Rep: OEB Doc: 12N9X Rev: 0 ONTARIO ENERGY BOARD Volume: 4 27 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 27 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 MICHAEL JANNIGAN VECC ROBERT WARREN CAC DAVID POCH GEC/CIELAP BRUCE MACODRUM CME MURRAY KLIPPENSTEIN Pollution Probe SUE LOTT VECC IAN MONDROW Direct Energy CRAIG PARRY Energy Probe THOMAS BRETT OPSBA JAY SHEPHERD OPSBA VINCE DEROSE IGUA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] :ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUES 9.2 TO 9.5; CONTINUED: SQUIRES, RYCKMAN, WILLIAMS, HEENEY, SIMON [56] CONTINUED EXAMINATION BY MR. O'LEARY: [62] CROSS-EXAMINATION BY MR. POCH: [224] CROSS-EXAMINATION BY MR. KLIPPENSTEIN: [409] CROSS-EXAMINATION BY MR. PARRY: [527] PROCEDURAL MATTERS: [824] ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 6.4: CHARLESON, COLLIER [875] EXAMINATION BY MR. O'LEARY: [880] CROSS-EXAMINATION BY MR. DeROSE: [946] CROSS-EXAMINATION BY MR. JANIGAN: [1167] CROSS-EXAMINATION BY MR. WARREN: [1354] 10 EXHIBITS 11 EXHIBIT NO. K.4.1: MINUTES OF THE 23rd DSM CONSULTATION - OCTOBER 25, 2000 [232] EXHIBIT NO. K.4.2: TABLE PREPARED BY GEC ENTITLED "ENBRIDGE'S 2003 POTENTIAL SSM PAYMENTS" [456] EXHIBIT NO. K.4.3: EnTRAC ALLOCATION METHODS [1139] EXHIBIT NO. K.4.4: BOOK OF MATERIALS FOR CROSS-EXAMINATION BY VECC [1171] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.4.1: TO PROVIDE FINAL BID PRICES FOR THE FIVE BIDS RECEIVED BY ENBRIDGE [1020] UNDERTAKING NO. J.4.2: TO PROVIDE THE SAME BREAKOUT AS AT EXHIBIT A.5, TAB 5, SCHEDULE 3, PAGE 2, FOR ALL THREE VENDORS [1041] UNDERTAKING NO. J.4.3: TO PROVIDE THE RELATIONSHIP BETWEEN ENBRIDGE GAS DISTRIBUTION AND CUSTOMER WORKS [1107] UNDERTAKING NO. J.4.4: TO TAKE EACH OF THE SIX BENEFIT CATEGORIES AND INDICATE HOW THESE COSTS WOULD BE ALLOCATED TO THE RATE CLASSES TODAY, AND TO HIGHLIGHT THOSE BENEFITS WHERE THOSE COSTS MAY FORM PART OF THE DPAC CHARGE TODAY [1270] UNDERTAKING NO. J.4.5: TO PROVIDE A BREAKDOWN OF THE OPTIONS THAT ALLOCATES THE COSTS BY WAY OF THE DIRECT-PURCHASE ADMINISTRATION CHARGE, AND THAT WHICH ALLOCATES THE BENEFITS TO THOSE CUSTOMERS PAYING THE CHARGE [1335] 14 --- Upon commencing at 9:40 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 PRELIMINARY MATTERS: 17 MR. BETTS: Welcome back, everybody, to day four of this proceeding. 18 Just as an opening remark -- and by the way, if you haven't seen the pattern, it's my approach to try and make as many procedural statements or informational statements at the outset and at the close of the sessions as possible so that those that are following by transcript can focus on those portions of the transcript for information. 19 And specifically today, I just wanted to address the fact that it appears we are falling somewhat behind on our proposed schedule for the hearing, and it was originally, I believe, understood that we would hear the issue on EnTRAC this afternoon, and perhaps I could ask Mr. O'Leary either as preliminary matters or at some point during the day if he and his -- and the company could identify what they expect that schedule will be turning into at this point. 20 And with that, I will, in fact, invite preliminary matters. 21 Mr. O'Leary? 22 MR. O'LEARY: Mr. Chair, speaking to the scheduling issue first, it is our intention, and we are ready to proceed with EnTRAC immediately following lunch this afternoon. We thought it would then -- be advisable then, once that panel and the cross-examination is completed, is move into the WAMS issue to deal with, perhaps, immediately following it tomorrow, presuming that the cross-examinations are completed. 23 That would then allow us to proceed with the balance of the DSM, because I don't believe -- reasonably anticipate that all of the cross-examinations will be completed by noon today of this panel. And then we could pick up on Monday morning and complete the balance of the DSM evidence of the applicant. 24 I believe it was initially anticipated that Mr. Neme and Mr. Rubin, then, might be available on Monday, and perhaps we could complete the evidence of the intervenors on Monday. 25 A further suggestion would be that the company has suggested that argument in respect of the EnTRAC matter, the EnTRAC issue 6.4, take place as soon as possible. And one proposal that we would offer is that the argument, the oral argument in respect of EnTRAC take place either late on Monday or Tuesday, and that would allow parties a chance to receive the transcripts and prepare their argument and to be in a position to deal with it in a comprehensive way on Tuesday. 26 That would be our suggestion for scheduling matters at this point. 27 MR. BETTS: Can I hear any comments on that scheduling proposal, if there are any. 28 MR. MORAN: Mr. Chair, if I may, I had some discussion with the DSM intervenors, and they're all prepared to come together and present all of their evidence at around the same time in the hearing schedule. That's CME, GEC, and Pollution Probe, and the proposal -- sorry, Energy Probe. I'm mixing those two up, I apologize. And the proposal would be to move all of the intervenors to the same point at which Mr. Rowan becomes available in early April. 29 MR. BETTS: So, Mr. Moran, you don't see any complication with the proposed schedule from the applicant? 30 MR. MORAN: No, with that modification, I guess, yeah. 31 MR. BETTS: Any other comments? 32 Mr. Poch? 33 MR. POCH: Mr. Chair, I imagine we may want to come back and just touch on scheduling again at the end of the morning, because I know, speaking to my friend Mr. Warren, that he may have some information at that point on whether this motion and if -- where it's going to go. 34 But leaving that up in the air, I just ask if, not now but at the end of today, we could just get -- gain some certainty on the proposal for the DSM schedule, both because we have witnesses travelling. 35 And just on speaking for myself, I think I've heard my friend for the company say in the proposal we will do DSM until noon today, and then we won't get back to it before sometime Monday at the earliest or, perhaps, Tuesday. That's fine, Mr. Chairman. I just need to know if I can safely leave town. 36 MR. BETTS: Well, I'm quite prepared to allow the participants the morning, or however long it takes, to firm up that schedule, and you've heard the proposal from the applicants. So perhaps either after morning break or after lunch break we could conclude the final schedule, or what we believe will be the final schedule. 37 MR. WARREN: Mr. Chair, I just wanted you to be advised of the status of the motion, since Mr. Cass is in the room. 38 The motion materials in their final form will be in the Board's hands this morning, I hope by 10:30 or so, and will be served on all of the other parties and the intervenors. 39 Yesterday afternoon I sent a copy of the penultimate draft to Mr. Cass so that he and his client could get a sense of what relief we were seeking and from whom. Mr. Cass and I have had a conversation this morning. He has indicated, fairly enough, that Monday may be too early for all of the parties to instruct counsel and be prepared to argue it. 40 The other factor is the availability of Mr. Thompson, and Mr. DeRose is checking on his availability. The bottom line, and I'm sorry to use that cliche, is that we are now thinking about the possibility of the motion being argued on Thursday next, which would allow Mr. Cass and his clients to instruct counsel, and it will turn on Mr. Thompson's availability. 41 We're hoping to have information about that by the morning break or noon at the latest, and we'll advise the Board at that stage. 42 MR. BETTS: Fine. It certainly appears that you are working together to try to accomplish this as quickly as possible. I don't think the Board can ask anything more than that. Certainly it's important that it be dealt with thoroughly and completely. 43 So we simply encourage you to keep working towards as tight a time line as is practical and -- 44 MR. DeROSE: Mr. Chair, throughout the morning you may see me popping up and down and leaving the room. I'm trying to track down Mr. Thompson using the telephone just outside the hearing room here and I will keep making best efforts to get hold of him. 45 MR. BETTS: Very well. Thank you. 46 Are there any other submissions in terms of scheduling, which is what we've come to at this time? I see, Mr. Cass, you've moved closer to the microphone; is there any comment you wanted to make on that? 47 MR. CASS: No, I don't think I need to add anything, Mr. Chair. I only came up in the event that you wanted to hear from me on the motion. But I think you've heard the status from Mr. Warren. 48 MR. BETTS: Thank you. 49 Okay, are there any other preliminary matters to be dealt with? 50 Mr. Moran, any from the Board's point of view? 51 MR. MORAN: No, sir. 52 MR. BETTS: And any others that any other intervenor may want to bring forward? Thank you. 53 I believe we ended the day yesterday with Mr. O'Leary and examination-in-chief of the Enbridge witness panel and welcome back, panel. We had completed, if I'm not mistaken, the examination-in-chief of the issue 9.2 and you were about to commence with 9.3, indicating that we would then deal with cross in both of those issues; is that still the plan? 54 MR. O'LEARY: It's our proposal to deal with 9.3, 9.4 and 9.5 and then open up the panel, if I remember to do it correctly this time. 55 MR. BETTS: Thank you. Actually I didn't catch that, so I'm glad you clarified that for me. Please proceed. 56 :ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUES 9.2 TO 9.5; CONTINUED: SQUIRES, RYCKMAN, WILLIAMS, HEENEY, SIMON 57 P.SQUIRES; Previously sworn. 58 N.RYCKMAN; Previously sworn. 59 T.WILLIAMS; Previously sworn. 60 D.HEENEY; Previously sworn. 61 J.SIMON; Previously sworn. 62 CONTINUED EXAMINATION BY MR. O'LEARY: 63 MR. O'LEARY: Thank you, Mr. Chair. 64 Just a couple of housekeeping matters, first of all. In reviewing the transcripts this morning, Ms. Squires directed my attention to a response that she made to Mr. Dominy's question which is found commencing at line 1288 of the transcripts. And for the sake of consistency with other answers that she had given, I'd like to read into the record the question and invite Ms. Squires then to advise of the amendment. 65 The question referenced the electronically commutated motors and Mr. Dominy quoted the reference to energy savings targets are proposed to be set in energy units rather than cubic metres of natural gas. And Mr. Dominy asked: 66 "I wanted to understand what that means. Does that mean going forward, in future, the energy savings that be would be used in a calculation of SSM and other things would be energy units including electricity, or is it still natural gas volume saved but on the basis of the calculations?" 67 Ms. Squires responded with: 68 "The proposal is really to just change the reporting mechanism. It's not meant to change the way in which we undertake DSM. 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 effected by the programs, we would express all of those together as an energy savings measure." 69 Mr. Dominy then asked: 70 "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." 71 And Ms. Squires responded by saying: 72 "That's correct." 73 I understand, Ms. Squires, that you'd like to say something in response to that answer. 74 MS. SQUIRES: Yes, Mr. Dominy, I perhaps I didn't hear your question at the time, and the right answer is that's incorrect. In fact, the SSM and LRAM calculations do include all resource savings - gas, electricity and water - and I believe that is consistent with some of the testimony I provided on the calculation of the TRC which does include all resource savings. So I just wanted to make sure that was understood. 75 MR. DOMINY: So it's included for the TRC and the SSM but it's not included in the LRAM. 76 MS. SQUIRES: It's included in SSM and LRAM. Oh, I'm sorry, I'm doing it again. It's included in the SSM but not the LRAM. And that's my final answer, yes. 77 MR. O'LEARY: The other housekeeping matter, Mr. Chair, is that I believe in our haste to get in the evidence yesterday we neglected to ask the consultants to adopt their evidence, and if I could just turn to that now and ask several questions to the consultant group. 78 The evidence that was generated collectively has been prefiled and marked as Exhibit A.7, tab 2, schedules 1 and 2, and may I ask each of you whether or not you participated in the preparation of those reports; and if so, do you adopt the evidence for the purposes of this hearing? 79 MS. SIMON: Yes, I do. 80 MR. HEENEY: I did participate and I adopt it. 81 MR. WILLIAMS: I did participate and I adopt the evidence. 82 MR. O'LEARY: And to Ms. Squires and Mr. Ryckman, can I ask you whether or not you reviewed those reports and whether or not you concur with their findings and adopt their findings and conclusions for the purposes of this hearing. 83 MS. SQUIRES: Yes, I do. 84 MR. RYCKMAN: Yes, I do. 85 MR. O'LEARY: Thank you. 86 Now, moving on, Mr. Chair, to issue 9.3 which is the review of the proposed framework for DSM for 2003 test year and beyond, including the requested one-time budget amount of 790,000. This is the evidence that is supported by the Exhibit A.7 series of evidence, in particular at tab 2, schedule 1. 87 May I ask Mr. Ryckman or Ms. Squires about the difference between the company's original application filing and what is contemplated under the settlement proposal. And, for the record, that is found at Exhibit N.1, tab 1, page 71 and 72. 88 MS. SQUIRES: Yes, I'll speak to that. 89 Under the application as filed, the company was looking for a one-time budget of $790,000 for the studies and for the facilitator. The summary of these proposed costs related to these recommendations are found in the company's evidence at table 1, which is found at Exhibit A.7, tab 1, schedule 1, page 13. 90 So essentially what I'd like to do is just compare the table that's in the company's evidence to the table that is included in the settlement and explain any differences that might be between the two. 91 In fact, I misspoke, there isn't actually a table in the settlement agreement; the amounts are expressed in prose rather than in a table. 92 The first item that is in the company's evidence that a budgetary request was made for is for the development of a new and refined incentive mechanism for DSM. Our original application included a request for $75,000 for that work and in the settlement proposal that amount was reduced to 50,000. 93 A second request was put forward for a budget amount to do an analysis of DSM results and processes in other North American utilities, and we had requested $50,000 for that. In the settlement proposal that amount was reduced to 30,000. 94 The third item is for the development of an end-use market information repository. We had requested 500,000 for that, and in the settlement proposal the 500,000 was maintained. 95 The next item was for the development of terms of reference and operating procedures for the DSM consultative. We had requested 50,000 for this, and in the settlement proposal no dollars were allocated to that. 96 We had requested in our original application $40,000 for an independent meeting facilitator; that was reduced to 20,000 in the settlement. 97 And the original application had a request for 50,000 for the development of a DSM evaluation policy. That was removed in its entirety in the partial settlement; similarly, the amount that we had requested for the development of an independent audit protocol, 25,000, that was removed from the settlement entirely. 98 So the net effect of this is that the 790,000 we had originally requested and proposed was reduced to 600,000 in this partial settlement. 99 MR. O'LEARY: Ms. Squires, can I then ask you to go to several of these items, and using -- keeping our finger on page 13 of 14, at A.7, tab 1, schedule 1, table 1 which you referred us to, can I ask you in respect of item number 1, which is the development of a new refined incentive mechanism for DSM, have any monies already been expended in respect of that initiative? 100 MS. SQUIRES: Yes, in fact much, if not all, of that money has been spent in the use -- and it has been used in the development of the proposals that are -- were prepared by our consultants that are found at A.7, tab 2, section 2. The company acknowledges that, under the partial settlement agreement at issue 9.2, it has agreed to examine, through the DSM consultative process, alternative shareholder incentive proposals for 2004 and beyond, and this may include, on the company's behalf, the proposals that are included in our evidence. 101 The company is proposing that these consultants remain engaged for the purposes of the review of the incentive mechanism by the consultative. 102 MR. O'LEARY: Thank you. Turning to item 2 at table 1, which is the analysis of DSM results and other North American utilities to the settlement agreement, it's now proposed that the budget of 30,000 be approved. There has been some discussion generally about the need for that in the evidence to this point. Could you perhaps elaborate a little further on the necessity, in the company's mind, of proceeding with that analysis. 103 MS. SQUIRES: Yes, I will. The new learnings from the proposed study will help put Enbridge's DSM into perspective and will reduce the need for the company to try and reinvent the wheel with regards to DSM. 104 The study was originally envisaged to be, in part, something that would better inform the DSM target- and budget-setting process by identifying whether there are any other jurisdictions with less contentious budget- and target-setting processes that we might learn from. 105 MR. O'LEARY: Thank you. Then could I ask you the very same question in respect to the next line item, which is the development of end-use market information repository. 106 MS. SQUIRES: Certainly. I'll try and list a few of the proposed benefits of this anticipated study. 107 First of all, the proposed market study will enhance the company's program development efforts and assist in its understanding of the existing programs that are reaching maturity, some of which we spoke about yesterday with the panel on 9.1. 108 The market analysis should also help to identify opportunities that most efficiently result in energy and environmental savings. The market information will also assist the company in setting targets and budgets. And finally, better end-use information will help mitigate the uncertainty and the risks of escalating DSM targets each year. 109 The $500,000 estimated cost is based on the experience and judgment that our experts have brought to the table based on their knowledge of similar studies done elsewhere. The original cost estimates were broken out as follows: $200,000 to be allocated to the business markets, 200,000 to the residential and mass markets, and $100,000 to the new construction market. 110 The proposal recognizes that a series of large coordinated studies of this magnitude will create more and better information than many smaller, less expensive studies through economies of scale. 111 In terms of prioritizing and identifying needs to be addressed by these studies, that will be done by interviewing DSM staff and through consultation with the DSM consultative group. 112 MR. O'LEARY: Thank you. Then working further down to the next item for which approval is sought and that is the independent meeting facilitator, I understand that the company is now proposing that the Board approve a sum of $20,000. Could you please elaborate on the company's view as to the necessity and benefits of engaging a facilitator in respect of the consultative meetings. 113 MS. SQUIRES: Yes, I will. 114 In recent experience the company has noted that the time spent in the consultative meetings has not been as productive as it could have been in terms of reaching decisions and settling issues in advance of the ADR and the hearing, which was one of the original objectives of the process. 115 Part of the reason for this is that the company has had to play the dual role of facilitating the meetings and actively participating in the discussion at the same time. The issues under discussion in recent years have been challenging issues with considerable disagreement among the members and therefore progress in the consultative meetings has been slow, if not non-existent in some areas. 116 The company feels that a professional facilitator will help ensure that the objectives of each consultative meeting are met and that progress is made in addressing, if not resolving, all of the issues on the table. 117 As we've already heard, the company engaged a facilitator for it's most recent consultative meeting last November and found that there was considerable improvement in meeting the stated objectives of the meeting. 118 In order to reach settlement on this issue, Enbridge reduced its proposed cost for a facilitator from $40,000 to 20,000 by removing the requirement of the facilitator to take meeting notes, prepare minutes, and produce an annual report. 119 At this point I'd like to point out to the panel that Enbridge pays through its DSM account the full expenses of all intervenors attending the consultative meetings, and to date has not put any restrictions on either the hourly rate or the preparation time that intervenors may charge for their participation in these meetings. 120 A typical full day meeting may cost ratepayers about $20,000. Enbridge wants to continue this process but wants to do so in a cost-effective, productive manner. 121 MR. O'LEARY: Thank you, Ms. Squires. 122 Could I now ask the panel to move on to the next issue, which is identified in the settlement proposal at 9.4 found at page 73, which is the review of the DSM consultative process. 123 And I note that the company is requesting under the partial agreement that the Board in its decisions specifically approve a protocol for the conduct of future consultative meetings. 124 Before asking you to review some of the particulars contained in the protocol specifically, can I first ask you, perhaps, Ms. Squires, for your thoughts as to why the Board should be asked to specifically approve the protocol and rules. 125 MS. SQUIRES: Certainly. 126 For similar reasons as described under the need for a professional facilitator for the meetings, the company feels strongly that a protocol for the consultative will ensure that time is not wasted during meetings on matters of process or on unproductive discussion and dispute. 127 All parties will know how the meetings will operate in advance and will come prepared to work within that framework. 128 MR. O'LEARY: And why do you feel it is appropriate for the Board to approve such rules? 129 MS. SQUIRES: Well, currently there appears to be some disagreement among the parties on exactly what role the consultative should play. In its evidence, the company has referenced the EBRO-485 decision in which the Board accepted the settlement proposal definition of the consultative process. Essentially this agreement defines the role of the consultative as being an effort to obtain meaningful input related to each of the major steps of the DSM planning process. It further acknowledges that Enbridge will be held accountable for its DSM activities. 130 However, given the changes that have occurred in DSM since that time and the inability of the consultative group to reach consensus or substantial consensus on matters of process to date, Enbridge feels it is important for the Board to reaffirm its view in this area by explicitly approving the protocol the parties have submitted in the partial agreement. 131 MR. O'LEARY: Thank you. 132 Now, on the assumption that some of the language in the protocol the company considers important and would like to highlight for the benefit of the Board, could I ask you to turn to page 73 of the partial settlement agreement, which again is Exhibit N.1, tab 1, schedule 1. 133 And under the subheading "Preamble," and the language there that Enbridge Gas Distribution is accountable to the Ontario Energy Board to develop and implement cost-effective DSM programs, can you provide us your thoughts as to why this is an important component in the protocol. 134 MS. SQUIRES: This statement is important, in my view, because there has been some question about who should ultimately have the final say when no consensus is reached, despite best efforts by everyone involved. Ultimately, the company is accountable to the OEB, and it must, therefore, have the last and final say in these matters. 135 MR. O'LEARY: And under the subheading or heading "Purpose - Enbridge Gas Distribution's DSM Consultative," there are five bullets which set out the purpose of the consultative. 136 Can you offer us your thoughts as to the importance of setting that out. 137 MS. SQUIRES: Certainly. And before the five bullet points are mentioned, there is a statement of purpose, and that is to provide stakeholder advice to the company. This means that Enbridge wants to have the benefit of the knowledge and experience of the consultative group in designing, delivering, and evaluating DSM programs in recognition that this is done in an advisory framework. In situations where no consensus is reached, the company must ultimately make a decision in respect of its own DSM activities. 138 And just to summarize the nature of the topics that are typically under discussion by the consultative, the five points that are listed there include: 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 mechanisms in general, and finally other DSM matters. 139 MR. O'LEARY: All right. 140 I note that the protocol provides for the consultative being responsible for the election of three members to the DSM audit subcommittee. And there has been some discussion about the subcommittee already, but I wonder if you could briefly explain or expand upon the role of this audit subcommittee and how the members be proposed to be elected under the protocol. 141 MS. SQUIRES: Yes. The audit subcommittee, which, as you indicated, is covered in more detail under 9.5, is intended to advise the company on matters related to the independent audit of the company's annual evaluation. The DSM consultative is responsible for the election of three members to participate in the audit subcommittee in addition to the company representative, and the rules relating to this election are set out under issue 9.5. And just to qualify who is eligible to be on the consultative in the first place, any intervenor at the most recent main rates case of the company is entitled to become a consultative member. 142 MR. O'LEARY: Thank you. Under the protocol, can you advise us how agendas for the DSM consultative meetings are set. 143 MS. SQUIRES: Yes. For the most part, in the past, certainly the agendas typically reflect matters which are currently under way or under discussion relative to the current regulatory cycle and this -- we are not proposing any changes to this. 144 For example, a meeting may be called to present and discuss program design concepts due to the upcoming filing of a new test year's plan, or a meeting may be called because there is a need to strike a new audit subcommittee to begin the audit process. Within these high-level objectives, any member may suggest specific items to be considered for inclusion on the agenda. In addition, unrelated or new topics may be suggested and are welcome for inclusion on the agenda by any party. 145 It is important to note at this point that there is a requirement in the protocol rules that, and I will just quote from it: 146 "All members of the consultative will make a good-faith attempt to achieve consensus or substantial consensus on all DSM issues through interest-based negotiations that take into account the interests of all parties." 147 Accordingly, all actions by the company and members of the consultative, including the selection of topics for meeting agendas, will be guided by this requirement to exhibit good faith. 148 MR. O'LEARY: Now, turning to page 74 of the partial settlement, I note under the subheading "Rules of Procedure" that there are a number of rules that are set out in the proposed protocol. Can you provide us with the company's position in respect of why such rules are necessary and should be approved. 149 MS. SQUIRES: Yes, I will. The parties in support of the settlement proposal believe that the requirement to speak in order, respect each participant's right to speak, and to conduct oneself in a professional manner, and exhibit courtesy and respect are fundamental and must be set out, in addition to the mechanism by which Enbridge will address individuals who do not follow these guidelines. 150 This will ensure that the consultative process will not be subject to delays and conflict and will make the best use of ratepayer dollars in respect of the consultative process, offering benefits to the company's DSM efforts. 151 Again, I'd like to emphasize that Enbridge feels it is important for the Board to endorse the principles of a productive, cost-effective consultative process by explicitly approving the protocol the parties have submitted in the partial agreement. 152 MR. O'LEARY: Ms. Squires, we heard on Tuesday of this week some testimony about what transpired at the DSM consultative meeting in November 2002, particularly some testimony relating to how the election of the audit subcommittee took place on that date. Am I correct in my understanding that you were at that meeting and were also involved in the preparations leading up to that meeting? 153 MS. SQUIRES: Yes, I was. 154 MR. O'LEARY: And can you tell me, what steps did you or the company take prior to that meeting to inform members of the consultative of what the company was proposing on the day of the consultative meeting? 155 MS. SQUIRES: I made a point of contacting all the consultative members either by phone or by e-mail to inform them that we were planning to undertake a selection process for the audit subcommittee and that the planned process was to be an election which would result in three members being elected in addition to the company representative. 156 The people that I communicated with were invited to either stand for election to that committee themselves, and if they weren't available to be present at the meeting in person, that they were invited to send a proxy for their vote. 157 MR. O'LEARY: All right. And of those that you contacted personally, do you recall if you received any objections or concerns raised about proceeding with an election format? 158 MS. SQUIRES: Yes, I did. With one party, Mr. Rowan, from CME, when I spoke to him about the plan, he did express his disagreement with the process in our conversation in advance of the meeting. And he was the only one that did express disagreement. 159 MR. O'LEARY: All right. Now, on the day of the meeting, am I correct in my understanding that an agenda was circulated at the beginning of the meeting for the consideration of all members of the consultative? 160 MS. SQUIRES: That's correct. And if memory serves, it probably was distributed a day or two in advance of the meeting. 161 MR. O'LEARY: All right. And I understand that that agenda also referenced an election that might take place at some point during the consultative meeting? 162 MS. SQUIRES: Yes, it did. 163 MR. O'LEARY: And was there any discussion at the commencement of that meeting about that item appearing on the agenda. 164 MS. SQUIRES: There was. And one of the first items on the agenda was to review the agenda, and at that point there was some discussion about the planned approach to selecting the audit subcommittee members. And Mr. Rowan, at that time, indicated that he was not in support of that process and wanted to speak to his concerns about it at that time. 165 MR. O'LEARY: All right. And what, in fact, then happened? 166 MS. SQUIRES: At that time we proceeded to follow the agenda, indicating that we would save time for discussion and give members the opportunity to present their views on the process when we reached that point in the agenda. 167 MR. O'LEARY: And the process you are referring to is the election of members to the subcommittee. 168 MS. SQUIRES: Yes, that's right. 169 MR. O'LEARY: And when that point in the day was reached, that item on the agenda was next up, can you tell us what then happened? 170 MS. SQUIRES: At that time our facilitator gave anybody who was interested in a position on the subcommittee an opportunity to speak to their qualifications and any concerns that they might have, and those parties that were interested took that opportunity. And I believe Ms. Kwik from VECC and Mr. Neme from GEC and Mr. Rowan from CME spoke at that time. 171 MR. O'LEARY: All right. And do you have any recollection of what Mr. Rowan stated or expressed in respect of the election and whether or not he was prepared to stand for consideration by other members? 172 MS. SQUIRES: Yes, I do. He took the opportunity to speak to his disagreement with the process and gave his reasons for that disagreement. He did also indicate that he wanted to be considered to be included on the subcommittee and he described his qualifications to be considered. And he also indicated at that time that he would abstain from voting. 173 MR. O'LEARY: All right. And can you tell me, was there any attempt made to determine whether there was a consensus or substantial consensus amongst the members of the consultative to proceed with the vote? 174 MS. SQUIRES: Yes. As a result of Mr. Rowan's objections to the process, the group took a straw poll, if you will, to find out if the consultative as a group wanted to proceed in this manner and have the election, and there was a substantial consensus reached at that time to proceed in that manner sand hold the election and so we did. 175 MR. O'LEARY: All right. And can you remind us who was elected to the audit subcommittee? 176 MS. SQUIRES: Yes, I can. Ms. Kwik from VECC representing VECC, Mr. Neme representing GEC, and Peter Thompson representing IGUA were elected. 177 MR. O'LEARY: Thank you. 178 Could I now ask that the panel move on to the next issue, which is found at page 75 of the partial settlement agreement, which is the review of the DSM audit process. 179 And, Ms. Squires, I understand the company is also asking the Board to specifically approve a protocol to the DSM audit subcommittee. Can you advise what is the underlying reason for proposing this to the Board? 180 MS. SQUIRES: Again, this is a pretty continuous theme that we've had in many of the panel discussions today. Given the experiences of the past, we believe that by having the Board consider and adopt such specific rules of process, the audit subcommittee will operate in a much more efficient and appropriate manner. 181 MR. O'LEARY: All right. 182 Turning you to the audit process protocol specifically, going to the top of page 76, and I won't ask you to repeat exactly what you've said in respect of the consultative protocol, but I see there's a preamble with language. Is that something that you consider important to be included? 183 MS. SQUIRES: Again, I believe the preamble is identical if not very close to the preamble in the protocol to the consultative, and it just references Enbridge's accountability to the Board for its own DSM activities. 184 MR. O'LEARY: Thank you. Then, under the heading "Role and Conduct of the Audit Committee," I notice a number of bullets there. Can you please highlight any of those bullets which you consider important for the purposes of bringing the Board's attention to them. 185 MS. SQUIRES: Yes, there is a list of eight items under "Role and Conduct of the Audit Committee" and I'm not intending to read them; however, I would like to focus on the first one because it does summarize, I believe, quite well the role of the audit subcommittee. So I will read these points into the record. 186 "The role of the audit subcommittee is to confirm the terms of reference for the independent audit, select the independent auditor, provide advice to the independent auditor with respect to the conduct of the audit, review the independent auditor's draft and final reports, recommend appropriate LRAM and SSM claims for the company, and deliver stated objectives within the designated time lines as indicated in the audit terms of reference." 187 One other significant item in this list is number 5, and again I'll quickly read that. 188 "All members of the audit subcommittee will make a good-faith attempt to achieve a consensus or a substantial consensus on issues through interest-based negotiations that take into account the interests of all parties. 189 "While Enbridge maintains that it is ultimately accountable for the audit outcome and therefore may make the final decision in absence of consensus, this point obligates all parties, including Enbridge, to make a best-efforts attempt at reaching consensus or substantial consensus whenever possible." 190 MR. O'LEARY: Can I also ask for your comments in respect of item 7 and its significance. 191 MS. SQUIRES: Yes. Similar to my last comment, it states that: 192 "In the absence of a consensus, Enbridge will take into account the audit committee participants' input in its decision-making process and defend its actions through the normal regulatory process. Enbridge will produce a report for the DSM consultative committee which clearly describes the various positions of Enbridge and each of the participants." 193 MR. O'LEARY: And how do you see that rule operating? 194 MS. SQUIRES: I'm sorry. Repeat the question. 195 MR. O'LEARY: You've taken us to item 7, and my question is: How do you see that rule being applied in practice? 196 MS. SQUIRES: How I see that being applied is that Enbridge will allow an appropriate amount of time to discuss the individual positions of the different parties during the consultative process, but when it determines that progress is not being made in reaching the consensus or substantial consensus, that it will record the positions of all the parties for the record and make a decision to proceed. 197 MR. O'LEARY: Thank you. 198 Now, I notice on page 77 under the heading "Audit Committee Membership and Selection" that it is proposed that the audit committee consist of four members; a company representative and three independent members selected by the DSM consultative. 199 Can you tell us your view why three was chosen and did not include all of the members of the consultative? 200 MS. SQUIRES: Well, clearly all the members of the consultative would -- it would defeat the purpose of having a subcommittee. 201 Going back to the original purpose of striking a subcommittee in the first place was that it was recognized that for the purpose of that review of the -- an oversight of the audit that a subgroup would be more effective and more efficient, because there would be a much closer working relationship for a shorter period of time, much more frequent contact. And just for administrative and logistical ease, it's recognized that a smaller group of people makes that a more effective process. 202 Now, the number three does not have any magic in and of itself, except that it was felt that four members, three intervenors plus the company representative, would form a small enough group that would achieve those efficiencies that I mentioned earlier without restricting representation in the audit subcommittee. 203 The number of three is also seen as a sufficient number of context for other number of contacts -- for other consultative members who are not on the committee that may wish to express a view or opinion related to the audit process, and therefore they would be able to reach and communicate with at least one member at any point in time. 204 MR. O'LEARY: And I note at item 2 under that subheading that the audit subcommittee will be chosen by secret ballot. 205 MS. SQUIRES: That is correct. That would be done at a DSM consultative meeting, and the rules for the vote are set out under item 2 in the audit subcommittee membership and selection section. 206 MR. O'LEARY: Thank you. 207 Now, I believe we heard in response to some cross-examination questions put to Mr. Rowan on Tuesday, or perhaps it might have been yesterday, it was suggested that where a member of the consultative who has entered into a partial settlement in respect of the clearance of an SSM amount might be in a position of conflict by also participating on the audit subcommittee, which is tasked with the overseeing of the audit of that year's evaluation report. 208 I'm wondering, if I could take you to item 5 on page 76 of the partial settlement proposal, whether or not you have any comments as to the significance of that provision and whether it responds to Mr. Rowan's comments. 209 MS. SQUIRES: I believe it does. The last words in this section indicate that members of the audit subcommittee are obliged to consider the interests of all parties in their task of advising the audit process. 210 It's clear to me that any party who participates on the subcommittee must do so as a representative of the entire consultative group and not just of their own ratepayer or interest group. 211 I should also mention that there is a mechanism by which all members of the consultative group are able to communicate directly with the auditor on their views about the audit process and/or the evaluation report itself, one which is clearly defined in the RP-1999-0001 settlement agreement. 212 This agreement stipulates that the company must invite from all members of the consultative and provide to the auditor in advance of the audit written comments on the evaluation report. These comments are not modified in any way by the audit subcommittee members. They go directly to the auditor unchanged. This requirement was fulfilled for the 1999, 2000, and 2001 audit. 213 And finally, I should point out that it is, in fact, the auditor, a highly qualified professional DSM evaluation expert, who completes the audit, not the audit subcommittee. 214 MR. O'LEARY: Thank you. 215 Finally, Ms. Squires, do you have any general views or observations about the value to the company and/or ratepayers of the consultative and of the audit subcommittee that you would like to share with the Board in summation of your evidence? 216 MS. SQUIRES: Yes, I do. I believe I indicated in an earlier panel that the company does support the continued existence of the consultative and the audit subcommittee. We have -- I believe, the company has benefitted in many ways from both of those processes. 217 On the consultative side, I can point to specific programs and program delivery concepts that were brought to the table as ideas from members of the consultative group, and some of these programs have been quite unsuccessful. 218 In terms of the audit subcommittee, notwithstanding all of the process issues that we have been discussing in the 2000 audit, I believe that Enbridge learned a great deal from that process, not only in terms of the learnings from the audit findings themselves, but in terms of how to work effectively with our intervenors and our consultative group. 219 MR. O'LEARY: Thank you very much. 220 Mr. Chair, that concludes the company's evidence in chief in respect of issues 9.2 through 9.5. 221 MR. BETTS: Thank you very much. 222 That brings us to cross-examination and we'll begin to hear from parties who are -- who would like to question in support of the proposal. 223 Mr. Poch, I see you nodding. You will go first. 224 CROSS-EXAMINATION BY MR. POCH: 225 MR. POCH: That's fine, Mr. Chairman. 226 I'd like to start with the consultation, where you just left off. And I'm going to try to be brief and deal with items 9.4 and 9.5 together as I think they share a great many of the same features. 227 Ms. Squires, in his cross-examination or your discussion with Mr. Warren yesterday, I think it's fair to say a pretty bleak picture was painted of the consultative process and the audit committee process. Mr. Neme, in his evidence and in response to some interrogatory requests, interrogatories, makes some comments on that and I wanted to take you to a few of those and get your observations. 228 But before I do, one of the -- sorry, I'm just having Mr. Millyard distribute a copy of minutes which I'm going to want to put before you, and it might be appropriate to get an exhibit number for that. 229 Mr. Chairman, you will recall yesterday this came up. There was a discussion about the resources of the company being a bit tied up in response to information requests and the witness spoke of a series of, I think there were five meetings that dealt with this chunk. And this, needless to say, when there was an allegation brought about that some parties in particular may have been the authors of that, we scurried back last night and spent a lot of time reading minutes. 230 I'll let Ms. Squires in due course report the good news, but when we -- this was just the first of that set of minutes and I -- it did trigger another observation. So I thought if I could file this one and ask Ms. Squires about it, that would be of assistance. 231 MR. MORAN: Mr. Chair, that would be Exhibit K.4.1. 232 EXHIBIT NO. K.4.1: MINUTES OF THE 23rd DSM CONSULTATION - OCTOBER 25, 2000 233 MR. POCH: And that is described as the minutes of the 23rd DSM consultation. 234 MR. MORAN: October 25, year 2000. 235 MR. POCH: And this is again on this theme of the problem and benefits of that consultative process, I just noted at page 10 and we've highlighted the paragraph there, there's an observation recorded that: 236 "In the 1999 review" -- and I assume that means the audit -- continuing, "only $100,000 of the knockdown" -- and again I'll ask you to correct me if I am wrong, that would be that the reduction in the company's SSM claim between its initial claim and the claim, the settlement -- continuing, then, "resulted from the work of the independent auditor, whereas 1.8 million of the knockdown resulted from the work of Kai and Chris" -- and I'll just -- I think we can agree that they were referring to Mr. Millyard and Mr. Neme there. 237 MS. SQUIRES: Yes. 238 MR. POCH: First of all, you were present at that meeting? 239 MS. SQUIRES: Yes, I was. 240 MR. POCH: And this is an accurate, as far as you can recall, minute of that observation? 241 MS. SQUIRES: Yes. 242 MR. POCH: And do you agree that that accurately reflects the history there? 243 MS. SQUIRES: Yes, I agree. 244 MR. POCH: All right. And I cite this both because it's entirely self-serving, Mr. Chairman, and because, really, as an example, Ms. Squires, would you agree that there is value, indeed value even from the perspective, the narrow perspective of ratepayer rates in participation of a broad range of interests in the consultative process. 245 MS. SQUIRES: Yes, I'd agree with that. 246 MR. POCH: And so you'd agree that the challenge then is to construct a set of rules of procedure where we don't throw the baby out with the bath water, in terms of we correct the problems but we keep a process. We don't throw the whole process out; we keep a process where we can obtain that value for the public. 247 MS. SQUIRES: Yes, that's what we'd like to do. 248 MR. POCH: Fair enough. Now, I'm going to take you to Mr. Neme's comments and in that context see if we can see where we agree. 249 First of all, I'm going to ask you to turn to three pieces of evidence, might be -- if you could pull them up in front of you at the same time. They are Exhibit L, tab 10, which is the pre-filed evidence of Mr. Neme. Actually, let's do this one at a time so people aren't struggling with so many binders. And in Exhibit L, tab 10, I wanted you to turn to page 10. Do you have that? 250 MS. SQUIRES: Yes, I do. 251 MR. POCH: I'm just looking at the paragraph below the bulleted paragraphs, under the heading "Consultation Process." I'm going to read you a couple of sentences and see whether can agree. 252 Mr. Neme observes that we share some of the frustrations. He goes on: 253 "In particular, we believe that until recently, the consultative discussions were not nearly as productive as they could have been, because it was possible for a single member of the consultative to prevent the rest of the group from productively moving through a meeting agenda by insisting that its issues or concerns be discussed even when it was clear that no consensus was possible on its positions." 254 Can I ask, do you agree that that was indeed a problem that has faced the consultative and audit committee in the past? 255 MS. SQUIRES: That is, in fact, a problem that we've experienced on occasion. 256 MR. POCH: All right. And is it your position that the protocols and the company's clarified understanding of its role will address that concern? 257 MS. SQUIRES: We believe it will. 258 MR. POCH: All right. And he goes on to indicate support for that, the more disciplined management of the consultative, the recent more disciplined management of the consultative process, and observes: 259 "Indeed, we believe it has begun to make the consultative process more effective." 260 You concur? 261 MS. SQUIRES: Yes, I do. 262 MR. POCH: All right. Turning to two answers that Mr. Neme provided to you, interrogatories from the CAC, they can be found at Exhibit I -- Exhibit I, tab 36, schedules 2 and 3. And they are responses of -- prepared by Mr. Neme. They were questions pertaining to his -- to him specifically, and he responded: 263 "These are responses to the interrogatories from the CAC number 2 and 3." 264 And I'm just going to take you to a couple of his observations there. 265 MR. BETTS: Can I have the reference again. 266 MR. POCH: This is Exhibit I, tab 36, schedules 2 and 3. 267 MR. BETTS: Is it important that we have this in front of us? 268 MR. POCH: No, Mr. Chairman, I think I can actually just read you the relevant sections, and they will be on the record -- 269 MR. BETTS: Please go ahead. 270 MR. POCH: In the first of those, tab 36, schedule 2, there's a question of the CAC, and I'll read it in full: 271 "Mr. Neme suggests that an operating objective should be to achieve consensus. If attempts to move forward were frustrated under the current framework, why would a consensus-building objective work under a new framework?" 272 He answers: 273 "The goal of consensus has not been the problem. The problem has been the way the progress or lack thereof towards that goal has been managed. Until recently, consultative and audit subcommittees have been bogged down by either, 1, not moving on when there isn't agreement, and it is clear that agreement will not be possible." 274 I take it from your earlier comments -- stopping there. I take it from your earlier comments that you'd agree with that observation? 275 MS. SQUIRES: Yes. 276 MR. POCH: "And, 2, not moving on when it appeared possible to reach only partial consensus, that is, among all but one or two parties." 277 And I gather that's a different flavour of the same, and you would agree with that? 278 MS. SQUIRES: Yes. 279 MR. POCH: "And, 3, too much time spent on details and not enough on bigger picture issues." 280 Would you agree with that observation? 281 MS. SQUIRES: Yes, I would. 282 MR. POCH: "These problems can be solved through the combination of clearly-articulated rules of engagement for the process, including responsibilities of all parties, and more disciplined management of meetings and agendas." 283 And I ask if you can concur with those two suggestions. 284 MS. SQUIRES: Yes, I would. 285 MR. POCH: All right. And turning to the second interrogatory I referred to, which is schedule 3 under tab 36, Mr. Neme -- the question is Mr. Neme refers to the fact that the current audit process is working well: 286 "...after some painful lessons from EGD's 2000 audit made it clear changes were needed. Please elaborate on what painful lessons Mr. Neme is referring to. What, in his view, were the reasons why the audit process for 2000 involved 22 meetings?" 287 And I'm going to pick my way through his -- it's a lengthy answer, but I think I can paraphrase some of these and put them to you. 288 He says there are a number of reasons: First, the company had not done enough evaluation of key issues; example, free riders and custom projects. This led to a significant expansion of the scope of the work of the auditor, that is, to do some primary evaluation rather than just reviewing the results of evaluations done by others. And the lesson here was that the company needs to do more focused evaluation of key issues on an ongoing basis. 289 "It is my understanding that they have begun to do so; for example, they are near completion of another evaluation study of custom project free riders." 290 Stopping there, then, do you agree with that observation -- those observations? 291 MS. SQUIRES: I do, and I think now that we've been through the audit process, and we have the benefit of hindsight, we recognize areas where we could have done more complete evaluation and in fact that's why we've got in our partial settlement some dollars allocated to exactly that. 292 MR. POCH: He goes on: 293 "Second, in the absence of clear rules regarding how new information would be used to adjust actual net benefits, budgeted net benefits, or both, for purposes of calculating rewards or penalties under the SSM, this led to a number of discussions on what such rules should be. The lesson here is that we need the Board to establish, clearly establish, those rules." 294 Do you agree with that observation? 295 MS. SQUIRES: Yes, I would. 296 MR. POCH: And I take it that you are content that the rules as set out in the proposed settlement are a good approach to that; if the Board were to adopt, endorse those rules, that would be a significant step forward in directing the consultative and audit groups? 297 MS. SQUIRES: I believe that would be a good step forward. 298 MR. POCH: All right. 299 "And third, the meetings were not managed as well as they could or should have been. In particular, we spent far too much time on routine items like reviewing minutes of previous meetings and discussing what the agenda for the current meeting", should be, I'm adding. "(On more than one occasion, these two items took up half of the time allocated to a meeting.) We all spent too much time discussing what I considered suggestions for relatively minor edits to the auditor's draft reports." 300 Before I go to his "Lessons Drawn," does that accord with your experience? 301 MS. SQUIRES: Yes, it does. 302 MR. POCH: "I draw two lessons from this experience," Mr. Neme says. "One is that meetings need to be run with greater discipline, forcing meetings to move on when agreement cannot be reached, with documentation in various positions in notes. Another is that some entity, that is the company, needs to be clearly vested with the authority to direct the discussion in that way." 303 I take it you've already agreed with that. 304 MS. SQUIRES: Yes, I have. 305 MR. POCH: Just pausing there. You've asked for money to hire an external facilitator, and I want to make sure there's no confusion here. The assumption is that it will be the company hiring the facilitator; correct? 306 MS. SQUIRES: That's right. And to further clarify that, that was to be for the consultative process, not the audit subcommittee process. 307 MR. POCH: And I take it the facilitator's instructions will be consistent with this -- these concerns. 308 MS. SQUIRES: Yes. 309 MR. POCH: All right. 310 "Fourth," and related to the third point, "almost from the beginning, one participant slowed the process by demanding extensive discussion on numerous issues even when it was clear that consensus on many of these issues was not possible. 311 "Again, the lesson here that the company needs authority to advance discussions when agreement is not in sight." 312 Do you agree with those observations and suggestions? 313 MS. SQUIRES: Yes, I do. 314 MR. POCH: He adds: 315 "Also, there is value in having participants in the audit committee selected by the consultative, as most members of the consultative are interested in greater efficiency in these deliberations and will select their representatives based, in part, on perceptions of whether they can work expeditiously." 316 Do you agree with that? 317 MS. SQUIRES: Yes. 318 MR. POCH: And would you further agree, not with Mr. Neme but my suggestion, that the use of a subcommittee for the audit committee will be a way to enable that selection for efficiency? 319 MS. SQUIRES: Yes. 320 MR. POCH: Thank you. 321 Now, you've taken us through the protocols. There was one matter that I think the protocols don't address which I wanted to ask you about. Correct me if I am wrong, but I recall the history is that a year ago, the consultative spent a good deal of time trying to land on budget and target numbers and that's when they were asking for the various scenarios that took so much time of your staff. And in fact no agreement was reached and it then had to go to an ADR, at which point agreement was reached; is that correct? 322 MS. SQUIRES: That's correct. But it was during fiscal 2001, not 2002. 323 MR. POCH: Right. And after going through that experience in the next year, with the first fiscal 2002, is my recollection right that the budget and target weren't discussed at nearly the same length and it was basically agreed to leave it to the ADR? 324 MS. SQUIRES: Yes, that's exactly what happened. 325 MR. POCH: And success was obtained in the ADR in reaching settlement on those items? 326 MS. SQUIRES: On partial settlement. 327 MR. POCH: Now, having tried it a couple of different ways, would you agree that indeed it is a cost-effective way to proceed to leave those items, the settlement of those items, largely to the ADR to avoid a duplication of effort and to impose a kind of pressure on the participants to make up their mind or go to the Board? 328 MS. SQUIRES: I would suggest that there's nothing wrong with attempting to reach some consensus in a consultative framework, but to allocate a certain period of time to do that, whether it be one meeting or a period of a few weeks, at which time the company could propose to the consultative group its preliminary plan, including a DSM target and budget, such as we did last November, and elicit feedback from the consultative members at that time. And if agreement can be reached, that's great. We don't want to not even bother to try, but certainly we would recognize that there should really be a limited time frame in which to attempt to do so. And if we can't succeed, go to ADR. 329 MR. POCH: And I take it, then, you agree that the -- those are the key factors for rate-setting purposes, and they are going to need to get addressed in this process each year, whether or not other items have to be addressed as well. 330 MS. SQUIRES: Yes. 331 MR. POCH: All right. Okay. I think we can leave consultation and move to issue 9.2 pertaining to SSM. I have just a very few questions here. 332 First of all, you clarified this morning that the notion -- flowing from the notion of going to gigaJoules, you've clarified the history that, in fact, you do include the TRC benefits of other fuels - in particular, electricity and water, if we can call it fuel - in your SSM. 333 May I ask you to confirm my understanding that you don't pursue pure electric or water conservation programs, that you recognize those savings when they are ancillary to a program that conserves gas? 334 MS. SQUIRES: That's correct. 335 MR. POCH: All right. And it's your intention that that shall remain your objective? 336 MS. SQUIRES: That's correct. 337 MR. POCH: All right. Thank you. 338 Now, panel, in the interest of time, some days ago I provided you with a copy of excerpts from ^ Mr. Chernick's evidence, which, Mr. Chairman, are reproduced in the GEC/CIELAP examination -- cross-examination materials, Exhibit A.1.3. And we -- this was -- Mr. Chairman, Mr. Chernick was a witness for -- filed evidence as an expert witness on behalf of GEC in the 495 case when SSM was being considered. A settlement was reached, and the Board endorsed that. 339 And we've -- this is an excerpt from his evidence, and I invited the witnesses to have an opportunity to read this so I wouldn't have to do what I just did, which is read lengthy sections into the transcript. And I think with that safely there, I can simply turn. 340 I imagine this may be for the consultant half of the panel. I want to ask you this: Mr. Chernick sets out a number of factors which he at the time indicated supported the need for an incentive mechanism. Do the factors that Mr. Chernick outlines in his evidence excised there, asserted there, are they still at play and still valid? 341 MR. HEENEY: I'll answer that on behalf of the panel. 342 We've looked at these factors very carefully, and I guess the answer has two, sort of, components to it: One is that, in general, we would agree that these things still apply. In particular, when we look at the factors on page 4, the first one about the utility profits are likely to be small when rates are set annually based on sales forecasts -- I'm sorry. The concern about lost revenues not covered by the LRAM, that was identified to us by various persons within the utility as something that they had a question about. It wasn't that they asserted that that was their view, but they wondered whether that might be possible. 343 The second one on utility endorsement of energy efficiency undermining the culture of energy consumption, we didn't hear that from anyone we spoke to within the organization. Obviously we didn't specifically ask them whether that was a concern of theirs either and therefore it may be. But we have no reason to think that it is. 344 And that's true, also, for the third one about the moral status of the utility sales efforts being undermined by efforts to reduce energy consumption. 345 The fourth one about concerns on the energy efficiency reducing the future profitability of the company, that is something that some persons within the organization had raised as a question; again not something that necessarily asserted was the case, but wondered whether it might be the case. 346 So those are concerns that people within -- those two, in particular, the first and the fourth, that people within the organization may -- they are questions in their mind, whether these are true or not. 347 MR. POCH: And in presenting these, they actually -- these were actually originally presented by ^ Mr. Nichols, who was a witness, I think, for the company, and these were -- Mr. Chernick offers these as concerns that may be concerns from the perspective of people in the company, whether or not they are -- he agrees with them on a theoretical basis. 348 But he starts his section there with a more fundamental concern; that is, this -- there is a competition for resources within the company, the company traditionally directed towards increased sales and revenues, delivering gas, and building facilities, and that to get management attention, support, and resources is the primary reason to have an incentive if we want to see DSM do well. 349 Do you agree with that more fundamental rationale, that that more fundamental rationale was -- that was still at play? 350 MR. WILLIAMS: The question about the point that energy efficiency efforts must compete with other business activities, I think, yes, that is true. DSM must compete with the other core activities of Enbridge. And through our discussions with the company, we did see some evidence that there is some tension between the core activities of the utility and DSM. 351 MR. POCH: Thank you. 352 I have a few other questions on SSM, and whoever on the panel feels appropriate to answer it, please do. 353 First of all, absent a situation where we have the shareholders investing their own capital in SSM -- in measures, can we agree that SSM is not at all about return on equity? 354 MS. SQUIRES: I would agree with that. 355 MR. POCH: All right. And it is about incenting performance? 356 MS. SQUIRES: Yes. 357 MR. POCH: So it can be seen as a form of performance-based regulation. 358 MS. SQUIRES: Yes, I believe so. 359 MR. POCH: All right. And Mr. Williams, I think I'm interested in your opinion on this most. Are you reasonably confident - you've set out some principles and so on - are you reasonably confident that the proposed settlement for 2003 while it may not be the be all and end all - and we all agree that we are looking forward to considering other options for the future - but at least for the interim, would you agree that that proposal will do what it's supposed to do, will incent the company to aggressively pursue DSM? 360 MR. WILLIAMS: In the settlement proposal? 361 MR. POCH: Yes. 362 MR. WILLIAMS: Yes, I believe that it will incent the company to pursue DSM and to achieve the results. 363 MR. POCH: All right. 364 MR. HEENEY: May I add something to that? 365 MR. POCH: Sure. 366 MR. HEENEY: We've specifically asked the corporation whether they will and they have advised us that it will, and we have no reason to doubt their assertion. 367 MR. POCH: And quite apart from the fact that you trust the folks, from your assessment of the pressures at play at the utility, I take it you don't glean any concern from there either. 368 MR. HEENEY: That's right. 369 MR. POCH: Now, Mr. Williams, you did list six principles. There's only one that we want to take you up on, and that was the second where you said that it's appropriate, in your mind, it's appropriate to have an SSM that actually provides a reward just for meeting the target, as opposed to the proposal which we've landed on which is you only start to get a reward if you exceed the target; correct? 370 MR. WILLIAMS: Yes. 371 MR. POCH: I think you have just agreed that in the situation where you have an SSM that kicks in when you start to exceed the target, the company is indeed motivated on the DSM front; correct? 372 MR. WILLIAMS: There is a motivation there, yes. 373 MR. POCH: All right. So then let me ask you: What's the rationale for needing a reward merely to meet the target? 374 MR. WILLIAMS: I think that there's been a lot of discussion about program saturation and changes in the market and I think that for Enbridge, there is an incentive for them if they were able to meet the target to -- the incentive for meeting the target will provide an additional impetus for Enbridge to achieve the target and in fact surpass the target. It just gives them that additional push above and beyond just an incentive starting at the target to pursue and expand its DSM activity. 375 MS. SQUIRES: If I could add to that as well, I think an incentive at the target explicitly acknowledges that significant TRC savings, energy bill savings have been achieved just by meeting the target. And in fact even to some degree even for achievements under the target, significant TRC benefits have been or have occurred and that -- and an award at the target acknowledges that. 376 MR. POCH: All right. Can we agree that your rationale for receiving a reward for merely meeting the target is perhaps strengthened if you view the particular target as a -- quite an aggressive target; that is, if it's a very easy target, would you -- let me put it in the opposite first. 377 If it was a very easy target, a cake-walk for the company, you would agree that would not be appropriate. 378 MS. SQUIRES: Yes. 379 MR. POCH: All right. So one's view on the need for that might depend on one's view of how aggressive the target is, then. 380 MS. SQUIRES: That's right. And I'd like to expand a little bit here, and I don't think it's a matter of easy versus difficult targets. You have to look at both budget and target in this situation and you can have a low volumetric target and a really low budget and that can still be really difficult to do. 381 MR. POCH: Okay. Thank you. That's very helpful. By all means if you want to -- 382 MR. HEENEY: When we were deliberating on this principle, I guess, there is another issue that we were considering that led to this principle and that's -- there are sort of three major kinds of activities that the company engages in. 383 There are activities that are clearly designed to generate income; those are the core businesses of the activity, primarily distributing gas. 384 There are activities that the company doesn't expect to generate income from but that are mandatory, that are an essential part of operating a business or that meet a regulatory this requirement, this proceeding, filing income tax and so on. There's not an expectation that those would generate revenue or income. 385 And then thirdly, there are activities that the corporation engages in for indirect benefits that it might achieve, for example, charitable participation contributions, and those are done for a whole bunch of reasons, being a good citizen and motivating employees and so on. 386 And the question was where DSM fits into those three things. And at the moment it's primarily seen as a regulated, a mandatory activity because there's no expectation of income when the target is met. And we want to address the concern that is identified in the Chernick paper where he talks about peripheral issues. If DSM is to be an integral issue rather than a peripheral one, it's reasonable that there be an expectation that DSM activities would generate income and revenue. 387 MR. POCH: Okay. I took it from your -- thank you. 388 Ms. Squires, I took it from your comments a moment ago that there is a design trade-off issue here between where the target is, what the budget is, and what the SSM structure is. All of these are important factors for the company in understanding where its incentives lie. 389 MS. SQUIRES: Right, they are all very interrelated. 390 MR. POCH: Thank you very much. 391 Those are all my questions, Mr. Chairman. 392 MR. BETTS: Thank you. It's 11:00 now and I think it's probably an appropriate time for a short coffee break, and you'll recall the rules we established for that. So we'll aim at getting back, if we can, in 20 minutes, and if I read my clockwork appropriately, it will be 20 past 11:00 in this case. So at this point we will stand adjourned until 20 past 11:00. 393 --- Recess taken at 11:00 a.m. 394 --- On resuming at 11:25 a.m. 395 MR. BETTS: Thank you, everyone. Please be seated. 396 Mr. Poch, I believe you concluded your cross-examination. 397 MR. POCH: Thank you. 398 MR. BETTS: Could I have an indication of how many would like to cross-examine the witness panel in support of the proposal? 399 MR. KLIPPENSTEIN: Pollution Probe would, Mr. Chair. 400 MR. BETTS: Thank you. Any others? 401 Thank you, then, please -- Mr. Parry. 402 MR. PARRY: Yes. 403 MR. BETTS: Thank you. Then please proceed. 404 MR. MacODRUM: Mr. Chair, you're asking just people that want to examine in support of the proposal? Because I do have a few questions but not in that category. 405 MR. BETTS: Okay. Well, we'll certainly get to your category as well. 406 MR. WARREN: Just have to hold our breath for the surprise. 407 MR. BETTS: Mr. Klippenstein. 408 MR. KLIPPENSTEIN: Thank you, Mr. Chair. 409 CROSS-EXAMINATION BY MR. KLIPPENSTEIN: 410 MR. KLIPPENSTEIN: I'd like to ask a number of questions of the panel regarding the SSM payments and particularly maybe trying to address the concern that somebody might have that the company is getting a large multi-million-dollar payment here and is it really worth it; and also the perception that the guy or the gal on the street might have that this is somehow not real savings, it's some kind of hocus-pocus. 411 Would you agree with me that the entire shared savings mechanism is linked to and derived from the savings as measured by the total resource cost test? 412 MS. SQUIRES: Yes, I would. 413 MR. KLIPPENSTEIN: So the TRC benefits are the fundamental concept behind the SSM. 414 MS. SQUIRES: Yes. 415 MR. KLIPPENSTEIN: The TRC, as I understand it, measures - well, as some members of the panel phrased it in your examination-in-chief - a certain benefit to society or Ontario. But let me zoom in a little bit, and I think this isn't in contradiction with what the panel members said but picks up on something. Ms. Squires, you said I think yesterday and today, what it measures is energy bill reductions; is that generally accurate? 416 MS. SQUIRES: I believe it is. 417 MR. KLIPPENSTEIN: And is it accurate to say that the TRC measures the total or aggregate net bill reductions for Enbridge customers? 418 MS. SQUIRES: Approximately so, yes. 419 MR. KLIPPENSTEIN: And when you say "approximately", that is pretty much essentially it; right? It's the total or aggregated net bill reductions for Enbridge customers as a whole. 420 MS. SQUIRES: Yes, to the extent that the assumptions behind the calculation are correct, it is, it is as you've described it. 421 MR. KLIPPENSTEIN: Right. And it's total because it's aggregated; correct? 422 MS. SQUIRES: Yes. 423 MR. KLIPPENSTEIN: And it's net because it's after you subtract the costs such as the costs to do the programs; right? 424 MS. SQUIRES: That's right. 425 MR. KLIPPENSTEIN: And it's bill reductions. It's not greenhouse gas reductions, it's bill reductions; right? 426 MS. SQUIRES: Right. 427 MR. KLIPPENSTEIN: And it's in relation to Enbridge customers. 428 MS. SQUIRES: That's right. 429 MR. KLIPPENSTEIN: Would it be fair, maybe not capturing every single nuance of it, but would it be fair to say that what we are measuring and looking at here is Enbridge customer bill reductions? 430 MS. SQUIRES: I would agree with that. 431 MR. KLIPPENSTEIN: Okay. So despite all the acronyms and the fancy talks from lawyers and consultants, what we're talking about here is customer bill reductions. 432 MS. SQUIRES: Yes. 433 MR. KLIPPENSTEIN: Now, if the person on the sidewalk is looking at this and says, Okay, supposing you're talking about customer bill reductions for Enbridge customers as a whole. How can you do that? It sounds like magic or hocus-pocus or lawyers and consultants dreaming things up. The testimony of several panels has talked about some of the ideas and technologies and applications that are part of this collection of programs. Would it be fair to say that these bill reductions come from good energy efficiency ideas, which, because of this or that identifiable, unsolvable hurdle, aren't yet being implemented? 434 MS. SQUIRES: That's correct. 435 MR. KLIPPENSTEIN: So basically these bill reductions come from good energy ideas and -- good energy efficiency ideas; is that right? 436 MS. SQUIRES: We believe so. 437 MR. KLIPPENSTEIN: Now, would you also agree with me to the -- in a way that addresses an idea that might occur to the guy or the gal on the street that -- and in fact, Mr. Warren, in his cross-examination, mentioned the concern that these programs cost money, which somehow gets factored in there, and there is no free lunch, and so what's going on here? 438 Would you also agree with me that when you use the TRC test or formula, what you are essentially doing is making sure that you basically use only those good energy efficiency ideas which are financially sensible; is that fair? 439 MS. SQUIRES: By definition, if you have a positive net TRC benefit, they are cost effective, and I would interpret that to be -- to mean sensible. 440 MR. KLIPPENSTEIN: So when we're looking at these millions of dollars of TRC savings and these millions of dollars of pay-outs to the company, we are -- it is a fundamental part of this structure that the programs that we're talking about are financially sensible. 441 MS. SQUIRES: I agree with your statement, but the preamble threw me a little bit. 442 Can you rephrase it, please. 443 MR. KLIPPENSTEIN: Okay. Good thing you didn't ask me to repeat it, because I couldn't have remembered. 444 Is it fair to say that because these programs as a whole are so essentially linked to the TRC test that it is a fundamental part of these whole programs, the theme that runs throughout them that they are financially sensible? 445 MS. SQUIRES: Yes. 446 MR. KLIPPENSTEIN: Thank you. 447 With that in mind, we've prepared a table, an exhibit -- a proposed exhibit with a table, which I believe has been distributed to panel members and Board members and -- or is about to be. Thank you. 448 And it deals with SSM payments, and it's called "Enbridge's 2003 Potential SSM Payments"; although, we've cleverly put the title not at the top where we would normally expect it, but beneath the table, for which I apologize. 449 MR. MORAN: Mr. Chair, that would be Exhibit K.4.1. 450 MR. BETTS: 4.2. 451 MR. MORAN: Sorry, 4.2, my mistake. 452 MR. BETTS: Thank you. 453 MR. WARREN: I wonder if there are any additional copies -- 454 MR. MORAN: Yes, I do. I have them. 455 That's a table prepared by Pollution Probe, "Enbridge's 2003 Potential SSM Payments." 456 EXHIBIT NO. K.4.2: TABLE PREPARED BY GEC ENTITLED "ENBRIDGE'S 2003 POTENTIAL SSM PAYMENTS" 457 MR. KLIPPENSTEIN: Now, do you see this table, Exhibit K.4.2? 458 MS. SQUIRES: I have it. 459 MR. KLIPPENSTEIN: And you've had it for a little bit of time. Have you had a chance to look at the assumptions that are listed there and the calculations, and are the calculations correct with those assumptions in mind? 460 MS. SQUIRES: Yes, they are. 461 MR. KLIPPENSTEIN: And let me just walk through them to see if I -- if we've got these implications correct. 462 Actually, a little bit more background before I get into this, because this deals with the actual hard numbers that come out from the way the SSM is prepared. 463 But in terms of historical context, according to the settlement agreement, the 1999 and 2000 and 2001 shared savings rates for the SSM program was 35 percent; is that right? 464 MS. SQUIRES: Can you repeat the years that you just mentioned. 465 MR. KLIPPENSTEIN: The SSM program for 1999 and 2000 and 2001 use the shared savings rate of 35 percent. 466 MS. SQUIRES: That's correct. 467 MR. KLIPPENSTEIN: Which meant that after a certain number amount of savings, the company would get 35 percent of the savings beyond that level. 468 MS. SQUIRES: Not exactly. The company would get 35 percent of the difference between the actual savings and the budgeted savings. 469 MR. KLIPPENSTEIN: Right. I think that's what I said, but your answer is clarification, thank you. 470 But then the next year, 2002, the rate went down to 20 percent; is that right? 471 MS. SQUIRES: That's right. 472 MR. KLIPPENSTEIN: In other words, the company got less of those savings and the customers got more. 473 MS. SQUIRES: Yes. 474 MR. KLIPPENSTEIN: And the partial settlement proposed before the Board now reduces that further; is that right? 475 MS. SQUIRES: That's correct. 476 MR. KLIPPENSTEIN: To a range between 6 percent and 18 percent. 477 MS. SQUIRES: That's correct. 478 MR. KLIPPENSTEIN: And the reduction in those rates reduces the potential reward to the company from what it was in past years in terms of percentage, and it does so fairly dramatically. 479 MS. SQUIRES: Yes, it does. 480 MR. KLIPPENSTEIN: So if you could turn to Exhibit K.4.2, in the second row, the first row with the numbers, in the first column entitled "Exceeds Target By," and just assuming that that means that that's the amount by which the bill reductions achieved by the company exceed the budget level, in other words, if the company gets bill savings 10 percent higher than projected, then the SSM payment to the company would be 2.34 million; is that right? 481 MS. SQUIRES: That's right. 482 MR. KLIPPENSTEIN: And moving to the next column, the total TRC benefits in that case, and I'll take out the jargon and substitute, the net total bill reductions to customers; is that a fair rephrasing? 483 MS. SQUIRES: Say that again, please. 484 MR. KLIPPENSTEIN: The net total bill reductions to customers -- 485 MS. SQUIRES: Yes. 486 MR. KLIPPENSTEIN: -- would be $143 million. 487 MS. SQUIRES: That's right. 488 MR. KLIPPENSTEIN: Now, in the next column, if I compare those two, the SSM payment to the company as a percentage of the total customer bill reductions is 1.6 percent; is that accurate? 489 MS. SQUIRES: Yes, it is. 490 MR. KLIPPENSTEIN: And to the next column, the impact of that SSM payment on Enbridge's after-tax return on equity using the assumptions below would be 14/100ths of one percent; is that fair? 491 MS. SQUIRES: That's what the calculations result in, yes. 492 MR. KLIPPENSTEIN: And that's based on reasonable assumptions, is that right, as set out on the table? 493 MS. SQUIRES: Yes. 494 MR. KLIPPENSTEIN: If I go to the next line and this follows the potential increase in net bill reductions, if you, meaning the company, exceed the target by 20 percent, then you, the company, get a payment of 4.29 million because you've achieved net bill reductions of $156 million for the customers; is that right so far? 495 MS. SQUIRES: Yes. 496 MR. KLIPPENSTEIN: And so the payment you get is 2.8 percent of the total bill reductions; right? 497 MS. SQUIRES: Yeah. 498 MR. KLIPPENSTEIN: In other words, of the bill reductions of 156 million, 97 percent of that is kept by the customers; right? 499 MS. SQUIRES: Yes. 500 MR. KLIPPENSTEIN: And in the next column, the impact of that payment of 4.29 million is 25/100ths of 1 percent on Enbridge's after-tax return on equity; is that correct? 501 MS. SQUIRES: Yes. 502 MR. KLIPPENSTEIN: I won't go through the others, but again, if you exceed the target by 30 percent, the company gets almost $6 million but the customers save 169 million; is that right? 503 MS. SQUIRES: 169 million less the SSM payment to the company. 504 MR. KLIPPENSTEIN: Right. So the customers keep 96.5 percent of the savings. 505 MS. SQUIRES: That's right. 506 MR. KLIPPENSTEIN: Would you agree with me that in this kind of structure, the SSM is in the financial self-interest of Enbridge's residential customers? 507 MS. SQUIRES: I believe it is. 508 MR. KLIPPENSTEIN: Is that true also for Enbridge's commercial customers? 509 MS. SQUIRES: In general, I can say yes, and I just want to be clear that it -- the true answer would depend on the share of the benefits between those sectors. 510 MR. KLIPPENSTEIN: Right. 511 MS. SQUIRES: And assuming they are both positive, the answer would be yes. 512 MR. KLIPPENSTEIN: And the same would be true for industrial customers. 513 MS. SQUIRES: Yes. 514 MR. KLIPPENSTEIN: And all of that, because it creates an incentive for Enbridge to aggressively promote financially-sensible energy efficiency programs which reduce their bills; is that fair? 515 MS. SQUIRES: I'm sorry, repeat the question again. 516 MR. KLIPPENSTEIN: That it -- the SSM as we've seen here, and as in the partial settlement agreement, is in the financial self-interest of those various customer groups because it motivates Enbridge to aggressively promote financially-sensible energy efficiency programs which will reduce their bills. 517 MS. SQUIRES: I would say yes, but I would qualify that to indicate that it's obviously, as you indicated, less of an incentive than we've had in the past in the sense that the marginal incentive rate is lower than we've had. 518 MR. KLIPPENSTEIN: Right. Which means you've just been out-negotiated this time round; right? 519 MS. SQUIRES: That's one way of looking at it. 520 MR. KLIPPENSTEIN: Would it be fair to characterize this as a continuation of a beneficial realignment of interests so that the interests of the customers as a whole and the company are, in a sense, in alignment here? 521 MS. SQUIRES: I think the realignment objective was what resulted in this partial settlement. 522 MR. KLIPPENSTEIN: And that -- and it's fair to say that this incentive structure which is set up to produce these kinds of bill savings results in this -- in a beneficial realignment of the customers' and company's interests; is that fair? 523 MS. SQUIRES: I believe that would be the consensus view of the parties to the partial settlement. 524 MR. KLIPPENSTEIN: I have no further questions. Thank you, members of the panel. Thank you, Mr. Chair. 525 MR. BETTS: Thank you, Mr. Klippenstein. And Mr. Parry, you had some questions of this panel. 526 MR. PARRY: Yes, thank you. 527 CROSS-EXAMINATION BY MR. PARRY: 528 MR. PARRY: I'm going to start off with looking at the 9.2 issue. And I should just say that the tenor of my questions will be really focusing on the year 2004 and beyond. 529 MS. SQUIRES: I'm having a little trouble hearing you. 530 MR. PARRY: I'm sorry, I will get a little closer to the microphone. 531 MS. SQUIRES: Thank you. 532 MR. PARRY: The tenor of the questions I'm asking you is to deal with the future approaches as opposed to the 2003 approach. What I'd like to begin with is just discussing, in general terms, the SSM mechanism as currently conceived. 533 Now, we've heard through cross-examination today and through evidence earlier that the target-setting exercises still figures prominently in the current proposal. Now, that target-setting exercise, that involves negotiations; is that correct? 534 MS. SQUIRES: Currently, yes. 535 MR. PARRY: And if those negotiations fail and there isn't consensus on a target, what happens then? 536 MS. SQUIRES: If the negotiations are occurring at the consultative stage, then the next step would be to take the negotiations to the ADR. And if again negotiations fail then it would be brought before the Board in a hearing. 537 MR. PARRY: And we've heard over the last couple of days evidence about the difficulties in past negotiations; is that fair to say? 538 MS. SQUIRES: At the consultative level, yes. 539 MR. PARRY: And you've underscored, though, that although there have been difficulties, these consultative efforts have had benefits; is that fair to say? 540 MS. SQUIRES: Yes, it is. 541 MR. PARRY: But nevertheless, looking at the future, one of the efficiency setbacks of the SSM mechanism as currently conceived could potentially be future difficulties in negotiations. 542 MS. SQUIRES: I feel that the proposals that the company's -- well, that the parties to the partial settlement have are related to the operation of the consultative, and the audit subcommittee will greatly improve the ability to negotiate these things. 543 MR. PARRY: And would you feel that would speak to the target-setting exercise as well as the audit process? 544 MS. SQUIRES: Definitely. 545 MR. PARRY: Now, when one is setting targets, there is inherently, in the setting of these targets, uncertainties; in other words, when one is trying to predict the company's performance, there is no certainty in the accuracy of those predictions. 546 MS. SQUIRES: There's no certainty, but there are degrees of accuracy. 547 MR. PARRY: Fair enough. But in making those assessments ahead of time, none of us have a crystal ball and can tell how effective the company is going to be in the future in promoting its DSM measures; is that fair to say? 548 MS. SQUIRES: That none of us has a crystal ball, that's correct. And I would add to that, that part of the settlement agreement again is to include some budget dollars towards improving our ability to forecast. 549 MR. PARRY: Very true. But there will always be differing opinions on the company's projected future success in implementing DSM measures. 550 MS. SQUIRES: Yes. 551 MR. PARRY: So there's a level of subjectivity. 552 MS. SQUIRES: A certain level of subjectivity, yes. 553 MR. PARRY: When we interpret the past performance, there's going to be issues on how you can -- what you can extrapolate from past performance when trying to predict future performance. 554 MS. SQUIRES: That's right, and that's why we are proposing to not just rely on past performance in the budgeting and target-setting process. 555 MR. PARRY: Now, on the one hand, if the targets are set too high, that leaves the company in a position because if they don't meet those targets, they fail to get any incentive; is that fair to say? 556 MS. SQUIRES: Yes, and again I would qualify to say if the targets are set too high without the necessary budget. 557 MR. PARRY: The company's incentive is to set a target that it thinks it can meet. I mean, the company wouldn't deliberately set a target it didn't think it could meet. 558 MS. SQUIRES: That's correct. 559 MR. PARRY: On the contrary, it would set a target that it thinks it's capable of meeting. 560 MS. SQUIRES: The company sets targets that it sees as aggressive yet achievable. 561 MR. PARRY: And if it achieves those benefits and gets an incentive, the incentive flows straight to the bottom line, if you will? 562 MS. SQUIRES: If it surpasses the target, that's correct. 563 MR. PARRY: And by that, it essentially is then -- and it may not be the proper term -- but essentially, when I say it goes straight to the bottom line, it's money in the company's pocket? 564 MS. SQUIRES: The incentive is, yes. 565 MR. PARRY: Human nature would dictate, then, that the company would try to keep at the low end of potential range of targets. 566 MS. SQUIRES: Again, as I said earlier, the company -- the company's approach is to end up with a target that is achievable, perhaps challenging but achievable. 567 MR. PARRY: And when you're in negotiations, some of the consultative groups would be saying, Look, this is what you did in the past; surely you are capable of doing that next year. Whereas the company might respond by saying, Well, yeah, but, you know, we're not sure we're going to be able to achieve the same results in the showerhead program this year, for example, because we've got a certain level of saturation, and there is a tug-of-war between two extremes. 568 Is that fair to say as to how the process evolves? 569 MS. SQUIRES: That's how it has occurred in the past. 570 MR. PARRY: And it's pretty safe to assume that that's how it's going to occur in the future. There's going to be this tug-of-war between low end of the extreme predictions and high ends of extreme predictions. 571 MS. SQUIRES: Well, again, I would repeat that with some of the other aspects of the settlement, partial settlement agreement in place, such as the operating procedures and the extra research, the company's position is that that will greatly facilitate the target and budget-setting process. 572 MR. PARRY: But nevertheless, there's going to be the -- a competition of competing interests, and there's going to be forces that try and drive the TRC down, the TRC target down, and there's going to be forces that try and drive the TRC target up. 573 MS. SQUIRES: That's fair. 574 MR. PARRY: That process is what has often been called "gaming"; fair to say? 575 MS. SQUIRES: I don't think that's fair. I think I would describe that process as negotiation. 576 MR. PARRY: But it would certainly not be in the company's interest to set a target that would affect its bottom line. 577 MS. SQUIRES: Can you repeat the question, please. 578 MR. PARRY: Well, the company's got a financial incentive to exceed a target; right? 579 MS. SQUIRES: That's correct. 580 MR. PARRY: And if it knows that if it exceeds a target, and the money goes straight to its bottom line, then there's a financial incentive to set a target that it knows that it can exceed. 581 MS. SQUIRES: That's correct, except that the company recognizes that it also has to defend that target ultimately before the Board. It's not -- it cannot set and go forward with a target without that approval. 582 MR. PARRY: But those are forces that, in any event, come to bear on this negotiating process. 583 MS. SQUIRES: Yes. 584 MR. PARRY: And negotiations will ultimately involve compromises; that's the nature of them; is that fair to say? 585 MS. SQUIRES: Yeah. 586 MR. PARRY: But in any negotiations, sometimes the compromises benefit one side of the dispute more than another, and sometimes you cut right down the middle. But in each year that will be something that is subject to change. 587 MS. SQUIRES: Yes. 588 MR. PARRY: I'd like to refer you to the evidence of -- the pre-filed evidence of Chris Neme, Exhibit L, tab 10. And I'm referring to page 8 of 16. 589 In the second paragraph under the heading B, "Analysis of EGD's Proposal," there's a discussion of what are characterized as important flaws in the proposal. 590 And again, I'm referring to this not to undermine the 2003 proposed settlement or partial settlement, but this is looking forward, so I'd like to ask the questions with that intention in mind. 591 Mr. Neme points out first and most importantly the determination of whether the EGD is entitled to any performance incentives is based solely on first-year energy savings. 592 Would you agree with that proposition? 593 MS. SQUIRES: Just to make sure that it's understood, this is a discussion about Enbridge's originally filed proposal, not about the settlement proposal. 594 MR. PARRY: Yes. I'm sorry. Yes. 595 MS. SQUIRES: The -- I don't think this is entirely accurate because the proposal by the company was based on, or is based on a TRC calculation which does take into consideration the lifetime of benefits from the program. 596 MR. PARRY: He goes on then to elaborate: 597 "In other words, a gigaJoule's electricity savings would be treated the same as a gigaJoule of gas savings even though we know that value is different." 598 Do you agree with that proposition? 599 MS. SQUIRES: If you read that properly, yes. 600 MR. PARRY: Is that an opinion that you share? 601 MS. SQUIRES: I'm thinking about it for a moment. To the extent that the TRC includes gas, electric and other resource savings in its calculation, I don't believe this is true, although I have to admit I haven't had the opportunity to fully analyze this statement. 602 MR. PARRY: Perhaps I'll let you reflect on that, and I'll move on for now. He goes on to say that a gigaJoule of gas savings in the winter would be treated the same as a gigaJoule savings spread across the entire year, even though they are not equally valuable. Would you agree with that opinion? 603 MS. SQUIRES: Embedded in the TRC calculation are load profiles as they might differ between heating and space heating so to that extent, again, I don't believe this is true. 604 MR. PARRY: Would there be any possibility of not accounting -- the proposed TRC method, would there be any possibility of not fully accounting for the difference between winter gigaJoule gas savings and year-round gigaJoule gas savings? 605 MS. SQUIRES: Can I just have a moment, Mr. Chairman, to consult? 606 MR. BETTS: Please. Go right ahead. 607 MS. SQUIRES: Thank you for the time. Just to get back to your question. What I think has happened in Mr. Neme's evidence is that perhaps either our proposal has been misunderstood or mischaracterized in the sense that we are proposing that what makes the company eligible to receive an incentive in the first place is whether or not we meet our gigaJoule target. So from that standpoint, a gigaJoule of electricity savings would be the treated the same as a gigaJoule of gas savings. But in terms of calculating the actual incentive amount, that is built on the TRC calculation which does take into consideration all the different resource savings as well as the load shapes and any seasonality that might be embedded in them. 608 MR. PARRY: It just occurred to me while you were consulting that the questions raised by this evidence that required the short consultation could be seen as an example where the input of the consultative had a positive result. And that is examination of a question that hadn't been anticipated; do you agree with that? 609 MS. SQUIRES: Certainly, I would, yes. 610 MR. PARRY: In other words, provoking discussion. 611 MS. SQUIRES: Yes. 612 MR. PARRY: And scrutiny, which, to paraphrase something that was suggested earlier, wouldn't be a total waste of time. 613 MS. SQUIRES: That's right. 614 MR. PARRY: In light of the answer you just gave me, I just want to go through the remainder of this paragraph because that might help clarify the remainder of the evidence in this paragraph and whether or not you agree with it. 615 The next sentences says: 616 "Finally, a gigaJoule of gas savings that will last only one year, for example, cleaning a furnace filter, would reward the utility the same as a gigaJoule of annual gas savings that lasts 20 years, for example, installing a high-efficiency furnace." 617 Do I take it from your evidence that the TRC calculation would take into account those differences? 618 MS. SQUIRES: Yes, it would, and maybe I'll take a moment to clarify again. 619 First of all, in terms of the process by which targets and budgets are set, even under the proposed settlement, the portfolio of programs that the company is planning to undertake in any given test year is a mix of measures and there is a focus on what the total TRC benefit will be from that mix of programs. So to that extent, and for that reason, the company can't just do furnace-filter replacements because the result will be very low TRC savings. 620 So there will always be a mix of programs and that mix of programs is developed with the help and input of the consultative group. 621 Having said that, again, I'll emphasize that the gigaJoule savings from those short measure-life programs and long measure-life programs are only proposed to be used in order to determine whether Enbridge is eligible. It's a yes or no result. And assuming that we are eligible, then the incentive itself is calculated on the TRC of those -- that mix of measures and programs. 622 MR. PARRY: That leads us, then, to the conclusion in that paragraph where there's a suggestion that there's incentives for the company to pursue short-lived or otherwise less valuable savings if they are easier to achieve. 623 Would you agree with that suggestion, that there is such an incentive? 624 MS. SQUIRES: No, I wouldn't. 625 MR. PARRY: And I take it the reasons for that disagreement are what you just previously told me. 626 MS. SQUIRES: That's correct. 627 MR. PARRY: The -- again, I'm referring to -- not to the 2003 settlement but to the proposed SSM design that we've been referring to which would be Exhibit A.7, tab 2, schedule 2, and I'm not asking you to flip to that right now. But just in general terms that the DSM budget would also be, under that proposal, subject to negotiations. 628 MS. SQUIRES: Yes, and as part of that negotiation process, we would bring to the table the extra information and knowledge we gleaned from the research that we're proposing to do under this partial settlement. 629 MR. PARRY: And that involves similar complexities and competing interest that we've just discussed in the context of the SSM target-setting exercise. 630 MS. SQUIRES: I'm sorry, I didn't follow your question. 631 MR. PARRY: Well, by virtue of being a negotiated process, there will be competing interests brought to bear on the target that or the budget that's being set for DSM expenditures. 632 MS. SQUIRES: This is what we talked about earlier? 633 MR. PARRY: Yes, the same thing. We were talking specifically with respect to target setting, and -- but this I'm referring to expenditures. The same type of dynamic is at play when one is setting the DSM budget. 634 MS. SQUIRES: That's correct. 635 MR. PARRY: So in that respect, the company's proposal retains some of the complexities that have existed in past systems. 636 MS. SQUIRES: The company's proposal, I think, mitigates and reduces those complexities, but I don't think our proposal, or any proposal that I've seen to date, can eliminate them. 637 MR. PARRY: When we speak to the issue of simplicity of design, the company's proposal now involves two types of incentives rather than the one type that exists under previous models; is that fair to say? 638 MS. SQUIRES: Can you explain what you mean by "two incentives"? 639 MR. PARRY: Well, there's the incentive obtained for meeting the target and, as I understand it, that involves setting a budget for volumetric gas savings. And then there's an incentive obtained for meeting that target, which would be 10 percent of the DSM budget. 640 MS. SQUIRES: That's correct. 641 MR. PARRY: So you would get a fixed incentive once you meet or beat the target? 642 MS. SQUIRES: That's right. 643 MR. PARRY: So, for example, if the DSM budget was $10 million and you met or beat your target, you would get $1 million? 644 MS. SQUIRES: That's right. 645 MR. PARRY: And that fixed number would be the same whether you exceeded the target by 1 cubic metre or by a million cubic metres? 646 MS. SQUIRES: That fixed portion would not vary; that's correct. 647 MR. PARRY: In the past, the company hasn't needed that type of incentive to exceed its targets; is that fair to say? 648 MS. SQUIRES: For '99, 2000, and 2001, that's correct. 649 MR. PARRY: The company exceeded its targets by a considerable margin without needing that fixed incentive. 650 MS. SQUIRES: That's correct. That's not the case in 2002, however. 651 MR. PARRY: The other form of incentive, although, involves a different formula than in the '99 and 2000 and 2001 years, still involves the assessment of how well the company exceeded its targets; is that fair to say? 652 MS. SQUIRES: I'm sorry. Are you referring to the 2003 settlement? 653 MR. PARRY: No, no. To the proposed -- proposed design contained in Exhibit A.7, tab 2. 654 MS. SQUIRES: And, I'm sorry, your question was again? 655 MR. PARRY: The second form of incentive in that proposal is a variable incentive that is a function of how well the company exceeds its targets. 656 MS. SQUIRES: That's correct. 657 MR. PARRY: And to that extent, I know the formula is different, but to that extent, it has similarity to the past SSM designs. 658 MS. SQUIRES: In that way, there are some similarities. 659 MR. PARRY: So it involves inherently -- or could potentially involve inherently some of the same disputes and tug-of-wars we've had and the difficulties that have been described with the past SSM design. 660 MS. SQUIRES: If nothing else changed, then I would agree that we would run into some similar difficulties. But again, I have to -- I have to mention the other aspects of the settlement proposal and, in fact, our original proposal that would help eliminate some of those issues, some of the process-related improvements. 661 MR. PARRY: So you'd have to have, for example, clear rules on retroactivity and symmetry, so there's no future bickering about that. 662 MS. SQUIRES: Most definitely. 663 MR. PARRY: You can never eliminate total competing arguments about target setting. That is a potential future hurdle that will also be inherent in any target-setting based SSM design; is that fair to say? 664 MS. SQUIRES: I'm sure there will always be some disagreement on that. 665 MR. PARRY: Which will always take time and effort. 666 MS. SQUIRES: Well, again, company is proposing times and means by which we can reduce that effort. 667 MR. PARRY: But not eliminate. 668 MS. SQUIRES: I think I should emphasize that the company -- I would put forward that we don't want to eliminate that debate because we are informed by that debate, to some degree. 669 MR. PARRY: That's a very fair point. 670 You have been made aware of Mr. Rubin's suggestion of eliminating the target-setting exercise. 671 MS. SQUIRES: Yes, I am. 672 MR. PARRY: And as I understand it, his suggestion is that the elimination of the target-setting exercise and basing the incentive on a fixed percent of the total TRC would eliminate some of the complexities and any of the other proposed designs and specifically the complexities I've just referred to, the target-setting exercise that was the source of so much debate and disagreement over the last few years. Would you agree that that proposed design, more than any other proposal, eliminates those difficulties? 673 MS. SQUIRES: I don't know if I can say that it -- well, I certainly would not agree that it eliminates those difficulties and I don't even know if I would go so far as to say that it is better than any other proposal in that way because I feel that, although that Mr. Rubin's proposal offers some advantages in minimizing target and budget-setting complexities, there are other complexities that it brings to the table that other proposals don't. 674 MR. PARRY: Let's go through those if we can. And I know -- I don't think it's been put into evidence to date and I anticipate we will probably discuss it in his evidence. But just for the Board's assistance, perhaps it would be easier to just go through the general framework of the proposal he circulated amongst counsel. And that is, the company in a given year would achieve a certain TRC benefit which would be subject to audit and there would be an -- after an audit, there would be a number decided upon pursuant to that audit; do you understand that to be part of his proposal? 675 MS. SQUIRES: That's my understanding. 676 MR. PARRY: And then the company would then be given a fixed percent of that TRC benefit, the post-audit TRC benefit; is that understood? 677 MS. SQUIRES: Again, that's my understanding. 678 MR. PARRY: And as a preliminary suggestion, he suggested numbers in the 12 to 18 percent range; is that -- you understand that to be... 679 MS. SQUIRES: I can't remember if those are the exact numbers but the range sounds about right. 680 MR. PARRY: And have you looked at the numbers as suggested by Mr. Rubin and examined whether or not they were something that were financially viable for the company? 681 MS. SQUIRES: We've had a high-level look at his proposal, and frankly we haven't spent a considerable amount of time analyzing it for a couple of reasons: One, because the company has been putting its resources and efforts towards supporting its own proposal and the settlement proposal; and given that this proposal wasn't in evidence, our intentions were to focus on the issues that were on the table at this hearing. 682 Certainly, you know, we have looked at it, we understand the proposal, and we're willing to look at it in more detail through the consultative process through fiscal 2004 as a partial settlement. 683 MR. PARRY: As I understand the proposal, you would recover your DSM costs from this fixed percent of the post-budget TRC incentive. Do you understand that to be -- 684 MS. SQUIRES: That's my understanding. That's a potential outcome. It's not a given that we would necessarily recover all of our costs under that proposal. 685 MR. PARRY: True. And of course the likelihood of that would depend on what percent of the TRC was used to calculate the incentive. 686 MS. SQUIRES: That and the extent of our achievement. Both of those factors would determine whether we would fully recover our costs. 687 MR. PARRY: Under that framework there would certainly be an incentive to obtain the highest level of achievement, then. 688 MS. SQUIRES: Yes, there is definitely an incentive there. 689 MR. PARRY: And there would certainly be an incentive to make sure that your DSM measures that are adopted are very cost-effective. 690 MS. SQUIRES: That's correct. 691 MR. PARRY: Because you wouldn't want to be spending $100 for a $10 million benefit because then you would be -- you wouldn't have those costs recovered ultimately through this proposed design. 692 MS. SQUIRES: That's right. 693 MR. PARRY: So when -- that would be one way of addressing the value-for-money concerns that have been raised. 694 MS. SQUIRES: I can't speak to the concerns related to value for money. 695 MR. PARRY: Well, from the company's perspective, you would certainly want value for money, and -- 696 MS. SQUIRES: From our perspective, yes, and we feel that that's measured by the TRC test, which would be embedded in that model. 697 MR. PARRY: But this proposal would certainly give you an incentive to get value for money out of any DSM measure taken? 698 MS. SQUIRES: By the TRC definition of value for money, yes, it would. And, in fact, our current model does that as well. 699 MR. PARRY: So one potential downside for the company would be that you're not going to recover your DSM expenditures? 700 MS. SQUIRES: Most definitely. 701 MR. PARRY: But if you look at history as a measure of the last couple of years, I would suggest the value for money obtained from the DSM measures would give you every reason to believe that you would be able to recover your DSM expenditures. 702 MS. SQUIRES: Well, I'm not prepared to state at this point that our past experience is a great indicator of what might happen in the future, and that's for the some of the reasons we heard yesterday about program saturation and so on. 703 MR. PARRY: Are there any other difficulties with this proposal that you'd like to identify at this point? 704 MS. SQUIRES: Well, just based on our admittedly high-level analysis of the proposal, there is one significant difficulty that jumped out at us. And that is that this proposal presents a significant departure from the mechanism by which DSM funding has occurred in the past. 705 And what I mean by that is that DSM funding to date has been with ratepayer funding approved in the budget for the test year, and assuming that the programs delivered are cost-effective and achieve the stated results, the company is guaranteed full recovery of those dollars. 706 And the proposal, as I understand it from Mr. Rubin, suggests or indicates that the funding for DSM would come from the shareholder initially, that there wouldn't be a pre-approved budget. And to me -- to me that presents a significant change in thinking and a significant change in the way management will look at DSM. 707 And up to the current point in time, and especially recently, there have been so many uncertainties around the processes in DSM and around the mechanisms and the -- and the extent to which -- and the certainty around achieving and actually being rewarded our incentive, I would expect there would be significant hesitance on the part of senior management of the company to go down that path at this time. 708 MR. PARRY: And at a high-level analysis, though, there might be some compromises available, for example, the negotiation of a fixed DSM budget that would be paid in advance in combination with this proposal. 709 MS. SQUIRES: That's certainly something that we would want to consider, and I guess I would put forward that that would bring us back to the sort of funding mechanism that we already have in place. 710 MR. PARRY: But the -- but in combination with a different incentive mechanism? 711 MS. SQUIRES: Right. That would be something we would consider. 712 MR. PARRY: I'd like to turn now to issues under 9.5. 713 Now, the document that was put into evidence today -- and forgive me, I didn't get the exhibit number, but it was the minutes from the consultative meeting for October 25th, 2000. It was put in by Pollution Probe today. 714 MR. BETTS: I believe that was Exhibit K.4.1. 715 MR. MORAN: That's correct. 716 MR. PARRY: You were referred to a paragraph at page 10 of that document. 717 MR. KLIPPENSTEIN: Just a correction for the record, Mr. Chair, I believe that was put in not by Pollution Probe but by GEC. 718 MR. PARRY: Oh, sorry. 719 MR. MORAN: GEC. 720 MR. BETTS: Thank you. 721 MR. PARRY: You were referred to a paragraph on page 10 where it was said: 722 "Jack pointed out that the experience of the 1999 process demonstrates that the status quo doesn't make sense in the 1999 review. Only $100,000 of the knockdown resulted from the work of the independent auditor; whereas, 1.8 million of the knockdown resulted from the work of Kai and Chris." 723 And I believe you agreed with that summary of the factual history; is that fair? 724 MS. SQUIRES: Yes, I did. 725 MR. PARRY: And in the context of 1999, the term "independent auditor" is a term that refers to a third-party auditor that was under the direction of the company. 726 MS. SQUIRES: That's correct. 727 MR. PARRY: And when we contrast that 1999 year to the 2000 year, we have an independent auditor that's under the direction of the subcommittee. 728 MS. SQUIRES: That's correct. 729 MR. PARRY: And in that 2000 audit, I think we all agree that the audit made substantial findings that modified the evaluation report numbers significantly. 730 MS. SQUIRES: That auditor made recommendations to change numbers in some cases to a significant degree, but as we have already indicated that did not necessarily suggest where and through what process those numbers should be changed. 731 MR. PARRY: Fair. The point being, though, that you agreed with many of the auditor's findings. 732 MS. SQUIRES: Yes, we did. 733 MR. PARRY: And those agreements in a dollar value had millions of dollars associated with them. 734 MS. SQUIRES: Without checking, I couldn't confirm that the recommendations the company agreed to resulted in millions of dollars. There were disputed issues that had results or implications worth millions of dollars. 735 MR. PARRY: Who picked the auditor in 1999? 736 MS. SQUIRES: Enbridge did. I should say that Enbridge did that after considering input from consultative members who also reviewed the proposals that were submitted. 737 MR. PARRY: But they had the final decision. 738 MS. SQUIRES: That's correct. 739 MR. PARRY: Much like in the proposal for the future; Enbridge would be the final decision. 740 MS. SQUIRES: That's correct, and again they would consider input from the consultative members in that decision. 741 MR. PARRY: And when we went down that road before, we realized that the auditor that was picked was not able to uncover as many "knockdown results" as the work of Kai and Chris, for example. 742 MS. SQUIRES: I think that's fair to say and I think that in many ways that's fair to say even in 2000, that a lot of the big-ticket issues, if you will, the ones that resulted in significant financial impacts, even those issues were largely resulting from the discussion of the audit subcommittee members rather than coming from the auditor. 743 MR. PARRY: Would you not agree, though, that in 2000, its auditor uncovered a more substantial, in terms of dollar amount, a more substantial quantum of things overlooked in the evaluation report? 744 MS. SQUIRES: In terms of number of items I couldn't say for sure in terms of -- 745 MR. PARRY: Monetary value. 746 MS. SQUIRES: Yes. I would also say that the company, in guiding the audit from 1999 to 2002, albeit with the input of the audit subcommittee, had learned a lot in that transition from one year to the next; and I would say that that also informed the process and the auditor resulting in more items being uncovered, if you will. 747 MR. PARRY: Probably fair to say that we are a not done learning either. 748 MS. SQUIRES: I think that's fair to say. 749 MR. PARRY: Now, under the proposed approach, there's a suggestion of having -- in terms of electing the audit subcommittee, there would be three votes for each consultative group; is that correct? 750 MS. SQUIRES: Not exactly. There would be three members elected to the audit subcommittee; is that what you meant to say? 751 MR. PARRY: But in terms of the methodology of voting, it wouldn't be one vote per consultative group to vote one member, it would be each group would vote for three members. 752 MS. SQUIRES: Just give me a minute to check my notes and I'll answer that question. 753 I don't actually believe that's correct. I'm just referencing the settlement agreement on page 77; that's Exhibit N.1, tab 1, schedule 1, page 77. And under the heading "Audit Committee Membership and Selection," point 2 states that "three independent members will be selected annually by the non-utility members of the DSM consultative by secret ballot. Each non-utility member of the DSM consultative may cast up to one vote for each of her three preferred choices." And I'm not sure if that's confirming what you said or not, but that's the process that we agreed to. 754 MR. PARRY: I think it does. But in other words, each member would, in essence, cast three votes then, one for each preferred constituent on the subcommittee. 755 MS. SQUIRES: That's correct. 756 MR. PARRY: What advantage do you see of that approach over each member just casting one vote and then the top three electoral candidates being chosen, that route? Do you understand the question? 757 MS. SQUIRES: Can you repeat it, please. 758 MR. PARRY: Well, I see a distinction between each member having one vote for picking one member. So you pick your favorite member, and everybody does that, and then you count up the three most popular candidates. 759 Do you understand the distinction of that approach? 760 MS. SQUIRES: I do understand it, yes. 761 MR. PARRY: What advantages do you see of the suggested approach over that approach? 762 MS. SQUIRES: I haven't analyzed the mechanics of how that might work in comparison to the methodology we've come up with. 763 May I have a moment to confer. 764 MR. BETTS: Go ahead. 765 MS. SQUIRES: I can answer the question. 766 Just on consultation with the rest of the panel, I think the proposed methodology for selection is -- has advantages over what you just proposed in that you have -- you have to keep in mind that there are approximately, say, ten or so active members of the consultative group, and by each party only voting for one, you don't get the diversity in the results that I think you would if -- in the scenario that we've actually proposed. You actually end up with a much bigger group of names. 767 I'm not a statistician, but I expect that in the proposed methodology, you end up getting a fairer representation of who are the favoured ones to be on the committee. 768 MR. PARRY: Well, I'm not sure how you would get a fairer representation if everybody picked their favourite committee member, and then the numbers were ranked, and according to popularity, the top three rankers were elected. Wouldn't that be representative? 769 MS. SQUIRES: I could conceive of an outcome where you end up with each consultative member voting for themselves, and you end up with ten people. 770 I mean realistically that wouldn't happen, but, I mean, it's quite realistic that you could end up with significantly more than the three that we need. 771 MR. PARRY: You're only picking the top three, right, out of -- you would have a ranking of number of votes achieved per candidate, and you are only picking the top three, so... 772 MS. SQUIRES: Well, if -- you can't pick the top three if everybody has one vote. Then there are no top candidates in that case. 773 MR. PARRY: No, I think you misunderstood my proposal, then. 774 What I would be suggesting is if there was one vote per person, each person elects a subcommittee member or puts in their bid for who their preferred subcommittee member is. Then you total up which candidates got which votes, and you only elected the three highest vote-getters, in other words, the three people who got the most single votes. 775 MS. SQUIRES: I think the result is still the same as I described, and perhaps I didn't describe it well enough. 776 You're going to end up with a lot of ties. You could end up with -- if there are ten -- I'll draw a scenario. If you have ten members on the consultative, and seven of them have expressed an interest in participating on the audit subcommittee, it's quite conceivable that a good number of the seven are going to get two votes each or one vote each, and then you'd have to have a subsequent tie-breaker vote. 777 To me it just seems that the proposal that we've got reduces the chance that you're going to have those ties. 778 MR. PARRY: Wouldn't it also increase the chance that if a block of people decided, We don't want that person on the board, let's not have them in amongst our three candidates, wouldn't it increase the chance that a minority could be excluded? 779 MS. SQUIRES: I'm sorry. In your proposal? 780 MR. PARRY: No, in your proposal. 781 MS. SQUIRES: I think that if that were to happen, that could happen regardless of the methodology. 782 MR. PARRY: Well, wouldn't you think the odds of it being -- or the ability for that to happen would be greatly diminished if you had one or, perhaps, two votes per member as opposed to three? 783 MS. SQUIRES: I don't believe so. I believe if -- I mean, I -- if there is a consensus or an intention amongst the voters to achieve a certain result, I believe they could do that in either methodology. 784 MR. PARRY: Well, if you've only got one vote, it would be much more complicated to arrange a consensus, wouldn't it? 785 MS. SQUIRES: I can't speak to that, because I haven't -- I haven't been a part of that sort of -- 786 MR. BETTS: Mr. Parry, I'm sorry. I'm not sure that these witnesses really come with expertise in the kind of electoral outcome, so... 787 MR. PARRY: That's fine. I don't intend to pursue it further. 788 MR. BETTS: Thank you. 789 MS. SQUIRES: Thank you, Mr. Chairman. 790 MR. PARRY: Dealing with the role and conduct of the audit committee, it's been suggested that they in the future be restricted to an advisory role, and what I'm going to suggest to you is a middle ground. 791 In the past, as I understand it, there's been no clear understanding of the committee's decision-making authority, and there's been disputes about whether or not you need a full consensus, a majority vote, or how we resolve our difference in opinion; is that fair to say? 792 MS. SQUIRES: Yes, it is. 793 MR. PARRY: One possible way to resolve that uncertainty would be to, for example, set out rules where the audit committee's decision-making power is still binding but it's based on clear rules, such as decisions made by a majority vote. Would you not agree that that would help resolve some of the difficulties? 794 MS. SQUIRES: I think that proposal still doesn't address the fact that Enbridge is the party that ultimately has to stand before the Board and defend decisions and outcomes. And if Enbridge has to be bound by a consensus amongst intervenors, then that puts Enbridge in a very awkward position in its defence of the decisions before the Board. 795 MR. PARRY: But it would have the effect of there being some check on Enbridge's decision-making. And earlier in my cross-examination I referred to the election of auditors, where some might suggest the 1999 appointment of an auditor was unsatisfactory. The majority vote approach might result in there being a check on company decisions; would you not agree with that? 796 MS. SQUIRES: I would agree that that's the outcome. But I would say that that check on Enbridge's decision-making should not occur in a subcommittee context but should occur in this context, in a hearing before the Board. And again, I would emphasize, in any event, it's the auditor that's carrying out the audit under a predetermined set of terms of reference, and the auditor, even if managed by Enbridge, is acting independently in their professional capacity. 797 MR. PARRY: I neglected to cover one thing under 9.2 and I apologize for jumping around. This is the last area I'm going to be covering. 798 When looking at the budget, the DSM budget exercise, as I understand it, one sets a budget for DSM expenditures in a current year. What would happen, though, if, after the budget is set, the company becomes aware of an attractive DSM opportunity that wasn't budgeted for? 799 MS. SQUIRES: That's essentially what the DSM VA, or if you're referring to the company's original evidence, the contingency as we proposed it, would address. 800 MR. PARRY: And under the current model, what happens if the budgeted program, through the course of the year, becomes manifestly unsuccessful? 801 MS. SQUIRES: In that situation, and that has occurred in the past, the company attempts to reallocate resources within its budget to programs that are being operated successfully and where we think we can pick up those results that aren't being achieved elsewhere. 802 MR. PARRY: And does that -- does the current structure allow that flexibility to occur during that current fiscal year? 803 MS. SQUIRES: Yes, it does. 804 MR. PARRY: I think I've finished all my questions but just let me have a moment, please. 805 Thank you. I have no more questions. 806 MR. BETTS: Thank you. It's obvious we will not conclude the cross-examination of this witness panel and I think this is probably an appropriate place to break in that I believe we have now heard from -- we've had questions from all the parties who signed on to that settlement proposal. 807 So when we resume with this panel, we will go on to the questioning from parties who were not signators to that agreement. At this point we will break for lunch and we will reconvene at 2:00 p.m. 808 MR. POCH: Mr. Chairman, I'm wondering if I might impose on you to have a very brief discussion of schedule to allow me to know whether I can safely leave at this point. 809 I took it this morning that the intention would be to deal with EnTRAC and WAMS this afternoon and tomorrow. And I gather there's -- there will be some discussion as to when the EnTRAC -- these matters will be argued orally which was I think the company's desire and -- but that in any event, this panel won't be -- stand again, this witness panel, until Monday at the earliest, sometime Monday at the earliest, depending on the progress of these two intervening matters. And that the proposal from Board Staff was that the intervenor witnesses on these DSM issues, rather than you hear Mr. Neme and Mr. Rubin on Monday and then Mr. Rowan on the following week, the proposal was that they be saved and heard in one tranche on that following week, the week of the 7th at some point. 810 That can work fine for my witness; that's not a difficulty, so long as we have adequate notice. But I wanted to make sure my understanding was correct before I left at this moment. 811 MR. BETTS: I can't tell you but perhaps someone can. 812 Is Mr. Poch's understanding correct? 813 MR. O'LEARY: To the extent that I can confirm it, I will attempt to; is that there have been discussions about, first of all, proceeding with the EnTRAC panel this afternoon and with WAMS tomorrow. There was then some discussion, but I don't think there is any decision or agreement reached, in respect of when the EnTRAC argument would proceed, whether that would precede or follow the cross-examination of this panel. So I think that's where we presently are. 814 I do believe that there is general acceptance that the DSM intervenor panels would come up at some point during the week of the 7th, recognizing that I believe the Board is not sitting on the 7th and the 8th is questionable depending upon whether the Union QRAM continues on into the Tuesday. But in terms of setting a date for the intervenor panels, I don't believe we've reached that stage as yet. 815 MR. BETTS: It may very well be that the only thing you can go away with is the knowledge that you're not required for the rest of this week. 816 MR. POCH: That's all I needed, Mr. Chairman, and -- my witness -- and I may get the same message from my wife when I get home, and that my witness isn't needed Monday. Thanks very much, Mr. Chairman. I will stay in touch with Board Staff later in the day tomorrow to see the order of things Monday, but I will make myself available however that flows. 817 MR. BETTS: Thank you. And I'm sure that all parties will be doing their best to try and firm up that schedule as soon as possible. 818 Any other questions or comments before we break for lunch? And it was appropriate that you bring that up at this stage. 819 If there are none, then we will stand adjourned until 2:00 p.m. 820 [EGD Panel on Issues 9.2-9.5 stood down] 821 --- Luncheon recess taken at 12:45 p.m. 822 --- On resuming at 2:10 p.m. 823 MR. BETTS: Thank you, everybody. Please be seated. 824 PROCEDURAL MATTERS: 825 MR. BETTS: Well, having completed, at least temporarily, some DSM issues, we see a few more vacant seats and a few more new but familiar faces arriving on the scene as well. 826 First of all, are there any preliminary matters? 827 One from the Board's perspective relates to the motion, which we've just received, filed by CAC regarding the issue of -- well, we all know which motion it is. 828 The timing on that, if I might, Mr. Warren, refers to the motion being argued on Monday, March 31st, and I know there was some discussion today about a later time. Can you clarify that at this point or -- 829 MR. WARREN: I think the building consensus, based on voting patterns of 3:1 ratio, sir, and in the absence of any hanging chads, subject to check, looks like the convenient date for everyone would be the 8th -- convenient, the Enbridge folks have advised me, quite understandably, that they can't be ready for Monday. Mr. Thompson can't be here until the 8th. 830 although Mr. Cass and I haven't talked about this, we have informally canvassed it among Mr. Janigan, Mr. Thompson, and me, and our view is that there are a number of issues which we can proceed with next week in the absence of the information which we've asked for, and so our anticipation is that next week can be used fully and profitably by the Board in working through issues. 831 But the earliest date that we can argue the motion that -- which all of the necessary dramatis personae are present is the 8th. 832 MR. BETTS: Can someone tell me, is that the Tuesday of that week? 833 MR. WARREN: That's the Tuesday, sir. 834 MR. BETTS: That is the Tuesday. The 7th is the day that we're not sitting; that's correct. 835 And, Mr. Warren, what are the possibilities of some of the parties who have been served this notice possibly looking for an extension to that, or does Mr. Cass feel that that timing would satisfy those parties as well? 836 MR. WARREN: I haven't spoken to Mr. Cass about that. I think Mr. Cass indicated to me this morning he had not yet been able to discuss the matter in any length with some of the other parties. They are -- I don't know whether they will be retaining separate counsel. 837 So I'll speak with -- I will be in touch with Mr. Cass as soon as I'm out of here, and we'll try and get you better information as soon as we can. But that's the target date we are looking at now, sir. 838 MR. BETTS: Thank you. We'll leave it on that basis, that that's the tentative date. 839 Any comment, Mr. O'Leary? 840 MR. O'LEARY: No, Mr. Chair. I was simply going to state that Mr. Warren adequately represents our state of knowledge at this time. 841 MR. SHEPHERD: Mr. Chairman, before we leave that subject, I'm concerned with two things in that regard: One is that if we deal with subjects next week, and it turns out that the information being provided relates to those subjects one way or another, I would hope it would be understood that we could call those witnesses back to cross-examine them on the additional evidence. 842 MR. BETTS: Mr. O'Leary, any comments with respect to that position? 843 MR. O'LEARY: I'm sorry. Would you repeat that again. 844 MR. SHEPHERD: If, for example, in corporate cost allocation, if it turns out that the information that we end up getting as a result of this disclosure, if any, raises more questions that are appropriate for cross-examination of those panels, would we have the opportunity, then, to call those panels back and cross-examine? 845 MR. O'LEARY: Well, Mr. Chair, the panel that we're proposing to call on cost allocations is coming a long way from Calgary, and the intent is to proceed with their evidence and to complete any cross-examinations that arise out of that evidence and the pre-filed evidence at that time. 846 So we don't think that it would be appropriate for what Mr. Shepherd is suggesting to take place. 847 MR. BETTS: Are there any -- Mr. Shepherd, first of all. 848 MR. SHEPHERD: Mr. Chairman, in those circumstances, I think we have a concern about that, because there's clearly overlap in the activities of the various affiliates and Enbridge Inc., and some of the disclosed information may provide us stuff we don't have right now on corporate activities. 849 MR. BETTS: Thank you. 850 Are there any further comments or submissions on this particular issue? 851 Mr. Moran? 852 MR. MORAN: Mr. Chair, there are two timing issues, I think, that flow from this that, perhaps, the parties need to consider. If this matter is argued on the 8th, and assuming decided on the 8th if that's possible, the two timing issues that arise as a result of that are, number 1, how long will it take to produce any information that might be ordered to be produced; and secondly, how long might parties need in order to be able to review that information so that they can cross-examine on it. 853 These two timing issues, of course, relate to the possibility of some number of days of delay between any decision on this motion and the hearing of the evidence. 854 MR. WARREN: Mr. Chairman, one of the things I intend to raise with Mr. Cass - I will do it certainly on a without-prejudice basis - is if speaking counsel to counsel we can get some understanding of how much information -- in an ideal world, if all of the information were ordered to be produced, how much information are we talking about. 855 And so the kind of issues that Mr. Moran is talking about, I'm hoping we will be able to -- we have a practical sense of before the motion is ever argued. 856 So that's -- I'm hoping to have that kind of discussion with Mr. Cass as soon as we are able to talk about it. He may not be in a position to tell me; he may not be willing to tell me. But I'm hopeful we can get a sense of the practical implications of this and some of that may feed into the issue which Mr. Shepherd has raised about the implications for panels that might otherwise be heard next week. 857 Just in aid of saying that, all this worrying about this at this stage may be a little bit premature until we have a more practical sense of what's at issue 858 MR. BETTS: I can certainly understand Mr. Shepherd's concern in wanting to get that understood in advance. And if you were able to have that discussion with Mr. Cass, when would you be able to advise the other parties of the situation? 859 MR. WARREN: I'm going to try to have that discussion with Mr. Cass tomorrow. Assuming that I'm out of here on the EnTRAC issue or WAMS issue then I will have that conversation with him tomorrow, I'm hoping. 860 MR. BETTS: Mr. Shepherd, if you were aware of that background, would -- by tomorrow, would that allow you to set your mind at ease at least until that point? 861 MR. SHEPHERD: That's fine, Mr. Chairman. That leads to the second issue Mr. Moran has alluded to and that is that we have a timing question after the 8th. And I -- while I take Mr. Warren's point that it may be premature to discuss that, the fact is that we're scheduling the argument for this now and that has implications for how long it's going to be before we get back to those issues. 862 While I'm -- I sympathize with the fact that Mr. Thompson is not available until the 8th, certainly we might want to consider whether we should proceed on this motion prior to the 8th if it would have an effect on the schedule, even without Mr. Thompson. He has very capable people in his office. So I'm just raising the issue as a concern, Mr. Chairman, and I wouldn't like to see that we decided to set the 8th as the date to hear this motion and not have considered what it means in terms of the hearing after that. 863 MR. BETTS: I certainly accept that as a valid concern, and the only thing I can suggest at this point, because the panel has no answer to this, is that I'd encourage all of the parties to discuss this offline and come back to us with as close to a consensus as possible and we will make the necessary decision from there. 864 Okay. Thank you. And good luck on that. 865 The other item that I'd like to just discuss in advance, and I hope I don't consume too much time because we do want to get to EnTRAC, is actually the arguments related to EnTRAC. And I would ask also again offline, first of all, if I could have an indication at this stage from those people present how many parties would expect to be presenting arguments on EnTRAC. I appreciate you haven't heard the examination of the evidence at this point, but could I have an early indication? 866 The purpose for that is that Mr. Moran would like to, offline, discuss with that group the alternatives in terms of both timing and the nature of the arguments and that would be done later today. So could we just have a show from these present who might be doing that. 867 So Mr. Moran, did you catch that? 868 MR. MORAN: I think so. 869 MR. BETTS: Thank you. We'll leave that with you. 870 Third and final item, and then we'll get on to the business at hand, is someone was requesting some methodology by which they could get quicker access to the transcripts electronically and Mr. Moran has indicated that the Board Secretary, if you contact Mr. Peter O'Dell, Board Secretary, that he will provide the interested parties with a pass word that will allow them access to the transcripts in the evening of the day that they were taken. 871 So I will have to leave that to each of you to contact the Board Secretary's office and each individual will get their own password. I don't understand the system, but those are my instructions so I'm sure Mr. O'Dell can help you with the details of that. And I hope that assists the parties. 872 Are there any other preliminary matters? Then with that, Mr. O'Leary, I will turn it over to you. And we are now entering discussion of issue 6.4. 873 MR. O'LEARY: Perhaps I could start by asking for the panel to be sworn by Mr. Dominy. 874 MR. BETTS: Thank you. Mr. Dominy will do that. 875 ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 6.4: CHARLESON, COLLIER 876 D.CHARLESON; Sworn. 877 J.COLLIER; Sworn. 878 MR. BETTS: Thank you, and the panel has been sworn in. 879 MR. O'LEARY: Thank you, Mr. Chair. 880 EXAMINATION BY MR. O'LEARY: 881 MR. O'LEARY: I'd like to introduce the panel. Sitting closest to the Board is Mr. David Charleson who is the Manager of Strategic and Key Accounts. And to his right is Ms. Jackie Collier who is Manager of Rate Research. 882 If I could first turn to Mr. Charleson and ask you to confirm that the evidence which has been prefiled at Exhibit A.5, tab 5, schedules 1, 2 and 3, which is a recent update, and all of the related interrogatory responses prepared by the company to questions were, I understand, prepared under your direction and supervision? 883 MR. CHARLESON: That's correct. 884 MR. O'LEARY: And you adopt same for the purposes of this hearing? 885 MR. CHARLESON: Yes, I do. 886 MR. O'LEARY: And Ms. Collier, I understand that some of the interrogatory responses, that you assisted in the preparation of some of those interrogatory responses? 887 MS. COLLIER: Yes, that's correct. 888 MR. O'LEARY: And to the extent that you participated, you have read those responses and adopted them for the purposes of this hearing? 889 MS. COLLIER: Yes, I do. 890 MR. O'LEARY: Thank you very much. 891 As you've pointed out, Mr. Chair, this is the EnTRAC issue, which has been assigned the number of 6.4 on the issues list and appears at the settlement proposal of Exhibit N.1, tab 1, schedule 1. And while it's indicated that there is no settlement, there, in fact, was some procedural agreement as between the parties, which I would just briefly highlight. And that is that the parties agreed that in respect of this issue, the evidence would be presented, cross-examination would be conducted, and arguments would be presented essentially as soon as possible at the beginning of the hearing. 892 The parties also agreed that they would request that the Board come to an early decision on this issue if possible so that the company could be in a position to proceed with its EnTRAC project as soon as possible, assuming that approval is given. 893 I just wanted to point that out, that there is complete agreement in respect of those requests. 894 And with that, Mr. Chair, we will return to some evidence in chief. 895 And I may ask you, Mr. Charleson, you recently filed supplementary evidence regarding EnTRAC, which I acknowledged as being Exhibit A.5, tab 5, schedule 3. Can you tell me what is the purpose of this evidence? 896 MR. CHARLESON: Yes. This evidence is intended to provide information regarding changes to the original filed evidence on EnTRAC. It discusses the outcomes of the requests for proposal or RFP process the company undertook for EnTRAC, also refinements that have occurred to the expected cost and timing of the project, while also providing additional detail on the breakdown of costs. 897 The exhibit also addresses the work that Enbridge has been doing in relation to service transaction requests, processing the GR specifies, and the impact of this to EnTRAC. 898 The evidence indicates that the impact of all these changes to the net present value of the project is to improve it from a negative NPV of 6.5 million to something in the range of negative 1.9 to 3.2 million. This depends on the costs that are assumed for having to address GR on a stand-alone basis. 899 MR. O'LEARY: Mr. Charleson, what is the company expecting the Board to approve with respect to the EnTRAC project? 900 MR. CHARLESON: Page 34 of the settlement proposal states that the parties agree that they endorse the objective enhancing at a reasonable cost, the information systems required to manage agreements with large-volume and direct-purchase customers, and associated gas-supply issues. 901 The company is looking for the Board to rule that the proposed EnTRAC system is the appropriate manner for addressing the system issues and that $18 million is a reasonable cost for doing it. 902 The company's also looking for the Board to issue its decision on this issue as soon as possible so that it would be in a position to proceed with the project immediately. 903 MR. O'LEARY: Are there any other issues which the company is looking for the Board to rule on in respect of EnTRAC in this proceeding? 904 MR. CHARLESON: The settlement proposal for EnTRAC indicates there are two main issues associated with EnTRAC; the project justification, which I just discussed; and also the allocation of cost and benefits to the customers. 905 The most pressing issue for the company is the project justification. While the allocation of costs and benefits is an important issue, the ability for the company to begin implementation work on EnTRAC is not contingent on it. 906 As discussed by Mr. Cass and others last week, it makes sense for all aspects of EnTRAC to be heard together. 907 The company does not, however, see the same urgency for the cost-allocation issue to be argued and ruled upon in advance of the full decision. Leaving this component for the written decision would provide parties more opportunity to formulate their arguments around the cost-allocation issues and provide the Board with more time to review this element of EnTRAC. 908 The company's not opposed to both the approval and cost-allocation issue being ruled on early, but does not see the same urgency around the cost-allocation issue. 909 MR. O'LEARY: Thank you. 910 Mr. Charleson, why does the company see EnTRAC as being important and necessary? 911 MR. CHARLESON: To understand the need for EnTRAC, it's important to first understand what's involved in managing direct-purchase agreements. Direct-purchase agreement typically represents a collection of customer accounts. It represents a commitment from these customers to make their own supply arrangements. 912 Under these arrangements, customers are obligated to make 365 equal deliveries of gas over a 12-month period of the contract. At the same time, the company ensures that sufficient gas is available for these customers to consume as required during the course of the year. 913 The company must be able to track and record all the deliveries made under the direct-purchase agreement and the volumes that are consumed. It must also take into consideration any special transactions that are entered into by customers to address any inequities between the deliveries that have been made and the expected consumption over the course of the agreement. 914 In addition, any adjustments that are made to the consumption volumes due to mitigating issues or other problems must be tracked. At the end of the contract term the customers must bring the deliveries back into balance with the consumption that has been -- that has occurred during the term of the agreement. 915 This requires relying on reports provided by the company to settle any imbalance between each of the agreements. Today these reports cannot typically be provided until 90 days after the contract term has ended. 916 Over the past few years, it has become increasingly complex to manage these agreements. Companies seeing a growth in the number of direct-purchase customers from less than 500,000 at the start of fiscal 1998 to more than 750,000 customers at the start of this fiscal year, an increase of more than 50 percent. These customers include nearly half of our mass-market customers and more than 90 percent of our large-volume customers. 917 At the same time, the number of direct-purchase agreements has increased by more than 250 percent from less than 400 agreements in 1998 to nearly 1,400 in 2003. Each of these agreements must be administered to address the volumetric balancing that I described. 918 As indicated in the evidence, the combination of manual processes and systems being used today create the potential for errors and data integrity problems. Some of these systems are more than 20 years old and were not designed with a view towards the type of business processes or volume of activity that have to be supported today. 919 As a result of the systems being used today, a number of problems are experienced. These problems were the focus of some discussion in the company's RP-2001-0032 filing. CEED interrogatories in that proceeding delved into the imbalances that occur with banked gas accounts, or BGAs, and what the company has to do with regard to the disposition of volumes outside of allowed tolerances. They also addressed how the company must work with customers to resolve issues that arise as a result of errors in the information provided by Enbridge. The response to CEED interrogatory number 59 in that proceeding identified more than $20 million in charges arising from being outside of allowed tolerances that were either delayed or waived, some of these directly as a result of incorrect or untimely information provided by the company. 920 These difficulties impact everyone. The balances within the BGAs have a direct impact on the purchases the company has to make for load balancing supply and system-gas customers. Inaccurate information or allowances that need to be made to direct-purchase customers have a direct impact on the volume and cost of gas purchased for these other purposes. All of this ends up in the PGVA and impacts all customers. 921 From this can be seen that these problems in limitations of existing systems have an impact on the marketplace that has led customers to endorse the changes that are being proposed. 922 MR. O'LEARY: Mr. Charleson, can you tell me, how have the company's customers endorsed this initiative? 923 MR. CHARLESON: The company conducts a series of customer council meetings over the course of the year. These meetings are established to work with large-volume customers and the agents, brokers and marketers that represent other customers to obtain their input on issues on Enbridge and the manner in which Enbridge works with these customers. Several presentations have been made at these councils on EnTRAC, copies of which were filed in response to CAC's interrogatory number 46 which is found at Exhibit I, tab 2, schedule 46. 924 These presentations have provided an overview of the solution that is being proposed and how it would impact their interaction with Enbridge. Demonstrations of an EnTRAC prototype were also provided through these meetings. Response on what is being proposed has been very positive and is seen as the right direction for the company to be taking. 925 EnTRAC has also been discussed with individual customers and ABMs in terms of addressing specific issues that have been encountered due to limitations in the existing system and processes. Some large-volume customers have been quite vocal in expressing their dissatisfaction at Enbridge's inability to meet their needs. EnTRAC is seen as a tool that will address many of these issues. 926 One such example of how EnTRAC will help customers comes from a meeting I had just last week with the cooperative that represents many of our greenhouse customers. Some of the flexibility that their members are looking for in managing their gas commodity costs cannot be supported within the existing systems and processes. The implementation of EnTRAC is necessary to meet the needs of these customers. This is just one specific example of discussions that we regularly have with customers and their agents. 927 MR. O'LEARY: Can you tell us, why is the EnTRAC project seen as the appropriate means of dealing with these problems? 928 MR. CHARLESON: Over the past few years, the company has tried to address shortcomings in the existing systems and processes through a series of activities. These have included making modifications and enhancements to address necessary changes, developing new spreadsheets and reports, and realigning activities within the supporting departments; in essence, supplying band-aids to try and stop the bleeding. These incremental attempts to address problems that are experienced have improved some of the complaints of customers and their agents, but they haven't been able to deal with some of the fundamental issues that contribute to the timeliness and accuracy of the information the company is able to provide. 929 It was from these efforts that Enbridge realized there was a need to take more dramatic action. After undertaking some initial analysis, and meeting with Union Gas to understand how they were addressing this area of the business, it became apparent that the best course of action would be to replace the existing systems and manual processes with a new solution. 930 Initial design sessions were held to get clear vision for what the future should look like and what customers should be able to experience. It was from these sessions that the EnTRAC system evolved. Based on the feedback we received from affected customers, EnTRAC appears to be the solution that will correct many of the concerns experienced today. 931 MR. O'LEARY: Thank you, Mr. Charleson. Why should the Board view the total $18 million cost as being reasonable? 932 MR. CHARLESON: $18 million is a significant investment to make to deliver EnTRAC. The company is not taking these costs lightly and has put considerable effort towards getting a level of comfort that this is a reasonable cost to deliver the functionality that's needed. The RFP process - that is highlighted in the evidence I provided an overview of earlier - has given a great deal of validation for the costs required to deliver EnTRAC. The company received responses from eight very capable vendors. Five of these were reviewed in detail, and when put on a comparable footing, the company chose the proposal that had the highest likelihood of success with costs that are similar to or lower than other proposals. 933 One of the key inputs to the RFP was the detailed design work that has been completed. This provided a high degree of detail for the vendors to base their estimates on and have comfort in doing so on a fixed-price basis. 934 The detailed design work also put Enbridge in a good position to assess other costs that would be included in the cost and to get an estimate from Customer Works for the functional changes that they would need to make. The program planning efforts that have been done have also allowed the company to tie all of the pieces together into the estimate described in Exhibit A.5, tab 5, schedule 3, an estimate that is now lower than the $19.5 million estimate originally filed by the company. 935 I believe the degree of detail and planning that the company has undertaken to arrive at the total project cost should give the Board a great deal of comfort that $18 million is a reasonable and achievable cost to deliver the type of solution being proposed. 936 MR. O'LEARY: Thank you, Mr. Charleson. 937 Mr. Chair, that is the evidence in chief on behalf of the applicant. 938 MR. BETTS: Thank you very much. 939 I will now invite cross-examination on this panel. Is there any particular order that -- 940 MR. WARREN: Mr. Chairman, now that my significantly senior president, Mr. Janigan, is in the room, Mr. Janigan has asked to precede me and I think he and my friend, Mr. DeRose, want to precede me so I'll defer to those two. 941 MR. BETTS: Thank you. Then Mr. Janigan. 942 MR. JANIGAN: And Mr. DeRose and I have agreed that he will proceed first. 943 MR. BETTS: Looks like the buck stops there. 944 MR. DeROSE: I think, in all fairness, I may be going first in part because I would perhaps define myself as quasi-adverse. There are some aspects of the project in which IGUA is supporting the company and some aspects which we are questioning. So that would be why it's appropriate for us to go ahead, unless there's any -- unless anyone has any objections to that. 945 MR. BETTS: Please proceed. 946 CROSS-EXAMINATION BY MR. DeROSE: 947 MR. DeROSE: Good afternoon, panel. My name is Vince DeRose; I believe we have met before. 948 I intend to address very broadly three issues this afternoon with you and I think I can be rather quick about it. The first is the benefit, the necessity of the project, the second is the project cost, and the third is the cost allocation. 949 Let me begin with the benefits. If I could have you turn to Exhibit I, tab 4, schedule 53. It's an interrogatory of the CME. 950 MR. CHARLESON: I have that. 951 MR. DeROSE: In this interrogatory, the CME was asking you for an explanation as to why all ratepayers should pay for a project that appears to benefit only direct-purchase customers, and I'd like to explore with you in a little bit more detail the benefits which the project would offer to all ratepayer groups. 952 First of all, you set out that the project would lead to reduced contract processing, legacy application maintenance, and hardware and software reductions. As I understand it, those three components at the moment are paid for by all ratepayer groups; is that right? 953 MS. COLLIER: Yes, that is correct, all customers recover those costs. 954 MR. DeROSE: And then if I can take you to the first paragraph of your response, it's the second last sentence and you say: 955 "Similarly a reduction in gas costs has a direct impact on the PGVA which determines gas costs for system gas customers." 956 You have mentioned it very briefly this afternoon in your direct. I'm wondering if you can provide me with a little bit more detail on how EnTRAC will need to a reduction in gas costs that impact the PGVA. 957 MR. CHARLESON: Again, as was discussed briefly a few moments ago, where we look at the various imbalance penalties, the load balancing that has to occur and the various deliveries that are made during the course of a contract term, although the company throughout the course of the year has to manage the overall supply portfolio that's required to meet all of our customer requirements, whether they be direct-purchase or system-gas customers, we have the responsibility for all of the -- balancing the total load. 958 As we see imbalances occurring and when other -- when direct-purchase customers fall outside of the allowed tolerances, there's a requirement on the company's part to adjust its purchasing or supply portfolio to offset these imbalances, and there's a cost associated with doing that. 959 With the implementation of EnTRAC, we expect direct-purchase customers to have improved information, have the ability to manage their own supplies in a more proactive manner, and also, with the increased accuracy of the information, to reduce kind of the situation the company's in today where there's a requirement to reconsider the application of some of those charges due to problems with information that's being provided. 960 So it's through a reduction in the number of agreements that we would see falling outside of those tolerances and also through having more strength in terms of being able to enforce any of the charges for being outside of allowed tolerances. 961 MR. DeROSE: And as I understand it, given your present system, sometimes you will -- perhaps a "mistake" is the wrong word, but you'll make a -- forgive me, I can't come up with a better one -- you will make a mistake in tracking the deliveries and the consumption, and you will buy gas thinking that there is an imbalance when really there isn't, there is -- that's not the case; is that right? 962 MR. CHARLESON: Again, the company will make its supply-purchase decisions based on the information that's available to it. At times there is the potential for inaccuracy in that information due to the integrity issues. 963 So is there the potential for some supply decisions to be made that may differ if the accurate information was available? Yes. 964 MR. DeROSE: And that would have an impact on the PGVA? 965 MR. CHARLESON: That's correct. 966 MR. DeROSE: Now, if I can take you to -- again, still with the same interrogatory. It's the last sentence in that first paragraph of your response, and you talk about the BGA settlement period. 967 And as I understand it, if the BGA settlement period is shortened, that will have an impact in the company's overall revenue requirement; is that right? 968 MR. CHARLESON: That's correct. 969 MR. DeROSE: And that would, again, have a benefit for all system gas users? 970 MR. CHARLESON: That's correct. 971 MR. DeROSE: Thank you. 972 Now, if I can take you to the RFP process, I'm going to switch gears a little bit. You've said today that you received eight proposals. 973 MR. CHARLESON: Yes, we received eight responses. 974 MR. DeROSE: And only five were reviewed in detail. Can you explain why three were not reviewed in detail? 975 MR. CHARLESON: As part of a normal RFP process, you will look to solicit a number of responses. 976 One of the first steps when you receive those responses is to do an initial review and determine which proposals merit further consideration. You try to basically cull down the number that you are going to be working with because of the effort involved in doing a detailed evaluation of each proposal. 977 Based on the eight responses received, in that initial assessment we determined that three of those responses didn't appear to have a strong rationale for us pursuing them further. 978 MR. DeROSE: Did any of those three proposals fail to meet a mandatory requirement? 979 MR. CHARLESON: No, all of the proposals met the mandatory requirements of the RFP. 980 MR. DeROSE: And would you be able to tell me what the lowest price of the three that you didn't review would have been? 981 MR. CHARLESON: The lowest price would have been $1.4 million. 982 MR. DeROSE: To do the whole system? For all of EnTRAC? 983 MR. CHARLESON: To do all of EnTRAC in the manner that the vendor proposed. 984 MR. O'LEARY: Mr. Chair, I'm just wondering, did Mr. Dominy hear that? 985 It's just not clear to us whether you heard the response to that. 986 MR. DOMINY: It was 1.4 million; was that it? 987 MR. CHARLESON: Yes, that's correct. 988 MR. DOMINY: Thank you. 989 MR. DeROSE: Now, in terms of the proposal that offered 1.4 million, you did not look at that proposal in any further detail? 990 MR. CHARLESON: That's correct. 991 MR. DeROSE: I'm going to be getting into a little bit more detail on the price of all of the proposals. Perhaps, as an undertaking, would you be able to provide the Board with the price of each of the eight proposals? 992 MR. CHARLESON: If you look at -- there's an interrogatory response to the School Board's number 152, which can be found at Exhibit I, tab 17, schedule 152, where we outline the prices associated with each of the responses and the nature of the proposal. 993 MR. DeROSE: I'm sorry, Mr. Charleson, I'm going to grab my... 994 I'm sorry, Mr. Charleson, could you just give me the schedule again. 995 MR. CHARLESON: Certainly. It's Exhibit I, tab 17, schedule 152. 996 MR. DeROSE: Mr. Charleson, on this interrogatory, that's Exhibit I, tab 17, schedule 152, if I understand it right, the pricing of the bids which you received were between 1.4 million and 16.6 million; is that right? 997 MR. CHARLESON: That's correct. 998 MR. DeROSE: And the vendor which you eventually have selected is Sapient; is that right? 999 MR. CHARLESON: Yes, that's correct. 1000 MR. DeROSE: Is Sapient vendor H, the 16.6 million? 1001 MR. CHARLESON: Yes, they are. 1002 MR. DeROSE: So I take it it's fair to say that you selected the most expensive solution. 1003 MR. CHARLESON: No, I don't think that's fair. I think based on the initial amounts proposed, yes, they were the highest bid that was originally received; however, through the course of the detailed evaluation, all of the vendors had the opportunity to revisit their proposals based on feedback and discussions with the evaluation team, and as a result, the final proposal from Sapient was significantly lower than the $16.6 million. 1004 MR. DeROSE: What was the final proposal number? 1005 MR. CHARLESON: The final proposal number was the $9.4 million that's included -- indicated in Exhibit A.5, tab 5, schedule 3. 1006 MR. DeROSE: I may misunderstand you, then. The proposal which you have selected is 9.4 million but you are seeking 18 million; is that right? 1007 MR. CHARLESON: That's right. 1008 MR. DeROSE: Can you please explain to me -- well, let me back up a second. The Sapient proposal, is that a fixed-price bid, the 9.4 million? 1009 MR. CHARLESON: Yes, it is. 1010 MR. DeROSE: And is there any room for overruns with that 9.4 million if it's a fixed-price bid? 1011 MR. CHARLESON: The only factors that would change that fixed-price bid to be any higher is if the company were to change the scope that would be addressed. So if any scope was added to the project, that would then, depending on the nature or size of that scope change, could have an impact on it. That would be the only factors that would impact that fixed price. 1012 MR. DeROSE: And I take it that if the company were to change the scope, it would have to come back to the Board to obtain approval for changing the scope. 1013 MR. CHARLESON: That's correct. Or I guess just to clarify that, it would be to -- if there was any cost overruns as a result of changing scope, we would obviously have to seek approval for those -- for an incremental cost beyond any Board approval at this time. 1014 MR. DeROSE: What was the lowest price of the five bids which you reviewed? And perhaps you could give us the revised bids. What was their final price, the lowest? 1015 MR. CHARLESON: The lowest price bid that we looked at would be vendor B that's listed in that Schools interrogatory where the price in their bid was $1.7 million. The final price in the process going through this was approximately $2.2 million, again for the nature of the proposal that they were making. 1016 MR. DeROSE: Okay. Would you be able to file by way of undertaking the final bid prices for each of the five bids which you reviewed? 1017 MR. CHARLESON: Yes. 1018 MR. BETTS: Mr. Moran. 1019 MR. MORAN: That would be Undertaking J.4.1. 1020 UNDERTAKING NO. J.4.1: TO PROVIDE FINAL BID PRICES FOR THE FIVE BIDS RECEIVED BY ENBRIDGE 1021 MR. DeROSE: Now, Mr. Charleson, if I can take you to Exhibit 5, tab 5, schedule 3. 1022 MR. CHARLESON: Yes. 1023 MR. DeROSE: Actually, before I -- I'm sorry if I can just stop there for a moment. 1024 You've indicated this morning that Sapient, which we know is the winning bid, was comparable in price or lower than the other bids; is that right? 1025 MR. CHARLESON: No, I wouldn't say that's an accurate reflection. What they -- in terms of comparability, what we looked at was the total program cost to deliver EnTRAC and perhaps the best means of dealing with that is to go to Exhibit A.5, tab 5, schedule 3. 1026 MR. DeROSE: Okay. 1027 MR. CHARLESON: In that schedule on page 2, at the top of page 2, we provide a breakdown of the various cost components that would be included within EnTRAC. As we evaluated each of the bids, there were various components that we needed to look at, whether they were included within the bid or excluded from the bid, and adjust each -- adjust the other components based on those bid prices. So while there may have been a low bid from a vendor, a low vendor cost, there are other elements, resources that weren't included, functional steps that may not have been included in that bid that we then needed to apply additional Enbridge IT resources or potentially additional Customer Works resources to, so in essence driving up the cost of the other components. 1028 So what we did -- so we had to take each of the bids and try to put them on that comparable footing to get it as close to an apples-to-apples comparison of those bids. To look purely at the price supplied by the vendor does not provide that comparison. 1029 MR. DeROSE: So you would have done the same analysis that you've done on Exhibit A.5, tab 5, schedule 3, page 2 of 4 for all five of the vendors? 1030 MR. CHARLESON: We did it in detail for three of the vendors. There were two vendors that, as we worked through the detailed analysis stages, we recognized that it wasn't -- they didn't warrant being pursued any further. 1031 MR. DeROSE: Did you do it for the vendor that offered 2.2 million? 1032 MR. CHARLESON: Yes, we did. 1033 MR. DeROSE: And when you did it for that vendor, did it come to more than 18 million? 1034 MR. CHARLESON: No, the cost was actually slightly less than the $18 million; however, we saw there being -- because of the amount of mitigation on other activities that we had to enter into to manage the program under that bid, we saw it introducing a great deal of risk to being able to deliver successfully, and we felt that that amount of risk would make it more difficult and put our ability to deliver at $18 million at greater risk. 1035 MR. DeROSE: Would you be able to provide us with an undertaking, the same breakout that you have at A.5, tab 5, schedule 3, page 2 of 4 for -- and if I understand you right, you only did that for three vendors? 1036 MR. CHARLESON: That's correct. 1037 MR. DeROSE: Would you provide that for all three vendors? 1038 MR. CHARLESON: Yes, we can. 1039 MR. MORAN: It will be Undertaking J.4.2, Mr. Chair. 1040 MR. BETTS: Thank you. 1041 UNDERTAKING NO. J.4.2: TO PROVIDE THE SAME BREAKOUT AS AT EXHIBIT A.5, TAB 5, SCHEDULE 3, PAGE 2, FOR ALL THREE VENDORS 1042 MR. DeROSE: Now, if I can take you again to A.5, tab 5, schedule 3, paragraph 3. 1043 MR. CHARLESON: Yes. 1044 MR. DeROSE: And the second sentence reads: 1045 "The company now expects the total cost of EnTRAC to be 18 million, a 1.5 million reduction from the original budget of 19.5 million." 1046 When you say "the company now expects," does that mean that it's still an estimate, or is that a hard, fixed number? 1047 MR. CHARLESON: I think with any IT project, until everything's said and done, it's an estimate. It's an estimate that we have a high degree of confidence in and a great deal of comfort. 1048 Will the final number differ from 18 million? I would expect that it will. It could be $200,000 less. It could be $200,000 more, but that's a number that we have a great deal of confidence in. 1049 MR. DeROSE: So you can't say with certainty that it will be 18 million? 1050 MR. CHARLESON: No, I think there's the potential it could be -- it could vary one way or the other. 1051 MR. DeROSE: Would it be fair to say that you are seeking pre-approval of a cost ceiling for this project? 1052 MR. CHARLESON: I would say that's fair, and that if there were -- if for some reason costs were to have to exceed that, we would have to -- we'd have to seek further approval for any variance that would drive it higher. 1053 MR. DeROSE: Now, were there certain points when you were -- first of all, I understand that you worked with Sapient, who is now the selected bidder, in preparing the business case which you filed; is that right? 1054 MR. CHARLESON: Yes, that's correct. 1055 MR. DeROSE: And if I can just take you to -- it's Board Staff interrogatories, Exhibit I, tab 1, schedule 67. 1056 MR. CHARLESON: Yes, I have that. 1057 MR. DeROSE: And then attached to schedule 67 are a number of attachments, which I understand is various correspondence between yourself and members of Sapient. 1058 MR. CHARLESON: Yeah, if you can give me just a minute to pull that out. 1059 MR. DeROSE: No problem. 1060 MR. BETTS: Mr. DeRose, what was that schedule number? 1061 MR. DeROSE: I'm sorry, schedule 67, so it's Exhibit I, tab 1. And then, Mr. Chair, I will be asking you to turn to page 22 of the attachments. 1062 MR. BETTS: Thank you. 1063 MR. CHARLESON: Okay. I have that page. 1064 MR. DeROSE: And if I take you to the middle of the page, it's -- starts with the heading "Dave Charleson." 1065 MR. CHARLESON: Yes. 1066 MR. DeROSE: And then the second paragraph says: 1067 "The number currently included in the overall corporate capital was 16.5 million in 2003 with some closing out mid-year. Through the course of our design work to date, Sapient is concerned that the complexity may be greater than considered at the end of the fusion exercise." 1068 And then if I take you down to the last three sentences of that paragraph: 1069 "Based on the information they've provided, that could translate into about an extra 2 to 3 million if taken at face value." 1070 So at that time you were talking, if I understand it - this is July of 2002 - that you were given a number of 16.5 million, and they were telling you that it might -- there might be costs of an extra 2 to 3 million; is that right? 1071 MR. CHARLESON: Yeah, they had discussed with us -- and actually, the costs they had told us -- talked to us about was more than the 2 to $3 million; however, we felt it was something that we were going to be able to manage to an increase somewhere in the $2- to $3-million range. 1072 MR. DeROSE: An then if I can take you to the next paragraph. 1073 "My concern is the number" -- and I assume that that should have been "that" not "the" -- "we file will become a ceiling for what we may be able to recover in rates. I don't want to make the ceiling too high to put recovery at risk. We may be better putting in the higher number, though, and then adjust down as we get more details worked out through design. If that was the case, I would recommend raising the amount to 19.5 million and hope that we can bring it down." 1074 Is it your evidence that you've brought it down as far as you can now or could it still be brought down further? 1075 MR. CHARLESON: No, it's my evidence that now that we have finished the detailed design, we have completed the RFP process, we have completed a lot more work on our program planning to the point where we are now -- where we now believe that the number that we have, the $18 million, is what is required to deliver EnTRAC as it is scoped today. 1076 MR. DeROSE: Now, you had said earlier that 18 million was for you a ceiling at the moment. So in a sense you are same applying the same thought, that you want an $18 million ceiling now, and if it comes down then it comes down; is that fair to say? 1077 MR. CHARLESON: I think it's fair to say that we're -- what we're looking at is we believe it's going to take $18 million to deliver EnTRAC. We would like to be able to get approval to proceed on that basis and with an expectation that we will be able to recover that $18 million in rates. 1078 If the actual costs are -- end up being lower than that $18 million, then that lower amount would be what gets recovered in rates. If we were to exceed that $18 million, our belief is we would need to come back to the Board and -- or determine whether we should be coming back to the Board to seek approval for any incremental amount. But it would be an amount that would obviously be at risk. 1079 MR. DeROSE: Now, if you could possibly be coming back to the Board in the future to ask -- if you have an overrun, I assume that also means that if the Board were to approve an amount lower than 18 million, you could also come back at a later time; is that right? 1080 MR. CHARLESON: Yes; however, I think we would have to look at our -- at the risk that we want to bear around the project, and if the Board were to approve an amount less than $18 million, we would have to assess our ability to reasonably deliver the project for that lower amount; and if we felt that we wouldn't be able to successfully deliver what is intended and achieve the benefits that we're expecting, we'd have to consider that closely before deciding how to proceed. 1081 MR. DeROSE: Now, there would only be risk if the project was not reasonable or prudent; is that fair to say? 1082 MR. CHARLESON: That's correct. We would expect that that cost reasonably incurred should be able to be recovered in rates. 1083 MR. DeROSE: Now, if I could have you turn to the business case, which is Exhibit A.5, tab 5, schedule 2. If I can take you to page 2. 1084 MR. CHARLESON: Yes, I have that. 1085 MR. DeROSE: And the very last sentence on that page: 1086 "The reduced contract processing efforts will result in fewer clerks being required to manage the existing workload, the productivity improvements for supervisory and management staff and savings in costs charged by Customer Works for services related to the scope of the project." 1087 Do I understand you right that EnTRAC will reduce the costs of Customer Works? 1088 MR. CHARLESON: EnTRAC should deliver some efficiencies to the manner in which Customer Works provides services to Enbridge today, and our expectation is that would then be returned to Enbridge in the form of reduced service fees. 1089 MR. DeROSE: So the efficiency gain that EnTRAC would give Works would be transferred back to Enbridge? 1090 MR. CHARLESON: That is our expectation. 1091 MR. DeROSE: And I assume that that gain would then be transferred to ratepayers? 1092 MR. CHARLESON: That's correct, given that our Customer Works charges are currently incorporated as part of our operating and maintenance costs. 1093 MR. DeROSE: And as I understand it, Customer Works is a related company; is that right? 1094 MR. CHARLESON: There is a relationship between Enbridge and Customer Works. 1095 MR. DeROSE: It's not an affiliate, is it? 1096 MR. O'LEARY: Perhaps, Mr. Chair, we might determine whether or not these witnesses are knowledgeable enough or qualified enough to respond to that. 1097 MR. BETTS: Can you determine that for us? 1098 MR. CHARLESON: I don't have a strong enough understanding of the relationship. 1099 MR. BETTS: That's fine. 1100 MR. DeROSE: I think I can go on. I'm confident that that will be established later in this case, the relationship between Customer Works and Enbridge. 1101 MR. BETTS: If you wish, perhaps Enbridge could undertake to provide that. It may not be from these witnesses. 1102 Mr. O'Leary, could you undertake to do that? 1103 MR. O'LEARY: We would, sir. 1104 MR. BETTS: Thank you. 1105 We'll establish an undertaking number for that. 1106 MR. MORAN: That would be J.4.3, Mr. Chair. 1107 UNDERTAKING NO. J.4.3: TO PROVIDE THE RELATIONSHIP BETWEEN ENBRIDGE GAS DISTRIBUTION AND CUSTOMER WORKS 1108 MR. DeROSE: Now, Mr. Charleson, are you aware of any assurances that Customer Works has given to Enbridge that those savings which you have in your evidence will be passed back to Enbridge? 1109 MR. CHARLESON: There have been some early -- some preliminary discussions with Customer Works where we have identified some benefits. There's still further discussions that have to held but there is an expectation from the discussions I've had with Customer Works that they recognize that there's benefits to be achieved, that we would have to make some sort of adjustment to the costs that are involved. 1110 MR. DeROSE: Now, what happens if Customer Works says thank you very much, but we aren't going to reduce your charges? Can Enbridge do anything? 1111 MR. CHARLESON: I think then we would take a look at the scope of EnTRAC and see if there is portions that we feel are delivering benefit primarily to Customer Works and determine if there is a different manner of addressing those at a lower cost where Customer Works wouldn't see any of the efficiency. 1112 MR. DeROSE: But EnTRAC will have already been developed and built within Customer Works' system; is that not right? 1113 MR. CHARLESON: No, we expect to be may have gone the discussions with Customer Works over the next month or so around how those -- how the benefits of EnTRAC should be addressed so we would have a clear understanding of what the expectations are around that before we are very far underway on the development. 1114 MR. DeROSE: And can you tell us whether intervenors will be in a position to check and ensure that the efficiency gains of EnTRAC inside Customer Works will be transferred back to Enbridge? 1115 MR. CHARLESON: I believe the opportunity for that would be in subsequent rate cases. 1116 MR. DeROSE: Can you say whether Enbridge will be in a position to provide the necessary information to check that, to ensure that Customer Works is in fact transferring those -- will be reducing those charges because of EnTRAC? 1117 MR. CHARLESON: I guess I'm not clear by what you mean by sufficient information. Will he be able to provide in our O&M evidence a reflection of any reductions to the Customer Works charges as a result of EnTRAC? Yes, we would be able to do that and I would see that as being sufficient. I'm just not sure if that's consistent with your term sufficient. 1118 MR. DeROSE: Fair enough, and I assume if there was no reduction in charges there would be an explanation as to why. 1119 MR. CHARLESON: I expect we would have to do that. 1120 MR. DeROSE: Now if I can take you, still in the same exhibit in the business case, to page 18. 1121 MR. CHARLESON: Yes. 1122 MR. DeROSE: Section 6.2.1.6, entitled "Service Provider Savings". 1123 MR. CHARLESON: Yes. 1124 MR. DeROSE: And the second sentence says -- actually I'll start from the beginning. 1125 "Enbridge currently relies on its service provider for portions of the activities associated with the contracting activities. It is expected that EnTRAC will also provide some efficiency to the processes within their organization." 1126 When you refer to the service provider is that Customer Works? 1127 MR. CHARLESON: Yes, I am. 1128 MR. DeROSE: Okay. Now, if I can turn very quickly to the cost-allocation issue. I take it you're aware that Union has a system that -- called Union Line, that provides similar services to what EnTRAC is intended to provide. 1129 MR. CHARLESON: Yes, I am aware of the Union Line application. 1130 MR. DeROSE: And are you aware of how Union Line's capital cost was allocated? 1131 MS. COLLIER: I have read through the Union decision. From my understanding, with regards to Union's proposal from last year, it's certainly not a one-for-one comparison for what we're proposing today with EnTRAC. Part of their implementation plan had to do with providing the unbundling of their rates and services for general service customers. As a result it was sort of treated in two phases. There was one phase that was allocated to customers based on those customers' delivery volumes. The second phase was allocated to the customer or general service customer classes, based on a customer number. 1132 So we are aware of Union's system. We're not just sure that there's a one-for-one match between the two systems. 1133 MR. DeROSE: Is it fair to say that it could be described as an allocation of 50/50 between customers and volumes by rate class? 1134 MS. COLLIER: The way the numbers worked out, it was roughly that 50 percent of the costs were allocated in one method and the other 50 percent in another method. 1135 MR. DeROSE: Would you be able to provide in a chart what the costs would be by rate class if you were to allocate the capital costs of EnTRAC on that manner, so the 50/50 between customers and volumes by rate class? 1136 MS. COLLIER: I actually have that information available as part of my back-up. We were obviously looking at various allocation methodologies and the result that would have on the rate classes. So there is a couple of scenarios on that page that I'm prepared to put into the record right now, if that's acceptable. 1137 MR. BETTS: Thank you. I guess we will file that as an exhibit, Mr. Moran. 1138 MR. MORAN: Mr. Chair, Exhibit K.4.3, entitled "EnTRAC Allocation Methods." 1139 EXHIBIT NO. K.4.3: EnTRAC ALLOCATION METHODS 1140 MS. COLLIER: Did you want me to walk you through the Exhibit K.4.3? I recognize the numbers are small as well, but they just fit on the page that way. 1141 Okay, essentially I looked at the total capital costs that we're asking recovery for for EnTRAC, which is the 18 million that we've been discussing. If you do that purely on a 50/50 allocation, of course, that results in $9 million each so the first line there is allocated on a volumetric basis to all customers. 1142 The second line there represents an allocation based on the number of customers to all of our customer classes resulting in a total indication of the $18 million, and followed that just on a percentage basis what proportion of the costs are there for recovering. 1143 The second method there, which isn't -- I see now they're not labelled one, two, or three, or anything, but the second method there also starts off with the 50/50 allocation. And this is really more a mirror of what Union has done; whereas, 50 percent of the costs were allocated to all customers based on volumes. 1144 The second was allocated only to their general-service customers. That was a result of the Board decision. So I mirrored that approach, and again, you see the allocation in total dollars and the resulting recovery from each of our rate classes. 1145 Just for my own benefit, I did, sort of, the reverse of that methodology, that being a portion of the costs or 50 percent of the costs would be allocated on volumes to all of our rate classes again, and another 50 percent would only be allocated to our large volume customer classes. And again, that shows the resulting rate impacts -- or allocation of costs, I should say. 1146 The next method entitled "Proposed" is what the company has proposed, and that illustrates, again, the allocation of the costs and the percentage allocation. 1147 The final two is just purely taking total $18 million and allocating on delivery volumes as well as $18 million allocated based on the number of customers, some of these options which were discussed during the settlement proposal, so we had, sort of, this sheet prepared. 1148 So I hope that's helpful in what you were looking for. 1149 MR. DeROSE: Thank you. That's very helpful. That's exactly what I was looking for. 1150 And just to be clear, what you have described as number 2 -- 1151 MS. COLLIER: Yes. 1152 MR. DeROSE: -- is what was approved in the Union case? 1153 MS. COLLIER: That's my understanding of their decision; that for the second phase of their implementation, those costs were borne by only their general-service customers based on a customer-number allocation. 1154 MR. DeROSE: Thank you. 1155 Three last questions: Who will own the licence rights and intellectual property rights of EnTRAC? 1156 MR. CHARLESON: EnTRAC will be the property of Enbridge. 1157 MR. DeROSE: Okay. And I take it that if anyone were to ever approach Enbridge and ask to have EnTRAC licensed out to them, Enbridge would consider that? 1158 MR. CHARLESON: Yes, we would. 1159 MR. DeROSE: And I would assume that if it would ever be licensed out, the money coming in would, in one way or another, be shared by ratepayers as they are funding the capital cost of EnTRAC? 1160 MR. CHARLESON: I would expect that any revenues that EnTRAC is able to receive would be returned to the people who funded it. 1161 MR. DeROSE: And the final question: Is Customer Works paying for any portion of the EnTRAC project? 1162 MR. CHARLESON: At this time, they're not. 1163 MR. DeROSE: Thank you. 1164 Those are all my questions. 1165 MR. BETTS: Thank you, Mr. DeRose. 1166 Am I correct that Mr. Janigan will be -- Mr. Janigan, please proceed. 1167 CROSS-EXAMINATION BY MR. JANIGAN: 1168 MR. JANIGAN: Thank you. 1169 MR. MORAN: Mr. Chair, Mr. Janigan has some materials for cross-examination. That would become Exhibit No. K.4.4 book of materials for cross-exam. by VECC. 1170 MR. BETTS: Thank you. 1171 EXHIBIT NO. K.4.4: BOOK OF MATERIALS FOR CROSS-EXAMINATION BY VECC 1172 MR. JANIGAN: Thank you. 1173 I'd like to start with the direct-purchase administration charge. I wonder if you could just confirm to me that Enbridge Distribution currently has a direct-purchase administration charge that recovers for the incremental cost associated with contract administration for direct-purchase customers. 1174 MS. COLLIER: Yes, that's correct. 1175 MR. JANIGAN: And I wonder if I could take you to that exhibit that Mr. Moran just mentioned, K.4.4. And on the inside page of the exhibit is an extract from EBRO-497, EBO-179-14. 1176 And on the first page, there is an executive summary which sets out the fact that the Board, in the decision previous to this one, EBRO-495, directed the company to carry out a study looking at incremental costs associated with both types of service, system sales and direct purchase; do you see that? 1177 MS. COLLIER: Yes, I do. 1178 MR. JANIGAN: And in this proceeding, Enbridge brought forth, and the Board subsequently approved, a gas-supply management fee, which, as I understand it, was brought about to provide a level playing field between the options of utility sales and direct sales? 1179 MS. COLLIER: Yes, that's right; we do have a gas supply administration fee. 1180 MR. JANIGAN: And system-sales gas customers pay a rate for gas procurement that Enbridge doesn't make direct-purchase customers pay; is that right? 1181 MS. COLLIER: That's right. 1182 MR. JANIGAN: And on the other hand, direct-purchase customers pay the DPAC charge that system customers don't pay. 1183 MS. COLLIER: Yes, that's right again. 1184 MR. JANIGAN: Now, the evidence in EBRO-497 notes that the study that looked at DPAC and gas-supply management costs and the setting of those particular charges only showed incremental costs, or only reflected the incremental costs; is that correct? 1185 MS. COLLIER: Yes, that's right. 1186 MR. JANIGAN: And if you look at page 3 of the same -- it would be page 3 of the particular exhibit that's included, there's a table that's set out there that lists a number of types of costs that were to be captured in the DPAC rates. Those included risk management, direct-purchase contracting nominations, reporting, and fringe benefits. 1187 MS. COLLIER: Yes. 1188 MR. JANIGAN: And I assume that system sales customers are similarly paying a list of their own incremental costs that went into the -- 1189 MS. COLLIER: That's right, that's the number there in column 1. 1190 MR. JANIGAN: And now looking at the list of costs recovered from DPAC, it's obvious that the incremental costs were associated with the direct purchase contracting costs, reporting and nominations costs when it was picked up in this particular rate. 1191 MS. COLLIER: As they related to direct purchase, yes. 1192 MR. JANIGAN: And in the ADR agreement from this proceeding, Enbridge is going to be carrying out a study extending the cost of the DPAC and system-gas fees from what we have in evidence and what was established in EBRO 497 to look at -- to go from what was established as incremental costs to fully-allocated costs; is that correct? 1193 MS. COLLIER: Yes. 1194 MR. JANIGAN: Okay. And directionally, is it fair to say when you look at the total costs of developing a direct-purchase contract as opposed to the incremental cost, you would likely have an increase in the number of cost items rather than a reduction in the number of cost items? 1195 MS. COLLIER: I would think -- yes, to actually -- generally to go from an incremental to a fully allocated, that would increase the level of those costs. 1196 MR. JANIGAN: Now, in terms of rate classes, it is predominantly system-sales customers that are paying the -- no, I -- could you tell me what are -- what rate classes predominantly pay the system-gas management fee? Are they primarily in rates 1 and 6? 1197 MS. COLLIER: I would think that's fair, generally service customers as opposed to large volume. 1198 MR. CHARLESON: On a per-customer basis. 1199 MS. COLLIER: On a per-customer basis. 1200 MR. JANIGAN: Now I'd like to turn to the evidence with respect to the GDAR, and in particular your new evidence that's been filed at Exhibit A.5, tab 5, schedule 3. 1201 MR. CHARLESON: Yes, I have that. 1202 MR. JANIGAN: And according to page 4 of this evidence, you're proposing that $6.7 million of the EnTRAC package be spent or incurred in 2003. 1203 MR. CHARLESON: That's correct. 1204 MR. JANIGAN: Now, does this cost include any costs of GDAR? 1205 MR. CHARLESON: No, it doesn't. 1206 MR. JANIGAN: And the cost for GDAR with this EnTRAC system would be an additional increment of 2.7 million; is that correct? 1207 MR. CHARLESON: That is our current estimate, yes. 1208 MR. JANIGAN: All right. And unless I'm mistaken, there's nothing in this evidence that lists the functionality or sets out the functionality for the GDAR. 1209 MR. CHARLESON: That's correct. 1210 MR. JANIGAN: And in Exhibit K.4.4, just on the last page, there's a letter from the Assistant Board Secretary to the effect that -- in a letter of March 14th, 2003, to the effect that the OEB has suspended its December 2002 direction to each gas distributor to file its implementation plan and form a service agreement that it intends to offer its gas vendors in conformance with the GDAR decision. 1211 MR. CHARLESON: That's correct. 1212 MR. JANIGAN: And this has come about as a result of an appeal that has been filed by both Enbridge and Union in the divisional court. 1213 MR. CHARLESON: Yes, that's right. The Board has suspended the requirement for the distributors to file their implementation plans in the form of service agreement. 1214 I guess what the letter doesn't go on to state is any kind of suspension or delay in terms of the actual implementation dates of GDAR that were specified in December. 1215 So our -- the understanding of Enbridge is that the March 1st, 2004, implementation date for service transaction processing is still in place. 1216 MR. JANIGAN: And your evidence is responsive to that supposition that the March 2004 date is still in place? 1217 MR. CHARLESON: That's correct. 1218 MR. JANIGAN: And I take it that from the launching of the appeal, that Enbridge does not want to do GDAR? 1219 MR. CHARLESON: No, I don't think that's an accurate representation. I think the appeal that's been filed by Enbridge -- and again, I'm not an expert on the appeal -- but is targeted strictly at the billing options component of GDAR and in no way challenges the service transaction request processing components of GDAR, which EnTRAC would be addressing. 1220 MR. JANIGAN: Let's move on. I'd like to deal with the EnTRAC business case at Exhibit A.5, tab 5, schedule 2. 1221 MR. CHARLESON: I've got that. 1222 MR. JANIGAN: And it sets out on page 1 that the scope of the EnTRAC system and the scope of the design was to encompass the creation and administration of large volume rate contracts and direct-purchase agreements, managing all of the gas delivery and compliance-related elements associated with these agreements and processing and reporting of related charges and remittances. 1223 MR. CHARLESON: That's correct. That's what it says there. 1224 MR. JANIGAN: Now, assuming that there were no direct-purchase customers and large volume gas customers, there wouldn't be any requirement for the EnTRAC system. 1225 MR. CHARLESON: I think that's fair. 1226 MR. JANIGAN: And as well, I wonder if you could turn up CAC interrogatory 51, Exhibit I, tab 2, schedule 51. 1227 MR. CHARLESON: I have that. 1228 MR. JANIGAN: And it may be a little redundant from my previous question, but there also would not be a need to set up the following contracts that are noted therein; namely, large volume distribution contracts, gas transportation agreements, firm transportation assignments, agent billing and collection service agreements, would there? 1229 MR. CHARLESON: That's true. If the company was strictly serving general-service customers on system gas, there would be no need for any of those contracts. 1230 MR. JANIGAN: And in CAC IR 43, that's Exhibit I, tab 2, schedule 43. 1231 MR. CHARLESON: I have that. 1232 MR. JANIGAN: There's a detailed explanation of the functions that are performed by the Legacy systems ELVIS and GASCON. How old is the GASCON system? 1233 MR. CHARLESON: The GASCON system was designed in the mid-'90s and, I think, came into service late '97, probably about five or six years old. 1234 MR. JANIGAN: Now, have any customers, apart from large volume customers or ABMs, requested an improvement to the existing Legacy systems? 1235 MR. CHARLESON: To the extent that ABMs represent a large portion of our customers, I'd say those customers have requested improvements to those systems. 1236 MR. JANIGAN: Let's leave that exception aside. 1237 Has there been any other customers or groups of customers apart from the large volume or ABMs, and to the extent that your point may be correct about representation? 1238 MR. CHARLESON: No, we have not received any request from a general-service system-gas customer. 1239 MR. JANIGAN: And this may be obvious, but would you agree with me that a direct-purchase customer elects to be a direct-purchase customer? They are not forced to become one. 1240 MR. CHARLESON: I would agree that is an election they make. 1241 MR. JANIGAN: And would you also agree that the fact that they become a direct-purchase customer is primarily driven by the fact that they can obtain natural gas supply at a lower price than purchasing it from the company? 1242 MR. CHARLESON: I don't know if I would necessarily agree that they can do it at a lower price, but they can do it under terms and conditions that they feel are suitable for their circumstances. 1243 MR. JANIGAN: And for the most part, those terms and conditions are driven by the idea that there will be a cost savings associated with it for the direct-purchase customer. 1244 MR. CHARLESON: I would say that's probably a fair assumption, yeah. 1245 MR. JANIGAN: And as well, if there are direct-purchase customers that they do obtain benefits from cost savings from their arrangements, the larger the volumes they purchase, obviously, the higher the cost savings. 1246 MR. CHARLESON: I don't operate within the direct-purchase community, so I can't speak to how the purchases may be made by those agents. 1247 MR. JANIGAN: Well, the greater the money -- the more volumes you purchase, and if you are gaining a cost savings, the more -- the higher the dollar amount that you'll save. It's arithmetical. 1248 MR. CHARLESON: Nor under normal supply and demand, yes, but again, depending on the timing of when those purchases are made, depending on the risk management -- there's all kinds of variables that come into play. So I don't know if you can make a broad assumption like that. 1249 MR. JANIGAN: And those benefits that a direct-purchase customer does obtain, of course, from cost savings from the gas supplies that they arrange, those are kept by the direct-purchase customer. 1250 MR. CHARLESON: Similar to any incremental cost that they may incur are kept by the customer as well. 1251 MR. JANIGAN: Now, I wonder if you could turn up Exhibit I, tab 2, schedule 52 that's CAC interrogatory 52. 1252 MR. CHARLESON: I have that. 1253 MR. JANIGAN: And it's set out in this IR response the six benefits that will result from the EnTRAC system. And there's a quantification of those benefits. 1254 MR. CHARLESON: Yes, it's the six benefits that were quantified at the time the business case was filed. 1255 MR. JANIGAN: Now, in terms of those benefits associated with reduced costs, those reduced costs won't come into play until the EnTRAC system is operational; is that correct? 1256 MR. CHARLESON: As different phases are implemented, some of those cost savings will be achieved; that's correct. 1257 MR. JANIGAN: And if EnTRAC, if there are problems with the functionality of those, those cost savings may not come about. 1258 MR. CHARLESON: Yes, that's correct. 1259 MR. JANIGAN: Now, these costs that they're being reduced, that will be reduced by the EnTRAC system, do you know where these costs are currently allocated by rate class? 1260 MS. COLLIER: I'll just flip through the response. Certainly the Legacy application maintenance hardware and software are IT-related costs. They would be allocated in the manner that's outlined in CAC number 40. That shows the allocation of how we allocate our IT capital costs to the various rate classes. 1261 MR. CHARLESON: Actually, I think, to be correct, it was in VECC number 38 that we showed the allocation of the maintenance costs. 1262 MS. COLLIER: Sorry maintenance costs, pardon me. Thank you, Dave. 1263 Reduced gas costs would show up in our purchased gas variance account which is allocated to customers. I think for this portion it would be to sales as well as buy/sell customers. 1264 MR. JANIGAN: Is it possible that I could get an undertaking on that? 1265 MR. CHARLESON: Sure. 1266 MS. COLLIER: Sure. 1267 MR. JANIGAN: As part of that -- I suppose it will show up in the undertaking, but I'm interested if there was any of these costs that were currently being recovered by the DPAC charge. 1268 MS. COLLIER: I'll highlight that if there is. 1269 MR. MORAN: It's undertaking J.4.4. 1270 UNDERTAKING NO. J.4.4: TO TAKE EACH OF THE SIX BENEFIT CATEGORIES AND INDICATE HOW THESE COSTS WOULD BE ALLOCATED TO THE RATE CLASSES TODAY, AND TO HIGHLIGHT THOSE BENEFITS WHERE THOSE COSTS MAY FORM PART OF THE DPAC CHARGE TODAY 1271 MR. BETTS: Sorry, Mr. Moran. 1272 MR. MORAN: That's Undertaking J.4.4. 1273 MR. BETTS: Is it clear to the parties exactly what that undertaking is? 1274 MR. CHARLESON: Just to paraphrase, I think what's expected is to take each of the six benefit categories and indicate how these costs would be allocated to customers today or to the rate classes today and in doing so also to highlight those benefits where those costs may form part of the DPAC charge today; is that accurate, Mr. Janigan? 1275 MR. JANIGAN: Yes, it is. 1276 MR. BETTS: Thank you. 1277 MR. JANIGAN: Now, will there be any case where the benefit savings that have been cited here will not go back to the customer classes that are currently paying these costs? In other words, if the benefit approved as a result of the reduced costs, they will all flow back to the rate classes that are currently paying those costs? 1278 MR. CHARLESON: That would be our expectation at this time. 1279 MR. JANIGAN: At the same level. 1280 MR. CHARLESON: Yes. 1281 MR. JANIGAN: Thank you. 1282 Now, in CAC IR 40, which you cited earlier -- this is Enbridge's proposal for recovery of the cost of the EnTRAC system and it's similar to other IT capital projects. 1283 MS. COLLIER: Yes, that's correct. 1284 MR. JANIGAN: And looking at this IR response, it would appear that rate 1 is allocated 73.09 percent of the costs and rate 6 is allocated 18.15 percent of the costs. 1285 MS. COLLIER: Yes, that's right. 1286 MR. JANIGAN: And so a total of 91 -- a little over 91 percent of the EnTRAC costs will be recovered from a group of customers where there is no contractual agreement or direct purchase agreement with those customers. 1287 MR. CHARLESON: I would disagree with that in that any of the direct-purchase agreements that are entered into by an agent, broker or marketer is done so in the customer's name. 1288 MR. JANIGAN: Okay. Let's leave aside this claim of representation. If we leave that aside, presuming that -- if we leave aside the idea of representation of the ABMs of customers in rate 1 and rate 6 -- there's no agreements made between those individual customers. 1289 MR. CHARLESON: The individual customers themselves do not sign the agreements but the agreements are in -- under their accounts and in their name. 1290 MR. JANIGAN: And not all residential customers are direct-purchase customers. 1291 MR. CHARLESON: That's correct. 1292 MR. JANIGAN: Now, at Exhibit G.2, tab 1, schedule 1, Enbridge provides their fully allocated cost study. 1293 MS. COLLIER: Yes, I have that. 1294 MR. JANIGAN: And if we look at page 30, in appendix B. 1295 MS. COLLIER: Yes, I have that. 1296 MR. JANIGAN: I don't see an annual indicator entitled "IT Capital Project Allocator". 1297 MS. COLLIER: No, there's not a specific allocation factor as it's laid out in this schedule. The method in which we treat IT capital costs is that it's sort of a multi-step purpose. There's not an allocation factor I can point to as in the table here, i.e., it's allocated on customer numbers. It's -- first, if you look at -- it's I guess functionalized, if you will, to each of the functional areas of the company and then classified in a similar manner and ultimately allocated to each of our rate classes. 1298 So it's actually sort of an internal allocation factor within the model if you will that happens that way. So it's not sort of driven on strictly customer numbers, volumetric basis, peak day basis, some of the other standard allocation factors that we have here. It's really the sum result of all these allocation factors. 1299 I'm not sure if I'm being clear, but what it does is the IT capital costs are charged back to each of our functional areas and each of those functional areas are allocated in a different manner so there's not one factor I can point to that says this is where you'll see that 73 percent that's allocated to rate 1, it's laid out in CAC number 40. 1300 MR. JANIGAN: Perhaps if we could look at an example on page 16. And it's item 3.11, SIM. 1301 MS. COLLIER: Yes. 1302 MR. JANIGAN: And SIM is the cost of the Strategic Information Management System. This item a functionalized based on a detailed analysis of the functionality of the projects falling under the umbrella of SIM. 1303 MS. COLLIER: That's correct. That's the manner in which those costs have been treated in the study. And up above there you see on item 3.10 computer equipment is functionalized based on the forecast information service charge-back to the functional group, so that's what I was trying to explain then. It's sort of a multi-step purpose. It's not like I have one of my standard allocation factors I apply to it; it's a multi-step purpose -- function. 1304 MR. JANIGAN: Would you be doing that for EnTRAC? 1305 MS. COLLIER: EnTRAC costs, rate-based costs have fallen under item 3.10, the computer equipment costs. We have not done a detailed analysis similar to the SIM project. 1306 MR. JANIGAN: Why wouldn't you do that if it's not computer equipment? 1307 MS. COLLIER: When we were looking at the EnTRAC project we chose to allocate it or treat it, I should say, in a manner similar to other computer equipment. Computer equipment includes hardware as well as software components in there. So given the level of dollars involved with EnTRAC versus -- well, a SIM project which was significantly more dollars many years ago, we chose that it was prepared to follow our existing allocation methodology. 1308 MR. JANIGAN: Just intuitively, computer equipment seems to be functionalized in a different way than a project like EnTRAC. 1309 MS. COLLIER: Well, I think you have to look at the cost as well as the benefits side of the equation, and when we looked at the results that -- in the allocation that fell out of our computer-equipment factor, we thought it was an appropriate level of cost for each of the rate classes to bear and we've stuck with that methodology. 1310 MR. JANIGAN: Presumably if you adopted the methodology used to analyze the cost of the strategic management system, a different result would have fallen out. 1311 MS. COLLIER: Yes, those costs are treated in a different manner. There's a trade-off we do. Obviously there is a number of elements and costs that go into our fully-allocated cost study. There is a trade-off we have to do with using our existing methodology or trying to develop a methodology for every single line item we have in there in performing a detailed study. There's time and resources involved to perform those studies and as I mentioned, this existing factor was available. We thought it was an appropriate method to use. So we just don't have the time or resources to do a study as we did in the manner of SIM at the time and that decision was made for the SIM project, again, I said because of the level of dollars involved with that project. 1312 MR. JANIGAN: Now, on page 9 of your cost-allocation study, you set out on paragraph 3.3 -- 1313 MS. COLLIER: Yes, I have that. 1314 MR. JANIGAN: -- that the overlying philosophy for proper classification and allocation of costs is to do so on cost-causing principles. Simply put, those who cause the cost pay. 1315 MS. COLLIER: Yes. 1316 MR. JANIGAN: Now, I have difficulty in trying to true that statement up with your response in CAC interrogatory 47 that you don't support a user-pay approach to recover the EnTRAC costs where, in fact, those that caused the cost are paying. Can you explain that? 1317 MR. CHARLESON: Yes, in -- in looking at the user-pay approach, you're looking -- you're only looking at one side of the equation. You are looking strictly at the cost side of the equation, where you're saying that those who cause the cost pay for it. But then you also have to look at the other side in terms of who receives the benefits, and how do you ensure that those who receive the benefits also pay for the cost of achieving those benefits. And that's where we felt that a user-pay approach would not do that because the benefits that we see accrue to all ratepayers, not strictly direct-purchase customers. And so to do a user-pay approach, in essence, direct-purchase customers would be funding benefits for all -- for system-gas customers. 1318 MR. JANIGAN: Well, are customers in rates 1 and rates 6 going to be getting over the 91 percent of the benefits of EnTRAC? 1319 MR. CHARLESON: I think it's difficult to determine which rate classes receive which percentage of the benefits. 1320 MR. JANIGAN: I'm just trying to understand it. I can understand if you start with the overlying philosophy that those who cause the cost pay, and then we modify it by the principle that well we have to also look at the benefits. But what I don't understand is this circumstance, where you have a case where clearly the rates 1 and 6 are not causing the costs and they may be enjoying benefits, but you've allocated them 91 percent of the costs without sort of looking at whether or not that trues up with the benefits. I mean, how can you methodologically apply these principles in coming up with a cost allocation for EnTRAC? 1321 MR. CHARLESON: I guess I would beg to differ with your comment that the customers in rate 1 and 6 aren't causing the cost. We have nearly 50 percent of the customers that are in those rate classes are direct purchase also, and so in essence they -- there is a support that needs to go in there. 1322 When we look at it, we viewed this as being similar to any other IT project that we undertake. There is an investment that needs to be made to achieve benefits that all customers are going to be able to achieve, and so we applied those similar principles to EnTRAC where we saw there's benefits that will be seen and achieved by all customers. 1323 so we didn't see a need to go and develop a custom allocation methodology that was applicable to EnTRAC because we didn't know how you would then turn around and apply a similar allocation methodology to the benefits that were achieved. 1324 MR. JANIGAN: Presumably all customers in rates 1 and 6 that are on direct purchase could have paid for the EnTRAC system through an increase of the DPAC charge. 1325 MR. CHARLESON: That would be one possible approach. 1326 MR. JANIGAN: And, however, in the option that you've chosen, all customers in rates 1 and 6, regardless of whether or not they are direct-purchase customers, will be paying 91 percent of these costs. 1327 MR. CHARLESON: And again the rationale behind that is I'm not sure how you would see refunding to those customers paying the DPAC charge the benefits that that funding that they provided delivered. 1328 MR. JANIGAN: I wonder if you could provide me with another run of the options that what you've done that allocates the costs to the -- by way of the direct-purchase administration charge and also allocates the benefits to that -- to those customers paying the charge. 1329 MS. COLLIER: You want me to -- well, the $18 million to be totally charged to a direct purchase administration fee, offset by some benefit level? 1330 MR. JANIGAN: Yes. 1331 MS. COLLIER: And -- because the direct purchase fee is a flat fee recovered from all customers -- I mean the fee is the same regardless of the rate class you're in. So you wouldn't see any change in the allocation of the cost there. I don't allocate those costs. Okay. 1332 MR. CHARLESON: I guess the one question I would put -- to ask for clarification that is in terms of how would you see as address benefits that haven't been able to be quantified? There are other benefits that we've articulated in the business case that we're not able to attach a dollar value to because of the nature of them and the risk that they -- the risk mitigation they deliver. What value would you see as attached to those benefits? 1333 MR. JANIGAN: I think those could be noted and, in effect, I guess it would be treated in the same way as customers that are not on direct purchase are being treated in your allocation, they will be allocated across the board, as it were. 1334 MR. MORAN: Mr. Chair that would be Undertaking J.4.5. 1335 UNDERTAKING NO. J.4.5: TO PROVIDE A BREAKDOWN OF THE OPTIONS THAT ALLOCATES THE COSTS BY WAY OF THE DIRECT-PURCHASE ADMINISTRATION CHARGE, AND THAT WHICH ALLOCATES THE BENEFITS TO THOSE CUSTOMERS PAYING THE CHARGE 1336 MR. BETTS: Everyone is clear on what they're undertaking. 1337 MR. CHARLESON: As clear as we can be at this time, and we will provide something and hopefully that meets Mr. Janigan's needs. 1338 MR. BETTS: Thank you. 1339 MR. JANIGAN: Now, just in terms of the meetings with customers and customer groups that took place prior to the presentation of this proposal, am I correct in assuming that there were no customer representatives save for your category of ABMs that were there representing rates 1 and 6 at those meetings? 1340 MR. CHARLESON: That's correct, there was no general service rate 1 and 6 customers present. 1341 MR. JANIGAN: And I just note on -- in your evidence -- I will get the reference here -- with respect to possible mitigation. I had it marked and my sticky fell off. 1342 In the business case, on page 23, And that is Exhibit A.5, tab 5, schedule 2. 1343 MR. CHARLESON: I have that. 1344 MR. JANIGAN: And we looking at the start of the table that: "In the risk area, the projects scope changes during implementation resulting in project delays and of cost overruns and the mitigation strategy was the project scope was established, documented and agreed to by all stakeholders." 1345 I take it except for the ABMs and their possible representative capacity that that wasn't agreed to by rates 1 and 6 who paid 91 percent of the cost. 1346 MR. CHARLESON: Yes. 1347 MR. JANIGAN: Those are all my questions. 1348 MR. BETTS: Thank you, Mr. Janigan. 1349 Am I correct that Mr. Warren is next? 1350 MR. WARREN: I am, sir. 1351 MR. BETTS: Can I just find out who else would like to cross-examine. Mr. Shepherd. Mr. Brett. Then we will proceed. We clearly will not complete that tonight, but we can begin with Mr. Warren and around or shortly after 4:00, we'll find an appropriate time to break for the day. 1352 So Mr. Warren, if you will proceed. 1353 MR. WARREN: Sure. 1354 CROSS-EXAMINATION BY MR. WARREN: 1355 MR. WARREN: Mr. Charleson, if I was very ignorant on the subject of DSM, I am profoundly ignorant on the subject of EnTRAC, particularly where the issue of computers is concerned, so can you help me out, sir? Just tell me what it is this thing is going to do. How does it work? 1356 MR. CHARLESON: If very simplistic terms. 1357 MR. WARREN: The only ones I can deal with, sir. 1358 MR. CHARLESON: What EnTRAC is designed to do is to provide an interface through the Internet for direct purchase customers or their agents to be able to interact with Enbridge in terms of managing their direct purchase agreements. It is also designed to deal with all the back-office processing that's required to manage those agreements, so all the information that has to be maintained and processed to be able to deal with the various reporting that has to be provided, and the various transactions that are entered into between Enbridge and direct purchase customers. 1359 MR. WARREN: Now, the direct purchase customers, at the risk of being too crudely reductionist, would consist by and large of the ABMs who would represent largely residential consumers, I think you said 50 percent of the residential consumer class are represented by ABMs; is that fair? 1360 MR. CHARLESON: Approximately. 1361 MR. WARREN: Roughly. So there would be that category and there would be the category of what I might describe as large industrial or commercial purchasers; is that fair? 1362 MR. CHARLESON: That's fair. 1363 MR. WARREN: And it would be that group whose total number is, I think the evidence is about 2,900 customers. 1364 MR. CHARLESON: Yes, about. 1365 MR. WARREN: They would be the ones who would be using the Internet to get access to the information which EnTRAC can provide; is that correct? 1366 MR. CHARLESON: Those would be the groups that we would be targeting as users. 1367 MR. WARREN: And can I assume, Mr. Charleson, that those folks, the 2,900 have some level of irritation or discomfort with the existing mix of old software systems -- sorry, old computer system and manual processes at the moment? 1368 MR. CHARLESON: I would classify more their -- the degree of frustration and irritation is more as a result of the way that Enbridge is able to respond to their requests as a result of those systems. 1369 MR. WARREN: They -- 1370 MR. CHARLESON: They, themselves, don't use or see those systems, it's more how we have to respond to them. 1371 MR. WARREN: You're saying there's some frustration or irritation at the slowness with which you can respond to what -- their information requests. 1372 MR. CHARLESON: It's both in terms of the timeliness of being able to provide the information, and also the degree of accuracy in that information when it's provided. 1373 MR. WARREN: And is it reasonable for me to presume that the slowness and the accuracy or the -- sorry, the slowness and the inaccuracy of the information may cause them costs; is that fair? 1374 MR. CHARLESON: Yes, I think it's fair. 1375 MR. WARREN: And do you have, in terms of your survey of those folks, any sense of what those costs might consist of and what they do to offset those costs? 1376 MR. CHARLESON: No, I don't. 1377 MR. WARREN: Okay. Now, Mr. Janigan asked the question: If you didn't have those 2,900 folks who were buying direct purchase, you wouldn't need an EnTRAC system; correct? 1378 MR. CHARLESON: That's correct. 1379 MR. WARREN: All right. 1380 Now, may I also presume, Mr. Charleson, that there is a discretion on the part of these 2,900 folks as to whether or not they're ever going to use EnTRAC? There's no obligation on their part ever to use it; correct? 1381 MR. CHARLESON: I don't know if I could agree with that. Our expectation is that once EnTRAC is in place, that will be the channel that we will expect the majority of those customers to transact with the company through. 1382 MR. WARREN: What I'm trying to get a handle on though, sir, is the extent to which you have been told by your customers, the 2,900 folks, that we need EnTRAC, and we're going to use it? 1383 What I have seen in the evidence in response to a CAC interrogatory is that you've had a number of what I will call generically town-hall meetings with these folks, and like anybody, I suppose, who said: Here's something that's an improvement in your life, and you don't have to pay for it, what do you think about it? And they say, Gee, sounds great to me. 1384 Is that a fair -- 1385 MR. CHARLESON: I don't think that's a fair characterization. 1386 MR. WARREN: But they don't have to pay for it themselves, do they, sir? 1387 MR. CHARLESON: I would say, yes, they do, to the extent when a large percentage of those customers are large-volume customers. They are ratepayers. They will have to pay through that. 1388 MR. WARREN: Can I just stay with that for a minute. 1389 To the extent that they are large-volume customers, they will pay something like 9 percent of the overall capital cost and something like that for the annual operating costs; is that fair? 1390 MR. CHARLESON: That's fair, based on the allocations that we've put forward. 1391 MR. WARREN: And in terms of the overall costs, they're paying a relatively small portion of the costs; is that fair? 1392 MR. CHARLESON: I'd say 9 percent is a relatively small portion. 1393 MR. WARREN: Go ahead. I interrupted your answer. 1394 MR. CHARLESON: And I lost my train of thought. 1395 MR. WARREN: You said that I was unfair in my characterization of the exchange at these town-hall meetings, but I characterize it as follows: Somebody looks at something that they don't have to pay very much for that seems to give them some benefits and make their life easier, and they said to you, Gee, that sounds good to me, and you said that was an unfair characterization of that exchange at the town-hall meetings. 1396 MR. CHARLESON: That's right. And I think when I -- the concern I have where you say where they don't have to pay, one of things that was put forward is the total cost of the EnTRAC was, and at the time we were presenting this was the $19.5 million. 1397 We made it very clear there was a cost to Enbridge to doing this, and so there was never any indication that there's a free ride associated that -- you know, obviously, there would be an understanding and expectation from the people in those meetings that somebody is going to be paying for it. And since they are customers or representing customers, in essence, they are -- they're footing the bill. 1398 MR. WARREN: The one group that we know with absolute certainty isn't going to pay any part of the bill are the ABMs, who represent residential consumers; isn't that fair? 1399 MR. CHARLESON: That's fair. They would not directly pay anything. 1400 MR. WARREN: They've made an election to take a service for which they don't have to pay anything; is that fair? 1401 MR. CHARLESON: We're -- I'm not sure what you mean by "made an election." 1402 MR. WARREN: They've chosen to use it. 1403 MR. CHARLESON: As I indicated before, I don't believe they will have a choice. 1404 MR. WARREN: Now, could you turn up, please, Exhibit A.5, tab 5, schedule 2, which is the business case, and I'd like to refer you to page 24. Mr. Janigan took you to a portion of this. This is the risk areas. 1405 MR. CHARLESON: Yes, I have that. 1406 MR. WARREN: Now, this business case, the last risk on the bottom page is: 1407 "Customers do not accept the new processes put in place by the project." 1408 So clearly, the business case when this was put together recognized the possibility that people simply wouldn't use the system; is that fair? 1409 MR. CHARLESON: I think it recognized that there may be some resistance from customers to using the system, and that would introduce a risk, because for the project to be successful, we need customers to do it. Our expectation is we would put that expectation on our customers; however, if they push back or don't use the system in the manner in which it was intended, that's going to introduce a risk to achieving any benefits. 1410 MR. WARREN: And certainly it's been recognized in what you've said by way of mitigation is that: 1411 "A number of checkpoints will be held during the course of the project to monitor customer acceptance of the direction being proposed." 1412 I take it, though, that we can say as we sit here today that there's some risk that $18 million will be spent, and people won't use it; fair? 1413 MR. CHARLESON: I -- if there is any risk, I would say it is very small, minute. 1414 MR. WARREN: To the extent that it's very small, it would seem reasonable, then, that the board of directors of Enbridge and its parent would have endorsed this project; is that fair? 1415 MR. CHARLESON: I'm sorry. I'm not clear what you are getting at. 1416 MR. WARREN: Well, if it's a no-risk project, then why would they not endorse it to go forward? 1417 MR. CHARLESON: I think you have to look at the -- looking at the overall business case, this is a project which has a negative net present value. 1418 So as -- why would Enbridge invest $18 million in something that has, you know, a negative return for itself? Again, the benefits would be expected to be returned to ratepayers. 1419 So I think they would -- as any reasonable management team would look for some comfort that they're going to be able to recover the investment and so that the people who are going to benefit from what's put in place are also going to provide the funding for it. 1420 MR. WARREN: Mr. Charleson, I take it that the circumstance which is described in Board Staff interrogatory number 67, that is Exhibit I, tab 1, schedule 67, where the answer is that: 1421 "The EnTRAC project has not been taken to the company's board of directors for formal approval to proceed." 1422 That circumstance hasn't changed; is that correct? 1423 MR. CHARLESON: That's correct. That circumstance hasn't changed; however, I think a high degree of commitment has been shown by the company's management towards EnTRAC through the amount of work that has gone forward already, you know, the effort involved in the RFP process, the program planning. 1424 There are costs that the company is incurring in an effort to have an appropriate plan and direction for this. 1425 Has it to gone to the board of directors for formal approval for the full 18 million? No, it has not. 1426 MR. WARREN: Let's just stay with the question of the level of company commitment. If you look at the second sentence in the answer, the answer is -- that sentence reads: 1427 "To date, the project has received approval from Ms. Janet Holder, vice-president, operations --" and I underscore the following words -- "to proceed with requesting funding approval through the regulatory process." 1428 That's the extent of the commitment from Ms. Holder, which is to come here and ask Mr. Betts and Mr. Dominy if they'll approve funding. 1429 MR. CHARLESON: That's approval for funding of the project as a whole; however, Ms. Holder has also allowed us to continue to proceed with an RFP process to release funds for doing program planning. There's a -- you know, there's several hundred thousand dollars in investment that Enbridge has made to date within fiscal 2003 towards advancing this project. 1430 MR. WARREN: I have just two more areas to cover, Mr. Chairman. I think I can get them done, if I can be allowed a couple of minutes. 1431 MR. BETTS: Please proceed. 1432 MR. WARREN: I want to just deal, sir, with the question of the rejection of the user-pay proposal. 1433 Now, can you and I agree, Mr. Charleson, that if you -- if, for example, you were to recover the costs through the DPAC charge that Mr. Janigan was talking about, that the cost -- to the extent that these 2,900 folks who will be using the system, to the extent that they felt there was a benefit to them and to their customers and were willing to incur the cost, they might then pass those costs on to their customers in turn; is that fair? 1434 MR. CHARLESON: I would expect as a reasonable business that if I incurred incremental costs, I would look to recover that from my customers. 1435 MR. WARREN: And then if we go back up that food chain, if I am, for example, a residential consumer using an ABM, and the ABM -- and my agent comes to me and says, It's going to cost you another 5 cents or 10 cents a month, or whatever it happens to be, I can then say, You know, I don't think there is enough of a benefit for that -- to me to pay that extra money. 1436 Or the industrial consumer, Mr. DeRose's clients, can say, You know, I don't think I can pass that cost on, because there's not enough of a benefit in it. 1437 So in that exchange, you get the true willingness of people to pay for what they perceive to be the benefit given to them; do you agree with that? 1438 MR. CHARLESON: I would agree with that, as long as you're factoring into -- when you look at the cost, you also look at what benefits those customers should be seeing as well as a result, and how you attribute the benefits that -- to that fee or that charge that they're having to pay is offset. 1439 MR. WARREN: But isn't the genius of the marketplace, sir, that the people who are selling the services and the people who are buying the services in that nexus of exchange, they can decide what the benefits are and what the costs are and whether the transaction should go ahead on that basis? 1440 MR. CHARLESON: I would agree, but in this case, there's benefits that are being accrued or received with another party that's not involved in that exchange. 1441 MR. WARREN: And that's also something else that can be worked out in that exchange in the marketplace. The concern -- let me go to the concern I have, Mr. Charleson, is that what we're doing is we're bypassing that basic market exchange, which a competitive market is designed to achieve. And what we're doing is we are disbursing the costs among a lot of people who don't see the benefits. 1442 MR. CHARLESON: I disagree. No, I disagree. 1443 As we've talked about the benefits, the benefits flow to all rate classes, all types of customers. Some of these benefits flow to system-gas customers through -- and we're going to undertake to respond to Mr. Janigan in terms of how those benefits would be allocated today and which ones would be recovered through DPAC. 1444 But the benefits that flow into the PGVA, it impacts the overall cost of system gas. It impacts the overall purchasing strategies of the utility and those benefits, so whether you are a direct-purchase customer or not, you would see some of those benefits. 1445 MR. WARREN: We can agree, I take it, sir, that functionally, purely functionally, you do have a mechanism whereby the 2,900 people who are going to use this service could pay for it; correct? 1446 MR. CHARLESON: Yes. Functionally any mechanism can be put in place to recover a dollar or to charge somebody for a service. 1447 MR. WARREN: And can we not agree, Mr. Charleson, that the real reason that you won't do that is that you're afraid that those 2,900 folks may say there's not enough in this for me to pay for that? 1448 MR. CHARLESON: No. 1449 MR. WARREN: But you don't want to that risk, do you, Mr. Charleson? 1450 MR. CHARLESON: No, because I don't believe that's fair and equitable to all parties involved. 1451 MR. WARREN: And it's because of these -- you won't do that because some of the system customers get this bundle of what you say are benefits from 2,900 people using this system. 1452 MR. CHARLESON: Not some, all. 1453 MR. WARREN: Thank you very much, Mr. Chairman. Those are all my questions. 1454 MR. BETTS: That concluded your --? 1455 MR. WARREN: It has, sir, I'm sorry, it has. 1456 MR. BETTS: Then it is an appropriate time to break at this point for the day, and we will reconvene tomorrow at 9:30 and have questions from Mr. Shepherd and Mr. Brett and Mr. Moran. And I guess with that, unless there are any matters that need to be discussed by the group, we will adjourn at this point in the afternoon to reconvene tomorrow morning. 1457 Thank you, everybody. 1458 --- Whereupon the hearing adjourned at 4:08 p.m.