Rep: OEB Doc: 12N9W Rev: 0 ONTARIO ENERGY BOARD Volume: 3 26 MARCH 2003 BEFORE: R. BETTS PRESIDING MEMBER G. DOMINY MEMBER 1 RP-2002-0133 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 Enbridge Gas Distribution Inc. for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, transmission and storage of gas commencing October 1, 2002. 3 RP-2002-0133 4 26 MARCH 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel COLIN SCHUCH Board Staff SUZANNE TONG Board Staff DENNIS O'LEARY Enbridge Gas HELEN NEWLAND Enbridge Gas DAVID POCH GEC/CIELAP BRUCE MACODRUM CME ROBERT WARREN CAC BRIAN DINGWALL HVAC MURRAY KLIPPENSTEIN Pollution Probe SUE LOTT VECC IAN MONDROW Direct Energy CRAIG PARRY Energy Probe JAY SHEPHERD OPSBA VINCE DEROSE IGUA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [19] ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 9.1: RYCKMAN, SQUIRES, HANLON, CLINESMITH [51] EXAMINATION BY MR. O'LEARY: [58] CROSS-EXAMINATION BY MR. POCH: [232] CROSS-EXAMINATION BY MR. KLIPPENSTEIN: [327] CROSS-EXAMINATION BY MR. PARRY: [349] CROSS-EXAMINATION BY MR. WARREN: [439] CROSS-EXAMINATION BY MR. MacODRUM: [969] CROSS-EXAMINATION BY MS. LOTT: [1119] CROSS-EXAMINATION BY MR. DINGWALL: [1157] CROSS-EXAMINATION BY MR. MORAN: [1181] QUESTIONS FROM THE BOARD: [1287] ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUES 9.2 TO 9.5: SQUIRES, RYCKMAN, WILLIAMS, HEENEY, SIMON [1387] EXAMINATION BY MR. O'LEARY: [1395] 10 EXHIBITS 11 12 UNDERTAKINGS 13 UNDERTAKING NO. J.3.1: TO ADVISE WHETHER INCLUDED IN THE COST CLAIMS WERE CLAIMS FOR TIME SPENT REWRITING THE MINUTES OF CONSULTATIVE MEETINGS [732] UNDERTAKING NO. J.3.2: TO PROVIDE BREAKDOWN OF EXPENDITURES FOR FIRST HALF OF THIS FISCAL YEAR [950] UNDERTAKING NO. J.3.3: TO PROVIDE PERCENTAGE BREAKDOWN OF INFORMATION REQUESTS BY INTERVENORS [995] UNDERTAKING NO. J.3.4: TO PROVIDE BREAKDOWN OF 10.55 MILLION FIGURE INTO FIXED AND VARIABLE COSTS [1098] UNDERTAKING NO. J.3.5: TO PROVIDE COST OF AUDIT REPORT AND THE RECONCILIATION REPORT [1264] 14 --- Upon commencing at 9:29 a.m. 15 MR. BETTS: Good morning, everybody. Please be seated. Welcome back. 16 Before I ask if there are any preliminary matters, I would like to make a point on behalf of the panel. The Board would like to thank parties that have provided the Board with exhibits which aggregate their materials to be referenced during examination and cross-examination. We have found that to be very helpful and certainly would not mind if it continued. 17 But with respect to that, I would suggest in reviewing the transcripts, I believe it would be helpful to the record if, in referencing items within those exhibits, we also referred to their origin in the evidence, and that would keep the reference intact. So once again, thank you for that extra effort. In many cases we recognize that it won't be necessary. If there's not that much reference material, certainly don't do it if it's not required or warranted. 18 With that, I will ask if there are any preliminary matters, Mr. O'Leary. 19 PRELIMINARY MATTERS: 20 MR. O'LEARY: Thank you, Mr. Chairman. One preliminary matter. 21 It is in respect of the company's March 21st, 2003 letter to the Board pertaining to the request by intervenors for the production of certain information relating to the affiliate outsourcing, and you may recall that the letter indicated in the last paragraph that the company would endeavour to complete the filing under -- pursuant to the Board's confidentiality guidelines by Wednesday, March 26th, 2003. 22 That endeavour or that suggestion was subject to what the letter states in paragraph 2, which is that the company would file this information pursuant to the guidelines for the treatment of filings made in confidence and will tender the Board's rules of practice and procedure. 23 For greater clarity, the company is prepared to file such information on the basis that it would be made available to intervenors participating in the hearing who sign a confidentiality declaration and undertaking, and to this point, we've actually not received any response yet from intervenors in respect to that request and thus I thought I would simply bring it to the Board's attention and that of intervenors that there has not been any further filing of information as a result of where we stand in respect of that very issue. 24 MR. BETTS: Thank you. Perhaps in pursuit of that, can I ask if there are any comments. 25 Mr. Warren? 26 MR. WARREN: Mr. Chairman, I will respond to Mr. O'Leary's observation in a moment. But what I wanted to do was honour, albeit a day late, my undertaking to provide the Board with information with respect to the intervenors. When I use the term "intervenors", I'm referring to CAC, IGUA and VECC, their position on productions. 27 As the Board may appreciate, we've had some difficulty in getting everybody together because Mr. Thompson is in Calgary at the NEB hearing. But we have been able, finally, to assemble everybody and the position of the intervenors is that the material which was set out in Mr. Cass's letter of March 19, 2003, is not sufficient for the intervenors' purposes for pursuing the issues which are on the issues list. 28 And as a result of that, Mr. Chairman, I have, on behalf of all three organizations, prepared a notice of motion. It was drafted -- I reviewed it in detail with Mr. Thompson last night as a result of that. There are changes being made to it this morning as we speak. It will be recirculated to all of the three parties some time this morning. I hope to be in a position to file the notice of motion either by the close of business today or no later than first thing tomorrow morning, and the delay is that it has to go out to Calgary for final review by Mr. Thompson. 29 So there will be a notice of motion in which we will ask for production of material, and the material that we will be asking for is more extensive than is outlined in Mr. Cass's letter of March 19, 2003. 30 That leaves two questions, Mr. Chairman: One is the question of when the Board would like the motion to be argued, and there are, in my respectful submissions, two timing issues which are relevant to that. 31 Since the motion seeks production from entities other than Enbridge Gas Distribution, it is incumbent on us to serve the motion on those entities. I have not had an opportunity to speak with Mr. Cass or, for that matter, with Mr. O'Leary about this. Obviously, it would shorten the matter up if we could come to an agreement on how the motion might be served on them, and in particular, if there is one counsel who will accept service of the motion. 32 The second practical matter is that, clearly, it would be in the interests of everyone if Mr. Thompson were available to argue the motion. I have spoken with Mr. DeRose about this, and I am advised by Mr. DeRose that Mr. Thompson can be available Monday next -- the coming Monday to argue the motion. 33 With respect to the -- so I need some guidance from Mr. Cass or Mr. O'Leary on the question of service of the motion. Assuming that that practical matter can be resolved reasonably easily, I will need direction from the Board on when the motion would be argued. Our preference, because of the centrality of Mr. Thompson to this issue, would be to have it argued on Monday. But obviously we will respect the Board's time constraints. 34 With respect to the issue of confidentiality, it is the position of the three intervenors for whom I am speaking on this issue this morning that it is up to Enbridge Gas Distribution and to the other entities who have been served with the motion to establish to the satisfaction of the Board that confidentiality is required. The intervenors will not, in advance, consent to the filing of any or all of the material that we've asked for in confidence. It is up to those entities to argue before the Board that they should be kept in confidence, and we will respond to that. 35 I apologize again, Mr. Chairman, for the delay in not responding to you yesterday as I had promised, but just as a practical difficulty of getting everybody together to discuss where we are going, that is a road map of where we propose to go, and those are the matters on which we require direction. 36 Thank you. 37 MR. BETTS: Thank you. 38 Perhaps in taking this forward, Mr. Warren, you could anticipate, too, in asking the Board to deal with those timing issues, just to perhaps communicate with the applicant and determine what those timing issues would imply to the overall timing of the hearing as well. It is of some concern to the panel, but certainly we will not disregard the need to have a fulsome review of these issues and deal with all the evidence that is required to manage that. 39 MR. WARREN: Thank you, Mr. Chairman, I appreciate that. And perhaps at the morning break I can speak with Mr. O'Leary or, if you prefer, I can speak with Mr. Cass to canvass all of the issues he and I need to talk about. 40 MR. BETTS: That's fine. 41 Can I also encourage parties, as soon as possible, I suppose, to review the list of materials that are being requested and perhaps some of those may be made readily available. If not, certainly they should be dealt with within the bounds of that motion. 42 So we will look forward to seeing that as soon as you can put it together. 43 MR. WARREN: Thank you, sir. 44 MR. BETTS: Mr. O'Leary, is there any further comment with respect to that letter and the need to deal with this situation? 45 MR. O'LEARY: I don't believe so, sir. We're happy to deal with Mr. Warren and should be able to give you a position later today. 46 MR. BETTS: Thank you. 47 Are there any other preliminary matters to be dealt with by the panel? Thank you. 48 Then that brings us to issue 9.1, and I see some old faces in the witness area and some new faces in the witness area, so Mr. O'Leary, I will turn it over to you and perhaps you could help us with introductions and the swearing in. 49 MR. O'LEARY: I will do that, and we require the swearing in first of all. 50 MR. BETTS: Thank you. 51 ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 9.1: RYCKMAN, SQUIRES, HANLON, CLINESMITH 52 N.RYCKMAN; Previously sworn. 53 P.SQUIRES; Previously sworn. 54 C.HANLON; Sworn. 55 S.CLINESMITH; Sworn. 56 MR. BETTS: I believe Ms. Hanlon and Ms. Clinesmith have been sworn in. 57 MR. O'LEARY: Thank you, Mr. Chair. 58 EXAMINATION BY MR. O'LEARY: 59 MR. O'LEARY: Just by means of introduction, you have been introduced to Ms. Squires, who's closest to the panel, to Mr. Ryckman; then we are joined by Susan Clinesmith and Ms. Cathy Hanlon. 60 And before inviting this panel to answer several questions in chief, I just thought I would start off with a brief introduction that this panel will be addressing the 9.1 issue which deals with the budget and target volumes. 61 MR. O'LEARY: Just to foreshadow what we will be doing later today and perhaps tomorrow, this panel will then be followed by another panel which will then deal with all of the issues of 9.2 through 9.5. What the company is proposing is that once we complete the evidence in chief of this panel that they be open for cross-examination on the 9.1 issue, and then the subsequent panel would deal with all the 9.2 through 9.5 issues in chief, and then it would be open to cross-examination. We thought that that might be the most efficient means of proceeding over the next day or so. 62 This panel as I indicated is dealing with the O&M budget and it is subject, in part, to a complete settlement and a partial settlement. The completed settlement is that all parties have agreed for the purposes of rate setting that the O&M budget would be fixed at 10.9 million, but that there is a partial settlement that the budget be set at 10.85 million, and that the target volumes be set in accordance with the partial settlement. 63 The parties have indicated, as I believe I indicated last Thursday to a question by yourself, Mr. Chair, that they were looking forward to a somewhat fulsome discussion about DSM, and with the Board's leave, we were proposing to ask a few questions in chief to briefly review some of the general concepts of what is DSM and how it works at a grass-roots level and that's what we're proposing to do with this panel to start out with. 64 Before we get into the meat of the questions, perhaps I could ask Mr. Ryckman to indicate for the benefit of the Board and everyone, the colleagues you joined with, could you tell me what their position is with the company in respect of DSM programs. 65 MR. RYCKMAN: Sure. And what I'll do is just kind of highlight why the older, more familiar faces are here today to assist with and that's overall program administration, including target setting budgets, achieving goals and objectives. 66 And then Susan Clinesmith, to my right, is responsible for the business market programs, and Cathy Hanlon, who is to Susan's right, is responsible for residential, commercial and new construction market programs. 67 MR. O'LEARY: Thank you. For the purposes of your testimony, I understand that evidence has been filed that appears at tab -- Exhibit A.7, tab 1, and also at Exhibit 7, tab 3, and can I ask each of you whether or not the material appearing at that portion in the record was prepared -- first of all, to Ms. Squires and Mr. Ryckman, specifically to Exhibit A.7, tab 1, can you tell me whether that material was prepared under your direction. 68 MR. RYCKMAN: Yes, it was. 69 MS. SQUIRES: Yes. 70 MR. O'LEARY: And do you adopt it for the purposes of your testimony today? 71 MR. RYCKMAN: Yes. 72 MS. SQUIRES: Yes. 73 MR. O'LEARY: And to Ms. Clinesmith and Ms. Hanlon, am I correct in understanding that the material that appears at Exhibit A.7, tab 3, schedule 2 and schedule 1, was prepared with your assistance and input. 74 MS. HANLON: Yes. 75 MS. CLINESMITH: Yes. 76 MR. O'LEARY: And have you reviewed it at all? 77 MS. HANLON: Yes. 78 MS. CLINESMITH: Yes. 79 MR. O'LEARY: And do you adopt it for the purposes of today's testimony? 80 MS. HANLON: Yes. 81 MS. CLINESMITH: Yes. 82 MR. O'LEARY: Thank you very much. 83 Ms. Squires, if I could ask you to turn to Exhibit A.7, tab 3, schedule 1, page 5, my understanding that the company recently updated this table, table 3 on page 5. Could you advise the Board as to the significance of that updating? 84 MS. SQUIRES: Yes, I will. This was updated about a week ago and I'll just highlight the changes made to that table. 85 The only numbers that have been updated are in the rows 23 and 24, reflecting the actual 2002 DSM results, and the variance from budget has correspondingly changed as well -- 86 MR. BETTS: Ms. Squires, sorry for the interruption, but can I get that reference point again. 87 MR. O'LEARY: Sure. It's Exhibit A.7, tab 3, schedule 1, page 5, and it's entitled "Table 3", and it was updated on -- well, last week. 88 MR. BETTS: Sorry to interrupt. I have it. Thank you very much. 89 MS. SQUIRES: No problem. Just to repeat again which parts of that table have been updated. The numbers that have been changed from the earlier version are found in rows -- or item number 23 and 24, and those numbers reflect the 2002 actual results and the variance from budget that falls out of those actuals. 90 And the -- in sum, in summary, the number that the year end result has fallen to is 92.3 million cubic metres. The number that was previously there before the update was 97.7. In other words, we've got a lower actual in 2002 than we originally thought. 91 Just a few comments on the significance of this update -- 92 MR. WARREN: I'm sorry, Mr. Chairman, I'm sorry to interrupt the witness, but does that change the percentage number as well? 93 MS. SQUIRES: Yes, it does. Yes, it changes the percent from -- I think it was positive 2 percent variance to a negative 2 percent variance. 94 MR. WARREN: Thank you very much. I apologize. I just didn't bring that sheet with me today. 95 MS. SQUIRES: Okay. 96 MR. BETTS: That's fine. 97 MS. SQUIRES: Just a few comments on the significance of that change. 98 The first point I'd like to make is that in our evidence we indicate that there has been, in recent years, a levelling off of DSM results. In particular, if you look at the percent change from year to year of our actual results, that's what's been slowing down. And this update reflects an even -- it supports that trend even more so than we originally thought. 99 The other point of significance of this update relates to the partial settlement on the budget. The partial settlement proposal calculated a fiscal 2003 budget using the estimated volumes that were previously in this table of 97.7 million cubic metres. This generated a cost of 12 -- an average cost of 12.03 cents per cubic metre, which was then increased for inflation. And this methodology I'm describing is actually articulated right in the settlement. 100 As this update indicates, the actual volume saved was lower than expected in 2002, and therefore the methodology used to arrive at the proposed settlement budget states the actual cost per cubic metre. If the updated 2002 actual volumes had been known at the time of the settlement conference, the same methodology for setting the budget would have resulted in a higher budget of about $650,000. 101 In other words, this evidence confirms the tightness of the budget contained in the proposed partial settlement proposal. 102 MR. O'LEARY: Thank you, Ms. Squires. While I understand that the company is here to support the partial settlement proposal, I'm wondering if you have any comments about it and any portions of the partial settlement proposal which you would like to specifically highlight for the purposes of the Board's understanding of it. 103 MS. SQUIRES: I do have a few comments to help clarify the partial settlement and in particular how it relates to the DSM VA, which is the DSM variance account. 104 The company asks in the partial settlement, the company asked that the Board approve an O&M budget of $10.85 million, and set a volume target of 72.5 million cubic metres assuming a free-rider rate of 30 percent per custom projects. The company also asks that the Board approve the continuation of the demand-side management variance account which permits the company to use an additional 20 percent of the approved O&M budget for cost incurred to exceed the volume target. Should the Board approve a higher or lower O&M budget, the DSM VA would operate in the traditional way, being a figure of 20 percent of the approved budget and accessible only for costs which allow the company to exceed the approved volume target. 105 I wish to point out that there is a second role for the DSM VA under the partial settlement proposal. Any difference between the complete settlement, which was approved by the Board last week, which was an O&M amount of $10.9 million, and the Board-approved O&M for fiscal 2003 will also be recorded in the DSM VA. 106 As well, any amount approved under issue 9.3 in respect of the company's proposals to undertake certain market studies and to retain a facilitator to assist with a consultative process will similarly be recorded in the fiscal 2003 DSM VA, which the company asks be cleared pursuant to the Board's decision in this application. 107 Finally, given the significant compromise which the partial settlement agreement contemplates in a DSM O&M budget relative to the budget proposed in the company's original application, the partial settlement proposes that the company not be penalized should it fail to meet its target volume. 108 As stated earlier, because the 2002 actual volumes were less than originally forecast, meaning that the cubic metre -- the cost per cubic metre of volume savings was higher than used to calculate the settlement budget, the removal of the penalty is simply that much more important. 109 MR. O'LEARY: Thank you. My next question I would invite either to yourself, Ms. Squires, and/or Mr. Ryckman, and this is going back to, as promised, the roots of DSM. Could I ask you to offer your evidence in respect to the goals and objectives of DSM. 110 MS. SQUIRES: Certainly. 111 To answer this question, I'd like to refer back to the fundamental DSM objectives and principles that has guided the company's DSM efforts since it's first plan in fiscal 1995, and in a moment I'm going to read from an earlier filing of the company and I'll mention the exhibit number. But before I do that, I'd like to mention that the objectives that I'm going to read from are actually the same objectives that the company has filed in each of its historical DSM plans from the beginning in 1995. In recent years, we actually haven't filed these objectives verbatim, but we've referred back to them; in other words, the overall objectives haven't really changed since 1995. 112 So the reference I'm about to read from is EBRO-497, Exhibit D.2, tab 6, schedule 1, page I-2. And I don't expect that many of you have that material with you so that's why I propose to read it. 113 There were five key objectives identified. The first one is to develop and deliver a DSM plan, which is seen by participating and non-participating customers as being fair and of good value, and which enhances the overall level of customer satisfaction. 114 The second objective is to develop and deliver a DSM plan which demonstrates progressive yet economically sound leadership in advocating and promoting environmental improvement, energy efficiency and conservation, demonstrates that the company is a source not only of reliable and economical gas supply but also of objective, timely and concrete assistance in enabling customers to use gas as efficiently as possible. 115 The third objective is to develop and deliver a DSM plan which positions the company as an energy services provider and enhances its ability to increase market share in all energy market sectors, where to do so is societally cost effective. 116 The fourth objective is to develop and deliver a DSM plan with a vision towards permanent market transformation. 117 And the fifth and final objective is to develop and deliver a DSM plan which protects the financial interests of the shareholder. 118 MR. O'LEARY: Ms. Squires, could I also ask you, as you may be aware, recently the government of the Ontario amended the Ontario Energy Board Act to amend one of the objectives in relation to gas, and the terminology has now changed from reading formerly, which one of the objectives was "to facilitate opportunities for energy efficiency." The government has now amended the Act to make the objective now read "to promote energy conservation and energy efficiency." Can you me whether you have a view as to -- or how you interpret that change? 119 MS. SQUIRES: Yes, we do have a view, and that is that that change really underscores the fact that the government supports and provides justification for the continuance of DSM. 120 MR. O'LEARY: Now, looking at the actual activities of the company over the last several years, can you give us a brief overview of the DSM that has been undertaken by the company? 121 MS. SQUIRES: Yes, and I would like to do this in two ways. The first way is to initially summarize organizationally how the company handles and delivers DSM; and secondly I'd like to speak briefly about the life cycle of the program, if you will, to give a sense of how we do this work. 122 Initially, from an organizational perspective, currently DSM activity is integrated with other activities in the company. In other words, employees who are involved in the design, delivery and administration of DSM programs are also involved in other aspects of the utility's business. This organizational structure allows programs to be delivered more efficiently, and it allows us to more effectively leverage resources and opportunities presented by DSM activities to support other utility activities and vice versa. 123 The other benefit of this structure is related to customer value. Customers typically look for total energy solutions, not just energy efficiency. Since our sales staff, for example, can offer customers DSM programs as well as other programs and services to meet their energy-related needs, the company is better able to provide value to its customers. 124 Moving on now to the program life cycle and how decision-making is made in that context. The primary driver of the decision to create a DSM program is a market need. This need may not necessarily be for a piece of energy-efficient equipment but possibly for an environmental or comfort-related concern, which can be brought about by a piece of energy efficient equipment. This market need triggers the beginning of a program life cycle that has many elements and phases to it. 125 Initially, when a market need is identified, DSM staff will take some time to investigate the potential for a program by researching the market and making inquiries with industry contacts. This stage of investigation will also include consultation with interested intervenors through the DSM consultative process, who may offer ideas on data sources and program delivery concepts, as well as perspectives on the likelihood of success based on their own experience. 126 The next stage is to begin to identify the program assumptions that will eventually translate a program into measurable cost-effective results. DSM staff will rely on manufacturer-published data, market information and published evaluation research carried out by other parties to determine preliminary estimates of all of the assumptions needed to screen the programs for cost effectiveness. At this point DSM staff makes use of the prescribed cost-effectiveness analysis and methodology set out in the EBO-169-3 report of the Board which contained the Board's ruling in the 1992 generic hearing on gas DSM in Ontario. 127 If the potential program passes the necessary cost effectiveness screenings, DSM staff will take the necessary steps to implement the program. If the program does not pass these screenings, the process may loop back to review and identification of assumptions stage to identify an alternative program structure with more cost-effective parameters. In some cases, program concepts never make it past the screening stage and the ideas are shelved, potentially for future consideration. 128 Once a program is underway, DSM staff must track program resources and results. This is often referred to as the monitoring or tracking of a program. This is an important element of the program life cycle because the eventual evaluation and audit of the program will depend heavily on accurately documented program tracking information. 129 During the delivery of a program, and often after the fiscal year is over, evaluation work may occur to quantify and/or verify the impact of the program. Again, this evaluation stage is important in updating program assumptions and informing future years' program plans. 130 This program life cycle, as I've described it, clearly depends on high quality, abundant market information, which is why we've identified a need to undertake new market research under issue 9.3, which we'll hear about later. 131 Since DSM has been in place at Enbridge and, in particular, since the shared savings mechanism was implemented in 1999, we have witnessed declining return from programs which have traditionally been very easy, low-cost programs to deliver, such as showerheads and water heater temperature turn-downs. This trend is leading to a much higher average cost to achieve similar results. It also points to a need for DSM staff to begin spending more time and resources on again the early stages of the program life cycle to identify new opportunities to replace the saturated ones. 132 MR. O'LEARY: Now, if I could invite the panel, and more particularly or specifically Ms. Clinesmith, could you give us -- I understand you're responsible for the business market programs for the company. 133 Could you first start and give us a sense of the types of customers that your programs are addressed to? 134 MS. CLINESMITH: Certainly. Business market program focus on designing energy efficiency programs for the industrial market, such as agriculture, food, transportation, chemical, pulp and paper. The commercial market; office buildings, retail establishments, multi-residential sector, regardless of whether it's non-profit or private. Institutional; schools, health care, government, et cetera. 135 These programs involve looking at all functions of the business in terms of the equipment replacement, repair, maintenance, building retrofitting, monitoring, targeting, and operational management of the energy uses of the building. 136 MR. O'LEARY: Thank you. There has been use of the term "custom projects" to date. I'm wondering if you could assist us with the company's interpretation of what that means. 137 MS. CLINESMITH: We would interpret custom programs or projects to define those projects designed to address specific and unique issues of a specific business, plant, building, facility, whatever the structure or the firm happens to be. It's a total energy solutions approach. 138 MR. O'LEARY: And in respect of the company's dealings and your group's dealings with various businesses, can you give the Board some view or, based on your experience, your view as to how the decision-making undertaken and made by operations managers and business owners is undertaken for the purposes of deciding whether to go forward with the DSM activity or not. 139 MS. CLINESMITH: Basically, each business operates within their own market realities. They have their own business plans, their own strategies, their own financial considerations, be they asset protection, expansion, contraction. They have their own competitive barriers they must face, their own competitive opportunities. Are there changes in line production? They are looking for a competitive advantage in their market production. 140 They are also involved in time lines, overall plant procedures. So we have to look at all of these issues with the business decision-makers in any DSM initiative. 141 MR. O'LEARY: In terms of the actual decision-making process, can you advise me whether the person that your sales staff meet with is, in every case, always the decision-maker? 142 MS. CLINESMITH: In most cases the initial contact is not the decision-maker. We will have a contact frequently with a plant manager and energy manager. As the discussions evolve, they have to go through their internal considerations and frequently it goes into the -- whether it's the chief financial officer, the chief operating officer. Frequently, the decisions are made by several people, either in sequence or in a team effort. 143 MR. O'LEARY: Do you have any sense of the kind of issues that those people would consider and weigh before they agreed to undertake a DSM program, whether there are other considerations from a business perspective that they would consider? 144 MS. CLINESMITH: Well, we work with them to identify the extent of their business needs and their business barriers, because frequently a gas technology can also provide solutions to other areas that they might be having issues with such as the ability to affect operational efficiencies. Whether there are ancillary benefits such as improved indoor air quality, worker productivity, we have to look at the entire process to see where the technology or the gas can bring positive impacts to their business. 145 MR. O'LEARY: What is the company's experience in respect of when a business is approached and certain DSM ideas are made known to the company? What, generally, is the response of the company? Do you know then and there whether or not there is any interest or not? 146 MS. CLINESMITH: That question varies. The answer to that question varies, rather. We spend a lot of effort in communication. We are very active in a lot of associations within the industry in terms of providing seminars and workshops, providing information to groups, communicating, doing case studies. 147 So frequently we will have a very -- we will have a presence within a marketplace before we actually talk to the person and the plant, the first contact there. 148 MR. O'LEARY: Perhaps I could ask you to give an example of one of the business markets programs that the company undertakes. 149 MS. CLINESMITH: I'd like to give an example of that, probably one that is very -- has widespread application, and that would be our steam-saver program. This is a program that starts with an audit of the plant to determine the hidden costs of heat loss and the hidden costs of delivery inefficiencies. 150 Frequently, it will be a walk-through by an Enbridge Energy Solutions consultant, if it's a smaller plant. If not, we will work with a potential business partner to provide a professional audit of the boiler system, the supply, the return lines, the piping, the pressure, the steam traps, the insulation, systems that can lead to hidden costs of the operation. 151 We will participate with them on a shared basis of costs for these audits if they are done independently by the contractor of their choice, and this will lead to a series of recommendations and processes and phases that they can use to incorporate energy efficiencies into their production. 152 MR. O'LEARY: Ms. Clinesmith, when you say that you would operate or proceed on a shared basis, you're talking about the financial cost of undertaking the audit? 153 MS. CLINESMITH: Yes, I am. 154 MR. O'LEARY: All right. So in respect of those situations where a company has agreed to contribute towards the cost of the audit, can you tell me what the company's experience is as to whether or not they are intending or not intending to proceed with the DSM activity? 155 MS. CLINESMITH: Well, we have found that if they are willing to pay for a significant portion of the audit that they are very serious, then, in proceeding with the project. 156 MR. O'LEARY: And do you have another example you'd like to share with the Board in respect of the business market programs? 157 MS. CLINESMITH: One of -- another project that we're working on that is, perhaps, not as well-defined physically as a steam audit or a steam traps and boiler systems, is a program we're calling monitoring and targeting which we've learned from some British utilities. 158 Monitoring and targeting is a comprehensive approach to energy management and efficiency through ongoing attention to the operational activities and the monitoring of these activities. 159 Frequently -- well, excuse me. M&T could be considered as a further evolution in affecting operational efficiencies focusing on no costs or low costs. Most of the time there is some element of technical, but it's mostly process-oriented thinking, process-oriented management: Improved metering, perhaps some software configuration; considering production variables and forming targets on them. 160 This requires senior management and corporate-wide buying, because it's basically a culture shift. It's a very holistic view of how a plant operates and how a plant can save money through their energy efficiencies, and it may build on previous energy efficiency initiatives that the company has indicated. 161 Again, this starts with a scoping study that identifies potential savings, outlines how to achieve them, and these savings are not restricted to gas savings. It's looked at, as I said, very holistically. 162 MR. O'LEARY: Picking up on that word, if memory serves, in the record somewhere the term "spillover effect" has been used. Can you advise us of your understanding of what that term means and what it's intended to encompass? 163 MS. CLINESMITH: Well, a spillover effect can be a benefit to the company that has provided over and above a gas technology, over and above an improved piece of equipment, that is more energy efficiency. 164 For example, worker comfort and safety may come about with improved ventilation, and this can be very critical in areas where humidity is an issue in the manufacturing process, such as in bakeries, where improved ventilation can hit the bottom line quite positively. 165 It can reduce operational down time due to inadequacies in equipment. If a boiler is not delivering the right process heat at the right pressure at the right time to the right place, you've got operational inefficiencies. It also can lead to improved indoor air quality which impacts the health and safety productivity of the work force. 166 MR. O'LEARY: Thank you, can you help me whether or not any of these spillover benefits are either recorded for the purposes of establishing the volumes of gas saved or for the shared savings mechanism. 167 MS. CLINESMITH: No, they are not. 168 MR. O'LEARY: Clear based upon your experience, Ms. Clinesmith, have you drawn any conclusions as to the trend that business market programs are heading in? 169 MS. CLINESMITH: Business market programs are becoming increasingly more expensive to deliver. I think that's a function of the market. We always have to look at what the businesses -- what their constraints are, the issues that they are dealing with. We are having to become more increasingly imaginative and more increasingly adventuresome. Such things as monitoring and targeting have a very large impact, but they take a very, very long time for a company to implement. 170 As I said, businesses are looking for holistic approaches and it has to improve their bottom line. Everybody is focussed on the bottom line, but everybody has their own individual market stress factors. Every segment is different. 171 The multi-residential sector faces certain constraints. Schools sector, as we all know, is dealing with a wide variety of problems. The industrial and commercial sectors all have their own individual stressors that impact on any decision they would make regarding energy efficiency. 172 MR. O'LEARY: Thank you. 173 As you're aware, the partial settlement contemplates an O&M budget of 10.85 million which is down from over 13 million which was proposed in the applicant's filing. Can you give the Board some sense of what this reduced O&M budget will mean from a perspective of the business programs of the company? 174 MS. CLINESMITH: From a perspective of the business programs, it means that the budgets will be very, very tight. There will be no money for program development and no money for research and planning into the future program development. 175 MR. O'LEARY: Thank you. 176 If I could then move on to what I understand is called the mass markets, which is the residential/small commercial, and I understand, Ms. Hanlon, that you're responsible for that area. 177 MS. HANLON: Yes. 178 MR. O'LEARY: Can you give us an overview of that portion of the company's DSM? 179 MS. HANLON: Yes, I can. 180 My group's role is to design and implement programs for the residential and small commercial markets. The majority of the DSM programs for this market tend to be the traditional DSM measures, such as water conservation, heating equipment replacement, and thermal envelope programs, as well as we have some non-traditional program to get the builders to use energy more efficiently during the building process. 181 Unlike the business markets, the mass market programs are not administered through a sales force. All the programs are delivered through a wide variety of channels such as manufacturers, contractors, retailers and various associations. 182 The small commercial area which is a fairly significant amount of customers if you -- it's basically the rate 6 customer, other than the customers that Ms. Clinesmith goes after, which tends to be the large commercial, that is a market that we traditionally haven't gone after at all in the past. And what we've tried to do is allow -- extend the traditional existing residential programs to that market whenever there is a fit. So the high-efficiency furnace program and programmable thermostat, because a lot of those customers could be, you know, your average Becker Store or something like that that could definitely take advantage of a residential program. 183 MR. O'LEARY: Ms. Squires indicated in her evidence just a short while ago, she made reference to the life cycle of particular program, and I'd like to ask you, Ms. Hanlon, what is your experience from the perspective of the company's mass markets in respect of the maturity and saturation of various programs? 184 MS. HANLON: We have several very significant programs that are reaching the end of their useful life. For example, the tank procurement program where we work with manufacturers and Union Gas to ensure that the energy factor of all tanks distributed in Ontario is at 0.65 or better, versus the required 0.65 will have to end next year because the standard is going to be changes to 0.65, so that program is basically out of reach now. 185 The tank turn-down measure has been removed for fiscal 2003 because, again, it has reached saturation point, and also the showerhead programs are reaching their end, although we do need to do more research to find out how soon they will reach the end of their life as well, and I believe that's part of the research plans that we have in our 2003 plan. 186 MR. O'LEARY: Ms. Hanlon, for the purposes of the development and enhancement of your programs, can you tell me what is the extent of end-use market data and analysis that is available. 187 MS. HANLON: Ms. Squires talked about some -- the industry-type research, information we get from manufacturers, but the information is fairly limited. 188 We really rely on industry partners and allies for the most part for this information, or it's about conducting our own research through customer surveys. 189 MR. O'LEARY: I'd also ask you to give us an example or two of some of the mass market programs. 190 MS. HANLON: The high-efficiency furnace program has been in effect for a couple of years now. This is where we encourage customers to install a high-efficiency furnace. We have a push-and-pull strategy for this program. We educate the customer on the value of installing high-efficiency equipment, as well as ensuring that all heating contractors and manufacturers are aware of this program in order to push it at the customer level. Ultimately, the decision to purchase high-efficiency equipment is going to happen at the kitchen table with the contractor and the customer, so we really need the customer to understand the benefits of installing the high-efficiency equipment, and we need the contractor to push that program at that time. 191 MR. O'LEARY: I believe it was in Mr. Chris Neme's evidence filed on behalf of GEC that there was an observation to the effect that the overall market share of the high-efficiency furnace program had not been increasing. Does the company have any targets or beliefs as to the future of that program? 192 MS. HANLON: As Mr. Neme pointed out, there is no evidence that overall market share in high-efficiency furnaces is increasing, and we've implemented some major changes to the program to hopefully change that. It's referenced in my evidence that says that we are working with NRCan, Natural Resources Canada, and we have been very successful in getting funding from NRCan of up to a million dollars to assist us at really pushing this program this year. 193 We administer the program, as we have in the past, and NRCan is matching our $100 rebate so that we have a $200 enticement to try and get the customers to choose high efficiency. 194 We've also added a boiler to this program that meets the Energy Star criteria of an AFUE of 85 percent or better, and they have practically no market share to date, which is why we haven't gone after them in the past. 195 We feel that with this additional funding, that we can double the participants in this program. We had about 5,000 participants in fiscal 2002 and we hope to get 10,000 for fiscal 2003. 196 NRCan's contribution ends September 30th, 2003, and we are already working on a plan to try and continue this funding. We also want to encourage the provincial government to work with us, and furnace and boiler manufacturers, and also include the ECM motor component because of the very, very significant electricity savings. We believe we can truly increase market share of high-efficiency equipment with these changes to the program. 197 MR. O'LEARY: Just to the benefit of everyone, NRCan refers to -- 198 MS. HANLON: Natural Resources Canada. 199 MR. O'LEARY: That's part of the federal government? 200 MS. HANLON: Right, the Office of Energy Efficiency. 201 MR. O'LEARY: And do you have a view as to whether or not they would have participated in such a program but for the existence of your DSM intiatives? 202 MS. HANLON: No, I don't believe they would have. We went to them with the concept, asked them to match our dollars, and basically convinced them that this was a good idea. And they have been very, very -- very, very happy with the program, and we hope we really can deliver those volumes for them. 203 MR. O'LEARY: Do you know if NRCan has the administration to implement such a program? 204 MS. HANLON: No. They are really relying on our customer base to get that message out to all of our existing residential customers, and basically we handle all the administration, such the rebates, et cetera. 205 MR. O'LEARY: Thank you. 206 I won't ask you to turn to this statement, but it's taken from Mr. Neme's paper, which is located at Exhibit L, tab 10, page 3. Mr. Neme makes the following observation: "For windows, the company continues to ignore the residential new construction market." 207 I'm wondering, Ms. Hanlon, if you could comment on that observation by Chris Neme. 208 MS. HANLON: I share Mr. Neme's view that there is probably potential in the windows program for the new construction sector. But with the changes to the budget, we've had to cut the retrofit windows program. 209 Basically, it is one of our more expensive programs to administer, and with rejigging the budget based on the ADR settlement, we've had to actually cut that from the 2003 plan. So yes, I'd be very keen on looking at that program for the new construction market; however, we really just don't have the dollars to do that. 210 MR. O'LEARY: Thank you. 211 Can I now turn it back to Ms. Squires and Mr. Ryckman. I wonder if you've drawn any preliminary views as to the performance of your DSM program this year. 212 MS. SQUIRES: I can say that we believe the company is on track to achieve the target proposed in the application and the partial settlement; however, it should be noted that the company has been operating, up until March, on the basis of the originally proposed budget, so the first six months of the year we were operating on the assumption of the 13.5 million, which was in our original application. 213 In order to meet the reduced budget that's included in the partial settlement, we've had to realign our portfolio programs, as we've heard from Ms. Hanlon already, in order to meet the new agreed-upon budget. This reduction in the O&M budget does increase the risk that the company might not achieve its volumetric target. 214 MR. O'LEARY: In respect of the target volume which is the subject of the partial agreement and proposed by the company, can you give us a sense of how the company developed that target volume of 84.9 million cubic metres? 215 MS. SQUIRES: Just to clarify, the 84.9 million cubic metres is the volumetric target with an assumption of 10 percent free ridership, which is essentially equivalent to the target that's in the partial settlement of 72.5 million cubic metres, just so that everybody understands that. 216 But in terms of how far we came up with that budget, as in historical years, it's really a mix of approaches. In part it's looking at historical patterns of success in programs and trying to see if it's possible for us to continue those historical trends. 217 In this year in particular, it was looking at the loss of these historically large but declining programs, such as the residential showerheads and temperature turn-downs in water heaters. So it's really a mix of the top-down, looking at historical patterns and grass roots, what can we do this year, starting from scratch. 218 MR. O'LEARY: All right. 219 Do you have any additional comments, Ms. Squires, in respect of the impact on the company of the agreement to limit O&M budget to 10.9 million from the perspective of the continuance of the DSM programs? 220 MS. SQUIRES: Really, I think we've heard a lot of the messages already on this point. As stated earlier, we've had to realign and reallocate programs. Some programs have been eliminated. Budgeted money for program development has been reduced. 221 While the company is proposing that the Board approve the partial settlement at issue 9.1, the company wishes it to be understood that the budget of 10.85 is lean, and it has had an impact of forcing the company to focus on the least expensive programs, which is not necessarily the best approach for the future. 222 MR. O'LEARY: Finally, Ms. Squires, do you have anything that you would like to add for the purposes of summarizing, or the conclusion of the company's evidence in chief? 223 MS. SQUIRES: Only that I wish to reiterate and underscore the value of the company's DSM activities. It should be noted that the company's DSM programs are creating significant spillover benefits, as we heard from Ms. Clinesmith, and I'd like to point out that in addition to the non-gas spillover effects that Ms. Clinesmith referred to, I would argue that there are probably energy-related spillover effects that we are not quantifying. We have not, to date, undertook to try and quantify the energy savings that might occur by companies that look at their success in one area, where they have undertaken a project with us and applied those learnings to other areas of their business, and we may not be aware or involved in those activities. 224 The company looks forward to streamlining DSM processes should the Board approve issues 9.4 and 9.5, which we will hear about later, and the studies proposed under 9.3, which will lead to a better understanding of this market and DSM opportunities that exist. 225 So in summary, I urge the Board to approve the partial settlement set out at issue 9.1. 226 MR. O'LEARY: Thank you, Ms. Squires. 227 Mr. Chair, that concludes the evidence in chief for panel 9.1. 228 MR. BETTS: Thank you very much. 229 Could we enter, then, the cross-examination phase of this, and I don't know whether there has been any agreement on order. If there has not, Mr. Warren -- 230 MR. WARREN: I think there has been agreement, Mr. Chairman, that there will be some supplementary examination in chief from Mr. Poch. Just joking. 231 MR. POCH: I think that's fair. We are aligned, obviously, as signatories to the partial settlement. My client supports the partial settlement, so it would be what we would call friendly cross and I think it's appropriate that I proceed. 232 CROSS-EXAMINATION BY MR. POCH: 233 MR. POCH: Panel, I'm going to ask you to turn up the materials that we grouped together for purposes of cross-examination, which is Exhibit K.1.3, and in particular, the second page. And that's a table entitled "DSM Costs and Benefits all in TRC and EV." Alphabet soup. Does everybody have that? 234 MS. SQUIRES: Mm-hm. 235 MR. POCH: What we're doing here, or what I'd like to do here, is just take you through this to make sure that we are in agreement, and it's apparent to the Board the interplay between the elements that go into looking at the costs and benefits of DSM. 236 And first of all, Ms. Squires, perhaps I can just ask you to expand the acronym TRC NPV, so that will be apparent. 237 MS. SQUIRES: TRC is total resource cost, and NPV is net present value. 238 MR. POCH: And by net present value, that is the stream of future costs or benefits then discounted back to present dollars; is that correct? 239 MS. SQUIRES: That's correct. 240 MR. POCH: Okay. We've tried to group the various inputs here, and I just want to make sure we agree roughly what they are this year. 241 First of all, on the costs section, the costs of getting measures installed include both costs incurred by the company, program delivery costs, and costs incurred by the customers. And my assumption is correct that customers typically pay the lion's share of measured cost? 242 MS. SQUIRES: Yes, we refer to that as the incremental customer cost. 243 MR. POCH: And for 2003, we're anticipating approximately $66 million in such investment? 244 MS. SQUIRES: Yes, that looks about right. 245 MR. POCH: And our figure there of 82 percent paid for by the participants in the programs is accurate? 246 MS. SQUIRES: Yes, that looks right as well. 247 MR. POCH: All right. 248 And then on the benefits side, the reason, presumably, we are all doing this, we've reproduced some numbers there which we took from an interrogatory, so you will see there are some ranges and, first of all, explaining the range, hence the range arises because, for different measures or customer groups, the patterns of use will differ and therefore there is a different value for a given measure for the system; is that correct? 249 MS. SQUIRES: Yes, it is. 250 MR. POCH: All right. And we have noted two categories of benefits, and I want to make sure we have captured them all here. 251 First of all, resource savings, can you tell us what you mean by that term. 252 MS. SQUIRES: That's intended to include fuel savings such as gas and electricity and water savings. 253 MR. POCH: And, of course, those are benefits enjoyed by the participants; correct? 254 MS. SQUIRES: That's correct. 255 MR. POCH: And then there are system savings? 256 MS. SQUIRES: Yes. 257 MR. POCH: And I take it that those are shared by more than the participants, because they occur in your system? 258 MS. SQUIRES: That's right. Across the system. 259 MR. POCH: And both of these measures -- or benefits, rather, groups of benefits, are benefits that accrue over the life of the particular measure that is put in place; correct? 260 MS. SQUIRES: Yes. 261 MR. POCH: So when you do your TRC analysis, you again do a net present value to discount the future benefits to their current value? 262 MS. SQUIRES: That's correct. 263 MR. POCH: And the total there we have for the actual mix in the current plan is $192 million in net present value benefits? 264 MS. SQUIRES: Yes. 265 MR. POCH: Terrific. So I guess the next line is fairly obvious. The difference between those costs and benefits gives us the 127 million, which is the TRC value of the net value of the program expected this year. 266 MS. SQUIRES: That's right. 267 MR. POCH: We've got allocation shared there. I take it it's fair to say shared in the fashion of the allocations above as between participants and other customers? 268 MS. SQUIRES: That's correct. 269 MR. POCH: Now, I want to distinguish between costs and benefits on the one hand and rate impacts on the other, and we have, or I'm sure will hear about, some concern about rate impacts as being or suggesting -- suggested to be a constraint on DSM. And we tried to distinguish between two categories, and I want to make sure I've got this right. 270 First of all, the obvious category is that you're going out spending money on these measures and that's being paid for in rates, and that offsetting that would be this category from above of benefits that reduce system costs over time; correct? 271 MS. SQUIRES: That's correct. 272 MR. POCH: And those impacts would be shared across customers, not just felt by the participants? 273 MS. SQUIRES: That's correct. 274 MR. POCH: And just looking at the -- in that tranche, just looking at the relative pluses and minuses within that, we've noted above, and I think you've agreed that the savings to the system in the net present value are somewhere in that range of 29 to 54 million; correct? 275 MS. SQUIRES: Yes. 276 MR. POCH: And that the costs borne by O&M, and again it would be -- well, we have 11.5 here, which is the... 277 I'm sorry, Mr. Millyard is just advising me that's the sum of the 10.85, 10.9 we've been speaking of this morning, plus a further item of $600,000, which you are going to discuss in a subsequent panel? 278 MS. SQUIRES: That's correct. 279 MR. POCH: So just in that -- and let's just be clear. Above, when I've spoken of allocation of costs, and we've used that 82 percent, that's for the sum of the customer and the O&M. Obviously the O&M is borne not primarily by participants but is a shared allocation? 280 MS. SQUIRES: That's correct. 281 MR. POCH: So looking at those shared costs and shared system benefits, I took it from that that on balance, this -- the combined effect is a net benefit to customers, not simply participants, being the difference between those two. That is 29 to 54, somewhere in that range, less the 11.5, so somewhere in the range of $20- to $40-million net benefit would be enjoyed by -- will spillover beyond the participants? 282 MS. SQUIRES: Correct, so it's a favourable rate impact. 283 MR. POCH: Favourable rate. 284 And then in addition, there's a further rate impact, which we've tried to capture in the bottom paragraph there, and that's due to the fact that if you're successful, you're reducing gas use. The gas system has a certain amount of pipe in the ground, fixed costs, and so when we spread the utility's recovery of those fixed costs, which the balance of this rate case is about, amongst fewer units of gas, obviously, the price per unit of gas has to go up; correct? 285 MS. SQUIRES: That's correct. 286 MR. POCH: And that's an impact that's felt by all customers on your system, not just participants? 287 MS. SQUIRES: That's correct. 288 MR. POCH: And so is it fair to say, dividing it the way we have, that that's really the -- if there's an overall rate impact that increases rates, that's what's driving it? 289 MS. SQUIRES: That's correct. And that's really not new costs, it's really the same costs allocated over fewer volumes. 290 MR. POCH: And if I, on my own, without any assistance from the company, went out and decided to upgrade my furnace, put in a more efficient one, it would have that very same impact on system costs, would it not, and rate impact? 291 MS. SQUIRES: Yes. 292 MR. POCH: Because the system would now be selling me less gas, and it already has an invested fixed cost to spread over this -- 293 MS. SQUIRES: That's correct. 294 MR. POCH: All right. 295 And further, to the extent that the system -- you're able -- your colleagues are able to market more gas or to the extent the economy simply grows and you sell more gas, that's going to offset this effect? 296 MS. SQUIRES: Yes, it would. 297 MR. POCH: And so in a growing system we don't have any concern about stranded assets, as the term has arisen in the electricity context; that is, fixed pipeline that is no longer needed? 298 MS. SQUIRES: As long as that balance is maintained, that's correct. 299 MR. POCH: Okay. And finally, just to say what we haven't got on this sheet, this -- the TRC measure does not include any measure of societal benefits such as reduced environmental externalities; correct? 300 MS. SQUIRES: That's right. 301 MR. POCH: That's the difference between the TRC and the SCT test, the societal cost test? 302 MS. SQUIRES: That's right. 303 MR. POCH: You've referred already today to the spillover effects, so I won't ask you about that, but is there a third group that we could call free drivers as opposed to free riders? And could you acknowledge that and explain it. 304 MS. SQUIRES: Yes, I can. Free drivers is a term that's used to reflect customers that undertake an activity such as an energy-efficiency activity because they heard about it either from their neighbours or friends or through reading something in the paper. As a direct result of some influence we've made in the market, those parties will undertake some activity without bothering to become an official participant in a program. In other words, they further the reach of the program without actually being a participant in the program. 305 MR. POCH: I take it that's not only something that's difficult to measure but something you're not attempting to try to take credit for in this result. 306 MS. SQUIRES: That's correct. 307 MR. POCH: Okay. Now, I have one other matter I want to cover with you and that is there was a suggestion made that - and this may be for you, Ms. Clinesmith - that if you, in delivering programs to your business markets, custom situation, you were to simply ask the question going in, Would you do this without us, you could basically avoid all free ridership. And I wanted to ask you if that's a practical suggestion; and if not, why not? 308 MS. CLINESMITH: I don't think that's a practical suggestion, that question, phrased the way it is, for several reasons. 309 First of all, that would be totally discounting the impact of our educational efforts prior to us arriving to ask the question. The work that we do on education, communication, workshops, seminars, to incorporate the free driver concept that everybody is becoming more aware of, the concept of energy efficiency, but they might not know what to do about it in their particular instance. They might have a very strong commitment to saying, We should do something, but have absolutely no idea how to go about it, the impacts, the best way to do that something, how to measure it in their operation, and how it will affect their operation. So I think it discounts a lot of very real factors. 310 MR. POCH: You mentioned in the examination in chief that -- this number of contacts you have in an organization. Does that complicate the evaluation for free ridership? 311 MS. CLINESMITH: Very much so. 312 MR. POCH: And is there also a potential in some of your clients for some gaming here, that they're savvy enough to understand if they say, Of course I'm going to do it anyway, then they lose the option or incentive? 313 MS. CLINESMITH: That's human nature. 314 MR. POCH: Now, with respect to the prescriptive measures, that is, the rest of your programs, the mass market programs, residential in particular, is it fair to say that free ridership is a -- is more certain, more predictable, because you have market share information and so on? 315 MS. HANLON: Yes, I think so. 316 MR. POCH: Finally, panel, if I have any questions about the choice of 30 percent free-ridership rate in the current proposal, am I correct in understanding I should save that for the next panel? 317 MS. SQUIRES: Not necessarily. I'm prepared to answer questions on that. 318 MR. POCH: All right. I'm just interested in the rationale for the choice of 30 percent. 319 MS. SQUIRES: Certainly. The company's gone on record on a few occasions, perhaps not in this hearing yet, but as indicating that we had some concerns about the free-rider work that was done by the auditor in the 2000 audit. While we recognize that the auditor was a professional evaluator, the circumstances under which that evaluation took place, in our view, were less than ideal, and we had some concerns about the quality of the findings. 320 For example, one weakness that we saw in that work was that the evaluator or the researcher in that case did not consider the impact of the historical relationship of our sales force with the customers so, in other words, the evaluator just asked the customer that question that we've just been talking about: Would you have undertaken this activity anyway? And she did ask it in a few different ways. 321 But in our view, a relevant piece of that answer would have come from the sales representative in the way of explaining how long the sales representative has been in contact with the customer and what was the nature of the historical relationship. 322 All of this was to say that we felt that an augmented evaluation study was warranted to get a more accurate and more appropriate free-rider rate. The company undertook to begin such research focusing on the 2001 and 2002 years in December past, 2002. That work is almost complete. We expect to have a final report in the next week or two, and the preliminary findings from that research, which I have just received orally from the researcher, have indicated that 30 percent is the number, or approximately the number, that they expect to land on. 323 MR. POCH: Thank you very much. Those are all my questions. 324 MR. BETTS: Are there further questions or cross-examination, I would say, in support of the partial agreement? 325 Mr. Klippenstein? 326 MR. KLIPPENSTEIN: Thank you, Mr. Chair. 327 CROSS-EXAMINATION BY MR. KLIPPENSTEIN: 328 MR. KLIPPENSTEIN: Panel, I have a few questions about the issue of free ridership, especially as it came up in the last day or two with Mr. Rowan's testimony. 329 Mr. Rowan has suggested that the company could, in theory, screen out all the free riders, in other words, get to a zero free-ridership rate. Did you hear -- I guess Ms. Squires, did you hear Mr. Rowan make that suggestion? 330 MS. SQUIRES: Yes, I did. 331 MR. KLIPPENSTEIN: As I understand it, the result of a free-ridership rate would be that nobody gets into the DSM program who would have adopted that program anyway on their own. Is that the theory of a zero free-ridership rate? 332 MS. SQUIRES: Yes, it is. 333 MR. KLIPPENSTEIN: Do you think it's possible that adopting more stringent screening rules and procedures for a DSM program, if you were to try to get to a zero free-ridership rate and keep out every possible free rider, that you would thereby screen out some valid potential participants, either because the rules and procedures became a bit of a hassle to the customer or because the rules and procedures were imperfect? 334 MS. SQUIRES: I would definitely agree with that statement. 335 MR. KLIPPENSTEIN: If that's true, in other words, that if adopting rules and procedures to aim for zero free ridership had the side effect of knocking out some valid participants, would one effect of that be to eliminate some DSM results that would otherwise be cost effective? 336 MS. SQUIRES: Yes. 337 MR. KLIPPENSTEIN: Let's look at the other side of the coin. In other words, in a world where you don't have zero free ridership, and the program does have some participants who otherwise would have done the measure anyway on their own, and using the present TRC methodology, I just want to ask how those free riders have an impact. 338 Am I correct in understanding that the way the TRC formula works, those free riders are netted out when the benefits are calculated? 339 MS. SQUIRES: That's correct. 340 Just to provide an example, if we assume, such as we have in the 2003 plan, that 30 percent of our custom projects are free riders, we reduce what we call our gross savings by 30 percent to land on a net savings of 70 percent, and those 70 percent of savings that proceed through the TRC calculations. 341 MR. KLIPPENSTEIN: So if some free riders get on the band wagon, that is calculated out when you evaluate the benefits of the band wagon? 342 MS. SQUIRES: Correct, and that's, as we call them, net benefits. 343 MR. KLIPPENSTEIN: Okay, thank you. 344 Those are all my questions, Mr. Chair. 345 MR. BETTS: Thank you. 346 Further questions? 347 Mr. Parry. 348 MR. PARRY: Thank you. 349 CROSS-EXAMINATION BY MR. PARRY: 350 MR. PARRY: Just picking up on the free ridership issue, I have some questions for Ms. Clinesmith. 351 Would you agree with me that there's a distinction between the company identifying free riders for the purpose of determining whether or not they take credit to the DSM's adoption and the SSM calculation. There's that on one hand versus not giving the incentive, on the other hand, to a free rider? 352 MS. CLINESMITH: I'm sorry, but could you make that a little more clear to me. 353 MR. PARRY: Well, I've heard evidence today about - and this is to paraphrase - no one gets into the program if they're a free rider. As I understand it, really what we're looking at is if we identify the person as a free rider, then that affects whether or not the company takes credit for their participation in the SSM calculation. 354 MS. SQUIRES: Perhaps I can help here. I think I'm following your line of thought here. I think you've got the concept correctly. 355 We currently do not exclude free riders from the program, so there may be some free riders that are able to take advantage of the incentive and therefore become participants, but we net those out in terms of what we claim credit for. Is that where you're going? 356 MR. PARRY: That's what I was going for. Ms. Clinesmith mentioned something about human nature, that people may not want to identify themselves as free riders if that would preclude their participation. That's what I thought you said. 357 Is that what you meant when you said human nature before in your evidence? 358 MS. CLINESMITH: I think I was responding to a question regarding somebody might try to gain the system by saying that they were not a free rider so that they could get an incentive. Is that what you're referring to? 359 MR. PARRY: Yes, but I understood it, the incentives are structured that they get the incentive whether or not they're a free rider. 360 MS. CLINESMITH: That's correct. 361 MS. SQUIRES: I'm sorry, if I could jump in. I think I sense a bit of a disconnect here. 362 MS. CLINESMITH: Thank you. 363 MS. SQUIRES: Correct me if I'm wrong, but when Susan was speaking about that human nature concept, I believe she was talking about it in the context of evaluation research that happens after the fact, where a researcher asks a customer, Would you have undertaken this activity anyway. That question is not asked at the point of sale, if you will. 364 MR. PARRY: And the question is why not? If they're not going to be disentitled to the incentive if they answer, Yes, we would have taken advantage of it anyway, and if the customer knows they're not going to lose the benefit if they answer honestly, where is the risk of gaining? 365 MS. SQUIRES: I don't know from a sales perspective, I don't have that background. But my instinct says the last thing you want to do as a sales representative is put it in the customer's mind that they -- then don't need the help that -- or they -- they have to pass some criteria to be eligible for this program. 366 You don't want to do anything to upset that positive feeling about undertaking the investment and pursuing energy efficiency. So by posing that question at that point, I would think that it might put some uneasiness into that relationship. 367 MR. PARRY: I suppose it depends on how you do it, and that's one of the aspects of the inquiry. 368 When we heard about, for example, the -- I just want to make sure of the term -- the steam audit program, I would imagine in that program you might get, for example, some customers who are looking for an audit of their own facilities, and there are other customers who would you would actively have to solicit; is that fair to say? 369 MS. CLINESMITH: That's fair to say. 370 MR. PARRY: The ones who are actively looking for someone to go and do an audit of their facilities, that might be a party you could identify as a free rider; is that correct? 371 MS. CLINESMITH: They might, at the beginning, know that they must do something, and an audit is a logical place to start to quantify the situation. I don't know if I would classify them as a free rider. They may at the time they become involved with discussing an audit not be aware of the scope of the opportunities or the scope of the problem. So if we're in talking to a person about one particular issue, there is the opportunity to broaden the scope of it to incorporate additional benefits to them, so that becomes a little different situation. 372 MR. PARRY: If we were doing a survey of that customer, and we said, Well, you've come to us looking for an audit to see how your operation is running, how efficient it is. Have you contacted anyone else? What advice have they given you, what have they offered you, and what can we do that's different? Those types of questions might help answer whether or not that person is a free rider versus whether or not you have had some positive benefit that has been created. 373 MS. CLINESMITH: I'll agree with that. 374 MR. PARRY: Can't you do that in other areas without affecting your sales capacity? 375 MR. RYCKMAN: I think there are also issues of -- when you get down to that, I'm not so sure the customer would be fully aware of the degree of impact of the various influences. 376 When you look at the influences that could play into this, I mean there's going to be corporate influences within their internal culture. There will be items such as Bill 210 and the impacts of that, awareness of Kyoto. There are going to be all kinds of things that really play into the decision and move forward with energy-efficient measures. 377 So I think there may be periods of time where the customer isn't fully aware of what degree those influences had on their decision-making process. 378 I think as I said earlier as well, through my experience, a well executed sales call is helping a customer fill a need, and they're usually of the opinion it's their decision. 379 I think also when they have to promote it internally within an organization, as Ms. Clinesmith talked about, whether it's to the CFO, to the president of the company, the plant operators and engineers, I think the lines get blurred somewhat. And certainly I can't see them necessarily going to their superior and saying, Oh, by the way, Enbridge came through the door and told us we've got to do this. 380 I mean if it's beneficial to the organization, I think that they might overestimate their influence and perhaps underestimate ours in some cases. 381 MR. PARRY: But the inquiries would help bridge the gap between being completely inaccurate and being more accurate. Would you not agree with that, Ms. Clinesmith? 382 MS. CLINESMITH: Yes. 383 MS. SQUIRES: Perhaps I can jump in with some further comment on this. 384 I think Enbridge would agree and would acknowledge that measuring free riders, say, two years after the fact, such as we did in the course of the 2000 audit, is not the best way to measure free ridership. With each passing month after the project took place, it's less likely that you're going to get useful responses by asking these types of questions. 385 So I would agree and I would acknowledge that in order to quantify free ridership, which we have to do, it's desirable to try and do it closer to the actual decision to undertake the activity. But I think there's a fine line here and we have to maintain a balance of getting the information that we need to quantify free ridership so that we can quantify the TRC and the SSM, and not disrupting the relationship and the sale and the actual implementation of the energy-efficient equipment. 386 MR. PARRY: So I infer from that that one of the concerns is it's impossible to be completely accurate about estimated free ridership, because there are a lot of subjective and psychological factors that are hard to quantify; is that fair to say? 387 MS. SQUIRES: That's a fair statement. 388 MR. PARRY: But the more approximate the assessments are made to the time of the sales pitch, so to speak, the better chance you have of being accurate? 389 MS. SQUIRES: That's correct. 390 MR. PARRY: So it would be better to be making inquiries while you're doing it than afterwards? Or at least, let me put it this way, if not overt inquiries, at least some form of record-keeping by the sales staff so that -- or some sort of census by the sales staff so that you can be in the best position to assess whether or not the person you're dealing with is a free rider or not. 391 MS. SQUIRES: That's correct. And in fact I made reference to some evaluation research that is currently underway to help us come up were a better free-rider estimate to use, and part of that research, part of that project is an undertaking to help us identify better mechanisms for collecting this information, just as you've suggested. 392 So I would agree that that will offer some improvements to our ability to estimate free riders and we will undertake those that are practical and reasonable to do so. 393 MR. PARRY: So in summary, it's fair to say that we're on the road to try and perfect that procedure, but in the past that is correct type of effort was not made? 394 MS. SQUIRES: That's correct, in the past it hadn't been the issue that it is now. 395 MR. PARRY: And that will include, then, probably 1999 and 2000 years, when you refer to the past? 396 MS. SQUIRES: Yes, it's only as a result of the 2000 audit that many of these issues have come to light. 397 MR. PARRY: Thank you very much. 398 MR. BETTS: Are there any further questions from parties in agreement with the partial settlement? 399 I assume there will be questions from parties that have not supported the partial settlement. I'm wondering whether this would be an appropriate time to take a break and come back to that. 400 MR. WARREN: I think that makes sense. 401 MR. BETTS: On that basis, we will adjourn now until 20 past 11:00. 402 --- Recess taken at 10:55 a.m. 403 --- On resuming at 11:19 a.m. 404 MR. BETTS: Thank you, everyone. Please be seated. 405 [Discussion off the air] 406 MR. BETTS: We are now back on the air. 407 Did we conclude all of the cross-examination from parties who were in agreements with partial settlement proposal? 408 Mr. Dominy has just asked - let me get the reference - for one clarification. It was the thing we were checking before I left and that was with respect to a piece of evidence that we believe has not been filed yet, and that was in A.7, tab 4, schedule 1. 409 Could someone advise me whether that has been filed, and if not, what its status is? 410 MR. O'LEARY: Mr. Chair, I'm advised that, in fact, there was no filing at A.7, tab 4, and the reason is that the report which was the 2001 evaluation -- 411 MS. SQUIRES: That's right. Oh, sorry, not evaluation, audit. 412 MR. O'LEARY: The 2001 audit was simply not in a position to be filed. 413 MR. BETTS: Thank you. 414 Is it possible we will receive that -- 415 MR. O'LEARY: That was water -- 416 MR. BETTS: I hope that wasn't -- 417 MR. O'LEARY: It's empty, though. 418 MR. BETTS: Is it possible we will see that filed during this hearing? 419 MS. SQUIRES: No. 420 MR. O'LEARY: I don't believe so. 421 MR. BETTS: Thank you for clearing that up. 422 Then may I invite -- 423 MR. MacODRUM: Mr. Chair. 424 MR. BETTS: Yes, Mr. MacOdrum. 425 MR. MacODRUM: Mr. Rowan gave us an undertaking in his testimony yesterday and I now have a response to that undertaking, if I might file it with Mr. Moran. 426 MR. BETTS: Thank you very much. 427 And I believe that was Undertaking J.2.2 that we were referring to. 428 MR. MacODRUM: That's correct, Mr. Chairman. 429 MR. BETTS: Thank you, Mr. MacOdrum. 430 MR. MORAN: J.2.1. 431 MR. BETTS: J.2.1. 432 MR. O'LEARY: May I ask, Mr. Chair, whether or not Mr. Moran or Board Staff were going to be in a position to make copies of that for the parties. 433 MR. MORAN: Mr. Chairman, we've only received one copy, but it's a small document so we'll arrange for that. 434 MR. BETTS: Thank you. We will circulate that as soon as it's available. I assume that no later than after our lunch break would be possible. 435 Thank you. 436 MR. MORAN: Perhaps if we could remind parties of their obligation. It's normally ten copies that we require, but we will do it this time. 437 MR. BETTS: Thank you. May I then have questions in cross-examination from parties who did not support this partial settlement agreement. 438 MR. WARREN: Thank you, Mr. Chairman. 439 CROSS-EXAMINATION BY MR. WARREN: 440 MR. WARREN: Panel, my name is Robert Warren and I appear as counsel to the Consumers' Association of Canada and I am instructed by my client to do something which, as counsel, I would never ordinarily do, and that is to advise you at the outset of the cross-examination that my client is not opposed either in principle or in practice to demand-side management. We do, notwithstanding that, have some issues to resolve with respect to the settlement agreement and what lies around it. 441 Ms. Squires and Mr. Ryckman, I see on the list that you are common to all three panels; is that right? 442 MR. RYCKMAN: Yes. 443 MS. SQUIRES: Yes. 444 MR. WARREN: I should say all DSM panels. 445 And what I'd like to do, Ms. Squires and Mr. Ryckman, is begin -- before I get to the issue 9.1, is to pose a number of questions to you about the DSM program as it has been operated at Enbridge as, if you wish, background to the ADR settlement; okay? 446 MS. SQUIRES: Okay. 447 MR. RYCKMAN: Yes. 448 MR. WARREN: I'd like to begin, Ms. Squires or Mr. Ryckman, and I mean no offense to any of the other panel members if I don't direct any questions to you, with some questions generally about what DSM consists of and the context, I suppose, of those questions is that the two of you will have forgotten in the last ten minutes more about DSM than I'll ever know in my life, so I apologize in advance for the simplicity of these questions. 449 Am I correct in understanding that DSM, at a very high level of generality, consists of measures to limit demand for the consumption of natural gas by promoting and installing energy conservation measures. Is that a fair or high level of generality description of what the DSM consists of? 450 MS. SQUIRES: I would agree with that. 451 MR. WARREN: And am I correct in understanding that one of the collateral effects and, indeed, arguably one of the collateral benefits of DSM measures is that they reduce greenhouse gas emissions; is that fair? 452 MS. SQUIRES: Yes. 453 MR. WARREN: And it is because of this collateral effect that DSM measures are supported by environmental groups or two of the environmental groups represented at this hearing; is that fair? 454 MS. SQUIRES: Well, I can't speak on their behalf, but that's my understanding. 455 MR. WARREN: Now, am I correct in understanding that Enbridge develops and markets DSM measures, perhaps not alone but in conjunction with others, but dealing with Enbridge Gas, you develop and market DSM measures and the costs of your doing so are recovered in rates; is that right? 456 MS. SQUIRES: Yes. 457 MR. WARREN: In addition to -- as the way DSM has operated in the last two or three years, the costs, if you exceed the forecast budget of expenditures on DSM measures, they are captured in the DSM VA, and you recover those at some point subsequently; is that right? 458 MS. SQUIRES: Up to a certain limit, yes. 459 MR. WARREN: Is it fair to say that as a general rule, Enbridge is kept whole with respect to the costs of the DSM programs? 460 MS. SQUIRES: Yes. 461 MR. WARREN: Now, in addition to which, if Enbridge is successful in its DSM programs, there is less gas throughput and, therefore, less revenue for Enbridge; is that right fair? 462 MS. SQUIRES: Yes. 463 MR. WARREN: And do I understand correctly that the LRAM, the lost revenue adjustment, is intended to keep Enbridge whole for that lost revenue as well; is that fair? 464 MS. SQUIRES: Yes. 465 MR. WARREN: And while I'm on that subject, Mr. Poch, in the course of his questioning this morning, thank you, in the course of his aggressive cross-examination this morning, pointed out what may be arguably a central contradiction in DSM programs, and it's this, and let me put the question to you: That to the extent that you reduce throughput, DSM measures reduce throughput over the fixed infrastructure of the transmission system, then your revenue goes down and the costs go up for everybody else; fair enough? The rates go up for everybody else? 466 MS. SQUIRES: That's right. 467 MR. WARREN: And Mr. Poch pointed out that that is offset -- there are a number of offsets, but that offset in some measure if you are successful if expanding your system and increasing throughput; is that fair? 468 MS. SQUIRES: Yes, that's typically the case. 469 MR. WARREN: And can we agree that that points to what's arguably a central contradiction to the DSM system; that in order to compensate in part for your success in reducing the throughput, you have to increase the throughput? 470 MS. SQUIRES: That's one way of compensating, yes. 471 MR. WARREN: As a general proposition, Enbridge is in the business of increasing throughput in order to make profit for its shareholders; correct? 472 MS. SQUIRES: That's its traditional business. 473 MR. WARREN: And DSM, to the extent that it's in the business of reducing throughput, is at odds with the tradition business of Enbridge Gas Distribution; is that not fair? 474 MS. SQUIRES: That's one view of it. 475 MR. WARREN: Okay. Now, in addition to being kept whole on lost revenue and on the costs of the DSM programs, since EBRO-497-01, Enbridge has had an incentive mechanism to promote DSM in the form of SSM; is that fair? 476 MS. SQUIRES: Yes. 477 MR. WARREN: That's the shared saving mechanism. 478 MS. SQUIRES: Yes. 479 MR. WARREN: And as I understand SSM at a very high level of generality, if Enbridge meets certain targets, it can realize, if you wish, a profit for its shareholders from the SSM; is that fair? 480 MS. SQUIRES: Yes. 481 MR. WARREN: And Mr. DeRose's clients, the Industrial Gas Users Association, posed an interrogatory to you which is interrogatory number 93 from IGUA. If you could turn that up, please. 482 Mr. Chairman, for the record, it is Exhibit I, tab 13, schedule 93. 483 MR. BETTS: Thank you. 484 MR. WARREN: Do you have that, panel? 485 MS. SQUIRES: Yes, we do. 486 MR. WARREN: I will just wait until the Board turns it up. 487 MR. BETTS: We're all set. Thank you. 488 MR. WARREN: The question that was posed by IGUA in that was to compare DSM expenditures over a four-year period with the SSM pay-out, and I'm not going to use a word which will no doubt attract some controversy on this issue. The word is "return"; I won't use that word. 489 What I will suggest, though, is that the data revealed on page 2 of 2 of the exhibit suggests that the SSM pay-out, as a percentage of DSM expenditures, is higher than the Board-approved equity return; is that fair? 490 MS. SQUIRES: Yes, that's correct. 491 MR. WARREN: Okay. Now, my final question at this high level of generality is this: That because of the SSM, it is in the interests of Enbridge, notwithstanding the earlier contradiction we referred to, it is in the interests of Enbridge to aggressively and successfully promote DSM; is that fair? 492 MS. SQUIRES: Yes. 493 MR. WARREN: And to that extent, albeit for different reasons, the interests of Enbridge and of the environmental groups in promoting DSM converge; is that fair? 494 MS. SQUIRES: I think so, yes. 495 MR. WARREN: Now, I'd like to turn, then, very briefly to a sort of history of the -- of DSM. Historically, it was first approved by the Board in the EBO-189 series of decisions back in 1993; is that fair? 496 MS. SQUIRES: EBO-169, perhaps. 497 MR. WARREN: 169, and there were three of the decisions, one, two, and three; is that fair? 498 MS. SQUIRES: Yes. 499 MR. WARREN: And thereafter, the two major, then three utilities, now two major gas distribution utilities developed and proposed for Board-approved individual DSM plans; correct? 500 MS. SQUIRES: That's correct. 501 MR. WARREN: As I understand the historic record, and I'm not sure anything turns on the precision of this, but in EBRO-495 in 1997, an LRAM was authorized in order to keep Enbridge whole with respect to the lost revenue. Is that consistent with your recollection, Ms. Squires? 502 MS. SQUIRES: Yes, it is. 503 MR. WARREN: And in that decision, in EBRO-495 in 1997, an SSM or some variation on an incentive scheme was proposed, and the Board ruled that it was not prepared to accept it at that time. Is that consistent with your recollection? 504 MS. SQUIRES: I wasn't personally involved, but according to my review of the historical record, that's correct. 505 MR. WARREN: The SSM came into existence as a result of an ADR agreement and the EBRO-497-01 decision; correct? 506 MS. SQUIRES: Yes. 507 MR. WARREN: And as I read your prefiled evidence, and you don't need to turn it up on this, but I'm using your language, the introduction of SSM resulted in dramatic changes in the way DSM was developed, planned, and monitored; is that fair? 508 MS. SQUIRES: I'm sorry, I would like to see that reference. 509 MR. WARREN: Sure. If you could turn up Exhibit A.7 tab 1, schedule 1. 510 MS. SQUIRES: Do you have a page number? 511 MR. WARREN: You're ahead of me. I will get to that. 512 I don't want to mislead you on this point, Ms. Squires, so with the Board's permission, I'm going to find out exactly where the reference is. 513 Can I turn you to page 5 of 14. Paragraph 14 says: "Since the SSM's implemented the role and function, the DSM consultative has changed" - and that's where I get the word - "dramatically." 514 Now, elsewhere in this prefiled evidence you talk about the role of the consultative in terms of developing targets, in terms of planning the DSM annually and in terms of monitoring and auditing, and so can I conclude that the introduction of SSM has had a dramatic effect on all of those functions of the DSM program? 515 MS. SQUIRES: I think that's a fair statement. 516 MR. WARREN: Now, am I right in understanding that the consultative participates in setting targets and in monitoring an evaluation and in auditing; is that fair? 517 MS. SQUIRES: In general terms, yes. 518 MR. WARREN: And you make a complaint, and the complaint -- that's my word, "complaint"; it's a gloss on your testimony. But if I look at Exhibit A.7, tab 1, schedule 1, pages 4 and 5, you make the observation, for example, on paragraph 16 that: 519 "Over the last few years the DSM consultative group has evolved into a decision-making body focussed on the details of program tracking and evaluation, with participation effectively limited to a small subset of the larger group due to the highly analytical nature of the work they're involved in." 520 And then you say in the next sentence: 521 "Evaluation decisions and decisions related to the independent audit have effectively been removed from the hands of the company and placed under the direction of the subcommittee of the large group." 522 Now, can I fairly conclude that the company is not happy with that development, that those functions have been removed from its control; is that fair? 523 MS. SQUIRES: Yes, that's fair. 524 MR. WARREN: Okay. Now, as I understand your prefiled evidence, these changes in the DSM -- in the way DSM is planned, monitored, audited, so on and so forth, resulted from the ADR agreement in EBRO-497-01. We have agreed on that, and there have been adjustments to the planning and auditing which have been -- which have resulted from ADR agreements subsequent to 497-01; is that right? 525 MS. SQUIRES: Yes. And I think it's important to clarify that the changes that have been articulated in our prefiled evidence are not changes that occurred overnight, they have been gradual. And in many ways Enbridge went into this whole process of the SSM with all the best intentions of continuing to work cooperatively with the consultative group and essentially giving that process the benefit of the doubt all this time. But it has, unfortunately, come to a point where we wanted to make some changes. 526 MR. WARREN: Ms. Squires, you are being apologetic and defensive long before you ever need to be. 527 MS. SQUIRES: Okay. 528 MR. WARREN: The only point I wanted to make, Ms. Squires, to see if I understand it, is that these changes have taken place, as I understand your prefiled evidence, have taken place from the -- largely from the introduction of the SSM in 497-01, and that from that time forward, the DSM program has never been considered by the Board in a contested proceedings; correct? 529 MS. SQUIRES: That's correct. 530 MR. WARREN: Now, the third area I'd like to deal with is to deal with the principal features, operational features if you wish, of the planning, design and monitoring of DSM. 531 Am I right, Ms. Squires and Mr. Ryckman, that Enbridge - correct me if I'm wrong on this - that Enbridge annually develops the major components of the DSM plan, including the O&M budget, the targeted savings, and the features of the SSM. That's Enbridge's function annually. 532 MS. SQUIRES: I would agree with all of that except for the function of the SSM. We don't determine that unilaterally on an annual basis. 533 MR. WARREN: I wasn't suggesting any of this was unilateral. But in terms of the first cut, if you wish, of the DSM program in terms of targets, in terms of targeted savings, O&M expenditures, any changes to the O&M, that's all done by you first; is that fair? 534 MS. SQUIRES: Yes. 535 MR. WARREN: And then it is reviewed by the consultative; is that correct? 536 MS. SQUIRES: Yes. 537 MR. WARREN: And in that context, if you could turn up your prefiled evidence, if you can turn up your prefiled evidence at Exhibit A.7, tab 1, schedule 1 at page 3. And if I look at paragraph 9, you observe, beginning in the middle of that: 538 "Volumetric budgets have traditionally been set with the input of the DSM consultative group whose objective is, at least in part, to present the interests of ratepayers and therefore there is pressure to keep increasing budgets and to minimize the cost to ratepayers who fund the incentive." 539 Do I read that sentence correctly, that at the end of the day the volumetric budgets are, in effect, negotiated in the consultative? 540 MS. SQUIRES: There are efforts to negotiate the volumetric budget and target in the consulting process; however, it's not always the case that a consensus is reached in that process. 541 MR. WARREN: I didn't say successfully negotiated, Ms. Squires. I just said they are negotiated in the consultative; is that correct? 542 MS. SQUIRES: That's correct. 543 MR. WARREN: I suppose an additional layer on it. To the extent that they are not successfully negotiated in the consultative, they are then subject to negotiation in the ADR process; correct? 544 MS. SQUIRES: that's correct. 545 MR. WARREN: Certainly from EBRO-497 forward you've been successful, I guess with the exception of what we've talked about over the last two days, in negotiating, for example, volume targets and O&M budget. 546 MS. SQUIRES: In either the consultative or the ADR, that's correct. 547 MR. WARREN: Now, can I -- have I read your prefiled evidence, and the context for this is Exhibit A.7, tab 7, schedule 1, page 8. The text I want to refer to is paragraph 23, beginning on the second sentence: 548 "However, the company also recognizes that a continued increase in volumetric budgets is unsustainable, and the existing consultative negotiated target-setting practice is inappropriate as it will continue to force targets upwards. The company proposes that future targets should be set on the basis of a fair, sustainable level of DSM activity backed by supporting market information and a survey of DSM activity by other utilities as a benchmark for performance." 549 Now that is - and we will return to this point later - that observation is consistent with an observation made by your consultant who reviewed, among other things, the DSM processes; is that fair? 550 MS. SQUIRES: Yes. 551 MR. WARREN: And do I read that text correctly that Enbridge wants, in the future, the volumetric targets to be backed by supporting information, if you wish, external reference points that allow you some guidance as to what's happening in the marketplace; is that fair? 552 MS. SQUIRES: Yes. 553 MR. WARREN: And may I conclude by a step of logic that one of the problems with the existing system is that -- is the absence of that data and absence of reference points to external information; is that fair? 554 MS. SQUIRES: Yes. 555 MR. WARREN: Does it follow then that the negotiation process within the consultative, it reflects the pressures that are brought to bear by the various interest represented in the consultative, but it doesn't have reference to external information; fair? 556 MS. SQUIRES: In most cases, that's correct. 557 MR. WARREN: Okay. 558 Now, just before I turn to the actual operation -- sorry, I want to turn to one other thing. 559 Your prefiled evidence also talks about the auditing function. Now, the auditing function is a -- has been developed, as I understand it, as a result of the existence of the -- principally of the SSM but also to a lesser extent the LRAM; is that fair? 560 MS. SQUIRES: Yes, that's fair. 561 MR. WARREN: And it was a result of a desire on the part of participants in the consultative to have some external, if you wish, measurement or review of the accuracy of the information in order to ensure that the SSM and to a lesser extent the LRAM, were fair; is that reasonable? 562 MS. SQUIRES: Yes. 563 MR. WARREN: Now, the objective of the consultative as I understand it is to reach a consensus on all of the main components of the DSM plan, including the targets and the budgets and the numbers for the LRAM and the SSM; is that fair? 564 MS. SQUIRES: Could you repeat that list again. 565 MR. WARREN: The objective of the consultative is to reach a consensus on what I describe as the main components of the DSM, which are the target, the budget, and the amounts in the SSM and the LRAM? 566 MS. SQUIRES: There are other objectives of the consultative group, but those items would be included, definitely. 567 MR. WARREN: One of the other objectives of the consultative, while we're at it? 568 MS. SQUIRES: I would characterize them as providing input and advice on matters of program delivery, on new DSM topics such as market transformation. We like to view it, and I think some of the parties certainly like to use it as an opportunity to network as well and to help staff find contacts in the industry that will help further our programs and so on. 569 MR. WARREN: The key concept I wanted to get at Ms. Squires, and I'm sorry if I was imprecise about it, is that the role and function of the DSM consultative has been -- has changed -- I'm going to suggest fundamentally from taking advice or consulting to being a decision-making body, isn't it? 570 MS. SQUIRES: That's our view of how it has evolved, yes. 571 MR. WARREN: And my reference there is Exhibit A.7, tab 1, schedule 1 in which you make the observation that in paragraph 14: 572 "Since the SSM wasn't implemented the role and function of the DSM consultative has changed dramatically." 573 The original function of the consultative was described in the EBRO-485 alternate dispute resolution agreement, I won't read it, but basically it's advice. We've gone from advice to what you say in the next paragraph is -- was to act as an advisory body to provide input. You say in 16 it's involved into a decision-making body; is that fair? 574 MS. SQUIRES: That's right. 575 MR. WARREN: Can I fairly characterize, Ms. Squires, the activities of the DSM consultative over the last couple of years as something that amounts to micro-managing of your DSM program; is that a fair observation on my part? 576 MS. SQUIRES: Yes, it is. 577 MR. WARREN: Okay. Now, what I'd like to turn to, then, Ms. Squires -- and Mr. Ryckman, I don't mean to exclude you from this exchange -- 578 MR. RYCKMAN: That's fine. 579 MR. WARREN: -- is I'd like to take a look at the operations of the consultative and the audit committee as they actually worked out an -- exhibit -- sorry, in 2001, 2002. 580 Now, in this context, if you could turn up, please, your interrogatory response to a question that was posed by my friend Mr. MacOdrum's client the Canadian Manufacturers & Exporters and the interrogatory number 168, and the reference, for the record, is at Exhibit I, tab 4, schedule 168. 581 MR. BETTS: What was the schedule again? 582 MR. WARREN: Exhibit I, tab 4, schedule 168. 583 MR. BETTS: 168. Thank you. 584 MR. WARREN: Do you have it, panel? 585 MS. SQUIRES: Yes. 586 MR. WARREN: Now, the CME's question, as I understand it, derived from an observation which is found in your prefiled evidence. Just for safety's sake perhaps we should also turn that up. 587 Panel, I'm not sure you need to turn it up, but it's in Exhibit A.7, tab 1, schedule 1, at paragraph 12, there's a sentence that says: 588 "Given the difficulty in achieving a consensus among the competing stakeholder interests, this has led to process delays." 589 Then at paragraph 17 it says: 590 "A further complication of the increased attention on evaluation and audit issues is that, from the perspective of the company's resource allocation, it has come about at the expense of program design and development efforts." 591 Now, the CME then asked you some questions about what had you meant by those observations, and the reference in the first response is to the 2000 evaluation report. 592 And before I go any further, can you describe for me, please, what the 2000 evaluation report is and what it was intended to cover? 593 MS. SQUIRES: The 2000 evaluation report is a summary of all of the results of the DSM programs that were delivered in the year fiscal 2000 and a summary of the resulting SSM claim and LRAM claim by the company. 594 MR. WARREN: So that's for the year 2000? 595 MS. SQUIRES: Yes. 596 MR. WARREN: And it was completed and released by Enbridge on December 31, 2001. I'm just reading from the answer, and it would have covered what period, chronologically? 597 MS. SQUIRES: October 1st of '99 to September 30th, 2000. 598 MR. WARREN: So it was about -- the report was delivered about 15 months after the end of the period we're dealing with; is that correct? 599 MS. SQUIRES: That's correct. 600 MR. WARREN: Now, the sentence next in the answer says: 601 "Delays in completing the evaluation report were occasioned by a redirection of Enbridge staff resources to data and analysis requests, primarily related to the setting of the 2002 DSM target from the DSM consultative resulting from five DSM consultative meetings between March and November of 2001." 602 Can you tell me, Ms. Squires, what are the requests that are being referred to in that answer? 603 MS. SQUIRES: I should first indicate that I wasn't personally present during that part of the year. I was on leave from the company; however, I have read the record of that process, so I can speak from that. 604 My understanding of the requests were for -- is that they were for different scenarios of budgets and targets relating to the 2002 test year and through the consultative process, various intervenors asked DSM staff to try and model different combinations of programs and budget dollars in order to potentially find, I suppose, a compromise budget and target that would be agreeable to all parties. 605 MR. WARREN: Who were these questions made by? 606 MS. SQUIRES: I'm afraid I can't answer that question. 607 MR. WARREN: Do you know how many requests there were? 608 MS. SQUIRES: I don't have an exact number for you, but I do know that there were enough to prompt the scheduling of additional consultative meeting. We don't typically have five meetings in a period of about eight months. 609 MR. WARREN: Typically, how many meetings would you have? 610 MS. SQUIRES: We try to have about three or sometimes four per year; it's varied. 611 MR. WARREN: This is five meetings in a four-month period? 612 MS. SQUIRES: From March to November. 613 MR. WARREN: Given that there was a gravamen of a complaint here is that these requests for information occasion delays. I want to try and get a concrete sense that the nature of the information that was asked for, how much staff time it took to generate it, and what information was produced. Can you give the Board some sense of what we're talking about here? 614 MS. SQUIRES: Okay, I'll attempt to do so. 615 I would say that the requests largely had to be handled by and responded to my staff at Enbridge, which consisted at the time of two senior analysts and three analysts, and I'm sure there was some additional effort put in by the program, the marketing staff as well, but restricting my comments to my staff's work at the time, I would argue that they would probably have spent at least three-quarters if not 80 or 90 percent of their time during that period responding to requests related to the consultative group. 616 MR. WARREN: Can you just give me the numbers again; that's how many staff people? 617 MS. SQUIRES: Five within my department referred to as planning and evaluation. 618 MR. WARREN: Five staff people, and we're talking about a period of six months? 619 MS. SQUIRES: Eight months. 620 MR. WARREN: Eight months. And over that time 75 to 90 percent of their time was spent in responding to requests to information from the consultative; have I got that right? 621 MS. SQUIRES: Keeping in mind that I'm estimating these, I don't have figures behind them, but that's my understanding of the workload requirements at the time. 622 MR. WARREN: Just responding to that information intuitively, that seems like an awful lot of time, and does that take them from their ordinary duties? 623 MS. SQUIRES: Most definitely. 624 Well, I should clarify. Responding to requests from the consultative and working on scenarios for the budget and target are definitely a part of their normal duties, but certainly not to that degree. 625 MR. WARREN: And that resulted in a delay of the production of the evaluation report? 626 MS. SQUIRES: That's correct. 627 MR. WARREN: Now, was there ever ultimately any agreement on the evaluation report that was finally produced among the consultative group? 628 MS. SQUIRES: Yes, that's fair to say. 629 MR. WARREN: There was no agreement? 630 MS. SQUIRES: Well, I'm hesitating, because the agreement that was attempted to be reached was not specifically on the evaluation report itself but on the SSM claim that fell out of it. 631 MR. WARREN: And there was no agreement on that? 632 MS. SQUIRES: That's correct. 633 MR. WARREN: As we've seen in the last couple of days? 634 MS. SQUIRES: That's correct. 635 MR. WARREN: Okay. Now, is this the entire consultative that's making these requests for these scenarios and taking up all of its time or is it a part of the consultative? 636 MS. SQUIRES: It certainly wasn't the entire consultative but, again, I can't specify which parties. 637 MR. WARREN: Now, I'm presuming that these staff folks -- five staff folks don't work for nothing, they are paid for their efforts; is that correct? 638 MS. SQUIRES: That's correct. 639 MR. WARREN: The costs of that time was ultimately recovered in rates; is that fair? 640 MS. SQUIRES: Yes. 641 MR. WARREN: So the ratepayers of Enbridge are paying for the time; fair enough? 642 MS. SQUIRES: Yes. 643 MR. WARREN: Now, is that -- is the money that's paid for them to do that, a salary, is that part of the O&M budget or is it part of the -- is it part of the DSM budget, I'm sorry, or was it part of some other budget? 644 MS. SQUIRES: 75 percent of their expenses is allocated to the DSM budget. 75 percent of their salary and expenses. 645 MR. WARREN: Now, is it reasonable for me to conclude that that allocation of their time to respond to information -- sorry, this was information for budget scenarios for 2002? 646 MS. SQUIRES: Primarily 2002, but I believe there was some discussion in the earlier meetings about the budget and target for 2001, which had not been settled at that point earlier in the year. 647 MR. WARREN: Now, I ask this question: What was the relevance of that information to the function of the consultative? Why did the consultative need that information? 648 MS. SQUIRES: I would say that the consultative members wanted that information to help establish a budget and target that all parties could accept and live with. 649 MR. WARREN: So it was an attempt to reach consensus on the budget; is that right? 650 MS. SQUIRES: Yes. 651 MR. WARREN: I will return to that point a little bit later. 652 I want to return to this answer to Exhibit I, tab 4, schedule 168, because the next part of the answer talks about the audit subcommittee. This is on page 2 of 3, panel members. 653 Now, can you describe for me, Ms. Squires, before we get into this, what the audit subcommittee is. I know we heard some references to it in Mr. Rowan's testimony over the last couple of days, but in order for the record to be clear, what is the -- when was it created and was is its function? 654 MS. SQUIRES: The audit subcommittee was created -- I don't have the exact date, but it was created in anticipation of the fiscal 2000 audit process so, in other words, the audit subcommittee did not exist for the fiscal 1999 audit. 655 By my recollection, the purpose and the objective, as it was discussed in the larger DSM consultative group, was to help advise the audit process and to, I suppose, improve upon the audit of the prior year, keeping in mind that this was a new process for Enbridge. There really was no precedent for any of us to look to to understand how an audit of an evaluation report should really work. So I believe a consultative group felt that it would be helpful to have members of the consultative work with Enbridge in advising the auditor on the process of carrying out the audit. 656 MR. WARREN: So the timing of the creation of the audit subcommittee was when? When did it come into existence? 657 MS. SQUIRES: It would take me a few minutes to find the exact date, but I believe it would have been, perhaps, December, January -- perhaps December of 2000, January 2001, around that time frame. 658 MR. WARREN: And it's function was to take a look at the evaluation report for -- to oversee the audit of the evaluation report for 2000; is that right? 659 MS. SQUIRES: That's right, and the audit would be conducted by a third party. 660 MR. WARREN: Who was on the audit subcommittee? 661 MS. SQUIRES: Norm Rubin of Energy Probe, Malcolm Rowan of CME, and Chris Neme representing GEC, and one company representative. 662 MR. WARREN: Was there a protocol for the operation of the audit subcommittee? Did it have to achieve consensus or agreement on what it was doing? 663 MS. SQUIRES: There was no written protocol for the committee. There was a terms of reference for the auditor but not for the committee. 664 MR. WARREN: But was there understanding -- implicit understanding was that it had to achieve consensus? 665 MS. SQUIRES: I think that might have been one of the failings, in hindsight, was that perhaps the members of the audit subcommittee did not have a consistent understanding of what their objectives were. Some parties might have felt that they were to be playing a slightly different role than other parties might have thought, so I see that as a shortcoming in that process. 666 MR. WARREN: Now, if I take a look at your interrogatory response -- this is on page 2 of 3 of Exhibit I, tab 4, schedule 168 -- it says: 667 "From January 2002 to July 2002" -- a period of, can we agree, Ms. Squires, of roughly, let's say, six months -- "the audit subcommittee met 19 times with respect to the auditor's 2000 evaluation report." 668 Is that fair? 669 MS. SQUIRES: Yes. 670 MR. WARREN: That strikes me as an extraordinary number of meetings for anybody. The Legislature of Ontario doesn't meet that frequently. 671 MR. POCH: Not in the House, anyway. 672 MR. WARREN: Does that not seem an extraordinary number of meetings? 673 MS. SQUIRES: It does, and it did. 674 MR. WARREN: Is the happy news that after 19 meetings -- those weren't the only meetings. There were additional meetings after that, weren't there? 675 MS. SQUIRES: There were additional meetings after the end of July, but there might have been a couple prior to the beginning of January. 676 MR. WARREN: So it may be more than 19 times they met? 677 MS. SQUIRES: Yes. 678 MR. WARREN: Did they ever agree? 679 MS. SQUIRES: They certainly didn't agree on the ultimate numbers for the SSM. There might have been agreement on some smaller issues throughout that process, but the larger issue was never resolved by full agreement. 680 MR. WARREN: Now, carrying this forward to -- I want to try and measure success for all of this. 681 There was never agreement, notwithstanding in excess of 20 meetings of the audit subcommittee? We're agreed on that? 682 MS. SQUIRES: Never agreement on the SSM amount. 683 MR. WARREN: It ultimately went back, then it went back to the consultative; is that right, and on to the ADR; or just directly to the ADR? 684 MS. SQUIRES: It went directly to the ADR, which was in keeping with the RP-2000 settlement agreement. 685 MR. WARREN: Now, going back to the general consultative's function and all of these information requests with respect to the budget for 2002, was there ever an agreement out of the consultative on the budget for 2002? 686 MS. SQUIRES: No, there was not. 687 MR. WARREN: And when you got to the ADR in December of last year, 2002, I take it the record is clear that there was no agreement on the amount of SSM and the LRAM for fiscal 2000, fiscal 2001; correct? 688 MS. SQUIRES: There was a partial agreement. 689 MR. WARREN: Partial agreement. I apologize. 690 And has there ever been an agreement on -- where are we with respect to 2002 in terms of the SSM and the LRAM? 691 MS. SQUIRES: The company is in the final stages of preparing its 2002 evaluation report, so it has not yet been released in draft form to the consultative. 692 MR. WARREN: Now I'd like you to, just in the context of this record, the operations of the consultative, to turn up in your interrogatory response delivered by my client -- it's CAC interrogatory number 63, which for the record is Exhibit I, tab 2, schedule 63. 693 We'll just wait for the panel members. 694 MR. BETTS: Schedule... 695 MR. WARREN: Sixty-three, sir. 696 MR. BETTS: Sixty-three. 697 MR. WARREN: Now, in this interrogatory, the CAC asks you for intervenor costs for the DSM for each year since 1998, and if I look at the years -- I want to make sure I understand this data correctly. I want to focus on two years, 2001 and 2002, okay. 698 Now, the -- sorry, this was driven off, I should say to Ms. Squires and to panel members, the members of the Board, this was driven off an observation which appeared in your prefiled evidence that intervenor costs had tripled in recent years. Do you remember that reference, Ms. Squires? 699 MS. SQUIRES: I remember it, but I'd like to turn it up if you don't mind. 700 MR. WARREN: Not at all. Not at all. I should have had it at hand. 701 MR. DeROSE: If it is of assistance, it's Exhibit A.7, schedule 1, tab 1, page 5 of 14, paragraph 16. 702 MR. WARREN: Thanks, Mr. DeRose. 703 The final sentence in that paragraph 16 reads: 704 "Cost award claims from DSM consultative participants have more than tripled since 1999, primarily to fund increased intervenor costs for their participation in the evaluation of audit-related activities." 705 CAC's number 63 has driven off that observation and asked for the costs of intervenor participation in the consultative process, and the answer is set out on schedule 63. 706 And if I look at 2001 and 2002, roughly speaking, Ms. Squires, the total intervenor costs in that period were $126,000; is that correct 707 MS. SQUIRES: Yes. 708 MR. WARREN: And is it fair -- this is a crude production; please feel free to disagree with me -- but that seems to me to be $126,000 that was spent to not accomplish very much; is that fair? Please feel free to be ungenerous if you want. 709 MS. SQUIRES: I would say on the substantive issues that were at play in those years, there was no agreement. 710 MR. WARREN: Now, we asked for a further drilling down through those numbers in a subsequent interrogatory response, and that's interrogatory response number 109. 711 Mr. Chairman, it's Exhibit I, tab 2, schedule 109. 712 The further refinement that we were asking for, my client was asking for on that, was to try and get a sense of the breakdown of the consultative meeting costs and the audit subcommittee meeting costs. 713 If I look at the second column in your response, am I right that for the audit subcommittee in its failed attempt - those are my words - in evaluating the 2002 evaluation report cost about $53,000; is that right? 714 MS. SQUIRES: Yes, 53,000 is approximately correct. 715 MR. WARREN: And again, may I suggest to you that to use that phrase that is popular with one of the intervenors, though not necessarily with this one, you didn't get much value for money, did you? 716 MS. SQUIRES: In terms of reaching a consensus on the SSM amount, we did not get value for the money. 717 MR. WARREN: Now, I want to deal, then, with the question of how these cost claims are processed. 718 The participants in the consultative and in the audit subcommittee, they file invoices with Enbridge following their participation; is that right? 719 MS. SQUIRES: That's correct. 720 MR. WARREN: And Enbridge pays them? 721 MS. SQUIRES: Yes. 722 MR. WARREN: Did you refuse, during the period 2001 and 2002, to pay any of the cost claims? 723 MS. SQUIRES: No, we did not. 724 MR. WARREN: And those cost claims are ultimately recovered from the ratepayers; is that right? 725 MS. SQUIRES: That's correct. 726 MR. WARREN: I'm instructed or advised, Ms. Squires, and please correct me if I'm wrong, that included in the cost claims were claims for time spent rewriting the minutes of consultative meetings; is that right? 727 MS. SQUIRES: I would have to check to make sure. That is my recollection, but I would want to check to make sure that that's the case. 728 MR. WARREN: Can you give me an undertaking to advise me whether or not some portion of the cost claims for 2000, 2001 arising out of the consultative was for time spent rewriting the minutes of the consultative meetings? 729 MS. SQUIRES: Yes, I will. 730 MR. MORAN: Mr. Chairman, that will be Undertaking J.3.1. 731 MR. BETTS: Thank you. 732 UNDERTAKING NO. J.3.1: TO ADVISE WHETHER INCLUDED IN THE COST CLAIMS WERE CLAIMS FOR TIME SPENT REWRITING THE MINUTES OF CONSULTATIVE MEETINGS 733 MR. WARREN: Now, we spoke a few moments ago, Ms. Squires, about the -- and this is my adjective and not yours -- quite an extraordinary amount of time that was spent responding to information requests, and just a few moments ago about these cost claims. 734 Can you tell me, Ms. Squires, what is the obligation of Enbridge to respond to these information requests, particularly when they seem on the surface to be taking an extraordinary amount of staff time. Why are you doing it, or why did you do it? 735 MS. SQUIRES: Well, I would have to go back to the history and the roots of the DSM consultative process in that in the beginning, I think, all parties came to the process, as I indicated, I think, earlier in a sort of good-faith intent to try and reach a consensus and accommodate intervenor concerns and questions. 736 We did see benefits in that process, and we have seen benefits resulting from that process, certainly during the earlier years, the pre-SSM years of DSM. And as once the SSM was put in place, the company continued with the same assumptions about how that process would work, and continued to act in good faith in terms of accommodating the requests for information that arose from those meetings. 737 In terms of the company's obligation, it's only recently that we've actually turned back to the original intent of the consultative process as it was decided in EBRO-485 to refresh our memories and to try and refocus, perhaps, the Board's attention and intervenors' intention on what that original purpose was, because we feel now in hindsight that we have strayed from it. 738 MR. WARREN: That was my question. Having undertaken that review, does Enbridge now in retrospect feel -- first of all, to be fair, did it feel at the time that it was under a legal obligation to pay in an unquestioning way all of the cost claims that were filed? 739 MS. SQUIRES: I don't think I can answer that question. I mean, my -- I'd have to check. 740 MR. WARREN: Okay. Did you feel -- did you feel that there was an obligation deriving from the terms of the approved ADR agreements? 741 MS. SQUIRES: I don't think there was a conscious thought that we were under a legal obligation to do so. It was more -- it was done more from the spirit of trying to cooperate and make the process work. 742 MR. WARREN: Did you feel, Ms. Squires, that the members of the consultative and the audit subcommittee were participating in that process in good faith at all times? 743 MS. SQUIRES: In the earlier days in the pre-SSM years, I would say that was more the case than it has been recently. 744 MR. WARREN: Can I take it from your answer that post-SSM your feeling is, to some extent, some members of the consultative may not have been participating in good faith? 745 MS. SQUIRES: To the extent that some members might have been wanting to use that process to achieve certain results that were not for the -- I suppose, for the broader good, I would say that might be the case. 746 MR. WARREN: Now, Mr. Poch is worried that I may be obliquely referring to him. Mr. Poch always participated in good faith, didn't he? 747 MR. POCH: I wasn't referring to me, but I do think, since this is on the record, I would invite my friend, and I would invite the witness, if I may interject, Mr. Chairman, through you, just insofar as my client is concerned, I wanted to make sure to ask the question, Were the comments intended to -- with respect of participation of our representatives in that process? 748 MR. WARREN: Mr. Chairman, I want to make it clear for the record that I am not engaged to any extent in a witch hunt in this process. What I am engaged in is an attempt to determine what went wrong with the consultative, what went so evidently wrong with the consultative. And as a derivative of that whether the consultative presently constituted, or constituted in any way going down the road, can operate effectively and whether it can ever be made immune to bad-faith efforts to destroy it. So who did it is really irrelevant. 749 I want to ensure the Board I'm not engaged in this exercise. 750 Which leads me to the question: Is it fair to say, Ms. Squires, that whatever was going on in 2000 and 2001 and then into 2002, that the efforts of the DSM consultative were undermined and as a result were ineffective; is that fair? 751 MS. SQUIRES: Again, on the substantive issues, I think, the success of the consultative was compromised in that period. 752 MR. WARREN: Can I conclude reasonably, Ms. Squires, that this must have been immensely frustrating to Enbridge Gas Distribution? 753 MS. SQUIRES: Yes, it was. 754 MR. WARREN: Now, notwithstanding that it was frustrating, Ms. Squires, for the period 2001, 2002 you didn't propose any changes or bring it forward to the Board with suggestions that this process was cancerous and should be changed; is that fair? 755 MS. SQUIRES: Not in any formal proceedings. I do know that there was some discussion in the 2002 case about the broader idea about bringing DSM back before the Board -- the Board and to discuss changes to the overall DSM framework, which is what we have before us now. 756 MR. WARREN: Now, Ms. Squires, I'd like to turn, then, to your prefiled evidence and what you brought forward for the 2003 rate case, and if you would please turn up in that context, Exhibit A.7, tab 1, schedule 1. 757 And if I look at page 1, I see in paragraph 2, it says: 758 "The balance of Exhibit A.7, tab 1, schedule 1, contains an overview of the company's proposed new framework for DSM in 2003 and beyond." 759 So that prefiled evidence, that's a fair summary of what was going on and what is going on in the prefiled evidence. You're proposing a new framework for DSM; fair? 760 MS. SQUIRES: That's right. 761 MR. WARREN: Now, I'd like to take you through, then, some of the concerns which are articulated in this prefiled evidence about the current DSM framework, and if you could turn to page 3, looking at paragraph 9, you express a concern about the setting of volumetric targets in the following words: 762 "Volumetric targets have traditionally been set with the input of the DSM consultative group whose objective, at least in part, is to protect the interests of ratepayers and therefore there is pressure to keep increasing targets to minimize the potential costs to ratepayers who fund the incentive." 763 And then you say in the next paragraph: 764 "The outcome of this pressure is an upward spiral in targets which is not sustainable." 765 Correct? 766 MS. SQUIRES: That's correct. 767 MR. WARREN: Then if I go to the next page, page 4, you make the observation in paragraph 12: 768 "A negative consequence of this increased focus on evaluation and audit, however, is that ownership of evaluation and audit decisions is effectively moved from the company to the DSM consultative group and/or the audit subcommittee. Given the difficulty in achieving consensus among the competing stakeholder interests, this has led to process delays." 769 Correct? 770 MS. SQUIRES: Yes. 771 MR. WARREN: You then say, if I can go to page 5 of your prefiled evidence, you say that: 772 "The DSM consultative" -- I'm looking at paragraph 16 -- "over the last few years the DSM consultative has evolved into a decision-making body, focusing on the details of program tracking and evaluation with participation effectively limited to a small subset of the larger group. Due to the highly analytical nature of the work they're involved in, evaluation decisions and decisions related to the independent audit have effectively been removed from the hands of the company and been placed under the direction of the subcommittee of the larger group. The original group's original, valuable function as an advisory body to advance program design and delivery concepts has been all but lost." 773 Then you make the observation about cost awards. And I take it I can understand, or the Board can understand what you say in paragraph 16 is a complaint from the company about the existing DSM structure. It requires changes; fair? 774 MS. SQUIRES: Yes. 775 MR. WARREN: And if I look, then, at paragraph 8 -- sorry, page 8 of the prefiled evidence. Paragraph 23: 776 "However the company also recognizes that a continue increase in volumetric targets is unsustainable and the existing consultative-negotiated target-setting practices is inappropriate as it will continue to force targets upwards." 777 Correct? 778 MS. SQUIRES: Yes. 779 MR. WARREN: Now, to some extent, these observations in here reflect the conclusions of a consultant that was retained to review improvements in the DSM framework; is that fair? 780 MS. SQUIRES: Actually, no; I would say the conclusions were reached by us. The consultants were retained to help us decide what to do about it. 781 MR. WARREN: In that context, I would invite you to turn to the consultants' report, Exhibit A.7, tab 2, schedule 1, it's a documented entitled improvements to the DSM framework. It's by somebody called IndEco. Have I pronounced that correctly? 782 MS. SQUIRES: IndEco. 783 MR. WARREN: It's not one of Heather's picks? Sorry, bad pun. 784 I just want to review some of the observations that are found in it in Exhibit A.7, tab 2, schedule 1 at page 4, the observation appears at the top of the page under section 2.1: 785 "DSM budgets and targets are negotiated with stakeholders through the consultative and then again through the ADR process." 786 Do you agree with that observation? 787 MS. SQUIRES: Yes. 788 MR. WARREN: "In many cases there is limited reliable, accurate end-use data on how energy is used." 789 Do you agree with that observation? 790 MS. SQUIRES: Yes. 791 MR. WARREN: Often the ability to estimate the likely effect of the changes is constrained by lack of knowledge about activity patterns existing in new technology and other factors." Do you agree with that observation? 792 MS. SQUIRES: Yes. 793 MR. WARREN: And then beginning of the next paragraph: 794 "Enbridge staff feels the target- and budget-setting process is troublesome and non-sustainable." 795 Is that a fair representation of what Enbridge staff feels? 796 MS. SQUIRES: Yes. 797 MR. WARREN: Including you? 798 MS. SQUIRES: Yes. 799 MR. WARREN: then on page 4 of that report. I'm sorry, I'm on the same page. Page 8; can't read my own writing. 800 Section 3.1, the second paragraph: 801 "Enbridge finds the current evaluation process, complex, time-consuming and cumbersome." 802 Do you agree with that observation? 803 MS. SQUIRES: I do, but I just -- on reading it more closely, I'm realizing that the term "evaluation process" is meant to encompass the whole evaluation and audit process. 804 MR. WARREN: Fair enough. With that gloss, do you agree with that observation? 805 MS. SQUIRES: Yes, I do. 806 MR. WARREN: Okay. Then the final sentence in that paragraph: "Staff," -- I presume that's staff of Enbridge -- "is keen to find ways to simplify the evaluation and audit processes." Do you agree with that observation? 807 MS. SQUIRES: Yes. 808 MR. WARREN: Then on page 10, it says, in the first paragraph: 809 "The once collegial consensus-building process that focussed on program design has become more adversarial as the focus has shifted towards the evaluation of audit processes." 810 Do you agree with that observation? 811 MS. SQUIRES: I'm sorry, I'm just having trouble finding that. 812 MR. WARREN: Section 4.1, first paragraph, last sentence. 813 MS. SQUIRES: Yes, I'd agree with that. 814 MR. WARREN: Could I fairly characterize the atmosphere in the audit subcommittee as adversarial? 815 MS. SQUIRES: Not in the current audit subcommittee. 816 MR. WARREN: Sorry, the 2000, 2001 -- 2002 audit subcommittee, The group that functioned last year for 22 meetings and didn't come to an agreement. Could I characterize that atmosphere as adversarial? 817 MS. SQUIRES: In some situations, yes. 818 MR. WARREN: Then on the same page of this consultant's report, it says in the middle -- sorry, the second sentence: "However, the consultative has become a source of great frustration for Enbridge. This is because the consultative has become adversarial, bogged down in excessive detail and fails to provide the kinds of input on program design and selection that it did in the past. Further, the decisions of the consultative had fallen apart when they got to the ADR." 819 Do you agree with all of those observations? 820 MS. SQUIRES: I do, but I think perhaps I should take this opportunity to indicate that there have been aspects of the consultative process that have added value in the last few years. I don't want to leave the Board with the impression that there is no value to the consultative process and, in fact, the company is supportive of continuing a DSM consultative process. It's for some of the specific issues related to the audit and the SSM and budget and target setting that we have run into some difficulties, so I just want to be clear that we're not suggesting that we don't like the process and concept. 821 MR. WARREN: We're going to get to that in a minute, Ms. Squires, but is it not fair for us to conclude, reviewing what we reviewed in the last hour or so, that the consultative process and the audit subcommittee process have been an acrimonious failure in the last year and a half, that it's cost a lot of money and it hasn't achieved very much. Is that not fair? 822 MS. SQUIRES: I believe that's putting things in the extreme. I would agree with -- I would agree with it -- if I were to word it, I wouldn't word it quite so strongly. 823 MR. WARREN: Now, I'm going to presume, Ms. Squires, that you filed the prefiled evidence, including this evaluation report by IndEco, was filed because it accurately reflected the sentiments and views of Enbridge; is that fair? 824 MS. SQUIRES: Yes, it is. 825 MR. WARREN: Now, finally, in this sort of prequel to the ADR agreement that's before it today, I'd just like to turn to your prefiled evidence and take a look at some of the recommendations that are contained in that prefiled evidence. If you could turn up Exhibit A.7, tab 1, schedule 1, page 8. 826 Having observed what you observed about the setting of targets, you, in the middle of paragraph 23 say -- the top third of it: "The company proposes that future targets should be set on the basis of a fair and sustainable level of DSM activity backed by supporting market information and a survey of DSM utilities by other utilities as a benchmark of performance." 827 And what comes out of that is a recommendation at the bottom of the page that you commissioned some independent reports that will provide you with, looking at the first bullet item, "... results of other North American utilities to put the company's DSM performance in perspective and to help establish fair and sustainable level of DSM activity," and then "to commission a major study to develop formal end-use market information." That's your recommendation that was in your prefiled evidence, because you wanted, I take it, some objective evidence that would inform the development of targets for volumes and O&M budgets and so on and so forth; is that right? 828 MS. SQUIRES: That's correct. 829 MR. WARREN: Now, the other thing that you wanted to do, if I look at page 9, is that you wanted to change the terms of reference, or you wanted to create written terms of references in the set of standard operating procedures for the consultative, and I want to -- if you look at paragraph 25, the first bullet item and I underscore the following words, "Reinforce the role of the consultative as an advisory of the decision-making body." Is that fair? 830 MS. SQUIRES: Yes. 831 MR. WARREN: And the terms of reference and operating procedures were to be submitted to this Board for approval. How was that to be done, was there a consultative -- sorry, a Freudian slip -- a consultant who was going to come up with the new terms of reference? 832 MS. SQUIRES: At the time we wrote this evidence, it had not yet been decided exactly who and how they would be written. The budget for that item, or the proposed budget for that item, allowed for the possibility of hiring a consultant to do that work. 833 MR. WARREN: And you wanted, among other things, an independent facilitator who is going to run the consultative process; is that fair? 834 MS. SQUIRES: Yes, who was going to facilitate the consulting process. 835 MR. WARREN: Sorry, facilitate the consulting process. The poor beknighted fellow or person who gets that job deserves to be paid well, I presume. 836 Paragraph 28 on page 10, "The following proposals are made by the company to improve DSM evaluation processes," and you recommend standardized DSM evaluation policy and a standard audit protocol, both of which are to be approved by this Board; is that correct? 837 MS. SQUIRES: Yes. 838 MR. WARREN: Mr. Chairman, my apologies for taking so long on the prequel stuff. I'm about to turn to the ADR. Would this be a convenient time to break? 839 MR. BETTS: How long do you anticipate you would likely be on that subject? 840 MR. WARREN: Probably half an hour to 45 minutes. 841 MR. BETTS: I think, then, it would be an appropriate time to break. 842 We will aim for a little more than an hour. Perhaps if we could target at 1:15 for -- to reconvene. Is that satisfactory to everybody? 843 MR. O'LEARY: Did you say more than an hour or less than an hour, sir? 844 MR. BETTS: I meant more than an hour, did my addition not work out? That's not good. 1:45. That's better. I saw some chagrin amongst those out there. 845 We will stand adjourned and reconvene at 1:45. Thank you. 846 --- Luncheon recess taken at 12:33 p.m. 847 --- On resuming at 1:46 p.m. 848 MR. BETTS: Thank you, everybody. Please be seated. 849 Welcome back. When we left, Mr. Warren was part way through his cross-examination. And are there any preliminary matters that arose during the lunch break, first of all? 850 MR. O'LEARY: Just one preliminary matter that is, actually, just a response to an undertaking that was given yesterday, I believe. It's Undertaking No. J.1.1, and I'm advised that the undertaking that actually appears on the transcript was not in fact what was intended. And I'm not trying to track from the answer that's been given, but the purpose of the undertaking was to actually provide that portion of the application as filed, the allocation, how much of the original claim of 20.2 million would have been allocated to residential customers, not that portion which relates to the settlement proposal. 851 Is that correct? 852 MS. SQUIRES: That's correct. 853 MR. O'LEARY: With that qualification, I have some copies of the response to that undertaking. 854 MR. BETTS: Thank you. I don't recall myself which party requested that undertaking. 855 Mr. Warren, can you tell me whether that will -- you haven't had a chance to view it yet. Perhaps you can view it and see whether that satisfies your request. If you need time to consider it, I can certainly take your comments later as well. 856 MR. WARREN: No, I think it's fine, sir. 857 MR. BETTS: Thank you very much. Then we will accept that as completing that undertaking. 858 MR. SCHUCH: We need -- 859 MR. BETTS: I guess it's probably appropriate to remind everybody that anybody that might be providing either exhibits or undertakings to this group, even despite the fact that our requirements are ten copies, it would be very, very helpful if there were copies sufficient for all participants to receive one. 860 Are there any other preliminary matters? 861 Mr. Warren, please continue. 862 MR. WARREN: Mr. Chairman, just after we broke at lunch, Mr. O'Leary raised with me what I regard as an entirely legitimate concern, and that is asking this panel questions which go beyond section 9.1 of the ADR agreement. And it's an entirely legitimate concern and I want to avoid, to the extent I can, duplication. 863 My difficulty is this: I have a number of questions that deal, if you wish, broadly with the ADR agreement as a whole, with what it represents and how it was arrived at, and if I don't ask this panel the question, then I don't know whom to ask. And since the key members on the panel are the ones and the same who will be back in the next couple of days, it seems to me this would be a sensible time to do it. There aren't a lot of questions. And following that I have questions which are specific to the budget and target numbers, 9.1. I want to assure the Board members and Mr. O'Leary that I will, to the extent that I humanly can, avoid all duplication. 864 And I don't intend to repeat all the stuff I did this morning with every single panel that comes through. That was general background on all of the DSM issues. 865 MR. BETTS: I certainly sensed that was the direction, but I would certainly encourage Mr. O'Leary, if you feel as though it's gone too far to be comfortable, I'm sure you will let the Board know that. 866 MR. O'LEARY: Thank you, Mr. Chair. All my intentions were to remind Mr. Warren that we will be calling one further panel and that will be dealing with all of the issues from 9.2 through 9.5, and Ms. Squires and Mr. Ryckman will be members of that panel as well. 867 MR. BETTS: Thank you. 868 Thank you, Mr. Warren. Please continue. 869 MR. WARREN: Ms. Squires and Mr. Ryckman, I have just a few questions before I finally turn to 9.1. I just have a few questions about the ADR proposal generally. 870 Can we agree, Ms. Squires and Mr. Ryckman, that the ADR proposal in the form which has been presented to the Board was negotiated with a number, some portion of the representatives in the ADR process; is that fair? 871 MS. SQUIRES: I'm sorry, can you repeat the question. 872 MR. WARREN: The ADR agreement with respect to DSM represents a negotiated settlement arrived at through negotiations with some, but not all, of the parties to the ADR agreement; correct? 873 MS. SQUIRES: Yes, that's correct. 874 MR. WARREN: And would it be fair for me to say, Ms. Squires, that in effect this ADR proposal was negotiated with what amounts to a subgroup of the DSM consultative? 875 MS. SQUIRES: That's correct. 876 MR. WARREN: And can we agree that the ADR proposal does not include the major consumer groups, residential and commercial? 877 MS. SQUIRES: That's correct. 878 MR. WARREN: Now, Ms. Squires, to be fair to you, I want to put the following questions to you. 879 In the course of my cross-examination of you this morning, I took you through your prefiled evidence in which Enbridge - this is my word and not yours - complained about the negotiation of volume targets in the consultative; is that fair? 880 MS. SQUIRES: Yes. 881 MR. WARREN: And is it not fair to say that this ADR agreement represents the negotiation of a volume target with a subgroup of the consultative? 882 MS. SQUIRES: Yes. 883 MR. WARREN: So that you have done in this ADR agreement that which you complained about in your prefiled evidence; is that not fair? 884 MS. SQUIRES: Yes, although the budget and target that's included in the partial settlement, the company did not undertake a significant effort to try and establish those through the consultative process for the 2003 test year. 885 MR. WARREN: But the number that was arrived at and that is before the Board today is negotiated with a subgroup of the consultative? 886 MS. SQUIRES: Yes, it is. 887 MR. WARREN: Okay. 888 Now, one of the - again this is my word and not yours - complaints that's reflected in your prefiled evidence about the negotiation of volume targets is that has historically been done without reference to external data, and that you were proposing to have an outside consultant do some studies to generate the external data that would inform the development of your DSM targets; correct? 889 MS. SQUIRES: Enbridge brought to the negotiations some degree of knowledge of market data. We do have access to some of that type of information, but not to the degree to which we would like to have it, and therefore we would propose to do extended market surveys as you've indicated. 890 MR. WARREN: But my point -- there's no magic to it, Ms. Squires, that in negotiating the volume target, not only has it been done in the manner that you complained about in your prefiled evidence, but it's been done without the evidence which, in your prefiled evidence, you said was necessary, sorry, without the information, that full external data that you say you need. 891 MS. SQUIRES: I would agree that it has been done without the benefit of the full complement of market data that we would hope to have. 892 MR. WARREN: Now, if you would turn up, please, the ADR agreement on -- and, Mr. Chairman, this is Exhibit M.1, tab 1, schedule 1, and I'm going to refer the panel of witnesses to page 68. 893 Now, as I read it, this is in the section which deals with the SSM, and as I read the first full paragraph on page 68, it reads: 894 "There is partial agreement that the Board should hear evidence on this issue despite this settlement. The parties to this partial settlement agree to examine, through the DSM consultative, alternative shareholder incentive proposals for 2004 and beyond that may address market transformation, cost effectiveness, and administrative fees." 895 And let me express my surprise so that you can assure me that I'm not missing something, Ms. Squires, that you have agreed to do any negotiation of anything through the consultative in light of the critique of the consultative which is in your prefiled evidence. 896 Why would you do that, Ms. Squires, when you said in the prefiled evidence, you said, in effect - and these are my words, not yours - the consultative doesn't work? 897 MS. SQUIRES: We agreed to do this in the context of this partial settlement, because under issue 9.4, which is headed up "Review of the DSM Consultative Process," we've also included a mechanism by which we feel the consultative process will be significantly improved, and that process -- those improvements will allow us to more effectively discuss and negotiate things like the alternative to SSM formula. 898 MR. WARREN: And the mechanism or the rules of procedure for the operation of the DSM consultative; right? 899 MS. SQUIRES: That's what I'm referring to, yes. 900 MR. WARREN: Now, you, as a member of another panel, will discuss this and we will return to this when you're here on that panel, but I just want to be sure of your position; that notwithstanding the critique of the consultative in your prefiled evidence, it is your position that the problems with the consultative will be eliminated as a result of the operation of these rules of procedure? 901 MS. SQUIRES: If we get Board approval that the settlement should be accepted and therefore this protocol for the consultative is approved, then I feel confident that that process will work much more effectively. 902 MR. WARREN: And I have one final general question on the ADR and, again, it's a point of puzzlement; that is, if you look at page 73 of 93, Exhibit N.1, tab 1, schedule 1, page 73 of 93, under the heading "Purpose of Enbridge Gas Distribution's DSM Consultative," it says: 903 "The purpose of the DSM consultative is to (a) provide stakeholder advice to the company; and (b) to seek to achieve a consensus or a substantial consensus with respect to the following: The development and implementation of the company's DSM programs, DSM budgets and targets, DSM evaluation reports, and its LRAM and SSM claims, DSM shareholder incentive mechanism, and other DSM matters." 904 Now, that's what puzzles me and, again, I would invite your response to this, Ms. Squires, is that one of the things that your prefiled evidence complains about is the transformation of the consultative from an advisory body to a decision-making body, and inherent in the decision-making or reflective of the decision-making body is the need to achieve consensus or substantial consensus. But in the ADR agreement you're presenting to the Board, you're having the consultative do exactly the same thing that you complained about in the prefiled evidence. Am I right about that? 905 MS. SQUIRES: Not exactly. Perhaps I can characterize it for you. 906 As I said earlier, Enbridge is in support of continuing the consultative process. These rules of procedure try to underline the fact in the preamble that Enbridge is accountable to the Ontario Energy Board and that implies that Enbridge is the one that ultimately has to take responsibility for decisions. 907 We would like to reach consensus on as many matters as we can and we had every intention of trying to do so, or if not full consensus at least substantial consensus, and we go into the process with that intention. 908 Further on in the rules of procedure for the protocol, we indicate -- and I'm looking at the bottom of page 74 of that same section -- the last paragraph says: 909 "Given that the consultative is an advisory committee rather than a decision-making body, where a consensus or a substantial consensus on an issue cannot be achieved in a timely manner, the diverging points of view will be noted in the minutes." 910 And I continue: 911 "In absence of a consensus Enbridge Gas Distribution will take into account the participant's input in forming its decisions and defend its actions through the normal regulatory process." 912 So essentially that means if consensus or substantial consensus cannot be reached, Enbridge will make the ultimate decision on how to proceed and do so. 913 MR. WARREN: That's the state of play now, isn't it? Under the existing rules, this is before these new rules were to come into effect, Enbridge is ultimately responsible for making the decisions; correct? 914 MS. SQUIRES: I would put forward that there haven't been rules in place up until now, and I think that the parties in the consultative group probably had different understandings of whether in fact that was the case. 915 MR. WARREN: I don't want to step on your function as part of another panel, so I will return to that later. 916 I turn actually, finally, to issue 9.1, and I have just a handful of questions about the target numbers and the O&M budget. 917 With respect to the development of the target numbers, Ms. Squires, can you help me out with how those numbers were developed, what the process was for development of those numbers? 918 MS. SQUIRES: I can speak to it in a general sense, and I invite Ms. Hanlon and Ms. Clinesmith to jump in if they have extra detail to add. 919 The target, the volumetric target actually was not changed in the settlement from our original application. The number is different, but that's only because a different free-rider rate was applied to the custom projects. But essentially the same number of gross savings are in the settlement. 920 In terms of how it was arrived upon, each of the sector groups, if you will, the residential and the business markets, did a combination of looking at what historically has been achieved, factoring in what programs are reaching saturation and can no longer be counted on to deliver savings and looking at new concepts and new program development to areas where up-and-coming programs, if you will, can be added in. That's an overview of how far the target is landed on. 921 MR. WARREN: Now, one of the - again my word, not yours - complaints about the target-setting process historically has been the absence of a sufficient base of external information, and I'd like to ask the panel generally, to what extent are the targets that are in this budget, to what extent do they reflect a consideration of whatever programs the federal government may have in place to achieve compliance with the Kyoto targets? 922 MS. CLINESMITH: The business market has implications from the Kyoto in basically two different ways. Now Kyoto is not fully fleshed out and determined in the business markets as to what all the rules and requirements and procedures would be, but one of our programs, the design advisory panel -- the design advisory program works very closely in the design stage to encourage that buildings be designed to 25 percent below the model national energy code and therefore eligible to participate in the federal government's CBIP plan, Commercial Building Incentive Program, which was identified by name in the Kyoto project. 923 MR. WARREN: Any others, for example, with respect to work residential programs? 924 MS. HANLON: I can answer that. My example about -- giving a specific example of one of the programs, the high efficiency furnace program, we have managed to secure the million-dollar funding to help deliver more participants in that program, and that is reflected in our 2003 plan. 925 MR. WARREN: Ms. Hanlon, while we are on that subject, can you help me -- that million-dollar funding, is that or should it be reflected in the budget in some way? 926 MS. HANLON: It isn't reflected in the budget, but then the cost per participant isn't reflected either. We still show it as $100 per participant which is our share of the funding, so it could be reflected on both sides. It really wouldn't matter. 927 MR. WARREN: To what extent, panel, does the setting of the targets reflect the experience of other utilities in the province of Ontario, whether electric or natural gas? In other words, have there been consultation with any of the electric utilities or Union Gas with respect to the setting of the targets? 928 MS. HANLON: We work with Union Gas quite closely. In fact, the tank procurement program is a program we do jointly to make sure that we influence all tanks within the province. So we do work closely with them. 929 We also work closely with them on other program development. For instance, moving forward with the NRCan agreement, we want to see if we can get Union Gas to participate in that program in 2004, again, to influence all equipment going into the province. So definitely. 930 MR. WARREN: Other than those two ways, does the target reflect their experience in what they've been able to achieve with their programs, for example? 931 MS. HANLON: I can't say for my programs they would. I don't know exactly what their targets are. 932 MR. WARREN: And what about the electric utilities? 933 MS. HANLON: The only influence that we look at, the electric utilities, is more with response to their plans for water heating, because we see that as a risk to our load, whether it be from an energy efficiency standpoint, or just a load-retention standpoint. 934 So we do meet with -- or try to secure some information from them about what their plans are especially in the water heater market. 935 MR. WARREN: And I take it -- can I conclude that it doesn't reflect the experience of other North American utilities because that's something you won't study over the course of the year; is that right? 936 MS. SQUIRES: Correct. 937 MR. WARREN: Okay. Now, with respect to the achievement of targets and the setting of targets, we are partway through the 2003 fiscal year; is that correct? 938 MS. HANLON: Yes. 939 MS. SQUIRES: Yes. 940 MR. WARREN: And the targets that are in, the target that's in the ADR agreement, does that reflect actuals achieved today? 941 MS. SQUIRES: It does. When we were going through the settlement conference process and we were going through the different scenarios and different portfolio mixes of programs, we obviously had to consider how far we had come in a year and which programs we invested money in already, so yes, that was factored in. 942 MS. HANLON: If I could just add to that point, one of the things that we went through in order to meet that budget target was looking at programs that we could cut. 943 And one of the issues was that, for example, the Livingwise program, which is the most expensive program in the residential sector, which looks at helping schools deliver an energy efficiency program to Grades 4 and 5 anywhere within our franchise area, we would have cut that program because its expense, but unfortunately we negotiated with the school board in September for the next fiscal year, so unfortunately we had already committed to that funding. 944 MR. WARREN: With respect to the O&M budget, again, you are partway through the year, to what extent does the O&M budget reflect actual experiences and expenditures today? 945 MS. SQUIRES: I would give the same answer as I just did on the volumetric target. In fact, I think Ms. Hanlon's targets are more relevant to the dollars than the volumes. 946 MR. WARREN: Is there a breakdown of what you've spent or can we get a breakdown as to what you've spent on various programs to this point? 947 MS. SQUIRES: I don't have one, but we can provide one. 948 MR. WARREN: Can I get an undertaking to provide that? 949 MR. MORAN: That would be undertaking J.3.2, Mr. Chairman. 950 UNDERTAKING NO. J.3.2: TO PROVIDE BREAKDOWN OF EXPENDITURES FOR FIRST HALF OF THIS FISCAL YEAR 951 MS. SQUIRES: Just to clarify, you're looking for our expenditures in the first half of this fiscal year. 952 MR. WARREN: That's right. Whatever is convenient for you, Ms. Squires. 953 Those are my questions. Thank you, panel. 954 MR. BETTS: Thank you very much, Mr. Warren. 955 Could I just have an indication of those parties that would like to also have the opportunity to cross-examine this witness panel. 956 MS. LOTT: VECC is interested. 957 MR. BETTS: Ms. Lott. 958 MR. MacODRUM: Mr. Chairman, I also have some cross-examination. 959 MR. BETTS: Mr. MacOdrum. 960 Any other parties? 961 MR. DeROSE: Mr. Chairman, I'm just going to review my notes right now. I believe Mr. Warren has actually covered everything that I intended to cover, and if that's the case I won't have any cross-examination. But I will be quickly going through my notes right now. 962 MR. BETTS: Thank you. We'll check with you towards the end. 963 Are there any other parties? 964 MR. DINGWALL: It's conceivable that there may be a few questions, but I'll wait for other parties before determining that, sir. 965 MR. BETTS: Thank you, Mr. Dingwall. 966 MS. LOTT: I understand Mr. MacOdrum would like to go before me. 967 MR. BETTS: Mr. MacOdrum? 968 MR. MacODRUM: Thank you. 969 CROSS-EXAMINATION BY MR. MacODRUM: 970 MR. MacODRUM: Mr. Chairman, with some reluctance, I wanted to pursue an area that Mr. Warren covered this morning, but I will try to do it as succinctly and briefly as I can. 971 Ms. Squires, do I understand the position you've taken earlier this morning, and now just again with Mr. Warren, is that you don't agree with the proposition with respect to the -- either the audit committee or the consultative process that he who pays the piper calls the tune? 972 MS. SQUIRES: Can you word that another way for me, please. 973 MR. MacODRUM: Well, you don't agree that you have -- you can control the process because you control the purse strings? 974 MS. SQUIRES: My answer would be that we -- ultimately, I feel that that's true; however, that's not the perspective that we have taken to date in our dealings with the consultative and the audit. 975 MR. MacODRUM: The impression I gained from the frustration that you were sharing with Mr. Warren about the process is that you were just a victim of the circumstances; is that correct? 976 MS. SQUIRES: In some ways, I would -- I would say that we would take some responsibility for allowing the process to get to the point where it had. But, again, I would emphasize that Enbridge went through this giving the benefit of the doubt to the participants in the process, and wanting to see it through in good faith. 977 MR. MacODRUM: Now, Mr. Poch interjected in Mr. Warren's cross-examination, if I may say, on angel's wings. Was the Green Energy Coalition a member of the audit committee? 978 MS. SQUIRES: Yes, they were. 979 MR. MacODRUM: And in fact they were also a member of the consultative process? 980 MS. SQUIRES: Yes, they were. 981 MR. MacODRUM: And I just note, Mr. Chairman, that I think people are going to have to read the record of this morning's examination very carefully, because Mr. Warren jumped between the consultative and the audit committee several times, and it was certainly confusing to listen to and I'm sure certainly confusing to read. 982 But in any event, you spoke of a large number of information requests that took up, was it, 75 percent of your staff time? 983 MS. SQUIRES: Yes, I did. 984 MR. MacODRUM: And you weren't able to estimate for Mr. Warren exactly how many came from each participant, but would you agree with me that a large portion of those information requests came from what Mr. Warren described as the environmental groups? 985 MS. SQUIRES: I can't answer that question without reviewing the minutes of meetings and trying to clarify it. 986 MR. MacODRUM: Were not a large number of those information requests with respect to increasing the targets and suggestions for new programs and new expenditure ideas? 987 MS. SQUIRES: Again, because I wasn't personally present for those meetings, I would have to check the historical record to answer your question. 988 MR. MacODRUM: Well, could you do that, and let us know what the rough percentage breakdown of the information requests were? 989 MS. SQUIRES: I will certainly attempt to do that, but I should caution you that the minutes of all the consultative meetings may not allow me to definitively quantify how many came from which parties. They don't always reflect who asked for what. 990 MR. MacODRUM: You'll do the best you can? 991 MS. SQUIRES: I'll do the best I can. 992 MR. BETTS: Mr. MacOdrum, I think we will identify that as an undertaking. 993 MR. MORAN: That will be Undertaking J.3.3, Mr. Chairman. 994 MR. BETTS: Thank you. 995 UNDERTAKING NO. J.3.3: TO PROVIDE PERCENTAGE BREAKDOWN OF INFORMATION REQUESTS BY INTERVENORS 996 MR. MacODRUM: Now, panel, as we move on to some more detail of this thing, I hope you will bear with me if my terminology is not quite as precise as some of those who have been more immersed in this process than I have been over the past several years. But in talking about the shared savings mechanism, it's your testimony that Enbridge earns a higher return from the DSM programs than are allowed by the Board on its traditional business; is that correct? 997 MS. SQUIRES: Not exactly. We didn't -- I don't believe we used the word "return," and I wouldn't characterize our SSM incentive payments as a return in that way. 998 MR. MacODRUM: But at the end of the day, it produces a number which works out to a higher return on equity than your traditional business? 999 MS. SQUIRES: Again, I would say that the SSM payment cannot be characterized as a return on equity. 1000 MR. MacODRUM: Is DSM more profitable than your traditional business? 1001 MS. SQUIRES: I'm not trying to be difficult in answering your questions, but again, measures of profitability I don't think can be compared between DSM and traditional utility activity. And the reason why I say that is because traditionally utility activity is based on an investment in capital and that's how you typically calculate a return on equity; whereas DSM expenditures are not investments in the same way, they are operating -- O&M expenses, so you cannot calculate a return on equity in the same way. 1002 MR. MacODRUM: Mr. Warren used the term this morning of "bad faith." Now, is it your testimony that members of the audit committee acted in bad faith? 1003 MS. SQUIRES: No, it's not. 1004 MR. MacODRUM: Would you agree with me that what to one person may appear bad faith, to another person may be vigorous, thorough, and forceful inquiry and comment? 1005 MS. SQUIRES: That's possible. 1006 MR. MacODRUM: Would you turn to Exhibit 6.A, tab 6, page 5 of 8. 1007 MS. SQUIRES: I'm sorry, I'm not sure. Exhibit 6 -- 1008 MR. MacODRUM: I'll repeat it again. Exhibit 6.A, tab 6, and it's a schedule page 5 of 8. Exhibit A.6, tab 6, schedule page 5 of 8, updated. 1009 MR. RYCKMAN: Sorry, could you repeat that one more time. 1010 MR. MacODRUM: You bet. Updated 2002-12-18, Exhibit A.6, tab 6, schedule page 5 of 8. 1011 MR. RYCKMAN: Which schedule? 1012 MR. MacODRUM: It does not say. It's entitled "Table 1 - Opportunity Development Group." 1013 MR. MORAN: I believe it's schedule 1. 1014 MR. RYCKMAN: Okay. 1015 MR. MacODRUM: Do you have that? 1016 MR. RYCKMAN: Yes. 1017 MR. BETTS: Does everybody have that, then? 1018 Thank you. 1019 MR. MacODRUM: Could you explain to me why the line 8, there's a heading -- in fact, in line 7 it says, "Total DSM excluded"; line 8 says "DSM"; and line 9 says "Total DSM included." But there are no staff listed under line 8. 1020 MR. RYCKMAN: Yeah, essentially what's happening there is the planning and evaluation group is located under the opportunity development support, so the head count was included in that department so that it wasn't double-counted. 1021 MR. MacODRUM: Do DSM staff perform other functions than just DSM? 1022 MS. SQUIRES: They do and I've been using the term "DSM staff" somewhat loosely. I think in my earlier testimony today I indicated that Enbridge staff involved in DSM activity are also involved in other traditional utility work. So the answer to your question is yes. 1023 MR. MacODRUM: I believe the testimony was that 75 percent of your budget is charged to DSM and -- 1024 MS. SQUIRES: That's the case for my direct report specifically. 1025 MR. MacODRUM: What are the other activities that the DSM staff are engaged in? 1026 MS. SQUIRES: In terms of my group, the planning and evaluation group, the types of activities that they might be involved in and are involved in are helping the utility monitor, track, and evaluate non-DSM utility programs, such as load-growth opportunities and programs. 1027 MR. MacODRUM: And what about DSM staff who are not your direct reports? 1028 MS. CLINESMITH: I'll speak to that for my staff. Fifty percent of my staff's time is allocated to DSM, 50 percent to traditional utility growth activities. 1029 MR. MacODRUM: By "growth activities," do you mean sales and marketing? 1030 MS. CLINESMITH: Sales, marketing, education, retention. 1031 MS. HANLON: My staff is exactly the same as Ms. Clinesmith's. 1032 MR. MacODRUM: Are the opportunity development staff provided an incentive in their role as DSM promoters? 1033 MS. CLINESMITH: I could start to address that, if you would like. 1034 All opportunity development staff have targets that have to be met during the year; it's sort of a contract with the company that we will achieve certain things. And if those certain things are achieved, we then become eligible for success sharing with the entire company as a whole, based on our performance. 1035 But it's not specifically fragmented to say that you will get X for DSM, Y for retention, something else for this activity, and something else for that activity. 1036 MR. MacODRUM: So there's not a performance-pay formula that has a section in it that is allocated to DSM, the success of the DSM program? 1037 MS. CLINESMITH: Not from my group. 1038 MR. MacODRUM: Is that the same for all of you? 1039 MS. SQUIRES: That's correct. 1040 MR. MacODRUM: When you discussed free ridership in the business sector, you indicated there were difficulties in estimating it because of the multiplicity of contacts, the difficulty in identifying causal factors, whether educational programs or workshops, and also it was suggested that there may be difficulties in the candor of customers saying they would have done it anyways, because that might affect their eligibility for the program. 1041 Is that correct, that you have encountered significant difficulties in estimating the free ridership for business markets? 1042 MS. SQUIRES: The evaluation work that was done during the 2000 audit was really the first large-scale review and comprehensive review of free ridership that Enbridge has undertaken in recent years, so that's really the only experience that we have to speak from, plus the added experience we've more recently gained from our update to that work. 1043 So it's -- we've only really tried it two ways to date, so it's hard to generalize about the difficulties in measuring that. 1044 MR. MacODRUM: But one of your comments was that it could be affected by gaming by the customers; is that correct? 1045 MR. RYCKMAN: I think there's two things here. In terms of going through the sales cycle, certainly introducing complications to the sales cycle is a bit of an issue, and that is the salesperson isn't typically an auditor. That isn't to say we're not interested in free ridership; I think we are, and we will continue to look in that area. But it's challenging to come to grips with. 1046 To the extent that -- from the perspective that you would provide an incentive to some people and not to others I think is -- people talk within the industry. If they were to find out about those things, they might state their positions differently in terms of that was free ridership with that knowledge. And I think that was what the reference was to. 1047 MR. MacODRUM: So what you're really saying is the customer who wants the incentive isn't going to say they would have done it anyways without the incentive? 1048 MR. RYCKMAN: I think if you look at programs, and Susan can probably help me out here, but in terms of agriculture, for instance, where we will put on a forum for greenhouse owners and operators, some of those may adopt some of the measures and some may not. Some may have other influences that they are impacted by. 1049 So I don't think it's an easy thing to come to grips with, and it's still worth studying to find out what exactly is involved with it, but it's not an easy task. 1050 MR. MacODRUM: I was thinking more of the industrial and commercial markets where your salespeople are talking one on one with these people and holding out the possibility of an incentive to do DSM activity. 1051 There's really not an incentive for the customer to say they would have done it anyways without the incentive. 1052 MS. CLINESMITH: When you consider the business markets of the large industrial commercial projects, the amount of our incentive as a percentage of the cost to the company to install the equipment or to modify their behaviours is probably quite small. In terms of the maximum percentage any industrial plant can obtain is based on an M cubed that they save, but only up to $30,000 for the entire project. 1053 So if you have a plant that's spending hundreds of thousands of dollars on work, I'm not too sure that a $30,000 incentive is going to actually make them do what you had suggested. 1054 MR. MacODRUM: So what you're really saying is with the large industrial customer, some part of their decision is incentive based and some part of their decision may be, in effect, free rider based, the same customer decision. In other words -- 1055 MS. CLINESMITH: I would add another sector to that, and that part of the decision might be based on new knowledge gained by interaction with our Enbridge consultants. 1056 MR. MacODRUM: But to the extent that their decision -- they would have done the decision anyway, then the incentive is not that material, why should the company get credit for that volume, then? 1057 MS. SQUIRES: I would say it's exactly for the reason, that third category that Susan, Ms. Clinesmith, just mentioned, and that is the customer or the potential participant gains knowledge through their interaction with the sales representative and that sales representative is coming from Enbridge, so it is in many cases a direct result of the knowledge and education that that sales representative provides to the customer. 1058 MR. MacODRUM: Let's turn to that sales representative, and would that sales representative ever admit that it wasn't there efforts that closed the deal on the DSM incentives? 1059 MS. SQUIRES: I believe there are, sort of, orders of -- you could probably quantify the extent of the influence to some degree. In some cases they could say quite unequivocally that they are the sole reason why a customer made a decision; in other cases you might quantify their influence as being something less than 100 percent. So there's a range of influence. 1060 MR. MacODRUM: You might do that, Ms. Squires, but is a salesperson themselves likely to take much less than 100 percent of the credit for the sale? 1061 MS. SQUIRES: They do, in fact. And I guess I would also like to point out at this point that in no place does the company or any other party suggest that asking the sales representative would be the sole basis for establishing what the free-ridership rate should be. 1062 MR. MacODRUM: Do you think it's possible to get an accurate quantification of free ridership for business markets? 1063 MS. SQUIRES: I think that's very difficult to do. 1064 MR. MacODRUM: Very difficult. Do you think it's possible? 1065 MS. SQUIRES: In the best of circumstances, free rider -- free ridership is an estimate, so it can't be -- it can't be measured in the same way you can count the participants. 1066 MR. MacODRUM: But in business markets, with all these plays -- where the incentive only plays a partial role, the customer has an incentive to be less than candid -- there may be influences on the sales representative about what the -- that affect their perception of what the reasons are that the customer chose to go on the program. It really is impossible, isn't it, to get a quantification of free ridership in the business market? 1067 MS. SQUIRES: I would agree that it's very difficult to come up with a point estimate that you can say has 100 percent accuracy and that has, in fact, been I think a theme in our testimony so far, is that it's very difficult to measure. And for that reason, we want to use the information we glean from free-ridership evaluation on a go-forward basis to help educate and inform us in our program planning, rather than being specific about how it should or shouldn't impact an SSM claim. 1068 MR. MacODRUM: Would you turn to Exhibit N.1, tab 1, schedule 1, page 66 of 93, and I believe this is the settlement agreement. And I'm turning to the subject demand-side management variant account, DSM VA. 1069 Would you explain to me why the additional amount over the agreed DSM operating and maintenance budget is required; in other words, why the DSM VA is required? 1070 MS. SQUIRES: Yes, the purpose for the DSM VA is the same now as it has been since it first was put in place a few years ago - I can't remember exactly what year it started - and that is so that the company, in the delivery of its programs, if it finds that either programs have unanticipated take-up in the market, a greater take-up than expected, or that the costs for delivering a program were higher than originally budgeted, the DSM VA would allow the company to continue to deliver that program without having to abruptly halt it because they've hit the cap on their budget. 1071 MR. MacODRUM: Could you explain to me why the DSM VA, the 20 percent average should be applied to both fixed and variable costs rather than just the variable costs? 1072 MS. SQUIRES: Because those types of uncertainties in costs apply to both categories, to both variable and fixed, just as we -- in budgeting for certain studies or research or administrative costs, those costs can be different than budgeted. 1073 In particular, to the extent that programs may have unanticipated acceptance and take-up in the market, there is an administrative burden that comes along with that; and even those we've categorized as fixed costs, there is some relation to the success of the programs in those fixed costs. 1074 MR. MacODRUM: The fixed costs are variable too or have a variable component. 1075 MS. SQUIRES: To some degree yes. 1076 MR. MacODRUM: Could you sever out the variable component and determine what the true fixed portion is and then have 20 percent only apply to what is variable, truly variable? 1077 MS. SQUIRES: I don't think I could, and I'll add another reason why I think the DSM VA should apply to both fixed and variable. 1078 The other thing that needs to happen through the course of a year and in terms of delivering programs is that the company may need to make reallocations within its budget; meaning in order to fund further program take-up and incentive costs, they may choose that it's prudent to allocate some of what had been formally applied to fixed costs into variable to ensure that the program resources are available, or the reverse is also true. In certain circumstances, if we're undertaking evaluation which is seen as significantly important, or even with respect to the audit, as what happened in 2002, extra resources were needed for the auditor to complete the task, so the company had to find dollars within its budget to put to that from exercise. So that happens, that give and take happens, throughout the year. 1079 MR. MacODRUM: Did you, at one time, apply the DSM VA only to the variable component? 1080 MS. SQUIRES: Only for the 2002 fiscal year. That's the only situation. 1081 MR. MacODRUM: But you have done it? 1082 MS. SQUIRES: Yes. 1083 MR. MacODRUM: How is the 20 percent DSM VA of the total DSM O&M budget different from that that was in place in previous years? 1084 MS. SQUIRES: I'm sorry, are you asking how the DSM VA in the current settlement proposal is different? 1085 MR. MacODRUM: Yes. 1086 MS. SQUIRES: Well, there's a couple of ways in which it's different, and it might help for me to characterize what we've had since the beginning of the DSM VA. We had one DSM VA mechanism in place up to and including 2001, and that was a 20 percent variance allowed on the total DSM budget with no other constraints. 1087 And in 2002, and for only the 2002 test year, there were additional constraints added to the DSM VA, one of the them being the one that you mentioned, Mr. MacOdrum, the fact that it should only be applied to the variable cost component of the budget, and another constraint was added in in 2002 related to a requirement for the company to meet what we called a threshold volume before we could have access to the DSM VA, and I believe there was a third constraint related to a cap on the cost per cubic metre that we had to adhere to in order to be eligible to access the DSM VA. 1088 MR. MacODRUM: Could you turn to Exhibit N.1, tab 1, schedule 1, page 65. 1089 Do you have that? 1090 MS. SQUIRES: Yes. 1091 MR. BETTS: Yes, thank you. 1092 MR. MacODRUM: Turning to the third bullet, the 10.55 million, could you identify breakdown of that number in fixed and variable costs. 1093 MS. SQUIRES: I can't, with the information I have in front of me now. 1094 MR. MacODRUM: Could you undertake to provide it? 1095 MS. SQUIRES: Yes, I will. 1096 MR. MORAN: That will be Undertaking J.3.4. 1097 MR. BETTS: Thank you. 1098 UNDERTAKING NO. J.3.4: TO PROVIDE BREAKDOWN OF 10.55 MILLION FIGURE INTO FIXED AND VARIABLE COSTS 1099 MR. MacODRUM: Turning to the next bullet, the second sentence: 1100 "There is therefore an agreement that a budget of 300,000 is appropriate for this purpose." 1101 Would you explain in a little more detail just what is the purpose of enhanced DSM evaluation and tracking? What is the purpose of the 300,000? 1102 MS. SQUIRES: There's one key item in that 300,000 which is an item which we had originally planned to undertake during fiscal 2002, but due to resource constraints related to budget, as well as a redirection of employee efforts to other projects, we didn't do that, and that is an upgrading of the company's DSM program tracking system. 1103 So it's actually a system upgrade and a process upgrade to ensure that our tracking capabilities are capable of managing the huge volumes of data and program results that our programs generate. 1104 MR. MacODRUM: Ms. Squires, you indicated that you, or Enbridge, disagreed with the 49 percent free-rider level proposed for the business sector by the auditor in 2000; is that correct? 1105 MS. SQUIRES: Yes. 1106 MR. MacODRUM: And you said that your position was that 30 percent was more accurate because Enbridge's staff was more knowledgeable about the marketplace and the customers' intentions? 1107 MS. SQUIRES: That's not quite correct. 1108 With respect to fiscal year 2000, Enbridge's position is that the free-rider rate should remain at the budgeted 10 percent. For the purposes of the 2003 plan, we propose to use a 30 percent free-rider rate, because our augmented evaluation research that we've recently conducted has shown some preliminary findings that result in the 30 percent. 1109 MR. MacODRUM: So what you're saying is that for the 2003 you feel you know more than the auditor did when they did their audit report, you know more about the marketplace, you are more in touch with, through your sales personnel, the participants in the marketplace so that you're in a better position to estimate what the free-ridership level should be? 1110 MS. SQUIRES: In fact I do. Because the research that we've conducted carried out a very similar exercise than the auditor did in the 2000 work, but in addition to that, the current researcher also looked at the information that our sales representatives provided so that you could do -- you could integrate both sets of data and both sources of information to come up with a more realistic estimate of free riders. 1111 MR. MacODRUM: So of all the parties -- the auditor, the intervenors -- it's your position that Enbridge, through its staff and its superior knowledge of the marketplace, is in the best position to make determinations with respect to free ridership? 1112 MS. SQUIRES: I want to be clear that it's an independent evaluator that has carried out this recent research. It's not me or Enbridge staff. 1113 And to be clear, this independent evaluator has considered the knowledge of Enbridge staff as it relates to the historical relationship between Enbridge staff and the customers. 1114 MR. MacODRUM: So the independent evaluator got their data from Enbridge? 1115 MS. SQUIRES: Some of their data. They also got another part of their data from the customers themselves. 1116 MR. MacODRUM: Those are all my questions, Mr. Chairman. 1117 MR. BETTS: Thank you, Mr. MacOdrum. 1118 Ms. Lott. 1119 CROSS-EXAMINATION BY MS. LOTT: 1120 MS. LOTT: Thank you very much, Mr. Chair. 1121 My name is Sue Lott and I'm counsel with the Vulnerable Energy Consumers Coalition. 1122 Just by way of introduction, I just wanted to say that VECC does support, in principle, the concept of DSM. We only take issue around some of the issues around its mechanism and implementation with respect to our constituent group which is low-income, residential ratepayers. 1123 So I'm just going to be asking you a couple of questions and I'm just going to be making reference to the Exhibit N.1, tab 1, schedule 1, which is the settlement agreement of 2003, and Exhibit A, tab 3, schedule 1, which is the 2003 demand-side management plan, and Exhibit K.1.3, which is GEC's cross-examination materials. 1124 MR. BETTS: Could you run that list again. 1125 MS. LOTT: Exhibit N.1, tab 1, schedule 1, which is the 2003 settlement agreement; Exhibit A.7, tab 3, schedule 1, which is the 2003 demand-side management plan filed by Enbridge; and Exhibit K.1.3, which is GEC's cross-examination materials that were provided. 1126 MR. BETTS: Thank you. 1127 MS. LOTT: You'll forgive me as I don't know where to direct some of my questions as I'm not as familiar with the panel members as some of the other intervenors here. 1128 My first question is, Mr. O'Leary this morning made some reference to the amendment to the OEB Act in Bill 210, which makes changes with respect to the OEB's role with respect to energy efficiency, and the key difference in changing that objective from facilitate to promote. 1129 Would you agree that a logical inference from this is that the OEB should be more proactive with respect to providing regulatory direction on DSM rather than simply making sure that there is no impediment to DSM? 1130 MS. SQUIRES: Yes, I would. 1131 MS. LOTT: And perhaps, Ms. Hanlon, you might want to respond to this. I know, in your exchange with Mr. Warren, you talked a little bit about working with the electrical utilities. How important is it to work with the electric utilities if and when they become more active with respect to carrying out DSM programs, in your view? 1132 MS. HANLON: I think it's very important. As we've demonstrated in working with NRCan, we can influence customers more significantly with more parties involved. 1133 MS. LOTT: Do you think it would be more efficient if DSM programs were carried out collectively between the gas and electric utilities? 1134 MS. HANLON: Depending on the program, that could very well be the case. 1135 MS. LOTT: I wonder if you could maybe describe some ways in which there might be some of these efficiencies gained by collaborative effort. 1136 MS. HANLON: Well, if I take the home energy audit program, for example, having a collaborative effort behind that program and being able to really influence the customer more at the end of the day to make a decision to make some sort of retrofit to their home to improve the energy efficiency, from my perspective, the more people or more organizations that are at the table to help that customer, the bigger the chances are that the customer is going to implement some of those measures that are recommended from that audit process. 1137 MS. LOTT: Just if I could make reference to GEC's cross-examination materials, I just wanted to look at that page 2 of the table on DSM cost and benefits. 1138 Now, I recognize that Enbridge didn't prepare this, but I'm just interested in when you look down at the rate impact and across that O&M spending less system savings, I wonder if somebody could talk a bit about what that would consist of and what might be the scope of some of those savings? 1139 MS. SQUIRES: The O&M spending, of course, is essentially the DSM budget and that's shown up in the top section as $11.5 million, in the case of the 2003 partial settlement. 1140 System costs consist of transportation and storage type costs for the utility -- or, sorry, yeah -- well, system costs, system savings. Yeah, it's essentially the utility transportation and storage. 1141 MS. LOTT: Could you talk a little bit about the scope of some of those savings. 1142 MS. SQUIRES: I wouldn't be able to get into too much detail. For this information, I rely on the folks in our company in the gas -- gas supply and gas control part of the organization, but I can refer you to some of our evidence that includes a bit more background on how we calculate the system costs and savings. 1143 And that can be found in Exhibit A.7, tab 3, schedule 4, under a section called "Avoided Gas Costs." It goes into a bit of detail about what the system savings and costs are. 1144 MS. LOTT: Okay. Thank you very much. 1145 My last question, I just wanted to make reference to the partial settlement agreement, Exhibit N.1, tab 1, schedule 1, and I'm looking at page 65 of 93. And I'm interested in bullet 4 of that, which states that: 1146 "The fiscal 2000 audit process revealed the need for enhanced DSM evaluation tracking. There is their foreign agreement that a budget of 300,000 is appropriate for this purpose." 1147 My question simply is: Where is this amount reflected in table 2, which is the breakdown of fiscal 2003 O&M budget which is found in the Exhibit A.7, tab 3, schedule 1, which is the 2003 demand-side management plan, and that's on page 4 of 5. If you could just point me to where that is reflected. 1148 MS. SQUIRES: It's not reflected dollar for dollar; however, the project that I referred to, in answering Mr. MacOdrum's question about DSM system tracking upgrades, that's captured in line 25 under research services, and it's also embedded, to some degree, in line 24 in the consulting category. So there are other costs mixed in on that table 2, but that's where you would find the similar projects that we're intending to spend the money on. 1149 MS. LOTT: That's great. Thanks very much. 1150 Those are my questions. 1151 MR. BETTS: Thank you, Ms. Lott. 1152 Mr. DeRose, did you come up with any questions? 1153 MR. DeROSE: Yeah, Mr. Chairman, I've reviewed my note, and I hope that IGUA's absence of questions will not be deemed to be disinterest in this topic. Mr. Warren covered everything much better than I could, so we're satisfied with the record. 1154 MR. BETTS: Thank you. 1155 And Mr. Dingwall? 1156 MR. DINGWALL: Just a couple of general questions, if I may. 1157 CROSS-EXAMINATION BY MR. DINGWALL: 1158 MR. DINGWALL: Is it anticipated that during the coming year the customer bill will be continued to be used as an effective tool for the delivery and communication of DSM-related initiatives. 1159 MS. HANLON: As it pertains to the residential customer, I could say yes. 1160 MR. DINGWALL: What is the process for determining which of the various parties that have access to the customer bill will have access on any given month? 1161 MS. HANLON: I'm sorry, I couldn't answer that. I'll defer it to another panel. 1162 MR. DINGWALL: In context to the DSM-related activities, Ms. Hanlon, you're going to need to use the customer bill as an effective medium of communication; is that correct? 1163 MS. HANLON: Yes. 1164 MR. DINGWALL: Is there a process or a mechanism set up to determine which of the parties, Enbridge Gas Distribution and Centrica or Direct Energy Home Services, has access to the customer bill for the purpose of putting bill stuffers in each month? 1165 MS. HANLON: I don't know what that process is. 1166 MR. O'LEARY: Mr. Chair, I might suggest that some of these questions might be better put to the customer care panel which will be produced and I would suggest that those questions be repeated then. 1167 MR. BETTS: Mr. Dingwall, can your question wait for that point, or in rephrasing it, is there something that you can address to this panel? 1168 MR. DINGWALL: Well, I think the panel's answers will speak for themselves, and whether the questions need to be reiterated to another panel for better answers might give some context around this. But I would like to continue with just a couple more, sir. 1169 MR. BETTS: Okay. I'll allow that. 1170 MR. DINGWALL: In forecasting the DSM budget and in forecasting what the variances will be, is there any taking into account of whether there might be competing messages going in similar months by the sharer of billing service and how that might impact the delivery of these programs? 1171 MS. HANLON: I'm sorry, can you repeat the question. 1172 MR. DINGWALL: Certainly. 1173 In forecasting the effectiveness of the DSM programs, are you giving any thought - since that appears to be what this panel's job is - are you giving any thought as to whether the message might be hindered or taken away from, whether there might be additional free-rider concerns arising from any activities that might also be coming from the sharing of the bill? Are you taking that into account in your forecasts and in your true-ups? 1174 MS. HANLON: I can honestly say it's something I have never specifically considered in the past. 1175 MR. DINGWALL: Thank you. 1176 Those are my questions, sir. 1177 MR. BETTS: Thank you. 1178 Were there any other questions in cross-examination for these witnesses? 1179 Mr. Moran? 1180 MR. MORAN: Thank you, Mr. Chair. 1181 CROSS-EXAMINATION BY MR. MORAN: 1182 MR. MORAN: Ms. Hanlon and Ms. Clinesmith, I know you haven't been asked very many questions, I don't want you to feel left out so I have a couple of questions for you. 1183 MS. HANLON: It's okay. 1184 MR. MORAN: Let me start with you, Ms. Hanlon, on your side of the program. You made some reference to some of the technologies that are at play, thermostat set-backs, more efficient hot water heaters and furnaces and so on. I wonder if you could just provide the Board with a little bit more information about the scope of the technologies that your side of the program actually deals with. 1185 MS. HANLON: The focus tends to be on the marketplace versus the technology, so if, you know, we look at what is the fit for the residential and small-commercial market and then basically go and see if there's a fit for the more efficient technology, to again fit the market as opposed to the other way around. 1186 So one of the most interesting findings we discovered, I guess, early last year, for example, was the electronically commutated motor, which has significant electricity savings, and how we can fit that into our programs in order to encourage customers again to use less energy, and we've called that our enhanced high-efficiency furnace program, because really, it's a pilot just to really get that technology off the ground. 1187 And when we introduced that program, quite frankly, there was a lot of business partners that weren't even aware of that technology, and the fact that there is significant energy savings when coupled with a high-efficiency furnace. So the education around that is what's has been going on over the past few months to really educate business partners, who can then educate the customer and push it at that level. 1188 MR. MORAN: So when you say that your approach is market-based rather than technology-based, is what you're saying, you identify a market for more efficient or lower heating costs and then you try to find technologies that might deliver more efficient or lower heating costs? 1189 MS. HANLON: That could very possibly be the way, for example, again, the energy audit. 1190 The homes are the problem; the program is the solution, the technology for that particular, you know, energy issue. 1191 MR. MORAN: And given that it's -- your starting point is what's in the marketplace, you still have to figure out what the technologies are. 1192 How do your staff -- how do you keep you staff educated on what the various technologies are that are available out there, or do you have any program in place for education purposes? 1193 MS. HANLON: For the most part it's just keeping our eyes open in what's going on in the marketplace as best we can, but our most significant learnings really comes from the business partners, working with channels, working with various associations. 1194 When have introduced the advanced high efficiency furnace program, the concept, the first thing we did was went and met with all manufacturers to find out how they felt we could push this technology. So again, rather than us -- we're not the experts on selling furnaces, they are, so we relied on them for input and then designed the program around that. 1195 MR. MORAN: Would that be the kind of approach you would take when it comes to new building activities as well? For example, there are some technologies out there in terms of how you build houses, integrated concrete forms, structural insulated panels, those kinds of things, then you've got these things that you take into account and take to the trades. 1196 MS. HANLON: Absolutely, and that's how we -- we would do that again through the various associations, the Greater Toronto Home Builders' Association, the Ottawa Carlton Home Builders' Association. Those are really the critical allies to get to that audience that can ultimately make that decision to build a better home. 1197 MR. MORAN: How do you deal with sorts of inertia in an industry; for example, like home building, if they just want to keep on building, have two by fours and sticking insulation bats in between them, and there's a better of way of doing it. How do you deal with that kind of -- 1198 MS. HANLON: That's probably the best example about where we really have the research to figure -- how we really need the research to figure out how we go to market to really impact that marketplace because we know the potential there is huge. And Mr. Neme pointed that out about the windows and the fact that we could do so much with windows in new construction. Figuring out how to influence that market is really critical. 1199 One of the things the manufacturers told us when we met about BCM motor was don't go there when it comes to builders. They won't fork out that extra dollar to add that extra, you know, extremely efficient equipment, but they're not going to pay the price. You know, maybe a few years from now once we can almost make it standard in the retrofit market, but we've got a long way to go as far as the builder. 1200 MR. MORAN: Now, another place where efficiency is going to gain is as a result of regulations, and if there was an energy efficiency act and there are regulations promulgated, do you have any interplay with the Ministry with respect to proposals to amend various regulations or create new standards or to deal with the building code? 1201 MS. HANLON: Absolutely. We do that on an ongoing basis with the federal government very much so, and with the provincial government. The company has been doing lobbying since Bill 210 came to light. 1202 One of the disincentives right now to choose natural gas equipment is the fact that they've taken the provincial sales tax off Energy Star electric products where, in fact, a natural gas dryer and range are more efficient than the electric counterparts; but because they don't have the Energy Star rating, they're ineligible. So we've been lobbying the government to say, you know, you need to think about the natural gas counterpart, because that's probably the way to go versus pushing the more efficient electric product. 1203 MR. MORAN: And Energy Star being the program that's restricted to electricity-using products? 1204 MS. HANLON: Right. Well, not always. The high-efficiency furnaces have an Energy Star rating as well, but it's because they do have an electric component in the motor. 1205 MR. MORAN: Ms. Clinesmith, would it be fair to say that things might be a little bit different on your side of the fence given that you're more custom-solution oriented in your programs than on the other side of the fence? 1206 MS. CLINESMITH: Different to a degree, but very similar in many aspects in that we also like to work with associations to make sure that we get the right message, to make sure that we aren't missing anything. We like to work with the federal government, for example, in terms of their monitoring and targeting, that program I referred to earlier, in that they are very interested - this is Natural Resources Canada - in how we deliver the training and workshops on it and have recently come down to monitor our system of training so that they can incorporate it in other areas of the country. 1207 So, no, we do work very, very closely, although our custom projects are business solutions with a technology component. 1208 MR. MORAN: Right. 1209 How do you go about identifying those kinds of projects? Is it a question of you saying, Okay, I know that business X over here, they've got a lot of boilers, they're obviously using a lot of hot water. I can tell because they have a big gas bill. Do you take a proactive approach to customers like that to say: We have a program that we can do an audit, we can make recommendations; we have technological solutions to your high gas bill and your high energy usage? 1210 MS. CLINESMITH: We do take that approach, not to the degree that I think we should be taking the approach. This is one of the reasons that we have been talking about research and to get more information into the barriers and hurdles that various sectors within the business markets face on their daily business. 1211 But definitely if there is a new technology or improvement in insulation or a factor that can measure/monitor something, we do try to determine who can best benefit by them. 1212 MR. MORAN: Now, you work, unlike Ms. Hanlon, you work with a sales force, right, people that go out and make contacts with specific customers? 1213 MS. CLINESMITH: Yes, we also work with business partners outside of the company. 1214 MR. MORAN: All right. When you've got somebody who's in contact with a particular customer, because you want to design a particular customer solution, maybe you could explain or describe the kind of training that those people have with respect to their knowledge of the various technologies that are available to address a particular kind of problem. 1215 For example, somebody who uses a lot of hot water in their process or within their particular company. 1216 MS. CLINESMITH: Okay, there's a few ways to approach that. The energy service solutions consultants have a -- for the most part come from the company with a background in the practical applications of the technology. They have attended, or are attending regularly, courses on commercial and industrial technology developments as offered, say, for example, by GTI or any other recognized organization. 1217 We are members of the Energy Solutions Centre, which is an educational -- a consortium-based group that its main purpose is to commercialize and make more knowledge readily available on industrial and commercial applications, and it's a CD-rom based training system. 1218 We've developed what we call E-tools, which are energy tools for our consultants to use, sophisticated tools to help our customers evaluate it. When it is very, very technical and in terms very large, that's when independent consulting engineers are brought into the picture by our people. So ongoing education is important from every source. 1219 MR. MORAN: All right. 1220 Now, these salespeople, as I understand it, have two things that they're supposed to be doing; they're supposed to be considering the objective of load retention, load growth on one hand, and on the other hand, load reduction because of the DSM program. 1221 How does that decision-making process get managed in the context of making recommendations in a particular example? How do you handle what would appear to be an inherent conflict between competing objectives? 1222 MS. CLINESMITH: Actually, we prefer to call it a leverage, and leverage one off the other. An example of that would be an added-load program that's been piloted this year, converting propane forklifts to natural gas forklifts. 1223 By doing that, you have reduced -- you've improved indoor air quality to the extent that the make-up air and the ventilation air requirements of the warehouse or the factory might be able to be reduced. So that is a very small growth-oriented program that has a demand-side management component. 1224 MS. SQUIRES: Just to be clear, if I'm not mistaken, the forklift program isn't one of the DSM programs. 1225 MS. CLINESMITH: No, it's not. It's an added-load program. I'm sorry if I didn't make that clear. 1226 MR. MORAN: I think I understood that. 1227 MS. CLINESMITH: It's an added-load program that has a spillover benefit for the company. 1228 MR. MORAN: All right. And to take the example of hot water heating, just for the sake of discussion, if you had a simple technology like solar passive water heating, which is low tech and cheap to install, how would a recommendation like that, which is load reducing, get any play in the context of the advice that your salespeople would be giving to customers? 1229 MS. CLINESMITH: We have worked on an informal basis with the manufacturer of solar wall systems where if we identify or they identify the potential of a plant with a large-enough south facing wall that isn't shadowed over by another building, to put that onto the table. 1230 MR. MORAN: Thank you. 1231 I now have some questions on the other side of the panel. 1232 Mr. Warren has already explored with you, Ms. Squires, some of the costs associated with the consultative program and the audit subcommittee and so on, and there's a -- there's an interrogatory response, Exhibit I, tab 2, schedule 63 which sets out some of the intervenor costs of the DSM program. 1233 You have that? 1234 And just looking at the year 2002, there are costs set out for various parties there, and I was just wondering what the scope of those costs are. Are the costs of the ADR process included in those costs? 1235 MS. SQUIRES: No, I don't believe they are. Those are costs related to the consultative and audit subcommittee -- 1236 MR. MORAN: It's restricted to the consultative and audit subcommittee activities, but not the subsequent ADR process that dealt with the same issues. 1237 MS. SQUIRES: Yes. 1238 MR. MORAN: Are those costs available? 1239 MS. SQUIRES: I'm sorry? 1240 MR. MORAN: Do you have the amount of those costs available, the ADR costs? 1241 MS. SQUIRES: I don't. They are probably available within the company, but I'd have to check. 1242 MR. MORAN: Maybe I could just get an undertaking, then, for those costs. 1243 MR. O'LEARY: Can I just ask for clarification, Mr. Chair. Is Mr. Moran asking for the costs associated with this year's ADR -- 1244 MR. MORAN: No, last year. 1245 MR. O'LEARY: The 2002. 1246 MR. MORAN: The one just past, that gave rise to -- 1247 MR. O'LEARY: Presumably that would have been filed with the Board. 1248 MR. MORAN: It may well have been. I don't know if we've got all the costs information yet. I'm just wondering if that number is easily available, that's all. 1249 MS. SQUIRES: I personally don't have that information, so I would have to find out -- 1250 MR. MORAN: Just to be clear, I'm looking for the costs for the ADR that led to the partial settlement, which is now the subject of this hearing. 1251 MR. O'LEARY: You're talking about the DSM ADR that was held in December? 1252 MR. MORAN: Yes, the issue 9.6. 1253 MR. O'LEARY: I think that perhaps the best we could do is indicate we'll make inquiries to see if that is yet available. 1254 MR. POCH: Mr. Chairman, I can tell you that we were led to believe that those costs are to be included for the Board's consideration at the conclusion of this proceeding, they've been rolled into the 2002 proceeding. So I imagine most intervenors are in the position we are. We haven't filed those costs yet. 1255 MR. MORAN: That's fine, Mr. Chairman. I don't need the undertaking. 1256 MR. BETTS: Thank you for the clarification, and there won't be a necessity for that undertaking. 1257 MR. MORAN: The actual cost of carrying out the audit, is that available? 1258 MS. SQUIRES: I can get it for you. I don't have it at my fingertips. 1259 MR. MORAN: And while we're on costs, the costs for the reports that was prepared by Kai Millyard & Associates, the reconciliation report; do you have that available? 1260 MS. SQUIRES: I can make both of those available. 1261 MR. MORAN: Perhaps we can have that as an undertaking then, Mr. Chairman. That will be J.3.5. 1262 MR. BETTS: Could you describe that undertaking. 1263 MR. MORAN: The cost of the audit report and the reconciliation report. 1264 UNDERTAKING NO. J.3.5: TO PROVIDE COST OF AUDIT REPORT AND THE RECONCILIATION REPORT 1265 MR. BETTS: Thank you. 1266 MR. MORAN: Just while we're on the interrogatory response from CAC, Exhibit I, tab 2, schedule 63, do these costs include the costs of the 19 meetings that were referred to in another interrogatory response? 1267 MS. SQUIRES: Yes, they do. There's an asterisk beside the column headed by 2002, and if you look at the footnote there it says 2002 totals include costs of both consultative meetings and the audit subcommittee. 1268 MR. MORAN: All right. Thank you. 1269 When you were last -- on the last panel, Ms. Squires, we went over some evidence which indicated what the impact would have been to the SSM claimed if the 49 percent free-ridership number had been used up front and then, in the target as well as in the actual, and if I remember, it was just under 200,000. 1270 Dealing with the free ridership issue, it having been identified as the main part of the dispute here, is it possible to get an understanding of how much of these costs and your staff costs and so on would be dedicated to that issue, in a ballpark figure kind of way or percentage kind of way? 1271 MS. SQUIRES: I think it would be difficult and let me explain why. The free-rider issue for custom projects, in and of itself, there probably wasn't a huge amount of time spent on that specific question. The bulk of the time was spent on the more general question about how to apply new information. 1272 The discussions through the audit subcommittee, as I was a part of them, were more related to the general question of what happens when you get new information. And the answer to that question would have applied to that -- the custom project free rider and any other situation that might - might - have arisen in that context. 1273 MR. MORAN: I have just one last question, then. If you could just turn up Exhibit K.1.5. It's entitled Pollution Probe cross-examination reference book, and specifically at tab 3. Tab 3 contains an excerpt from the ADR agreement that was adopted in that proceeding, the RP-1999-0001 proceeding. 1274 Mr. Chair, you have the document? 1275 MR. BETTS: Yes. 1276 MR. MORAN: If you turn to the second page, just the page after the cover page, item number 6, DSM, at the bottom of the page there's a bullet point that talks about part of the settlement that was reached and it indicates that: 1277 "The value of the pivot point for the SSM formally for the test year is increased accordingly subject to subsequent adjustment in order to give effect to the variances if any between the forecast net benefits and actual net benefits", and there's some stuff in brackets, "that arise from variances in the following inputs and assumptions: Energy savings per measure, avoided costs, discount rates and measure lives." 1278 My question is whether it would, from your perspective, given your experience on the -- with the free-ridership issue as an example, whether it would be easier to deal with issues like that by adding free ridership to this list for automatic adjustment rather than to have the kind of debate, I guess, that's unfolded as a result of the audit report? 1279 MS. SQUIRES: Your suggestion, I believe, would be an improvement on the current situation; however, the company's position is, in fact, that for new information such as a new free-rider rate, that you don't make any retroactive changes, if you will, that you preserve those changes for the next available test year for which you can make a plan. 1280 So in other words, our preference and our proposal is that you do not make corrections in hindsight to any of these types of assumptions. 1281 MR. MORAN: All right. And so what you're suggesting is that the correction be made going forward? 1282 MS. SQUIRES: That's correct, with one exception. In the -- well, in this case, in looking at the reference you just read from, energy savings per measure, in the case of custom projects, that's treated as what we call a performance measure. We are trying to effect changes in the size of the projects and the number of cubic metres of gas that are saved, so we do treat that as an actual measure of our performance. So out of that list, that would be the one exception to the rule about only applying changes forward. 1283 MR. MORAN: Thank you very much, panel. 1284 MR. BETTS: Mr. O'Leary, if you would like to re-examine, and we will reserve the right to ask a few questions later; and if you need to clarify anything that has arisen from those questions, we will allow that as well. But if you will please proceed. 1285 MR. O'LEARY: Thank you, Mr. Chairman. We don't have any re-examination questions. 1286 MR. BETTS: Thank you. 1287 QUESTIONS FROM THE BOARD: 1288 MR. DOMINY: I just wanted a couple of clarifications. I was looking at Exhibit A.7, tab 1, schedule 1, page 11, and it's the reference to the electronically commutated motors paragraphs, and it says: 1289 "Energy savings targets will be set in energy units rather than cubic metres of natural gas." 1290 And I wanted to understand what that means. Does that mean, going forward in future, the energy savings that will be used in the calculation of SSM and other things will be energy units including electricity, or is it still natural gas volumes saved but on the basis of the calculations? 1291 MS. SQUIRES: The proposal is really to just change a reporting mechanism. It's not meant to change the way in which we undertake DSM. 1292 So if I heard your question correctly, we would still be pursuing gas savings, most definitely, and to the extent electric and water savings were also affected by our programs, we would express all of those together as an energy savings measure. 1293 MR. DOMINY: For what purpose, that's just to say how much energy you saved, but it doesn't enter into the calculation of LRAM and SSM? 1294 MS. SQUIRES: That's correct. 1295 MR. DOMINY: To what extent are these programs being pursued jointly with the electrical utilities for whom, obviously, this would be a benefit for any DSM activity they would be considering? 1296 MS. SQUIRES: Do you want to answer that? 1297 MS. HANLON: If you're talking about the ECM motors, I mentioned that we planned -- we're working on a plan right now in getting further funding from NRCan and including the ECM motor as a component of that and working with the provincial government, manufacturers and contractors to figure a way -- and associations to figure a way to really develop that product in the marketplace, because right now it has a very, very small saturation. 1298 MR. DOMINY: I have a sort of vague recollection of some time in the past where there was a number of government initiatives aimed at producing what I would call regional energy management plans, whatever you'd like to call them, where they would try to assemble, for instance, in a community, the municipal government, the local electric utility, and so on, Consumers Gas in certain areas, and to work out some strategies for more efficient energy use and energy management. Are any of those sorts of initiatives still underway? 1299 MS. HANLON: Sustainable Peterborough, for one, is one that I can think of right off the top of my head, and I think there's some more localized municipalities working on some issues. And I can't think, for the life of me, of the other -- the one big other. I bet Mr. Millyard would know them, but I just can't -- there are several different municipalities that are working on those sorts of initiatives. And anywhere we are, it's within our franchise, we are always at the table. 1300 MR. DOMINY: A simple question, and that's looking at J.1.1 and J.1.2, which are the interrogatory responses I think you provided, Ms. Squires, and I just wanted to understand them. 1301 And basically J.1.1, that shows the allocation and the benefits in the total resource cost tests. 1302 MS. SQUIRES: I'm sorry, could I have a moment to get a copy. My copies were handed out. 1303 I'm sorry, please continue. 1304 MR. DOMINY: As I understand that, that's the allocation of the benefits to the rate classes; is that correct? 1305 MS. SQUIRES: Are you referring to 1.1 or 1.2? 1306 MR. DOMINY: 1.1 and 1.2, I think they are both the same number, virtually. 1307 MS. SQUIRES: They are, actually, and 1.1 simply looks at -- is in addition, really, to 1.2 in that it looks at two years and sums them together. 1308 MR. DOMINY: And so this, in fact, shows that the benefits are 58 to the residential -- I can't remember the acronym that you were using for those types of classes. 1309 MS. SQUIRES: Mass markets. 1310 MR. DOMINY: Mass markets and 42 percent to the business markets or the other acronym you're using there. 1311 Now, that's different to the way in which the SSM is currently proposed to be recovered in the agreement, isn't it, because that was showed a larger proportion going to the mass markets and a smaller proportion going to the business markets; is that correct? 1312 MS. SQUIRES: Yes, it is. 1313 MR. DOMINY: And as I understand it, the statement had been that the SSM would be allocated based on the benefits -- the classes based on the benefits they received from it; is that correct? That was the thinking or the underlying principle. There have been a lot of discussion that there aren't any, but I think there was some principles about that in the original design of the SSM; is that correct? 1314 MS. SQUIRES: That is the methodology, yes. 1315 MR. DOMINY: That's a departure from that in the way it's being recovered -- supposed to be recovered? 1316 MS. SQUIRES: In a way, yes; in a way, no. And I'll try and explain my thinking. 1317 MR. DOMINY: Thank you. 1318 MS. SQUIRES: The fact is that, for the purposes of the settlement, we landed on a different total SSM amount which was based on a different total TRC amount. 1319 In looking at that different amount, the allocation followed the prescribed methodology. In other words, our starting point was a different number for the settlement and that's why the allocation resulted in a different percent split. 1320 MR. DOMINY: So would there be somewhere the number showing the different benefits allocation that underlies the settlement agreement? 1321 MS. SQUIRES: Well, I think that might be problematic to present that because -- I'm not sure how much I can say about the settlement discussions. But certainly from Enbridge's standpoint, the parties to that settlement agreement came to the number by different means, so you might get a different answer if you asked a different person as to what those shares of benefits should be. 1322 MR. DOMINY: I think I'll think about that. 1323 MS. SQUIRES: Yes, I'm not trying to be difficult in answering your question, but I'm trying to recognize the confidentiality of the settlement discussions. 1324 MR. DOMINY: I understand where you're coming from. I'll think about it. 1325 I just wanted to have an understanding -- Mr. Poch did me a favour by raising the concept of free drivers with you. And I also heard the discussion of spillover -- 1326 MS. SQUIRES: Yes. 1327 MR. DOMINY: -- and I was wondering, is spillover a broader term which includes free drivers? They are not the same, are they? Or are they? 1328 MS. SQUIRES: I'm thinking about the question. 1329 I think that I would characterize spillover as a general effect that would include free drivers, but if I had a discussion with somebody about it, I might be convinced otherwise. It depends how you define them. 1330 Free drivers, you would -- some organizations, some utilities have attempted to quantify free drivers and they look at them from the standpoint of a specific program. So, for example, high-efficiency furnaces, you might attempt to quantify the savings from free drivers of that particular program. 1331 However, spillover effects, I would characterize as a range of activities that result from the general promotion of DSM. Is that helpful? 1332 MR. DOMINY: I had my own thinking what it might be, but I think that helps me a bit. 1333 MS. SQUIRES: Okay. 1334 MR. DOMINY: The last point is you talk about going out to try and find examples or experience from other jurisdictions who will help you in looking at DSM plans, targets, et cetera, and I was wondering if you would give me some indication of -- we know Union Gas exists, but what were the other sorts of groups that you would be looking to try and find comparable information? 1335 MS. SQUIRES: Certainly, any other utilities in North America, and to the extent that information is available even outside North America, as long as it wasn't cost prohibitive to do so, we would be interested in looking at utilities that have similar circumstances to us in terms of the regulatory structure, in terms of the incentive structure, in terms of the market. We will never find another utility that matches on all those fronts, but I feel we have to widen the scope of the analysis to find parallels wherever we can. So our starting point would be to look at North American utilities. 1336 MR. DOMINY: We have heard -- there are complementary remarks about the degree of activity of Enbridge in DSM. I was wondering whether you had any understanding of the degree of Enbridge's involvement in DSM compared to that of other North American activities. Don't worry about Ontario, in other words, don't compare us with Union Gas, but against some of the other utilities. 1337 MS. SQUIRES: I don't think I can do a good job with that type of comparison, and that's why I'm really looking forward to doing that type of research. 1338 MR. DOMINY: Thank you very much, Ms. Squires. 1339 Thank you, Mr. Chairman. 1340 MR. BETTS: I have a few small or simple questions as well. 1341 There was one party that raised the question about incentives primarily to those people that are making the calls on your business customers and others in terms of achieving DSM objectives. I believe I took from the response that I don't believe there was any financial incentive related to that. Can anyone confirm that or do they have -- do you have knowledge of that? 1342 MS. CLINESMITH: Our internal salespeople are not on a commission basis. Is that -- 1343 MR. BETTS: That would be one form of financial incentive to achieve DSM objectives. Certainly, if you're not aware of any, that's fine, I'll accept that as an answer. 1344 MS. CLINESMITH: We do have, as I said, the success sharing where if a company does well during the year, there's the potentiality (sic) for a sum of money to be split amongst the employees depending upon the performance. 1345 MR. BETTS: That's in a very, very general sphere, isn't it? 1346 MS. CLINESMITH: Yes. 1347 MR. BETTS: Is anyone aware of any financial incentives for sales volumes for those same people that would be making calls for sales reductions or volume reductions? 1348 MS. CLINESMITH: Not on our internal staff. 1349 MR. BETTS: Thank you. That answers that clearly for me. 1350 A question about free ridership: Can you tell me what kind of a category this particular party would fall into, in other words, whether they would be a free rider or not a free rider; and that would be a business that would contact Enbridge and request a contact with your personnel to discuss a DSM initiative? Is that a free rider or not a free rider? 1351 MS. SQUIRES: I don't believe that is a free rider, but the ultimate answer to that question would not be known until a decision had been made about any activity that might fall out of that discussion. 1352 Simply by contacting the company to speak to a sales representative, that simply means, if nothing else, that the customer has been exposed to some of our promotional material or has heard through their industry contacts that Enbridge has a expertise in a certain area and perhaps they should call them and find out more about programs. To my mind, that doesn't define a free rider. 1353 MR. BETTS: Thank you. 1354 The final question related to the high-efficiency motor program that you're considering. Is this the first time that Enbridge has entered into that reduction of electricity as part of its DSM program? 1355 MS. HANLON: I don't know. We have a lot of programs that have an electricity component savings. The ECM motor program has been piloted as an enhanced high-efficiency furnace program; in other words, you have to get the high-efficiency natural gas furnace with the ECM motor to take advantage of the incentives. 1356 MR. BETTS: I see. So it's more or less associated with the high-efficiency furnace. 1357 MS. HANLON: Exactly. 1358 MR. BETTS: And not a direct approach to reductions. 1359 MS. HANLON: Exactly. 1360 MR. BETTS: And in terms of measuring or including that as one of the success factors in the DSM results, you talked about identifying the savings in terms of energy units. At some point, does that get converted to natural gas volume units? 1361 MS. SQUIRES: In fact, it happens in the reverse direction. Our starting point is to quantify the natural gas, the electric and water savings individually where they happen, and then to aggregate that information into a total energy savings, so the information will be available both ways. 1362 MR. BETTS: Then the question -- the next question is, is that -- it's the conversion of those numbers, those electricity energy numbers, into equivalent gas volume numbers or vice versa - I appreciate what you've just said - but it is the conversion factor. 1363 In converting it, would the company consider the pure conversion factors that relate to energy content of electricity versus natural gas, or does the company look at the cost of using natural gas as a fuel to produce electricity, or the volume of natural gas that would be required to produce that electrical unit? 1364 MS. SQUIRES: It's my understanding that we would approach it in the first way that you described, in terms of looking at the heat value of each energy form to convert it. 1365 MR. BETTS: And I guess the final part to that - I think that's great that everybody is thinking broader than their own fuel source - would this concept allow you to consider moving into other areas of energy conservation or other areas of electrical energy conservation? 1366 MS. SQUIRES: I believe that with -- with Board approval, that's certainly something that we would want to investigate, at a minimum. 1367 MR. BETTS: Okay. 1368 Thank you. Those are all my questions. Do you feel -- 1369 MR. O'LEARY: We have no questions arising out of the panel's. 1370 MR. BETTS: I think we still have a good part of the day left. 1371 Mr. O'Leary, is your next panel available? 1372 MR. O'LEARY: Yes, they are, sir. We would be pleased to proceed. 1373 MR. BETTS: I would like to thank these four witnesses very much. You certainly helped this Board member to understand the fundamentals better than when we started, anyway. 1374 MR. BETTS: We'll just take a five-minute break, just a stretch-your-legs break while the panel changes. 1375 [The witness panel is excused] 1376 --- Recess taken at 3:32 p.m. 1377 --- On resuming at 3:39 p.m. 1378 MR. BETTS: Please be seated, everyone. 1379 Before we proceed with this panel, the Board wanted to just make a point for the record. The Board understands that a former Board member is appearing in the next panel. That's Ms. Judith Simon. Good to see you. 1380 The Board is of the view -- well, first of all, Ms. Simon left the Board's involvement, I believe it was about a year ago. The Board is of the view that nothing should compromise the ability of the Board to fulfill the obligation to carry on its statutory functions in an impartial, unbiased and just manner. That's certainly for your interest well beyond the normally-accepted cooling off period, but again, in the interest of setting the record straight. 1381 Are there any comments from any participants on that particular item? 1382 With that, Mr. O'Leary. 1383 MR. O'LEARY: Mr. Chair, I take this opportunity to introduce the panel in its entirety, but Mr. Ryckman is going to rejoin -- and I trust there's no need for an explanation or introduction in respect to the first two members of this panel. But the new faces are joining us, in the middle we have Mr. Todd Williams, who's with Navigant; to his right is Mr. David Heeney, with IndEco; and to his right, as you know, is Ms. Judith Simon. 1384 As I indicated at the beginning today, this panel is going to present evidence and respond to questions from the Board and parties with respect to issues 9.2 through 9.5. We propose to proceed through those issues in a numeric fashion as set out in the proposed settlement proposal and the issues list. At the conclusion of the evidence in chief, we would suggest at that time that that's the appropriate time after reviewing all of these issues, that this panel be exposed to cross-examination. 1385 MR. BETTS: Fine. Shall we swear in the new panelists. 1386 Mr. Dominy. 1387 ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUES 9.2 TO 9.5: SQUIRES, RYCKMAN, WILLIAMS, HEENEY, SIMON 1388 P.SQUIRES; Previously sworn. 1389 N.RYCKMAN; Previously sworn. 1390 T.WILLIAMS; Sworn. 1391 D.HEENEY; Sworn. 1392 J.SIMON; Sworn. 1393 MR. BETTS: And the witnesses have been sworn. Thank you. 1394 Mr. O'Leary. 1395 EXAMINATION BY MR. O'LEARY: 1396 MR. O'LEARY: Mr. Chair, the three consultant witnesses, if I can use that expression, have been chosen by the company for their expertise in the areas of public policy analysis and economic incentives to achieve public policy objectives and DSM planning and policy design and implementation. 1397 I'd first like to take the Board to the curriculum vitae that have been filed on behalf of the consultant witnesses which is found at Exhibit A.1, tab 8, schedule 4, and starting with the CV of Mr. David Heeney. 1398 Mr. Heeney, if I could just briefly take you through your curriculum vitae. I understand that you are the president, and have been so since 1994, of IndEco Strategic Consulting Inc.? 1399 MR. HEENEY: That's correct. 1400 MR. O'LEARY: And prior to that you were a partner at Hickling & Associates, the president of HB Hickling, and from 1998 to 1991 you were with VHB Research and Consulting Inc., which I understand specializes in environmental and resource economics? 1401 MR. HEENEY: That's correct. 1402 MR. O'LEARY: And in the early 1980s you were with Middleton & Associates. At that time the company was specializing in renewable energy and energy conservation? 1403 MR. HEENEY: Correct. 1404 MR. O'LEARY: Your education consists of a Bachelor of Science, Physical Geology, from McGill in 1997, followed by a Master's in Environmental Design, Environmental Science, Information and Policy Analysis and Technological Systems from the University of Calgary. 1405 Your curriculum vitae, sir, contains a fairly extensive list of the relevant projects. Perhaps I could just ask you to confirm that the first three, which all seem to be involved with various local distribution companies, all involve DSM policy design? 1406 MR. HEENEY: That's right. 1407 MR. O'LEARY: And looking down on the list with the City of Toronto Efficiency Office, the Canadian Gas Association, the -- several projects with them, you were looking at changes to what the company did and how to affect their decisions. 1408 MR. HEENEY: That's correct. In the case of the Canadian Gas Association it wasn't the association itself, but we were working with them for other business organizations. 1409 MR. O'LEARY: Fair enough. And in respect of the International Joint Commission, for example, I understand it's an example of numerous studies of economic instruments? 1410 MR. HEENEY: That's correct. 1411 MR. O'LEARY: And do you have anything you would like to add for the benefit of the Board or the parties in respect of your past and how it qualifies you as an expert in respect of public policy analysis and economic initiatives to achieve public policy objectives. 1412 MR. HEENEY: Perhaps the only thing I would add is that my Master's work was in environmental science, but my thesis was on energy supply and demand in Alberta and the role of energy conservation and renewable energy. And my work on economic instruments is largely related to environmental issues, but I see them as directly relevant because they are focused on encouraging or motivating organizations to adopt technologies or management practices that are good for society and that relate to public policy objectives. So I see a direct relevance to the DSM initiatives. 1413 MR. O'LEARY: Thank you, Mr. Heeney. 1414 We are offering Mr. Heeney as an expert in the area that I just identified for the purposes of this proceeding. 1415 MR. BETTS: Thank you. Are there any comments? 1416 MR. WARREN: From the point view of the CAC, we don't take any quarrel with the qualifications of any of the experts. If my friend wants to save time, from our point of view, we don't have any issue with it. I don't know if anybody else does, but we certainly don't. 1417 MR. BETTS: That seems to be a view commonly held as I look back at the faces, so please proceed. 1418 MR. O'LEARY: All right, then. We will move right into our evidence in chief. 1419 We were proposing, Mr. Chair, to some extent, follow the subheadings that were contained in the settlement proposal, the first relating to the shared savings incentive rate, and to enter into a discussion about that at first. 1420 I ask the panel, before endeavouring to review the partial settlement proposal, could you briefly explain some of the fundamental concepts behind DSM incentive mechanism. 1421 MS. SQUIRES: I'll do that, and I recognize that a lot of these concepts have already been addressed and covered today and yesterday, so I'll try and be succinct and brief, if possible. 1422 The DSM incentive mechanism that we're talking about, of course, is the shared savings mechanism. Both the company's existing mechanism and the mechanism outlined in the partial settlement are both based on the concept of total resource cost and, as we've already heard, the TRC is an evaluation of the costs and benefits accruing to a society as a whole, due to DSM activity. The costs that are included in the TRC are program costs and participant costs. Benefits that are included are primarily the participants' lower gas bills over the life of the DSM measure, plus any electric and water savings that might also occur. 1423 In determining the TRC, you subtract cost from benefits, and the result is the net direct financial benefit to society. 1424 In the partial settlement, the budgeted TRC for all programs is approximately $130 million. That means that net of all the costs, Ontario will be better off by $130 million as a result of the DSM activities included in the settlement proposal. 1425 The funding for these programs come from ratepayers and participants, and under the proposed settlement Enbridge receives no direct financial benefit for producing the budgeted $130 million worth of benefits. 1426 Under the proposal, only if Enbridge exceeds the target would the company received a direct financial benefit in the form of the SSM. 1427 MR. O'LEARY: May I ask you why this direct financial benefit is appropriate? 1428 MS. SQUIRES: Yes, and to answer that question first, I'll just describe how the financial benefit is calculated under the settlement proposal. 1429 This financial benefit for exceeding the target, as outlined in the settlement, is based on the degree to which Enbridge exceeds the budgeted TRC of $130 million. For example, if Enbridge achieves a TRC of $140 million, we would receive 18 percent of the $10 million that occurred in excess of the $130 million TRC target. That translates to $1.8 million. 1430 This $1.8 million translates to only 1.3 percent of the share of the total TRC benefits that our programs have generated. 1431 It provides an incentive for the company to exceed this target, and this was the point. Note that it was a declining percent formula, and as a result, it reduces the potential for what could be perceived by some as an excessive reward in the event of a significant overachievement of the targeted TRC. 1432 And just to repeat, under the proposed settlement for any performance up to and including $130 million, there is no reward and appropriately no penalty. 1433 In terms of the appropriateness of this incentive mechanism, there are really three reasons why we feel it is appropriate. 1434 First of all, it represents a compromise. It is less lucrative than the previous incentive formula, but on the flip side, there is no penalty. It is also less lucrative than Enbridge's originally-proposed incentive mechanism prior to the settlement. The partial settlement indicates that this mechanism will apply only to the 2003 test year. Enbridge will examine alternative incentive mechanisms for 2004 with the consultative, and this is outlined in the partial settlement proposal. 1435 The third reason this mechanism is seen as appropriate is that it still provides some incentive for the company to continue pursue DSM and exceed its target. 1436 MR. O'LEARY: Thank you. 1437 And if I could ask you to turn to page 68 of the settlement proposal, Exhibit N.1, tab 1, schedule 1. First, I note, just for the record, that the reference to the company agreeing, through the consultative, to consider incentive proposals for 2004 beyond, that is where the reference is that you've just referred to. 1438 But could I invite you to go to the bullet at the bottom of the page under the heading "Calculation of TRC Savings," where it states that: 1439 "The rules for the calculation and clearance of the SSM account need to be set out clearly in advance." 1440 Could you provide some thoughts as to why that is important? 1441 MS. SQUIRES: Yes, I will. 1442 The company sees this as a critical requirement to the success of the SSM in order to create a more certain business environment for program planning and resource allocation. This will allow Enbridge to focus its efforts on maximizing TRC benefits to society. 1443 Another reason why this is important is because it will ensure that Enbridge's performance is only evaluated on those program parameters over which it has influence. 1444 As we've seen from some of the previous discussion at this hearing, there are some circumstances under which previously used assumptions and inputs to the TRC calculation might become no longer valid. There are generally three situations that might account for these circumstances: 1445 The first is external factors outside Enbridge's control change. An example of that would be when avoided gas costs change. 1446 A second situation would be when new information regarding program parameters becomes available. An example would be the new evaluation findings on free ridership that we've discussed. 1447 The third situation would be factors within Enbridge's control change, and an example here would be participants or costs are different than what was budgeted. 1448 In the first two situations, those being external factors change and new information becomes available, the company should not be subject to SSM risks or rewards for information which was not known at the time the budget was set. At that time, program designs had been established, and resources had been allocated on the basis of the information that was available at that time. 1449 In the third situation, such as when more participants took part in a program than budgeted, the company should be rewarded for these results, assuming more participants came in than budgeted, because they came about as a direct result of the company's actions and performance. And that is, in fact, what the SSM is supposed to reward. 1450 The principles outlined on page 69 of the settlement agreement are largely consistent with Enbridge's view on the treatment of changed assumptions as I've just described them and how they should affect the TRC calculation, if at all. 1451 I will not bother to read through those, but I would like to highlight a couple of the key ones that I think are particularly significant. 1452 The first is that any changes to prescriptive program assumptions will not be applied retroactively to the budget and actual TRC calculations, and just to ensure you understand that my choice of words "prescriptive programs" are typically the residential and mass-market type programs. 1453 In other words, a no-no application of changed assumptions will be used, and I think we've heard on a couple of occasions that type of terminology being referred to. "No-no" meaning you don't change values in the budget, and you don't change values in the actual retroactively. 1454 In these programs, the only TRC inputs that will incorporate a new value for the actuals will be program participants and costs, in other words, program results that were influenced by Enbridge. 1455 A second highlight of these principles that are on page 69 is that the free-rider rate for custom projects for 2003 has been identified as 30 percent. We have had some discussion about this already. It should be noted that the settlement also stipulates that this amount will not be altered in the actuals. In other words, again, a no-no application of any new information or evaluation findings will be used. 1456 This was agreed upon by the parties to the partial settlement agreement in recognition of the fact that the company does not have the ability to directly influence the actual free-rider rate in the course of a year. Programs and delivery mechanisms are already in place for the business-market programs and cannot be changed quickly to effect any significant changes in free ridership. 1457 As I indicated, this 30 percent value reflects the preliminary findings of a new free-rider evaluation project, which is currently underway and expected to be complete within a few weeks. 1458 And that's the extent of the highlights I wish to expand upon. 1459 MR. O'LEARY: Thank you, Ms. Squires. Perhaps I could offer you a break and turn to the company's consultants and ask: You've heard what Ms. Squires has had to say about the importance of having rules for the calculation and clearance set out clearly in advance. 1460 Do you have anything further to add in support of Ms. Squires's comments? 1461 MR. HEENEY: Yes, I do. 1462 In general, most businesses and employees would prefer to operate and expend their efforts in a more certain business environment with clear rules and gravitate towards areas of the business with greater certainty and where the relationship between efforts and results are clear. 1463 In a practical sense, businesses will discount a future income at a higher rate in an uncertain environment so that the economic attractiveness of a particular investment is much lower than in an environment with clear and stable rules. 1464 During our investigations at Enbridge, it was clearly evident that the ambiguity and uncertainty regarding the rules for calculation and clearance of the SSM account distracted Enbridge DSM staff from focusing on program design and program update, and you heard some evidence earlier today that confirms that. 1465 Firstly, a significant portion of their time was diverted to what I would call process-related activities rather than to results-related activities; and secondly, the relationship between the efforts of DSM staff and the results these efforts would create was obscured, because of uncertainty over whether and to what extent DSM activities were likely to be recognized as contributing to the TRC calculation. 1466 By holding Enbridge accountable only for those DSM inputs under its control or influence and harmless from those outside its control, the rules for calculation and clearance of the SSM count, as described on page 68 of the partial settlement, will create an environment of greater certainty and greater transparency between effort and results. This will help to create a more favourable business environment for DSM within Enbridge and will help Enbridge to focus its efforts on maximizing TRC benefits. 1467 By clearly setting out the rules in advance, the settlement agreement will allow Enbridge DSM staff to spend more time on program-related activities and less time on those process-related activities that don't really contribute to results. 1468 MR. O'LEARY: Now, the evidence that has been prefiled by Enbridge has identified a number of key principles for the SSM, and the company, I understand, will be taking the position that these principles should be considered by the Board and, if appropriate, included in its final decision. 1469 Could I invite the panel members to explain what these principles are and why you believe they are important for the Board to adopt? 1470 MR. WILLIAMS: Certainly. I would be happy to. 1471 On pages 2 and 3 of Exhibit A.7, tab 2, schedule 1, there are a number of key strategic and operational principles for the DSM framework. 1472 Several of these principles are directly relevant to the DSM incentive mechanism. There are also additional principles directly relevant to the DSM incentive mechanism presented on page 8 of Exhibit A.7, tab 2, schedule 2. 1473 These principles can be consolidated into six key principles that the mechanism -- that the incentive mechanism should reflect, and the first key principle is that the rewards should create an incentive for the company to continue and expand its DSM program. 1474 This principle is consistent with the principle for a shareholder incentive in order for a utility to commit to an aggressive DSM effort that was established in the first line of paragraph 10.3.7 on page 104 of EBO-169-3. In simple terms, this principle is that the incentive should not be too low and should serve as a real motivator for the company. 1475 The second key principle is that there should be a reward for meeting the target. And in most businesses, achieving your target would be considered a success, and this success would normally be rewarded. 1476 Although the incentive mechanism in the settlement agreement does not include an incentive for meeting the target, the incentive mechanism originally proposed by Enbridge did include an incentive for meeting the target. 1477 The third key principle is that the incentive should be based on results achieved for ratepayers, not just effort expended, and this principle recognizes that the primary objective of DSM is to realize net benefits for society. And this principle will help to align the day-to-day behaviour of Enbridge's DSM staff with this objective. 1478 The fourth principle is that risks and rewards should not be too high. If the risks are too high, it would be unfair to the company. And if the rewards were too high, the incentive mechanism would be unfair to ratepayers. 1479 The fifth principle is that the return for DSM initiatives ought to be somewhat higher than for gas distribution alone, reflecting both the greater societal benefits and the higher levels of uncertainty associated with DSM. This principle would only apply if Enbridge invests its own shareholder money in DSM. 1480 Just as an aside, I think it's worth noting that in the settlement agreement, the share of TRC benefits that Enbridge would receive for exceeding the target cannot be compared with the allowable rate of return, allowable return on equity. 1481 And last but not least, the sixth principle is that the incentive mechanism should be transparent and straightforward. This will allow the company and stakeholders to accurately determine the impact of their decisions and actions related to DSM. Essentially, the incentive mechanism should create a clear line of sight between the inputs and the results. 1482 It is important for the Board to adopt these six principles to provide guidance to Enbridge and the consultative in examining alternative shareholder incentive proposals for 2004 and beyond. 1483 MR. O'LEARY: Unless there are any other further comments in respect of those six principles, Mr. Chair, that is the evidence in chief on behalf of this panel. 1484 MR. BETTS: Thank you. 1485 It is past four o'clock. Typically, we would now begin to hear cross-examination from parties who are in agreement with the settlement proposal. I think it might -- would it put anyone at a disadvantage if we broke at this point and returned with this panel tomorrow morning for that stage? 1486 MR. O'LEARY: Sorry. I probably misspoke myself, then, and we were going to do it issue by issue, and I'm just reminded of that, that we were going to go through that part of the evidence on one issue and then move on to the next point, and then we were going to invite the cross-examination at the end. 1487 So all I was doing was, then, drawing to conclusion 9.2 as being that issue we've addressed, so then in the morning we would continue with the evidence in chief for the balance of the issues. 1488 MR. BETTS: Thank you for that clarification. And I assume that it will take some minutes, at least, to finish the 9.3? 1489 MR. O'LEARY: It I don't think will be a great deal of time in the balance of the issues, but I would suggest no more than an hour for 9.3, 4, and 5. 1490 MR. BETTS: Well, I think, then, it is timely to break at this point, and we will reconvene tomorrow morning with this panel, and you can continue with the direct. 1491 If there is nothing further, then, we will stand adjourned until 9:30 tomorrow morning. 1492 --- Whereupon the hearing concluded at 4:04 p.m.