essence of the difference between Union's proposal and the -- and the approach of some of the intervenors at this point. 126 MR. KITCHEN: I think the essence of the differences is that Union will continue to recognize the benefit provided by obligated deliveries, whereas the alternative proposals recognize only the elimination of the avoided cost. And the outcome of that is that customers who are -- who have benefitted most from the avoided cost in the form of lower delivery rates overall end of getting a larger benefit as a result of a DCC elimination than the benefit they are providing the system through their own obligated deliveries. And the opposite is true for customers that are net providers of the benefit through their obligated deliveries; they would see the rate decrease -- less than the benefit that they provide. 127 MR. PENNY: Now, you indicated in that answer that -- I think it was implicit in that answer, at least, that the proposals being brought forward by some intervenors will result in net increases to the delivery bills of customers. 128 MR. KITCHEN: Yes. 129 MR. PENNY: As opposed an equal impact pre- and post-elimination of the DCC. 130 Are those impacts provided as part of your evidence? 131 MR. KITCHEN: Yes, those are provided at Exhibit B, tab 9, schedule 2, and it might be useful just to turn that up. 132 MR. PENNY: That was Exhibit B, tab 9, schedule 2. 133 MR. KITCHEN: Schedule 2. 134 The title of the schedule is, "Rate impacts of eliminating the DCC based on cost." And in that column F, you can see the impact of eliminating the DCC based on cost, and there's a significant increase in the net delivery bill for contract customers, who would typically provide a larger net benefit to the system than they consume. 135 MR. PENNY: Sir, just so I'm clear, when you say the title of this is, "Rate impact of eliminating the DCC based on costs," which proposal -- which proposal is this reflecting? The Union proposal or the intervenor proposal? 136 MR. KITCHEN: That's the intervenor proposal. 137 MR. PENNY: All right. Thank you. 138 MR. KITCHEN: So you can see that in column F the impact on M-7 customers is approximately 36 per cent, and T-1, 49 per cent. Whereas under the intervenors' proposal, M-2, M-9, and M-10 would see net decreases. 139 MR. PENNY: And under the Union proposal, the comparable numbers would be floating somewhere around zero? 140 MR. KITCHEN: Yes. 141 MR. PENNY: All right. Now, have you broken down that -- this, of course, shows global percentages. Have you broken down the impact of eliminating the DCC, on the basis of cost only, into any further detail? 142 MR. KITCHEN: Yes, in the package I've provided a table for M-7 and T-1 that shows the impact on individual customers, assuming an elimination of the DCC based on cost. 143 MR. PENNY: Just so we all know what we're talking about, rate M-7 are what type of customer and rate T-1? 144 MR. KITCHEN: Rate M-7 is large, bundled customers that are typically large industrials, such as chemical plants, steel mills, etcetera. T-1 customers are also typically large, although there are also some smaller customers in that class. 145 MR. PENNY: All right. Thank you. 146 So what's shown on estimated impact of DCC elimination based on cost, rate M-7? 147 MR. KITCHEN: The tables demonstrate that there is a significant impact on customers and it's consistent with what was filed on Exhibit B, tab 9, schedule 2. The schedules, actually, are trying to update for some of that information using 2002 actual revenue as the base. So there's a slight difference because of that, but the impacts are significant nonetheless. 148 I think the other thing that it shows is that we have received a number of letters from customers and the numbers quoted by customers and those impacts are consistent with the numbers here. 149 MR. PENNY: So if I understand this correctly, what you've done is list all of the M-7 customers without identifying them? 150 MR. KITCHEN: Yes. 151 MR. PENNY: So these are individual customers? 152 MR. KITCHEN: That's correct. 153 MR. PENNY: And so the -- column F is the net delivery bill that those customers will see if the DCC is eliminated on the basis of the intervenor proposal rather than Union's? 154 MR. KITCHEN: That's right, and column D represents the increase to each of those customers. 155 MR. PENNY: And then can you walk through the second page of that, the comparable table dealing with rate T-1. 156 MR. KITCHEN: The T-1 table has the same format as the M-7 table. The column D provides the increase by customer. Again, the customer names have been eliminated or used with letters to identify them, and their revised delivery bill would appear in column F. 157 MR. PENNY: And you mentioned a moment ago, Mr. Kitchen, that you'd received correspondence from some of these customers. Can you just explain what you meant by that. 158 MR. KITCHEN: A number of customers have sent letters to Union, and I believe copied the Board, suggesting -- or indicating that they support Union in our proposal and that the DCC is an important part of their economics and that the impacts would be significant for these customers. 159 MR. PENNY: All right. Thank you, Mr. Kitchen. 160 Ms. VanderPaelt, if I could just turn to you for a moment. Let's just talk for a moment about how Union ensures the east end obligations that Mr. Kitchen described earlier are met. 161 I understand that following the table that we were just looking at, there are two graphs and that -- looking at the first graph, that this is Union's load duration curve which forecasts loads on the Dawn-Trafalgar system from the coldest to the warmest winter season day. 162 MS. VANDERPAELT: Yes, that's correct. 163 MR. PENNY: Can you please explain what is depict and how it is depicted on this graph. 164 MS. VANDERPAELT: Okay. At the bottom of the graph, we have the number of days in the winter season going from the coldest day being day number 1 and then as weather progressed to a warmer day around day 73. On the other axis you'll see the total daily Dawn-Trafalgar transmission requirements, so this is how much transmission space we need to meet our operational requirements on a peak day. 165 What the diagram is illustrating is illustrating how our load profile moves from a cold day, for example, on day number 1, and our requirements being quite high, to as the solid blue line moves down on the warmer days to day 61, our requirements are quite low. This corresponds with -- we've built our facilities to meet peak day demands, as Mr. Kitchen indicated, and we assume that as the days get warmer the demands on our Dawn-Trafalgar system do reduce but our facilities are built to meet peak day. 166 MR. PENNY: You explained what is depicted by the solid blue line. What is the dotted blue line? 167 MS. VANDERPAELT: The dotted line illustrates what the demands on our system would look like if we did not interrupt our in-franchise customers. 168 MR. PENNY: You mean interruptible customers? 169 MS. VANDERPAELT: Our interruptible in-franchise customers. So if all our interruptible customers were on the system you can see that our transmission requirements would be significantly higher. 170 MR. PENNY: Does this mean that the Dawn-Trafalgar system is designed on the assumption that you will interrupt interruptible customers on peak days? 171 MS. VANDERPAELT: Yes, it is. And that's illustrated by the beginning of the graph, the dark blue line, you'll see it dips significantly to about day 5. Our assumption is that our in-franchise interruptible customers historically are interrupted an average of approximately five days a winter. So if we put that into our planning assumptions for which we use this load duration curve, the line shift from the dotted line to the solid line showing a decrease in the demands on the Dawn-Trafalgar system. Then around day 5 or day 6, we would assume the interruptibles come back onto our system and are consuming so you then see a slight increase in the our requirements on the Dawn-Trafalgar system. 172 MR. PENNY: What is depicted by the red line and the green shaded area? 173 MS. VANDERPAELT: The red line indicates the transmission requirements that are currently being met through facilities or through obligated deliveries at the Parkway end of our system. The green indicates on a planning bases the shortfall between what our facilities and our obligated deliveries provide, and what we would plan as being our peak day, and this is what we use a winter peaking service for, or another term we use is a non-facility option, so essentially we could buy a service which would give us deliveries at the east end to make sure our peak day is met. 174 MR. PENNY: Has Union actually required a non-facilities option in recent years -- in recent past years to fill in that green shaded area. 175 MS. VANDERPAELT: Yes, we have, through the responses to the IRs I believe I indicated the last time we required a winter peaking service was '98, '99. 176 MR. PENNY: '98, '99 and what about the years in between since then? 177 MS. VANDERPAELT: We haven't had a requirement for winter peaking service. 178 MR. PENNY: What would the explanation for that be? 179 MS. VANDERPAELT: We've had warmer than normal winters and we base this -- this is a planning diagram which shows us how much we may require depending on the weather conditions. When we put in what we perceive the weather conditions to be and the corresponding reduction in demands on our system, it would reduce the shortfall, and in warmer than normal winters, we haven't needed to build that excess in. 180 MR. PENNY: Thank you. 181 Now 2 1/2 years ago the intervenors agreed to an arrangement which enabled them at M-12 rates to move 20 per cent of their obligated deliveries from Parkway to Dawn, and that 20 per cent flexibility solution was a three-year arrangement, which I understand expires in October of 2003. 182 Is Union proposing to renew or extend that arrangement? 183 MS. VANDERPAELT: No, we are not proposing to renew or extend that arrangement. 184 MR. PENNY: And why not? 185 MS. VANDERPAELT: Currently, we polled our customers in the fall and late summer to find out what their interest was in continuing that arrangement and the comments we received back from our customers was that the price, which at the current rates was approximately a M-12 toll, did not support the economics for them as business individuals to purchase that service. 186 MR. PENNY: Just dealing with the M-12 toll, what on average is the cost of the M-12 toll to a customer? 187 MS. VANDERPAELT: The average cost was about 9.2 cents Canadian a GJ. 188 MR. PENNY: Are you saying that Union was not prepared to extend this in the absence of a consensus on the part of customers that they wanted it? 189 MS. VANDERPAELT: Yes, we agreed in the original ADR that we would only continue with this service if there was consensus among the parties at the table and through the last customer review process we were not able to achieve consensus. 190 MR. PENNY: All right. Has Union offered other solutions or options to customers with respect to increasing their Dawn delivery flexibility? 191 MS. VANDERPAELT: What we have been proposing to customers is that although it is apparent in a solution for all customers on the system, such as the one that exists today is not appropriate in their view, we are looking at individual customer solutions where if a customer was interested in moving their deliveries, they would pay the costs for whatever they wished to do, so it would be an end user is paying for the obligations resulting from their own actions. 192 MR. PENNY: Perhaps I should have asked you earlier and it may be stating the obvious, but it seems implicit in trying to increase Dawn delivery flexibility options that there's a preference on the part of customers to Dawn deliveries over Parkway deliveries. Can you explain what the dynamic is that underlies that motivation? 193 MS. VANDERPAELT: Customers have found that Dawn is a much more liquid point than Parkway is for doing transactions and we look at the liquid point as being a place where there are multiple transportation options. Parkway, you really only have TransCanada and into the Enbridge system where there's multiple transmission pipes accessing the Dawn facilities. In addition, there's no daily public prices at Parkway. It's only a monthly index, so it's hard to get price transparency at that location. 194 MR. PENNY: All right. Thank you. Diagram 2 then, I understand, shows what level of deliveries you would need to replace that three-year arrangement that we just spoke of in order to maintain an equivalent level of Dawn delivery flexibility? 195 MS. VANDERPAELT: Yes. 196 MR. PENNY: Can you walk us through diagram 2? 197 MS. VANDERPAELT: This is the first diagram with another line added to it. It looks pink or purple, on the colour of your copy. What this illustrates is if customers moved 20 per cent of their obligated deliveries from Parkway to Dawn, and that equates to approximately 160,000 GJs, then we would have a shortfall on our transmission system to meet the peak day requirements. And that shortfall would essentially be the difference from the top of green area to the pink area all the way across to day 53. 198 So if I can show you up here, it's essentially this area in here would need to be filled with a replacement service because you've now moved the deliveries down to Dawn so, when we look at our transmission system, we have a shortfall between our requirements on the system and the gas that's coming in at Parkway which enabled us to meet our peak day obligation. And it carries through. 199 MR. PENNY: And Is the quantity of delivery that's in between the blue and the pink line, is that equivalent to the amount of delivery that was used to provide the Dawn flexibility through that M-12 arrangement that terminates in October of 2003? 200 MS. VANDERPAELT: Yes, it is. We provided a 20 per cent solution for all customers, so this is approximate with that amount. 201 MR. PENNY: Finally, Ms. VanderPaelt, what would the approximated cost be of replacing that wedge of flexibility you were just talking about with a winter peaking service, in other words, a non-facilities option? 202 MS. VANDERPAELT: The difficulty we had with costing out a winter peaking service is once you've moved the service to a 53-day requirement, it really becomes a winter service. Peaking services typically are only called upon for five to ten days and once you move out past that they price it based on you taking the service for the entire winter. The practices we've seen in the past suggested the price has offer hovered around 9 1/2 to 10 cents. I believe in our -- 203 MR. PENNY: For what portion of the -- 204 MS. VANDERPAELT: -- for the winter peaking service. We had required about 50,000 a day in the '98/'99, and those prices were filed as part of the interrogatory responses and that was the cost at that point, but subjecting to the market prices, the availability of the service, and the more winter peaking service, because it is a limited service that you want to purchase on the market, the higher the price tends to go. 205 MR. PENNY: Now, you mentioned 9 cents. Is that for the delivery portion of the service? 206 MS. VANDERPAELT: That's for the delivery portion, yes. 207 MR. PENNY: Do you also -- do you have to have a commodity portion as well? 208 MS. VANDERPAELT: Yes, there's another component on the winter peaking service. The 9 1/2 cents represents the demand charge you would pay in order to procure the service. On the day the supplier actually delivers the gas, you would also have a commodity cost based on the supply in the month that you received the gas on top of that. 209 MR. PENNY: And just by way of example, what was the commodity price that was -- that was applicable, say, in the last few days? 210 MS. VANDERPAELT: In the last few days, the commodity price at Parkway has been between the $20 and $24 U.S. price range. 211 MR. PENNY: And so, in order to get the comparable price for the M-12 solution, would you have to add the $24 to the 9 cents demand charge? 212 MS. VANDERPAELT: No you wouldn't, because what we do in the M-12 solution is we are actually holding the capacity on the pipe as an assignment in-franchise customers, so we physically move, we have the capacity to move their volumes from Dawn to Parkway. With a winter peaking service option, you do not have physical service capacity on the Dawn-Trafalgar system. You are relying on molecules being delivered at Parkway to assist you in meeting those requirements. 213 MR. PENNY: I should just clarify that the unit of measure that we've been talking about for the past few minutes, we're talking in GJs? 214 MS. VANDERPAELT: Yes, we are. 215 MR. PENNY: Those are all my questions, Mr. Chairman. Those are my questions in examination in chief. 216 MR. SOMMERVILLE: Thank you, Mr. Penny. 217 Mr. Janigan. 218 MR. JANIGAN: Thank you, Mr. Chair. 219 CROSS-EXAMINATION BY MR. JANIGAN: 220 MR. JANIGAN: I wonder if you could turn up from Union's own evidence Exhibit B, tab 9, page 9, paragraph 30. 221 MR. KITCHEN: Exhibit B, tab 9? 222 MR. JANIGAN: Tab, 9, page 9, paragraph 30. 223 I thought that provided a good summary of what the DCC was and why it was paid. It indicates that: "The DCC is the payment made to customers managing their transportation capacity and an obligating to deliver in accordance with terms and conditions of service. A payment is made in recognition of the system benefit provided by those customers that obligate their deliveries. The cost of paying the DCC represents the avoided facilities cost resulting from having obligated deliveries." 224 Now, when there was no such thing as direct purchase, I take it that Union had full control of the firm supply? 225 MR. KITCHEN: Yes, Union would have had its -- east end deliveries would have been entirely in Union's portfolio. 226 MR. JANIGAN: Okay. And in the evidence, Union notes that the Dawn-Trafalgar system was designed on the basis that part of Union's obligations, that the system's east end would be met by firm supply? 227 MR. KITCHEN: Yes. 228 MR. JANIGAN: And if you didn't have firm supply, you would need increased facilities? 229 MR. KITCHEN: Yes, that's correct. 230 MR. JANIGAN: So everyone gets the benefit of lower rates by the fact that there's firm supply in the east end? 231 MR. KITCHEN: That is the case, yes. 232 MR. JANIGAN: So back when you were -- Union itself was responsible for obligating firm supply in the east end, all customers got the benefit of Union's obligation. 233 MR. KITCHEN: The benefits of the obligation was there as well as the distance credit, yes. 234 MR. JANIGAN: Now, along comes direct purchase, and Union needed to facilitate a competitive gas supply market by allowing for direct purchase customers; is that correct? 235 MR. KITCHEN: Union -- yes, I would say that Union had to facilitate that, yes. 236 MR. JANIGAN: And in order to maintain the optimal system on the Dawn-Trafalgar line Union had to require that these direct purchase customers obligate their deliveries in the same manner that Union obligated its deliveries back before there was no direct purchase. 237 MR. KITCHEN: Union proposed in 412 to mandate those deliveries be obligated, and at that time the Board found that Union was not able to contractually mandate those deliveries. 238 MR. JANIGAN: But presumably Union was able to negotiate to make sure that there were obligated deliveries in the east end? 239 MR. KITCHEN: It was really the establishment of the buy/sell pricing mechanism and the fact that customers were able to receive a premium for their obligated deliveries that recognized that benefit that allowed Union to essentially have them -- those deliveries obligated. 240 MR. JANIGAN: Well, let's go back. 241 In the days before direct purchase, Union is responsible for maintaining firm supply in the east end. Everybody gets the benefit of the fact that Union delivers firm supply in the east end because you don't need increased facilities. 242 MR. KITCHEN: Yes. 243 MR. JANIGAN: We move to direct purchase, and now with direct purchase customers providing deliveries in the east end, there is a risk that we're not going for get firm supply there, or at least there's a greater risk. 244 MR. KITCHEN: If the deliveries didn't show up as Union's deliveries had showed up, yes, there was a risk to system integrity. 245 MR. JANIGAN: Now, direct purchase customers -- I assume that in all likelihood a direct purchase customer has chosen or chooses to be a direct purchase customer because it can get a lower commodity price. 246 MR. KITCHEN: I assume that when a direct purchaser becomes a direct purchaser they're doing it to their benefit, yes. 247 MR. JANIGAN: And this price benefit, generally speaking, is magnified by greater volumes? 248 MR. KITCHEN: The greater volumes that they can buy, you mean? 249 MR. JANIGAN: Yes. 250 MR. KITCHEN: I presume there's buying power as a larger customer. 251 MR. JANIGAN: And just the volumes themselves will generate a greater benefit just based on those volumes. 252 MR. KITCHEN: It's difficult for me to comment on what a direct purchaser will pay for the volumes they get, but if you can get a buying discount you can reap benefit from that buying discount. 253 MR. JANIGAN: I think my point was more mundane: You get a bigger price benefit if you are ordering more gas than you would if you were just using smaller gas. If you have a price difference between system supply and your direct purchase gas, the more you buy, the more you're going to get a price benefit? 254 MR. KITCHEN: From your supplier? 255 MR. JANIGAN: Yes. 256 MR. KITCHEN: Again, I'm not sure, but yes, okay. 257 MR. JANIGAN: Now, in those sense are those benefits, the price benefits that a customer derives, they're not required to kick back or share those benefits with any other customer on the system, are they, as far as you know? 258 MR. KITCHEN: No, they're buying the supply to meet their own requirements of the plant. 259 MR. JANIGAN: Now, if direct purchase customers were not obligated to deliver, presumably new facilities would have to be built; is that correct? 260 MR. KITCHEN: If they were not obligated to deliver -- 261 MR. JANIGAN: Yes. 262 MR. KITCHEN: If there was no east end delivery, yes. Facilities would have to be built. 263 MR. JANIGAN: And if new facilities were required because these direct purchase customers were not delivering, how would the costs of these new facilities be allocated to customers? 264 MR. KITCHEN: They would be allocated based on the design day demands in the same way that the avoided cost of the DCC is currently allocated. 265 MR. JANIGAN: If you can turn up Exhibit B, tab 9, schedule 1. 266 MR. KITCHEN: I have it. 267 MR. JANIGAN: It shows this allocation in that M-2, which is the general service class, which assume residential and small commercial are in, are allocated 70 per cent of the costs; M-4, firm contract allocated 7 per cent; and so forth and so forth. M-5A, 0 per cent; M-6A, 0 per cent; M-7, 8 per cent; M-9, 6 per cent; M-10, 0 per cent; and, T-1, 8 per cent. 268 Now, I assume these categories, M-5A, M-6A, M-7, M-9, M-10, T-1, those are the class where most direct purchasers reside? 269 MR. KITCHEN: The majority of direct -- I guess it depends on your perspective. If you're looking at volume of direct purchase or number of customers, there are a large number of direct purchasers within the M-2 class, but because they consume a lower volume -- end-use volume, they would -- that's not necessarily -- I can't say that there's not a large number there. I don't know exactly what that number is, but there is a portion of the M-2 demands that are served by direct purchase, by REMs. 270 MR. JANIGAN: Most direct purchase volumes, I take it, are served by the classes M-5A, M-6A, M-7, M-10, T-1. 271 MR. KITCHEN: Maybe I could answer it bit differently, and I could say, and we are both happy with this, in the contract rate classes, Union currently has no system customer -- no sales customers, in which case those are all direct purchase volumes, the M-4, M-5, M-7, T-1. 272 MR. JANIGAN: Of the total volume flowing in the system, it would be fair to say that makes up, maybe, 70 per cent? 273 MR. KITCHEN: I'll take that, subject to check. 274 MR. JANIGAN: Now, I note that, in the event that a direct purchase customers do not obligate their deliveries and new facilities had to be constructed, the M-2 class would be responsible for 70 per cent of the cost of new facilities, according to this. 275 MR. KITCHEN: That's consistent with their design day requirements, yes. 276 MR. JANIGAN: And back in the days when there was no direct purchase, there's no -- this could have been assured that there was no need for additional facilities because Union was handling this? 277 MR. KITCHEN: Union has operator assistance to move its deliveries to where they made the most sense, operationally, in terms of optimizing the system. 278 MR. JANIGAN: If you needed firm supply at the east end, Union would be providing it? 279 MR. KITCHEN: Union would provide it or build facilities, depending which was more economic. 280 MR. JANIGAN: Okay, but in this circumstance, where you have a system dependent upon the delivery of firm supply at the east end, Union would have maintained a firm supply at the east end in order to avoid building those facilities. You can say that with some certainty. 281 MR. KITCHEN: Again, it depends on the economics. There may not be any capacity at the east end for Union to contract to increase its deliveries in order to meet those demands. It may have to build. 282 MR. JANIGAN: Well, no. We're talking about the -- before direct purchase. 283 MR. KITCHEN: I would say it's the same before direct purchase. You can't always go out and contract for capacity into Parkway. The capacity is not there. 284 MR. JANIGAN: But this is based on -- this system is based on the fact -- the whole DCC credit is based on the idea of avoided facilities, and the fact of maintaining firm supply at the east end. 285 Back when there was no direct purchasers, if we wanted to avoid facilities, Union would be obligating supplier or obtaining firm supply at the east end and we wouldn't have to worry about this? 286 MR. KITCHEN: If the supply was available at the east end, Union could increase that -- increase that supply in order to meet its east end requirements. If it wasn't available, we either have to get a winter peaking service or build facilities and then those facilities costs would be built into rates in the same way that the avoided cost would be allocated. 287 MR. JANIGAN: But the additional risk and the reason for the DCC commitment comes about because of direct -- the necessity to obligate direct purchase customers to deliver to the east end, does it not? 288 MR. KITCHEN: The DCC comes about as a result of the requiring of the need to incent customers to obligate, because we don't have -- because based on the decisions in 412, we don't have the contractual ability to mandate that. 289 MR. JANIGAN: And those customers are the ones that -- direct purchase customers are the ones that are deriving the benefit from the arrangements through their negotiation of lower commodity prices, for example? 290 MR. KITCHEN: My concern is not with the whatever benefit. I don't know what benefits direct purchase customers get. 291 My concern is that the system operates and Union's rates reflect the operation of that system. Whether a customer, who's a direct purchase customer, receives a benefit by virtue of how they can line up their supplies, that nowhere is factored into the cost of service for Union or in its rates, and I don't think it should be. 292 MR. JANIGAN: But it's not likely a direct purchase customer would stay a direct purchase if it wasn't a financial benefit to do so? 293 MR. KITCHEN: It's up to the direct purchaser to make that call. 294 MR. JANIGAN: Assuming this is the planet Earth, I would assume a direct purchase customer would not stay with system sales if it was to their financial advantage. 295 MR. KITCHEN: I presume so. Yes. 296 MR. JANIGAN: Now, I want to take you back to 493-04, 494-06, the Board decision, and as I recall from your examination in chief today and from the Union evidence, it might be useful just to turn that up. It's in our book of materials. 297 MR. MORAN: Mr. Chair, this hasn't been marked as an exhibit yet. It would be Exhibit F.2.2, book of materials for cross-examination by VECC. 298 MR. SOMMERVILLE: It's 2.2? 299 MR. MORAN: That's correct. 300 EXHIBIT NO. F.2.2: BOOK OF MATERIALS FOR CROSS-EXAMINATION BY VECC 301 MR. JANIGAN: On page 5 of the book of materials. And I believe this -- starting with page -- line 15, this recapitulates, I believe, what you indicated today in examination in chief. The DCC mechanism arose historically from Union's buy/sell pricing methodology where the DCC represented the difference between the Ontario buy/sell price and Union's weighted average cost of gas. The payment of the DCC was extended to bundled T-service customers when this service was introduced in order to maintain equivalency between the buy/sell and bundled T-service option. 302 I believe that's what you indicated this morning? 303 MR. KITCHEN: Yes. 304 MR. JANIGAN: And it wasn't until 493-04 that, in fact, the DCC was related to system benefits? 305 MR. KITCHEN: It was in 493- -- it was in 499 that the aborted cost methodology was brought forward. 493, 494-06, we extended the DCC payment to buy/sell customers in recognition that it was no longer in the buy/sell reference price and allocated those costs to in-franchise customers based on design day demands at that point. 306 MR. JANIGAN: Okay. Just going back to the way in which the pre-cursor of the DCC looked like. If you look on page 3 of our materials, that set out the price differential associated with the different characteristics of the gas supply that was being provided to Union? 307 MR. PENNY: Just so we're clear, Mr. Chair, could I just confirm which decision this page 3 is from? 308 MR. JANIGAN: Sure. It is referring to decision 462. EBRO-462, I'm sorry. Am I correct on that? 309 I'm sorry, do you want me to repeat the question? 310 MR. KITCHEN: Sorry, I thought you asked something else. Yes, go ahead. Please repeat the question. I was looking at something. 311 MR. JANIGAN: That's okay. 312 On page 3 of -- in these materials, it sets out the price differential which essentially was the precursor of the DCC that applied to the different characteristics of the gas supply as to Union demanding what was obligated or not. Am I correct on that? 313 MR. KITCHEN: Yes. 314 MR. JANIGAN: And essentially, this amount varied on a volume basis? 315 MR. KITCHEN: Sorry, would you repeat that. 316 MR. JANIGAN: This amount, or the amount that was to be paid -- or that was paid to an individual customer for their gas varied on the basis of the volume of supply. 317 MR. KITCHEN: Right. It was paid in respect to those deliveries, depending whether it was obligated or unobligated. 318 MR. JANIGAN: Now, according to the evidence that has been filed in this proceeding by VECC, the evidence of John Todd and Joyce Poon, and I wonder if you could turn that up at pages 6 and 7. 319 MR. KITCHEN: I have it. 320 MR. JANIGAN: Would you agree, based on that evidence, that Union had support from the Board to obligate its direct purchase customers to deliver? 321 MR. KITCHEN: Which -- are you talking about in 462, or which -- or -- 322 MR. JANIGAN: 456-04, and if you look over the next page, page 13. Line 13, page 7: "The Board therefore accepts that all gas volumes delivered to an Ontario LCD on a buy/sell arrangements should be on a firm basis with an obligation to deliver." 323 MR. KITCHEN: I agree that it says -- if you look at the pure words, the Board did approve that, but I think you have to look at in the context of prior decisions as well that established the buy/sell pricing mechanism. These deliveries were obligated, and the Board accepted that all the volumes should being delivered to Ontario on a firm basis, but that was after a financial incentive had been put into place. 324 I don't think it also negates the 412 decisions as to Union -- contractually obligated. 325 MR. JANIGAN: And the financial incentive was really based upon the upstream transportation costs. 326 MR. KITCHEN: A customer that obligates deliveries received a higher buy price for their gas than they otherwise would have if they didn't obligate. 327 MR. JANIGAN: And that was a direct relation of the cost of gas in the marketplace? 328 MR. KITCHEN: It was reflected the fact that the WACOG, the weighted average cost of gas, was based on Union's firm supplies, which at that time were premium to its landed cost. 329 MR. JANIGAN: Now, Union has a contractual commitment from its direct purchase customers now, but they will obligate their deliveries? 330 MR. KITCHEN: They do, but I would view it as -- it's a contract by consent, I suppose, that they're getting -- they're providing the obligated delivery and we're providing them the DCC payment. 331 MR. JANIGAN: And you note in Exhibit C.16.67 in the interrogatory -- 332 MR. KITCHEN: Exhibit C.16.67? 333 MR. JANIGAN: Yes. 334 MR. KITCHEN: I have it. 335 MR. JANIGAN: You note that it would be difficult for Union to justify the obligation of deliveries, given prior Board decisions. 336 Just so I'm clear, which prior decisions is Union specifically referring to? 337 MR. KITCHEN: 412 decisions, really that -- those decisions really laid the basis for Union's ability to mandate deliveries to its system. 338 It also indicated that there was a benefit to having supplies -- competitive supplies into Ontario, and those factors haven't changed since that time. 339 MR. JANIGAN: You said decisions. I wonder -- 340 MR. KITCHEN: Well, there was 412-01 through 412-03. 341 MR. JANIGAN: Okay. 342 Now, it seems apparent by the historical account that you've provided in appendix A that the natural gas market has changed substantially since the date of the 412 decision. 343 MR. KITCHEN: In the last 20 years, yes, the market has changed. 344 MR. JANIGAN: And prior to the 1998 Energy Competition Act, direct purchase customers were not able to hold title to their natural gas commodity? 345 MR. KITCHEN: I'll accept that. I'm not sure about that, but ... 346 MR. JANIGAN: And in part because of this legislative constraint, the buy/sell reference price came to be. 347 MR. KITCHEN: I believe that to be the case that the buy/sell reference price came to be because we had to take title of the gas. 348 MR. JANIGAN: And on page 6 of my materials -- actually, it should be page 7, it gives an extract from EBRO-452-3. 349 This outlines what effectively the buy/sell arrangement was on paragraph 4.5 of that decision. A comparable Alberta border buy/sell arrangement involves the following: (i), that the customer purchases gas directly from the supplier at the Alberta border at a negotiated price. The LDC then purchases the gas from the customer at the Alberta border and the gas is commingled with the LDC system supply and the customer repurchases its gas supply at its meter at a price set by the OEB under a sales service contract with the LDC. 350 Now, since the 1998 Energy Competition Act, Union's end-use customers can hold title to the natural gas commodity. Union is not allowing -- is allowing existing buy/sell customers to expire and not providing any new buy/sell contracts; is that correct? 351 MR. KITCHEN: I don't think we have any buy/sell customers at this point. 352 MR. JANIGAN: Okay. There's no need for Union to be in the middle in order for a direct purchase customers to realize the benefit from the natural gas commodity prices? 353 MR. KITCHEN: Yes. There are no buy/sells left, so it's all either bundled T or T-service. 354 MR. JANIGAN: And it wasn't until 493-04, 494-06 that Union proposed that the DCC should be changed from a volumetric allocation based on gas costs to the Dawn-Trafalgar design day. Am I right? 355 MR. KITCHEN: The recovery -- with the elimination of the buy/sell pricing mechanism, the recovery of the DCC payments were allocated based on facilities that would be required if we didn't have east-end delivery. 356 It wasn't -- I won't quote it as an avoided cost methodology at that point. It was merely the allocator that made the most sense. 357 MR. JANIGAN: It wasn't until that 493-04, 494-06 that that occurred? 358 MR. KITCHEN: That's when the recovery was put into rates, yes. 359 MR. JANIGAN: Okay. Up until that time, the DCC wasn't consistent with the concept of a payment related to the system benefit provided to the distribution company? 360 MR. KITCHEN: Up until that point the DCC had been essentially a result of the buy/sell pricing methodology. 361 MR. JANIGAN: In 493-04, 494-06, the Board only accepted this concept on an interim basis; is that correct? 362 MR. KITCHEN: They did, and they directed Union to bring forward proposals with respect to the payments of the DCC -- or payment for obligated deliveries in EBRO-499. And we did that. And at that point, the avoided cost methodology was established and was agreed to in the ADR and accepted by the Board. 363 MR. JANIGAN: In 499, were there any unbundled service offerings available then? 364 MR. KITCHEN: The unbundled services weren't offered until the 0017 case was completed. 365 MR. JANIGAN: Mr. Chairman, I'm getting into another area here. I don't know what time you're planning the morning break. I can continue until 11:00 if you'd like or we can -- 366 MR. SOMMERVILLE: Is this a convenient time for you to break? 367 MR. JANIGAN: This would be a convenient time for me to break. 368 MR. SOMMERVILLE: In which case we will stand adjourned until 11:05. 369 --- Recess taken at 10:43 a.m. 370 --- On resuming at 11:08 a.m. 371 MR. SOMMERVILLE: Be seated, thank you. 372 Mr. Janigan? 373 MR. JANIGAN: Thank you, Mr. Chair. 374 MR. PENNY: Oh, Mr. Chair, sorry, just before Mr. Janigan recommences, Mr. Kitchen indicated to me at the break that he wanted to come back to one issue that was raised this morning, correct or supplement an answer that he gave. 375 MR. SOMMERVILLE: Certainly. 376 MR. PENNY: With your leave. 377 Thank you. 378 MR. KITCHEN: Thank you, I just wanted to go back to your questions related to the Competition Act. I believe you asked me -- 379 MR. PENNY: The Energy Competition Act. 380 MR. KITCHEN: Or the Energy Competition Act. I believe you asked me with the changes to that Act, customers were now able to deliver gas to Ontario in the absence of a buy/sell; in other words Union was no longer the middle person. Prior to the Act, we did have -- did have and do have T-service customers that had delivered their gas to Ontario, both T-service in the T-1 category and bundled T-service customers. Just a clarification. 381 MR. JANIGAN: Thanks for that. 382 I have another clarification just arising from your oral testimony before the break, and correct me, I don't have a transcript before me, but correct me if I'm wrong. I thought I heard you indicate that this proposal that you're bringing forward was in response to the OEB decision in RP-2001-0029; is that correct in that? 383 MR. KITCHEN: We are responding to that directive through this proposal, yes. 384 MR. JANIGAN: I wonder if you could turn up one of our interrogatories, Exhibit 25.45. 385 MR. KITCHEN: Yes, I have it. 386 MR. JANIGAN: The question is that "given that Union is proposing to eliminate the DCC in the same manner that they originally proposed in RP-1999-0017 and the same method as discussed in RP-2001-0029, is there any change in Union's current fees from the case material -- i.e. evidence IRs, transcript -- from those proceedings related to this topic." And the answer is: "There was no material change to the case material provided in RP-1999-0017 and RP-2001-0029." 387 MR. KITCHEN: Yes. 388 MR. JANIGAN: So I take it that the response to the Board's decision was to re-file the proposal? 389 MR. KITCHEN: The response to the Board's decision was to re-file the proposal and we didn't make any changes to that proposal because we believe that the proposal is it still the best proposal and the correct proposal. 390 MR. JANIGAN: Okay. 391 Now, in your evidence on Exhibit B, tab 9, page 5, one of the reasons you list as the need to eliminate the DCC is that -- is because the DCC is unique to Union's southern operations it does not exist for other North American pipeline companies. 392 MR. KITCHEN: Which page is that; sorry, page 5? 393 MR. JANIGAN: Exhibit B, tab 9, page 5. 394 MR. KITCHEN: Sorry, I was just in the appendix at page 5. 395 Yes, I have it. 396 MR. JANIGAN: And one of the reasons that you indicated for the elimination of the DCC in number (d), or 16(d), is that the DCC is unique to Union's southern operations area and does not exists for other North American pipeline companies. 397 MR. KITCHEN: That's correct. 398 MR. JANIGAN: And I assume when you say that, that no other North American pipeline companies have a DCC, is what you mean is that no other utilities that you're aware of compensate direct purchase customers for an obligation to deliver. 399 MR. KITCHEN: I think what I was trying to say there is that the DCC that is paid by Union is an anomaly in the market, and -- and it's not -- it's not paid by -- on any other pipelines, and so it brings forward a bit of confusion when you have, in terms of what we're doing with it. 400 MR. JANIGAN: Now, in terms of the styling of this as proposal to eliminate it, the net effect is maintained by embedding the cost and the rate classes that formerly paid that and embedding -- the net effect of the rate classes that formerly got the benefit of it. 401 MR. KITCHEN: That's right, because the benefit of the obligated deliveries continues to exist after the elimination of the DCC. 402 MR. JANIGAN: No other utility has gone to the extent of mandating a DCC payment to customers in this fashion. Do you know whether any of them have embedded similar benefits in their rates? 403 MR. KITCHEN: I have no information on that, no 404 MR. JANIGAN: Now, the OEB also regulates Enbridge Gas Distribution; I'm sure you're aware of that. And when you go to the EGDI web site to obtain terms and conditions for direct purchase arrangements -- and we've set out in our materials at page 9 their web site -- If you look on page 9 under the section, "Section B, Obligation to Deliver," that applicant's selling gas to a company pursuant to a gas purchase agreement must on each day in the term of such agreement deliver to the company the mean daily volume of gas specified in such agreement. 405 Isn't this same as Union's obligation to deliver for its direct purchase customers? 406 MR. KITCHEN: No. No it's not. I think that the -- I'm not sure what Enbridge does and has in their rates or not in terms of the benefits provided by deliveries, but I think the fact is that Enbridge doesn't have a system like the Dawn-Trafalgar that required east-end deliveries in order to maintain its demands off the system. 407 MR. JANIGAN: If Enbridge didn't obligate deliveries, could Enbridge maintain 100 per cent utilization of its upstream assets? 408 MR. KITCHEN: I can't comment on Enbridge's operations. I know nothing about it. 409 MR. JANIGAN: Would it be natural to assume that if they didn't obligate deliveries that additional facilities might be required as a result of -- 410 MR. KITCHEN: On Enbridge facilities? 411 MR. JANIGAN: Yes. 412 MR. PENNY: Mr. Chairman, Mr. Kitchen has already said that he knows nothing of that, and really, in my submission, Mr. Janigan is asking for Mr. Kitchen to speculate. 413 MR. SOMMERVILLE: Mr. Janigan? 414 MR. JANIGAN: I'm happy to withdraw the question. 415 MR. SOMMERVILLE: Thank you. 416 MR. JANIGAN: However, it appears that they do obligate to deliver, if this is correct? 417 MR. KITCHEN: There is in there -- I can see that there is something that says obligation of delivery, yes. But again, I'm not aware of anything behind this obligation. 418 MR. JANIGAN: Now, are you aware that if a customer on EGDI doesn't obligate to deliver that they're assessed an unauthorized gas supply overrun charge, which is 150 per cent times the backstopping service rate, 320? 419 MR. KITCHEN: I'm not aware of that. 420 MR. JANIGAN: Are you aware of that? 421 MR. KITCHEN: I'm not aware of that. 422 MS. VANDERPAELT: No, I'm not aware. 423 MR. JANIGAN: Sorry, Ms. VanderPaelt. Your name escaped my memory. 424 Just getting back to another reason for your elimination of the DCC, how does embedding DCC in the rates cause the rationale to be better understood? 425 MR. KITCHEN: I'm not sure that I said it would cause the rationale to be better understood. I think I said the rationale is not understood. It's one of the reasons that we wanted to explain and give the background of DCC. 426 MR. JANIGAN: So it's no longer -- it no longer has a particular heading, but as it's embedded in the rates there's no need to explain it? 427 MR. KITCHEN: I think that there you can say that we recognize the benefits provided by east end deliveries in rates. I think that it's confusing for customers to look at a rates schedule that has a delivery rate and then tell them oh, by the way you're going to get a credit in respect of your deliveries. I think it's cleaner to have it embedded in rates. 428 MR. JANIGAN: Now, when a customer elects to be a direct purchase customer, is there a contractual commitment that's obtained by Union that the direct purchase customer today will in fact remain a direct purchase customer in the future? 429 MR. KITCHEN: I don't know. 430 MS. VANDERPAELT: Depends on the contract the direct purchase customer has signed. The contract is typically one year in length. At that point they may choose to return back to a sales customer. 431 MR. JANIGAN: Okay. And every year the choice is up to the customer to remain a direct purchase customer or to become -- or revert to being a system sales customer? 432 MS. VANDERPAELT: Yes, at the time of their contract renewal. 433 MR. JANIGAN: And Union's current proposal for this DCC elimination isn't proposing that if a direct purchase customer today converts to a system sales customer at the end of this contract, that these customers will receive a different delivery rate than everyone else in the class? 434 MR. KITCHEN: No, the delivery rate would be based on what's in the class. 435 MR. JANIGAN: So ... 436 MR. KITCHEN: Sorry. The delivery rate will appear in the rate schedule and will be -- will assume that the east end deliveries, when it reverts back to Union, are also. 437 MR. JANIGAN: So the customer, even though he becomes a system sales customer still gets the credit, as it were, for obligating direct purchase deliveries at the east end, even though you're doing it? 438 MR. KITCHEN: The customer, system customer does get the benefit of having the east end delivery in their rates. 439 MR. JANIGAN: Yes, but in this case, for example, if an M-7 customer decides to become -- goes from being a direct purchase customer to a system sales customer, he's still going to get the credit in the M-7 rates for obligating deliveries. He doesn't pay a different rate from the rest of the M-7 customers. 440 MR. KITCHEN: No, except when we're eliminating the DCC for M-7 class. It's based on an individual calculation that includes the obligation in that calculation, because right now all of our M-7 customers are obligated. 441 MR. JANIGAN: So that M-7 customer decides at the end of the contract to become a system sales customer, he isn't assessed a different rate; is he? Based on the fact that he no longer has an obligation to deliver? 442 MR. KITCHEN: Assuming that the capacity is returned back to us, and we would be able to still account -- count on that capacity on design day, they would still see the benefit. 443 I guess the point I make, though, is I think -- I believe a number of our customers have their own capacity into Union's system, and I can't see them turning that over to us if they were to become a system customer. 444 I don't know the possibility of that happening. Maybe that's a better way to say it. 445 MR. JANIGAN: But if it does happen, that's essentially what will happen; Union takes over the obligation and they still get the benefit. 446 MR. KITCHEN: I think if it happened, we'd have to look at it. I presume if that was happening, there would be something that would be driving not just M-7 customers back to system but other customers back to system, and we would have to look at the whole thing of that. 447 We're eliminating the DCC based on the current situation. The fact that we have obligated deliveries and as a benefit to those, we're flowing those benefits back to direct purchase customers such that they're not impacted -- or at least minimally impacted by the proposal. 448 The prospect of a customer coming back to system, a large customer, I think, has a very low probability of happening. 449 MR. JANIGAN: Before direct purchase, when Union did all the obligation of deliveries, there was none of this allocation of credits to customers? 450 MR. KITCHEN: There was no DCC prior to direct purchase. 451 MR. JANIGAN: The DCC is based upon direct purchase to customers obligating their deliveries? 452 MR. KITCHEN: Yes. 453 MR. JANIGAN: There's nothing in your system at the moment when a direct customer becomes a system sales customer that they're going to lose the benefit of that theoretical obligation of deliveries? 454 MR. KITCHEN: At this point there's nothing in our proposal that addresses that specifically, no. 455 MR. JANIGAN: Now, in the event that Union was unable to carry out the obligations to deliver that were associated with this direct purchase customer and went back to system, presumably you're going to have to build additional facilities? 456 MR. KITCHEN: If Union didn't have the pipe coming into the east end, there would be a requirement to maintain that level of demand at the east end and we would have to either build or purchase a facility as a replacement. 457 MR. JANIGAN: So when we have -- potentially we have the circumstance when you have a direct purchase customer that flips or is set back to system sales because they failed to obligate their deliveries, and Union is unable to obligate the deliveries, you will have to have the -- you'll have the need for additional facilities costs constructed on the design day parameters, which provide for a 70 per cent allocation to the M-2 customer. 458 MR. KITCHEN: Again, the likelihood of a large customer flipping from direct purchase to system, and given that they hold the capacity, I'm not -- I'm not sure that that is a possibility. 459 MR. JANIGAN: Okay. 460 Now, if a new customer came along, let's say, in the M-7 or one of the other contract classes, and elected to become a system sales customer, will that customer get the same delivery charges as all the other customers in that rate class? 461 MR. KITCHEN: If there was a new M-7 or T-1 customer, they would bring their own capacity with them. Union, at this point -- and perhaps Ms. VanderPaelt can help me here -- Union at this point doesn't contract for capacity to serve its M-7 customers, I don't believe. 462 MS. VANDERPAELT: If we have a brand new large industrial customer come into our system, they do bring their own capacity, we establish where the demands are on our system and determine if there's an incremental cost as a result of where they wish to supply. 463 For example, if a customer decided to put a power plant in Hamilton and wanted to supply at Dawn, we would assess how much it would cost us in terms of either facilities or non-facility costs at Parkway, and that customer would be responsible for those costs directly. It then becomes an economic choice as to whether he would want to supply at Parkway or Dawn. 464 MR. JANIGAN: Is what you're saying that they don't have a choice between being a system sales customer or a direct purchase customer coming on? 465 MS. VANDERPAELT: They do have a choice; if they came on as a system sales customer, it would go into the planning of their entire system sales planning portfolio, and Union would have to determine the most economical way to serve that load. What we have found, though, is that customers will probably be pursuing the direct purchase market. Since customers have migrated in that direction, we haven't seen them return back to sales since about 1987. 466 MR. JANIGAN: Let's say there was a migration and they elected to -- or for whatever reason the circumstances favoured them coming on as a system sales customer, if they were the M-7 category, they will be getting the same delivery rate as the rest of their direct purchase customers in that category? 467 MS. VANDERPAELT: I think what Mr. Kitchen was trying to establish is that, based on our proposal, the M-7 delivery rates would be negotiated. So the customers come to system would get a rate negotiated on where those deliveries would be. So it would likely not be identical to the others in his customer class. 468 MR. JANIGAN: Would it contain the embedded DCC credit that's put into those delivery rates? 469 MR. KITCHEN: When we establish the M-7 and T-1 rates that we established on the basis of a range, and to the extent that that customer will be driving additional facilities, that could be -- that would be reflected within the range. 470 So would they get the DCC? Probably not, if they weren't providing the benefit -- or depending on where they were in the system and the cost required to recover -- or the rate required to recover those costs. 471 MR. JANIGAN: So you're saying the individual customers would then be contract classes, and that's M-4, M-5A, 6A, 7, et cetera. They will be assessed individual rates depending upon whether or not they have an obligation to deliver. 472 MR. KITCHEN: Only for M-7 and T-1 will there be individual rates. The rates for M-4, M-5, and so on will be dealt with by reducing the commodity rate by the amount of DCC. 473 MR. JANIGAN: So in that circumstance, if I use those categories as the example and you have a new system customer coming on board, effectively they would get the same rates as the direct purchase customers in my category? 474 MR. KITCHEN: They would get the same rates as the direct purchase customers, but to the extent that that customer provided -- was required a build of facilities, that would be factored into the economics and that would be taken into account in the form of an aid to construct. 475 I don't think that we would just say, Oh, here you go, here's the rate, without looking at the facilities require and where those demands are and where the deliveries are. 476 MR. JANIGAN: But in that case, you would be paying the cost; right? 477 MR. KITCHEN: The customer would be paying. 478 MR. JANIGAN: In order to come on the system. 479 MR. KITCHEN: If we required Dawn-Trafalgar facilities, for instance, to serve a new M-4 system customer, those demands -- that demand on the Dawn-Trafalgar would be factored into the economics, and would be reflected in the aid paid by that customer. 480 MR. JANIGAN: Okay. 481 Now, I want to make sure I understand who gets the revenue for any penalty charge for non-delivery. Can you help me with that. 482 MR. KITCHEN: The failure to delivery charge? 483 MR. JANIGAN: Yes. 484 MR. KITCHEN: Under the current failure to delivery -- this really is -- there's two mechanisms. First we charge the M-2 first block delivery rate on the failed volumes, and we also have the right to claw back the DCC back to the beginning of the contract from the time of the failure to the start of the contract. 485 The DCC piece of the failure would go into the direct purchase revenue cost deferral account as a credit. The portion related to the M-2 first block would be used to defray any cost that Union might have as a result of the failure. 486 MR. JANIGAN: Is this going to continue when you don't have a DCC payment? 487 MR. KITCHEN: When we eliminate the DCC, we've also proposed to change the failure to deliver charge. What we're proposing is that we would continue to charge the first block M-2 delivery rate and we would add to that a -- an additional charge or additional amount that represents the clawback of 12 months of DCC recovered over 30 days, which is a dollar -- I think $1.37 in my evidence. 488 What we're trying to do is really to restore with that the deterrent that was there with the DCC clawback. 489 MR. JANIGAN: This deterrent however goes to Union's pocket. It doesn't go to reduce the DCC payment embedded in the rates of all customers. 490 MR. KITCHEN: With the elimination of the DCC, the deferral account also would also be eliminated. Would those amounts go to Union? Yes, they would go to Union, but the amounts that we're looking at here would be small. It's meant to be a deterrent to prevent people from gaining their obligations at the east end based on alternatives where it would be economic to sell supply rather than deliver. Union is hoping, I would think, that we don't actually have to charge the penalty. It's there, really, as a deterrent. 491 MR. JANIGAN: It just seems to me that the customers who are paying a credit to ensure delivery should be getting any payments to -- that are being made as a deterrent to this clawback? 492 MR. KITCHEN: Again, the amounts that we're talking about are small. I think that there was a -- the last estimate that I saw there was around $50,000 of penalty that was actually available for collection. It's not a large amount, and it's really there as a deterrent to customers. It's not meant to be a revenue gain for Union. 493 MR. JANIGAN: I wonder if you could turn up page 16 of our materials, and I'm looking to find out how the DCC is going to be treated after it's eliminated pursuant to your proposal and I note that the -- in terms of the cost of service study, it sets out here in an excerpt from EBRO-499, Exhibit G.3, tab 1 that: "The objective of the cost of service study is to allocate the forecast cost of service to customer rate classes. In order to allocate costs, the test year cost of service must be analyzed to determine the appropriate function and the classification of costs. The assignment of costs or individual rate classes is based upon these determinations." 494 Now, the reason that we have some difficulty in figuring out the answer to this is that if you turn up Exhibit C.25.46 in this proceeding. And it would ask: "Please identify the exact costs that Union will incur to ensure that direct purchase customers will obligate its deliveries." Response: "There are no incremental costs required to ensure that direct purchase customers obligate their deliveries." 495 Further when you skip over to interrogatory C.16.62, it's noted there that: "Neither the DCC nor its elimination has anything to do with costs Union will or will not incur. Rather the existence of the obligated deliveries reduces the facilities requirement, and thereby delivery rates for all customers. This does not change with the elimination of the DCC." 496 Now, if the DCC costs are no longer there when there's no costs associated with the DCC as part of Union's new cost of service, how will Union continue to recognize the 27 million as a system benefit from one group of customers to another? 497 MR. KITCHEN: When Union eliminates the DCC cost, presuming the 2004 rebasing hearing, that cost will no longer show up in a cost of service study, the costs are out of a cost of service study, and the rate at that point will also have the $27 million removed. 498 When Union goes forward to set rates coming out of 2004, Union will maintain that benefit through the rate setting process by really ensuring that those revenue to cost ratios stay at a level that's reasonable. 499 The cost of service study is a guide for setting rates. It's not -- it's not the -- it's not a hard fact rule that we will set our rates exactly as the cost study would dictate. I'm not sure I've answered your question. 500 We'll go forward with rates that are consistent with the rates that we have. If we change those rates, we risk losing volumes, et cetera. 501 MR. JANIGAN: So they will be adjusted after the cost of service study is -- calculations are done, and when you get into the rate setting aspects, you will make some adjustments based on revenue to cost ratios. 502 MR. KITCHEN: Well, the rate design -- the cost allocation study and the rate design piece are two separate processes. The cost allocation step looks inward at Union's cost and allocates those to customers. Part of the rate design process is to look outward and to ensure that those rates are reasonable, given a number of conditions, including what customers expect to pay, what the market will allow us to charge. It's not a -- it's not a one-for-one match between the cost study and what ends up in rates. 503 MR. JANIGAN: Now, will Union be recalculating the benefits provided by direct purchase customers at any point in time? 504 MR. KITCHEN: Recalculating the avoided cost? 505 MR. JANIGAN: Yes. 506 MR. KITCHEN: No, once Union has built that avoided cost into its rates, to the extent that we have additional volumes coming on and obligated -- those deliveries have obligations to them, they will generate the benefit as we go forward. We are not proposing to re-examine what the avoided cost is going forward. 507 MR. JANIGAN: What happens if there's switching between direct purchase and system sales? Wouldn't that change the benefits that are being provided? 508 MR. KITCHEN: If there were significant changes, but I don't foresee that there will be significant changes in the future. 509 MR. JANIGAN: What about volume differences between direct purchase and system? Do they -- presumably, it would take a big change for that to be re-examined; is that what you're saying? 510 MR. KITCHEN: What do you mean by volume changes, demand changes or supply? 511 MR. JANIGAN: Supply. 512 MR. KITCHEN: If there were supply changes, then the -- there -- if there were supply changes, Union would continue to meet those deliveries at the east end with deliveries. The avoided cost is still a cost that's built into rates. I'm not ... 513 MR. JANIGAN: Will Union be updating the $4.25/10 3 m 3 rate that you used to calculate the facilities cost? 514 MR. KITCHEN: Once we've eliminated the DCC, no. 515 MR. JANIGAN: Effectively this means that the 27 million is a static adjustment based on the EBRO-499 deliveries. 516 MR. KITCHEN: Those are the amounts that Union is proposing to remove from the recovery and also reflect in rates, yes. 517 MR. JANIGAN: In the future? 518 MR. KITCHEN: Yes. 519 MR. JANIGAN: Now, in Exhibit C.16.71, Union's proposal concerning the elimination of the DCC on the basis of the benefit provided -- 520 MR. KITCHEN: Excuse me, I don't have that. 521 MR. JANIGAN: Sorry. Exhibit C.16.71. 522 MR. KITCHEN: We have it. 523 MR. JANIGAN: Union's proposal to eliminate the DCC on the basis of a benefit provided will result in no net increase in the price per GJ to large industrial customers and it's indicated this will allow Union to maintain it's existing level of competitiveness post DCC elimination; correct? 524 MR. KITCHEN: That's correct. 525 MR. JANIGAN: Now, maintaining this level of competitiveness post DCC elimination doesn't mean that large industrial customers may not flip to alternate fuels, does it? 526 MS. VANDERPAELT: No, it doesn't. 527 MR. JANIGAN: That may be, but the flip is not going to be caused by DCC elimination; is that your position? 528 MS. VANDERPAELT: By maintaining revenue neutrality, we perceive that the customers would not flip as a result of the DCC elimination, based on Union's proposal. 529 MR. JANIGAN: Now, in Exhibit C.1.40. 530 MR. KITCHEN: Just a second. 531 MR. JANIGAN: Sure. I'm looking at page 6 of that exhibit. 532 MS. VANDERPAELT: We have it. 533 MR. JANIGAN: Would you agree with me that this table shows a fair amount of volatility in the price of natural gas over the subject period, in terms of price? 534 MR. KITCHEN: Yes, it appears to be volatile. 535 MR. JANIGAN: And the difference in price from month to month, on many occasions, is in excess of the 1 cent per GJ that Union claims is all we need to swing -- reduce takes by industrial customers. 536 MR. KITCHEN: Yes, on the graph there are increases that are significantly -- are significant and larger than 1 cent per GJ. It doesn't change the fact that a little 1 cent per GJ shift could cause a customer to switch to an alternative fuel. 537 MR. JANIGAN: That point seems to be emphasized -- not in terms of the latter point, but the fact that the volatility and that these swings are greater than the 0.1 cent per GJ seems to be emphasized on page 5 of this exhibit, if I could read it, which outlines the differences on a month-to-month basis in highs and lows. 538 MR. KITCHEN: Yes. I think one of the things that needs to be made clear, though, is if you flip back to the graph, at points where the price of natural gas has spiked, Union has lost to alternative fuel significant volumes, and I think in the IR that was approximately 600 ^10/6. That's a real loss and immediately switchable. It's not something that requires capital or anything else. 539 MS. VANDERPAELT: If I could add, what we're trying to do here is we recognize that we do not control the customer's price of commodity for a direct purchase customer. They are buying their own supply. We are recognizing that we don't need to add to their volatility by changing the rates that they pay from us. 540 MR. JANIGAN: But what you're saying is the price of commodity is a significant factor in customers' fuel switching. 541 MS. VANDERPAELT: It is one of the factors of fuel switching, yes. 542 MR. JANIGAN: And you indicated, I think you experienced your biggest volume of fuel switching during a period of commodity price changes 543 MS. VANDERPAELT: That's correct. 544 MR. JANIGAN: These commodity price switches are well in excess of the 8 cents per GJ effect of the -- elimination of the DCC payment or embedding of the DCC payment would be in the contract class rates, are they not. 545 MS. VANDERPAELT: It is. 546 MR. KITCHEN: They are, but the price of the commodity is only one factor that the customer looks at. They also take into account changes in our delivery rates. All other things being equal, if there was a 1 cent change in delivery rate without a change in commodity relative to another fuel, they would switch. 547 MR. JANIGAN: But you're in a market where there is -- that 1 cent per GJ change in delivery rates seems to be dwarfed by the changes on a monthly basis to the delivered price of gas. 548 MS. VANDERPAELT: We also can't speculate how the customers purchase their gas. Your assumption would hold true if they purchase the gas in January at that peak. Customers do purchase annual strips and other pricing mechanisms, which may not have seen the same impacts that this graph would suggest. 549 MR. JANIGAN: Given that the natural gas price volatility that basically exists in the market, should a cross subsidy exist between customers without fuel switching capabilities to customers with the ability to fuel switch? 550 MR. KITCHEN: I don't view that -- it's not a cross subsidy. What we're doing is we're recognizing the obligation that those customers have to deliver and the benefit to the system. It's not a cross subsidy. Those customers that benefit from the obligated delivery through lower rates pay the majority of the costs, because they receive the majority of the benefit. 551 I think, back to the graph though for a second, the thing -- you can't look at a pricing graph of natural gas in isolation of other fuels. It's not the fact that there is a huge -- that's there's price volatility. It's that price volatility is relative to an option. 552 MR. JANIGAN: And in fact, you have to look at the end-use cost of fuel, really, and all of the components of that fuel to determine whether a customer is going to switch or not? 553 MR. KITCHEN: There's a number of factors the customer would look at. Yes. One of the factors may be that the customer may have bought oil in another period and just have it. 554 MR. JANIGAN: For example, if we wanted to look at oil, the fact that there was an increase in the price of trucking that oil to the plant might not trigger a fuel switch to natural gas in and of itself. They would want to look at the end-use cost of all of the components. 555 MS. VANDERPAELT: The customer would look at their complete economic picture when evaluating their choices between alternate fuels. 556 MR. JANIGAN: Now some of the momentum favouring oil as an alternate fuel seems to have left the market; would you not agree? 557 MS. VANDERPAELT: I would say it depends on the market conditions. Today, it appears that customers are staying on gas. Tomorrow, I don't know what the oil price is going to do. 558 MR. JANIGAN: Currently the Venezuelan oil struck and the Iraqi war concerns are driving the price of oil. 559 MR. KITCHEN: I believe that to be the case. 560 MR. JANIGAN: Now in looking at the end-use cost of natural gas, inclusive of the mean delivery charge component, I wonder if you could turn up Exhibit C.16.66. 561 MR. KITCHEN: Sorry, what was that reference? 562 MR. JANIGAN: Exhibit C.16.66. 563 MR. KITCHEN: We have it. I have it. 564 MR. JANIGAN: In that -- the question was to provide the rate impact shown in schedule 2. It's been visited earlier, by rate class for the end-use cost of natural gas including the gas commodity cost, upstream transportation cost, and regulated utility costs including transmission, storage, and distribution. And if Union is unable to establish an appropriate gas commodity cost to use for direct purchase customers, please use the current system gas charge for all customers. 565 Now, if I look at the following table on page 2 of that, it would appear that the maximum impact upon the direct purchase classes that will be obtaining a credit under your proposal for the -- to replace the DCC is about 2 per cent? 566 MR. KITCHEN: Those are the numbers that are calculated using the assumption. I think what we used was $237/ 10 3. 567 MR. JANIGAN: Yes. 568 MR. KITCHEN: But I guess that I'm not sure -- it doesn't change the fact that Union's delivery rate will be increasing substantially based on that -- based on an alternative methodology to eliminate the DCC. 569 MR. JANIGAN: Yes, but when it's all calculated in, the net effect on these customers is about 2 per cent. 570 MR. KITCHEN: I don't know what a customer pays for his gas. My concern is the delivery rate change. When we provide delivery rate impacts for facilities that we put, we don't look at the customer's impact and say, well -- if we're building a Dawn-Trafalgar facility for instance, we don't say the impact on a customer is deminimous because we looked at the whole delivery bill. We look at the delivery rate only, and this is not consistent with it. 571 I -- personally I can't comment on what another customer's total supply cost is and whether or not that will make them switch. 572 MR. JANIGAN: But the fact of the matter is that one of the issues that you've raised is the threat of customers switching to an alternate fuel in this proceeding, and what we've agreed upon, essentially, is that the cost of that fuel is based on a whole number of different components, one of them is the delivery rate. 573 And in this scenario, we've built in some reasonable expectations with respect to the different components of the gas delivered to the customer and have shown that the net impact is about 2 per cent. 574 MR. KITCHEN: That doesn't change the fact that a change in the delivery bill will cause a change in how a customer consumes. 575 If a customer, for instance, is a feedstock customer, they may look at this and say, Well, we're just not going to produce, because we're out of the market for something. Then we lose the whole amount. 576 MR. JANIGAN: But in the final analysis, what he's going to have to do is sit down and look at the end of the day, if I switched from natural gas to oil, I'm going to be paying this amount in total, and that's what's the concern. 577 MR. KITCHEN: As Ms. VanderPaelt said, they will look at the total economics in making their decisions, but that doesn't detract from the impact on Union's delivery rate. 578 MR. JANIGAN: Now, I take it if a customer -- I take it given the one-year commitment of direct purchase customers, there's no guarantee that if they are getting the benefit of the DCC, elimination costs embedded in rates, that they won't switch to alternate fuels. They're not contractually obligated to stay with natural gas. 579 MR. KITCHEN: Through the elimination of the DCC -- are you asking through the elimination of the DCC do they become contractually obligated to take interruptible volumes? 580 MR. JANIGAN: Maintain gas supply. 581 MR. KITCHEN: As an interruptible customer, they have the -- sorry, as a customer that has the ability to fuel switch, they will look at their demands and consume -- they will look at the price and consume what they need to consume to make the best -- that makes the best economic sense to them. I can't comment on -- 582 MR. JANIGAN: I guess what I'm asking is: Are residential customers being asked to be paid for a pig in a poke? Essentially people were asked to pay the DCC commitment embedded in rates in order to make sure that they're going to stay on gas, but there's no commitment from them to stay on gas. 583 MS. VANDERPAELT: I would suggest there's no commitment, but the firm customers have facilities that go into their plants which are substantial. So although we've identified there's 600 ^10/6 of load switching, there's also all the firm portions of those rates that are impacted by our DCC proposal and those customers just can't remove the facilities and put in another facility. So there is definitely a guaranteed stream of gas flowing down our system to meet these based on the firm use and the infrastructure that these companies have built in. 584 MR. JANIGAN: That also seems to argue for the fact that there -- it's quite difficult for customers to switch. 585 MR. KITCHEN: Switch to fuel? Switch to an alternate fuel? 586 MR. JANIGAN: Yes. 587 MR. KITCHEN: I don't believe it does. A customer that reduces its consumption because it has the ability to switch is doing so at the drop of a hat. 588 If it -- if the change is significant enough to cause capital requirements, capital to change, or to change their baseload consumption, they will do that, and those reduced volumes will be reflected in higher rates at some point. It's not going to be an immediate overnight change, but it has the potential to impact rates. 589 MR. JANIGAN: If they've heavily invested in facilities associated with natural gas, they're much less likely that they're going to embark upon a decision to change fuels. 590 MS. VANDERPAELT: Customers would look at their choice every time they're putting in capital equipment, replacing existing equipment. And those that are identified in C.16.71 are customers who are interruptible customers, who are required to have fuel switching capabilities and view that as a choice that they make at the time they put the infrastructure in. 591 MR. JANIGAN: Now, Union obtained the ability to negotiate rates in the RP-1999-0017 decision? 592 MR. KITCHEN: Yes. 593 MR. JANIGAN: And the reason those negotiated rates were obtained were to mitigate bypass threats? 594 MR. KITCHEN: I think that was one of the reasons that was brought forward, yes. 595 MR. JANIGAN: And a bypass threat results in a customer not moving gas volumes through the Union distribution system. 596 MR. KITCHEN: It effectively bypasses our distribution facilities, yes. 597 MR. JANIGAN: And if Union has concerns about possible reduced volumes, it still has the option to negotiate rates lower than a posted toll to retain serving that customer's loads through its distribution system. Would you not agree? 598 MR. KITCHEN: Union has the ability to negotiate rates, but I think we need to look at Union's proposal to offer a negotiated long-term rate to a customer. That was done in the context of a PBR filing that didn't contemplate rebasing. 599 To the extent that Union is -- has to negotiate a rate to mitigate bypass or to mitigate volume risk, it would be doing so -- it would be doing so in order to maintain volumes. I'm not sure if that deficiency generated by those transactions shouldn't go into the next rebasing hearing to be recovered from customers. 600 MR. JANIGAN: But let's assume you did that. You presumably would be doing it on the basis of real information about the real customer and not speculative information. 601 MR. KITCHEN: That's right. And to the extent we did that, it would also be, as it notes in the decision, subject to scrutiny by the Board. 602 MR. JANIGAN: In your material you indicate that Union has five customers that are taking services under negotiated rates at the moment? 603 MR. KITCHEN: Yes. 604 MR. JANIGAN: And I believe four of the five contracts negotiated have been negotiated at a discount? 605 MR. KITCHEN: Yes. 606 MR. JANIGAN: Is it Union's view that this Board should view the DCC payment as a load retention rate? 607 MR. KITCHEN: No, the DCC is not be being proposed to be eliminated as a means of retaining load. It's being proposed as a means to align the -- primarily as a means to align the 365-day obligated delivery with the unbundled service. 608 The result of eliminating the DCC another way may be that there is load loss, but it's not a load retention strategy. The DCC exists, and customers expect to receive recognition for their obligated deliveries. 609 MR. JANIGAN: I wonder if you could turn up Exhibit C.1.85. 610 MR. KITCHEN: I have it. 611 MR. JANIGAN: And I believe in that interrogatory, you indicate that system sales customers don't provide any system facilities benefit. Is that because they don't provide obligated deliveries at Parkway? 612 MR. KITCHEN: I don't think that the answer says that there's no benefit. I think that it says that system deliveries aren't made pursuant to an obligation. All that means is that Union, as operator of the system, isn't obligated to provide deliveries to itself. It provides them at whatever point is required to ensure that the system functions in an optimal way. 613 MR. JANIGAN: Because they don't have that obligation to deliver, they don't provide a system facilities benefit. 614 MR. KITCHEN: They do provide a system benefit and that is also factored into rates. Both Union's firm deliveries and the obligation by direct purchasers are factored into the reduced facility size. 615 MR. JANIGAN: You don't get a credit, though, for that, a system sales credit? 616 MR. KITCHEN: Union doesn't pay the DCC to itself. 617 MR. JANIGAN: Well, if it paid it to itself, the benefit would flow to Union's customers, presumably. 618 MR. KITCHEN: If the DCC was paid to itself, it would have to be flowed back to customers in the same way. 619 MR. JANIGAN: Okay. 620 And it's Parkway, principally, what the obligation has to be obtained in order to minimize the facilities; is that correct? 621 MR. KITCHEN: The primary facilities gain is made through obligations at Parkway in terms of avoided Dawn-Trafalgar facilities. 622 MR. JANIGAN: And the direct purchase customers that negotiated their delivery point with Union; is that correct? 623 MR. KITCHEN: To the extent that the direct purchase customer was assigned capacity that Union held at Parkway, they are obligated to provide it there, but a new customer or a customer that had deliveries into Dawn would be obligated at that point. 624 MR. JANIGAN: Now, why is it that Parkway is the point of delivery for direct purchase customers and not Dawn? 625 MR. KITCHEN: Because it's the requirements at the east end of Union's system that are met by those east end deliveries. The east end deliveries, as I said, don't actually go to serve the in-franchise demands. On a physical basis, on design day they go to serve the ex-franchise design day demands, primarily. That being, then, 12 customers. 626 If we had obligations at -- if all deliveries were obligated at Parkway -- or at Dawn, sorry, the -- you would still -- you would need to move all of those demands down the Dawn-Trafalgar and you would have a larger system. 627 MR. JANIGAN: Now, does -- prior to the vertical slice methodology, was it not the -- provided in OEB decisions that direct purchase customers were to be allocated TCPL capacity? 628 MR. KITCHEN: Customers were allocated TCPL capacity up until the vertical slice, yes. 629 MR. JANIGAN: Does Union hold any TCPL capacity to the south for peak day requirements of Parkway anymore, which they provide for system sales deliveries? 630 MR. KITCHEN: No. 631 MR. JANIGAN: And in the last -- actually in the reply submission in EB-2001-0441 -- that's on page 24 of our materials -- I believe it's noted there that as of the summer, 2001, there was no TCPL FT capacity remaining. 632 MR. KITCHEN: Yes. 633 MR. JANIGAN: And Union holds Alliance-Vector firm capacity and the majority of system supply, therefore is delivered at Dawn? 634 MR. KITCHEN: If we don't have capacity at Parkway, then it would be showing up at Dawn, yes. 635 MR. JANIGAN: On a planned basis, the Alliance-Vector capacity is utilized at 100 per cent load factor? 636 MR. KITCHEN: Yes. 637 MR. JANIGAN: In order to utilize this transportation capacity at 100 per cent load factor wouldn't the gas supply from that capacity have to be delivered on a firm daily basis? 638 MR. KITCHEN: Yes, it's delivered on a firm daily basis. 639 MR. JANIGAN: Which, in effect is what an obligated delivery pattern of a supply coming in 365 days is. 640 MR. KITCHEN: Yes, but to the extent that Union saw -- to the extent that Union needed to change its delivery patterns, it could do so, because it is not -- the delivery is firm, yes, but Union could move its deliveries to the point where it needed the gas most over time. 641 MR. JANIGAN: If there was a -- if there was a lower load factor than, there would be less than optimal use of the contracts held by Union, I would take it? 642 MR. KITCHEN: We would incur UDC if it was less than 100 per cent. 643 MR. JANIGAN: Okay. And wouldn't Union then need more storage to meet peak requirements? 644 MR. KITCHEN: If the gas is arriving on peak day, it doesn't actually go into storage, so that's the basis of the design for Union's rates, so it would just flow up the Dawn-Trafalgar to meet demand. 645 MR. JANIGAN: In any event, if there was less -- if gas at Dawn was less than needed on the basis of deliveries, there would be an impact on the system. 646 MR. KITCHEN: Repeat your question. 647 MR. JANIGAN: If gas at Dawn was being supplied less than the planned basis for deliveries, there would be an impact on the system. 648 MR. KITCHEN: On an actual basis? 649 MR. JANIGAN: Yes. 650 MR. KITCHEN: If our deliveries are different from what we planned, there's an impact on the system. That's irrespective of whether it's Dawn or Parkway. 651 MR. JANIGAN: Now, yesterday Mr. Simpson indicated that to optimize the northern TCPL capacity, there are diversions that take place from the gas that is ordinarily obligated at Parkway by direct purchase customers in the south. 652 MR. KITCHEN: Yes, I believe that to be the case, although, I haven't -- I didn't hear Mr. Simpson's testimony yesterday so, ... 653 MR. JANIGAN: And this occurs during peak? 654 MR. PENNY: Just so we're clear, perhaps I could ask through you, Mr. Chairman, whether Mr. Janigan has the reference to that evidence. 655 MR. JANIGAN: If you turn up line 635 and 636, it might be helpful, of yesterday's transcript. 656 MR. SOMMERVILLE: Do the witnesses have that? 657 MR. KITCHEN: Yes, we do. 658 MR. JANIGAN: "That 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 searches its integrated sales customers today. So absent direct purchase, we have molecules that fill up the northern pipe and arrive in the northern delivery days on peak days. Non-peak days it's delivered to the southern operations area, and that's the key element of our portfolio. That's why it's in the vertical slice." 659 When a peak occurs in the north, the diversion is no longer going to be filled with gas to the south on a diversion basis, and the northern TCPL will be used in the north to meet peak day requirements. 660 MR. PENNY: Mr. Chairman, I don't think Mr. Simpson was speaking at all about the obligations of customers to deliver. He was speaking about what happens to the molecules, to the actual molecules in order to make the system work on a given day. 661 MR. JANIGAN: That's fine. 662 Do you have enough -- 663 MR. KITCHEN: I need you to restate the question and I'll tell you whether or not we can answer that. I'm not sure that we have the expertise, but we'll try. 664 MR. JANIGAN: I'll try to put it in more general terms. 665 What we heard yesterday through Mr. Simpson was that Union manages this system as an integrated system with a view to optimizing the use of its facilities. 666 MS. VANDERPAELT: That's true. 667 MR. KITCHEN: That's true. 668 MR. JANIGAN: And one of the ways that it does so is by way of the diversion of the molecules to meet peak day requirements, or at least the movement of molecules to meet peak day requirements. 669 MR. KITCHEN: Yes. 670 MR. JANIGAN: And if -- when a peak, -- as we understand it, when a peak occurs in the north, the diversions are no longer going to be filled with gas in the south on a diversion basis. The northern TCPL will be used in the north to meet peak day requirements? 671 MR. KITCHEN: Of the north, yes. 672 MR. JANIGAN: And the direct purchase customer, which has given this northern TCPL assignment, will continue to obtain the DCC credit as if the customer was delivering on an obligated basis to Parkway, notwithstanding the fact that it isn't really happening. 673 MS. VANDERPAELT: I think what Mr. Simpson stated there is the customer is obligated to put gas into the pipe at Empress 365 days. They do not have a choice around that, and that is their obligation. 674 Union delivers that gas to the area that needs it based on peak day, according to his testimony, and for that, the customer is compensated, as he is with all obligated deliveries. 675 MR. JANIGAN: Now, if there's a peak day in the north and in the south, what happens to the gas that was diverted to the north that was to be delivered to the south by the direct purchase customer in the south. Where does he get his gas now? 676 MS. VANDERPAELT: Because Union's planning their system, that would be our operations group, who -- they would have a contingency plan in place in order to make sure our east-end deliveries were still made at Parkway. I can't speak to what their plan is, but they would have a plan in place and would have thought out those circumstances. 677 MR. PENNY: Mr. Chairman, Mr. Simpson did address that in answer to a question that I asked him in re-examination at paragraph 8.20 and he said they would get that gas from storage. 678 MR. JANIGAN: If it's maxed out, how do you get the gas from storage is the question. You're peaking in the north and the south. 679 MR. KITCHEN: The gas -- on peak day, the gas coming out of storage and also arriving at Dawn was moving on the Dawn-Trafalgar and the first demands that are met are those that would be in-franchise customers as it moves along the Dawn-Trafalgar via the laterals, then we meet our demands at Parkway -- Kirkwall for TCPL, and then the remaining volumes would actually move on the Dawn-Trafalgar, in portion serve ex-franchise demands at Parkway. 680 MR. JANIGAN: Just one last item. I wonder if you could -- just a moment, please. Sorry. 681 I wonder if I could refer you to an excerpt from a transcript from the RP-1999-0017 proceeding. 682 MR. MORAN: That will be Exhibit F.2.3, excerpt of transcript from RP-1999-0017 proceeding. 683 EXHIBIT NO. F.2.3: EXCERPT FROM TRANSCRIPT FROM RP-1999-0017 PROCEEDING 684 MR. JANIGAN: And this transcript relates to a Board briefing concerning the ARD agreement filed in RP-1999-0017, and I'm curious with respect to page 27 of this transcript, and I just want to make sure that I understand Mr. Baker's answer here and what role it plays or does not play in what's been presented before the Board here. 685 His answer starting on line 9 that: "Maybe to try to clarify it a bit more, in the approved rates in EBRO-499, again, take rate 2, for instance, if there was -- I'm sorry, M-2, for instance -- if there was, say, 10 million of delivery commitment credit that was recovered within the M-2 rate, it is that 10 million that will be taken out of the M-2 rate. So it goes back to the amounts that were approved in EBRO-499 for recovery within those specific rate classes." It sounds to me that Mr. Baker was in our camp at that point in time; am I correct? 686 MR. KITCHEN: Well, I hope he wasn't, but I don't think that he was. 687 Union's proposal is to eliminate -- eliminate the payout based on the payout, and to the extent that there is an amount in delivery rates with respect to the obligated deliveries, it's the net amount that remains in delivery rates. 688 MR. JANIGAN: Yes. 689 MR. KITCHEN: It might be useful if we could turn to -- just let me find the reference. If we could turn to Exhibit B, tab 9, schedule 3, and it may clarify what I think Mr. Baker might have been saying. 690 MR. SOMMERVILLE: Could I have that reference again? 691 MR. PENNY: If I might just point out Mr. Chairman, Mr. Baker was sitting in this chair yesterday and it might have been useful if Mr. Janigan had questions for Mr. Baker that he put that to him. 692 MR. JANIGAN: I have to say that I didn't have the transcript then. 693 MR. KITCHEN: The reference was Exhibit B, tab 9, schedule 3. 694 MR. SOMMERVILLE: Thank you. 695 MR. KITCHEN: The schedule shows the actual elimination of the DCC and how it would actually flow through to rates. 696 Union's proposal will eliminate both the cost and the revenue stream. If you look at the first three columns, columns A, B, and C, those are the 1999 approved delivery revenue and delivery cost. Included in column B is the allocation of the recovery of those costs and there's no -- there's nothing in the delivery revenue column, in column A, with respect to the payment. 697 If you then move to the '99 net -- 1999 approved net of DCC, if you were to compare column A to column D, you would see that we have removed from there the payout. So for M-2 customers, I believe that payout was around 3.8 million dollars, and that appears on schedule 1 from Exhibit B, tab 9. 698 And if you were to compare column D and column E, you would see that $19 million have been removed from the cost side. I think Mr. Baker may have been referring to that. It doesn't change our proposal at all. I don't think it necessarily -- anything hinges on it. What we're doing is we're removing both the recovery -- DCC recovery and the payout, such that customers end up paying the same net delivery bill. 699 This schedule provides a calculation of the revenue cost ratios to show how those change going from DCC current mechanism to DCC out. 700 MR. JANIGAN: Yes. 701 MR. KITCHEN: But the net impact on a rate class would be the net of what they're paid versus what's recovered. 702 MR. JANIGAN: I guess it amplifies that the -- the correctness of the Board's decision with respect to ambiguity on that. 703 Thank you, panel, those are all my questions. 704 MR. SOMMERVILLE: Thank you, Mr. Janigan. It's now 12:25. 705 Can I have some indication: Do all of counsel present intend to cross-examine this panel? 706 Mr. AIKEN: I do, Mr. Chairman. I expect to be somewhere between half an hour and 45 minutes. 707 MR. SOMMERVILLE: Thank you. Mr. Ryder? 708 MR. RYDER: Yes, I do. I may be a little longer because I have a few points. 709 MR. SOMMERVILLE: Ms. Young. 710 MS. YOUNG: I have no questions for this panel. 711 MR. SOMMERVILLE: Ms. Bodnar. 712 MS. BODNAR: No questions. 713 MR. SOMMERVILLE: Mr. Warren. 714 Mr. WARREN: I expect to be no more than 15 minutes at the end of the day, thanks. 715 MR. SOMMERVILLE: Mr. Adams. 716 MR. ADAMS: No questions. 717 MR. SOMMERVILLE: Mr. Haynal. 718 MR. HAYNAL: Approximately 10 minutes. 719 MR. SOMMERVILLE: Mr. DeRose. 720 MR. DeROSE: At the moment two very short questions, that's it. 721 MR. MORAN: And I expect to be about half an hour. 722 MR. SOMMERVILLE: I propose to reconvene at 1:30. Does that hour and five minutes give everyone enough time over the break to do what they need to do? 723 MR. PENNY: That's fine for us, Mr. Chairman. 724 MR. SOMMERVILLE: Does that create a difficulty for anyone? 725 We'll reconvene at 1:30. It's my intention to proceed until around 4 o'clock, we would see as our normal time to adjourn for the day. We'll play that by ear, but if that's of some assistance to parties. 726 Mr. Ryder, would you be in a position tomorrow, if we were to finish with this panel today, to proceed with your evidence tomorrow? 727 MR. RYDER: Yes. 728 MR. SOMMERVILLE: We'll adjourn until 1:30. Thank you. 729 --- Recess taken at 12:24 p.m. 730 --- On resuming at 1:30 p.m. 731 MR. SOMMERVILLE: Please be seated, thank you. 732 MR. SOMMERVILLE: Are there any preliminary matters, before we continue with the cross-examination? 733 MR. PENNY: Just the one, Mr. Chairman, that the undertakings from G.1.1 and G.1.2 have now been filed. 734 MR. SOMMERVILLE: Thank you, I have that. I have both of those. Thank you. 735 We will proceed with the cross-examination of this panel. 736 Mr. DeRose, are you prepared to proceed at this point? 737 MR. DeROSE: Yes. 738 MR. SOMMERVILLE: Thank you. 739 MR. DeROSE: Certainly that would be fine, sir. 740 Mr. Chair, over the lunch hour, my cross-examination became slightly longer than two questions, just to give you a warning. It's maybe now up to about ten, but I believe it will still be short. 741 MR. SOMMERVILLE: We're used to that kind of slippage, there DeRose. As long as it doesn't go any further than that. No, I'm teasing. Please proceed. 742 CROSS-EXAMINATION BY MR. DeROSE: 743 MR. DeROSE: First of all, this morning you referred to a number of letters you received from customers? 744 MR. KITCHEN: Yes, I believe there were letters sent to the Board and we received copies of those letters. 745 MR. DeROSE: Would you would you be in a position to either file those as an exhibit today or undertake to provide those to the parties? 746 MR. KITCHEN: Yes, we could undertake to provide that. 747 MR. MORAN: That would be undertaking G.2.1. 748 UNDERTAKING NO. G.2.1: LETTERS SENT TO Union BY CUSTOMERS 749 MR. DeROSE: Secondly, can you confirm that a company by the name of Coral Energy would been affected by what has been called the intervenors' proposal? 750 MR. KITCHEN: Yes, they would in fact be affected by this proposal. ^ 751 MR. DeROSE: They would be in one of the industrial classes that would be seeing a rate increase? 752 MR. KITCHEN: Yes, they, I believe, are a T-1 customer expected to come on. 753 MR. DeROSE: Now, this morning there was some discussion about the parameters of direct purchase customers' obligation to deliver and I would just like some clarification on that. 754 First of all, the direct purchaser's obligation to deliver is explicit, in other words, it's contractual; is that right? 755 MR. KITCHEN: It is within the contract. It is contractual. The -- it's contractual, though, in lieu of the payment of DCC? 756 MR. DeROSE: Is that contained -- is the general transmission agreement that they would be contained in, or where would the contractual obligations be contained in? 757 MS. VANDERPAELT: It would be contained in schedule 2 of their bundled T contract, and if they were a T-1 customer, it would be in schedule 2 of their T-1 contract. 758 MR. DeROSE: And that obligation to deliver would be binding on all direct purchase customers within that class; is that -- 759 MS. VANDERPAELT: Yes, that's correct. 760 MR. DeROSE: Am I right to understand that there's no similar provision contained in the contracts between system gas users and Union, in terms of the obligation to deliver? 761 MS. VANDERPAELT: The system gas customers don't actually have a contract with Union, because they're on system there's inherently a non-contractual relationship, so there's no explicit requirement there. 762 MR. DeROSE: And with respect to the delivery point obligations, they are delivery point specific; is that correct? 763 MS. VANDERPAELT: Yes, the obligations are stated by the point that Union expects to receive the gas at on an obligated basis. 764 MR. DeROSE: And when Union buys gas for system gas users, is Union restricted to specific delivery points? 765 MS. VANDERPAELT: No, Union looks at the entire system and purchases gas in a manner that optimizes the assets to serve the entire system. 766 MR. DeROSE: So there's no delivery point specific obligation on the company? 767 MS. VANDERPAELT: No, there isn't. 768 MR. DeROSE: And this morning you discussed the penalty that's imposed on direct purchase customers who fail to deliver. Is there -- well, my understanding is that there would be no similar penalty imposed on Union or through Union to its system gas users if for some reason Union failed to deliver at any given point. 769 MR. KITCHEN: No, that's right, Union wouldn't penalize itself, although I would not expect Union to fail given that they have an obligation to provide the service that they are providing. 770 MR. DeROSE: And in your opinion, is there an implicit obligation on system gas users to deliver gas at a specific point? 771 MR. KITCHEN: No. 772 MR. DeROSE: Those are all my questions. 773 MR. SOMMERVILLE: Thank you, Mr. DeRose. 774 Mr. King? I think I neglected to ask you if -- I'm sorry, are you representing Tractebel? I guess Tractebel has withdrawn entirely. 775 MR. MORAN: Mr. Chairman, Mr. King indicated to me earlier that he wouldn't be here today. His client is still participating, but he has no questions. 776 MR. SOMMERVILLE: Thank you. 777 Mr. Aiken? 778 CROSS-EXAMINATION BY MR. AIKEN: 779 Mr. AIKEN: If I could have you turn to page 1 of Exhibit B, tab 9. There the evidence indicates that Union proposes to eliminate the DCC when 2003 rates are implemented. Couple of questions on that statement. When you say eliminate the DCC, I'm assuming you mean eliminate the payment of the DCC? 780 MR. KITCHEN: We would eliminate the payment from the delivery rates, yes. 781 Mr. AIKEN: When do you expect to implement rates for 2003? 782 MR. KITCHEN: That really depends on the timing of the Board decision, but in the rate implementation evidence, we indicated that we would implement it approximately 60 days following a decision. 783 In the evidence that was -- I believe we estimated July as the implementation. 784 Mr. AIKEN: Will the DCC continue to be paid until that point in time or just until April 1st? 785 MR. KITCHEN: Well, the DCC, under my -- I believe -- excuse me. I believe the DCC would be paid until we implement, yes. 786 Mr. AIKEN: Okay. If you look at the response to Exhibit C.16.59, the first part of the answer there states: "There are no costs to Union related to the current DCC program now." Can you explain to me what you mean by that. 787 MR. KITCHEN: The DCC is funded by in-franchise customers based on the avoided cost of the facilities, and those are allocated to customers based on design day demands of Dawn-Trafalgar. Payout is based on obligated deliveries. And to the extent it's the same number, in terms of Union's proposal, there's no cost to Union. 788 Mr. AIKEN: So no net cost. 789 MR. KITCHEN: No net cost. 790 Mr. AIKEN: Okay. 791 The recovery in rate of the DCC payment and the associated cost -- and this is on the current recovery of those costs -- is it fair to say that in most but not all cases costs are allocated based on cost causality? 792 MR. KITCHEN: Yes, I would say that's a fair statement. 793 Mr. AIKEN: And is it also true that in some cases costs can be allocated based on who benefits from a particular cost? I'm thinking of specifically the Board decision and the enabling unbundling decision. 794 MR. KITCHEN: Yes, that was -- the Board in that decision did require Union to allocate the enabling unbundling costs, based on volume, I believe, or a portion of them, of the phase 1 costs. 795 Mr. AIKEN: In paragraph 6, on page 2 of tab 9, there's a statement there that says the DCC is causing uncertainty -- 796 MR. KITCHEN: Just a second, I'm still looking. 797 Mr. AIKEN: Sorry. 798 MR. KITCHEN: That's okay. 799 Sorry, what was the page again, page 6? 800 Mr. AIKEN: Page 2. 801 MR. KITCHEN: Page 2. 802 Mr. AIKEN: Yes, paragraph 6, and specifically parts B of paragraph 6. 803 Mr. AIKEN: Yes. 804 Mr. AIKEN: It states there that: "The DCC is causing uncertainty as to the financial impact on existing customers and is causing uncertainty in negotiating commercial agreements with new customers." 805 And the question is this: Has Union negotiated any commercial agreements that may be impacted by the Board's decision on how the DCC payment and the recovery of rates is dealt with? 806 MR. KITCHEN: Yes, we have. 807 Mr. AIKEN: What would be the impact on those customers as a group and on Union? 808 MR. KITCHEN: If the DCC is not eliminated in the way that Union has proposed, the impact on that customer would be that it would affect that customer's economics in terms of whether or not they can go forward with the project. Volumewise, I'm not sure what those impacts would be, but I know that they've indicated that the DCC -- that the payment of the DCC or the reflection of it in rates is part of their economic assessment in terms of that facility and the competitiveness of that facility. 809 Mr. AIKEN: If I could have you turn up the response to interrogatory C.4.7. 810 MR. KITCHEN: Yes. 811 Mr. AIKEN: In this interrogatory the City of Kitchener asked you to recalculate Exhibit B, tab 9, schedule 1, incorporating the assumption that obligated deliveries, or maybe I should say firm deliveries to serve the M-2 system customers, were allowed a DCC. 812 On page 2 of that response, which shows an allocation of roughly $40 million rather than $27 million, would that effectively replace schedule 1 of tab 9 if the Board were to determine that the benefits were to be treated equally between direct purchase deliveries and system gas deliveries? 813 MR. KITCHEN: ? If Union was paying themselves the DCC for the system deliveries, then these are how the payments would be made and how the costs would be recovered in rates. So it's the same presentation as appears in Exhibit B, tab 1. 814 Mr. AIKEN: I'd like to get an undertaking from Union to add a column to these schedules, being schedule 1 of Exhibit B, tab 9, and page 2 of Exhibit C.4.47, that shows a net impact that would be embedded in rates under the two different approaches. So basically column B, I believe it is, minus column E. 815 MR. KITCHEN: You'd like us to take -- sorry, you'd like to take the column from Exhibit B, tab 9, schedule 1? 816 Mr. AIKEN: No, for each of those schedules individually. 817 MR. KITCHEN: Yes. 818 Mr. AIKEN: Add a column on the right-hand side that shows the impact embedded in rates under the two different approaches. 819 MR. KITCHEN: Just the net of those two. 820 Mr. AIKEN: Yes. 821 MR. KITCHEN: We can undertake to do that. 822 Mr. AIKEN: As part of that undertaking, could you also break out the M-5A, M-7 and T-1 rate classes into the firm and interruptible components? 823 MR. KITCHEN: I'll try to do that. I'm not sure if I can, but I'll try to do that. 824 MR. MORAN: That would be Undertaking G.2.2. 825 UNDERTAKING NO. G.2.2: TO ADD A COLUMN TO SCHEDULE 1 of EXHIBIT B, TAB9, AND PAGE 2 OF EXHIBIT C.4.47, THAT SHOWS A NET IMPACT THAT WOULD BE EMBEDDED IN RATES UNDER THE TWO DIFFERENT APPROACHES AND TO BREAK THE M-5, M-7 AND T-1 RATE CLASSES INTO FIRM AND INTERRUPTIBLE COMPONENTS 826 Mr. AIKEN: Do direct purchase customers have the right to choose whether or not they obligate to deliver, or is that a contractual requirement if they want to go direct purchase? 827 MS. VANDERPAELT: We view it as a contractual requirement because we pay the DCC to them. 828 Mr. AIKEN: If you don't pay the DCC to them, would it still be a contractual requirement? 829 MS. VANDERPAELT: We have -- we would expect that there is because the embedded benefit would be in their rates. 830 MR. KITCHEN: Assuming that we eliminate the DCC, based on our proposal. 831 Mr. AIKEN: And if you don't, you don't believe that you can contractually require them to obligate to deliver? 832 MR. KITCHEN: I think that that contractual obligation becomes difficult to maintain. Customers will say, why should we deliver on an obligated basis? We used to get the DCC in recognition of the system benefit; now we don't. We may be able to try to require them, but I'm not sure that we would be successful. That's really given prior decisions as to Union's ability to mandate a delivery. 833 Mr. AIKEN: If a customer fails to delivery on a short term basis, meaning a day or a week, for example, what does Union do to cover this delivery shortfall? 834 MR. KITCHEN: So if we had a failure at the east end for a day or two? 835 Mr. AIKEN: Yes. 836 MR. KITCHEN: To the extent that it was on design day, we would go the market and buy whatever service we would need to meet that demand. On an average day, I guess it would be a similar situation, although not as critical. 837 Mr. AIKEN: And then I guess my question, kind of as a follow up to what Mr. Janigan was asking about, with the failure to deliver penalty, does that sufficiently recover the cost to Union of buying that service or doing what they had to do to cover off that short term cost? 838 MR. KITCHEN: I don't think -- the failure to deliver charge is not there to recover -- is not meant to recover the cost of the supply that we would need to purchase. It's there to act as a deterrent to customers, who otherwise might fail to deliver. 839 Those -- you know the current mechanism, the DCC that's clawed back, would end up back within the deferral account, and the M-2 -- M-2 first block and the M-2 rate is really what Union would use to defray any additional overhead type costs that may result because of time spent or whatever else. But the molecule, I think, would be visited back on the customer that failed as part of that part overall. 840 MS. VANDERPAELT: Yeah, if I can add to Mr. Kitchen's response, there's the failure to deliver charge, and then if we needed to replace the physical molecules that did not show up because of peak design or we had reason to, those costs are visited back on the customer in addition to the failure charge, recognizing the failure is a penalty. The customer is in breach of the contract and the intent is, we don't want them to be in breach of contract, and that's what it's there for. It's not, as Mr. Kitchen indicated, to recover in itself the commodity costs for placement. But there may be situations where we did not need to recover the commodity, because it wasn't a design day; however, the customer still is in breach of their contract. 841 MR. KITCHEN: And I think just to add to that, when a customer is in a failure to deliver situation, the customer itself may -- we may never be able to collect on the penalty from the customer if they no longer exist. So it's not a slam dunk that we'll 842 Mr. AIKEN: That was going to be my follow-up question on Ms. VanderPaelt's scenario. If you're buying a molecule on a peak day and then you find out you can't recover from that customer, who pays for that cost? 843 MR. KITCHEN: If you don't mind, I'll take that as an undertaking. We just need to check to see what the accounting is for that. 844 MR. MORAN: That will be Undertaking G.2.3. 845 UNDERTAKING NO. G.2.3: TO PROVIDE UNION'S COST RECOVERY PLAN 846 Mr. AIKEN: If we turn to a second scenario now, and that is where the customer fails to deliver for an extended period, and by that I mean a month or more, in the RP-2001-0029 transcript Mr. Packer indicates that if the failure lasted this length of time, Union will look at moving the customer back to system, and that transcript is found on page 1 of my book of materials. That probably should be given an exhibit number. 847 MR. MORAN: Mr. Chair, that will become F.2.4, reference materials for cross-examination filed by London Property Management Association. 848 EXHIBIT NO. F.2.4: REFERENCE MATERIALS FOR CROSS-EXAMINATION FILED BY LONDON PROPERTY MANAGEMENT ASSOCIATION 849 Mr. AIKEN: And specifically, it's at paragraph 2 of 4 of the first page of those reference materials. And I guess my first question is it still the case that if a failure to deliver was taking place for an extended period of time, that customer would be moved back to system? 850 MS. VANDERPAELT: Yes, that's correct. 851 Mr. AIKEN: And how does Union deal with this return to system on a long-term basis? Specifically related to obligated deliveries. 852 MS. VANDERPAELT: If a customer had an assignment of Union's capacity we would take back that capacity and continue filling it. So if they had some TransCanada capacity or some Alliance-Vector as a part of the vertical slice we would then take on the obligations of the associated pipe with that. 853 If the customer has all of their own transportation which they have acquired on their own, we would then have to look at the best way to manage that supply in our entire portfolio, so it would be dependent on how large the customer was, the impacts it had on our system, as to what we would have to require in order to serve them. 854 Mr. AIKEN: If it were a large customer, and it was extremely costly for whatever reason to take them back as a system gas customer part way through any given year, who would those costs be recovered from? Would we go into the gas cost deferral account, for example? 855 MR. KITCHEN: To the extent that you had a large failure of an M-7 or T-1, I would presume that that customer was no longer taking demands at its plant, in which case we wouldn't need the supply. 856 I think under your scenario what you've asked is if a customer failed to deliver but then was still taking supply, a large customer, or still taking demands. 857 Mr. AIKEN: I'm thinking more from an obligated delivery point of view. In your scenario, if that customer no longer exists, you would still want that capacity delivered at Parkway. 858 MS. VANDERPAELT: If the customer didn't exist, their demands are no longer on our system, so we have a reduced requirement at the east end of our system that corresponds to that? 859 MR. KITCHEN: There may not be a complete match between what has gone from the east end and then ends at the plant, but there is a loss of demand to correspond to the loss of supply. 860 Mr. AIKEN: If we now take a look at the third page of my reference material, this is Exhibit G.4, tab 5, schedule 24, page 1 from EBRO-499, part of the cost allocation study. And I believe this is the most recently approved study that the Board has reviewed? 861 MR. KITCHEN: Yes. 862 Mr. AIKEN: And the DCC allocation is shown on line 4, labelled DCC costs allocated using the TT trend? 863 MR. KITCHEN: Yes. 864 Mr. AIKEN: What is the difference between the 24.8 million there and the 27 some-odd million that we've been talking about? 865 MR. KITCHEN: In EBRO-499, when the cost study was completed, the DCC at that point was $3.88 per 10 3. As part of the 499 proceeding, we proposed to increase it to 425, so the cost study continued to have a DCC of 388 in it, which maps to the 24,885 number, and then when rate design was done and the DCC was approved at 425, that was factored in at the rate design level but not back into the costing. 866 Mr. AIKEN: Now, as I understand your proposal, the cost associated with this payment will be eliminated, so in terms of this cost of service study allocation with the DCC, the total cost of line 4 will effectively become zero? 867 MR. KITCHEN: And the next time we do a cost study, there will be a reduction -- that line won't show up in the cost study any longer, but by the same token, we've removed the payment such that we still recognize the benefit of the DCC. 868 Mr. AIKEN: If you flip to the next page of my reference material, page 4, would you agree that what I've done there essentially reflected your embedded DCC proposal? 869 MR. KITCHEN: At line 10? 870 Mr. AIKEN: Yes? 871 MR. KITCHEN: I think I might describe it a little different. I would say that that's the -- that's the -- 872 Mr. AIKEN: Net impact. 873 MR. KITCHEN: -- net impact of the DCC recovery and the DCC payout, and so essentially that is what is left in rates. 874 Mr. AIKEN: Am I correct in assuming that the DCC and the elimination of the payment is outside of PBR? By that I mean it's not -- you can't classify it as a non-routine adjustment. It's not a pass through item and currently the price cap doesn't apply to the DCC payment. 875 MR. KITCHEN: I don't know that it's outside of PBR. It was part of our PBR proposal that was brought in -- I guess, part of our unbundled proposal that was part of the 0017 case and we at that time felt that we had an agreement in 0017 ADR. 876 We didn't actually -- when we then came to the 0029 case and were proposing to implement the DCC elimination as we thought we had agreement on, that's when that proposal -- that's when we found that there was an agreement, there was a misunderstanding and the Board found that to defer the elimination. We're still bringing this forward as part of that original proposal. 877 I wouldn't coin it as being outside of PBR. It formed part of the 0017 case. We're just now hearing it. 878 Mr. AIKEN: Would you characterize it as being treated as a separate item outside of the mainstream of PBR? 879 MR. KITCHEN: I can accept that with the caveat that had we eliminated the DCC as we had proposed, we wouldn't be sitting here today talking about it, and that wouldn't be part of the PBR process because it would have been eliminated back when the 0017 rates were set. 880 Mr. AIKEN: And if it had been eliminated back them, and it was embedded in rates as was your proposal, would the price cap then apply to that component? 881 MR. KITCHEN: Just give me a second. 882 The DCC would be eliminated prior to the escalation for the price cap. 883 Mr. AIKEN: If you could turn now to the response to Exhibit C.16.66. This is the end-use impact analysis that I had requested. 884 MR. KITCHEN: Yes. 885 Mr. AIKEN: In the response there you indicate that: "Union does not accept this analysis as meaningful." Can you explain that? 886 MR. KITCHEN: The reason that it's not meaningful is that the end-use cost is, first of all, only one -- the end-use cost is not the only component that a customer looks at, or the commodity is not the only piece that a customer looks at when they're deciding whether or not to change their demands. 887 The elimination of the DCC affects Union's rates, and I don't know what a customer is paying for the supply or not. I -- it's not meaningful from the point of view that this is not the rate impact that Union's rates will have for direct purchase customers. 888 Mr. AIKEN: Under your proposal you're going to continue to recover approximately $15.3 million dollars from the M-2 rate class. Can you provide an estimate of what the annual impact in dollars is on each of an average-sized residential, commercial, and industrial customer served under the M-2 rate class? 889 MR. KITCHEN: Of that $15 million? 890 Mr. AIKEN: Yes. 891 MR. KITCHEN: We could provide that. 892 Mr. AIKEN: Could you do that by undertaking? 893 MR. KITCHEN: Yes. 894 MR. MORAN: That will be G.2.4. 895 UNDERTAKING NO. G.2.4: TO PROVIDE AN ESTIMATE OF WHAT THE ANNUAL IMPACT OF UNION'S PROPOSAL IN DOLLARS IS ON EACH OF AN AVERAGE-SIZED RESIDENTIAL, COMMERCIAL, AND INDUSTRIAL CUSTOMER SERVED UNDER THE M-2 RATE CLASS 896 Mr. AIKEN: You've indicated earlier that you thought it might be hard to maintain the obligation to delivery if the DCC were eliminated in a manner proposed by the number of intervenors. If the Board were to determine that customers that choose the direct purchase option should continue to be required to obligate the deliveries without any compensation either directly or indirectly for doing so, would then Union's major concern then be the potential load loss that you've identified in response to Exhibit C.16.71? 897 MR. KITCHEN: I think if through the Board's decision they required Union to obligate, and that was mandatory on the part of the customer without recognition of the DCC benefit, then yes, it would be the load loss that we would potentially see. 898 Mr. AIKEN: Now, in the response to Exhibit C.16.71, you haven't attempted to quantify potential load loss. Is that something that could be done relatively easily? 899 MR. KITCHEN: I think what we're able to identify immediately is the load loss that is immediately switchable. We haven't done the analysis to determine how much firm load may be lost as a result of the DCC elimination. I don't think it would be necessarily easy to do in the form of an undertaking. 900 Mr. AIKEN: Could you provide the break out then of the firm versus interruptible volumes? I guess this maybe ties back into a previous question of the M-5, M-7, T-1 firm verus interruptible break down. 901 MR. KITCHEN: On that schedule, the interruptible volumes would appear. 902 MS. VANDERPAELT: What Mr. Kitchen was trying to get there is the 600, 10 6 that was identified in C.16.71, is what we are aware of as interruptible -- people who have the capability to switch to an alternate fuel today. We don't have a manner of estimating firm. We have letter from customers. We've heard thier concerns, what they would be factoring into their economic decisions, but we don't have a manner of estimating what that actual total would be. We're just aware that there is a risk there. 903 Mr. AIKEN: So associated with the 600, 10 6 m 3, what is the approximate delivery margin to Union on that amount of interruptible gas? 904 MR. KITCHEN: We don't have that information with us. We'd have to -- 905 Mr. AIKEN: Could you undertake to provide that? 906 MR. MORAN: G.2.5. 907 UNDERTAKING NO. G.2.5: TO PROVIDE THE APPROXIMATE DELIVERY MARGIN TO Union ON THE 600 10 3 M 3 OF INTERRUPTIBLE GAS 908 Mr. AIKEN: In the RP-2001-0029 decision, at paragraph 6.86, the Board stated that "if the rate impact on discontinuing an allocation of credit to large industrial classes would be large enough to materially affect gas deliveries to large customers, the proposal should address a phasing out of the credit program over time." 909 Has Union brought forward any rate mitigation plan related to phasing out this credit in this proceeding? 910 MR. KITCHEN: The proposal brought forward by Union continues to be the proposal that we brought forward in 0017, because we -- it's our intent to, as much as possible, leave customers without harm, pre and post DCC elimination. If our proposal did harm a customer, then I could understand why we would bring something in terms of the phasing in, but if there is no intent for harm, I don't see any reason to phase that in over time. 911 Mr. AIKEN: If we turn to schedule 2 of Exhibit B, tab 9, and I take it this schedule shows the impact of the intervenor proposal on the methodology of eliminating the DCC? 912 MR. KITCHEN: Yes. 913 Mr. AIKEN: Specifically, column E, I guess it is, you see that there is a rate increase under the intervenor proposal of 2.1 million for rate M-5A, 5.7 million for the M-7s, and 6.2 million for the T-1 rate class. 914 MR. KITCHEN: Yes. 915 Mr. AIKEN: If I could now have you keep those numbers in mind and look at Exhibit B, tab 8, schedule 2, which is a yellow page ADR update on deferral account dispositions. 916 MR. SOMMERVILLE: Could you repeat that reference, please Mr. Aiken. 917 Mr. AIKEN: Yes, it's Exhibit B, tab 8, schedule 2, ADR. It's a yellow page. 918 MR. KITCHEN: Deferral account? 919 Mr. AIKEN: Yes. 920 MR. KITCHEN: I have it. 921 Mr. AIKEN: Now, if you look specifically at line 28, and for rate class M-5A, we see a credit of 1.8 million, a credit of 4.6 million for rate M-7 and a credit of 1.39 million for rate T-1. 922 Would it be reasonable, in your opinion, if these credits to these rate classes could be used to offset a significant portion of the increase from the DCC elimination, as proposed by intervenors, for the 2003 test year? 923 MR. KITCHEN: I don't know how you could -- what justification you could have for mixing deferral accounts that are allocated based on proven methodologies to offset a DCC elimination when the DCC elimination is -- is related to something totally different from what the deferral accounts were meant to deal with. 924 Here we have deferral accounts in -- on that schedule to be tab 8, schedule 2, that are being disposed of, and through, like, normal deferral accounting process, and yet we're talking about a change to delivery rates. I'm not sure how I could justify in my mind how you would combine those two. 925 Mr. AIKEN: If we look upon the basis of the rate impact, or specifically the cost impact, to, for example, the rate M-7 customers, the DCC elimination would add $5.7 million to their costs, which would, in the 2003 test year, be offset by $4.6 million in deferral account dispositions. So there would be a net increase of only approximately 1.1 million. 926 MR. KITCHEN: That is true in the context of 2003 if you were to take those two amounts and put them together for some reason. But what would happen if you were to eliminate the DCC based on cost, is you would permanently be increasing the M-7 and T-1 and other customers that we talked about, their net delivery bill. There's no guarantee that those deferral account credits now will be credits forever. 927 It deals with it perhaps in the context of one year, but not on an ongoing basis and it doesn't recognize the ongoing benefit of the obligation to deliver. 928 Mr. AIKEN: But you would agree that we're coming back shortly in the rebasing year where the cost allocation rate design in their entirety will be reviewed by the Board, not just a specific item. 929 MR. KITCHEN: That is going to happen in the context of 2004 rebasing. I still in, my own mind, can't justify the fact that just because we have credits here that we can use those to offset something else we're doing on the delivery side. There's no link between the two, other than the fact that the numbers seem to get you close to what the costs -- what the negative impacts are on those rate classes, based on the proposal for cost elimination. 930 Mr. AIKEN: Mr. Janigan touched on the ability of Union to negotiate rates with individual customers, and I take it you have done that with, I believe, it's five customers? 931 MR. KITCHEN: Yes. 932 Mr. AIKEN: We touched on it earlier, but you're going to continue to pay the DCC until rates are implemented, which could be somewhere between May and July? 933 MR. KITCHEN: Yes. 934 Mr. AIKEN: ^ Roughly. 935 MR. KITCHEN: Yes. At this point we brought forward our proposal and are waiting for the Board's decision on that proposal. 936 Mr. AIKEN: And if we look back at schedule 1 of tab 9, am I correct in assuming this $27 million figure is based on annual cost? 937 MR. KITCHEN: Yes, that's correct. 938 Mr. AIKEN: And looking at the T-1 rate class as an example, Union's proposal is to embed the difference between the 2.2 million in column B and 8.5 million in column E into the delivery rates, that's roughly 6.3 million that would be a reduction embedded in the delivery rate. 939 MR. KITCHEN: A reduction in the delivery rate, but that reduction would maintain the rates that the M-7 and the T-1 customer are currently paying. 940 Mr. AIKEN: Yes. 941 My question is: Will these numbers change based on the fact that you're going to continue to pay the DCC for up to, maybe, six months in the current year? 942 MR. KITCHEN: No, and they wouldn't change because what we'll do is those -- the delivery rates, going forward on a prospective basis will have the benefit of the -- sorry, will have the DCC payout eliminated. And since the DCC is paid out on a commodity basis for the volumes that the customer consumes for the remainder of the year, it would be the same as if they were to get the DCC paid to them for the remainder of the year, because half the volumes, theoretically, will have been gone, will have already been consumed. 943 Mr. AIKEN: Okay. 944 Now, we've touched on the topic of the allocation of benefits, because they provided a reduced cost to all customers. Do the obligated or firm deliveries of system gas customers that Union provides provide the same benefit as direct purchase obligated deliveries? 945 MR. KITCHEN: Union itself isn't obligated to deliver. There is a benefit to having Union as operator of the system able to adjust its deliveries to wherever those deliveries are required to meet demands. 946 Overall within rates, the benefit of both the obligated delivery and Union's firm deliveries are reflected. 947 Mr. AIKEN: Do you agree with the statement that it's Union's view that rates should be designed to recover costs and to reflect the value of benefits provided customers through their actions? 948 MR. KITCHEN: Repeat that statement, please. 949 Mr. AIKEN: Is it Union's view that rates should be designed to recover costs and to reflect the value of benefits provided customers through their actions? 950 MR. KITCHEN: It's Union's view that the -- that the -- if a customer provides a benefit through an action, then -- and to another group of customers, then that group of customers should compensate the provider of the benefit for that. 951 Overall, I think that in terms of our cost of service, we're trying to recognize the appropriate allocation of costs and the appropriate allocation of benefits. 952 Mr. AIKEN: If I could have you turn up Exhibit C.25.47, this is an interrogatory from VECC that has to do with the Alliance-Vector pipeline costs? 953 MR. KITCHEN: Yes. 954 Mr. AIKEN: I take it that the Alliance-Vector pipeline provides benefits to Union's customers, including direct purchase customers. 955 MR. KITCHEN: Well, the Alliance-Vector is a pipeline that interconnects with Union and takes service on it. It provides supply and it provides an alternative to TCPL. I'm not sure if it provides a benefit in terms of ... 956 Mr. AIKEN: Perhaps you could turn to the book of materials, pages 6 and 7, and probably the top of page 7 is the most relevant. 957 MR. KITCHEN: What proceeding is this from, sorry? 958 Mr. AIKEN: Sorry, it's page 7. This is part of Union's reply submission in EB-2001-0441. And part of that submission reads at the top of page 7: "Virtually all direct purchase customers have used the flexibility resulting from the expiry of these contracts and have been able to access discounted capacities/supplies in the secondary market. The existence of discounted capacity is driven in large part by the availability of supply provided by the Alliance-Vector pipeline. Accordingly, the benefits achieved through turn back of capacity would not have been possible if no additional capacity had been built into Ontario and secondary market capacity had continued to trade at a premium." 959 What I'm saying is that Union in that reply argument seems to be implying that there is a benefit to all customers of the Alliance-Vector pipeline. 960 MS. VANDERPAELT: I believe what we were trying to say was there was a benefit to the entire Ontario market by having excess capacity into our province, as the result was there were different transmission options and different pricing on capacity. 961 Mr. AIKEN: Yes, there was a benefit to everybody in the province. 962 MS. VANDERPAELT: That's correct. 963 MR. KITCHEN: And that actually speaks back to the original Board decisions from 412 where Union wasn't able to mandate a delivery point without some sort of recognition of the benefit, and that the reason they did that was they wanted to develop the transportation systems into Ontario. 964 Mr. AIKEN: Does Union allocate a portion of the Alliance-Vector costs to direct purchase customers? 965 MS. VANDERPAELT: Direct purchase customers who get a portion of our vertical slice would be invoiced their own cost directly off Alliance and Vector. They receive their invoices directly from those pipelines. 966 Mr. AIKEN: Direct purchase customers who do not receive a slice of Alliance-Vector, they don't pay for any Alliance-Vector costs. 967 MS. VANDERPAELT: No, they would pay for the upstream costs of those pipelines that they contracted for capacity on. 968 Mr. AIKEN: I'd like to turn now to the issue of flexibility. In the response to Exhibit C.26.9 from the wholesale group. 969 MR. KITCHEN: What was that reference, please? 970 Mr. AIKEN: C.26.9. 971 MR. KITCHEN: We have it. 972 Mr. AIKEN: In that response, it indicates that: "Union has and will continue to allow customers to provide deliveries at Dawn and use M-12 or C-1 transportation capacity to meet their Parkway commitments." In Exhibit C.16.72 Union indicates that: "A number of industrial companies have taken advantage of this option." 973 My question is: Is this option available to all customers or, I guess, all direct purchase customers for delivering at Parkway? 974 MS. VANDERPAELT: Yes, there's a variety of options in the market that customers can contract for themselves. As one example, TransCanada just held an open season this last fall where customers could contract for Dawn to Parkway service through TCPL. 975 Mr. AIKEN: But it is available to all direct purchase customers? 976 MS. VANDERPAELT: That's right. The expectation is they would be contracting for their service themselves. 977 Mr. AIKEN: Yes. 978 Just from a philosophical point of view, why do these customers have to pay the M-12 or C-1 rate, if they want to move their obligated deliveries from Parkway to Dawn, why are they charged the additional rate? 979 MS. VANDERPAELT: If the customers are contracting for this service from Union, we need to charge them the regulated rate and in the IRC-26.9, we're referring to customers who are contracting at our M-12 or C-1 rates. If a customer buys this service from a third-party supplier, it would be at the rate that that third party is willing to offer the service at. 980 Mr. AIKEN: Yes. 981 If incremental Dawn-Trafalgar facility would be required to allow a customer to shift from Parkway to Dawn, would that customer pay for those incremental costs related to construct if the costs were over and above the incremental M-12 revenue generated, for example, from that customer? 982 MS. VANDERPAELT: Are we talking about an in-franchise end-use customer who was wanting to deliver gas at Dawn and they were new to our system? 983 MR. KITCHEN: In other words, incremental -- incremental to what's already there or ... 984 Mr. AIKEN: No, I'm thinking more of an existing customer who wants to take advantage of moving their deliveries from Parkway to Dawn. 985 MS. VANDERPAELT: An existing customer who wanted to do that would have to purchase a service. 986 If we were building capacity, and the customer was willing to sign up for the ten-year commitment that's required, they would be welcome to do that. 987 Mr. AIKEN: Okay, thank you. 988 One last question back on the DCC, Exhibit C.16.65, the response there was that Union has not conducted the comprehensive multi-jurisdictional analysis that question requested. My question is: Has Union attempted this analysis since November 22nd? 989 MR. KITCHEN: No, it has not. 990 Mr. AIKEN: Okay. 991 Thank you, Mr. Chairman. Those are my questions. 992 MR. SOMMERVILLE: Thank you, Mr. Aiken. 993 Mr. Haynal? 994 MR. HAYNAL: Thank you, Mr. Chairman. 995 CROSS-EXAMINATION BY MR. HAYNAL: 996 MR. HAYNAL: I have a few questions with respect to Exhibit F.2.1, the exhibit that was filed this morning. 997 MR. KITCHEN: We have it. 998 MR. HAYNAL: On the second page on the bottom of that page, there is a note: Requirements as per July 31, 2001, TFEP, additional information request, RP-2000-0110. 999 Please confirm that this RP-2000-0110 is Union's application for two loop sections under Dawn-Trafalgar section. 1000 MR. KITCHEN: I'm not sure what the docket is. I know this is related to the last TFEP application, if that was the last one. I can check, but it's based on the most recent TFEP application. 1001 MR. HAYNAL: Subject to checking, I presume that's what it was about, and my recollection is that in that facilities application, Union applied for two looped sections, and then later advised the Board that one of those two loop sections will be delayed. Do you recall that? 1002 MR. KITCHEN: I believe that's the case, yes. 1003 MR. HAYNAL: So my next question, was the second loop section installed since? 1004 MS. VANDERPAELT: I don't think so, no. 1005 MR. KITCHEN: I don't think so, no. 1006 MR. HAYNAL: It has not? Can it be undertaken? 1007 MR. KITCHEN: Yes, I don't think it has been, but I will undertake to clarify that. 1008 MR. MORAN: That would be G.2.6, Mr. Chairman. 1009 MR. SOMMERVILLE: Thank you. 1010 UNDERTAKING NO. G.2.6: TO PROVIDE STATUS OF SECOND LOOP SECTION 1011 MR. HAYNAL: My next question still within this design day flow diagram, at Kirkwall, the diagram shows a volume of 1,600,000 gigajoule per day to ex-franchise customers. 1012 MR. KITCHEN: Yes. 1013 MR. HAYNAL: Am I right in assuming that 1.6 million GJ includes deliveries to Union's in-franchise customers of TransCanada's system? 1014 MR. KITCHEN: I'm thinking of Hamilton Gauge 3, and then there's a delivery point from the Kirkwall lateral, what Union calls Dominion. 1015 MR. KITCHEN: I think that those demands are purely demands of ex-franchise customers. Those would be the demands comprised of TCPL's contracts at Niagara. 1016 MR. HAYNAL: So those additional two points I referred to would be probably in the 1.6 million GJ per day in-franchise volume arrow shown between the Lobo and Bright compressor stations on this diagram? 1017 MR. KITCHEN: Yes, the only reason why that is where it is, is for illustrating the schematic, it's not to indicate that the loads between Dawn and Kirkwall are 1.6 million. In-franchise demands of 1.6 million on design day, ex-franchise demands at Kirkwall of 1.6 million. 1018 MR. HAYNAL: Then my next question, can you please tell me for what winter seasons is -- requirements and capabilities referred to; is this for 2001/2002 or some other year? 1019 MR. KITCHEN: Just one second. 1020 2002/2003. 1021 MR. HAYNAL: Thank you. 1022 If I look at Union's facilities application which this page refers to, for 2002/2003, the total ex-franchise requirement is 4.36 million GJ per day, but on this one, if I added the ex-franchise volumes 2.4 million and 1.6 million, it's only 4 million GJ per day. 1023 Can you explain the difference or the reason for the difference? 1024 MR. KITCHEN: I'm not really sure what you're looking at. I'm not sure what I'm comparing it to. Do you have something that -- 1025 MR. HAYNAL: Okay, I'm quoting from schedule 5, Section 3 of your facilities application, which has the number RP-2000-0110. 1026 MR. KITCHEN: I don't have that in front of me. 1027 MR. SOMMERVILLE: Mr. Haynal, you want to show that to the witnesses? 1028 MR. HAYNAL: I'm sorry? 1029 MR. SOMMERVILLE: You're going to show that to the witnesses? 1030 MR. HAYNAL: Yes, I would like to show it. 1031 I am showing a copy from that exhibit and on the 2002/2003, the total M-12 contracts is slightly over 4.3 million GJ per day, and on this new exhibit, the sum of 1.6 plus 2.4 added up to only 4 million, which is more like the 2001/2002 volume. 1032 MS. VANDERPAELT: The individual who prepared these diagrams is not here, but we can check with him. 1033 My understanding from the documentation that was left with me that it was 2002/2003, but we will need to check that with him. 1034 MR. SOMMERVILLE: Thank you. 1035 MR. HAYNAL: Maybe I will stay for a minute longer. 1036 The reason could be for the discrepancy is that there are some volumes shown in the facilities application, for instance, for Gaz Metropolitain, they might have expired, and Union is not obligated to deliver those M-12 volumes. 1037 MS. VANDERPAELT: It could be that there was updates to the original filing numbers, but, again, we would have to check with the person who prepared the original diagram. 1038 MR. MORAN: That would be Undertaking G.2.7. 1039 UNDERTAKING G.2.7: TO PROVIDE THE M-12 TRANSPORTATION REQUIREMENTS FOR 2002/2003 OR FOR 2003/2004 1040 MR. HAYNAL: I could ask, Mr. Chairman, to ask Union to provide the M-12 transportation requirements for 2002/2003 or for 2003/2004. 1041 MR. KITCHEN: I just wanted to make one quick point, the -- this schematic was provided as a means of indicating how design day -- how Union services demands on design day. Trying to reconcile those demands to something that was a facilities case is doable, but it doesn't change, at all, how demands would be served on design day. 1042 MR. PENNY: Mr. Chairman, that's the drift of what I was going to say is that -- I mean, we want to provide as much information to the relevant issues as possible, but because we've got a number of information requests, already, of course, we don't want to just do things for the sake of doing them, and it's not clear to me why any of this matters, and it's really for the reason that Mr. Kitchen just outlined. 1043 The purpose of this diagram isn't to reconcile specific numbers to some facilities application. It's simply to illustrate to the Board how the system works. I don't know what difference it makes why there's a slight difference between the total here and the total in some facilities application that's not before us. 1044 MR. SOMMERVILLE: I take your point Mr. Penny, but I think we will permit the undertaking to go forward. 1045 Mr. Haynal, you may continue. 1046 MR. HAYNAL: Thank you. 1047 Would you please turn to the page which shows the diagram with the title, "estimate of winter peaking service requirements to move customer deliveries from Parkway to Dawn." 1048 MS. VANDERPAELT: The first one or the second one? They both have the same title. 1049 MR. HAYNAL: My question will apply to both, but let's start with the first one. 1050 MS. VANDERPAELT: Okay. 1051 MR. HAYNAL: My understanding is that the gas in the winter moves from Dawn to Parkway. 1052 MS. VANDERPAELT: That's correct. 1053 MR. HAYNAL: So then I am confused with this title, which shows that the requirements on the Dawn-Trafalgar transmission system decreased from day one to day 73 as the days become less cold during the winter, and at the same time, the deliveries move from Parkway to Dawn, which is a westbound movement, so I'm confused with the title and the diagram. Please help me. 1054 MS. VANDERPAELT: The title was really there to illustrate the second diagram, which included the pink line, because what we were trying to illustrate is where we would have a shortfall requirement if customers moved their delivery from Parkway to Dawn. The reason we created the first diagram is we recognized it was probably easier to explain in two sections than it was to explain in one diagram in totality. 1055 MR. HAYNAL: But the fact is if a customer wants to get gas at Dawn instead of at Parkway in the winter season, it can be done by displacement. Am I right in that? 1056 MS. VANDERPAELT: If a customer wants to deliver gas at Dawn instead of Parkway in the winter, they can do it if we have facilities or if they've purchased facilities or purchased a third-party service in order to satisfy the Parkway obligation. 1057 And what I was trying to achieve on the second diagram is where the pink line is, the difference between the very top of the green to the pink, and all the way to day 53 shows the amount of service they would have to purchase in order to move 20 per cent of their deliveries from Parkway to Dawn. 1058 MR. HAYNAL: I'm confused, because physically the gas does not move from Parkway to Dawn. How it takes place, the gas, which is to be delivered to Parkway is not delivered to Parkway by Union, but the gas is dropped off at Dawn. That's what I call displacement. 1059 MS. VANDERPAELT: The way our system is designed is if that gas is delivered at Dawn, the needs that was to be met on a peak day are along the Dawn-Trafalgar transmission line, so we then have to move that gas towards Parkway in order to meet our design day requirements and this is where we have a shortfall if the customer delivers the gas to Dawn, because there's no facilities to move that gas instead of delivering it to Parkway as we had designed on a peak day. 1060 MR. HAYNAL: I will have to read this. I don't think that's how it works. I will have to read it. 1061 What happens in the summertime? What's the capacity of Union to move gas from Parkway to Dawn? Do you have -- 1062 MS. VANDERPAELT: Actually, over the last two summers, we have continually moved gas from Dawn to Parkway. We have not had reverse flow. 1063 MR. HAYNAL: Because you don't need any -- any westbound movement even during the -- 1064 MS. VANDERPAELT: Yes, we haven't had cause for westward movement in the last two summers. 1065 MR. HAYNAL: Are the Union facilities capable of moving gas from Parkway back to Dawn? 1066 MS. VANDERPAELT: Yes, they are. 1067 MR. HAYNAL: The compressor stations can -- 1068 MS. VANDERPAELT: You're getting into an area that's not my expertise. 1069 MR. HAYNAL: Thank you very much, Mr. Chairman. 1070 MR. SOMMERVILLE: Thank you Mr. Haynal. 1071 Mr. Warren. 1072 CROSS-EXAMINATION BY MR. WARREN: 1073 Mr. WARREN: Sir. 1074 Panel, my name is Robert Warren and I'm acting for the Consumers' Association of Canada, and you have forgotten more about DCC in the last minute and a half than I will ever know. I'm going to ask you to indulge my level of ignorance as I sort of walk in baby steps through what DCC is. 1075 I want to begin with a very crude historical framework, if I can, j just so that I can I understand it. Am I right in assuming that it's at some point, historically, 100 per cent of the deliveries on the Union system were system gas customers? 1076 MR. KITCHEN: Prior to direct purchase, that would be the case. 1077 Mr. WARREN: In that universe, Union controlled the entire system, and so could minimize the risk of a failure to deliver. It was all within your control; is that fair? 1078 MR. KITCHEN: It could minimize the risk of a failure to deliver. It could also optimize the size of the system. 1079 Mr. WARREN: With the advent of direct purchase, some portion of that 100 per cent, whatever it is, let's say notionally 50 per cent, because the exact amount doesn't matter. 50 per cent of the deliveries were now under the control of the direct purchasers? 1080 MR. KITCHEN: Right. Capacity was theirs to control. 1081 Mr. WARREN: With that, I take it, there was a risk to Union that someone would fail to deliver. 1082 MR. KITCHEN: in the beginning I don't even think so much someone would fail to deliver but would not deliver their gas to Union. It's not so much a failure, it's that the gas wouldn't be where we needed it at that time. 1083 Mr. WARREN: Thank you. That's a more precise way of putting it. And that was a risk that was outside of Union's immediate capacity to control; is that right? 1084 MR. KITCHEN: Yes. 1085 Mr. WARREN: Am I right in assuming that there were a number of mechanisms which Union could use, could deploy, if you wish, in order to try and control that risk, one of which was an contractual obligation to deliver 100 per cent of the capacity; is that fair? 1086 MR. KITCHEN: Yes. 1087 Mr. WARREN: A second component of that was, if you wish, a corollary of that contractual obligation, was a penalty if you don't deliver, then you're going to suffer a penalty of some kind. Is that fair? 1088 MR. KITCHEN: Presumably you would have a contractual obligation and you would have a penalty to go along with that. 1089 Mr. WARREN: And a third mechanism, if I'm right is that you could, to put it at the crude level with which I'm comfortable operating, you could pay people to deliver 100 per cent of their obligation, correct? 1090 MR. KITCHEN: You could incent them to deliver, yes. 1091 Mr. WARREN: That's what the DCC is: It's an incentive to fulfill your contractual obligation; is that fair? 1092 MR. KITCHEN: It's an incentive to fill your obligation of delivering -- again, I look at the consent within the contract as really being two-pronged. You obligate to deliver, and in respect of that obligation, you get the DCC. 1093 Maybe I haven't said anything different from what you've just said -- 1094 MR. PENNY: I think he has said something different in a sense and it arises because Mr. Warren's question called for a legal conclusion. 1095 I think Mr. Kitchen has said it accurately, which is that because of the Board's prior -- he say this had before, in answer to questions Mr. Janigan put, that in response to the Board's earlier ruling that Union was not in a position to require direct purchasers to deliver at a particular point, for fear that it would impede the development of the competitive market, Union had therefore to offer some incentive to those people in order to get them to agree to something that the Board wasn't prepared to let Union impose upon them. 1096 Mr. WARREN: It's an incentive to get them to honour their obligation. 1097 MR. PENNY: Not to honour into their obligation. To enter into the obligation. 1098 Mr. WARREN: I'm not sure anything turns on this. It's an incentive to enter into the obligation; is that right? 1099 MR. KITCHEN: Yes. 1100 Mr. WARREN: Can you and I agree, panel, that once you start paying people incentives to do things, it's very painful if you take the incentives away; correct? 1101 MR. KITCHEN: Obviously from these proceedings, it's complicated, because what we're trying to do is to take away -- to maintain the incentive of delivering through the delivery rate change and not have a mechanism where we collect money through delivery rates in the form of a bill and make a separate payment to them. 1102 Mr. WARREN: I want to cut to the nub of what we're talking about here today, and that is if we take away the incentive, there's a risk that people will not enter into the obligation. 1103 MR. KITCHEN: That is correct, that we will not have the ability to maintain the obligation that we had. 1104 Mr. WARREN: Now, for the next series of questions, I want to again apologize in advance for my ignorance of the history of DCC. But can you tell me, panel, how the is total amount of the DCC calculated? 1105 MR. KITCHEN: With the current methodology, the DCC is calculated as an avoided facilities cost based on Union's embedded M-12 rates so. We looked at the facilities that would be avoided by obligated deliveries -- all obligated deliveries, and if those weren't there, what facilities would be required to replace them. That cost was determined using Union's embedded cost rather than using an incremental cost for it. ^ 1106 Mr. WARREN: I apologize again for the crudeness of this, is the assumption that if you took away all of the direct purchases, that there would be facilities that would be required to operate the system? 1107 MR. KITCHEN: If you took all of the obligation? 1108 Mr. WARREN: Yes? 1109 MR. KITCHEN: There would be facilities required. 1110 Mr. WARREN: And is that the way it's calculated? 1111 MR. KITCHEN: Yes, the assumption is that there are no east end deliveries. 1112 Mr. WARREN: So the assumption -- just so that I can understand, the assumption is that everybody reaches their obligation to deliver completely; is that fair? 1113 MR. KITCHEN: Right. It's not so much -- there is -- what we said is what facilities would we require if there was no such thing as a east end delivery. And that would mean that more gas would have to flow on the Dawn-Trafalgar to meet the design day demands, and that extra flow is in excess of the capacity that we currently have. 1114 Mr. WARREN: Would the facilities be required to meet the existing system obligation? 1115 MR. KITCHEN: Facilities in place today? 1116 Mr. WARREN: Would additional facilities be required to meet the -- assuming the obligations no longer existed, you have system customers whose needs you need to meet. Would there be additional facilities required needed to meet those additional system customers' needs? 1117 MR. KITCHEN: I think I -- for planning purposes, we don't look at system demands versus direct purchase demands versus ex-franchise demands. We look at what do we need to meet our in-franchise requirements, facilitieswise, and what do we need to meet our ex-franchise requirements. We operate our system on that basis, not on the basis of we need this facility to meet a system requirement or a sales customer requirement and a this facility to meet a direct purchase requirement. There's no distinction within the facilities as to who was being served. 1118 Mr. WARREN: My question, I guess, panel, to cut to the nub of it: How can the Board know that your estimate of the facilities that need to be built is an accurate estimate? How can the Board be satisfied that the total quantum of the DCC reflects any situation that is likely ever to happen? 1119 MR. KITCHEN: The methodology that was used was brought forward in EBRO-499 and agreed to by parties and accepted by the Board as part of that decision. In there we calculated the DCC, because we were looking at an avoided cost methodology, we determined what facilities would be avoided. The cost calculation was to use Union's embedded M-12 rates, which are a cost-based rate. 1120 Part of that proposal -- not proposal, but part of the evidence on that issue also looked at whether or not we should look at using the incremental cost of facilities as opposed to the embedded costs. There were a number of things looked at and our proposal was to use the embedded cost, and that was accepted. 1121 Mr. WARREN: Mr. Janigan in the portion of his cross-examination that I was able to hear posited for you the notion that the DCC was really a load retention rate. Do you remember him putting that proposition to you? 1122 MR. KITCHEN: Yes. 1123 Mr. WARREN: Now, back in the days when there was -- this is several generations ago and at least four years ago, when the Board used to consider hydro rate applications, there were applications for load retention rates. And Ontario Hydro, as I recollect them, used to bring forward evidence about the likelihood that manufacturer S or mining company Y would move to Alabama or some other salubrious environment with its business. 1124 Now, let me put this proposition to you, panel. Would it not be more sensible, for the purpose of paying this incentive, if the Board were able to determine the likelihood that people would actually leave the system if you stop paying DCC or its equivalent? Because today, I'm going to suggest, we have no evidence as to whether or not anybody would leave the system if you stop paying the DCC. Is that not fair? 1125 MR. KITCHEN: I don't look at the DCC as being a load retention rate. The DCC is there to represent the avoided facilities costs and recognize that certain customer groups -- certain customers, by virtue of providing a delivery, provide a benefit to the system. 1126 We're not looking to retain load through this. There may be some load lost as a result of the DCC being eliminated. As Ms. VanderPaelt said, I don't know -- we don't know the extent of the firm load loss. We do know that a loss of a DCC could immediately impact our interruptible -- our interruptible load, our load that has alternative fuel capability. 1127 I think it really comes down to the premise of whether or not this is a load retention strategy, and it's clearly not. The strategy is to eliminate the DCC and leave customers paying what they were prior to its elimination; no more, no less. 1128 Mr. WARREN: You say it's not a load retention strategy, and I don't want to quibble over words, but let me make sure I understand your evidence. 1129 As I've understood your statements this morning, early afternoon, if you didn't have the DCC, you don't believe that people would enter into the obligation to deliver. Ms. VanderPaelt said that, as I recollect; is that fair? 1130 MS. VANDERPAELT: We wouldn't have the contractual requirement because of the 412 decision, yes. 1131 Mr. WARREN: As a result of that, there would be a risk to you that people would not deliver; is that fair? 1132 MS. VANDERPAELT: It may not be a risk that they don't deliver, it could be a risk that they don't deliver at this right point on the system. 1133 Mr. WARREN: Fair enough. And if you didn't have the DCC and you be didn't have that, if you wish, incentive, people entering into the obligation, there's also the risk that they might go to another fuel. 1134 MS. VANDERPAELT: Yes, that's correct. 1135 Mr. WARREN: So to that extent, it's an incentive to keep people from shifting to another fuel; fair? 1136 MR. KITCHEN: No, I don't think that's fair. But that's -- because -- primarily the DCC recognizes a benefit of avoided facilities. The upshot of not being able to obligate those deliveries or have -- be able to count on the point at which those deliveries come is a facilities requirement that would result in higher rates. The higher rates themselves that come from the facilities requirement could also drive a load loss. 1137 It's not -- the fact of the matter is that the customers will be paying more than they were prior to the DCC being eliminated, and immediately, that may drive a load loss. Will it be a permanent load loss? I don't know. We'll have to look at that, depending on what happens to the DCC elimination. 1138 Mr. WARREN: Panel, I would ask you, and I apologize, because I wasn't there I don't know what Mr. Janigan has already done with this, and I apologize if I'm going over deeply and effectively tilled ground. But I just wanted to ask you a couple questions about the last decision of the Board, which is the RP-2001-0029. Do you have that with you? 1139 MR. KITCHEN: Just one second. 1140 MS. VANDERPAELT: Yes, we do. 1141 Mr. WARREN: Panel, could you turn up page 105, and it's paragraph 6.82. This is the portion of the decision which the Board's findings on the DCC issue are -- and I'd like to take you to paragraph 6.82, and I'm going to read you the last sentence in that paragraph. 1142 It reads as follows: "Union's evidence is that contractual obligations and failure to deliver penalties can provide sufficient incentive without the need to continue payment of the DCC as well." Do you see that? 1143 MR. KITCHEN: Yes. 1144 Mr. WARREN: Now, if that was Union's evidence, why do we need a DCC equivalent or, if you wish, a replacement for the DCC if you don't need it as an incentive? 1145 MR. KITCHEN: The -- the statement, though -- I guess if I could just put this in front of me, so I'm not leaning over. 1146 I think that it is true that if we had a contractual obligation that was mandated -- that could be mandated by the Board, that was not subject to incentive to pay -- or subject to that incentive, we could force people to obligate. But that's not our proposal, and it may have the effect of giving us the system requirements that we need, but it is not Union's proposal, because that would end up causing the customer's net delivery bill to increase. 1147 And that's -- yes, you can force a customer to obligate, I think, but that would mean going back over the decisions that have been made in the past and saying that those are no longer valid. And I think that's -- that's -- I think that's the crux of this. I'm not ... 1148 Mr. WARREN: Thanks. I have your answer on that question. 1149 There was one other point in the Board's decision, and I didn't -- I wasn't able to cull it from the pre-filed evidence. If you look at paragraph 6.85 on the next page, page 106, in that. 1150 It says, and I quote: "While the Board is reluctant to stray from the terms agreed to in its accepted settlement agreement, the Board notes that in this case there appears to be differences in view among the parties to the settlement agreement in RP-1999-0017 as to the meaning of 'revenue neutrality' The wording of the agreement would itself indeed permit more than one interpretation of how revenue neutrality is to be satisfied." 1151 Skipping down to 6.86: "The Board therefore finds it appropriate to defer the elimination of the DCC until Union brings forward a proposal that addresses the issues and concerns as stated above and an implementation plan." 1152 Now, can you tell me where in your pre-filed evidence I can find your response to the revenue neutrality issue? It may well be there, panel; it's just that I can't find it. 1153 MR. PENNY: Mr. Chairman, I'm happy for Mr. Kitchen to go and point to the various points, but it's hard to believe that Mr. Warren does not appreciate that the whole thrust of the entirety of the evidence that Union has filed on this issue is directed in one way or another to that issue. 1154 I mean, it does come up specifically in some schedules and various things, but that's the underpinning to the entirety of the evidence. 1155 Mr. WARREN: I prefaced my question by saying I was the dumbest guy in the room on DCC, and I'm still going to ask the panel if you could help me out where in this evidence I am going to find the answer to the puzzlement over revenue neutrality. 1156 Is it in the way that the costs are going to be allocated? Is that the magic? 1157 MR. KITCHEN: In the evidence -- I can't find the exact quote, but I believe I say that it's Union's goal to minimize the impact on customers such that the customers pay the same net delivery bill pre and post DCC elimination. 1158 To that revenue neutrality means -- as a customer, I used to pay a delivery charge, and Union would remit, also to me, a payment in respect to my obligated deliveries. That net amount is what my net delivery bill is. 1159 After the elimination of the DCC, they will pay their delivery bill, and it will be the same as what they would have paid as a result of that -- those two transactions, the payment of the delivery bill and Union paying the DCC. 1160 Mr. WARREN: Thank you, panel. Those are my questions, Mr. Chairman. 1161 MR. SOMMERVILLE: Thank you Mr. Warren, we'll take 15 minutes. 1162 Mr. Ryder, you'll be up when we resume at 3:15. 1163 MR. RYDER: Thanks. 1164 --- Recess taken at 2:57 p.m. 1165 --- On resuming at 3:16 p.m. 1166 MR. SOMMERVILLE: Thank you. Please be seated. 1167 Mr. Ryder. 1168 MR. RYDER: Yes, thank you, sir. 1169 CROSS-EXAMINATION BY MR. RYDER: 1170 MR. RYDER: Panel, I act for the City of Kitchener, which, as you know, takes service under Union's T-3 rate schedule. 1171 Can I ask you to look at Exhibit C.16.66. 1172 MS. VANDERPAELT: Point 66? 1173 MR. RYDER: Yes. 1174 MR. KITCHEN: We have it. 1175 MR. RYDER: And the -- there's no line for the T-3 rate schedule and I assume that is the impact of the -- the elimination is included in the M-9 numbers? 1176 MR. KITCHEN: Yes, that's correct. The reason that the T-3 is not on there is that everything that we're doing is based on the EBRO-499 proceeding, at which time T-3 -- Kitchener wasn't taking the T-3 service. 1177 MR. RYDER: And Kitchener is the only customer on the T-3 rate schedule? 1178 MR. KITCHEN: Yes, that's correct. 1179 MR. RYDER: So in any event, for the M-9 numbers, the service to Kitchener would represent the bulk of the numbers? 1180 MR. KITCHEN: Yes, it's the majority of that. 1181 MR. RYDER: Yes. And I suggest there are two basic components to the DCC program: One is the credit, and the second is the cost of the credit. 1182 MR. KITCHEN: Yes, that's correct, the avoided cost of facilities, and the payout. 1183 MR. RYDER: And if I look at column E of C.16.66, the amount of the credit to the M-9 class is 1,358,000. 1184 MR. KITCHEN: Yes, that's correct. 1185 MR. RYDER: And in column F, the amount of the allocated cost to the M-9 is 1,502,000. 1186 MR. KITCHEN: Yes. 1187 MR. RYDER: So the M-2, and the M-9, and the M-10, the costs of the program exceed the credit. 1188 MR. KITCHEN: I would say that the avoided cost benefit that is being provided by obligated deliveries exceeds the benefit that M-2, Kitchener, -- M2, M9 are provided by the system. 1189 MR. RYDER: But the allocated costs to those classes, their contribution to the DCC program, the costs exceed the credit. They paid more for the program than they received back in the way of credits. 1190 MR. KITCHEN: They pay more for the program -- they paid more in the recovery because they're providing -- and they received less of the benefit because they're providing less to that benefit. 1191 MR. RYDER: We'll deal with the reasons in a minute. The basic point that I want to draw from you is that the cost of the program to those classes are greater than the credit. 1192 MR. KITCHEN: And I think that I said yes, the costs are greater than -- 1193 MR. RYDER: And for the M-4, M-5A, M-7, and T-1 classes, the credits that these classes receive are greater than the costs allocated to those classes? 1194 MR. KITCHEN: Right, consistent with the benefits they provide, they receive a larger proportion of the credit. 1195 MR. RYDER: And it's Union's proposal that the credit is terminated, there'll be no more payments, and so the credit is eliminated completely, but the allocated cost is reduced by the amount of the credit. 1196 MR. KITCHEN: The -- when we eliminate the DCC, we will be eliminating the payout from the delivery rate, so the net effect is what is the difference between the two. 1197 MR. RYDER: The net effect is the difference. 1198 So for the M-9, 144,000 of former DCC program costs remain in the rates? 1199 MR. KITCHEN: Remain in the rates, yes, as they currently are paid. So they're paying the same as they would have paid with the DCC program. 1200 MR. RYDER: And for the M-2, $15,370,000 remains in the rates? 1201 MR. KITCHEN: Yes. 1202 MR. RYDER: And the DCC program continued after EBRO-499; it continues to this day? 1203 MR. KITCHEN: Yes, we are still paying the DCC. 1204 MR. RYDER: And now Kitchener, which is the bulk of the M-9 class, receive service under the T-3 rate schedule? 1205 MR. KITCHEN: Yes. 1206 MR. RYDER: And the T-3 has a contract. There's two documents which govern service to Kitchener, one is the rate schedule and the other is the carriage service contract? 1207 MR. KITCHEN: T-3 contract, yes. 1208 MR. RYDER: And the contract contains an obligation to deliver a fixed ECQ at Parkway? 1209 MR. KITCHEN: Yes, it does, and for that, the city of Kitchener is provided the DCC on that obligated delivery. 1210 MR. RYDER: Yes, but Kitchener pays a net cost. It doesn't get a net credit -- it gets a credit, but then it pays a cost which exceeds the credit. 1211 MR. KITCHEN: The cost that is recovered in delivery rates reflects the design day use of the system, what it costs the City of Kitchener is using. 1212 MR. RYDER: There's no incentive to Kitchener by which you extracted the obligation to deliver, because Kitchener bears a net cost of this program. So the program doesn't provide an incentive to Kitchener of any kind. 1213 MR. KITCHEN: If Kitchener didn't have obligated deliveries there would be no DCC and what would be recovered in the rate would be a much higher amount. I would say that the DCC does provide the incentive for the City of Kitchener to obligate its deliveries. 1214 MR. RYDER: And the incentive is a net cost to the city of $144,000. 1215 MR. KITCHEN: No. The incentive is the payment of the DCC in respect of those obligated deliveries. 1216 MR. RYDER: For which Kitchener pays over and above an accredited amount equal to $144,000? 1217 MR. KITCHEN: Kitchener is not paying for the -- Kitchener is not paying a cost to get the DCC; they're paying in their delivery rate the costs related to those avoided facilities, the cost to essentially represent what would happen in there were no obligated deliveries. 1218 MR. RYDER: But you didn't need to incent Kitchener to agree to an obligated delivery point, did you? I mean, wasn't that a demand by Union that was essentially non-negotiable? 1219 MR. KITCHEN: I -- I don't know what the process of negotiating was with the City of Kitchener. The prior Board's decision don't allow Union to mandate its delivery points without their consent and the consent is provided by accepting the DCC obligation, or delivery point obligation, and then we pay them the DCC in respect of that. 1220 MR. RYDER: Do you recall, Mr. Kitchen, that Union's position, when it addressed the Kitchener contract was that Parkway was a required delivery point and that your position was upheld when the matter was referred to the Board, upheld by the Board? 1221 MR. KITCHEN: And what proceeding was referred to -- 1222 MR. RYDER: I believe it's RP-1999-0011. 1223 MR. KITCHEN: That's when the Board approved the T-3 contract, is that -- 1224 MR. RYDER: Yes. 1225 MR. KITCHEN: I think that the -- I'm -- I haven't read those transcripts. I haven't reviewed that evidence, so it's difficult for me to comment on what that -- 1226 MR. RYDER: All right. Perhaps, then, could I ask you to produce the Board's decision in RP-1999-0011. 1227 MR. PENNY: Mr. Chairman, it's a matter of public record. Surely, if it's a matter of argument -- if Mr. Ryder wants to make reference to it, he's certainly entitled to do so. 1228 MR. SOMMERVILLE: I think that's fair, Mr. Ryder. 1229 MR. RYDER: I'm happy with that. 1230 All right, so we've seen from Exhibit C.16.66 that under the DCC elimination, there is a permanent cost allocation or revenue responsibility allocation to the M-2s, M-9s, and M-10s. And if I take you to column H in Exhibit C.16.66, the numbers in brackets represent the permanent increases in the revenue responsibility of those classes resulting from the DCC? 1231 MR. KITCHEN: Those amounts are the net amount of the DCC cost recovering DCC payout and they're exactly the amounts that are currently built into the DCC mechanism in terms of the recovery and the payout. There's not a permanent increase. 1232 MR. RYDER: All right. But on your proposal, they would be left in rates? 1233 MR. KITCHEN: That's correct. The rates would be left -- 1234 MR. RYDER: Okay, and the amounts not in brackets represents reductions to the revenue requirement to those classes? 1235 MR. KITCHEN: They're not reductions to the revenue requirement. They are amounts that are currently remitted to those customers through the DCC, net of what they recover in rates. 1236 MR. RYDER: All right. But they're reductions in the sense that they tend -- had there never been a DCC program, those amounts -- the revenue requirements for those classes would be higher? 1237 MR. KITCHEN: If there had never been a DCC program, the net delivery bill to the customer would be higher, and we -- probably that delivery bill of every customer would be higher because we probably would have had to build facilities. 1238 MR. RYDER: Well, unless you required every customer to meet or have an obligated delivery provision in the contract. Would you require them to? 1239 MR. KITCHEN: That would be in contravention of what 412 decision aid, which said that we could not mandate a delivery point obligation. That was subject to negotiation between the customer. 1240 MR. RYDER: If I'm right, on my recollection of the proceedings in RP-0011 in 1999, we were required, Kitchener was required to meet -- to agree to an obligated delivery. 1241 MR. PENNY: Well, Mr. Chairman, we've already discussed this. The decision say what is it says. There's no point in speculating about that with the witnesses, in my respectful submission. 1242 MR. RYDER: Well, I don't recall, Mr. Kitchen; perhaps you can tell me whether you've rested your position in that case on something the Board said in EBRO-412? 1243 MR. KITCHEN: In terms of the negotiations with the City of Kitchener? I wasn't party though those negotiations. 1244 MR. RYDER: Now, the amounts permanently embedded in M-2, M-9, M-10, effectively match the benefit that remains in the rate for the other classes. 1245 MR. KITCHEN: Sorry, can you say that again. 1246 MR. RYDER: Well, the amounts that are permanently embedded -- under the brackets in column H, effectively matches in column H the amounts of the permanent reduction in revenue requirements to the M-4s, M-5, M-7 and T-1 1247 MR. KITCHEN: That's because the avoided cost that's built into rates is equivalent to the payout. 1248 MR. RYDER: Is that what's meant by revenue neutrality? 1249 MR. KITCHEN: What's meant by revenue neutrality is that a customer, as close as possible, will be paying the same net delivery bill pre and post DCC elimination. 1250 MR. RYDER: But isn't fundamentally your proposal a transfer of a revenue requirement from the M-2s and M-9s to the other classes? 1251 MR. KITCHEN: No, because we're not doing anything differently than the current DCC mechanism provides for. It's just that there's two transactions; one we receive delivery through the bill on the invoice for delivery revenue, and the second is that we pay a DCC. 1252 There's no shift of costs. This is merely taking what's currently built into rates and adjusting it so the net impact at the end of the day is the same. 1253 MR. RYDER: Isn't that -- fundamentally, the effect of the DCC program in itself was a transfer of revenue responsibility from one set of classes to another? 1254 MR. KITCHEN: No, it's not a transfer of revenue responsibility. It's a recognition that certain customers use the system more than other customers and as a result should be -- should have those costs visited on them, those avoided costs, and those customers that provide a system benefit should receive -- or provide more of a benefit than the facilities that they use should receive a credit for that. 1255 MR. RYDER: Well -- 1256 MR. KITCHEN: To me it's completely consistent with the allocation of -- appropriate allocation of costs and benefit. 1257 MR. RYDER: Well, would you agree that an avoided cost is not a cost? 1258 MR. KITCHEN: An avoided cost, I guess, is not a cost until you can't avoid it, but it's a cost. 1259 MR. RYDER: While you're avoiding the cost, is it a cost? 1260 MR. KITCHEN: It is a cost that we are avoiding. The avoided cost methodology that was used to set the DCC rate in the first place, the recovery of that amount is then allocated based on each rate class's use of those facilities that are avoided. 1261 MR. RYDER: Is there any other avoided cost collected through rates? ^ 1262 MR. KITCHEN: I don't believe so. 1263 MR. RYDER: And is there any other element in rates which reflects facilities which haven't been built yet? 1264 MR. KITCHEN: No, traditionally in cost of service we include the facilities that we have, with the exception of DCC funding which is in recognition of avoided facilities costs. 1265 MR. RYDER: After the DCC credit is eliminated, there is no -- the cost of the credit is eliminated; right? 1266 MR. KITCHEN: When you re-base, there will be no DCC cost recovery. There will be a permanent recognition, however, of the DCC benefit of the credit in delivery rates. 1267 What we're doing is we're recognizing that -- where we've only recognized the cost side, we're now recognizing the revenue side in rates. It's as simple as that. 1268 MR. RYDER: Isn't it fair to say that your proposal doesn't then eliminate all aspects of the DCC program? 1269 MR. KITCHEN: What the proposal does is it builds into rates the benefit provided by obligated deliveries and maintains the recognition that those benefits provide -- I'm sorry, those obligation deliveries provide a benefit. That doesn't go away with the elimination of the DCC. We're not eliminating the benefit of the obligated delivery. 1270 MR. RYDER: No, but you're leaving a residue of revenue requirement in some of the rates. 1271 MR. KITCHEN: We are adjusting -- 1272 MR. RYDER: Yes or no. Just can you just tell me whether you are. 1273 MR. PENNY: Excuse me. 1274 MR. RYDER: I need an answer to my question. 1275 MR. PENNY: And Mr. Kitchen, Mr. Chairman, with respect is trying to give an answer and Mr. Ryder is interrupting him and then blaming him nor not answering the question. 1276 MR. RYDER: All right. 1277 Well, is there a residue of the revenue requirement attributable to the DCC program that is left in rates? 1278 MR. KITCHEN: Their rates will continue to recover the -- will continue to reflect the ongoing benefit of obligated deliveries. If that means there's a -- I don't like to use the word residue in rates. Right now I'm looking -- in 499 rates there's a cost of $27 million dollars which has been allocated on design day demand. The revenues don't reflect the payment of that, and that's all we're doing is adjusting rates to reflect the payment. 1279 If you look at the current proposal, you could make the argument that the costs are staying and the revenue is being adjusted to reflect the payout. 1280 MR. RYDER: Could you look at column H again in C.16.66, and there's $144,000 that remains in the M-9 rate. 1281 MR. KITCHEN: There's $144,000 that will continue to be recovered by M-9 customers or T-3 customers. 1282 MR. RYDER: So you haven't eliminated the program, you've just converted it for a different form. 1283 MR. KITCHEN: We have eliminated the program because we're no longer paying the DCC, but we are recognizing the benefit those obligated deliveries provide. 1284 MR. RYDER: You've, in effect, converted a credit to a permanent reduction in some rates paid for by other rate classes. 1285 MR. KITCHEN: We haven't reduced rates from what they otherwise would have been, if you didn't have this mechanism that was two transactions. Rates are not different. What the customer pays is not different. 1286 MR. RYDER: The revenue to cost ratio based on the -- resulting from the application of the intervenors' position, is that shown in the material? I'm not able to find it. 1287 MR. KITCHEN: You will just have to give me a second. I'm not sure if that was asked -- it's not in our evidence. If it did, it would be as part of an IR. 1288 MR. RYDER: Can that be produced, if it's not already present? 1289 MR. KITCHEN: Yes, I can undertake to provide that. 1290 MR. RYDER: Can we expect that the revenue to cost ratio when you produce it for the M-7s and T-1s will still be under 1.0 once the intervenor position is applied? 1291 MR. KITCHEN: I would expect it still to be under 1.0. I'm not sure until I do that calculation. 1292 MR. RYDER: So both classes will still be under-contributing? 1293 MR. KITCHEN: They would likely have a revenue to cost ratio of less than one. 1294 MR. MORAN: Mr. Chairman -- Mr. Ryder, want an undertaking number? G.6.2.8 -- sorry, G.2.8. 1295 UNDERTAKING NO. G.2.8: THE REVENUE TO COST RATIO RESULTING FROM THE APPLICATION OF THE INTERVENORS' POSITION 1296 MR. RYDER: Can I turn to delivery point flexibility for a minute. 1297 As I understand it, interested buy customers in delivery point flexibility arises because direct purchase bundled customers are obligated to deliver their supply through Parkway 365 days a year. 1298 MS. VANDERPAELT: They're obligated to delivery at Parkway and they're interested in moving those deliveries to Dawn. 1299 MR. RYDER: Yes. And Union has made a number of attempts in the past to provide delivery point flexibility to its bundled customers? 1300 MS. VANDERPAELT: Yes, we have. 1301 MR. RYDER: And one you described this morning that was agreed to in the ADR agreement of RP-1999-0017. 1302 MS. VANDERPAELT: That's correct. 1303 MR. RYDER: And that expires on October 31, 2003. 1304 MS. VANDERPAELT: That's correct. 1305 MR. RYDER: And while there is interest in delivery point flexibility evidenced by your customers, they weren't interested in that particular solution -- 1306 MS. VANDERPAELT: We had some customers which were not interested in delivery point flexibility at all and we have some who are interested in a custom solution. 1307 MR. RYDER: Now, can you turn to interrogatory C.4.39? 1308 MS. VANDERPAELT: I have it. 1309 MR. RYDER: And this describes Union's Dawn flex proposals. 1310 MS. VANDERPAELT: What it describes is some of the proposed solutions we may have that we are taking to our customers to discuss at this point in time. 1311 MR. RYDER: And I gather you held a meeting called a focus group of interested customers in November of last year? 1312 MS. VANDERPAELT: That's correct. 1313 MR. RYDER: And that was in response to feedback that was supplied by your customers to you, saying they wanted some solutions for delivery point flexibility? 1314 MS. VANDERPAELT: We have a customer advisory council group of customers, and they indicated they were not interested in continuing the existing solution but would be willing to discuss potential opportunities that may be available. 1315 MR. RYDER: Yes, and page 2 of the interrogatory response contains the -- is this the invitee list, or is this the list of people -- companies that showed up at the Dawn flex focus meeting? 1316 MS. VANDERPAELT: This is the invitee list. 1317 MR. RYDER: And how was the response to your meeting? 1318 MS. VANDERPAELT: I believe we had probably about 70 per cent of those parties, but I would have to check that. 1319 MR. RYDER: And Kitchener wasn't numbered in the invitees. 1320 MS. VANDERPAELT: That's correct. 1321 MR. RYDER: But Kitchener has expressed to you over the years its interest in delivery point flexibility? 1322 MS. VANDERPAELT: Yes, and we have had conversations with them on that. 1323 MR. RYDER: And so you are going to add Kitchener to the list of interested parties? 1324 MS. VANDERPAELT: We can do that. 1325 MR. RYDER: The next two pages are slides, which describe your proposals. 1326 MS. VANDERPAELT: These are handouts that were presented at the meeting of November 12th. 1327 MR. RYDER: And they show two proposals, a summer proposal and a year-round proposal? 1328 MS. VANDERPAELT: Yes. 1329 MR. RYDER: And then -- the next two pages is a description of the two proposals; am I right. 1330 MS. VANDERPAELT: That's correct. 1331 MR. RYDER: And both the summer proposal and the year-round proposal are based on using Dawn-Trafalgar capacity? 1332 MS. VANDERPAELT: No, that's not correct. 1333 MR. RYDER: The year-round one is based on Dawn-Trafalgar? 1334 MS. VANDERPAELT: No, some of those solutions would be possibly exchanges we purchase from a third party. 1335 MR. RYDER: Let's turn to page 4 of the interrogatory response, the second page of the description. This is the year-round commitment. 1336 MS. VANDERPAELT: Page 4 of 7? 1337 MR. RYDER: Yes. 1338 MS. VANDERPAELT: Okay. 1339 MR. RYDER: And dot 2 speaks of Union securing capacity from Dawn to Parkway. 1340 MS. VANDERPAELT: What we were indicating there is Union will make the arrangements. It may not be physical capacity. We were looking at a variety of options in the marketplace to see what type of providers could supply us in way of services. 1341 For our customers' benefit, it's easier to explain it to them as moving the volume from Dawn to Parkway. Sometimes you buy an exchange whereby there is no capacity underpinning that. Our intent was we would look at the option of services and the prices and try to find the most economical price for our customers to underpin this service with. 1342 MR. RYDER: All right. And so both proposals would be administered by Union? 1343 MS. VANDERPAELT: The proposals that are here, yes. 1344 MR. RYDER: Now, for the summer service, does Union release customers from the obligation to deliver at Parkway during the summer months? 1345 MS. VANDERPAELT: We have not, before. 1346 MR. RYDER: No, but is this the proposal? 1347 MS. VANDERPAELT: It is a service we are contemplating. We are trying to establish whether there is interest from the customer group at this point in time for us to make the changes administratively that would be required to offer this. 1348 MR. RYDER: But your proposal for the summer-only Dawn service contemplates a release of customers from their obligation to deliver at park dale? 1349 MS. VANDERPAELT: Yes, it would replace it with an obligation at Dawn. 1350 MR. RYDER: And for the greater year-round commitment, I gather customers tell you when they want flexibility and what volumes, and Union then obtains some means of getting their volumes to Dawn in a different fashion -- sorry, to Parkway in a different fashion. 1351 MS. VANDERPAELT: We would administer the program from a customer viewpoint similarly to how we administer the 20 per cent solution that exists today. What we would do is we would ask customers who are interested in moving volumes from Parkway to Dawn, and then that customer would be obligated there in the year round service for the entire year, for 365 days, at Dawn. Union would then purchase services from third party providers behind of the scenes, so that on days when we needed the Parkway deliveries, we were able to make them there and we were able to transport the gas to the Parkway system either through a physical transportation or through a virtual exchange. 1352 MR. RYDER: So these alternative arrangements that Union would enter into would only be called on when you needed to meet peak demand at Parkway? 1353 MS. VANDERPAELT: No; in actual fact, there's increments as you move through the system. 1354 As I illustrated on the graph that was handed out, Exhibit F -- the picture, F.2, by the pink line, there would actually be 53 days where we would need the service in some way shape or form in order to allow customers to move 20 per cent. So it wouldn't only be on a peak day that we would require the service to make sure in a we had gas arriving at Parkway. 1355 MR. RYDER: But these alternative arrangements would be called on when you needed to provide additional deliveries to Parkway? 1356 MS. VANDERPAELT: That's right. 1357 MR. RYDER: And so the customer's supply would come to Dawn and then you would buy additional supplies to get to Parkway? 1358 MS. VANDERPAELT: No, we don't need twice the gas. The customer would have the supply at Dawn and we would have a mechanism whereby we would be able to move that supply from Dawn to Parkway. Now, said, it could be physical capacity or it could be an exchange. 1359 MR. RYDER: Could it be a third-party provider, like -- a provider of peak service on TCPL? 1360 MS. VANDERPAELT: The difficulty with peak service is it has a commodity component in it, and we don't need the gas. We have the customer's gas arriving on an obligated basis at Dawn, so we have the molecules. What we don't have is those molecules at Parkway. If we have a winter peaking service, you essentially not only get the deliveries at Parkway, you also get additional molecules, and we don't have a need for double the molecules. 1361 MR. RYDER: Well, but you -- so I take it you do release, though, the customers from their obligation to deliver at Parkway? 1362 MS. VANDERPAELT: That's correct. 1363 MR. RYDER: And they replace that obligation with your alternative arrangements. 1364 MS. VANDERPAELT: That's correct. 1365 MR. RYDER: And Union needs to administer that, because only Union knows when it needs to call on these alternative arrangements. 1366 MS. VANDERPAELT: Well, the arrangements we've had so far in place have been year-round arrangements that we didn't have to nominate a call on, so they were always in place. 1367 We do have customers on the system that have taken on the responsibility themselves of finding an arrangement with a third party provider to move themselves from Dawn to Parkway. What this does is the customer will buy the gas at Dawn, make a nomination on our system through whatever service they've bought from another person or party, and move that gas to Parkway. So customers are able to take on this obligation themselves. 1368 The reason we're looking at offering it to a group of customers that may be interested is we have some players who, either due to credit or changing in the energy industry, and the players who are out there selling these services find it more difficult to contract on their own because they're smaller in nature, and they've looked to us to say can you help some of us procure service on our behalf, and that's what we're investigating at this point in time. 1369 We would open it up to all of our customers who are interested, but we do have some existing customers who buy this service on their own and do not require our help in administering it. 1370 MR. RYDER: Let me reduce this to simple units. If a customer's obligation at Parkway is 100 units. 1371 MS. VANDERPAELT: Yes. 1372 MR. RYDER: And through your year-round proposal, 20 units are shipped into Dawn; all right? Now, during those 53 days when you may need to call on alternative arrangements, does a customer receive 20 units at Parkway -- sorry 100 units at Parkway and 20 units at Dawn? 1373 MS. VANDERPAELT: No, what we've done in the past is the customers have 100 units at Dawn, and then behind the customer's nomination, we've moved that -- the 20 units we need to Parkway on their behalf. 1374 MR. RYDER: All right. And you only move the 20 units to Parkway on those 53 critical days? 1375 MS. VANDERPAELT: We move it on any days that our system required it. 1376 MR. RYDER: All right. And so the customer pays for the alternative arrangements? 1377 MS. VANDERPAELT: The way that the last arrangement was structured, is it was a solution for all customers. So we took the cost of the M-12 contract that was sub-assigned to us from TransCanada, and we embedded that into all delivery rates. So all customers paid for that. 1378 Going forward what we're proposing is that the user would pay for whatever service they contract for as an individual, not a rate class solution. 1379 MR. RYDER: Thank you. And the cost of transporting gas from Dawn to Parkway, which is in implicit in the customer's regular rates, what happens to that? 1380 MS. VANDERPAELT: On October 31? 1381 MR. RYDER: Well, if this program is picked up by a group of customers, they don't have to transport gas anymore to Parkway. 1382 MS. VANDERPAELT: What will happen on October 31, assuming the program ends, the cost of the M-12 capacity will be removed from all rates. 1383 MR. RYDER: I'm just talking about your proposal here -- 1384 MS. VANDERPAELT: Then if a customer would like to move their obligated deliveries from Parkway to Dawn, they would receive an additional bill from us for the cost of that service over and above their delivery rate. 1385 MR. RYDER: All right. So they would still be paying to transport gas from Dawn to Parkway, even though the obligation is only to Dawn? 1386 MS. VANDERPAELT: What we've done is enabled them to purchase gas at Dawn, recognizing that there's still an obligation to the system to meet our Parkway deliveries that they held. So they still have a cost obligation in order to move their delivery from Parkway to Dawn. 1387 MR. RYDER: So they still pay for the Dawn-Trafalgar transfer. 1388 MS. VANDERPAELT: They pay for whatever the services we use to backstop this. 1389 MR. RYDER: Do they not, in addition, pay for the Dawn-Trafalgar capacity implicit in your rates? 1390 MS. VANDERPAELT: No, they pay for the Dawn-Trafalgar capacity in their rates based on their continuing obligation at Parkway. All they're paying is the incremental cost of them wishing to move that obligation to Dawn. So their rate is the same as every other customer in their rate class, because the design load centre hasn't changed as a result of this one customer moving. 1391 MR. RYDER: So they continue to pay to get their gas to Parkway, but they're allowed to take it at Dawn, and then they pay in addition for these alternative arrangements. 1392 MS. VANDERPAELT: What we're recognizing in their rates -- 1393 MR. RYDER: I don't want to interrupt you, but wonder whether I'm right in that. 1394 MS. VANDERPAELT: I would like to clarify it. In their rates they pay they actually get a benefit, I think as Mr. Kitchen is trying to illustrate through the delivered commitment credit of having the deliveries at Parkway, and we've had avoided costs. If they choose an alternate delivery point there's an increased cost which they have to pay. So I would not suggest they're paying twice. I would suggest they have a benefit in their rates to the extent they would choose a different delivery point, and there is a cost to that, and it's the customer's option to enter into that arrangement. 1395 MR. RYDER: Can I just clarify an earlier answer you gave. 1396 With respect to the decision to call on these alternative arrangements, I take it only Union knows when it is necessary to make that call, because it's a system requirement that you're meeting, not an individual customer requirement. 1397 MS. VANDERPAELT: These services that we've had in the past have been in place all year, so we haven't had to call. The services that we would believe would replace this type of service would likely be an exchange or, potentially, a winter service of some sort. 1398 If it is a winter service it will be in place, it would not need a call; if it was an exchange, we would need to call that service. 1399 MR. RYDER: But only Union would be able to know when it needs to call on the exchange. 1400 MS. VANDERPAELT: That would be correct. 1401 MR. RYDER: And even though you're not enthusiastic about a peaking service, if a peaking service is used to backstop delivery point flexibility, only Union would know when to call on it. 1402 MS. VANDERPAELT: If you used a peaking service, Union would know when to call on it, but Union doesn't believe a peaking service works for this. 1403 MR. RYDER: I know, you've told me that a number of times. If that was a solution that was proceeded with, it would have to be administered by Union, because only Union knows when to call on it. 1404 MS. VANDERPAELT: That's correct. 1405 MR. RYDER: Another reason why it has to be administered by Union is because only Union can give relief from the Parkway obligation. 1406 MS. VANDERPAELT: We're not necessarily giving them relief. They have an obligation, and they're paying the additional cost of moving to Parkway. 1407 In the sense the contract would read differently, that's relief. They're paying the same as if they had to stay at Parkway. 1408 MR. RYDER: What's the benefit of delivery point flexibility if it probably costs more than leaving your deliveries at Parkway? 1409 MS. VANDERPAELT: This is why we didn't get customer support, because the customers didn't feel the costs offset the economic benefits. 1410 MR. RYDER: No, but there seems to be some interest. 1411 MS. VANDERPAELT: Those customers are mainly looking at diversifying their supply portfolio and they have more options at Dawn. It would depend on their circumstances as to whether they feel they could derive an economic benefit. 1412 MR. RYDER: Can either of you speak to the derivation of the SSS and SPS? 1413 MR. KITCHEN: I can try to, yes. 1414 MR. RYDER: Can I get you, Mr. Kitchen, to turn to C.1.62, page 3. 1415 And I take it that tells us that both rates are derived from the storage components of the T-1 and T-3 rates? 1416 MR. KITCHEN: Yes, that's correct. 1417 MR. RYDER: So they're not done on the basis of any cost study for this case? 1418 MR. KITCHEN: To the extent that the T-1, T-3 rates are essentially cost based rates, the derivation of the rate is consistent with how those cost based rates were derived. 1419 MR. RYDER: T-1 is not a cost based rate. 1420 MR. KITCHEN: T-1 gets cost based storage. 1421 MR. RYDER: It's derived from costs, you may know what it costs, but it's not cost based. 1422 MR. KITCHEN: Cost base -- storage costs are cost based. They're not paying market rates for storage. 1423 MR. RYDER: All right. Storage. 1424 Do you intend on re-basing to produce a cost study show the cost of these unbundled services, or is this the only opportunity we have of claiming the need to have a cost study for this -- these rates? 1425 MR. KITCHEN: I'm actually not sure what you're looking for. 1426 The rates that we have, the rate design and what's included in the standard storage service and the standard peaking service were all part of the 0017 case. We've done nothing more than apply the formula that came out of that and have not changed that rate design or -- that rate design. 1427 The reason that we have to go to a T-1, T-3 base rate is we don't have any unbundled customers to include in a cost study if we were doing one in a PBR term. 1428 MR. RYDER: Do you need customers in order to -- 1429 MR. KITCHEN: You need a forecast. If I don't have a forecast, I can't put them into a cost study. 1430 MR. RYDER: Now, the T-3 is itself a derived rate. Is it not -- 1431 MR. VANDERPAELT: It's derived from the T-1 rate because, at the time that the '99 cost study was set, there was no T-3 rate class. If the 2004 rebasing, the T-3 will show up as its own rate. 1432 MR. RYDER: I thought T-3 was derived from the M-9. 1433 MR. KITCHEN: Storage costs are derived from the T-1. 1434 MR. RYDER: Isn't T-3 the same as M-9 less the unbundling -- sorry, less the load balancing? 1435 MR. KITCHEN: The storage rates that appear in the T-3 rate schedule are the same as the storage rates that appear in the T-1 rate schedule. 1436 MR. RYDER: So that means that we cannot expect to receive a cost study on these unbundled rates and tell customers to take up the services? 1437 MR. KITCHEN: That's correct. There will be a cost study prepared that will include T-3, because it is now a customer. 1438 But until I have a forecast of unbundled demand, I don't have anything to allocate cost to those rate classes in respect of. 1439 MR. RYDER: So we have no way of knowing whether the rates in this exhibit for SSS and SPS, you don't know the extent of the variances in costs, if any? 1440 MR. KITCHEN: They are derived all from cost based storage rates, and that was the proposal in 0017, and we are doing nothing but continuing that through the PBR term. 1441 MR. RYDER: Those are my questions. Thank you. 1442 MR. SOMMERVILLE: Thank you, Mr. Ryder. 1443 I'd like to continue with Mr. Moran's questions. It's now 4:05. Does continuing on create any difficulties for anyone at this stage? 1444 MR. PENNY: Not at all, Mr. Chairman, subject to what Mr. Moran has, I'm probably, right now, five to ten minutes in re-examination, so nothing very long at all. 1445 MR. SOMMERVILLE: Thank you. 1446 Mr. Moran. 1447 MR. MORAN: Thank you, Mr. Chairman. 1448 CROSS-EXAMINATION BY MR. MORAN: 1449 MR. MORAN: Let me start off with the issue of revenue neutrality. Right now, as the DCC is currently formulated, it's revenue neutral from the perspective of Union; right? You collect money on rates and then you hand it back out in the form of a DCC payment? 1450 MR. KITCHEN: Yes. 1451 MR. MORAN: And with respect to the proposal that you've got before the Board, the end result is the same because the DCC is going to be reflected as a reduction in the rates of those people who would otherwise receive the DCC, but it's still revenue neutral from your perspective? 1452 MR. KITCHEN: Yes. 1453 MR. MORAN: If you were to take the DCC out all together and remove the cost from the rates, that also would be revenue neutral from your perspective? 1454 MR. KITCHEN: From Union's perspective, we would not be financially harmed from it but our customers would see a net increase -- some of our customers would see a net increase. 1455 MR. MORAN: It would be revenue neutral from Union's perspective though; right? 1456 MR. KITCHEN: Yes. 1457 MR. MORAN: And perhaps not revenue neutral from the perspective of customers? 1458 MR. KITCHEN: And in our proposal was trying to maintain the customer neutrality. 1459 MR. MORAN: And I think you've indicated that you're not aware of anyone else in North America whose reflected avoided costs in rates in this fashion, you're certainly not aware of anybody whose got a DCC payment mechanism; right? 1460 MR. KITCHEN: That's correct. 1461 MR. MORAN: And I think you indicated that there's no other examples of avoided costs in Union's own rates, other than this one? 1462 MR. KITCHEN: Not that I can think of. I'm very sure that there isn't. 1463 MR. MORAN: So this makes it a unique situation? 1464 MR. KITCHEN: That's correct. 1465 MR. MORAN: Now, if you could just turn up in the schematics that you filed earlier today in Exhibit F.2.1. If you could turn up the second page, the design day flow diagram. 1466 MR. KITCHEN: I have it. 1467 MR. MORAN: Just to understand how this works, if we look at Parkway, we see a number of different kinds of deliveries happening there. There are firm deliveries at Parkway that are composed of Union firm and direct purchase obligated; right? 1468 MR. KITCHEN: That's correct. 1469 MR. MORAN: And the Union firm I take it is the system gas firm delivery? 1470 MR. KITCHEN: Those are Union's supplies on behalf of system customers. 1471 MR. MORAN: Right. And if you go to the other side of the diagram, Dawn, is it the same kind of mix there, some is direct purchase, some is system gas? 1472 MR. KITCHEN: That's correct. There would be direct purchase obligated deliveries at Dawn, and there will also be Union deliveries at Dawn. 1473 MR. MORAN: I guess the unifying theme in all of these deliveries are the fact that they're firm deliveries, whether they're at Parkway or at Dawn; right? 1474 MR. KITCHEN: That's correct. 1475 MR. MORAN: To the extent that system integrity benefits or system optimization benefits from firm deliveries, it doesn't matter who actually owns the molecules that are -- that compose the firm delivery, the firm deliveries is what gives rise to the system integrity benefits; right? 1476 MR. KITCHEN: That's correct. In our planning, we don't differentiate between the obligated deliveries of direct purchase customers or Union's direct purchase customers -- sorry, Union's customers. 1477 MR. MORAN: Any of the molecules that are part of a firm delivery package contribute to system integrity, system optimization; right? 1478 MR. KITCHEN: Yes, I would say that's correct. 1479 MR. MORAN: Regardless of whether it's system gas or direct purchase gas? 1480 MR. KITCHEN: That's correct. And to the extent that there are system integrity benefits, everybody benefits -- every customer benefits whether they're system or sales customers or direct purchase customers; right? 1481 MR. KITCHEN: All customers benefit from the smaller size of the facilities than they otherwise would be, including in-franchise customers to a certain extent. 1482 MR. MORAN: All right. When we moved from seeing Union supply all the gas to all the customers to a competitive market, is it fair to say that the people who could now organize their own gas purchases and deliver it as direct purchase gas were, in fact, receiving a benefit as a result of being able to do that? 1483 MR. KITCHEN: A benefit -- I'm not sure I understand which -- 1484 MR. MORAN: They could go and negotiate for their own gas and presumably the fact that they're doing it indicates that they're getting a better price than perhaps they were getting if they were on system gas. 1485 MR. KITCHEN: Yes, I would assume that if a customer went direct purchase there was a benefit to doing it in terms of their supply or something. 1486 MR. MORAN: That's been reflected in the fact that in all of your contract rate classes, everybody is on direct purchase; right? 1487 MR. KITCHEN: Yes. 1488 MR. MORAN: And that benefit isn't particularly reflected anywhere in rates? 1489 MR. KITCHEN: No, because I have no way of knowing what benefits direct purchase customers are getting as a result of being direct purchase customers, and those aren't Union's costs. 1490 MR. MORAN: Right. 1491 Now, with respect to this avoided facility benefit, I guess, if as a result of something I do, I then go up to you and I just say, I've just saved you 10 bucks, give me ten bucks, from your perspective, you don't care either way; right? You could say, why should I give you ten bucks; right? 1492 MR. KITCHEN: I'm kind of confused about the question. I don't have ten bucks to give anybody right now. 1493 MR. SOMMERVILLE: Is that an offer, Mr. Moran. 1494 MR. MORAN: Just checking. I work for the Board. 1495 MR. KITCHEN: To the extent that there's a recognizable avoided cost that customers' actions are providing, you can build it into rates and reflect that through the cost. 1496 MR. MORAN: Right, but to the extent that's as a customer, somebody is saying they're saving me money, therefore I have to pay them the money that they've saved, I haven't saved anything, ultimately, right? Because it's been recovered I've been charged for the thing that they said they saved me doing. 1497 MS. VANDERPAELT: I think the difference here is the customers didn't volunteer to obligate. We asked them to do something, and in return, they said, Okay, what do I get for it, for doing that thing. We asked you to obligate, we'll pay you the DCC on it. So it's a difference between who initiated the decision to obligate. 1498 MR. MORAN: All right. 1499 MR. KITCHEN: Just to clarify, I think a customer doing something on the system, for instance, that saves fuel, we don't visit fuel charges on them. Just as an example of that. 1500 MR. MORAN: If we come down to, then, what seems to be the heart of the debate before the Board on this issue, you've indicated that system integrity benefits are delivered as a result of firm deliveries at Parkway and firm deliveries at Dawn, and it doesn't really matter whether those firm deliveries are composed of system gas or direct purchase gas, they are achieving the benefits and everybody benefits. Is an alternative approach to the DCC program that you now want to embed in rates possible on the basis of simply prorating the obligation to deliver at particular points, proportionate amongst the system gas and direct purchase gas contracts? 1501 MR. KITCHEN: In what way, so that we look at -- we would rejiggle or rejuggle the system of who has what pipe and redistribute it? I'm not really following the question, sorry. 1502 MR. MORAN: Given that you can deliver system gas to Dawn, you can deliver system gas to Parkway, right? Given that you can obligate delivery of direct purchase gas to Dawn and obligate direct purchase gas to Parkway, is there a way to just simply balance those deliveries so that you achieve the same system integrity benefits and prorate the delivery obligations as opposed to doing it through rates? 1503 MR. KITCHEN: I'm not sure how that would change the benefit being provided by the obligated delivery and the need to recognize it, because all we'd be doing I think is shifting the obligation from one point to another. You may shift; the obligation benefit may shift to less transportation -- less transmission cost benefit and more storage cost benefit, but I'm not sure that you would change the idea of avoided facilities benefits as a result of those deliveries. 1504 MR. MORAN: Let's say you take the DCC out, you take the avoided facility cost out of rates completely. It's truly eliminated as opposed to embedded now, in rates, you just remove it altogether. 1505 MR. KITCHEN: On the basis of costs. 1506 MR. MORAN: Right. So what's left now is the need to balance deliveries at the two delivery points in order to achieve this same outcome, i.e. avoided facilities, right? Is there a way to do that, given the different kinds of deliveries that you have available at Parkway and at Dawn, i.e., system gas deliveries and direct purchase deliveries? 1507 MR. KITCHEN: If we eliminate the DCC on cost, there's going to be a net increase to some customers' delivery rates, and whether or not we can somehow move their deliveries to another point to make them -- to mitigate some of those costs, I'm not sure that that's possible. I'm not sure that that's a solution that would leave everybody neutral. 1508 And to the extent that we have -- are counting on those deliveries at those points, we still need them. It doesn't matter whose they are. 1509 MS. VANDERPAELT: Can I put your question back to you to see if I'm understanding where you're going? 1510 MR. MORAN: Sure. 1511 MS. VANDERPAELT: Are you suggesting to get rid of all these cost mechanisms, and that you would take the amount of gas -- let's just use 50/50, for example, and you say you are now going to say that 50 per cent of the system's portfolio is obligated, split equally between two locations, and a direct purchase customer has a 50 per cent obligation also split equally between two locations, so as a result of the gas that they bring in they would have a non-obligated amount -- or maybe a unobligated location; we would need the gas on a daily basis, but maybe not at the location. Is that what you're proposing? 1512 MR. MORAN: Yes. That's a good way to set it up. If we assume that half is system, half is direct purchase, you've got system needs that are met by obligating the direct purchase at Parkway, is there a way to balance between the two kinds of deliveries so that the system needs are met without having to worry about the cost implications of rates anymore> 1513 MS. VANDERPAELT: I think the part that the panel wouldn't know is, currently we manage our system and we're able to optimize the delivery stage on not having set obligation at a point. I don't know what that would do to our abilities to operate the system and how it would impact the integrated north and south operations of the system, because it really becomes a bit of a physical change, possibly, in how Union is supplying the system gas portfolio today. That's the only piece that I wouldn't be able to -- 1514 MR. MORAN: Wouldn't the only change really be your ability to manage the obligation, the ability to say this is how much I need to obligate you to deliver to Parkway. If manage that, if you were given permission by the Board because you indicated that you don't think you have that permission right now. 1515 MS. VANDERPAELT: I guess that's the second piece. If we could get permission to obligate contractually without having to pay something, that would certainly assist. But the second part that I was more concerned with was, if we have the system portfolio now being obligated at a delivery point, that's the piece that I'm not sure what it will do to our integrated operations. 1516 Currently, the system portfolio, I think it was recognized earlier, has a lot of the gas arriving at Dawn through the Vector-Alliance system and there's some northern gas that comes down. I don't know if we would have to do a physical shift and maybe buy something additional that we don't purchase today in order to meet that obligation on the system customer. So I don't know what that shift would mean, operationally, and if there would be a cost involved in order for the system to meet its obligation. 1517 But having the other piece of it would certainly assist. It's when you get into that mix as to how you would achieve that. 1518 MR. MORAN: Presumably you would be able to engage in the kinds of other kinds of solutions, you've be examining swaps and that kind of thing. 1519 MR. KITCHEN: I think I would agree with Ms. VanderPaelt that it would be an entire rethink of our system planning, how that would ultimately work and what costs would shake out of that. It's difficult for us to say. 1520 MR. MORAN: I mean, you approach the system on an integrated basis right now. If you're going to continue, you'd obviously do it on the same basis. 1521 MS. VANDERPAELT: You would have to make an assumption that the system has obligated a point, and then you would have to make sure you had supply landing at that point on a daily basis. That's the assumption which we don't have in our planning right now. 1522 MR. MORAN: Right. And perhaps maybe the use of the word obligated is too strong of a word. You just simply have to plan on delivering some system gas to Parkway as part of the balancing process between the twins; right? I'm mean, you're not going to necessarily have to obligate yourself, you're just planning on doing it; right? 1523 MR. KITCHEN: I think if it was just a matter of increasing our obligations, our firm deliveries at Parkway and lessening those in direct purchase and putting more to Dawn, I think the system would be in balance still. 1524 MR. MORAN: And that way everybody is contributing to the benefit and paying for the benefit as a result of the costs associated with obligated delivery to the particular points; right? 1525 MR. KITCHEN: I think it becomes an issue of how we would do it contractually, so it's not something that we would really -- that we really contemplated. 1526 MR. MORAN: In order to do that, you would meet the flexibility to obligate people in contracts and to -- 1527 MR. KITCHEN: And also change the current obligation to something else. 1528 MR. MORAN: There might be a transition period because the current obligations expire, do they not? 1529 MS. VANDERPAELT: Yes. 1530 MR. KITCHEN: Yes, there is work that would need to be done. 1531 MR. MORAN: I have one last question for you. What would be the implications if you were asked to defer this issue until you were re-basing -- to continue, in other words, the status quo for the time being? Is there any implications that flow from that that are important? 1532 MR. KITCHEN: I think the -- I'll let Ms. VanderPaelt talk to the customer issues, but I think from rates point of view -- in April of 2003, Union is planning to implement the storage line on the bill, which will at that point allow M-2 customers to take the unbundled service. And with the unbundled service comes a less restrictive delivery obligation in the form of a 22-day call. 1533 I don't know if there would be customer take-up of that service, but to the extent that there is, there would be an inconsistency between the 22 -- toward the unbundled service, which right now doesn't contemplate paying a DCC, even though we would be providing a 22-day call, which is notionally similar to the 365 day requirement. 1534 MR. MORAN: How significant a problem would that be? 1535 Let me ask you first -- 1536 MR. KITCHEN: Well, we may not have anyone take the unbundled service up if they're not getting recognition from the DCC, because those rates are currently derived from existing rates schedules. 1537 MR. MORAN: Right. So it depends on whether people take up the unbundled service? 1538 MR. KITCHEN: Yes. 1539 MR. MORAN: Do you have any indication of how much clamor there is for taking up the unbundled service at this point? 1540 MS. VANDERPAELT: There is one large retail energy marketer who is sniffing around. We don't know what their system design requirements in their own shop is at this point. 1541 MR. MORAN: And what period of time would we be talking about for such a problem to exist, given your plans? 1542 MR. KITCHEN: Which problem would that be? 1543 MR. MORAN: How long would this problem last for if DCC continued as the status quo until re-basing? 1544 MR. KITCHEN: Well, it really depends on the timing of the 2004 re-basing hearing, how long that would take. Potentially a year, I would suppose, where we would have the existing mechanism in place and not consistent with the unbundled service. 1545 I think there would also continue to be customer confusion. 1546 MS. VANDERPAELT: We have some large customers who were under the impression that they were going to remain -- the customer was going to remain revenue neutral as a result of this proposal. And one of the customers actually is identified in C.16.71. There's the discussion around emergent power plants, and they've made some assumptions about their build schedule and their location of facilities based on what they believed to be the elimination. 1547 To the extent they have economic certainty in this market and the corresponding electricity market, it just increases their whole anxiety overall and may have an impact on their schedule. 1548 We have heard from some customers, I would say it's probably the newer customers or the ones where the negotiation of the rates has been around the fact that DCC was going to be eliminated on a revenue neutral basis, that though customers made an economic decision based on that, and may still have an opportunity to change that decision if they have an outcome to this hearing quickly. 1549 MR. MORAN: Are there any other implications that would flow from maintaining the status quo, other than those ones there? 1550 MS. VANDERPAELT: Not that I can think of. 1551 MR. KITCHEN: Not that I can think of, no. 1552 MR. MORAN: Thank you, Mr. Chair, those are all my questions. 1553 MR. SOMMERVILLE: Thank you, 1554 Mr. Penny? 1555 MR. PENNY: Yes, thank you, Mr. Chair. 1556 RE-EXAMINATION BY MR. PENNY: 1557 MR. PENNY: Mr. Kitchen, you were asked some questions by Mr. Janigan about Enbridge Gas Distribution and its obligated deliveries and so on; do you recall? 1558 MR. KITCHEN: Yes, I do. 1559 MR. PENNY: Is Enbridge a transmission company? 1560 MR. KITCHEN: No, Enbridge is a distribution company. They don't have transmission facilities. 1561 MR. PENNY: Does Enbridge sell transmission services to ex-franchise customers? 1562 MR. KITCHEN: I don't believe so. I don't believe they have ex-franchise customers. 1563 MR. PENNY: Does Enbridge have anything comparable to the Dawn-Trafalgar system? 1564 MR. KITCHEN: No, they don't. 1565 MR. PENNY: In a similar vein, Mr. Moran asked you a few moments ago some questions about the fact that the DCC issue was unique; do you recall that? 1566 MR. KITCHEN: Yes. 1567 MR. PENNY: Are you aware of any other fully integrated distribution storage and transmission companies in North America? 1568 MR. KITCHEN: No, I'm not, actually. 1569 MR. PENNY: And does the DCC mechanism and the avoided Dawn-Trafalgar cost methodology that you've been discussing arise from the fact that Union is a fully integrated distribution, storage and transmission company? 1570 MR. KITCHEN: Yes, it is. 1571 MR. PENNY: Then Mr. Janigan had asked you some questions about the other tools you had to enforce obligations to deliver and so on and other deterrents, and there was a discussion about failure to deliver, and I simply wanted to ask you about whether there is a cost to Union of a customer failing to deliver? 1572 MR. KITCHEN: Yes, there is. 1573 MR. PENNY: And what is that cost? 1574 MR. KITCHEN: The first cost that would come to mind is we would have to replace the molecules that we were expecting, because the customer would continue to take its demands. There may also be legal costs in terms of trying to collect the -- whatever Union was out, because we would try to revisit those costs on the direct purchaser. 1575 There's also the cost of time. These things, when they happen, quite don't typically happen at the best of times. It happens when you're busy trying to buy gas to meet the demands of the system and it requires a significant amount of effort to juggle something when you're expecting something to happen and then it doesn't. 1576 MR. PENNY: All right. And then Mr. Janigan also asked you -- at one stage, my note had to do with -- sit with the system gas purchases by Union on behalf of customers who are not direct purchase, and that the deliveries of that gas, and the relationship of that to the system integrity concerns you've been discussing. 1577 And you had said that the benefit of Union's acquisition of system gas is reflected in rates? 1578 MR. KITCHEN: Yes. 1579 MR. PENNY: I just want you to explain -- to expand on that and explain what you meant by that. 1580 MR. KITCHEN: Union's firm deliveries are also built into the rates of all customers in the form of reduced facilities. 1581 The fact that Union operates a system and has to ensure that demands of all its end-use customers are met requires Union to be able to make changes to its delivery patterns at times, and so there is no delivery point obligation related to those. 1582 The fact is that Union, by where it brings its supplies in would overall reduce the facilities requirements, and therefore rates. 1583 MR. PENNY: Thank you. And then Mr. Ryder had asked you at one point to confirm that there were no other avoided costs in rates, and I just wanted to return to that for a moment. 1584 The avoided -- did I understand you correctly to say that the avoided cost methodology is the basis of determining the global -- the global amount of the delivery commitment credit? 1585 MR. KITCHEN: Yes. Yes, it is. 1586 MR. PENNY: Is the payment of delivery commitment credit a real cost to Union? 1587 MR. KITCHEN: The payment of the delivery commitment cost is a real cost. 1588 MR. PENNY: Thank you. 1589 Ms. VanderPaelt, one final question for you. I think this also arises out of a question from Mr. Ryder, and the question related to a discussion you had where Union -- where the suggestion was that Union would need to administer some of these flexibility products, because it would know, in terms of its overall system management, when it would need the gas at Parkway. Do you recall that discussion? 1590 MS. VANDERPAELT: Yes, I do. 1591 MR. PENNY: Now, here's my question: Is a winter peaking service at Parkway available to a customer who wanted it as a product in the competitive market? 1592 MS. VANDERPAELT: A customer could buy winter peaking service at Parkway, yes. 1593 MR. PENNY: And presumably, a customer would know what its requirements were, and could decide to buy it or not buy it? 1594 MS. VANDERPAELT: They could. 1595 MR. PENNY: And does Union need to be involved in such a case when a customer -- either deciding whether it wants or needs that service, or in acquiring it, once a customer decides it does want that service? 1596 MS. VANDERPAELT: If the customer is acquiring it just for winter peaking service, Union would not need to be involved. Where they're trying to replace an annual obligation with where the customer may attempt to estimate which day they need to call on it, and they made a mistake on that estimate, that's where the benefit of us knowing how the system operates. That's where our peaking system is unique in terms of the other services which would be in place on ongoing basis and the customer could manage them. 1597 MR. PENNY: Is part of the flexibility offerings that you consider in discussions with customers, assisting customers in making those arrangements, if they wish to? 1598 MS. VANDERPAELT: Yes, if customers want to talk to us about any of the arrangements, we're willing to talk to them. 1599 MR. PENNY: Thank you. 1600 Thank you, Mr. Chairman. 1601 MR. SOMMERVILLE: Thank you, Mr. Penny. 1602 No question from the panel. The witness panel is excused. 1603 Thank you very much for your assistance today. 1604 We would normally reconvene tomorrow at 9:30. Tomorrow will be a short day as I indicated at the beginning of the proceeding. We would look to end at noon. 1605 If it is thought useful, we could convene early tomorrow at 9:00 rather than 9:30. Mr. Ryder, does that resinate with you in any way? 1606 MR. RYDER: Well, I recommend the 9:30, Mr. Chair, because my client is coming in from Kitchener in the morning, so it's easier to meet the 9:30 deadline. 1607 MR. PENNY: Mr. Chairman, I can say that from at least my perspective, as you know, I think, from past hearings, I do not spend a lot of time in cross-examination so, whatever I have for Mr. Quinn will be quite brief. I anticipate no problem finishing if we start at 9:30 from my perspective. 1608 MR. SOMMERVILLE: We will regard that 12 o'clock witching hour fairly rigidly tomorrow, so fair warning. 1609 We will stand adjourned until tomorrow morning at 9:30. Thank you. 1610 --- Whereupon the hearing adjourned at 4:28 p.m.