Rep: OEB Doc: 12N9P Rev: 0 ONTARIO ENERGY BOARD Volume: 3 26 FEBRUARY 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER F. PETERS MEMBER 1 RP-2002-0130 TRANSCRIPT VOLUME #3 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 #3 4 26 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 WARREN CAC ALICK RYDER The City of Kitchener VINCE DEROSE IGUA TIBOR HAYNAL TCPL BARBARA BODNAR Enbridge Gas 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [15] CITY OF KITCHENER - PANEL 1 [39] EXAMINATION BY MR. RYDER: [41] CROSS-EXAMINATION BY MR. PENNY: [138] 10 EXHIBITS 11 EXHIBIT NO. F.3.1 CIRRICULUM VITAE FOR ROBERT DWAYNE QUINN [30] 12 UNDERTAKINGS 13 14 --- On commencing at 9:41 a.m. 15 PRELIMINARY MATTERS: 16 MR. SOMMERVILLE: Good morning. Please be seated, thank you. 17 Good morning Mr. Ryder. 18 MR. RYDER: Good morning, sir. 19 MR. SOMMERVILLE: The Board has one preliminary issue that I'd like to put on the record and ask staff to ensure that all parties are advised accordingly. 20 As an administrative matter, the Board would prefer it in intervenors could file their submissions with respect to costs at the time they submit their argument in this case, and we would be asking the applicant to reply, if it sees fit to do so, at the same time that it files its final reply. 21 If we could communicate that to all parties and it's now on the record. 22 Are there any preliminary matter from the parties? 23 Mr. Ryder, are you prepared to proceed? 24 MR. RYDER: Yes, thank you, sir. 25 MR. SOMMERVILLE: Thank you. 26 MR. RYDER: I apologize for the delay. 27 MR. SOMMERVILLE: Not at all, sir. 28 MR. RYDER: I filed with you Mr. Quinn's curriculum vitae. 29 MR. MORAN: Give that Exhibit No. 3.1. I think you have copies -- 30 EXHIBIT NO. F.3.1 CIRRICULUM VITAE FOR ROBERT DWAYNE QUINN 31 MR. SOMMERVILLE: Yes, I have, thank you. 32 MR. RYDER: I see, Mr. Quinn, that you are the director of utilities for the City of Kitchener? 33 MR. QUINN: That's correct. 34 MR. RYDER: And you received -- 35 MR. MORAN: Mr. Chair, I don't know if the witness has been sworn yet. 36 MR. SOMMERVILLE: Sorry. 37 MR. QUINN: I'll take that back. 38 MR. RYDER: So far I'm the only one who has given evidence. 39 CITY OF KITCHENER - PANEL 1 40 D.QUINN; Sworn. 41 EXAMINATION BY MR. RYDER: 42 MR. RYDER: Mr. Quinn, you are the director of utilities for the City? 43 MR. QUINN: That's correct. 44 MR. RYDER: And the City operates both a gas utility, distribution utility, and a water system utility? 45 MR. QUINN: Yes, we have an integrated gas and water enterprise. 46 MR. RYDER: And you're responsible for both? 47 MR. QUINN: Yes, I am. 48 MR. RYDER: And you graduated with a Bachelor of Science from the University of Western Ontario in 1985? 49 MR. QUINN: That's correct. 50 MR. RYDER: Then through the mid-90s you received a Masters of Business Administration in 1997 from Laurier University? 51 MR. QUINN: That is correct. 52 MR. RYDER: And your entire employment life has been in the gas industry? 53 MR. QUINN: The energy industry, anyway. I had a brief stint at Babcock and Wilcox in Cambridge doing steam generators for nuclear plants. 54 MR. RYDER: Then you joined Union in -- when did you join Union? 55 MR. QUINN: 1985. 56 MR. RYDER: And you worked in the facilities planning department? 57 MR. QUINN: That's correct. 58 MR. RYDER: And your other experience with Union is outlined in your curriculum vitae? 59 MR. QUINN: Yes, it is. 60 MR. RYDER: Then you joined the City of Kitchener utilities in 1994? 61 MR. QUINN: Yes. 62 MR. RYDER: First as the utilities engineer, and you became the director of utilities in 1998. 63 MR. QUINN: That's correct. 64 MR. RYDER: And you're responsible for the overall operations and maintenance of the utility. 65 MR. QUINN: Yes. 66 MR. RYDER: You filed testimony previously before the Ontario Energy Board, I believe, in the application that was filed to approve the carriage service contract. 67 MR. QUINN: That's correct; there's an omission in the vitae that in regards to 1999-0011, we did file evidence at that time, and at a technical conference here at the Board. 68 MR. RYDER: And that the evidence transcribed as a technical conference which you gave was upon agreement made the evidence in the proceedings? 69 MR. QUINN: That's correct. 70 MR. RYDER: And the evidence pre-filed in this case, in Exhibit D.1, was that prepared by you? 71 MR. QUINN: Yes, it was prepared by me with associates, including yourself, obviously. 72 MR. RYDER: Were you also responsible for the evidence in the interrogatory responses in Exhibit E.1? 73 MR. QUINN: Yes. 74 MR. RYDER: Now, in Exhibit D.1, at page 9, you've given the -- paragraph 18, you've given a short summary of the benefits of delivery point flexibility. 75 What are the basic economics of the feasible delivery point solution? 76 MR. QUINN: Delivery point flexibility, obviously, has been an issue that has been in the Ontario market since the time of 1987 in the original EBRO-412. As Kitchener -- and in terms of evolving our contractual relationships with Union, we identified delivery point flexibility as an opportunity we wanted to pursue. The economics were such that delivering at other points such as Dawn seemed to be economic, but understood our responsibilities to work with Union in terms of coming up with a contract. 77 Further, and in terms of some of my experience, as the chair of the ONGA natural gas supply committee, we had opened discussions with representatives of utilities and market participants, including marketers about the Ontario market and understood that in the interests of a natural gas industry, an efficient market for Ontario is what we desired and we had open discussions about removing some of the barriers, including one of the main points was delivery point -- the point of receipt for gas in Ontario, and if we could remove some of the barriers that would improve the efficiency of the overall market. 78 Union's need for gas at Parkway during the winter conditions is recognized. Kitchener has understood as a utility some of the dynamics of the system, and their need at Parkway for gas, especially on a day like today is indisputable. But Kitchener has requested Union to consider other ways and means of providing that Parkway capability and our peaking services is only one option, and over the years, we believe that it should have been given more consideration given some of the economics that were there. 79 In fact, because of the overall positioning on this issue, we've been concerned that a systemwide solution would not be implemented by Union, and therefore, we had such a strong belief in delivery point flexibility, and uncertain of a systemwide solution that Kitchener started in 2002 to study the entire North American market and understand the economics behind different delivery options in North America, forecasting that in the future in terms of gas supply development and expectations for pipelines forecasted, we came up with a strategy whereby we wanted to create our own delivery point flexibility. 80 In November we entered into discussions to create some of that flexibility, and as of December 11th, signed a contract to create our own flexibility starting later on in 2003 for the period of five years. 81 MR. RYDER: When you say -- you refer to the systemwide solution. What was that about? 82 MR. QUINN: A systemwide solution, as we have been proposing, as I say, since 1999, needed the willing participation of the system operator, in this case, Union, to be able to identify those days where additional gas supply would be needed if people were given flexibility and what are the days that gas would be needed at Parkway to sustain their system operations? 83 In doing a systemwide solution, there is the opportunity that only the amount of gas and additional capacity would be -- would be called on on any particular day, given an efficiency of economics -- 84 MR. RYDER: Only the amount needed. 85 MR. QUINN: Only the amount needed. If I misstated that that is a correct statement. Only the amounted needed would be called for by the system administrator. In doing that -- 86 MR. RYDER: Can individual customers -- contrast that situation with an individual customer solution, like the one you've engaged in. 87 MR. QUINN: An individual customer solution is -- there's potential out there and as I've stated, we have sought and secured that potential ourself. 88 An individual customer must go out and incur the transaction costs associated with providing themselves the flexibility. Those costs are involved in the transaction costs, a bid/offer spreads that are in the market and an element of financial security to be able to hold a contract with a viable financial partner over the long term. 89 In comparison, what you could have is -- each individual customer, and they could be in the dozens, were to go out and do that, there would be a duplication of effort for everybody to provide the gas at Parkway for the days that it is required, whereas if Union were to do it, only a subset of that number of customers would have to provide it. 90 Not unlike Union's 22-day callback, where in their evidence in 1999-0017, they talked about a 22-day callback, they would call the amount of gas as required from customers, but not all customers would be called on the same day depending on Union's needs at the time. The peaking service proposal we put forward to this point used those type of criteria to suggest that Union would call on the amount of gas -- only the amount of gas it would need and the cost would be borne by the users who employ the system and create delivery point flexibility for themselves. 91 MR. RYDER: Now, did you participate in the solution that was originated in the ADR agreement of 0017 in the year 2000? 92 MR. QUINN: Yes, we moved 20 per cent of our volumes to Dawn under the agreement that was created with Union and TransCanada. 93 MR. RYDER: And were you one of the participants who declined to participate further with that type of solution? 94 MR. QUINN: Yes, we did not support its continuance, given the economics for Kitchener specifically. We paid a higher rate for the service than we could extract from the market benefits available to delivering at Dawn for those 20 per cent volumes. 95 MR. RYDER: Now, Kitchener takes service under Union's T-3 rate schedule? 96 MR. QUINN: That's correct. 97 MR. RYDER: And it is therefore a contract customer? 98 MR. QUINN: Yes. 99 MR. RYDER: And do you have an obligation to deliver in your T-3 contract? 100 MR. QUINN: Yes, we do. 101 From the outset of our discussions in moving to a T-3 contract, we were advised by Union that part of the contract was the obligation to deliver, wherein lay some of our negotiations or discussions around delivery point flexibility, and flexibility in the redelivery point, which was one of the issues in 1999-0011. 102 MR. RYDER: Can I stop you there? 103 MR. QUINN: Sure. 104 MR. RYDER: Was the obligation to deliver presented as a mandatory requirement or was it negotiable? 105 MR. QUINN: It was a mandatory requirement. In fact, from the outset when we went to the bundled T contract, there was an underlying obligation to have firm deliveries which supported the ability to get to the bundled T, and then from the bundled T contract, which was characterized as a T-9 contract, but essentially, it was the bundled contract where we provided commodity. We made the next step to the unbundled contract of the day, which was a carried service T-3 contract, the obligation for us to deliver was embedded in the contract and was not subject to negotiation, whether we obligated volumes or not. 106 MR. RYDER: Now, we heard from the panel of Union witnesses yesterday that the DCC is -- can be considered as an incentive to its customers to agree to an obligation to deliver. Has that been your experience? 107 MR. QUINN: We spent, quite frankly, over two years in negotiation with Union in terms of trying to create the T-3 contract, which we eventually arrived at. 108 During that period of time, at no point was the DCC considered or was it communicated to me as being an incentive to deliver. It was our obligation to deliver. We had significant discussions around flexibility in terms of the point, and actually, at the end of the day, arrived at a small amount of flexibility for Kitchener, but the DCC was never an issue. 109 And when that point was different, it was deemed to be Dawn for a small portion of our deliveries. The DCC was still included for us to obligate at Dawn. 110 MR. RYDER: Now, we've seen from the interrogatory response in C.16.66, it's not necessary to turn that up, that the DCC program as a whole resulted in a net cost to the City. 111 MR. QUINN: That is correct. 112 MR. RYDER: Is there any way in which the DCC program as a whole, that is the cost and the credit combined, played an incenting role to Kitchener to accept the obligation to deliver? 113 MR. QUINN: No. 114 MR. RYDER: Now, you did say that you negotiate -- you were able to engage in negotiation over the delivery points. 115 MR. QUINN: We did, yes. 116 MR. RYDER: And what was the result of that? 117 MR. QUINN: The result was that most of our deliveries were maintained at Parkway. We did have an opportunity to move some volumes back to Dawn. At the time, Union identified it was going to try and come up another systemwide solution so our contract afforded us a minimum amount at another location other than Parkway, but not to be inhibited from the amount that was allowed for in the systemwide solution. 118 MR. RYDER: All right. Now, is the DCC paid on Dawn deliveries? 119 MR. QUINN: Yes, it is. 120 MR. RYDER: And now, I think you have may have touched on this, but assuming that the economics are feasible for a peaking service approach to delivery point flexibility, is such an approach workable in the absence of Union's cooperation? 121 MR. QUINN: No, it's not. Because each customer will still maintain an obligation to deliver, and any kind of bundled or semi-unbundled contract there will still be an obligation. Even under a 22-day callback there is still an implicit obligation upon Union's call that the volumes be provided. In any event, that obligation to Parkway cannot be achieved efficiently without the knowledge of the system operator knowing how many days, which days and how much gas would be required at Parkway. 122 MR. RYDER: So just to summarize, there are two bases for Union's involvement. One is to release the customer from the obligation to deliver at Parkway, and secondly, to make use of its system diversity in knowing when to call upon the peaking service. 123 MR. QUINN: To a great extent that's correct. I want to clarify, though, releasing from the obligation of Parkway for only a portion. In real terms trying to do a peaking service for 100 per cent of the volumes for direct purchase service customers at Parkway would probably become unworkable and uneconomic; but yes, there is a requirement to the second part of your -- if you could repeat that, Mr. Ryder, so I'm specific, the second part of your point. 124 MR. RYDER: Well, to take advantage of the diversity in Union's system. 125 MR. QUINN: Yes, that's correct. And that is correct, because the system diversity allows for the fact that gas -- 100 per cent of all gas commitments are not needed at Parkway on 100 per cent of the days. The system diversity can be achieved and benefit the customers as well as Union in any decision about peaking service. 126 Further and I might add, it also adds to the economics of plant it has already invested in Ontario and I would include in that other pipelines such as TCPL. It creates an efficiency on use of assets that is in the economic interests of the ratepayers of the entire province and the economy of the province. 127 MR. RYDER: Now, the approaches that Union has sponsored to date, have they all involved the use of its own facilities on Trafalgar. 128 MR. QUINN: To this date, and in fairness, I was only able to take in part of the cross-examination from yesterday. As I understand it, Union is now putting forth another proposal which may involve exchanges, which may or may not use the assets of third parties. If Union has communicated, I guess, a proposal, we haven't been communicated with to understand the intricacies of that proposal, but I would suggest that, from what I understand of that proposal, it may use the assets of other people. Union would go out, though, and source those assets. I'm not sure if that's done through the S&T department or through the utility itself and where the revenues would go, but I guess that would be communicated as their policy comes forward. 129 MR. RYDER: And you're referring to the Dawn flex proposal which is outlined in interrogatory response C.4.39? 130 MR. QUINN: That's correct. 131 MR. RYDER: Those are all my questions. 132 MR. SOMMERVILLE: Ms. Bodnar, do you have any questions of this witness? 133 MS. BODNAR: No questions, thank you. 134 MR. SOMMERVILLE: Mr. Haynal? 135 MR. HAYNAL: Thank you, no questions. 136 MR. SOMMERVILLE: Mr. Penny. 137 MR. PENNY: Thank you, Mr. Chairman, I really think that just about everything Union wants to say on this topic is properly said in argument, but I will have one or two questions of factual clarification. 138 CROSS-EXAMINATION BY MR. PENNY: 139 MR. PENNY: Mr. Quinn, I want to understand specifically the sequence that took place the resulted in the T-3 contract that you referred to earlier. 140 As I understand it, there was some initial negotiation, which was not satisfactory to you, which prompted the City of Kitchener to bring an application -- I think you referred to it as 1999-0011 before the Board; is that correct? 141 MR. QUINN: That's correct. 142 MR. PENNY: Then the Board issued, in effect, an interim contract as a result of that -- 143 MR. RYDER: There's a legal point here. I think the reality is that the contract is subject to Board approval even if there is agreement so, we had to go to the Board in any event. 144 MR. PENNY: Fair enough. 145 MR. QUINN: That is correct. It was communicated to us by Union, the amount of storage which we would be seeking which underpinned our deliveries required Board approval. 146 MR. PENNY: So there was an interim contract that resulted from that proceeding? 147 MR. QUINN: That's correct. 148 MR. PENNY: And then subsequent to that, you had further negotiation with Union, which resulted in a satisfactory agreement; is that correct 149 MR. QUINN: That's correct. 150 MR. PENNY: That agreement was subsequently approved by the Board? 151 MR. QUINN: That is correct, yes. 152 MR. PENNY: Thank you. 153 Thank you Mr. Chairman. Those are all my questions. 154 MR. SOMMERVILLE: Thank you. Mr. Moran. 155 MR. MORAN: I don't have any questions, Mr. Chair. 156 MR. SOMMERVILLE: The Board has no questions, which means you're excused, Mr. Quinn -- oh, pardon me. Mr. Ryder, do you have any redirect? 157 MR. RYDER: No, sir. No, I don't. 158 MR. SOMMERVILLE: You're excused, Mr. Quinn. 159 We will adjourn today, now, to reconvene Monday morning at 9:30 for the evidence of VECC witnesses and it is -- we will then, after that is concluded, that will effectively conclude, subject to any rebuttal evidence, the evidentiary portion of this proceeding, and we will deal with arguments following that. 160 MR. PENNY: Yes. I should advise the Board and parties through the transcript that the balance of Union's transcript undertakings will be available today. Because we've whistled through the evidence quickly this morning, they're not quite ready, but we will send them out by e-mail or fax to parties so that they have them before Monday. 161 MR. SOMMERVILLE: Thank you, Mr. Penny. 162 In which case, we stand adjourned until Monday morning at 9:30. Thank you. 163 --- Whereupon the hearing adjourned at 10:04 a.m.