Rep: OEB Doc: 12N9Q Rev: 0 ONTARIO ENERGY BOARD Volume: 4 3 MARCH 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER F. PETERS MEMBER 1 RP-2002-0130 TRANSCRIPT VOLUME #4 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 #4 4 3 MARCH 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 MICHAEL JANIGAN VECC ROBERT WARREN CAC VINCE DE ROSE IGUA THOMAS ADAMS Energy Probe RICHARD KING Tractebel Power VALERIE YOUNG OAPPA BARBARA BODNAR Enbridge Gas 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] VECC - PANEL 1 [26] EXAMINATION BY MR. JANIGAN: [29] CROSS-EXAMINATION BY MR. DEROSE: [117] CROSS-EXAMINATION BY MR. KING: [402] CROSS-EXAMINATION BY MR. ADAMS: [494] CROSS-EXAMINATION BY MS. YOUNG: [550] CROSS-EXAMINATION BY MR. MORAN: [604] CROSS-EXAMINATION BY MR. PENNY: [615] 10 EXHIBITS 11 EXHIBIT F.4.1 REFERENCE MATERIALS FOR THE CROSS-EXAMINATION OF THE INDUSTRIAL GAS USERS ASSOCIATION [316] 12 UNDERTAKINGS 13 UNDERTAKING NO. G.4.1: ESTIMATED RATE IMPACT ON AVERAGE SIZED RESIDENTIAL SYSTEM GAS CUSTOMER [593] 14 --- Upon commencing at 9:33 a.m. 15 MR. SOMMERVILLE: Good morning. Thank you very much, please be seated. 16 PRELIMINARY MATTERS: 17 MR. SOMMERVILLE: We are reconvening this morning in the matter of the customer review process application made by Union Gas. Our primary purpose today is to hear the evidence of VECC in this matter. 18 Are there any preliminary matters? 19 Mr. Penny. 20 MR. PENNY: Yes, Mr. Chairman. I just wanted to advise thaw all of Union's transcript undertakings have now been answered. They were distributed this morning G.2.1, G2.2, and 2.3 -- sorry, 2.3 through 8. I was only reading the top page. 21 MR. SOMMERVILLE: I have those, it appears, Mr. Penny, thank you. 22 Are there any preliminary matters from any other party? 23 Are you prepared to proceed, Mr. Janigan? 24 MR. JANIGAN: Yes, I am, Mr. Chair. I wonder if the witnesses could be sworn. 25 MR. SOMMERVILLE: Yes. 26 VECC - PANEL 1 27 J.POON; Sworn. 28 J.D.TODD; Sworn. 29 EXAMINATION BY MR. JANIGAN: 30 MR. JANIGAN: Yes, first, Mr. Todd, you are the founder and president of Econalysis Consulting Services, which provides research analysis and assistance to clients and regulated industries? 31 MR. TODD: That's correct. 32 MR. JANIGAN: I understand that your business was founded in 1980, and you have nine consultants in that organization? 33 MR. TODD: Yes. 34 MR. JANIGAN: And last year, you founded the Canadian Energy Regulatory Information Service? 35 MR. TODD: The Canadian Energy Regulation Information Service, or -- CERIS, yes. 36 MR. JANIGAN: And that provides service and information on energy issues across Canada and to some extent North America. 37 MR. TODD: That's correct. 38 MR. JANIGAN: In terms of your education, you received an undergraduate degree in electrical energy from the University of Toronto, and your MBA from that same university in economics and management science. 39 MR. TODD: Yes. 40 MR. JANIGAN: And you've given expert testimony in numerous proceedings in this and other tribunals across Canada. 41 MR. TODD: That's correct. 42 MR. JANIGAN: And a more detailed list of your experience, including your papers and relevant projects, is found in Exhibit 2.2.1. 43 MR. TODD: I believe that's correct, so yes. 44 MR. JANIGAN: And Ms. Poon, you are currently engaged as a consultant for Econalysis Consulting and have been a consultant since 1999. 45 MS. POON: That's correct. 46 MR. JANIGAN: You received an honours Bachelor of Arts and your Masters of Arts from that same university in applied economics program. 47 MS. POON: Yes. 48 MR. JANIGAN: Since 1988, you have worked in regulated industries in progressively more responsible positions. 49 MS. POON: Yes. 50 MR. JANIGAN: And you started with TCPL and worked in regulatory analysis for TransCanada Gas Services? 51 MS. POON: That's correct. 52 MR. JANIGAN: And you went to Centra Gas as supervisor of economics and demand forecast group. 53 MS. POON: Yes. 54 MR. JANIGAN: And you joined Enbridge Consumers Gas where, in your last three years prior to joining Econalysis, you worked as manager of rate design? 55 MS. POON: That's correct. 56 MR. JANIGAN: And for both at Centra Gas and Enbridge Consumers Gas you have prepared testimony and appeared and gave testimony before this Board? 57 MS. POON: That's correct. 58 MR. JANIGAN: And a more detailed summary of your experience is found in Exhibit 2.2.1. 59 MS. POON: Yes. 60 MR. JANIGAN: And the evidence that's filed in this proceeding as Exhibit D.2 and the interrogatories that you have answered, both of you prepared that either yourselves or under your direction, and you're responsible for the contents? 61 MR. TODD: Yes. We're jointly responsible. 62 MR. JANIGAN: And is it true, to the best of your knowledge and information and belief? 63 MR. TODD: Yes. 64 MS. POON: Yes. 65 MR. JANIGAN: Now, I wonder if you could explain the essential difference between Union's approach to eliminating the DCC and the approach advocated in your evidence. 66 MR. TODD: The delivery commitment credit, or DCC, is a volume-based credit given to direct purchase customers for delivering their gas at 100 per cent load factor to a designated delivery point, which may be either Dawn or Parkway. The cost of those payments is currently charged to in-franchise customers based on their peak days usage of the Union system. 67 Although Union commits to transportation arrangements that obligate the planned delivery of system gas, or system customers, to the same terms, system customers do not receive this credit. Union appears to me to believe that this payment to DP customers is appropriate and necessary. 68 As a result, they are proposing a mechanism that will embed the benefits and the costs of the current DCC into rates even after the DCC is eliminated. 69 We believe the DCC is neither appropriate nor necessary. We are, therefore, recommending that not only the DCC but also the interclass transfers be eliminated. 70 MR. JANIGAN: Can you indicate why you believe Union's approach is not appropriate. 71 MR. TODD: Union has always had an obligation to manage its system so as to minimize total costs. It had this obligation before direct purchase was introduced into Ontario. It has that obligation now. Nothing has changed in this regard. 72 An integral part of managing the system efficiently is advance planning. For example, Union manages its gas supply so as to utilize its upstream transportation capacity at 100 per cent load factor. It also divides planned deliveries between Dawn and Parkway so as to minimize the capacity required on the Dawn-Trafalgar transmission line. This planning avoids unnecessary facilities costs. 73 The existence of direct purchase makes no difference to either efficient management of Union's system. The volumes that must arrive at each location are the same with or without direct purchase. Put simply, Union must pre-plan and contract for a certain proportion of its total supply to be delivered to Dawn and the balance to be delivered to Parkway. Clearly, it cannot know what portion of its system supplies should be delivered to each location if it doesn't know where the DP gas is being delivered. 74 The delivery commitment of direct purchase customers is an integral part of Union's system planning. They have to know where the gas is going. 75 Furthermore, it seems obvious to me that when Union signs transportation contracts for system supply, the contracts create delivery obligations that are every bit as binding as the DP customers' obligation to deliver. For example, to the extent that Union contracts for capacity on the Alliance-Vector pipeline to Dawn, it is obligated to deliver that amount of gas to Dawn. And if it fails to use the pipe at 100 per cent load factor, it is likely to face the penalty in the form of a disallowance of costs from the Board. That's what system planning is all about. 76 The bottom line is that for system planning purposes, it is absolutely essential that both system and DP deliveries are committed to arriving at 100 per cent load factor and that they arrive at a known location. Furthermore, the total deliveries to each location, that is to Dawn and to Parkway, have to be consistent with the peak day planning constraints that were discussed by Union last week. 77 It seems clear to me that the obligation to deliver for which the DCC is now paid serves only one purpose: To ensure that DP customers deliver their gas in the same manner as the same gas would have been delivered as system supply. 78 To emphasize that point, we can look at it a bit differently. As we all know, direct purchase generally displaces system supply. Because supply is displaced, a DP customer gets an assignment of Union's transportation capacity. It must also inherit the corresponding delivery obligation. 79 To illustrate, Union's overall system management will be compromised if it handed over to a direct purchase customer TCPL capacity that terminates at Parkway but then allowed the customer to deliver its gas to Dawn. The gas, the transportation, and the delivery obligation go hand in hand, both when it's part of system gas and when it's part of DP supply. 80 I therefore fail to see any rationale for paying DP customers to fulfill the same obligations that they had as system supply customers. Let me illustrate the point with a simple analogy. 81 I have two daughters. They are not yet of driving age, but soon will be. Using Union's logic, they could argue that by driving carefully, they will save me money. I'll have lower repair costs if they have fewer accidents. If DP customers are paid to deliver their gas in a way that avoids unnecessary facilities costs, why shouldn't they be paid to drive carefully? 82 Need I tell you my response to this argument, drive with care, or you pay yourselves. I find it equally incomprehensible that DP customers would expect to be paid for accepting the same obligations as have always existed in a de facto sense for system customers. Deliveries must be made in accordance with prudent system planning constraints. 83 MR. JANIGAN: Mr. Todd, your answer deals with the reason why you believe the elimination of the DCC by Union in the way its proposed is not appropriate. Why do you think that the payment is not necessary? 84 MR. TODD: There is no difference between Union's proposal and ours from the perspective from the method used to enforce the obligation to deliver. In both cases, the threat of penalties ensures the customers deliver in a manner that optimizes Union's system. 85 In fact, it is clear that even under the current DCC regime, the obligation is backed up by a penalty. If the customer fails to deliver, the DCC payment is clawed back. In other words, there is a financial penalty. 86 Under Union's proposal, the payment to DP customers will be embedded in rates so the company will no longer be able to clawback the payment from a customer that fails to meet its delivery obligation. Clearly penalties will be needed to discipline DP customers to fulfill their obligation. The embedded payment is irrelevant to the effectiveness of the penalties, because the penalties themselves in either proposal that will ensure obligations are mets. 87 MR. JANIGAN: Now, how does the historical record of OEB decisions effect your conclusions with -- contained in your evidence? 88 MS. POON: In EBRO-456-4, we believe that the Board has the ability to obligate deliveries. The Board accepted that all gas volumes in Ontario, LDCs under buy/sell arrangements, should be on a firm basis with an obligation to deliver. 89 In carrying out of the this decision, the Board recognized that in the event a customer, a direct purchase customer, did not obligate -- Union as a utility or all LDCs were required to still obligate to serve these customers. As a result, if the Board deemed it was inappropriate to allow these LDCs -- therefore, the Board deemed it was appropriate to allow these LDCs the right to make direct purchase customers to obligate, because if they didn't, it would be unfair -- inequitable -- unfair advantages from a cost causality perspective on these LDCs to still have to obligate to deliver to these customers. 90 In requiring these LDC -- these direct purchase customers to obligate to deliver, they compensated direct buy/sell customers by ensuring that their supply was being paid an obligated price for that gas supply. 91 MR. JANIGAN: In particular, there has been reference made in these proceedings to date about the effect of the EBRO-412 decision upon the arrangements that need to be made associated with the DCC or that Union believes had to be made with respect to the DCC. Do you agree? 92 MS. POON: No, I don't, because in EBRO-412-2, that was a generic proceeding. It was a contract carrier to arrangement decision whereby it was applicable not only to Union, but it was applicable to Union Gas, Centra Gas Ontario at the time when it existed, and because of that decision, Union is saying that it precludes them the ability to obligate to deliver or to be able to mandate that, and if that, in fact, would be true, then we would not see that Enbridge would be allowed to mandate its direct purchase customers in its terms and conditions to obligate to deliver. 93 MR. JANIGAN: Speaking of Enbridge, we have heard earlier with the Union panel -- in the evidence of the Union panel, that the absence of a DCC in the Enbridge system is not relevant for the consideration of what should be present in the Union system. Can you comment upon that. 94 MS. POON: Well, both utilities are distribution utilities and both have an obligation before this Board and to everybody, in fact, to optimize all the use of its assets and to minimize cost for all its customers. 95 So regardless of the fact that Union also serves ex-franchise customers such as Enbridge Consumers Gas or TransCanada, they still have the obligation whereby they should utilize the assets in their contracts in which they purchase at an optimal manner, similar to Enbridge, which they do, in fact, do. 96 MR. JANIGAN: Have you considered the impact upon the large direct purchase customers and the system in general if the DCC is eliminated in the manner which you have proposed? 97 MS. POON: Yes, I have. I guess I looked at it from the perspective of when I was a manager of rate design at Enbridge Consumers Gas. When looking at impacts as a result of cost allocation changes, we would look at the overall end-use impacts to these customers, and look from that perspective in regards to if it's impacting its competitive position. 98 MR. JANIGAN: Thank you, panel. 99 Those are all my questions. The witnesses are available for cross-examination. 100 MR. SOMMERVILLE: Thank you. 101 Have intervenors discussed an order for cross-examination? 102 In which case, I will impose one. 103 MR. PENNY: I think we did, actually, Mr. Chairman and I think the normal practice would be that intervenors who support the position would go first. Intervenors other than the applicant who oppose the position would go next and then the applicant would go last -- I guess then Board staff depending on whether they support or oppose, and then the applicant would go last. 104 MR. SOMMERVILLE: That's exactly what I had in mind. 105 So Mr. Penny, are you prepared to proceed? 106 MR. PENNY: Sorry, we're the applicant, so we would go last. 107 MR. SOMMERVILLE: I beg your pardon. 108 Those in support of the point of view expressed by these witnesses. 109 Mr. Warren? 110 Mr. WARREN: I don't want to appear to be the world's living virgin on this question, Mr. Chairman, but I think notionally we probably are in support of it, but we're not quite there yet. But having said all of that, I have no questions for this panel. 111 MR. SOMMERVILLE: Thank you. 112 MR. JANIGAN: Virgin indeed. 113 MR. SOMMERVILLE: That's preserving your status, I believe, Mr. Warren. 114 Mr. WARREN: My job in life, sir. 115 MR. SOMMERVILLE: Mr. DeRose. 116 MR. DeROSE: Thank you. 117 CROSS-EXAMINATION BY MR. DEROSE: 118 MR. DeROSE: Well, if Mr. Warren is the world's oldest virgin, I may be the youngest at the hearing. I'm new to the world of the OEB. 119 Panel, my name is Vince DeRose. I'm here on behalf of the Industrial Gas Users Association. Let me start by making sure we're on the same page with the way that DCC operates. My understanding is there is two components to DCC as it operates today. 120 The first component is that the cost of the DCC payout are recovered from all in-franchise rate classes based on design day system use; is that correct? 121 MS. POON: That is correct. 122 MR. DeROSE: And just for the ease of my examination, I would refer to that as the recovery component of DCC; is that fair? 123 MS. POON: That's correct. 124 MR. DeROSE: And then the other aspect is the DCC credit or payout which is paid to direct purchase customers based on the system benefit provided; is that correct? 125 MS. POON: It's paid out to all direct purchase customers on a volumetric basis. 126 MR. DeROSE: Just for ease of the examination, I would call that the credit component. So we have a recovery component and a credit component? 127 MS. POON: It's a payment. It's not a credit and it never enters into the rates. It is money taken by Union and paid out to direct purchase customers. 128 MR. DeROSE: Well -- 129 MS. POON: So it's a payment. It's not really -- it's never a credit. It's never embedded in rates. 130 The other side of the equation is carried outside of the rates. 131 MR. DeROSE: Without getting into semantics about whether it's a payout or a credit -- 132 MS. POON: Sure, it's a credit to the bill. 133 MR. DeROSE: I think it's a credit to the bill. 134 MS. POON: Sure. 135 MR. DeROSE: I'm using the word credit, because it's in the title of DCC. So there's a credit component and a recovery component; is that fair? 136 MS. POON: Sure. 137 MR. DeROSE: In your evidence, you refer to a de facto obligation or an implicit obligation to deliver that system gas customers have. Is that -- 138 MR. TODD: Yes. 139 MR. DeROSE: And as I understand the evidence, Union operates a system to ensure that all of its demands of its end use customers are met and therefore it has to bring gas into system. Is that what you're referring to as the implicit obligation? 140 MR. TODD: Well, it goes beyond that. Union contracts for, among other things, upstream transportation capacity. 141 The upstream transportation capacity that it contracts for delivers gas either to Parkway or to Dawn. Once it contracts for capacity, it has to use that capacity, or it will suffer financial consequences. It can't contract for capacity on the Alliance-Vector line and let it be unused and send gas through the TCPL line to Dawn. 142 So the mere fact that a contract exists for transportation capacity on a particular line for system customers means that it must use that, and therefore, perhaps not as a lawyer, which I'm not, but as an economist, which I am, this is a de facto obligation to deliver the gas where the transportation takes the gas. 143 MR. DeROSE: When you say the implicit obligation, you're not referring only to their firm delivery contracts, are you? 144 MR. TODD: What I'm referring to is the overall planning of the system. Again, I'm not referring to the flexibility of the margins that deals with things such as, this year is warmer than normal, therefore we don't need as much gas, or colder, as we see today, where they need more gas than anticipated. I'm talking about the basic planning of the system on a broad and conceptual basis. 145 MR. DeROSE: And perhaps, then, it's useful to look at the nature of first of all direct purchasers' delivery obligations. 146 And first of all, direct purchase delivery obligations are contractual. I assume you would agree with that? 147 MR. TODD: Yes. When you involve a direct purchaser, it is the commitment to facilitate -- the planning of the system is no longer internal the company. You've now moved it to an outside party. Therefore there's a contract that says here is what the responsibilities are for the outside party. Whereas when it's internal to Union Gas, Union does not contract with itself that says it must deliver gas in accordance with its system planning requirements. 148 MR. DeROSE: I guess so. In it's simplest terms, if I'm a direct purchase customer, I'm contractually obligated to deliver gas at a specific point in the system, at a specific amount 365 days a year. 149 MR. TODD: Or, you pay penalties, consequences, which is exactly what Union suffers if it doesn't manage its assets properly. 150 MR. DeROSE: So direct purchase customers, you would agree, have delivery-specific contractual obligations? 151 MR. TODD: Yes, which they have entered into through negotiation with the company, correct. 152 MR. DeROSE: And you've also indicated that there is consequences if there's a failure to deliver, and those consequences, as I understand it, are automatic, and would include a DCC clawback, penalty charges, and possibly supplemental gas charges? 153 MS. POON: That's correct. 154 MR. DeROSE: And so if I'm a direct purchase -- 155 MS. POON: But the fact -- you have to recognize the fact that if they do fail to deliver, it is Union who therefore, then has to replace that volume and that delivery and consequently, it is the direct purchase customer that is causing a possible failure to the system. 156 And in the meantime, direct purchase customers may still be allowed to consume and be provided firm service by the LDC in the same instance. 157 MR. DeROSE: I guess to be clear on simply what I'm getting at, I'm trying to understand what the obligations are for direct purchase customers and my understanding is that the obligation -- or not the obligation -- the consequences of failing to meet an obligation for a direct purchase customer includes penalty charges and a DCC clawback, and that would be automatic? 158 MS. POON: That's correct. 159 MR. DeROSE: Now, on the other hand, Mr. Todd, you've already indicated the system gas customers do not have a contract with Union to make certain obligated deliveries? 160 MR. TODD: Well, the customer could not enter into a contract, because it does not make the deliveries. The system gas customer is not responsible for handling the gas. The company is. Therefore, the company is under an obligation under its responsibilities enforced by this Board to manage its system in the most cost effective way. 161 That's where the obligations lie, not between the customer. 162 MR. DeROSE: So the obligation is owed from Union to the customers, not from the customers to Union? 163 MR. TODD: Well, Union is entering into contracts on behalf of the customer. You know, transportation contracts in order to deliver the gas. 164 You know, for a system customer, Union is handling the gas for them and entering into contracts for them. I'm not sure what you mean the obligation is to the Board, to itself, to the customer. It's -- it has an obligation to itself to manage the system properly. 165 The consequences of a cost disallowance -- if it does not manage the system properly, there are two possible consequences. One is that its costs are higher than the customer's costs. The other is that the Board determines that they acted in a way that was not prudent. The costs are disallowed, in which case the shareholder would bear those costs. 166 MR. DeROSE: Right. 167 MS. POON: I guess I want to point out, in the event that, say in a hypothetical world, a system sales customer on behalf of Union was in fact obligated to a specific delivery point for 365 days of volumes, to the extent that a direct purchase customer failed, the system would no longer be optimized. That would cause a non-optimization of the system. 168 By Union locking itself in as the supplier for the system sales customers in the same manner as they would -- they request that of a direct purchase customer, they would have allowed the entire system to fail. They need the flexibility to carry out optimization of this system at all times. 169 MR. DeROSE: Well, that, I guess, brings me to my next point, is Union does have delivery point flexibility. I believe that's a fair statement; is that right? 170 MS. POON: They do to a degree, yes. 171 MR. DeROSE: Well, they certainly have more flexibility than a direct purchase customer. 172 MR. TODD: The direct purchase customer is able, with a fee which reflects the costs of changing, to change delivery point. 173 If -- but what it recognizes -- what the arrangement recognizes is that if there is a -- if flexibility is exercised, there are consequences of that. What must be recognized by this Board, this panel, is that the flexibility exercised by Union is done with respect to its obligation to keep costs down. In fact, it could be argued it is not true flexibility. What it is is just system planning causes it to deliver gas -- it's forced to deliver gas wherever it is least costly to do so. 174 Part of the planning is that there must be a known delivery of direct purchase gas to a particular point, or the overall system would not be managed at minimum cost. Union has to know where the direct purchase gas is going, so that it can accommodate that within the overall system planning. 175 MR. DeROSE: Now, you say that Union must deliver its gas to the -- gas in the most cost effective manner. Isn't that delivery point flexibility, that they have to look at the system and manage it in a reasonable manner, in the most cost effective manner and they have to assess on any given day where it is advantageous to introduce gas into the system as a whole? 176 MS. POON: With the constraints of the Dawn-Trafalgar facilities. 177 As we have heard here, there is a requirement to bring gas both at Dawn and at Parkway on a peak day. Union cannot negate that at all, so it's not at all costs. It's a cost of optimizing the existing assets to bring that gas in. 178 MR. TODD: I think you have to be clear, there's flexibility -- we can talk about flexibility for the bulk of the supply. We can talk about flexibility at the margin. And we can do that both with respect to Union and with respect to direct purchasers. 179 The bulk of Union's system supply comes to a pre-determined point, no flexibility. It has capacity on the Alliance-Vector line, and in practical terms, it has no flexibility about using that. 180 Yes, there's flexibility in terms of the variation due to whether there are other factors that are driving demand in terms of at the margin, does it do a little bit more to Dawn, a little bit less, a little bit more to Parkway, a little bit less, but recognize equally that a direct purchase customer also has a -- I think it was a base load, forecast flow, which is pre-determined, and it has to make adjustments in terms of the timing of deliveries and so on, which are different than the forecast demand divided by 365. And it makes over deliveries in order to keep in balance, and there is a variation of, I believe it's plus or minus 4 per cent in terms of its final delivery, so that the direct purchase customer has some flexibility as well at the margin. 181 That's just the realities of gas supply, because we don't know exactly what we're going to consume. Again, it's not particularly different for Union or DP customers. 182 MR. DeROSE: Now, there's no penalty charge automatically passed onto system gas users if Union were to fail to delivery; is that right? Automatic? 183 MR. TODD: There is no penalty charge passed on to system customers if Union fails to deliver? 184 MR. DeROSE: Yes. 185 MR. TODD: If customers are able to say that the costs were imprudently incurred -- first of all, gas costs are flowed through as actual costs to customers. 186 MR. DeROSE: Let me rephrase the question. It wasn't a trick question -- 187 MR. TODD: It's not automatic, because there's potential for a cost disallowance, which means it flows through to shareholders instead of to customers. 188 MR. DeROSE: Right. That's actually my point. 189 MR. TODD: Subject to a hearing and a finding of imprudence, it flows through -- 190 MR. DeROSE: So that would be a difference between direct purchase customers and system gas customers. That when a direct purchase customer, if there's a failure to deliver an obligated delivery amount, they have an automatic penalty charge, whereas system gas users, it would be up to the Board whether the circumstances were reasonable or prudent. And it may be disallowed and it may not be disallowed. 191 MS. POON: If it was imprudent, it would probably be disallowed, but yes. 192 MR. TODD: By definition, if it's found to be imprudent by the Board, then that would imply disallowance. 193 MR. DeROSE: That would be a difference in the nature of the burden that direct purchase customers have contractually as opposed to system gas customers? 194 MR. TODD: The difference being that if a direct purchase customer acts in an imprudent manner with respect to its own obligations, it would bear those costs, yes. 195 What you're saying is that because the end use customer of system gas does not, in fact, have control over its gas supply. That if the company does something which increases costs unnecessarily, it is not the customer that pays, it is the company that pays, that's true. 196 Now, in the case of the direct purchase customer, it is the customer that controls the supply and therefore bears the costs. 197 MR. DeROSE: Right, but the direct purchase customer -- there's know assessment of imprudence and appear penalty structure. If you fail to deliver, you have a penalty. 198 MR. TODD: That's because the customer is in control. 199 If you look at system supply, the -- the reality of the direct purchase side, first of all, is that there is a customer, there is also a supplier, a marketer or broker. There is actually the possibility, depending on the arrangement, that either the person who's managing the supply, i.e., the marketer, or the customer, could bear the costs of failing to meet the obligation. 200 Similarly, where Union is in effect in the role of the marketer, i.e., managing the gas supply, there's a possibility that the company who manages it would bear the costs as opposed to the customer. To me there's no difference. Either the customer who takes the gas or the party responsible for delivering the gas will bear the costs, depending upon the cause of the problem and the arrangement between them. 201 MR. DeROSE: So -- 202 MR. TODD: You represent IGUA. Your customers would not necessarily bear the costs if they had a contract that if the supplier fails to live up to their contractual obligations to their customer, an IGUA client, then that supplier would bear the costs. 203 MR. DeROSE: Well, I presume -- I don't want to get into a debate on the legality of it, but I presume that the IGUA customer may have a cause of action against that supplier but it wouldn't change the fact that Union would still have the right to charge its penalty to the IGUA customer. I think that's -- you would agree with that. 204 MR. TODD: I agree, and I agree that Union has the right to pass its costs through to customers, unless customers have a cause of action for the Board to come back and say it's not our cost. It's theirs. They did not act responsibly. 205 MR. DeROSE: So you see no difference in your mind? 206 MR. TODD: That's correct. 207 MR. DeROSE: Do you accept Union's evidence that it requires a certain amount of obligated supply to be delivered to Parkway in order to avoid facility costs? 208 MR. TODD: Yes. 209 MR. DeROSE: And I assume that you would also agree that that gas reaching Parkway brings a benefit to the entire system? 210 MS. POON: Yes. 211 MR. DeROSE: And the benefit has been identified as a reduction or an avoidance of facility costs. 212 MR. TODD: Yes. Same benefit was always there before DP as it is now, and whatever gas is delivered brings that benefit. It's just part of the overall system planning, and Union has to ensure that the appropriate amount of gas is delivered to Parkway and the appropriate amount is delivered to Dawn in order to utilize its facilities efficiently. 213 MR. DeROSE: So delivery point specific obligations benefit the system as a whole. 214 MR. TODD: Absolutely. It's a necessary part of planning the system. 215 MR. DeROSE: If I could take you to your written evidence, and if I could take you to footnote number 2 on page 2. Do you have it there? 216 MR. TODD: Yes. 217 MR. DeROSE: And I'll just read an excerpt from it. "It seems to me that if direct purchase customers are disadvantaged by the delivery commitment relative to system gas customers, then it is direct purchase customers that should be compensated. Not all customers and classes with a relatively high proportion of direct purchase volumes, in other words, the DCC should be retained. This point is not pursued, since there is no evidence to suggest that the delivery commitment disadvantages direct purchase customers relative to system gas customers." Now, if I can just have you assume for a moment that there -- well, let me rephrase that. 218 If the Board accepts that there is evidence, which suggests that the delivery commitment disadvantages direct purchase customers relative to system gas customers, it would be your evidence that the DCC should then be retained? 219 MR. TODD: There are actually two alternatives. One is that if direct purchase customers are disadvantaged, i.e., incur higher costs than the normal costs for system customers, they could be compensated for that in order to hold them whole and level the playing field. 220 The alternative is -- would be to rearrange the obligation in a way that would level the playing field itself. The reality is probably there shouldn't be -- Union should not be using its negotiating power to in effect force direct purchase customers to take bad facilities, if I can term it so crudely. 221 They should be treating direct purchase customers and their own customers on a level playing field, treat them comparably, and that is, in effect, the way the system has worked. 222 But, yes, if there was a good rationale for providing or forcing the direct purchase customers to take the expensive facilities, it would be appropriate to hold them whole by providing a credit or some type of mechanism. 223 MR. DeROSE: And in your evidence, you've referred to the credit as the DCC should be retained. 224 MR. TODD: Yes, in the footnote, the words said, "should [indiscernible]." That would be the simplest option since we already have it. But I wasn't saying that's the only option, saying that would be that or some other way -- the problem, it would be a problem and it should be recognized. 225 MR. DeROSE: But it's one of the options that you recognize? 226 MR. TODD: Yes. There are other reasons for not retaining the DCC and going some other route, but yes, that would be an option. 227 MR. DeROSE: I also understand that it's your evidence that if direct purchase customers' obligation to deliver was found to be more onerous than what you have referred to as the implicit obligation of system sales customers to deliver, then a payment in the form of either a DCC credit or some other form of credit, would be appropriate. 228 MR. TODD: Yes. That doesn't refer to the quantity; the first step would be to actually quantify the value of the disadvantage, the difference, that the penalty, in effect being borne by direct purchase for being direct purchase, and offsetting that -- which, of course, is totally different than looking at avoiding system costs. 229 We're actually talking about the disadvantage that would be borne, and our evidence is that there is no disadvantage. In fact, under present conditions, if anything, there are advantages to them being able to deliver, using discounted TCPL capacity to Parkway, rather than relatively high cost transportation capacity on the Alliance-Vector line. 230 MR. DeROSE: Well, the various methodologies aside, it's still your evidence that it would be appropriate to pay direct purchase customers, whether you want to use the word a credit or a payment, to recognize more stringent obligations, or more onerous obligations is the word you used. 231 MR. TODD: I used the word "onerous" and I believe I defined that in terms of a dollar higher cost, is what "onerous" means in my use of the word. 232 And yes, if this panel, if the Board should determine that DP faces a cost disadvantage in a systematic way due to its obligations, it should recognize that and address that issue, either through some form of compensation or by directing Union to level the playing field. 233 Direct purchase shouldn't be at a disadvantage relative to system supply. 234 MR. DeROSE: Thank you. 235 Are you aware of a toll -- a TCPL firm service tendered toll? 236 MS. POON: Yes. 237 MR. DeROSE: And my understanding of that -- of the TCPL FST was that -- 238 MR. TODD: You're talking about a past -- 239 MR. DeROSE: I am. 240 MS. POON: That no longer exists today. 241 MR. DeROSE: It no longer exists, but it did exist. 242 And my understanding of that, the way that it operated, was that a customer who signed on to FST could be -- could either receive no gas on any given day or double the amount of gas on any given day and that the rationale for that service, in part, was that it would allow TCPL to avoid having to construct further facilities. Is that your understanding of that toll, and you can take it subject to check, if you like. 243 MS. POON: It was a toll whereby there was some constraints underpinning it, but at the end of the year Union was -- TCPL was obligated to move the annual volumes at the year end. 244 MR. DeROSE: Correct. 245 MS. POON: And there are specific time frames in which those deliveries may offer may not come during winter season. That's my understanding. 246 MR. TODD: And that's analogous to interruptible rates. I mean, the actual terms are a bit different in terms of total deliveries over the year, but it's basically saying that when the system is constrained we don't have to deliver the gas, which is conceptually similar to interruptible supply. 247 MR. DeROSE: And my understanding in part of the rationale of that toll was that it would allow TCPL -- or it was to avoid having to construct further facilities on their system, in part. Do you have that same memory? 248 MR. TODD: Yes, which is the same rationale which is used for interruptible rates; it's to avoid having to build facilities and as a consequence, the way you determine rates is by not allocating all of the peak costs, because they're not driving peak costs. 249 It's a cost causality rate, which reflects that flexibility in peak periods. 250 MR. DeROSE: But in any event, the rate was lower, simply because it was allowing for the avoidance of facility costs. 251 MR. TODD: Well, I would suggest that the rate is lower, because the allocated costs are lower when you don't deliver in peak periods. It's a cost causality driven rate. 252 MR. DeROSE: Which allows -- 253 MR. TODD: Pardon? 254 MR. DeROSE: Which allows TCPL to operate its system with less facilities? 255 MR. TODD: Yes. 256 MR. DeROSE: You've described this morning the proposal for DCC elimination which has been put forth by VECC, and I think -- first of all, it's fair to say that the impact of that methodology would result in some customers' net bills going up and some customers' net bills going down, as a starting position. 257 MR. TODD: There would be a change in the allocation of costs. Any change in allocation of cost that has ever been undertaken has called the bills of some customers to go up and others to go down; so yes. 258 MR. DeROSE: Panel, do you have which was marked as Exhibit F.2.1, which was submitted by Union? 259 MS. POON: Yes. 260 MR. TODD: Are we talking the diagrams? 261 MR. DeROSE: We are, but if you can turn to the third page -- 262 MR. TODD: This is a page showing estimated impact of DCC elimination based on cost, rate M-7. Lists unidentified customers, and shows a revised net delivery bill. 263 MR. DeROSE: Correct. 264 MR. TODD: Yes. 265 MR. DeROSE: Have you seen this before? 266 MR. TODD: Yes, we both have. 267 MR. DeROSE: And my understanding is that when the title says DCC elimination based on cost, that is referring to what has been referred to as the intervenors' proposal? 268 MS. POON: That's correct. 269 MR. DeROSE: And the second column from the right, titled, Rate Increase, -- 270 MS. POON: Yes. 271 MR. DeROSE: -- that would be, on a customer by customer basis, what the percentage increase of their rate is. 272 MS. POON: Of their delivery rate component, yes. 273 MR. DeROSE: And if I could back up for one moment; in your opinion, would an increase of, say, 10 per cent be significant as a general proposition? 274 MR. TODD: Per cent of what? In terms of 10 per cent of the total bill, yes, it would be significant. 275 MR. DeROSE: Actually, let me put it this way: If any class were to receive a rate increase of 10 per cent on any given day, that would be significant, in your mind? 276 MR. TODD: Yes, in the kinds of increases in costs that customers have seen due to volatility of gas prices, it's certainly significant. 10 per cent is much less than that, but it's still significant. 277 MR. DeROSE: You certainly wouldn't call 10 per cent insignificant? 278 MR. TODD: No. 279 MR. DeROSE: And if we run our finger down the column which I've just indicated, which is, Rate Increase, we see the highest is a 67 percent increase, which is sixth from the bottom; do you see that? 280 MR. TODD: Yes. 281 MR. DeROSE: If 10 per cent is significant, I guess it would be fair to say that 67 per cent would be severe; would you agree with that? 282 MR. TODD: We're sticking labels on numbers, what's severe, what's significant. 283 First of all, we're talking delivery rate, which is only a component of the total cost of gas supply. "Severe" has a pejorative sound to it. Sixty-seven is large number; it's bigger than 50 per cent. 284 MR. DeROSE: Would you agree it's very significant? I don't want to get into semantics with you, but ... 285 MR. TODD: You can call it whatever you want and I'm not going to disagree with it. 286 MR. DeROSE: In any event, I think you would agree with the low end being 10 per cent, and the high end being 67 per cent, the rate increase is significant for M-7? 287 MR. TODD: Yes, it's absolutely the case that there have been very significant benefits being realized by these direct purchase customers from the DCC, and if the Board's finding in this proceeding is that those benefits are inappropriate, then removal of those benefits will have significant impact; absolutely true. 288 MR. DeROSE: And if there were a proposal put forward, which would result in a 67 per cent rate increase for M-2s, would that raise concerns to you? 289 MR. TODD: Firstly, it would raise concerns for any customer; and there are two responses. One is the customers would want to clearly examine whether that rate impact was appropriate, i.e., was it cost-based. If the answer is yes, then it's something that you bear. 290 If in the Board's wisdom it determines that the rate of change in that particular rate has too big an impact, it's something that is not a reason not to implement the change but may be a reason for phasing in the change -- which we have in our response to interrogatories, I believe, identified as a possibility when asked what if the Board felt that the rate impact was too high, said, well, as they have done in other cases, it could be phased in over a couple of years. 291 MR. DeROSE: If I could have you turn the page -- we're still on Exhibit F.2.1, and this is titled, Estimated Impact of DCC Elimination based on cost rate T-1. 292 Do you that page? 293 MR. TODD: Yes. 294 MR. DeROSE: Again, if I take you to the same column, which is Rate Increase, we have one customer which has a low of 2 per cent and there's a high of 72 per cent. I take it you would agree that that's the range on the sheet? 295 MR. TODD: Yes. 296 MR. DeROSE: And as with the M-7 rate that we have just looked at, again, you would agree that much of these rate increases, all of them are over 10 per cent, except the one customer who was 2 per cent. Again, those would be significant rate increases. 297 MR. TODD: All of the preceding dialogue can be repeated in this case. 298 MR. DeROSE: Okay. 299 Now, in contrast, if Union's elimination proposal, which recognizes both what I've called the recovery component and the credit component, the net impact on a customer's bill would be negligible, is what Union's evidence was this week. You would agree with that? 300 MR. TODD: Yes, because in effect it embeds the current transfer. 301 MR. DeROSE: So in other words, if Union's proposal were accepted, when a customer receives their bill, both pre-and post-DCC elimination, the bills would be almost identical. There might be a slight change, but certainly not significant. 302 MR. TODD: Yes. That's the evidence of Union. 303 MR. DeROSE: And you don't disagree with that evidence, do you? 304 MR. TODD: No. 305 MR. DeROSE: Are you suggesting that the elimination of DCC and the increased charges should be retroactive? 306 MR. TODD: No, that's not part of our proposal. What's done is done, and rightly or wrongly, the fact that it existed, it was there, it was approved, it was in place. 307 MR. DeROSE: You believe it should just be on a going-forward basis. 308 MR. TODD: Yes, we are talking about the methodology for eliminating the DCC, the timing, the removal of the DCC is there. We have not addressed the retroactivity issue in our evidence. 309 MR. DeROSE: Have you thought about the retroactivity issue? 310 MR. TODD: In general, personally I'm not a supporter of retroactivity unless it was identified in advance, you know, as in interim rates -- 311 MR. DeROSE: That's not the case. 312 MR. TODD: -- and we're not talking about that here, so there's no suggestion for retroactivity. 313 MR. DeROSE: Now, panel -- perhaps I should pass this up to the Board. I have a -- what I refer to as reference materials for cross-examination of the Industrial Gas Users Association. In retrospect, I probably should have put by the Industrial Gas Users Association. They are at the back of the room. 314 Actually, all of the information contained in this package is actually either a Board decision or is already in the record. I simply put it together for ease of all of us flipping pages, and I guess perhaps, Mr. Moran, do we want to make this an exhibit now or -- 315 MR. MORAN: Mr. Chair, that would be Exhibit F.4.1, reference materials for the cross-examination of the Industrial Gas Users Association. 316 EXHIBIT F.4.1 REFERENCE MATERIALS FOR THE CROSS-EXAMINATION OF THE INDUSTRIAL GAS USERS ASSOCIATION 317 MR. TODD: And we appreciate your weekend work. 318 MR. DeROSE: I apologize for the clips, Mr. Chairman. Quite frankly, I don't know how to use the binding machine. I was in yesterday and there was no one to help me, so we end off with clips. 319 MR. TODD: I actually notice that you're quite technologically advanced for a lawyer. 320 MR. DeROSE: I try. That can be a problem. 321 Now, if I can take you to tab 2. 322 MR. TODD: Yes. 323 MR. DeROSE: And this is -- go to the second page. It is an extract from the ADR settlement agreement in RP-1999-0017. And would you like a moment to review that? I assume that you have reviewed it recently. 324 MR. TODD: Not in the last couple of hours, but I think we're both familiar with it. 325 MR. DeROSE: Okay. 326 Now, first of all, VECC accepted this settlement; is that correct? 327 MS. POON: That is correct. 328 MR. DeROSE: And some parties took no position on the issue, but VECC wasn't one of them. 329 MS. POON: That is true, because of the interpretation in which we believed what DCC was in fact doing was a removal of the costs that were embedded in rates. 330 MR. DeROSE: Ms. Poon, you represented VECC at the ADR settlement negotiation, didn't you? 331 MS. POON: Yes, I did. 332 MR. DeROSE: I assume that when you accepted on behalf of VECC, you had VECC's authority to accept the settlement? 333 MS. POON: Yes, I did. 334 MR. DeROSE: And I assume if you were representing VECC at the ADR negotiation, you would have had all of Union's evidence. 335 MS. POON: Yes, I did. 336 MR. DeROSE: And you would have reviewed it carefully? 337 MS. POON: I would have based on what was filed by Union. 338 MR. DeROSE: Everything filed by Union, you would have read? 339 MS. POON: In that particular case, yes. 340 MR. DeROSE: And I guess -- well, I assume that you would have taken steps to ensure that you understood all of Union's evidence filed with respect to DCC in that case before you accepted any proposal. 341 MS. POON: Based on what Union provided. 342 MR. DeROSE: If I can have you turn to tab 3 -- 343 MS. POON: And furthermore, Union's own witness, in that case, when they explained this issue before the Board in their own technical conference in regards to the ADR agreement, Mr. Baker himself discussed explicitly what was embedded in rates would be taken out in rates. And that was already discussed and brought to light by Mr. Janigan. 344 And -- it was transcript -- it was a transcript in RP-for 1999-0017 whereby Mr. Baker on page 27 indicates that quite clearly starting from line 8. 345 MR. DeROSE: Can you again repeat where you're reading from? 346 MS. POON: It's -- 347 MR. TODD: It's Volume 1, which was at the technical conference of the transcript. In fact, it's the heading of a volume that says Board briefing -- 348 MR. MORAN: Mr. Chair, it's been marked as Exhibit F.2.3. 349 MR. TODD: That's correct. 350 MR. DeROSE: Could I have you turn to tab 3, please, Ms. Poon. 351 MS. POON: Yes. 352 And Ms. Poon, when you were representing VECC in RP-1999-0017 at the ADR settlement conference, you were not there in the capacity of a witness, were you? 353 MS. POON: No, I was not. 354 MR. DeROSE: What would have been your capacity at that point? 355 MS. POON: An advisor to VECC, as a consultant. 356 MR. DeROSE: And your job, I assume, would have been taking proposals to VECC, talking about it, and returning with VECC's position? 357 MS. POON: That's correct. 358 MR. DeROSE: In part. 359 MS. POON: Making recommendations on their behalf. 360 MR. DeROSE: And who did you take instructions from? 361 MS. POON: Mr. Janigan. 362 MR. DeROSE: This Mr. Janigan, I assume? Is there another one? 363 Mr. WARREN: There's the movie star. 364 MR. TODD: We always thought that's the same one. 365 MR. DeROSE: Okay, now, if I -- and I had said tab 3, what I meant was tab 4 of my examination -- oh, actually, I'm sorry, tab 2. And what I have at tab 2 of our material is -- 366 MR. TODD: This is back to what we're talking about -- it's the same tab as we were talking about a moment ago, the ADR agreement? 367 MR. DeROSE: I'm sorry, tab 1. 368 And what I have at tab 1, this is part of the evidence that was filed by Union in RP-1999-0017. Ms. Poon, you've already told us that you've reviewed this evidence. 369 MS. POON: That's correct. 370 MR. DeROSE: I'm wondering if I could take you to page 28 of 28. 371 MR. TODD: This is interesting numbering. Page 26 is page 26 of 26, and page 27 is 27 of 27, and 28 is 28 of 28. 372 So it's actually 28 of at least 30. 373 MR. DeROSE: Well, numbering aside, this is the third page in the brief, and it's marked 28 of 28 by Union in that case, and at line 13 is reads: "In order to ensure customers are not harmed by this change and given that the DCC was a commodity-based payment, each rate class' delivery commodity charge would have to be reduced by the DCC payout that each class would have otherwise received." 374 Now, my understanding, when I read that is that the DCC payout that each class would have otherwise received is what we have referred to today as the payout or credit component of the DCC. 375 MS. POON: That's correct. 376 The payout in the RP-0017 case is not explicitly indicated, that this payout is different from the cost. 377 If I take you back to page 27 of this same evidence, and we go to line 7, the company point-forms what it was doing, and it explicitly says on line 7, point A, that they would eliminate the payment of the DCC, at which time the payments were these cheques in which the individual industrial customers were, in fact, receiving, and they would take out and they would eliminate the related charges in the delivery rates. 378 The related charges in the delivery rates were only the rates that were embedded in rates. 379 Consequently, from that information, from Union's own evidence, it was from my understanding that that's what they were doing. They were eliminating what was in rates. At no point in time did they ever indicate in this particular docket that there was any difference between payouts or the DCC that was embedded in rates. 380 MR. DeROSE: So if we take point A, they were going to eliminate the payment of the DCC, which is what we've talked about as the credit component -- 381 MS. POON: Right. 382 MR. DeROSE: -- and they were going to take out the related charge (recovery), which is the recovery component. 383 MS. POON: Right. 384 MR. DeROSE: Thank you. 385 Ms. Poon, who is Coral Energy? 386 MS. POON: It's a power plant. 387 MR. DeROSE: And you've recently been retained by Coral Energy, have you not? 388 MS. POON: I have carried out work for them specifically on assisting them on their application, their Brighton Beach. 389 MR. TODD: Econalysis was retained and Joyce Poon provided some assistance in that case. 390 MR. DeROSE: And in fact, Ms. Poon, if I understand correctly, you were put forth as an expert for Coral Energy? 391 MS. POON: On their discounted cash flow analysis. 392 MR. DeROSE: And Coral Energy is a T-1 rate class which will be affected by VECC's proposal. 393 MS. POON: I have no idea what will happen to Coral and its negotiation with Union. 394 MR. DeROSE: So you didn't know that Coral Energy was a large industrial user of gas that would be in a large industrial rate class? 395 MS. POON: I know that they're a large industrial rate user, and they have negotiated a deal between Union and themselves that I'm not party to. 396 MR. DeROSE: Did you obtain their consent before you filed your evidence in this case? 397 MS. POON: There was no need to. 398 MR. DeROSE: Thank you. Those are all my questions. 399 MR. SOMMERVILLE: Thank you, Mr. DeRose. 400 Mr. King? 401 Mr. KING: Thank you. 402 CROSS-EXAMINATION BY MR. KING: 403 Mr. KING: Panel, I'm here on behalf of Tractebel Power. They're the owners and operators of a co-generation facility in Windsor. I'd like to start by asking you to turn up Exhibit G.2.2. 404 MR. TODD: This is the undertaking from today? 405 Mr. KING: Yes, these are the undertakings that -- 406 MR. TODD: Exhibit G.2.2, undertaking Mr. Kitchen and Ms. VanderPaelt to Mr. Aiken. 407 Mr. KING: That's right. 408 MR. TODD: Yes, we have it. 409 Mr. KING: I'm looking at pages two and three in particular. Page 2 you'll recognize as what Union filed as schedule 1, Exhibit E, tab 9, which basically sets out the allocation, DCC cost and payment by rate class under the current regime. 410 And then page 3 of 3 started at, I believe, an IR from the City of Kitchener to Union. The same as page 2 of page 3 but it's been modified to recognize system gas deliveries as obligated deliveries so that M-2 system gas customers would be entitled to DCC. That is the difference between page 2 and page 3; correct? 411 MR. TODD: Yes, as I understand it, it is going the opposite direction from us, which is saying, Well, instead of saying that we should not be recognizing this notional benefit which has no costs for only direct purchase, we would recognize it for everybody. 412 Mr. KING: Would you view the method underlying page 3 of 3 for eliminating the DCC as acceptable? 413 MR. TODD: It is as inconsistent with cost allocation principals, which is the basis of our evidence, as the Union proposal, in that it's allocating costs that don't exist, costs which are avoided costs, which are not -- which are not allocatable costs, not recoverable costs. 414 Mr. KING: Is it your view that any type of avoided costs shouldn't find their way into rates, ever? 415 MR. TODD: Not -- not because they're avoided costs. I mean that's -- as I mentioned earlier, that's paying my daughters not to have accidents. I just -- that rationale doesn't hold water. 416 There may be other ways you come up with avoided costs. Sometimes that may be a proxy for an allocated -- allocation method, but certainly in the cost allocation study, you have to start with the revenue requirement, which are actually incurred costs, and say, Who has caused them? 417 Even Union is not proposing at this point as I understand it to include these costs in its cost allocation study. It's talking about doing an ad hoc adjustment after the fact to rate as part of the rate design process. So, no, you don't include avoided costs in the cost allocation methodology. 418 Mr. KING: Would the appropriate place for considering cost allocation with respect to DCC elimination be in a rebasing hearing? 419 MR. TODD: The issue is they have to be addressed at the time that the DCC is removed. The DCC is being removed, something has to be done at the time. The rebasing hearing is just putting off the consequences of that. 420 Mr. KING: You'll agree, though, that -- what we're here arguing about is in effect two sort of different interpretations about what DCC elimination meant. Union thought it meant something more akin to I think a rate design issue, whereas certain intervenors thought it was more appropriately sort of a cost allocation issue? 421 MR. TODD: As far as I'm concerned as an expert witness here, that is not the issue that we're talking. 422 We are talking about the issue of whether the DCC, as it has currently stood, reflects some costs that should be paid by system customers or by in-franchise customers to direct purchase customers. 423 We are not debating the history. We are not debating the misunderstanding. We're not saying one party thought this and the another party thought that. You know, whatever the Board -- was in the Board's head is what should be done. That's not the issue we're addressing. The Board knows what was in its head in past decisions and wants to be bound by that past decision, which it is not bound by that past decision. It can choose to do so. 424 We're simply here looking at it from a principle perspective. What is the appropriate method -- appropriate way to look at the issue. 425 Mr. KING: Nevertheless, there is a lot of evidence on the record that deals with the history of the DCC and the precursor to the DCC. Do you believe that the Board's determination in 499 with respect to DCC elimination was wrong then, or is it wrong now? 426 MR. TODD: I think the Board has in past decisions subsequent to 499 recognized this whose issue has been very confusing from the beginning, and what we're trying to do is say, Okay, let's set aside all this confusion, all this misunderstanding and let's take a clear look at the fundamental issues and decide them correctly. 427 Personally, I read those past decisions and I can't be sure what was in the Board's mind other than the statements where the Board very clearly said the evidence, the agreements and so on, are ambiguous. We know they recognize that. 428 What the parties meant, what the Board meant is all water under the bridge and it's just confusing us and all I know is that from our perspective in the past as advisors to VECC, we know what was in our heads, which is that this would be dealt with in a logical way, which is exactly what we're proposing right now. 429 Mr. KING: You've read the Union evidence in 499? 430 MS. POON: Yes, I have. 431 Mr. KING: In there Union considered a number of ways of eliminating the DCC; correct? 432 MS. POON: That's correct. 433 Mr. KING: You've listed those, I believe, on page 13 of your evidence. 434 MS. POON: Right. 435 Mr. KING: As part of Union's evidence, they analyzed each of those options and decided that the preferred option was the DCC in the form it is in today; correct? 436 MS. POON: That was their preferred option, and this -- this entire issue was approved under an ADR agreement. 437 MR. TODD: In which a large number of parties took no position and chose not to force the issue to hearing. 438 Mr. KING: The parties did not object. 439 MR. TODD: No. No. The parties took no position. There's a difference. 440 Mr. KING: I'm aware there's a difference. 441 That settlement agreement was submitted to the Board for approval? 442 MR. TODD: Yes, the settlement agreement appears as an appendix to the 499 decision. 443 Mr. KING: And the settlement agreement included the DCC in its current form. 444 MR. TODD: As item G.4, yes. 445 Mr. KING: Is it your understanding that the Board would have reviewed the settlement agreement before approving it? 446 MR. TODD: It reviewed the settlement agreement as a package. 447 Mr. KING: Would they have approved the package, had not that settlement agreement resulted in just and reasonable rates? 448 MS. POON: Based on -- 449 MR. TODD: Sorry, the agreement as a package, which means that it's taken as a package, and does not explicitly endorse any particular element of that. It doesn't say it's right or say it's wrong; but yes, it accepted it, and accepted that the consequence of this was just and reasonable rates. 450 Mr. KING: You could say that they didn't accept one elements or another as right or wrong. You could also say that they accepted all elements. 451 MR. TODD: I can say whatever they wish, but yes, they accepted the package. 452 Mr. KING: I want to get back to the issue of cost allocation and what you view as costs that are appropriately allocated and find their way to rates. 453 Is it just simply direct costs. I'll call those, and those things that Union pays for, writes a cheque or ... 454 MS. POON: Yes. According to Union's own evidence and basic cost allocation principles, is in fact to take the company's revenue requirement or the cost of service, the costs that they are incurring in order to provide service for all its customers. You functionalize it, you allocate it, and you classify it. There are no costs associated with DCC to Union in its cost of service, after the removal of the DCC. 455 MR. TODD: The DCC of course was a credit. It was a cost. 456 Mr. KING: Let me try another example. 457 If a utility had a system that allowed certain large customers to opt out of, with the resulting revenue requirement to be borne by the remaining customers, the bulk of whom would be small users, that will be, in regulatory parlance, cost shifting? 458 MR. TODD: In regulatory parlance, that would be cost shifting. You're saying somebody opts out? 459 Mr. KING: If I have a system, and there are a number of customers on that system, some large, some small, some large customers have the ability to opt out of the system or a large component of the system, such that the revenue requirement stays close to the same, but there's an increased burden on the remaining customers, the customers that do not opt out? 460 MR. TODD: Which is the basis of a bypass rate, for example. You're talking -- you're talking about somebody has the -- threatens to leave the system, and when they do, revenues will go down, but costs will not. 461 Mr. KING: Correct. 462 MR. TODD: Okay, so there's a bypass opportunity, yes. 463 Mr. KING: Would you view the imposition of an exit fee on those opting-out customers as a cost that could validly be included in rates? 464 MR. TODD: I am not aware of an exit fee having been imposed on potential bypass customers in any jurisdiction. I believe that at the time of the examination of some of the so-called competitive rates of then-Ontario Hydro that the issue of exit fees came up and there are certainly practical difficulties. 465 Now, I'm not sure what you mean by including them in the rates. If they paid -- if there were exit fees and somebody paid them, they would be real dollar revenue and they would be factored into rates, presumably, because it's a revenue to the company and it would be in consideration of setting rates. Is that what you're referring to? I'm struggling here a bit with what you mean. 466 Mr. KING: Wouldn't you view the notion of an exits fee based on what you view as costs, as offensive. It's not something Union would pay for? 467 MR. TODD: I'm not saying you're right; an exit fee would be paid by the company. It wouldn't be paid by Union. An exit fee is something which is paid by the party that's exiting the system. 468 For example, in some of the discussions of Heritage Power for West Kootenay Power, now Aquila, there's some discussion of exit fees if -- recognizing benefits of leaving the system, and more particularly, to come back in. But they're not costs to the company, these are customer payments. Unless you're talking something quite different than -- what I've seen is reference to exit fees. 469 Mr. KING: Would you view exit fees in that circumstance as appropriate? 470 MR. TODD: Exit fees is one way of recognizing historical, contractual arrangements, and future situations. 471 Exit fees -- depending on the context, exit fees may be appropriate. In situations where I've looked at them, they were a valid option, but certainly to say for a customer to leave a system in a broad generic sense that they have to pay an exit fee, no, that's not considered by anybody and not something I would endorse, but there are some special circumstances where it may be appropriate. 472 Mr. KING: When would it be appropriate? 473 MR. TODD: In the West Kootenay Power case, I think that the exit-fee notion was linked with the right of return, so essentially, you're paying an exit fee to avoid some costs but you had the right to come back onto the system and enjoy the benefit of the system at any time. It essentially said well, it was way of requiring the customer to take those costs with them, since they would retain the right to return. In that kind of context, an exit fee may be perfectly legitimate. 474 Mr. KING: Would it ever be legitimate because it shifts costs onto other customers? 475 MR. TODD: Only if it would -- if the customer who is leaving the system was under long term contract, in which case, just as any private sector business, if you exit a contract, there's a consequence to that. But if a customer has a right to leave, you can't penalize them for exercising that right. 476 Mr. KING: Those are all my questions. Thank you. 477 MR. SOMMERVILLE: Thank you. 478 We will take our morning break now and reconvene at 11:20. 479 Who remaining wishes to cross-examine this panel? 480 MS. YOUNG: Mr. Chair, I just have a couple of questions. 481 MR. KILLEEN: Mr. Chairman, I have just a couple of questions myself. 482 MR. SOMMERVILLE: Mr. Moran. 483 MR. MORAN: I may have a couple questions. 484 MR. SOMMERVILLE: Mr. Penny. 485 MR. PENNY: I will have a few questions. 486 MR. SOMMERVILLE: We'll reconvene at 11:20. 487 --- Recess taken at 10:59 a.m. 488 --- On resuming at 11:21 a.m. 489 MR. SOMMERVILLE: Please be seated. Thank you. 490 Ms. Young. 491 MR. ADAMS: Mr. Chairman, I wonder if I could just ask for your indulgence for a moment. My -- Energy Probe's position is not -- as clearly opposed to the evidence as some of the previous cross-examiners, so I may have violated your instructions by not getting in the right order. I wonder if I might ask my questions, which will take about five minutes and then if I've trespassed people can make that determination. There may be further questions from other parties. I'm not sure, but I think I should go before Ms. Young. 492 MR. SOMMERVILLE: Why don't you proceed Mr. Adams. 493 MR. ADAMS: Witnesses, please feel free to both pipe up if you want -- I'm not directing them at any particular individual on the stand. 494 CROSS-EXAMINATION BY MR. ADAMS: 495 MR. ADAMS: If the Board accepts your approach or if the Board accepts Union's approach, then I understood your evidence to be that Union will have to have the ability to mandate DP deliveries to Parkway and impose penalties for failure to delivery in order for the system that you've proposed or Union has proposed to function properly. 496 MR. TODD: In order for the system to function properly, it has to get the right amount of gas at each place, so it has to be able to manage not only its own supply but also DP supply to ensure that it's delivered in a cost effective manner. 497 MR. ADAMS: And penalties in your submission could be part of that solution? 498 MR. TODD: The reality is in all solutions. It's penalties which ensures that people live up to the obligation. In essence, what the DCC has done is said, Here's some money up front, so if we penalize you, you just end up even, because there's a clawback of the DCC if they [indiscernible] deliver. 499 MR. ADAMS: Yes, I understand. 500 MR. TODD: So, yes. But that's -- once the obligation is there, if somebody fails to the live up to the obligation, there's a penalty. And it's a slightly different concept, in fairness, then saying, Okay, do we -- do you deserve compensation for having the obligation in the first place? 501 MR. ADAMS: Yes, I appreciate the distinction. 502 Now, in your proposed solution to this issue, are you recommending cost-based penalties? 503 MS. POON: The penalties in our evidence -- we haven't actually recommended a specific penalty. I don't see anything wrong with Union's penalty. I haven't really assessed that. 504 MR. TODD: There are two kinds of the penalties. One is, in effect, whole the company and therefore other customers whole by paying a penalty that reflects the costs. The other is more in line with penalties for violating the law, which simply says, we want a penalty that causes you not to do it. 505 And the objective there is to make the penalty high enough, that you never impose the penalty, because people fulfill their obligation. 506 Now, there may be special circumstances where it happens, so you want a penalty that's in some sense fair. One way of being fair is cost based, if you think it will be effective. The other is just to make sure it's not ridiculously onerous but is an incentive to fulfill your obligation. We have not recommended that and that's Union's responsibility to appropriate penalties. 507 MR. ADAMS: Let me just see if I can capsulize this. There are either cost-based approaches which are more -- might have -- a cost-based approach to penalties, or a more morally-based approach. Is that a fair encapsulization? 508 MR. TODD: Let's call it incentive based or effectiveness based. I mean, it's -- when it comes to delivery of gas, I'm not sure there's a moral element to that. 509 MR. ADAMS: Moral is not the right term. I'm grasping -- 510 MR. TODD: It's incentive based. It's to provide an effective incentive. 511 MR. ADAMS: Right. 512 So under your proposal, is it possible that these -- let me back up. Would these penalties be an element of the rate structure for the DP customers? 513 MS. POON: They're included in the terms and conditions of service. 514 MR. ADAMS: As terms and conditions of service. Okay, so these penalties would apply for failure to deliver at Parkway, right? 515 MS. POON: For delivery, period, irregardless of Parkway or Dawn, as they do right now. 516 MR. ADAMS: Okay, so deliveries that the rate identifies as required at Parkway, if the customer fails to deliver at Parkway as identified in the rate, then the penalties in the rate would apply? 517 MS. POON: If there's failure at any point -- the obligation to deliver is just to put the gas in 365 days. A delivery point is yet a further obligation to where, but to the extent that the gas does not come 365 days, there is a penalty. 518 MR. TODD: And of course, terms and conditions can be written in any way you want. There's a concept of authorized overrun and non-authorized overrun where some flexibility can be permitted under those terms and conditions or whatever, but the point is that you have to have terms and conditions that require anybody who controls their gas to deliver that gas in a manner that is consistent with the system planning constraints. 519 MR. ADAMS: A now, the system planning constraints that the company normally works with are based on weather-normal conditions. When they're designing rates on a prospective basis the designs that are -- the assumptions that they're using for planning purposes is weather normal, right? 520 MR. TODD: You can think of long-term planning and short-term planning, but yes. If you're talking about planning now for a future test year in terms of rate design, or if we're talking about now in terms of next year for gas supply, the assumption is normal. 521 And conditions that exist, so, for example, if you had, as happened previously, a couple warm years, and you end up with sort of abnormal storage as a starting point, that abnormal condition would be linked with normal weather in your planning and you may end up with planning that deviates from true normal conditions. 522 MR. ADAMS: Now, let's take a hypothetical instance of a colder than normal year, like in this instance, the current year. The value to the company from a reliability perspective for deliveries at Parkway would be relatively greater -- let me just see if I can ask you to agree that the value of deliveries at Parkway would be greater in a cold year such the one we're experiencing than in a warm year, such as the previous year, where there might be excess capacity on the Dawn-Trafalgar system. 523 Would you accept that hypothetical? 524 MR. TODD: From a short-term planning perspective -- 525 MR. ADAMS: From a operational perspective. 526 MR. TODD: Day to day, if you're closer to your design-peak day, where you have more days closer to design peak, it's more critical that everything is operating exactly in a kosher manner, that's true. 527 But of course the kinds of costs that they're talking about are avoided costs, they're facilities cost, and facilities costs are irrelevant in the current year. 528 MR. ADAMS: I apologize. I'm jumping between long term design and planning of the system relative to operational dispatch of the system. So my immediately previous question was referring to operational dispatch of the system. 529 So if we designed penalties -- if penalties were adopted in the terms and conditions of the rate based on weather -- assuming weather-normal conditions to provide incentives for customers -- DP customers to deliver at Parkway and then we had a warm year, would you accept that the incentives that -- that the Board or that the designer of and authorizer of the rate might have imposed could over-recover costs relative to the costs imposed on the utility? 530 MS. POON: Well, the fact of the matter is, I guess, the penalties are a penalty charged to incent not violating this. 531 To the extent, in their own undertaking by Union, first and foremost if there is a situation whereby they need to replace that supply, they are, in fact -- I think that's G.2.3, undertaking by Union. This goes into the concept that the cost of that supply is directly recovered from the direct purchase customer. So now the penalties are over and above that so in effect, they are over-recovered in the costs. 532 MR. ADAMS: Right, I understand. 533 MR. TODD: The existing penalties are not cost based. They're incentives by design. So, by definition, here's over-recovery. 534 MR. ADAMS: In Union's evidence, it noted -- in Union's evidence in this case and also Union's evidence in the 0017 case, Union noted that liquidity at Parkway is more limited than transactional liquidity at other market hubs, such as Dawn. Do you accept that evidence? 535 MS. POON: Yes. 536 MR. ADAMS: Now, I'm thinking out in the future if -- is it -- do you imagine that it's possible that if a more liquid market at Parkway developed -- just leaving aside the question of what might be done to encourage liquidity at Parkway -- but if there was greater liquidity at Parkway, is it possible that the mechanisms for leaving the company whole, protecting the company in the event of failure of DP customers to deliver at Parkway could be strictly market-based? 537 That is, just Union recovering the gas that it requires in -- at Parkway and charging that cost through to the DP customer and not having administered penalties? 538 MR. TODD: I think what you're talking about, in fact, would be the company providing additional services, which certainly is a concept that's been discussed in the context of unbundling, where, depending upon the actual cause of the failure, the company could provide a backstopping service, which essentially says if you're unable to deliver, we have a service where we will deal with that problem for you, and that service could be cost-based. 539 And as a service, like other services, probably would be cost based if it's a regulated -- if they charge a regulated price. 540 MR. ADAMS: Would you be supportive of such a development? 541 MR. TODD: In totally different contexts, I think I'm on the record as saying as you move to a fully unbundled world, all of these services should be available. Whether that type of service should be offered by the regulated utility or other parties, and certainly in a liquid market it could be and perhaps should be offered by other parties, is a separate question. But that type of service should be available in a totally functional competitive marketplace, and in fact, would be available, whether you want it or not, at a liquid trading point, because if a DP customer or their agent recognizes that they have a problem with delivery, they don't have to fail. They can go and get some help to deal with the problem, so they do meet their obligation, and there would be a cost, by definition. 542 MR. ADAMS: Thank you for that. 543 If the Board, in its decision in considering this matter, you know, which has been before the Board many times before, if the Board was to urge the company and the parties to make efforts to enhance liquidity at Parkway by means that, you know, you left to the ingenuity of the parties, could that be a road forward in terms of reducing the requirement for penalties for failure to deliver? 544 MR. TODD: In great theory. In practice, just looking at the map on Exhibit F.2.1, and thinking back to a lot of the discussion in the tendering market review process and subsequent processes, doing it is a problem. It's very difficult to just create liquidity at some point, if you need an active market and people wanting to deal with it, you need multiple pipelines. There's a lot of factors necessary in order to have a liquid trading point. 545 Parkway is a little short on some of those necessary or nearly necessary conditions, but that would be agreed if they could. 546 MR. ADAMS: Thank you. No more questions. 547 And again, my apologies for stepping out of order, if I'm found to be not in compliance. 548 MR. SOMMERVILLE: Ms. Young? 549 MS. YOUNG: Thank you. 550 CROSS-EXAMINATION BY MS. YOUNG: 551 MS. YOUNG: If I could ask you to turn to Exhibit E.2.1.1, and that is VECC's response to Board Staff's first interrogatory. 552 MR. TODD: So E.2.1.1? 553 MS. YOUNG: Yes. 554 MR. TODD: The question starting off: "Please indicate whether it is VECC's position"? 555 MS. YOUNG: Yes. 556 MR. TODD: And the question is about rate shock -- 557 MS. YOUNG: Right. And if I look at the fourth paragraph in VECC's response, the last half of that paragraph states: "It is far from obvious that the impact on the all-in cost of gas would be significant enough to be characterized as rate shock, particularly in light of the magnitude of the fluctuations in the all-in cost of gas due to price volatility." 558 MR. TODD: Yes. 559 MS. YOUNG: Has VECC done any analysis to substantiate that conclusion? 560 MR. TODD: Please read the opening sentence which is: "The evidence of John Todd and Joyce Poon represents the views of the witnesses and is not necessarily a reflection of exposition." And these responses are those of ours, so it's clearly not even VECC's words here. So VECC has certainly not undertaken anything. So I assume your question is really have we undertaken anything. 561 MS. YOUNG: Have you, Mr. Todd or Ms. Poon, undertaken any analysis to substantiate that conclusion? 562 MS. POON: When you look at Exhibit C.16.66, filed by Union, they do provide an analysis of an end use impact to these rate classes, which appeared to provide rate impacts in the range of 2 per cent. 563 MS. YOUNG: Sorry, Ms. Poon. Can you give me that reference again, please. 564 MS. POON: Exhibit C.16.66. 565 MS. YOUNG: Yes. 566 MS. POON: In this analysis that was carried out by Union in response to the London Property Management Association, they, in fact, carry out an end use impact. 567 And you see the results of that in -- by way of a percentage impact in column I in the range of 2 per cent to 1 per cent. 568 MS. YOUNG: And am I correct that this, the preparation of this response assumes that all customers are paying the current system gas charge? 569 MS. POON: Yes, it is. 570 MS. YOUNG: And would you agree that that is not necessarily reflective of the supply cost that direct purchase customers may be paying? 571 MR. TODD: In the short run. Like, within a year. 572 MS. YOUNG: Right. 573 MR. TODD: Yes. Talking year to year; it depends on contract renewals and the contract terms and so on, which is a very different situation than day to day and week to week. 574 MS. YOUNG: And in terms of VECC's proposal and the annual impact in dollars on an average sized residential system gas customer, what is the impact of your proposal? 575 MS. POON: According to Randy Aiken's undertaking, I believe, that was filed by Union in Exhibit G.2.4, it's $11 per year. I believe -- 576 MS. YOUNG: My understanding, looking at that response that that's the impact of Union's proposal. 577 MS. POON: Oh, let me double check. 578 MS. YOUNG: Ms. Poon, you're looking at G.2.4. 579 MS. POON: I don't know what the individual customer rate impact would be for a residential customer as a result of our proposal. It would, in fact, just be a reduction in the M-2 general service rates of what's currently embedded by these -- to these customers currently of $19.1 million, to the extent I haven't done the analysis as to how that trickles out to a specific individual residential customer. 580 I don't have the information pertaining to how many individual residential customers there are and how that would fall out. 581 MR. TODD: That number could be provided as an undertaking. 582 MS. YOUNG: That would be fine, thank you. 583 MR. MORAN: That will become -- 584 MR. TODD: Just a minute, I may have jumped the gun on that one, since Joyce was actually doing the calculation. 585 MS. POON: I don't know the current number of Union's current residential customer account, currently. I think that's a better undertaking to Union. 586 MR. TODD: We could provide an approximation, which is the best available information, which would be in the ballpark, because if what you're talking about is to the nearest percentage point what the rate impact is. 587 MS. YOUNG: We have some information on the record about the impact on various groups of customers, but this seems to be one that's missing, and so it would be helpful if you could undertake to estimate that impact. 588 MS. POON: Sure. 589 MS. YOUNG: Thank you. Those are all my questions. 590 MR. MORAN: That would be Undertaking G.4.1, Mr. Chair. 591 MR. SOMMERVILLE: And that's an estimate based on your best estimate of the number of residential customers. 592 MR. TODD: Based on information available on the record. 593 UNDERTAKING NO. G.4.1: ESTIMATED RATE IMPACT ON AVERAGE SIZED RESIDENTIAL SYSTEM GAS CUSTOMER 594 MR. TODD: We usually manage to duck those kinds of questions and let the company calculate them and then there's no controversy over whether they're right or not. 595 MR. SOMMERVILLE: Mr. Penny? 596 MR. PENNY: Yes, Mr. Chairman. If Board staff has no questions for this panel. 597 MR. MORAN: Mr. Chair, I think when Mr. Penny was proposing the order of cross-examination he might have been proceeding on the mistaken assumption that Board staff is a party to the decision and I would submit that I would ask my questions in the usual order, at the end. 598 MR. SOMMERVILLE: Mr. Penny, do you have a response to that? 599 MR. PENNY: Well, Mr. Chairman, Union is the applicant in this matter. Whether Board staff is a party or not, in my submission, is not really the relevant question. The issue is as the applicant we're entitled to know what the evidence is on the record from an intervenor witness panel before we conduct our cross-examination, otherwise -- whether Mr. Moran has a "position" isn't so much the issue as to whether it brought out evidence that I might consider that I needed to deal with in the course of my cross-examination. 600 So that's why, in my submission, it's appropriate that the applicant go last in this circumstance? 601 MR. SOMMERVILLE: I agree with that. Mr. Moran, do you have questions of this panel? 602 MR. MORAN: Sure. 603 Just one question, Mr. Todd and that has to do with timing issues, more than anything else. 604 CROSS-EXAMINATION BY MR. MORAN: 605 MR. MORAN: The DCC is currently being collected and, of course, will continue to be collected while the Board contemplates what decision it wants to make. Is there any unacceptable implications from your perspective if the current arrangement were to be continued until the rebasing hearing, if you were to assume that the Board might ask that to be dealt with at that time? 606 MR. TODD: I've always taken the view that what the Board decides is correct by definition. 607 MR. MORAN: Those are all my questions, Mr. Chair. 608 MR. SOMMERVILLE: Thank you, Mr. Moran. 609 MR. MORAN: That's a position that I think Board staff could support. 610 MR. PENNY: I thought Mr. Moran just told us that he never took positions on anything. 611 MR. SOMMERVILLE: There are exceptions -- 612 MR. MORAN: There are exceptions. 613 MR. PENNY: I guess he takes positions where his paycheque is in order. 614 Thank you Mr. Chair. 615 CROSS-EXAMINATION BY MR. PENNY: 616 MR. PENNY: Ms. Poon I just wanted to start with a few bits and pieces that came out of some examination that took place earlier. You told us that you have been the manager of rate design at Enbridge? 617 MS. POON: That's correct. 618 MR. PENNY: And do you agree with me that at Enbridge, their revenue-to-cost relationships did not equal a ratio of exactly one for all rate classes? 619 MS. POON: No, but as you would look at them, they're actually very close to one. 620 MR. PENNY: But they're not right on. 621 MS. POON: No, because we endeavour to attempt to get them to one, but they don't necessarily always land. 622 MR. PENNY: They don't always land on one. And one of the reasons for that is because, I think you'll agree with me, that rates are not merely a mathematical product of the cost allocation study; is that fair? 623 MS. POON: That's fair. 624 MR. PENNY: And that there are other factors that one takes into account in setting final rates. 625 MS. POON: That is correct. 626 MR. PENNY: You were asked a question by Mr. DeRose about -- when he was establishing his definitions for the purposes of his examination in dealing with what he called the credit or the payout, and he asked you whether that was paid out to direct purchases on the basis of system benefit. And you agree we had that, but said that it was on the basis of volume; do you recall that? 627 MS. POON: Yes, I do. 628 MR. PENNY: And you'll agree with me that only volumes that are obligated deliveries attract the DCC. You understand that? 629 MS. POON: According to Union's proposal, yes. 630 MR. PENNY: No, the way that it's worked historically. 631 MS. POON: Yes. 632 MR. PENNY: You understand that. And if a direct purchase customer is also delivering non-obligated deliveries, they get no DCC? 633 MS. POON: That's correct. 634 MR. PENNY: Now, Mr. Todd, similarly, you said on a few occasions, I think, that Union had an obligation to maximize the utilization of its assets as a general proposition. 635 MR. TODD: Yes, or optimize -- minimize cost I think is the way I usually termed it. Make the best use of it. 636 MR. PENNY: Right. And to the extent that that's -- we could characterize that as an obligation, that's an obligation that Union has to all customer, to minimize cost. 637 MR. TODD: Yes, it's minimizing cost for the system as a whole. 638 MR. PENNY: Yes. 639 MR. TODD: We're not talking about rates, we're talking about the costs. 640 MR. PENNY: To the benefit of all customers? 641 MR. TODD: Exactly. 642 MR. PENNY: Not just system sales customers? 643 MR. TODD: Exactly. 644 MR. PENNY: And Ms. Poon, you are aware that Union allocates the cost of its Dawn-Trafalgar transmission facilities on the basis of design day demand? 645 MS. POON: Its existing facilities? Yes, I am. 646 MR. PENNY: And will you agree that customers with the highest design day demand are not necessarily the same as the customers who provide the most obligated Parkway deliveries 365 days of the year? 647 MS. POON: The existing systems that exist today that are built and exist are obligated -- are allocated the costs associated with the design day basis, because they are, in fact, yes, using those systems now. 648 MR. PENNY: I think you're trying to answer the inference rather than the question, Ms. Poon so, I'll ask it again. Will you agree with me that customers with the highest design day demand are not necessarily the same customers who provide the most obligated deliveries at Parkway for 365 days of the year? 649 MS. POON: Yes. 650 MR. PENNY: Thank you. 651 Now, I want to ask at page -- I think it's page 1 of Exhibit D.2, there's a section called, Introduction. 652 MS. POON: Is that our evidence? 653 MR. TODD: Our evidence? 654 MR. PENNY: That's right. It may not be necessary for you to turn it up. I just want to make reference to a statement you made at the bottom of page 1, in which you say that the rate classes that will be impacted the most by way of an absolute dollar amount include the M-2 rate class with an expense burden of $15.3 million. I just want to ask about the derivation of that $15.3 million. 655 It might assist you if you turned up Exhibit G.2.2, page 2, which was passed out this morning. I think someone referred you to that a little bit earlier. 656 Do you have that? 657 MS. POON: Yes. 658 MR. PENNY: Exhibit G.2.2, page 2 of 3. 659 If you look at the first line, general service, if you look under column B, there's a $19.1 million; do you see that? 660 MS. POON: Yes, I do. 661 MR. PENNY: And you agree that is the amount of the DCC cost that is currently embedded in M-2 rates? 662 MS. POON: Yes. 663 MR. PENNY: And then if you look at column E, there's a column called "DCC payout" and do you agree that the $3.8 million is what M-2 customers have been paid for their obligated deliveries? 664 MS. POON: Yes. 665 MR. PENNY: So the $15.3 million that you talk about in your evidence is shown now on this revised exhibit in column G, the 15.3? 666 MS. POON: Right. 667 MR. PENNY: And that is the amount that is currently embedded in rates as 19.1 million, less the amount that has historically been paid to the M-2 customers by way of DCC payout. 668 MS. POON: That's correct. 669 MR. PENNY: And so right now, that 15.3 million is already in rates. Indeed there's more than that. 670 MS. POON: Yes. 671 MR. PENNY: There's 19.1 million in rates. 672 MS. POON: That's right. 673 MR. PENNY: And under Union's proposal, that $3.8 million of DCC payout, that is a rate reduction that goes directly to customers? 674 MS. POON: That's correct. 675 MR. PENNY: And so under Union's proposal, rate recovery for the DCC cost goes down from 19.1 million to 15.3 million, as embedded in rates? 676 MS. POON: Right. 677 MR. PENNY: Now, in order to receive a DCC payment, do you understand that a customer has to deliver its contracted demand at a fixed delivery point for 365 days of the year? 678 MS. POON: Yes. 679 MR. PENNY: And under that obligation, they have to deliver their daily contracted quantity, whether they're actually consuming the gas or not? 680 MS. POON: Yes, because that's a contractual commitment to do so. 681 MR. PENNY: Right. And consistent with the Board's earlier direction that if they expected to get firm service, that they had to be prepared to provide firm deliveries? 682 MS. POON: That's right. 683 MR. PENNY: But their obligation, that is the direct purchase customers' obligation to deliver is not contingent on their actual consumption on any given day. 684 MS. POON: Yes. 685 MR. PENNY: They have to deliver whether they need it or not? 686 MS. POON: Yes. 687 MR. PENNY: Now, Ms. Poon, in your examination in chief, you were commenting on the EBRO-412 decision, and I think you were down-playing that decision a little bit by saying that it was a generic proceeding. Do you recall that? You described that as a generic proceeding. 688 MS. POON: I'm actually just looking at -- it was a -- specifically it was -- whereby Union was not or all the LDCs were not allowed to mandate delivery, of obligated deliveries was, in fact, -- the decision I'm referring to is a decision that was entitled, EBR-410-11 was a series. EBR-411-2, like Phase 2. EBR-12-2. And it was specifically a hearing to inquire into the matters relating to contract carriage arrangements for Centra Gas, ICG, and Union Gas. And that was the decision I was making reference to. 689 MR. PENNY: All right. Well, the record, maybe, will clear this up. I thought you had referred to the EBRO-412 decision, but in any event, if it did, you're not correcting that, or if it didn't, you're clarifying it. You were referring to 410; is that correct? 690 MS. POON: That's correct. 691 MR. PENNY: Would you look at Exhibit B tab 9, appendix A with me for a moment. This is Union's summary of the decisions and it contains some excerpts from the decision. 692 MS. POON: What page -- 693 MR. PENNY: Do you have that appendix A of Union's evidence at tab 9? 694 MS. POON: Yes. 695 MR. PENNY: And if you turn to page -- page 1 starts outside with a discussion of EBRO-412. Do you see that? 696 MS. POON: Yes. 697 MR. PENNY: And then over the page there are some quotes from the decision. 698 MS. POON: Yes. 699 MR. PENNY: If you start with me at the bottom of the first page -- where it says: "The Board notes that designation of delivery points by each of the utilities could inhibit the development of transportation services." Do you see that? Bottom of the first page? 700 MS. POON: Yes. 701 MR. PENNY: Then if you look at paragraph 3 of page 2, it says: "The Board finds the proposals of Northern and Consumers acceptable in respect of delivery points for the interim period. The Board directs that Union not mandate Oakville as the delivery point, but treat the matter on a case-by-case basis in the interim in order not to discourage potential T-service customers." Do you see that? 702 MS. POON: Yes. 703 MR. PENNY: You, in fact, note, I think, in Exhibit D.2 at page 6, you note that decision, indicating that Union could not unilaterally impose Oakville as a delivery point. 704 MS. POON: That's correct. 705 MR. PENNY: And you say, I think, that the Board was endeavouring to avoid utility-imposed restrictions that could discourage the development of a competitive market. 706 MS. POON: That's correct. 707 MR. PENNY: One of the means that was adopted, I think you'll agree, by the various governments involved in 1985 to facilitate competition was to allow customers to purchase their own gas, and if they wanted, their own upstream pipeline arrangements; do you agree? 708 MS. POON: Yes. 709 MR. PENNY: And direct purchase was a means, therefore, of trying to create competition in the natural gas market? 710 MS. POON: Yes. 711 MR. PENNY: And direct -- will you agree with me that direct purchase did indeed introduce competition into the end use natural gas market? 712 MS. POON: Yes, it did. 713 MR. PENNY: Will you agree that this advent of competition had the effect of lowering gas prices from what they otherwise would have been? 714 MS. POON: For that direct purchase customer, potentially. 715 MR. PENNY: Will you agree with me that it had the effect of lowering gas prices from what they otherwise would have been for all end users. 716 MR. TODD: If you go back -- 717 MR. PENNY: Mr. Todd, if I could just have Ms. Poon's answer first, and then you can supplement it however you like. 718 MS. POON: I don't know the exact total practical outcome of that for a fact. 719 MR. PENNY: You don't know. 720 Mr. Todd, you wanted to add something. 721 MR. TODD: Yes, because I've dealt with this issue, and Ms. Poon has not dealt with this issue, so it's appropriately my question. 722 Through that period of the early '90s, the pressure of direct purchase on essentially diversion of supply from the Alberta suppliers did bring down the cost of system supply for the Ontario utilities. 723 MR. PENNY: Thank you. 724 Now, you were taken earlier -- I think it was you, Ms. Poon, or perhaps both of you, I can't recall -- to Exhibit E.2.1.1. And I wanted to ask you about the first sentence, which I think Mr. Todd you made reference to. 725 You say the evidence of Todd and Poon represent the views of witnesses and is not necessarily a reflection of VECC's position. 726 Who retained you in this matter? 727 MR. TODD: Michael Janigan did. 728 MR. PENNY: Is there a retainer letter? 729 MR. TODD: There's a standard retainer between us. I don't think there's a letter on every occasion, which is essentially review the file and give us your views. 730 MR. PENNY: Is there anything setting out the parameters of what it was you were asked to do? 731 MR. TODD: I'd have to check our file on this particular case, but there may not have been. 732 MR. PENNY: Could you do that, please and if you have something make it available, please? 733 MR. TODD: Yes. 734 MR. PENNY: This is perhaps consequent upon that question, but was there any indication as to who the client was when you undertook this retainer? 735 MR. TODD: The client of PEAC is the Vulnerable Energy Consumers Coalition. 736 MR. PENNY: In EBRO-499, Mr. Todd, I think you were involved in that case? 737 MR. TODD: Yes, I was. 738 MR. PENNY: And the Ontario Coalition Against Poverty was an intervenor in that case? 739 MR. TODD: Yes, and I was retained on that occasion as well by Mr. Janigan. 740 MR. PENNY: You were retained by Mr. Janigan on behalf of the Ontario Coalition Against Poverty? 741 MR. TODD: Yes, on behalf of OCAP. 742 MR. PENNY: And OCAP, as I understand it, is a member of VECC; the Vulnerable Energy Coalition grew out of the Ontario Coalition Against Poverty involvement in these matters. 743 MR. TODD: I believe that's correct; that's my understanding of it. 744 MR. PENNY: All right. Now you were in attendance at the settlement conference in EBRO-499? 745 MR. TODD: Yes, I was. 746 MR. PENNY: And Union brought forward a proposal on the DCC in that case? 747 MR. TODD: Yes, it did. 748 MR. PENNY: And you may recall that the settlement agreement that was entered into in that case in the introduction noted that where no agreement was reached, the document sets out who supported Union's proposals, who opposed Union's proposals, and who took no position. 749 MR. TODD: That's correct. 750 MR. PENNY: And under section G.4 dealing with the delivery commitment credit, the settlement agreement -- I don't know if you have it available, do you? 751 MR. TODD: I have it available in G.4. 752 MR. PENNY: Would you look at page 80, please and you'll see at the top of the page the paragraph reads: "Union proposes to continue paying a DCC on all obligated deliveries. Union also proposes that the DCC rate be based on both the avoided cost of transmission and storage facilities using an average of existing M-12 storage and transportation rates. On a forecast basis, Union is relying on 21 10 6 m 3 of east end delivers on design day. The effect of Union's proposal is to increase the DCC from its current level of $3.88 for 10 3 m 3 to 4.25 for per 10 3 m 3 and results in approximately $27 million in DCC costs in 1999." 753 Do you agree that that's what the settlement agreement said, at that time. 754 MR. TODD: I would agree; yes. 755 MR. PENNY: And beneath that it says: "The parties agree that Union's evidence on this subject should be accepted -- 756 MR. TODD: But at the beginning of this section -- 757 MR. PENNY: Sorry Mr. Todd, is that what it says? 758 MR. TODD: That's what it says. It's incomplete in terms of ... 759 MR. PENNY: Did you want to add something? 760 MR. TODD: You're cutting me off. 761 Yes, what I was adding was that at the beginning, which is an important point, there is a statement -- 762 MR. PENNY: Beginning of what, sir. 763 MR. TODD: Beginning of Section G.4, delivery commitment credit proposal. There's the statement: "The following parties take no position on this issue", and the list of parties included OCAP. So OCAP took no position on the issue, and, in fact, I checked back in my files and I provided no recommendation on this issue to OCAP and in fact did not analyze and had absolutely no review of this issue. 764 This issue was a continuation of something that existed before, and in the decisions made as to what issues to examine, this was left off the list. 765 MR. PENNY: Who made those decisions? Was it you or Mr. Janigan? 766 MR. TODD: I would have been responsible for not recommending to Mr. Janigan that the issue be examined in detail and he would have been responsible in not directing me to examine that issue in detail. 767 MR. PENNY: It was open to OCAP to examine that issue in detail? 768 MR. TODD: It was open to OCAP to examine that issue in detail -- 769 MR. PENNY: And it was open to you to carry out that analysis under instructions. 770 MR. TODD: Absolutely. 771 MR. PENNY: And either a combination of you and Mr. Janigan, or perhaps just you, chose not to do that? 772 MR. TODD: I would have to take responsibility for any oversight that is implicit in not examining the issue more closely. 773 MR. PENNY: And just -- one final question, Ms. Poon. It's just a timing issue. Reference was made, I think you made reference to it, Exhibit F.2.3. 774 MS. POON: Yes. 775 MR. PENNY: And that was an excerpt that Mr. Janigan provided a few days ago from a briefing to the Ontario Energy Board following a settlement agreement; is that correct? 776 MS. POON: That's correct. 777 MR. PENNY: And I guess the only point I want to make is that when this briefing -- obviously took place after the settlement agreement was reached? 778 MS. POON: That's true. 779 MR. PENNY: Thank you. 780 Mr. Chairman, those are all my questions. 781 MR. SOMMERVILLE: Thank you. 782 Mr. Janigan, do you ever any redirect? 783 MR. JANIGAN: I have no redirect, Mr. Chair. 784 MR. SOMMERVILLE: There are no questions from the Board, in which case the evidentiary portion of this hearing is concluded. 785 I'd like to thank the panel very much for its assistance today. 786 The order of written argument has been reflected on the record, and unless there are anomalies of some kind which the Board would need to address, we would expect the schedule to be adhered to by all parties. 787 Are there any matters that parties wish to raise at this stage before we adjourn the matter until we receive the argument and ultimately make the decision? 788 MR. PENNY: I have no further matters, Mr. Chairman. 789 MR. SOMMERVILLE: None arising. We will adjourn, and I'd like to thank all the parties for their very able assistance in this evidentiary portion and we look forward to receiving the written argument, and the Board will endeavour to make its decision in as timely a fashion as the materials and the issues permit and our undertaking to the parties is that we will try to move as expeditiously as possible to a decision. 790 Thank you very much, and we stand adjourned. 791 --- Whereupon the hearing concluded at 12:10 p.m.