Rep: OEB Doc: 12NB2 Rev: 0 ONTARIO ENERGY BOARD Volume: 8 2 APRIL 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 2 APRIL 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 TANIA PERSAD Enbridge Gas FRED CASS Enbridge Gas ROBERT WARREN CAC JAY SHEPHERD OPSBA VINCE DEROSE IGUA MICHAEL JANIGAN VECC JIM HAMILTON OESC 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] REPLY ARGUMENT BY MR. O'LEARY ON ISSUE 6.4: [48] ENBRIDGE GAS DISTRIBUTION PANEL ON MANUFACTURED GAS PLANT DEFERRAL ACCOUNT: BOURKE, BOYCE, LADANYI [132] EXAMINATION BY MR. O'LEARY: [139] CROSS-EXAMINATION BY MR. DeROSE: [175] CROSS-EXAMINATION BY MR. MORAN: [204] RE-EXAMINATION BY MR. O'LEARY: [316] QUESTIONS FROM THE BOARD: [335] FURTHER CROSS-EXAMINATION BY MR. MORAN: [358] FURTHER CROSS-EXAMINATION BY MR. SHEPHERD: [374] PRELIMINARY MATTERS: [399] ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 7.45: BROOKS, COWAN, MEES, TURNER, LADANYI [426] EXAMINATION BY MR. CASS: [433] CROSS-EXAMINATION BY MR. JANIGAN: [580] 10 EXHIBITS 11 EXHIBIT NO. K.8.1: INTERCORPORATE SERVICES AGREEMENT, DATED JANUARY 1, 2003, BETWEEN ENBRIDGE INC. AND CONSUMERS GAS COMPANY LIMITED [406] EXHIBIT NO. K.8.2: CURRICULUM VITAE OF ROBERT D.M. TURNER [412] EXHIBIT NO. K.8.3: ISSUE 7.45, CORPORATE ALLOCATION: BOOK OF MATERIALS FOR CROSS-EXAMINATION FILED BY VECC [418] EXHIBIT NO. K.8.4: REGULATORY TIME LINE, CORPORATE CHARGES [420] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.8.1: TO UPDATE EXHIBIT K.4.3 WITH ADDITIONAL SCENARIOS AS ARGUED BY INTERVENORS AND AS ADDED TO BY THE BOARD [119] UNDERTAKING NO. J.8.2: TO FILE A COPY OF THE STATEMENT OF CLAIM [182] UNDERTAKING NO. J.8.3 TO ADVISE IF ENBRIDGE CURRENTLY HOLDS ENVIRONMENTAL LIABILITY INSURANCE FOR ENVIRONMENTAL MATTERS THEY DEAL WITH TODAY [259] UNDERTAKING NO. J.8.4: TO PROVIDE INFORMATION REGARDING IF INSURERS WHO WERE PUT ON NOTICE IN 1991 AND 1992 INDICATED THAT THEY WOULD NOT DEFEND [364] UNDERTAKING NO. J.8.5: TO CONFIRM WHETHER OR NOT THERE IS A UNANIMOUS SHAREHOLDERS AGREEMENT WITH RESPECT TO EGDI [586] UNDERTAKING NO. J.8.6: USE TABLE PARAMETERS TO ENSURE APPLE-TO-APPLE, YEAR-TO-YEAR COMPARISON [1012] 14 --- Upon commencing at 9:35 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 PRELIMINARY MATTERS: 17 MR. BETTS: Good morning, everybody. Welcome back, I believe today is day eight of the hearing. 18 We ended yesterday, having heard arguments from intervenors on issue number 6.4, or EnTRAC, and we were to commence today with reply arguments from the applicant. Before we do that, are there any preliminary matters? 19 Mr. Shepherd? 20 MR. SHEPHERD: Mr. Chairman, I have a preliminary matter with respect to corporate cost allocation. I, I think along with some of my colleagues, am having a little bit of trouble understanding the scope of the two different corporate cost allocation panels, and in preparing cross-examination, it's difficult if you don't have a clear distinction between what subjects are covered in which. 21 And I wonder if the company could at some point in the morning, now if that's possible, give us a fuller explanation of the difference between the two so that we can prepare more carefully. 22 Thank you. 23 MR. BETTS: Thank you, and perhaps -- is that possible to have that clarification? 24 MR. CASS: I will make a stab at addressing it right now, Mr. Chair, if I may. 25 MR. BETTS: Please do, Mr. Cass. 26 MR. CASS: As everyone would be aware from the schedule, the company has proposed two panels to deal with the issue of cost allocations from the corporate office. 27 The first panel is intended to address issues in the area of methodology for the allocation, what the allocations are in the sense of amounts, and the calculation, so those types of issues which perhaps I might loosely call "numbers issues." 28 The second panel is more directed towards the services that are provided from the corporate office and the benefits that are received at Enbridge Gas Distribution. So just to fill that out a little more, on the second panel, it's a fairly large panel because there will be three people from the corporate office and three people from the Enbridge Gas Distribution office. 29 They have, amongst themselves, responsibility for the vast majority of the corporate charges; it would be upwards of 90 percent. They will also endeavour to speak to all of the corporate charges, but from a responsibility perspective, these three people from each office have responsibility for the large majority of them. 30 So the three people from the corporate office on the second panel would talk about what the services are and why they are provided to Enbridge Gas Distribution from the corporate office, and the three people from the Enbridge Gas Distribution side on the second panel would talk about the benefits that Enbridge Gas Distribution receives from those services. 31 So I hope that helps. The first panel, generally, is the methodology of allocation, the calculation, the amounts, what I have loosely called the numbers. The second panel is the services and the benefits. 32 MR. BETTS: Mr. Shepherd? 33 MR. SHEPHERD: Mr. Chairman, that's very helpful. Thank you. 34 MR. BETTS: Excuse me for just one moment. Thank you. 35 Are there any other preliminary matters? 36 MR. O'LEARY: Mr. Chairman, the only other thing that the company would raise as preliminary matters is that we do have a new hearing timetable schedule, which we would be pleased to circulate. 37 MR. BETTS: Thank you. We would appreciate that. 38 And, Mr. O'Leary, I take it from the order of things this morning that the first panel on the 7.45 issue will not be available until after lunch; is that correct? 39 MR. O'LEARY: That's correct, Mr. Chair. 40 MR. BETTS: When, roughly, at what time will they be available? 41 MR. O'LEARY: I believe it's no earlier than 1:00. 42 MR. BETTS: But at 1:00 we could expect them, if the schedule works out? 43 MR. O'LEARY: That's reasonable, sir. 44 MR. BETTS: Thank you. Any other preliminary matters? 45 And before we invite Mr. O'Leary to provide his reply, I'll just make certain that all intervenors have given arguments that would like to give arguments. 46 I don't see any new faces so, Mr. O'Leary, please continue. 47 MR. O'LEARY: Thank you, Mr. Chair. Good morning to you and Mr. Dominy. 48 REPLY ARGUMENT BY MR. O'LEARY ON ISSUE 6.4: 49 MR. O'LEARY: To the extent possible, I have attempted to group the company's response to the arguments made yesterday under similar headings, which I hope is going to advance the response and limit the amount of time involved. 50 The first issue that we wish to reply to is the one that flows from those arguments that questioned the need for the EnTRAC project itself. And I go back to one of the first items I raised in argument, and that is the wording of the ADR settlement which is found at Exhibit N.1, tab 1, schedule 1. 51 And the wording, and again I repeat it directly from the first paragraph: 52 "That the parties agree that they endorse the objective of enhancing at a reasonable cost the information systems required to manage agreements with large-volume and direct-purchase customers and associated gas supply management issues." 53 Now, it is submitted that this wording is significant for several reasons. What we learn from the language is that it was agreed upon by all parties, not just some, and was agreed upon with the assistance of counsel after many iterations of the settlement document. 54 Secondly, the wording tells us that all of the parties are aware that the information systems to manage agreements with large-volume and direct-purchase customers and associated gas-supply-management issues are the specific functions which all of the parties agreed needed enhancement. So they knew that what was contemplated here was specific to large-volume and direct-purchase customer agreements. 55 Thirdly, all parties expected that these upgrades would cost something. There's reference to "at a reasonable cost." There was no suggestion that it should come at no cost. 56 Mr. Chair, it is the company's submission that the attempts to wiggle out or to withdraw from the wording of the settlement agreement which we heard yesterday is -- it flies in the face of the settlement document and the ADR process itself. It therefore does not lie in the mouth of a party who agreed that such specific enhancements are valid objectives, to now say that such enhancements may not be used or useful. There is an obvious inconsistency, and hence the attempts to withdraw from the agreed wording yesterday should not be relied upon. 57 The evidence is that the project will be used and useful and it's not limited strictly to the wording of the settlement agreement. We know that IGUA, the OESC and Schools' have clearly stated that the project is needed. In response to questions from the Board panel, VECC conceded that it endorses the ADR agreement and that the system should be enhanced, and that's found at volume 7, paragraph 651. 58 There is, therefore, demonstrable support for the project which, it is submitted, is sufficient evidence for the Board to conclude that the project will not only be used but also useful. 59 A second issue raised by several intervenors yesterday, which has a number of sub-issues which I will address specifically, relates to questions around the RFP process in relation to the EnTRAC project. The first sub-issue raised by some intervenors was the question of the knowledge by potential bidders of the company's pre-estimate of 19.5 million, the suggestion, of course, being that this some how distorted the bid process. If, in response to that, the company first submits that if the Board and parties were to turn to the interrogatory response to School Boards' 152, you would see that the range of responses from the eight bidders range from 1.4 million to 16.6 million. This clearly indicates that the pre-estimate had no bearing on the bids and the amount of the bids that those eight entities submitted to the company. 60 Secondly, the pre-estimate had no breakdown as to the extent and number in a dollar figure of the resources that were expected from the bidding entity or the company, and this is made clear from the interrogatory response to CME number 60. One would therefore have to question the usefulness to a bidder trying to inflate their bid when they do not have the identifiable breakdown or expectations as to the resources which the company is prepared to commit versus the bidder. In fact, the evidence is that the RFP process required each bidder to break down their bid on the basis of the resources they would commit and what they expected from the company -- thus the wide range between the 1.4 and 16.6 million which, as I suggested yesterday, made it important to do a leveling of the playing field analysis so that ultimately you could compare apples with apples. 61 The next sub-issue relating to the RFP is that vendors might have been discouraged from bidding, allegedly because of the involvement of Sapient in the design phase of the RFP process. First, I think it's important that one understands the nature of the complaint. Intervenors did not suggest that a company should not seek out expert assistance in the development and design phase of a project for the purposes of putting together the detailed RFP. The complaint appears to be that Sapient was then allowed to participate in the process. 62 Well, there's two solutions if you accept that as being a problem: One is that the company would then be prohibited from using the expert that it sought advice from for the design phase, and if that expert happened to be one of the best in the industry, it means that it precludes a company from relying upon the best in the industry. 63 The alternative is to combine both phases, the design and the bid phase, and to proceed completely without expert assistance to the RFP process. You would have, of course, a much less specific and well-designed RFP process and the company submits that it would not be in the interests of both the company and ratepayers for that process to have been followed in this case. One can only imagine the nature of the comments that would have been received had that less intensive and specific process been followed. 64 It is therefore the company's submission that it is simply without merit to suggest that you do not allow an entity that has assisted you with the design process to participate in the bidding process. 65 Now, contrary to the suggestion of some intervenors that Sapient's involvement with the design phase acted as a deterrent, we see that there were eight full responses by qualified bidders. That's a substantial number. As well, when asked about whether any bidders had declined specifically, Mr. Charleson stated at volume 4, paragraph 374 of the evidence, and I propose to quote it. I misspoke, it's volume 5 at 374. 66 When asked by Mr. Shepherd, Mr. Charleson's response was that "in the case of the one vendor who declined to bid, their indication was that they felt that working with the original supplier/designer of the system would probably generate the best outcome. So they were looking at it more in terms of what they felt would provide the highest likelihood of success for Enbridge as opposed to them." 67 The third area of concern raised in respect of the RFP process was in respect of its alleged short time frame. Well, I don't propose to make submissions as to whether 15 business days, which is three weeks, is short or not, but some have suggested that it is. 68 But the company gave evidence at volume 5, paragraph 382, that it did not receive any complaints about the tight time frame, if that 15 days is to be interpreted as such, and therefore there is no evidence that the tight time frame, in fact, caused any potential bidder reluctance to participate. And again, we see that there were eight bidders that fully responded and met all of the requirements set out in the RFP. 69 The next issue, Mr. Chair, I propose to respond to is that raised by several intervenors that the EnTRAC project generates an unfavourable NPV. First of all, the company admits that the numbers generate a negative NPV, and it's for that reason that approval is sought. 70 But some intervenors suggested that the NPV excludes the future cost of GDAR. What this argument neglects to state is that the net incremental benefit of GDAR was included in the analysis. If you are to include the entire cost of GDAR, you would also have to include all of its benefits. 71 So the NPV does reflect GDAR, and the evidentiary basis for this basis is several-fold: There is Exhibit A.5, tab 5, schedule 3, page 3, and the benefits table at A.5, tab 5, schedule 2, page 20. 72 Further, there was, on a related note, some concern about the extent to which the GDAR project has been worked out, and the evidence of the company is that within the EnTRAC project, steps have been taken and the GDAR implementation is that much further advanced than it is without EnTRAC. 73 A fourth area of issue raised by intervenors was what I've characterized as a lack of confidence in the project's dollar figure. First, the company's response is that it must be remembered that the RFP process involves independent third-party bidders in a competitive bidding process. 74 Secondly, when the bids were analyzed and the playing field levelled and the number reduced to three short-listed bidders and their bids were compared on an apples-to-apples basis, the range of difference between the bids was only $700,000, and the support for that is found at Undertaking J.4.2. 75 Thirdly, the Union project, Union Line, while not directly comparable, which is what Mr. Charleson stated at volume 4, paragraph 1132, to the effect that they're not a one-to-one match, its cost of 15.7 million, which is a price that was set several years ago, indicates that the $18 million projected cost is within the range and is reasonable. 76 Accordingly, the company submits that the projected cost of EnTRAC passes two tests of reasonableness; one, it has been developed through an independent competitive bidding process, a measure considered and relied upon as being important under the Affiliate Relationship Code; and secondly, the cost is not out of line with the only other comparable project in Ontario, which is Union Line. 77 The next matter that the company wishes to address, which may or may not be an issue and thus this may be more of a comment than a clarification or a response, but it flows from some of -- it flows from the nature of some of the arguments which were made yesterday. It's not certain to the company whether there has been some confusion on the part of some intervenors about what is actually occurring here. 78 Some of the argument seemed to be more akin to a debate, a concern about a request for the company in respect of an O&M expense, which is not the case. 79 In this instance, we know that we're talking about an expenditure and investment of the shareholders' money, which, to the extent that it's closed into rate base, would then attract a reasonable return on equity at the Board-approved rate. 80 To suggest that the ratepayers' money is financing the full cost of this investment is, therefore, not completely accurate. 81 Another issue raised by some intervenors was a concern about the extent to which the company undertook financial analysis of the integrity of Sapient. Our response to that, Mr. Chair, is that first of all Sapient is the service provider which was referred to the company by Union. At a minimum, it has the credentials already of having been responsible for the development of a comparable working project at Union, and that project is of some comparability. That's an important piece of evidence that we submit the Board should rely upon. 82 Secondly, we presume that the reason why this financial analysis issue has been raised is because there is some concern about ratepayers' money being put at risk. Again, it is the shareholders' money that is being invested in the project, and to the extent that the project is developed and produces benefits, it would be closed into rate base. 83 If the costs of the project increase by reason of Sapient's demise, there is no certainty that the shareholder would ever recover the additional cost. 84 On a related note which flows out of some of the questioning by one intervenor yesterday as to the credentials of Mr. Charleson and his ability to recognize whether or not a form number used with a filing in the U.S. Securities and Exchange Commission means that the company has not, therefore, completed its due diligence and sufficient financial analysis, we respectfully suggest should be simply disregarded. 85 There were also some suggestions yesterday that the project should be questioned by the Board by reason of the company's alleged failure to produce a technical witness. Well, that's simply unfair. 86 It has been open to the parties from the beginning for a request to be made for a technical witness to be produced at the technical conference that took place a number of months ago. There was opportunities through the IR process to request specific information of a technological nature. We went through a lengthy ADR settlement process. 87 Advanced notice could have been given before this hearing that a technical witness was required, and to then suggest in cross-examination that the company should be faulted because the witness produced in support of the project, that his history in the IT area extends back some seven years ago is insufficient to respond to the specific technical issues of today is simply unfair and the intervenors should be reminded that if they need a specific witness, that notice should be given to the company. The fact is that no technological issues came up, other than in the cross-examination yesterday or the day before. 88 Another issue raised by intervenors related to the $3 million which was closed out to rate base in fiscal 2002. Without going into the detailed reasons of it in response, the company simply asks the Board its response to School Boards' number 4 which sets out in detail what it did and why it was appropriate to close it out to rate base in 2002. 89 But in addition to that, the Board should be aware that, or reminded that, the rate base issue was the subject of a complete settlement in the ADR agreement and that the $3 million was included in the 2002 IT capital budget, which is identified in the School Boards' 54, and that particular capital budget was approved in the previous fiscal 2002 matter -- case. The company therefore submits that it's simply not a live issue which the Board need address in this proceeding. 90 Moving on to the second part of the issues raised which relates to the cost-allocation methodology which is proposed by the company, and the first is the company's choice of using the IT computer allocator. I would like to take the panel to the evidence of Ms. Collier which is found at volume 4, paragraph 1307. 91 Ms. Collier's evidence, commencing within that paragraph was as follows: 92 "When we were looking at the EnTRAC project we choose 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." 93 Mr. Janigan then asked: 94 "Just intuitively, computer equipment seems to be functionalized in a different way than a project like EnTRAC." 95 Ms. Collier's response was: 96 "Well, I think you have to look at the cost as well as the benefit 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." 97 Now, this being said, Mr. Chair, the company notes that IGUA and the OESC have indicated that, in the alternative, they would be prepared to live with or support the Union Line methodology which, you will recall, has been set out at Exhibit K.4.3. And in response to that, Ms. Collier set out at volume 5, paragraph 1016, that methodology is not all that greatly dissimilar from that proposed by the company. I paraphrase that, but I would direct you to that citation. 98 Finally, the company notes that the Board accepted in its RP-2000-0078 decision at paragraph 566 - and this is the one that dealt with Union Line - that the Union Line project would have system-wide implications for all customers, which is what the company, in its evidence, has indicated will be the case in respect of EnTRAC. 99 We therefore -- the company therefore submits that a methodology akin to what the company has proposed, which may or may not be the Union Line methodology, is similarly appropriate for the Board to approve here. 100 A related issue is that of cost causality. The company submits, in response to those arguments made by intervenors, that the principle of cost causality should be the determining factor in respect of the cost-allocation methodology chosen. The company reiterates that this should lead to a user-pay approach, for a small group of users to pay for the benefits of all system customers, this is not a reasonable and equitable application of the cost-causality principle. 101 One simply cannot exclude from the equation the fact that about 50 percent of rate 1 and rate 6 customers have chosen to enter into direct-purchase contracts, and to fail to recognize the benefits to these customers through user-pay charge or methodology, allocating the project's cost to just one small group of customers, would again, we submit, be inequitable. 102 At Undertaking J.4.5, and the company's response to that undertaking, we remind the Board and parties that if the methodology approved by the Board is a user-pay methodology, when one matches the costs of the project with the benefits by looking at the revenue-requirement impacts which are generated, that undertaking response indicates that large-volume customers and ABMs are in fact entitled to a credit. 103 In conclusion, Mr. Chair, the company submits that there is broad support for the upgrades to the system necessary to support the administration of large-volume contracts and direct-purchase contracts. There is broad, complete agreement that, in fact, these upgrades are necessary for the administration of those contracts. The company submits that it -- that the cost of the EnTRAC project is reasonable by several measures, not least of which is the fact that a somewhat comparable project has been implemented by Union and it's within a relatively similar price range. The company submits that the cost-allocation methodology should reflect the fact that there will be system-wide benefits achieved and we should not simply look at one side of the ledger; namely, the reasons for those costs. 104 Finally, the company submits that it is inappropriate to consider the EnTRAC project in a vacuum without recognizing the deregulated environment in which the company and its customers operate. To suggest that the costs should be allocated on the basis of whether a small group of users do not exist neglects the reality of the market and the system-wide benefit that EnTRAC, like Union Line, will generate. 105 For those reasons, Mr. Chair, those are our respectful submissions, and we reiterate our request for the approvals as set out in our earlier argument and the application record. 106 MR. BETTS: Thank you, Mr. O'Leary. 107 [The Board confers] 108 MR. BETTS: The panel really has no questions. Thank you very much. But there is one undertaking we would ask the company to provide for us, if you will, and that is with reference to Exhibit K.4.3. 109 MR. O'LEARY: Yes. 110 MR. BETTS: We would like the company to expand that analysis to include any scenarios that intervenors have provided through their arguments respecting various cost-allocation methodology. 111 One of those, for example, I think it was VECC that indicated their preference to have it all dealt with through DPAC, so that would be an example of one scenario. 112 And perhaps you could expand further by including a scenario or perhaps two scenarios that would include 50 percent being applied through DPAC and the other 50 percent being applied on a volume basis, and then the next alternative being to have that last 50 percent applied on a customer basis. 113 And if there are any scenarios that we have -- that I haven't mentioned specifically, perhaps you could capture those from the arguments and include those as well. 114 MR. O'LEARY: Would you give us a second, sir. 115 Sir, I have that request, and we will respond to it. 116 MR. BETTS: Thank you. 117 Can we establish an undertaking for that. 118 MR. MORAN: Yes, Mr. Chair, the undertaking would be J.8.1, undertaking to update Exhibit K.4.3 with additional scenarios as argued for by intervenors and as added to by the Board. 119 UNDERTAKING NO. J.8.1: TO UPDATE EXHIBIT K.4.3 WITH ADDITIONAL SCENARIOS AS ARGUED BY INTERVENORS AND AS ADDED TO BY THE BOARD 120 MR. BETTS: Thank you. 121 And, Mr. O'Leary, that completes our need for information from you. Thank you very much. 122 MR. O'LEARY: Thank you, Mr. Chair. 123 MR. BETTS: It's obviously too early to break, so I think it's our opportunity now to lead into the next issue. 124 And had you intended to have a witness panel on that? 125 MR. O'LEARY: In fact, we do, sir. And I see they are all in the room now. If you would give us a few minutes, we can bring them to the front. 126 MR. BETTS: Let us take then -- well, if it's not going to take long, just go ahead and do that. We'll wait for that to happen. 127 MR. HAMILTON: Mr. Chairman, OESC has no issues with this panel, so with your permission, I will withdraw at this time. 128 MR. BETTS: Very well. 129 Perhaps we should commence by swearing in this panel. 130 MR. O'LEARY: Yes, please, Mr. Chair. 131 MR. BETTS: Mr. Dominy? 132 ENBRIDGE GAS DISTRIBUTION PANEL ON MANUFACTURED GAS PLANT DEFERRAL ACCOUNT: BOURKE, BOYCE, LADANYI 133 R.BOURKE; Previously sworn. 134 T.LADANYI; Previously sworn. 135 M.BOYCE; Sworn. 136 MR. BETTS: And I believe it's Mr. Bourke and Mr. Ladanyi have already been sworn in, and we have now Mr. Boyce being sworn in. 137 So Mr. O'Leary? 138 MR. O'LEARY: Yes, Mr. Chair. Perhaps I could start by introducing the panel. 139 EXAMINATION BY MR. O'LEARY: 140 MR. O'LEARY: As you may recall, the witness that's closest to the panel, Mr. Rob Bourke, is the Manager of Regulatory Accounting. To his right is Mr. Tom Ladanyi, who is Manager, Rate Proceedings. To his right is Mr. Mark Boyce, who is Associate General Counsel and Corporate Secretary. 141 The evidence in respect of this particular panel is found at Exhibit A.8, tab 1, schedule 2, page 1 of 3. 142 And I'm wondering, first of all, if I could ask Mr. Boyce whether he's had a chance to review the -- this evidence and whether or not he adopts it for the purposes of his testimony here? 143 MR. BOYCE: I have reviewed it, and I do adopt it. 144 MR. O'LEARY: And, Mr. Ladanyi, have you similarly reviewed it, and do you adopt it for the purposes of this proceeding? 145 MR. LADANYI: Yes, I have reviewed it, and I do adopt it. 146 MR. O'LEARY: And, Mr. Bourke, the same question to you. 147 MR. BOURKE: Yes, I do. 148 MR. O'LEARY: Thank you very much. 149 Mr. Chair, the manufactured gas plant issue comes up in the settlement agreement at page 82, Exhibit N.1, tab 1, schedule 1. It's the last paragraph on page 82. 150 And the company is briefly proposing to establish a 2003 manufactured gas plant deferral account which would record the cost of investigating, defending and dealing with any claims made in respect of manufactured whole gas property contamination. 151 I should direct the panel's attention to the last sentence on the next page which states that: 152 "This proposal does not fall within the ambit of the settlement proposal at this time." 153 The reason for that is the timeliness of the statement of claim which was received, which was in the midst of the ADR settlement process, and with the receipt of the statement of claim, that was brought to the attention of intervenors and the company shortly thereafter proposed to establish this deferral account, anticipating that there may be some significant legal and other costs that may be incurred responding to that. 154 As a result, we do not have, actually, an agreement either for or against or anyone taking a position, to my knowledge, and thus the company had proposed to put forward this panel to respond to any questions by intervenors. 155 MR. BETTS: Mr. O'Leary, can I just interrupt for one second. I just looked out to the audience and realized there is very few people here. I would like to make certain -- were all parties aware that this matter would be dealt at this time? 156 MR. O'LEARY: As of yesterday afternoon we did address it, you'll recall, when we were doing scheduling matters. 157 To my knowledge, there has been no party that has indicated a strong disagreement with the establishment of the deferral account. There were some questions raised as to whether or not they had yet had a chance to consider it because of the newness of the matter, and that's why it was not included in the settlement agreement. 158 MR. DeROSE: And Mr. Chair, if I can give any more assurances, I speak on behalf of CAC; they are aware that this panel is going on right now and so is VECC. 159 MR. BETTS: Great. I will take it, then, that people are informed and I am aware of the fact that we did talk about it last night as well. I apologize for the interruption but that sudden fear came over me, so thank you. Please proceed. 160 MR. O'LEARY: With that, Mr. Chair, I have very, very limited questions in chief, and one is to simply ask Mr. Boyce if there has been any significant change in the status of the litigation commenced by Cityscape which ultimately is the reason why the company has proposed the establishment of this deferral account. 161 MR. BOYCE: No, there's been no significant change since we were served with the Statement of Claim. 162 MR. O'LEARY: Now, each of these witnesses, sir, are here to answer any questions that the parties may have and the Board may have as to the establishment of the deferral account and any related perhaps historical questions, and thus the company would invite cross-examination at this point. 163 MR. DOMINY: Mr. Cass -- sorry, Mr. O'Leary. I haven't got my glasses on, I need my glasses to look at distances. Just to clean up the Exhibit N.1, tab 1, schedule 1, page 83, the evidence references should be A.8-1-2 not A.8-2-1, not -- on the manufactured gas line. 164 MR. O'LEARY: Yes. I'm just checking that myself, sir. The evidence that I have as filed is Exhibit A.8, tab 1, schedule 2. 165 MR. DOMINY: That's right. 166 MR. O'LEARY: So that appears to be a typographical error. 167 MR. DOMINY: I just wanted to clean up the record. 168 MR. BETTS: Now, cross-examination from intervenors. 169 Mr. Shepherd. 170 MR. SHEPHERD: Mr. Chairman, before I endeavour to do any cross-examination, perhaps we could just clarify the approval the company is seeking in this regard. If I understand it correctly, the company is seeking approval only to set up the deferral account and there's no implication that the clearance of that deferral account would be to the ratepayers; it could be to the shareholder, for example. That issue remains outstanding, who bears these costs in the end. Is that correct? 171 MR. BETTS: Could we hear your position on that? 172 MR. O'LEARY: Certainly. It is -- what the company's proposing is simply the establishment of a deferral account. What's included in it which is subsequently cleared is a matter that, if it's a live issue, would be raised in a subsequent proceeding. 173 MR. SHEPHERD: In that case, Mr. Chairman, I have no questions. 174 MR. BETTS: Mr. DeRose. 175 CROSS-EXAMINATION BY MR. DeROSE: 176 MR. DeROSE: Good morning, panel. I have a few questions but it won't take long. Mr. Ladanyi knows who I am. Panel, my name is Vince DeRose. For the other two members, we have not met. I'm here on behalf of IGUA. 177 First of all, if -- and I apologize if it was included in the evidentiary package that was sent out, but my package does not have a top copy of the Statement of Claim. Has that been provided? 178 MR. BOYCE: I don't believe a copy of the Statement of Claim was included in the evidence, no. 179 MR. DeROSE: Would we be able to have a copy of the Statement of Claim? 180 MR. BOYCE: Certainly. 181 MR. MORAN: That would be Undertaking J.8.2, Mr. Chair, an undertaking to file a copy of the Statement of Claim. 182 UNDERTAKING NO. J.8.2: TO FILE A COPY OF THE STATEMENT OF CLAIM 183 MR. DeROSE: Now, panel, as I understand it, a variance account is not set up for every lawsuit that is brought against Enbridge; is that fair to say? 184 MR. BOURKE: Correct. 185 MR. DeROSE: And what is unique about this case, that requires a variance account? 186 MR. LADANYI: I would say what's unique about this case is this is a relatively large claim, this is not a minor claim. 187 MR. DeROSE: So it's the quantum. 188 MR. LADANYI: Yes. 189 MR. DeROSE: And to date, have you been able to determine whether the amount in which the claim is brought -- actually, first of all, just for the record, how much is the claim for? 190 MR. BOYCE: The claim, I believe, seeks $50 million in general damages and $5 million in punitive damages. 191 MR. DeROSE: And has there been any determination whether 55 million would exceed your insurance caps? 192 MR. BOYCE: We have notified our insurers, or are in the process of notifying our insurers, but I don't believe we can answer that question at this time. 193 MR. DeROSE: Okay. Now, if the Board does not approve a variance account at this time, my understanding is that the company would still be in a position and would still have the right in a future case to bring forward costs for recovery; correct? 194 MR. O'LEARY: Mr. Chair, I just might remind Mr. DeRose that we're proposing the establishment of a deferral account, not a variance account. 195 MR. DeROSE: I'm sorry, a deferral account. 196 MR. LADANYI: Well, if the company did not have an account to collect these costs then the costs incurred in 2003 would not be able to be transferred to some future year. The purpose is to collect any costs incurred in 2003 for later disposition. 197 Now there is the option, always, if the Board does turn this down, that we could apply for an accounting order to have an account created. But in a situation like this where this is a fairly significant and large item, it's better handled through the rate case, and that's why the Board should be considering it now. 198 MR. DeROSE: So if there is no deferral account granted in this case, you would be precluded from recovery of legal costs or associated costs expended in 2003? 199 MR. LADANYI: With the caveat that we did not subsequently seek an accounting order. But essentially that would be it. 200 MR. DeROSE: Those are all my questions. Thank you. 201 MR. BETTS: Thank you. 202 There are no other intervenors here. Mr. Moran. 203 MR. MORAN: Thank you, Mr. Chair. 204 CROSS-EXAMINATION BY MR. MORAN: 205 MR. MORAN: Just picking up where Mr. DeRose left off with the issue of Enbridge getting sued, I assume you, Mr. Boyce, would be best to answer this question: I suspect there's quite a few lawsuits against Enbridge over the cost of a year; isn't that fair? 206 MR. BOYCE: Yes, I would typically deal with several. The amount in any particular year would go up and down. 207 MR. MORAN: Right, and this covers a range of things: Traffic accidents involving company vehicles, accidents at construction sites involving citizens who don't work for Enbridge, things like that? 208 MR. BOYCE: Yes. 209 MR. MORAN: Environmental matters? 210 MR. BOYCE: Could be environmental matters, yes. 211 MR. MORAN: Explosions in people's houses, things like that. 212 MR. BOYCE: That's right. 213 MR. MORAN: So quite a range of things over the course of any particular year. And I take it that, as you've already indicated, you don't typically seek to set up a deferral account for any of those matters even though some of the quantum figures being claimed would be quite large in some of those cases. 214 MR. BOYCE: That's correct. 215 MR. MORAN: And I assume Enbridge has insurance; right? 216 MR. BOYCE: Yes. 217 MR. MORAN: And part of dealing with a particular lawsuit would require Enbridge to carry out some sort of investigation into what's going on, what's behind the claim. 218 MR. BOYCE: This particular lawsuit. 219 MR. MORAN: In any lawsuit. 220 MR. BOYCE: Yes. 221 MR. MORAN: Right. And in any of these lawsuits, you typically would put your insurers on notice as well; right? 222 MR. BOYCE: Yes. 223 MR. MORAN: And typically the insurers would have an obligation to defend you. 224 MR. BOYCE: It would depend on the nature of the claim. For example, in an operations incident, typically those would be the subject of insurance coverage but there are others that might not. 225 MR. MORAN: Right. And for things that fall within insurance coverage, there would be an obligation on the part of the insurance company to defend the company in the claim. 226 MR. BOYCE: I believe so, yes. 227 MR. MORAN: Okay. My understanding of the only exception with respect to establishing deferral accounts relates to the Garland case; right? That was one set up to do with the Garland case. 228 MR. BOURKE: That's correct. 229 MR. LADANYI: And that's also because it was a very large claim. 230 MR. MORAN: And in that one, was there an issue of whether you were insured for that kind of loss? 231 MR. BOYCE: I'm not sure whether we would have insurance coverage for that loss, but I'm -- so I can't really answer that question. 232 MR. MORAN: Right. It's not within the usual run of the mill of things that you would typically be sued for; right? 233 MR. BOYCE: No. 234 MR. MORAN: All right. 235 MR. BOURKE: If I could add something too, the CASDA, deferral account, there's also consideration given to fact that late-payment penalties have been a component of our revenue requirement in historical years, covered by the claim at the same time. 236 MR. MORAN: Right. The costs for insurance, for the stuff that you normally get sued for, how does that get dealt with in your rates? 237 MR. LADANYI: We have a certain forecast within our O&M total forecast of damages and potential claims that we would have to settle any insurance that's paid out. Again, this would be a variance against those. 238 MR. MORAN: Right. 239 And in terms of the costs of carrying out any investigations that are necessary for claims that are made against the company, where do those costs get captured, typically? In the O&M budget as well? 240 MR. LADANYI: Could you restate your question. I'm not quite clear. 241 MR. MORAN: All right. Let me just back up a little bit, then. 242 You're served with a notice of claim because somebody had an accident with one of your vehicles, for example, and you want to investigate it. So how do you go about investigating it? Do you use your own forces to investigate, or do you instantly put the insurer on notice and let them do it? How does that work? 243 MR. BOYCE: Typically we would, through our external counsel, use our own investigators. 244 MR. MORAN: And the costs associated with that investigation, where would they typically be captured, in the O&M budget? 245 MR. LADANYI: These people would -- if they're our own investigators, that would be within our O&M budget. 246 MR. MORAN: Thank you. 247 Do you have insurance for environmental matters? 248 MR. BOYCE: I can't answer a question related to the extent of our insurance. That's not something I'm typically involved with. 249 MR. MORAN: I wasn't so much concerned with the extent as to whether it exists but whether you have actual insurance for environmental liability at the moment. 250 MR. BOYCE: I believe we do, but, again, I couldn't answer the exact nature of that insurance coverage. 251 MR. MORAN: All right. Is that something you would need to check, then, to answer the question? 252 MR. BOYCE: Yes, it would. 253 MR. MORAN: Mr. Chair, perhaps I could get an undertaking on that. 254 MR. BETTS: Please. 255 MR. O'LEARY: Perhaps I could just ask for a clarification of Mr. Moran. Are we looking for an answer which would indicate whether insurance presently exists for environmental matters that occur today, or are you asking whether or not environmental insurance exists in respect of liabilities that arise historically, for example, from the period 1850 to 1960? 256 MR. MORAN: Mr. Chair, I think it's the latter -- sorry, the former, whether they currently have environmental liability insurance for environmental matters that they have to deal with today. 257 MR. O'LEARY: I'm happy with that answer, because to provide a response to the second part would be somewhat voluminous. 258 MR. BETTS: Thank you. 259 UNDERTAKING NO. J.8.3 TO ADVISE IF ENBRIDGE CURRENTLY HOLDS ENVIRONMENTAL LIABILITY INSURANCE FOR ENVIRONMENTAL MATTERS THEY DEAL WITH TODAY 260 MR. MORAN: Now, as I understand the evidence that you've put before the Board, you have insurers on notice with respect to this particular claim? 261 MR. BOYCE: We are in the process of putting insurers on notice. I can't state with certainty whether we have completed that process at this point. 262 MR. MORAN: Perhaps you could describe what that process is, so I can just understand that answer. 263 MR. BOYCE: Through our risk and claims department, who are the ones that maintain records of historical insurance coverage, they are currently engaged in the process of writing to both current and historical insurers. 264 MR. MORAN: All right. So I guess I may make Mr. O'Leary's life more difficult, then. This brings me to the issue of historical insurance. 265 Are you in a position to indicate whether you have historical insurance for historical claims? 266 MR. BOYCE: I can't answer that question in terms of whether -- whether we have a strong case to claim coverage from those insurers. 267 MR. MORAN: All right. What you can say, I guess, is that you are going through a process of notifying certain insurers on the theory that you do have that kind of insurance coverage? 268 MR. BOYCE: Yes. 269 MR. MORAN: All right. Are you able to estimate how long that might take to complete? 270 MR. BOYCE: No, it would be difficult for me to give an estimate at this point. As I say, the process is completed through our risk -- risk and claims department, but I can certainly check on that. 271 MR. MORAN: So of course, you don't have any indication at this point as to whether anybody will refuse to defend, despite any assertion you might make that they have that obligation? 272 MR. BOYCE: No, I'm not aware of any. 273 MR. MORAN: In the event that it turns out that you don't have insurance, then I guess Enbridge is self-ensuring at that point with respect to this claim; right? 274 MR. BOYCE: Yes. 275 MR. MORAN: Okay. From a regulatory, rate-making perspective, maybe I can ask you this question, Mr. Ladanyi: What is there that would prevent the company from simply keeping track of the costs that are associated with this claim on its own, and why do you need to have a Board-considered account? 276 MR. LADANYI: Well, the reason to have a Board-considered account is to collect costs in the account in one accounting period, which would be 2003 fiscal year, to be able to later on collect these costs in the future accounting period, which may be 2004, 2005, whenever it's settled. So it's really a transfer of costs from one accounting period to another. It's not just a question of tracking these costs but be able to later on dispose of these costs in a different accounting period. 277 MR. MORAN: Right. But what prevents you from being able to claim those costs in a later period, having kept track of them without the benefit of a deferral account? 278 MR. LADANYI: It is our understanding of how the Board's uniform system of accounts works. So, I mean, we were essentially following the rules set by the Ontario Energy Board, our understanding of these rules. 279 MR. MORAN: So that's the basis upon which you come forward to ask for a deferral account. 280 MR. LADANYI: That's right. 281 MR. MORAN: Just to clarify your answer to a question that Mr. DeRose -- maybe it was Mr. Shepherd. In setting up this account, is the theory purely to keep track of these costs and -- without any notion that it is or is not recoverable in rates? 282 MR. LADANYI: Well, we are not currently making any claim that the costs are recoverable in rates. There are, however, numerous precedents, particularly in the United States, where similar costs of remediation of manufactured gas-plant sites were recoverable in rates and approved by commissions and boards in the United States. And if -- should we be seeking recovery or any costs, we would use these as precedents. 283 MR. MORAN: Okay. I'm not sure if that is quite what I was asking. If I could just get you to turn to Exhibit A.8, tab 1, schedule 2, the evidence on this matter at page 1. 284 MR. LADANYI: Page 1, yes. 285 MR. MORAN: In paragraph 3 there is an excerpt from the company's annual report back in 1991, so I guess this issue isn't that new. And in that excerpt, the company indicates towards the end: 286 "Although there are no known and regulatory precedents in Canada, there are precedents in the United States for recovery of costs in similar case in rates. The company expects that, if it is found that it must contribute to any remediation costs, it would be generally allowed to recover in rates those costs not recovered through insurance or by other means." 287 Now, given that this is in the annual report, I guess it that the company is trying to establish at least an impression that these costs might be recoverable; right? 288 MR. LADANYI: Correct. 289 MR. MORAN: And is that impression of recoverability added to by the existence of a deferral account in relation to those? 290 MR. LADANYI: I would say the existence of deferral account is neutral on that issue. We would have to make a case for recovery in the future date. 291 MR. MORAN: All right. So from your perspective, the deferral account would be truly just a tracking account. 292 MR. LADANYI: Would be a cost-collection account, so tracking wouldn't be quite the right thing and the costs would be sitting in that account and not somewhere else. 293 MR. MORAN: But if it's not simply tracking those costs, what else is it doing? 294 MR. LADANYI: It's holding those costs for later disposal. 295 MR. MORAN: Right. 296 MR. LADANYI: They are not being expensed in the year incurred, so if the costs are not sitting in the deferral account they would be treated as an expense in 2003. 297 MR. MORAN: Right. And for disposal later, which would include perhaps to the shareholders' account for the -- 298 MR. LADANYI: Yes, it would either be to the shareholders' or to the ratepayers' account, depending on the Board's decision at some future date in some future rate case. 299 MR. MORAN: Now, I suppose an alternative approach simply might be you go through the process, you may or you may not be covered by insurance, you may or may not incur costs as you go along and there may or may not be a court order at the end of the day. But let assume there's a court order at the end of the day, after all the legal stuff is finished, and the court order says Enbridge owes X millions of dollars. Isn't that a good enough basis for proceeding in a claim for recovery at that time? 300 MR. LADANYI: I think if that court order took place in 2003 and we did not have a deferral account, then we would have to record that directly as income and -- against income in 2003; so, rather, by putting it in the deferral account for later disposal, this would not impact the income of Enbridge Gas Distribution in 2003. 301 MR. MORAN: Right. If the court order occurred in the year 2005, if justice is particularly speedy, wouldn't you just claim it in 2005? 302 MR. LADANYI: Since we operate on a forward test year, and if we were so far ahead that we could, for example, at the very beginning of the test year, in advance of the test year, know exactly what the results of this claim is, we could presumably forecast it and put it into our rate application. But that's got many ifs around it. 303 So a much more practical way to deal with this type of a situation is to allow for the creation of the deferral account to collect the costs so that they can be considered by the Board appropriately in its schedule when it considers futures rate cases. 304 MR. MORAN: Let me just, to conclude then, ask a question about the dynamic of the process. 305 In a situation where there's at least a theoretical possibility that Enbridge might be on the hook for some amount of money with respect to remediation, do you think it makes a difference to the vigor with which Enbridge will approach or resist that outcome in two situations: One where there is a deferral account and one where there isn't? 306 MR. BOYCE: In my view, it would not change the strategy we employ in defending that claim or any future claims that might arise. 307 MR. MORAN: Right. I guess what I'm getting at is that if there wasn't a deferral account, and if there wasn't any perception, even, that any of this might be recoverable in rates, wouldn't that make the company all the more anxious to resist this as strongly as possible in order to defeat it in order to avoid that risk of having to bear that cost itself? 308 MR. LADANYI: We believe our responsibility is to do our best to defend every action like this, and we certainly don't believe that we are -- that we are responsible for any of these damages. And so we will be vigorously fighting this action whether it's -- whether there's deferral account or not. It's got no impact on it at all. 309 MR. MORAN: All right. 310 Well, then, just to wrap it up, then, I take it the deferral account is simply -- for the accounting impacts that some of these costs would have, you don't want it to affect income; right, this year? 311 MR. LADANYI: That's right. 312 MR. MORAN: All right. 313 Thank you, Mr. Chair. Those are all my questions. 314 MR. BETTS: Any redirect, Mr. O'Leary? 315 MR. O'LEARY: A couple questions, Mr. Chair. 316 RE-EXAMINATION BY MR. O'LEARY: 317 MR. O'LEARY: The first I would put to Mr. Boyce, and it relates to a question about if the Court was to grant judgment in favour of Cityscape or another plaintiff, can you tell me whether or not that judgment would include any of the legal costs of Enbridge and any costs of its investigations and defence of the matter? 318 MR. BOYCE: I believe it likely would, yes. 319 MR. O'LEARY: Maybe I didn't -- wasn't quite clear in that. If they're granting judgment in favour of the plaintiff, and Enbridge is ordered to make a payment representing the damages and legals of the plaintiff, does that judgment normally include a cost of the defendant defending the action or their legal costs? 320 MR. BOYCE: No, it wouldn't. Sorry. I misunderstood the question. 321 MR. O'LEARY: And I don't know, Mr. Boyce, if you are aware of -- know, or another panel member, but according to the evidence at A.8, tab 1, schedule 2, it indicates that there were a number of claims that were advanced and forwarded to the company in the early 1990s. 322 Do you know whether or not the company put its insurers on notice at that time? 323 MR. BOYCE: I believe we did. 324 MR. O'LEARY: And can you advise the Board as to whether or not any of the insurers that were given notice of those claims indicated that they accepted that coverage was, in fact, in place and available for those claims? 325 MR. BOYCE: I'm not aware of any positive statement from any insurer that coverage was available, no. 326 MR. O'LEARY: Thank you. 327 And is the deferral account intended only to reflect the Cityscape claim, or is it also available, should other claims be advanced? 328 MR. LADANYI: It is available should other claims be advanced as well. 329 MR. O'LEARY: And finally, Mr. Boyce, can you, perhaps, attempt to compare the ability of the company to quantify the claims made by Cityscape -- of the nature made by Cityscape relative to claims made in some of the other types of actions, which Mr. Moran referred to, such as, you know, a commercial claim or a personal injury claim. 330 Is one more difficult than the other to quantify? 331 MR. BOYCE: In my opinion, claims of this nature, such as the Cityscape claim, are much more difficult to quantify. 332 MR. O'LEARY: Thank you. 333 Those are our questions, Mr. Chair. 334 [The Board confers] 335 QUESTIONS FROM THE BOARD: 336 MR. DOMINY: Mr. Ladanyi, I just understand that this -- from the way you've described it, this is not a deferral account for the Cityscape claim. This is a deferral account for any potential claim with regard to the environmental effects of the previous activities of the company in manufactured gas plants; is that it? 337 MR. LADANYI: Yes, Mr. Dominy. 338 MR. DOMINY: The second question is: As I understood the discussion, you're making a distinction between regulatory accounting and financial reporting or financial accounting, and basically, am I to understand that as a consequence of the creation of the deferral account, your financial statements would not include these costs in the income statement, but they would be put into a liability, a future liability account; is that what would be the case? 339 The costs you've expended in investigating and legal costs related to this. 340 MR. LADANYI: Yes, they would be on the balance sheet but not on the income statement. 341 MR. DOMINY: But it is the financial accounts you are dealing with. 342 MR. LADANYI: Yes, we are. 343 MR. DOMINY: As opposed to the regulatory treatment which was the other set. Thank you. 344 Mr. Betts. 345 MR. BETTS: Just a couple of questions that relate to the kind of background of this specific action that you're contemplating which is, I guess, the catalyst for this deferral account. 346 If I understand the evidence, this -- Enbridge, or probably Consumers at that time, operated a company in the mid-1800s; is that correct? 347 MR. LADANYI: The predecessor company operated a manufactured gas plant on that site, which is at on Front and Parliament. There are still some remaining buildings on the site but they are not owned by Enbridge. This Cityscape site is to the south-east of the former gas plant. They are not actually on the lands that were at any time occupied by the plant. 348 MR. BETTS: And at what point did Consumers transfer ownership of that property? 349 MR. LADANYI: Well, the property -- the Cityscape property was never owned by Consumers. It was a Gooderham & Worts property, from my understanding. So by the -- but the property where the gas plant was, was sold. The plant stopped operating in 1954 and Consumers Gas still owns some buildings on the plant. There was, I think, a large gas holder there until I think 1958. I believe it was demolished then and there's still some remaining buildings which were sold to other users. 350 If you're familiar with the area, Mr. Betts, you might notice, for example, the Canadian Opera Company that has a building that's one of the former Consumers Gas buildings from the plant, and there are some other brick buildings in the area now converted to other uses. 351 MR. BETTS: And, for the record, was Consumers a regulated company at that time, when they were operating that plant? 352 MR. LADANYI: Yes, Consumers Gas was regulated by a statute with the province between 18 -- I don't have my notes here, between 1876 and 1954. And then in 1954, the Ontario Fuels Board was created and that operated until 1960 when the Ontario Energy Board was created. 353 MR. BETTS: Somehow I thought you might have that information. 354 That is -- that concludes my questions as well on this matter. 355 Mr. Moran. 356 MR. MORAN: Mr. Chair, with your permission there was just one question of clarification in an answer that Mr. Boyce gave to Mr. O'Leary. If I may just do a quick follow-up. Mr. O'Leary may have some. 357 MR. BETTS: I think in the interest of keeping the record straight, please do that. 358 FURTHER CROSS-EXAMINATION BY MR. MORAN: 359 MR. MORAN: This was in relation to putting insurers on notice in 1991 and you indicated that there were no positive statements in response. Just to clarify, did any of the insurers put on notice indicate that they would not defend? 360 MR. BOYCE: Not to my knowledge. I'm not aware of the specific responses that were provided at that point. That predates my time with the company. 361 MR. MORAN: Is that something you could check? 362 MR. BOYCE: Certainly. 363 MR. MORAN: And provide that. Perhaps we could just get an undertaking then. That would be Undertaking J.8.4. 364 UNDERTAKING NO. J.8.4: TO PROVIDE INFORMATION REGARDING IF INSURERS WHO WERE PUT ON NOTICE IN 1991 AND 1992 INDICATED THAT THEY WOULD NOT DEFEND 365 MR. BETTS: Could you describe that for the record. 366 MR. MORAN: Undertaking to check and see if insurers who were put on notice in 1991 and 1992 indicated that they would not defend. 367 MR. BETTS: This is probably a little bit out of order but I see a big question mark in Mr. Shepherd's face and -- Mr. Shepherd, is there something that came up in that process that you needed to have clarified? 368 MR. SHEPHERD: I -- yes, Mr. Chairman, thank you. 369 MR. BETTS: Mr. O'Leary -- 370 MR. O'LEARY: I have no difficulty, Mr. Chair. 371 MR. BETTS: I know it's a little bit out of order but I'm interested in getting everything that's possible on the record. 372 Mr. Shepherd, please proceed. 373 MR. SHEPHERD: Thank you, Mr. Chairman. 374 FURTHER CROSS-EXAMINATION BY MR. SHEPHERD: 375 MR. SHEPHERD: Mr. Ladanyi, was this the only manufactured gas plant in the company's history in the past? 376 MR. LADANYI: No, there were others. 377 MR. SHEPHERD: Is the intention, then, that this deferral account will apply to all potential environmental claims relating to all manufactured gas plants in the company's past? 378 MR. LADANYI: Any -- that's future claims, you mean? 379 MR. SHEPHERD: Yes. 380 MR. LADANYI: That's correct, yes. 381 MR. SHEPHERD: Has the company at any time done an assessment of its potential environmental liabilities with respect to manufactured gas plants? 382 MR. LADANYI: I'm not aware of it. 383 MR. SHEPHERD: I guess I'm just concerned and maybe you could help me here, I'm just concerned that this one claim is for $55 million. Presumably there are potentially other claims with respect to that plant in the surrounding area, and if there are other plants presumably there are potential claims with respect to those. 384 I'm concerned that this particular plant is in downtown Toronto and if other plants are in downtown areas of cities we could be talking billions of dollars of claims. Am I misunderstanding the situation? 385 MR. LADANYI: The very large number I would dispute. I think that if you take into account that the plants stopped operating in 1954 when natural gas was brought in from the United States into the Toronto area, there's been actually very few claims. So I don't expect there is going to be very many claims in the future. But there is the potential always. 386 And I would be disputing whether the claims would be as large as you suggest, but there could be some substantial claims; I'm not disputing that. 387 MR. SHEPHERD: Thank you, Mr. Chair. Those are all my questions. 388 MR. BETTS: Mr. O'Leary, do you have anything to clarify in redirect? 389 MR. O'LEARY: We have no follow-up, sir. 390 MR. BETTS: That concludes the panel's interest in this particular matter at this time. 391 Mr. O'Leary, we obviously can't expect to have your next panel available until 1:00. Does that suggest we're going to have a two-hour break? 392 MR. O'LEARY: That's what we would respectfully recommend, unless you'd like to hear me filibuster for the next half an hour. 393 MR. BETTS: I think the two-hour break sounds very good. Thank you. 394 So we will adjourn now and reconvene at 1:00 p.m. Thank you. 395 --- Luncheon recess taken at 10:55 a.m. 396 --- On resuming at 1:05 p.m. 397 MR. BETTS: Thank you, everybody. Please be seated. 398 Welcome back. Before we proceed to the next issue are there any preliminary matters? 399 PRELIMINARY MATTERS: 400 MR. CASS: Thank you, Mr. Chair. Just before the panel comes forward, there are a few preliminary matters all of which really are documentary filings. 401 First, I believe that an undertaking was given, I believe it's Undertaking J.8.2, to provide a copy of the Statement of Claim in the manufactured gas plants litigation that was recently commenced. The proceeding was actually commenced with two documents, a Notice of Action and then a Statement of Claim, so copies of those documents are available and are being passed around. 402 MR. BETTS: Thank you. Mr. Cass. 403 MR. CASS: Next, Mr. Chair, in relation to the panel that is about to take the stand, a request was made that the company provide a copy of the previous version of the Intercorporate Services Agreement under which Enbridge Inc. provided services. I believe that this will probably be referred to in cross-examination. A request was made for that purpose so we have that document available to be passed around, and perhaps if it was given a number now, that would expedite things when the cross-examinations proceed. 404 MR. BETTS: Thank you. 405 MR. MORAN: Mr. Chair, that would be Exhibit K.8.1, the Intercorporate Services Agreement, dated January 1, 2003, between Enbridge Inc. and Consumers Gas Company Limited. 406 EXHIBIT NO. K.8.1: INTERCORPORATE SERVICES AGREEMENT, DATED JANUARY 1, 2003, BETWEEN ENBRIDGE INC. AND CONSUMERS GAS COMPANY LIMITED 407 MR. BETTS: Thank you, Mr. Moran. 408 MR. CASS: Third, Mr. Chair, also in relation to the panel that's about to come forward, there is a witness on the panel from Ernst & Young, his name is Bob Turner. I will, when the panel comes forward, lead him through his qualifications to qualify him as an expert in transfer-pricing, but we also have his written CV to provide to everyone. 409 MR. BETTS: Thank you. 410 MR. MORAN: That would be Exhibit K.8.2, CV of Robert D.M. Turner. 411 MR. BETTS: Thank you. 412 EXHIBIT NO. K.8.2: CURRICULUM VITAE OF ROBERT D.M. TURNER 413 MR. CASS: Finally, Mr. Chair, you may not have seen this yet, I'm not sure if it's been provided to the Board, but Mr. Janigan, on behalf of VECC, was good enough to provide the panel in advance with some materials that he proposes to use in cross-examination. One item in the materials is a chronology. And having reviewed that, the company itself did what I might call perhaps an expanded version of this regulatory time line; and, again because it will undoubtedly come up during the course of the examination of the panel, I thought perhaps that we could pass out that regulatory time line now as well. 414 MR. BETTS: Mr. Janigan, we do have a copy of your cross-examination notes and it has not been entered as an exhibit yet. Would it be appropriate to do that? 415 MR. JANIGAN: Yes, I believe so. I believe it would be, Mr. Chair. 416 MR. BETTS: Okay. Then let us first of all enter the VECC cross-examination material as an exhibit and then we'll follow with the company change to that. 417 MR. MORAN: That would be Exhibit K.8.3, "Issue 7.45, Corporate Allocation: Book of Materials for Cross-examination Filed by VECC." 418 EXHIBIT NO. K.8.3: ISSUE 7.45, CORPORATE ALLOCATION: BOOK OF MATERIALS FOR CROSS-EXAMINATION FILED BY VECC 419 MR. MORAN: And K.8.4, table entitled "Regulatory Time Line, Corporate Charges." 420 EXHIBIT NO. K.8.4: REGULATORY TIME LINE, CORPORATE CHARGES 421 MR. BETTS: I think we're up to speed so far. 422 MR. CASS: Thank you, sir. With that, Mr. Chair, unless there are any other preliminary matters, I think I can call the panel up to be sworn. 423 MR. BETTS: Are there any preliminary matters? 424 Please bring your panel forward. 425 MR. CASS: Thank you, sir. The members of the panel who may come forward now are Karyn Brooks, Bill Cowan, Tom Ladanyi, Michael Mees, and Bob Turner. 426 ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 7.45: BROOKS, COWAN, MEES, TURNER, LADANYI 427 K.BROOKS; Sworn. 428 W.COWAN; Sworn. 429 M.MEES; Sworn. 430 R.TURNER; Sworn. 431 T.LADANYI; Previously sworn. 432 MR. BETTS: Mr. Ladanyi was previously sworn, and the other witnesses have been sworn. Proceed when you're ready. 433 EXAMINATION BY MR. CASS: 434 MR. CASS: To expedite matters, Mr. Chair, perhaps I'll just introduce the panel and identify each person for the Board and for others in the room. 435 Sitting closest to the Board is Michael Mees. He is the Assistant Controller of Enbridge Gas Distribution. 436 Next to Mike is Karyn Brooks. She is the Vice-president and Controller of Enbridge Inc. 437 Then we have Bill Cowan. He is Team Leader, Finance and Regulatory of Enbridge Gas Distribution. 438 Mr. Ladanyi, of course, everyone knows. He is Manager, Regulatory Projects -- Proceedings, I'm sorry, at Enbridge Gas Distribution. 439 And then, finally, Mr. Bob Turner from Ernst & Young. 440 Starting with Mr. Mees and Ms. Brooks. I understand that you were jointly responsible for the company's evidence in respect of Enbridge Inc. cost allocations as it relates to the methodology, the calculations and the amounts; is that correct? 441 MS. BROOKS: Yes. 442 MR. MEES: Yes, it is. 443 MR. CASS: And was that evidence prepared by you or under your direction and control? 444 MR. MEES: Yes. 445 MS. BROOKS: Yes, it was. 446 MR. CASS: And is the evidence accurate, to the best of your knowledge or belief? 447 MR. MEES: Yes. 448 MS. BROOKS: Yes. 449 MR. CASS: Thank you. 450 And then for the other end of the panel, if I could address some questions to Mr. Turner. 451 Mr. Turner, I understand that you are a chartered account; is that correct? 452 MR. TURNER: That is correct. 453 MR. CASS: And a partner, I believe, with Ernst & Young? 454 MR. TURNER: Yes. 455 MR. CASS: In fact, you are a member of Ernst & Young's partnership board; is that right? 456 MR. TURNER: That is correct. 457 MR. CASS: Your title, and correct me if I get it wrong, but you are National Director, Transfer-pricing Services, at Ernst & Young? 458 MR. TURNER: Ernst & Young Canada; that is correct. 459 MR. CASS: And I understand that as part of your experience in transfer-pricing, you participated in the first two advanced-pricing agreements for CCRA; is that correct? 460 MR. TURNER: That is correct. 461 MR. CASS: Can you tell us what advance-pricing agreements are, please. 462 MR. TURNER: I'll try. A transfer-pricing or the pricing for goods or intangibles or services are matters of interest to tax authorities internationally, and advance-pricing arrangement or advanced-pricing agreement, APA, is a mechanism by which a taxpayer can go to a government or governments and get them to agree to the taxpayer's transfer-pricing policies and methodology in advance, rather than waiting for an audit or challenge on audit. 463 MR. CASS: And I understand that in total you've worked on over 25 of these advanced-pricing agreements; is that right? 464 MR. TURNER: Yes. I believe that's correct, yes. 465 MR. CASS: And you've been advising clients in the transfer-pricing area for in excess of ten years? 466 MR. TURNER: Yes, that's correct. 467 MR. CASS: You are an author of a paper on transfer-pricing for the Technical Committee on Business Taxation appointed by the Minister of Finance; is that correct? 468 MR. TURNER: The Minister of Finance of the federal government; that is correct. 469 MR. CASS: I believe that you have appeared previously before this Board and at least one other Canadian energy regulator on transfer-pricing matters; is that right? 470 MR. TURNER: That is correct. 471 MR. CASS: You've been a frequent speaker and author on transfer-pricing; is that fair? 472 MR. TURNER: Yes, I have published articles for the International Bureau of Fiscal Documentation, the transfer-pricing Reporter, and appeared at a number of seminars presented by the Tax Executive Institute, Ernst & Young, and some private seminar sponsors. 473 MR. CASS: Thank you. 474 Mr. Chair, I would ask that the Board accept Mr. Turner as an expert in transfer-pricing. 475 MR. BETTS: Any submissions from intervenors with respect to that? 476 Thank you. The Board does accept Mr. Turner as an expert. 477 MR. CASS: Thank you, sir. 478 Then turning to you, Mr. Cowan, can you explain for the Board, please, what issues coming out of the settlement proposal are to be addressed by this panel. 479 MR. COWAN: Yes. This panel does not need to deal with issues associated with the cost consequences arising from the allocation in that those were part of the settlement proposal brought forward for the O&M envelope of $270 million. 480 So in that -- Mr. Cass has asked me what we are going to talk about, I've started with what we're not going to talk about. 481 Also, we are not planning to talk about matters related to the O&M deferral account. That part of the settlement proposal also was that there would be no impact on the deferral account arising from this discussion that we are proposing to have. 482 Indeed, what we are expecting to address are matters associated with the policy questions that appear to be unresolved from the perspective of the intervenors. One of the conditions, or the condition under which the settlement proposal was brought forward was that, indeed, the Board would resolve or address unresolved policy issues. So it's those aspects that we are intending to address. 483 In aggregate, then, the purpose of our evidence is to gain the Board's support for the methodology that we have put forward so that it can be applied in future years. 484 MR. CASS: Thank you, Mr. Cowan. 485 Can you tell the Board, please, where the general evidence about the allocation methodology is to be found? 486 MR. COWAN: There are two primary references to the methodology: First is in our pre-filed exhibit, which is - I will simply give you the reference so we know what it is - Exhibit A.6, tab 19, schedule 1. 487 And the second principle reference is an attachment to Board Staff interrogatory filed at Exhibit I, tab 1, schedule 71. 488 In that particular interrogatory, Board Staff asked us to supply copies of the affiliate agreements between Enbridge Gas Distribution and each of the affiliate companies in the family of Enbridge companies, and we did do that. 489 The first attachment in that interrogatory response is the intercorporate services agreement between Enbridge Gas Distribution and Enbridge Inc. And attached, in turn, to that attachment is a schedule which is the procedure that was developed last fall that outlines the methodology in some considerable detail. 490 So those are the two primary references. 491 MR. CASS: Thank you. 492 Ms. Brooks, could you address, please, for the Board the extent to which there have been any changes in the cost-allocation methodology. 493 MS. BROOKS: The methodology for the years '99 through 2002 was the same in each of those years. We changed the methodology in 2003 primarily to respond to changes in the corporate office. It had grown in size as a result of the transfer of functions to the corporate office, as well as its increasing responsibility for matters related to policy strategy and standards. So in 2003, we adopted the revised methodology. 494 The reasons that we believed it was important to do that was that the methodology -- the prior methodology was a fee-based methodology. We wanted to move to a more structured allocation framework with the appropriate changes to business processes and practices as well. 495 The prior methodology was administratively burdensome in the sense that it required a significant amount of intercompany billings, reconcilliations, dispute resolutions, and took up what seemed to be an inordinate amount of time to administer. 496 The new methodology is also more comprehensive than the old methodology, yet it is simpler to apply because it is applied evenly, or the same methodology is applied across all business units. 497 We also believe that we have substantially enhanced the cost drivers that are used to allocate the costs with the adoption of the new methodology. We did a review of the types of costs, the nature of the costs that were incurred, and adopted drivers that we believe appropriately allocate the cost between business units. 498 The other thing that the methodology has done is allow us to have more transparency in the allocations to the business units. Under the old methodology, the allocations weren't well-understood and they were hard to describe. Now, it is a reasonably simple process because we do have this enterprise-wide allocation methodology that has more rigor attached to it, perhaps, than the old methodology did. 499 MR. CASS: Thank you, Ms. Brooks. 500 You alluded to changes in the level of services from the corporate office. Can you elaborate on that, please. 501 MS. BROOKS: I can. 502 A number of years ago -- '99, I believe it was -- Enbridge adopted a strategy that encompassed a one-company, one-vision type of strategy. That resulted, as I mentioned earlier, in matters related to strategy, policy, and standards being dealt with by the corporate office rather than individually in the business units. It also resulted in certain functions being transferred to the corporate office, and resulted in more of a shared-services environment than the way the company had previously operated, which was more like a hold-co. design. 503 We created centres of excellence in the years of 2000 through 2002. The reason for creating those centres of excellence was to define certain functional areas that were of strategic importance to the company, so they needed to be combined into one centralized unit. Or for cost effectiveness or because -- well, not because. As a result of the unbundling of the services business, it became important for those people who worked in Toronto and provided services to both those lines of business that they be removed from the utility and their costs charged appropriately to each of those lines of business. 504 The organization has since changed, and with the sale of the services business, we have moved some of the centres of excellence -- or all of the Toronto staff based in the centres of excellence back into the utility, because they are devoting primarily all of their time to the utility business. 505 In addition, the business environment has changed fairly substantially over the last year or two with an increased focus on corporate governance, with the implosions that we've seen over the last 12 months or so, and there is an expectation that we provide solid governance functions across the organization. 506 So we have created functions such as the chief information officer and a records management function to ensure that we meet those corporate governance standards that are required in the marketplace. 507 MR. CASS: Ms. Brooks, what was done to ensure that the methodology meets the Board's requirements? 508 MS. BROOKS: We took a number of steps to ensure that we had covered that off. 509 I should first mention, perhaps, to put it in context that the methodology was developed by a team of senior finance staff from across the business units. It was led by the corporate office but certainly had a substantial amount of input from each of the business units. 510 So as a result of using that cross-business unit team, Enbridge Gas Distribution and Enbridge Inc. took into consideration the Board decisions in developing the policy. 511 We considered the Westcoast, the decision on -- with respect to Westcoast, allocation of corporate charges to Union and Centra, and looked at the three tests of cost incurrence, cost allocation and cost benefit. We also considered the Board's comments in EBRO-495 and -497 regarding concerns around the allocation methodology and the transparency with respect to the pool of corporate costs to be allocated. We also reviewed the Affiliate Relationships Code to determine if the new methodology met the provisions of that code. And lastly, we undertook an independent review of the methodology and the results thereof through the engagement of Ernst & Young, to review the policy itself. 512 MR. CASS: Thank you. 513 Mr. Cowan, could you address, please, how the methodology does meet the EBRO-493, -494 tests starting with cost incurrence. 514 MR. COWAN: Yes, indeed. Cost incurrence, we understand, that to meet this test, the Board expects us to be able to substantiate the need for the services is evident, and we believe that we can do that at two levels. On a high level, we can see how the need is substantiated, but then on a specific service-by-service basis, we've also established, we believe, in the evidence that the needs are there. 515 So first with regard to the high level, it's our view that ratepayers and investors are needing more than a statement from the company that we are setting high standards for governance, more than statements that we are setting a high standard for conduct of our employees, and that we're setting standards of excellence in the way we operate the gas distribution business. 516 It's our expectation that more than statements are required, that investors and ratepayers are looking for some other form of assurance that, in fact, those statements will come to pass; in other words, that we will achieve the standards that we are espousing. 517 We believe that the availability of this policy framework that we have for the allocation of costs allows the services provided to contribute to assuring that those standards are, in fact, met. And we believe that through these -- the application of the policy and through the provision of services, that the company is able to sustain a high level of confidence with its customers and with the investors in relation to meeting the standards that we've established. 518 So from the perspective of meeting a need, we believe that the sustainability of the enterprise is underwritten by the services provided and through the methodology that we've used to allocate the costs. 519 And I believe that's what comes to mind for that question. 520 MR. CASS: Thank you. What about the cost-allocation test, Mr. Cowan? 521 MR. COWAN: Yes. With regard to the cost-allocation test, here, we understand the Board to be looking for us in choosing the methodology to apply one which uses cost drivers and that those cost drivers, in turn, reflect the principle of cost causality in the way in which they are selected and applied. And so we believe that the methodology does do that and that the causality links are described in our pre-filed exhibit and also in the response, in the procedure that I referred to as an attachment to interrogatory 71 posed by Board Staff. 522 In addition, there are a number of interrogatories that get to the point or the question of the suitability and the selection that we've made with regard to cost drivers. I won't enumerate them but I do believe that you'll find that questions, as appropriate, will draw those out. 523 Finally, when it came to looking at the methodology, we -- this was, in fact, part of the work done through Ernst & Young, to consider the suitability of the cost drivers. I believe that was the part of the scope of what they considered as they reviewed our methodology. 524 MR. CASS: And the cost-benefit test? 525 MR. COWAN: Yes, the third test that the Board enumerated in EBRO-493 and -494 is cost-benefit test, and here the test is -- should be able to demonstrate that the benefits, in fact the value of the benefits, exceed the cost of providing them for the Board to be comfortable that, in fact, there's a legitimate basis for allocation. 526 We have addressed this question in response to one interrogatory in particular that focuses the question on whether there is a greater value in the benefit than there is a cost, and that particular interrogatory is CME number 164, in which we indicate that the value of the benefits exceeds the cost by $3 million. 527 Ms. Brooks alluded to there being other benefits associated with the methodology, for instance, the significant reduction in administrative burden. 528 MR. CASS: Mr. Cowan, can you tell the Board about compliance with the statements made in the EBRO-495 and -497 decisions, please. 529 MR. COWAN: Yes. The -- we believe that concerns identified in those decisions have all been addressed through the procedure that we've put in place. 530 Just to give an illustration, there was concern about the sufficiency of information about corporate totals in the -- I think this was in EBRO-497. The decision indicates that it was difficult for the parties to see the total corporate pool of costs and thereby understand how the allocation to Enbridge Gas Distribution stacked up against the corporate total. We believe that we put a considerable amount of evidence on the record with regard to that particular concern and that it has been addressed. 531 Just as a quick reference here, let me see if I can identify the -- I can't, I didn't write it in my note here, so I suspect we will find it as we go if we need it. There are a number of interrogatories that get to the total and also the allocation year by year, and the split between regulated and non-regulated enterprises. 532 MR. CASS: Thank you. 533 Mr. Cowan, can you address, briefly, compliance with the Affiliate Relationships Code, please. 534 MR. COWAN: Yes, the Affiliate Relationships Code contemplates the type of shared-services agreement that we have put in place or in article -- or in section, I should say, section 2.2 wherein it spells out the terms and conditions that need to be included in an Affiliate Relationships Code-compliant agreement. So we have made a point of making sure that all of those matters are addressed in the intercorporate services agreements that we have put in place. 535 Secondly, the Affiliate Relationships Code spells out that in the case of shared services where there's not a market price available for the services, that the pricing should be on the basis of cost, or the phrase is used that it should be a cost-based pricing of those services. We believe that indeed in evidence we can show that that is, in fact, how we have priced the services under the shared-services agreements. 536 MR. CASS: Mr. Mees, what involvement did Enbridge Gas Distribution have in the development of the methodology? 537 MR. MEES: The controller's group for Enbridge Gas Distribution was involved in three ways: It was involved in the development of the cost-allocation methodology, it was involved in the review of the cost-allocation methodology, and it was also involved in the application of the methodology and, in particular, the verification of the amounts allocated in 2003. I'll expand a little bit on those. 538 The overall development of the cost-allocation methodology was led by Ms. Brooks and the corporate controller's group. But, as Ms. Brooks has already mentioned, there was a group of controllers, a group of representatives from the controller's groups of each of the lines of business, including Gas Distribution, that met several times on the methodology. This group developed the guiding principles, it reviewed drafts, it discussed specific issues; it really ensured the interests of each company was addressed, including those of Gas Distribution. 539 As I previously indicated, the controller's group was -- reviewed the drafts and it reviewed the final methodology shown at Board Staff 71. 540 Now, in applying the methodology to 2003 budget, Enbridge Gas Distribution personnel were involved in reviewing the 2003 allocations. There was discussions that were held between the service provider and the service recipient. So there was -- in this discussion, there was discussions on the services to be provided, the cost drivers to be provided, and it was through this discussion that there were changes that were made to the methodology. 541 One example that I'll give you is within labour relations. The labour-relations department originally had used a cost driver of unionized head count. And after discussions on the driver, it was changed and you'll see that to enterprise FTE and so that -- what that did was, using that driver, it was more representative of the actual services that were provided. So both parties were then in agreement. 542 MR. CASS: You referred to the controller's group. What about involvement of executive management? 543 MR. MEES: The executive management, executive of each business unit of Enbridge, was involved in reviewing and approving the methodology. In particular, for Gas Distribution, the executive management team discussed directly with their counterparts in Enbridge Inc. to determine the level of services required from that particular department in the corporate office, so this, as you can imagine, took a number of meetings to finalize. And once it was finalized and the 2003 allocations were verified, then both parties signed off on the -- on those costs, and you'll see that sign-off contained within IGUA 100, in the response to IGUA 100. 544 MR. CASS: Thank you. 545 Back to you, Mr. Turner. Ernst & Young provided a report that is in the evidence. It's actually attached as a response to an interrogatory, and for the Board, I believe the reference is Exhibit I, tab 13, schedule 55. 546 Mr. Turner, was that report prepared by you or under your direction and control? 547 MR. TURNER: Yes, it was. 548 MR. CASS: And is it accurate, to the best of your knowledge or belief? 549 MR. TURNER: Yes, it is. 550 MR. CASS: Can you just summarize for the Board briefly your comments in relation to the Enbridge Inc. cost allocations. 551 MR. TURNER: Yes, and what I will do is I will talk about the scope of our review and how we reached our conclusions and then summarize our conclusions. 552 Firstly, we were engaged by Enbridge to review the methodology, not to assist them in developing the methodology. 553 We were asked to review the cost allocations on the basis of previous Board findings as well as on the basis of the stated policies in the Enbridge cost-allocation policy methodology. 554 With respect to the Board's principles, we referred back to Decisions 493, 494, 495 and 497. 555 With respect to the cost allocations, the following principles were the ones that we focused on: Firstly, with respect to management costs, there must be a fair and appropriate allocation amongst the parties of the shared- or joint-management costs, and then there was a listing of what those costs might be. 556 Secondly, the cost allocation must be -- or the cost must be properly allocated based on the application of cost drivers and allocations factors supported by principles of cost causality. 557 Thirdly, there must be a benefit. 558 Fourthly, the cost-driver methodology is set by the Board as it offers significant reductions in administrative costs and efforts as well as being forward-looking. 559 Finally, we also looked at the Affiliate Relationships Code which calls for cost-based application of pricing. 560 We looked at the Enbridge cost methodology, and it identifies the various services, the determination of related costs, the determination of the cost drivers and then the mechanical application of those principles in determining the amount of costs or budgeted costs to be allocated. 561 Here's what we did: With respect to causality and benefit, we interviewed our personnel in Calgary as well as our personnel in Toronto, interviewed both Enbridge Inc. personnel at the corporate office level as well as at the EGD level. 562 The purpose of interviewing the people in Enbridge Inc. was to ensure and understand the kinds of services that were being provided and to ensure that they were consistent with the cost groupings underlying the cost-allocation determinations. 563 The purpose of interviewing the recipients or the EGD personnel was to establish that they perceived there was a benefit to be received, confirmed that they, in fact, enjoyed the fruits of these services, and thirdly, to ensure that there was no duplication of services. 564 These latter principles are consistent with the normal policies or approaches that are followed in transfer-pricing in general and are not specific to the Board's. 565 We then looked at the underlying cost centres to ensure that the costs that had been grouped under the budget were, in fact, consistent with their descriptions, i.e., that they related to the service departments and had been properly captured. 566 Thirdly, we looked at the cost drivers, and we looked at the cost drivers from two perspectives: Generally speaking, in looking at this from a transfer-pricing perspective, cost drivers are really intended to link the causality or the origin or the service or activity that creates the cost with those underlying costs; and secondly, to ensure that in looking at the allocation of those costs to the service recipients, that they are an appropriate measure of the benefit as referenced by the underlying costs, i.e., that there's consistency from both the recipient's perspective as well as the provider's perspective. Again, this is in accordance with generally-accepted transfer-pricing principles. 567 In looking at the drivers, it's very important to understand that the transfer-pricing field is more of an art than it is a science, and it is a matter of judgment. 568 With respect to drivers, in looking at indirect allocations or allocations of indirect or share costs, it's important to recognize that the direct relationship between the cost, the service, and the benefit received is somewhat obscured; therefore, we must rely upon cost drivers to approximate the result that would have arisen had we been able to directly track the service or service provider to a recipient or a service recipient. 569 There are generally-accepted drivers. No one is correct in all facts and circumstances, and we must also take into account the fact that the more granularity or the more specificity and the more the number of drivers, the greater the cost in tracking things through. 570 In the end result, we are looking for reasonability of the allocation, i.e., reasonability of the cost driver from a both -- sorry, from both a cost-incurrence perspective as well as from a benefit perspective. 571 Taken as a whole, we were satisfied and are satisfied that the principles espoused by the Board in its previous rulings that I have cited, as well as in the Affiliate Relationship Code and the general principles applicable in the field of transfer-pricing, have been met by the methodology applied and the policies adopted by Enbridge for this purpose. 572 MR. CASS: Thank you. 573 Those are my questions of the panel, Mr. Chair. Thank you. 574 MR. BETTS: Thank you. 575 We will now turn to the intervenors for cross-examination. Was there any order that's been agreed to? 576 MR. WARREN: Mr. Janigan is going to precede me, Mr. Chair. 577 MR. BETTS: That's satisfactory. 578 So, Mr. Janigan, if you would like to begin. 579 MR. JANIGAN: Thank you, Mr. Chair. 580 CROSS-EXAMINATION BY MR. JANIGAN: 581 MR. JANIGAN: Just as an opening question, panel, I wondered if -- is there any unanimous shareholders agreement that's in place with respect to the governance of Enbridge Gas Distribution under the OBCA? 582 MS. BROOKS: Not that I'm aware of. 583 MR. JANIGAN: Would you undertake to advise me if there is such a document. 584 MR. MEES: Yes, we can. 585 MR. MORAN: Mr. Chair, that's Undertaking J.8.5, undertaking to confirm whether or not there is a unanimous shareholders agreement with respect to EGDI. 586 UNDERTAKING NO. J.8.5: TO CONFIRM WHETHER OR NOT THERE IS A UNANIMOUS SHAREHOLDERS AGREEMENT WITH RESPECT TO EGDI 587 MR. JANIGAN: Now, I'm afraid, Mr. Chair, that I've forgotten or misplaced the number of my own exhibit here. 588 MR. WARREN: K.8.3.. 589 MR. JANIGAN: K.8.3. I wonder, panel, if you could take in hand Exhibit K.8.3, and I'd like to review the history of corporate fees and charges and allocations for -- between IPLE and the Consumers Gas in the period of 1995 to 1999. 590 First of all, is it correct to say that 1999 was the last time that the Board examined the methodology and explicitly approved an amount for IPLE corporate charges for recovery in rates? 591 MR. LADANYI: Yes, that would be in EBRO-497. 592 MR. JANIGAN: And if you would turn to our exhibit, schedule 1, VECC schedule 1, we've set out some decisions that existed before 1999 together with some excerpts from the different judgments. 593 First, I wonder if we could look at the development of these charges in a general way. First of all, I wonder if you could describe the undertakings to the lieutenant-governor-in-council and briefly why they were put in place. 594 MR. LADANYI: Yes, maybe I can answer that question. 595 The undertakings -- I presume you are speaking of the undertakings that were put in place originally in -- if you look at my exhibit, which is K.8.4, the date is given as June 21st, 1994, for the issue of those undertakings. 596 And they were issued pursuant to the Board order, EBO-179, which dealt with the purchase of controlling shares of the Consumers Gas company by IPL Energy. 597 And these undertakings were given to the lieutenant-governor-in-council and set out certain things that ILP Energy and also the Consumers Gas company had to do in order that this be approved, and these were signed. 598 I don't -- have I answered enough, or would you want to go through each one or -- 599 MR. JANIGAN: No. In a general way, why were these undertakings put in place? 600 MR. LADANYI: Why were they put in place? 601 MR. JANIGAN: Yes. 602 MR. LADANYI: I presume that the Ontario government felt that it was prudent to do this, to put some restrictions on the ownership of the Consumer's Gas Company. 603 MR. JANIGAN: Curbs on corporate power, as it were. 604 MR. LADANYI: If you want to put it that way. I don't know if I would characterize it that way, but you could put it like that. 605 MR. JANIGAN: Now, if we move to 1997 and we look at tab 2 of our Exhibit K.8.3, there's some extracts in that -- under that tab from the Board's decisions in EBRO-492 and -495; correct? 606 MR. LADANYI: Yes. 607 MR. JANIGAN: And in 492 -- actually, I'll look at the Key Board Findings and Approvals under schedule 1. There was a comment from the Board with respect to justification, and at that time a 425,000 fee was approved for fiscal year 1997; is that correct? 608 MR. LADANYI: Well, if I look at the Board decision which actually you provided under -- which is, I believe, the second sheet of paper under your tab 2, it says that there is a parties' agreement to settle affiliate transactions. That's what it says right at the bottom of the page: 609 "Board accepts the parties' agreement on this matter as reasonable and authorize the company to continue the consolidated-insurance program and management-fee payment for an additional year pending the results of the comprehensive cost-allocation study." 610 So on my understanding of 492 - and I have actually reviewed it last night - is that there was a settlement agreement in 492 amongst the parties that the Consumers Gas company, as it was then called, would file in the subsequent rate case, which was 495, a comprehensive cost-allocation study. On that basis, the -- all the affiliate transactions, including the management fee and the insurance fee, were settled. The Board did not, as far as I can tell from the decision, make the comment that you are mentioning. 611 MR. JANIGAN: We won't go behind the reasons for that allocation study and we'll skip over to EBRO-495. 612 In that proceeding, there was a number of different comments that were made by the Board pursuant to a request for approval of 1.3 million in IPL and management fees; is that correct? 613 MR. LADANYI: Yes. 614 MR. JANIGAN: And in particular, it's noted on page 47 of the extract that's in the material at the bottom of that page at paragraph 2.2.57: 615 "The Board would have expected that given the size of the fee and the substantial increase of justification it would have formed part of the company's pre-filed evidence and would have not been dealt with in the casual manner it was in this proceeding. In any event, the Board now has sufficient information to make a determination on the reasonableness of the..." 616 And at that time, the end result is that it approved a management fee of $500,000 for the test year which was an increase of 75,000 over the level approved by the Board in fiscal '97; number two, to reduce the utility cost by .8 million on this account; and, on the next paragraph, directed the Board -- directed the company to provide its justification and quantify, to the degree possible and practical, the management fee to be paid by the company in its pre-filed material." 617 That's all correct? 618 MR. LADANYI: Yes, it is. If you will allow me, I want to put this in the historical context of how things went during those years. 619 There was a -- if you look again back to my Exhibit K.8.4, there was no management fee by the Board for recovery in 1995. The company had not, in fact, put anything in rates. And maybe perhaps I should explain the regulatory regime that was in place at that time. 620 The undertakings and all of the undertaking filings that were filed under EBRO-179 dealt with payments by the Consumers Gas Company legal entity to its corporate parent, which was IPL Energy. The rate case dealt with the recovery of these payments in rates so we are dealing with two specific, different regulatory decisions that were required for the recovery of these payments in rates. 621 In EBRO-497, Consumers Gas had not put anything in its cost forecast for a management fee and neither to do that in EBRO-490 (sic). 622 MR. JANIGAN: Did you say 497? 623 MR. LADANYI: 487. I misspoke, I'm sorry, 487, which was for fiscal year 1995. And then on August 9th, 1995, we filed an application, which is EBO-179-04, which was an approval for treasury services in excess of $100,000. And this was for a payment of these services but there was actually no inclusion of this in our 1996 cost of service, so there was no recovery as such. But it was just an application for approval to pay these costs. 624 In the similar time frame, on September 20th, 1995, we filed application EBO-179-05 which dealt with approval to pay a management fee in 1995 of $300,000 and $400,000 for 1996. Neither of those were included either in the 1995 or in the 1996 rate case. And that was clear in the application, and the Board approved both of those. 625 Lastly, again in the same time frame, we applied for, under EBO-179-06, for an affiliate transaction with IPL Insurance of $2.2 million. Again, none of these were included in the rate cases of those years. 626 Now, then, we come to the subsequent year which was 1997 and these were then included in the -- in the 1997 forecast of costs that we were requesting to recover for the 1997 test year. 627 MR. JANIGAN: Thank you. 628 Now, I wonder if I could take you next to -- after the EBRO-495 decision, to the 493/494 decision which I believe you also referenced in your -- 629 MR. LADANYI: Yes. 630 MR. JANIGAN: -- in the examination-in-chief. And in this decision, on page 143 of the decision, paragraphs 5.514, this is the decision that outlines the criteria the Board applies to determine if corporate costs or charges should be allowed or recovered in rates. 631 MR. LADANYI: Yes, and I think that's important to notice from the time line in Exhibit K.8.4 that EBRO-493/494 decision came out long after we filed the 492 application which was December 15th, 1995, and the 495 application which is December 13th, 1996. So we did not have the benefit of the Board's guidance for the development and justification and recovery of a corporate centre or management fee at that time when we filed for those cases; this came afterwards, and that's an important thing to consider. 632 MR. JANIGAN: So anything before that 495 -- 492, you obviously didn't have the benefit of 493, 494 decision; 497, I take it you had the benefit of the 493/494 decision before that? 633 MR. LADANYI: That's right. So the first case that we would have had any benefit of that would be in the EBRO-497 filing which was for our 1999 test year. 634 MR. JANIGAN: Okay. Now, I want to deal with what the Board said in this case a little more specifically, and in particular, when you look at page 143, paragraph 5.517, the Board sets out a number of different types of benefits. And I wonder if you could explain what is meant by "replacement benefits" or "synergistic benefits"? 635 MR. COWAN: I wonder if I can speak to this. I'm not quite clear on how much more to go on what's written here on the decision from the Board; for instance, it says -- "Replacement Benefits" is expanded and it says, "The services provided replace an equivalent service at equal or lower cost." 636 MR. JANIGAN: Can you give us an example of that. 637 MR. LADANYI: Well, I think an example that I could give you from the past would have to do with insurance, because when we applied to have insurance provided through the parent company, we eliminated that insurance cost, that was an internal cost, with an external charge. 638 MR. JANIGAN: And synergistic benefits, is that effectively economies of scale? 639 MS. BROOKS: Yes, it is, including purchasing power. 640 MR. JANIGAN: Revenue enhancement; is that economies of scope? 641 MS. BROOKS: Yes, I think that would be another definition provided in that decision. 642 MR. JANIGAN: And stand-alone benefits where the corporate centre itself can institute some kind of activity that benefits everyone. 643 MS. BROOKS: Yes. 644 MR. JANIGAN: Okay. Now, at pages -- at paragraphs 5.523 and 5.524, the Board makes a number of comments in which it rejects the costs of Westcoast corporate board of directors and Westcoast corporate executive costs, and it's noted particularly in 5.525 that: 645 "The Board finds that the Westcoast board of directors' expenses are a cost properly incurred by Westcoast as part of managing its investment in its subsidiaries, including Union and Centra, and the allowed return on common equity invested in Union and Centra appropriately compensates the shareholder for any additional indirect governance that Westcoast directors may provide." 646 I wonder if you could tell me how this passage in this decision guided your allocation of corporate charges. 647 MS. BROOKS: Our allocation methodology considers the corporate structure that the Enbridge group of companies has adopted so that by virtue of adopting this integrated shared-services environment, we didn't believe that this was particularly relevant to our corporate structure without, obviously, speaking to what the Westcoast corporate structure is; I don't believe that would be appropriate. But we have a shared services environment so that these costs aren't managing the investment as such, they are working with business units to provide service. 648 MR. JANIGAN: So if I can get this straight, you are, in fact, allocating expenses from the board of directors as part of the -- as part of your corporate-charges methodology? 649 MS. BROOKS: Yes. 650 MR. JANIGAN: And the reason that you think that this section does not govern your methodology is that you have a different structure than Westcoast? 651 MS. BROOKS: I'm not sure that I would say "doesn't govern." We considered this in the context of developing a methodology that was appropriate for the Enbridge group of companies. Without knowing specifically how the Westcoast group of companies does their business, it's difficult to reach a conclusion on that. 652 MR. JANIGAN: And you didn't follow the -- that portion of the decision that found that board of directors' expenses are a cost properly incurred by the parent company? 653 MR. COWAN: We considered the application of that in the particular situation of our company to be appropriately considered differently than this decision suggests because of the facts in our own case. 654 MR. JANIGAN: And those facts are? 655 MR. COWAN: Those relate to the way in which we are structured and the integrated operating model that's used for engaging the company and how the utility is managed in its relationship with the parent company, being one which is an integrated arrangement and there is dependency between our entity and the services provided from the corporate centre, including the board of directors, which we believe is a particular circumstance that some of our other witnesses can perhaps address as we go forward; suggests a particular treatment, in our case, that's different than this decision would suggest. 656 MR. JANIGAN: Well, I take it you have your own board of directors. 657 MR. COWAN: Enbridge Gas Distribution has its own board of directors. 658 MR. JANIGAN: I don't want to prolong this point unduly, but I'm just curious in terms of the actual specifics of the differences between the way in which a west -- Westcoast executives and directors expenses would be treated differently than the expenses of Enbridge Inc.'s directors and executives. 659 MR. COWAN: I'm not -- perhaps we can -- perhaps you can help me a little. I guess I would assert they're not treated differently. Both are charged as a cost that we've included or would propose to be included in the rate base. 660 MR. JANIGAN: But in the case of the Westcoast example, the Board disallowed those costs. 661 MR. COWAN: In the case of the Westcoast, that's correct. 662 MR. JANIGAN: And you didn't follow that direction from the Board. 663 MR. COWAN: That's correct. So we are treating it the same in our context. 664 MR. TURNER: Perhaps I could just make a point of clarification on how, when we reviewed this, we looked at it. 665 We looked at the Board's principles as being those that I enumerated in my direct examination, and that the Westcoast finding vis-a-vis the board of directors was a determination of fact based on the facts and circumstances in the Westcoast case. 666 The relevant facts and circumstances, I believe, are set out in the materials that have been provided by the company. The factors we took into account in determining whether it was consistent with the general principles espoused by the Board were as follows: 667 It is our understanding that, yes, there is a board of directors at each of Enbridge Inc. and EGD; however, we understand that the board of directors at EGD was reduced in number. We also understand that the scope of the EGD board is focused primarily on the direct operations of EGD, and the governance issues that do benefit EGD are really developed initially and under the guidance of the board of directors at Enbridge Inc. 668 Therefore, we concluded that having due regard to the principles enunciated by the Board that the facts and circumstances were properly outlined in submission or the methodology that have been applied by Enbridge Inc., and we believe that the principles espoused by the Board have been properly followed in the allocation. 669 We believe it is up to the Board to make the determination as to the relevant facts and circumstances. 670 MR. JANIGAN: Have you given me all the facts which you -- 671 I'm sorry, Mr. Cass, were you going to interject? 672 MR. CASS: I was just going to say something that might be helpful, Mr. Janigan. These questions, of course, are perfectly appropriate for this panel. I wanted to alert you that in terms of being a little more specific about how functions can be differentiated from a role of managing the investment, Mr. Scott Wilson will be on the second cost-allegations panel. He's the Vice-president, Finance, at Enbridge Inc. and he's coming, at least in part, to address the specifics of that. 673 So I don't want to suggest the questions are in any way inappropriate for this panel, but just to give you a head's-up, that I think Mr. Scott Wilson will be able to give you more of the details than, perhaps, some of these people can. 674 MR. JANIGAN: I'll save any questions on specifics for Mr. Wilson. But I just wanted to make sure that the facts that Mr. Turner has told me are the facts upon which you made the determination that the circumstances of the Enbridge corporate centre was different than the circumstances of the Westcoast corporate centre, and made a different allocation accordingly. 675 MR. COWAN: Mr. Turner has outlined the framework that one uses for making that judgment, and what we've done is identified what the facts are with regard to our own case under that framework. So our -- we are the ones applying that framework. 676 MR. JANIGAN: I heard Mr. Turner give me three facts that differed. Those facts form the framework; is that what you're saying? 677 MR. COWAN: That's what I'm saying. 678 MR. JANIGAN: Okay. I wonder if you could turn up paragraph 5.5.32 of that same decision, and here I'll read the passage: 679 "The major difficulty the Board finds in the methodology is the apparent use of rate-based fixed assets as a default. In the Board's view, rate-based fixed assets is an indicator of the size of a subsidiary but not necessarily of cost causality for certain Westcoast activities, or the contribution to the growth and earnings and shareholders' equity that are the primary focus of most senior corporate executives." 680 Now, I wonder if you can tell me how this passage of the Board's decision guided you in the preparation of your methodology. 681 MS. BROOKS: The closest allocation factor that we have used to rate base or fixed assets is capital employed. We don't have any default factors, if you like. 682 We have used capital employed for those departments who -- if they were to use a time-based estimate, for example, would end up allocating most of their time to what I refer to as "common activities." 683 Common activities typically relate to some extent to governance of the organization, things that deal with the group of companies as a whole, so you can't say as a corporate staff person, I'm allocating this hour of time to a particular business unit. 684 Because they relate often to corporate governance or matters related to maintaining the company's capitalization and confidence in the marketplace, we have used capital employed, because there is a tie between the work that is done and the effort that it is trying to support which is the maintenance of the credibility in capitalization of the entity as a whole in the marketplace. So it's -- we have not -- we have used variation of rate base or fixed assets, but it's actually a capital employed number which is a different allocation factor than fixed assets. 685 MR. JANIGAN: I was going to ask you later on this point but I might as well ask you now: What is the difference between capital employed and rate base? 686 MS. BROOKS: Capital employed has -- has a deduction from total assets liabilities, so it's -- to a certain extent, it's somewhat equate-able (sic) to the shareholders' equity, but not totally. 687 MR. JANIGAN: I wonder if you could just give me that formula again, how you arrive at the capital employed and then I'm just going to true it up against rate base. 688 MS. BROOKS: Perhaps the best -- there is a definition of capital employed in the cost-allocation methodology where we -- if you will, just give me a moment to find it. Bear with me one minute, please. 689 I'm sorry, it's not in the methodology, it is at Exhibit A.6, tab 19, schedule 1, page 6 of 15, in paragraph 14, which describes that "each of the bases of allocation..." 690 MR. JANIGAN: I've got the interrogatory, the one with the cost-allocation methodology. You referred me to the evidence. 691 MS. BROOKS: Yes, I'm sorry, I was in the wrong place. 692 MR. CASS: Can you give the reference again, Ms. Brooks. 693 MS. BROOKS: It's Exhibit A.6, tab 19, schedule 1, page 6 of 15, paragraph 14. 694 MR. JANIGAN: It's total assets, less current liabilities, less debt due within one year, less deferred credits for each line of business. 695 Why is that employed rather than rate base for a regulated company? 696 MS. BROOKS: Again, it is a matter of judgment as to which allocation factor you use. It was our view that capital employed was more representative as a cost driver than rate base for the departments for which that allocation factor is used for allocation purposes. 697 MR. JANIGAN: And to the extent it's been employed, it, in effect, is a gloss or a qualification of the direction of the Board that's contained in this particular decision that I read to you. 698 MS. BROOKS: At paragraph --? 699 MR. JANIGAN: 5.5.32. 700 MS. BROOKS: We certainly didn't see it that way because we don't use fixed assets or rate base as a default allocation factor; and secondly, we believe that there was cost causality between the factor that we were using to allocate the costs and the costs themselves. 701 MR. LADANYI: Mr. Janigan, can I help you with this issue in particular? 702 MR. JANIGAN: Sure. 703 MR. LADANYI: If you turn to our response to Board Staff interrogatory 149, you will notice there, in that interrogatory - and you don't have to turn to it - that we are allocating costs both to regulated and unregulated entities. Unregulated entities would not have a rate base, so capital employed is used because this way you can put both regulated entities and unregulated entities on the same basis; otherwise I don't know how you would calculate a rate base for an unregulated entity. 704 MR. JANIGAN: But to the extent that both measures are attempting to look at capital or fixed assets, to the extent that it is used, it is in opposition to the guidance provided by the Board in 5.5.32. 705 MR. LADANYI: It's not in opposition, it is again an attempt -- I think when the Board made its decision in the Westcoast case, it was dealing with regulated entities only as far as we can tell. And what we're saying here is, here you have a pool that consists both of regulated and non-regulated entities and capital employed is essentially a refinement to bring both regulate and unregulated entities on the same basis, so you can compare them on an apples-to-apples basis. 706 MR. JANIGAN: If an entity has both regulated and unregulated businesses, how did you segregate the capital-employed cost driver and the allocation between the two parts of the business to allow for regulatory recoveries? 707 MS. BROOKS: I'm sorry, could you repeat that question, please. 708 MR. JANIGAN: If an entity has both regulated and unregulated businesses, how did you separate the capital-employed cost driver and the allocation between the two parts of the business to allow for regulatory recoveries? 709 MS. BROOKS: If I understand the question correctly, Enbridge's accounting system tracks the businesses by line of business, and it's a relatively straightforward arithmetic calculation to do the capital employed calculation. 710 MR. JANIGAN: So there was nothing to stop you from using rate base in this particular circumstance. 711 MS. BROOKS: Well, except, as previously mentioned, the non-regulated line of business within the Enbridge companies don't have that -- don't have that same notion of rate base. 712 MR. LADANYI: They don't have rate base so what you are suggesting, they would not allocate anything to unregulated businesses because they don't have rate base, so you would see that that wouldn't make any sense. 713 MS. BROOKS: I also think that it's important to remember that when we look at the cost causality piece of selecting this driver, I said at the beginning of my response to this series of questions that the -- this driver was used for departments that spent most of their time on common activities, which related to the maintenance of the capitalization of the consolidated entity. 714 Those entities that are larger and, by virtue of having more capital employed require more capitalization, and so that -- that's the link between using the capital employed cost driver to the costs and the reason for incurrence of those costs. 715 MR. COWAN: I would also like to add that our view on this particular section, 5.5.32, was that the main message was the concern about the default and the use of a blanket solution, that the paragraph makes comments that seem to flow. And we understood them to be as a -- an expression of the concern by using a default that seems to be rather coarse in the case at hand with Westcoast. So that, from our perspective, didn't preclude any particular measure if we were able to identify the cost causality appropriate in the circumstances. 716 MR. JANIGAN: Aren't you using capital employed, in effect, as a decoy -- as a default? 717 MS. BROOKS: No. It is a surrogate for time. It's not a default. We didn't use any defaults. 718 It's used in those places where a time estimate -- and that's probably the best example for, you know, functional admin service groups, as I call them, like controllers and other groups like that, because most of it -- if they were to use time, which seems like the first logical place to go, most of that time would end up in a category called "Common" or "Corporate" or something. 719 And so you look for the best cost driver to allocate that that represents what the people in the department are doing and the services they are providing. 720 MR. JANIGAN: And when you can't get the time estimate, presumably you use a surrogate or a default. I don't understand the difference between the use of those terms. 721 MS. BROOKS: Well, I think a surrogate is something that you just use when you don't think of a relationship between the cost and how that cost was allocated. 722 Capital employed was selected very specifically as a replacement or a surrogate for time based on what the activities are in the corporate department. 723 MR. JANIGAN: Let's move ahead to the next paragraph of this decision, and maybe the link will become clear. It's noted here that: 724 "The Board, while not advocating its reinstatement, suggests that time docketing provides more direct links. Time docketing may also provide a means of validating the use of a particular cost driver for allocating corporate centre charges such as those in corporate planning and development." 725 Can you tell me how this passage of the Board's decision guided your preparation of the methodology? 726 MS. BROOKS: I can do that. 727 We certainly agree with the Board's view as expressed in this paragraph. We believe that direct charging is the most direct link, and for those services and third-party costs that can be direct-charged, we do so. 728 The next best - perhaps I will use "best" in quotation marks - link to an allocation factor is time, but it's very administratively burdensome to do that. And for those departments where it makes sense to use time, and in the corporate environment it's difficult, I keep referring back to this common time. 729 So for those departments that wouldn't have most of their time in that common pool, we have used time in allocating corporate costs. It is only for those departments who would end up with most of their time in this common pool, which then needs to be allocated somehow, that we have used the surrogate for their activities in capital employed. 730 MR. JANIGAN: We'll explore a little bit of that later, but I want to take you forward again in time that after the OEB and the new OEB Act was proclaimed in 1998, in EBRO-497-1415. The company in that proceeding, in 1999, applied for a targeted performance-based regulation plan to apply for the period between 2000 and 2002. 731 MR. LADANYI: That's right. It was actually EBRO-497-01. I think you have misquoted the docket number. 732 MR. JANIGAN: Yeah, that should be corrected. 733 MR. LADANYI: We filed the application for that, actually, in January of '98, and on my time line, which is in Exhibit K.8.4, I'm showing July 21st, 1998, as the filing time -- that is when we filed the evidence. 734 That was part of a lengthy case combined with EBRO-497, which was filed earlier that year. And then the hearing was held on 497 and then we proceeded to 497-01, and that explains the actual -- the docket number. 735 MR. JANIGAN: Okay. Now, as part of the EBRO-497 proceeding, the company led evidence from Mr. Brad Boyle regarding the scope of the services and the methodology for corporate charges, and that's been included in our Exhibit K.8.3, at tab 3. 736 MR. LADANYI: Yes, I have it. 737 MR. JANIGAN: It was in response to interrogatory IR -- tab 24, schedule 99, page 1 of Mr. Boyle's evidence as an attachment. 738 MR. LADANYI: So if you notice the docket number and the date of filing, that was actually filed as a part of the EBRO-497 case and not part of EBRO-497-01, so that was filed well in advance of the filing for the targeted PBR. That was filed as a part of the cost-of-service hearing proceeding that dealt with setting up the base for targeted PBR. 739 MR. JANIGAN: That's correct. 740 Now, I wonder if you could look at questions 5 and question 6, where the company states the purpose of the IPLE corporate office. And if I could summarize what these two questions and answers seem to say is that "where incremental resource requirements" -- and actually I'm going to read from the second paragraph of question -- of the answer to question five: 741 "Where incremental resource requirements of an individual subsidiary may be more efficiently provided by the corporate office in Calgary due to economies of scale through sharing of resources, IPLE will initially incur the incremental costs then recover the costs of service from the appropriate subsidiaries through an intercorporate service fee." 742 Does that correctly give the way the arrangements were supposed to work? 743 MR. LADANYI: Yes, it does. Yes, that was the arrangement in place at that time. 744 MR. JANIGAN: And it was a bit like going to an IPLE corporate services store and shopping for the services that the utility required and those services would be provided and the ratepayers would be billed the incremental cost. 745 MR. LADANYI: I think that would be your slant on it. I wouldn't agree with that statement. I think the statement is clear from Mr. Boyle that the company decided that it was more efficient to provide certain services in the head office, and I think that statement presumes that these same services would not be provided at the different divisions or subsidiaries and therefore there would be no duplication. 746 MR. JANIGAN: But if you need the services, presumably you go and shop for those services at the head office, and that you are billed accordingly, on an incremental basis. 747 MR. LADANYI: The shopping word, we have a lot of trouble with that. That's obviously got a slant to it. 748 MR. JANIGAN: Acquiring. Acquiring. I don't think you could -- the company could have shopped anywhere else. Let's just say acquired. 749 MS. BROOKS: I'm not even certain that the word "acquire" is correct. There are agreements between the business units and the corporate office around which services will be provided by which group and where. 750 MR. JANIGAN: Well, presumably at some point in time, though, the company decided they would like the services and asked daddy to provide the services; daddy provided them and they were billed for them. Or did daddy just tell them? 751 MR. LADANYI: No, I think when you look at this, and again I think you have to look at the time frame - we are now looking at a document that's dated February of 1998 - at that time we had already filed, and if you look back to my Exhibit K.8.4, we had filed applications to pay for services, for treasury services and for a management fee and for insurance under EBO-179-04 to EBO-179-06. So it was understood at that time that certain of those services that Mr. Boyle speaks of can be provided more efficiently on a corporate level than through individual IPLE companies, such as Consumers Gas Company. 752 MR. JANIGAN: We may be tripping over semantics here. You were trying to indicate that there was no choice but for the company to acquire these services. 753 MR. LADANYI: What it was, it was decided as the corporate level that certain services, such as the treasury, would be provided from the head office in Calgary, and they would not be provided from the Consumers Gas Company office in Toronto. There was nothing surprising about it; it's not that Consumers Gas went shopping for these services in Calgary, it was nothing of the sort. It was the centralization of these services in Calgary. 754 MR. JANIGAN: They agreed in advance that these services would be provided; is that fair? They agreed with the parent company? 755 MR. LADANYI: Well, I think you have to get into an environment whereby, who is "they"? "They" is the owners of the company, and the owner of the company, the shareholder, is IPL Energy. Who is "they", in your mind? 756 MR. JANIGAN: I'm going to give up on this point. 757 Let me just take you to question 7 of Mr. Boyle's evidence. And question 7 indicates the specific services that would be provided by IPLE to Consumers Gas, and goes through it services by services that the utility is going to acquire, take up, get, whatever term you prefer; is that correct? 758 MR. LADANYI: I didn't actually hear the question. Could you restate it again, Mr. Janigan. 759 MR. JANIGAN: Question 7 goes through the services that -- and the need for those services and the justification for those services that the utility wanted to get. 760 MS. BROOKS: Yes. 761 MR. MEES: Yes. 762 MR. JANIGAN: Now, I want to take you to the justification for an increase in deviation services; it's on page 14. 763 MR. BETTS: Mr. Janigan, can you, just before you go there, tell me where question 7 was. 764 MR. JANIGAN: Sorry, it was -- question 7 was in the evidence of Mr. Boyle, so what you -- 765 MR. BETTS: Sorry, I found it. I didn't see where it -- that's on page 9, you're referring to. 766 MR. JANIGAN: Yes. 767 MR. BETTS: Page 9 of 42 is the reference there. 768 MR. JANIGAN: We're replete with lots of numbers here. 769 MR. BETTS: Anyway, I found that, Mr. Janigan. Thank you. Please proceed. 770 MR. JANIGAN: On the -- I wanted to take you forward to page 14 of Mr. Boyle's evidence where the justification for aviation services is set out, and it indicates: 771 "As appropriate, the services of this department facilitate travel of Consumers Gas board members to Consumers Gas board meetings as well as minimizing travel time and travel costs of other IPLE departments that provide service to Consumers Gas." 772 Now, does this same justification drive the aviation component of the fee, of the cost amount that's to be allocated to Enbridge Gas Distribution for aviation? 773 MS. BROOKS: In 2003? 774 MR. JANIGAN: Yes. 775 MS. BROOKS: No. 776 MR. JANIGAN: And question 8 outlines the 1999 approach to determining the IPLE corporate services costs, and it outlines the 1999 budget using time and charges and cost drivers. 777 Do you see that? And in particular, the table on page 16. Do you see that? 778 Sorry, did somebody say yes? 779 MR. LADANYI: Yes. 780 MR. MEES: We were waiting for the question. 781 MR. WARREN: Are you awake, George? 782 MR. JANIGAN: And I note that the allocation for all of these particular charges is time. Can you comment upon that? 783 MS. BROOKS: In the context of the 1999 allocations? 784 MR. JANIGAN: Well, in the context of the 2003 allocations and the methodology that you developed. 785 MS. BROOKS: Many of the bases of allocation that have changed when we developed the new methodology in 2002 for 2003, the nature of the corporate office has changed fairly significantly over the four years. The nature of the businesses and the number of businesses managed by Enbridge or in the Enbridge group of companies has also changed significantly over the years. There are more of them for starters. And when we designed the new allocation methodology, we basically started with a blank sheet of paper. 786 As Mr. Mees said in his examination-in-chief, we -- it was a grass-roots development. We started with guiding principles and some over-arching principles, if you like, and then looked at the departmental costs and, as a group, landed on what we believed was the most appropriate cost driver for the expenses as they are incurred today. And they aren't necessarily the same as those that were used in 1999. It's a different business organization now than it was then. 787 MR. JANIGAN: But given your earlier testimony, I would assume that these particular bases of allocations would obtain a more accurate result for allocation purposes? 788 MS. BROOKS: Which -- using time, you're suggesting? 789 MR. JANIGAN: Yes. 790 MS. BROOKS: No, I'm saying -- no, I don't agree with that. I said when you can use time, it is perhaps -- and it depends on the costs incurred in the department, so we can't just assume time is always best; it depends what the department does for a living. 791 But in those cases where time would end up being unallocable, then, no, it doesn't give you a better answer. And that's part of what's happened in the corporate office. Because of the expansion in the functions and the shared-service environment and the number of businesses that are now in the Enbridge group of companies, time wouldn't give you a representative analysis or allocation. 792 MR. JANIGAN: So that is why, for example, under "Aviation" that you've gone from flight time to capital employed? 793 MS. BROOKS: Yes, and Mr. Wilson in panel number 2 will be talking around the specific services and benefits the corporate -- and at the risk of overlapping into what they are going to say, but the corporate jet and aviation facilitate Enbridge's access to the capital markets. 794 And that's why we used -- and it is used mostly for that purpose, and that is why we used capital employed for aviation. 795 Again, because if people were to document the purpose of their flight, and it is primarily the executive management team that uses the corporate aircraft, if they were to document the purpose of their flight, typically it's to go to do road shows or investor conferences or credit rating meetings or whatever, that again support the capitalization of the consolidated entity, that then supports the capitalization required in the gas distribution business. 796 And if all that time -- if the flight log is going to say -- it's all what I refer to as "common," then, again, you are looking to something that is a cost driver that approximates what would happen if you could direct charge. 797 MR. JANIGAN: Now, was that the experience under this particular method of allocation back in 1999, that all of the allocations were based on -- were based on common expenses? All the time spent was for common investment purposes? 798 MS. BROOKS: No. No, I don't believe so, and I'm speaking to something that I didn't prepare. And I didn't work for Enbridge in 1999, but I do know that the corporate office was substantially smaller. The number of businesses were smaller, and it would have been much easier for individuals working there. 799 We basically only had three lines of business. We had the big oil pipe in Edmonton, we had the oil pipe in -- that ran through the United States, and the distribution business. Time, then, becomes a little easier to manage than when you have 25 or 30 lines of business. 800 MR. JANIGAN: Mr. Chairman, I don't know when you plan to take an afternoon break, but this might be an appropriate time. 801 MR. BETTS: We're right on the same thought pattern there. I was going to ask you when you find an appropriate time to have an intermission of your questioning. 802 MR. JANIGAN: You probably thought about that 15 minutes earlier, but -- 803 MR. BETTS: Is this a suitable time, Mr. Janigan? 804 MR. JANIGAN: Yes, it is. 805 MR. BETTS: Then let's break for 20 minutes. We'll reconvene at 3:00. 806 --- Recess taken at 2:40 p.m. 807 --- On resuming at 3:08 p.m. 808 MR. BETTS: Thank you, everybody. Please be seated. 809 We are now prepared to resume. Are there any preliminary matters that popped up? 810 MR. CASS: Mr. Chair, I haven't even had a moment to look and see what it is, but the response to Undertaking J.8.1 has been handed to me. I can pass it out now or we could wait until the end of the day, if you would prefer Mr. Janigan carry on right now. 811 MR. BETTS: Was Undertaking 8.1 relating to this particular topic? I see not so perhaps we will circulate it at the end of the session, then. Thank you. But it's been duly noted that it's here. 812 If that is all, I will ask Mr. Janigan to resume. 813 MR. JANIGAN: Thank you, Mr. Chair. 814 I wonder if we could go to Exhibit K.8.3, that's our book of materials, and turn up tab 4 where there is an extract from the Board decision in EBRO-497. I want to take you to the Board's findings on a number of issues. 815 MR. LADANYI: Yes, we have it. 816 MR. JANIGAN: First of all, on 3.4.6, would you agree with me that the gist of this comment there is that the company has the onus to show the reasonableness of any fee which is charged to ratepayers? 817 MR. COWAN: Is there a particular paragraph? 818 MR. JANIGAN: Well, the last -- the middle sentence here: 819 "The Board has no authority over IPLE and finds that Consumers Gas has not met the onus upon it to prove the reasonableness of these fees." 820 MR. LADANYI: That's what it says. 821 MR. JANIGAN: Do you agree with me that, in the context of both 497 and in this proceeding, you have the onus to prove the reasonableness of these charges? 822 MR. LADANYI: Correct. 823 MR. JANIGAN: Now, in paragraph 3.4.7, the Board indicated that: 824 "The Board finds that, in general, IPLE costs related to the governance of Consumers Gas are a shareholder cost of manage units investment and are not a cost which should be borne by the utility ratepayers." 825 Now, we explored this a little bit in our examination of the decision involving Westcoast but, once again, can you tell me how this paragraph guided your preparation of methodology? 826 MR. COWAN: In general, back at the time of this decision, the governance framework for the corporation was one of -- more of a holding-company configuration. At that time, the model was different than what we are facing at present. At present, the corporation is -- has evolved to what we refer to as an integrated operating model, whereby many of the corporate functions are providing services in a variety of different areas, for example, IT, human resources, or finance but cover a broad array of services within the Enbridge family. 827 As such, the framework for managing the company is an integrated one as opposed to one directly through a board of directors, and singularly through a board of directors. When we refer to the hold-co. model, the idea there is that it's more or less a board kind of governance framework, whereas the integrated model, while there is a board structure, there is nonetheless a more integrated framework involving the functions across the business. So at the time of this decision, the framework was more in the -- of the form of a holding-company arrangement. So what was done in that context was that a different -- was in a different context than what we are facing now. 828 MR. JANIGAN: Specifically, I wonder if you could direct your attention to the end of that paragraph where, in fact, the amount in issue here is the directors' fees and the corporate secretarial functions. Now, admittedly, the corporate centre has changed, but in effect we are still referring to fees that are paid to the board of directors and the corporate secretarial functions for managing the investment. 829 MR. COWAN: I would submit to you that we are paying those fees; indeed, they are the same. The idea as to whether they are for managing the investment or not is where I'm suggesting that the model provides the distinction. The board of directors is doing more than managing the investment, it is providing governance for the companies within the framework of the Enbridge family of companies as well as other things that it is providing leadership for within the corporate family, not simply the statutory obligation of -- that would be implied in this paragraph. 830 MR. JANIGAN: Well, if you look at paragraph 3.4.8, the Board, in this case, is dealing with a combined proposed cost of 515,000 for IPLE executive management services. And it indicates herein: 831 "In with respect to CEO and energy-distribution costs, IPLE executive management costs, the Board is not convinced by the evidence that these services are required by Consumers Gas for management of its core utility operations as opposed to other company activities such as diversification, business development, and corporate reorganization of the Consumers Gas company Limited." 832 Aren't these same observations applicable to the activities at the corporate centre? 833 MR. COWAN: Today, you mean? 834 MR. JANIGAN: Yes. 835 MR. COWAN: I would suggest that we actually have addressed this question in an interrogatory response with regard to the particulars associated with the CEO's role. And if you'll bear with me a moment, I will look it up so that we can refer to it. 836 In fact, I believe it's in your own -- your own material behind tab number 12. So this, again, is part of -- is your Exhibit K.8.3, and it is Exhibit I, tab 4, schedule 163, as behind your tab 12. 837 MR. JANIGAN: Mm-hm. 838 MR. COWAN: And that exhibit is one wherein we outline the benefits that the CEO's office brings to the utility. So I would suggest to you that that -- that's the answer to your question. 839 MR. JANIGAN: Tell me, I assume that some of the activities that were formerly considered not to be expensed to the Enbridge Consumers Gas are included in the cost of the CEO office at present. 840 Do you make any attempt to try to look back at these decisions and say, Look it, obviously, we didn't get these expenses in the past; we're not allowed, so we deduct them as a matter of course before we determine any kind of allocation of the CEO's office as a whole? 841 MS. BROOKS: Yes, we did, in the course of developing the methodology. 842 MR. JANIGAN: Was it done as a matter of course right from the top, the CEO's office expenditure is a direct deduction before you even got into the allocation? Or are you saying that it was subsumed in the context of the allocation? 843 MS. BROOKS: I'm sorry. I, perhaps, misunderstood your question. I thought you were asking whether or not we had considered this particular part of the Board decision when we developed the new methodology. 844 MR. JANIGAN: So any deduction, as it were, comes as a result of the application of your methodology, not as a deduction from the amount before the allocators are applied? 845 MR. COWAN: We're having a little trouble with the question. Could I try to characterize what I think you've asked? 846 MR. JANIGAN: Yes. 847 MR. COWAN: We know that the corporate pool of costs is $96 million, and that there's a portion of that allocated through the application and methodology to the utility, which amounts to about $21 million. 848 I think your question is: Is there any amount excluded at the corporate level from the $96 million before we do the math and do the allocation? 849 MR. JANIGAN: That's correct. 850 MR. COWAN: Okay. And the answer is no, there is not anything excluded from the $96 million. 851 So the CEO's costs, for instance, to be very specific, as you are asking here, are included in the $96 million that in turn is then redistributed amongst the Enbridge family of companies. 852 MR. JANIGAN: Now, at paragraphs 3.4.13, among others, the Board approved the management fee of $1 million for 1999 based on the quantified direct benefits to the company, and in addition, a treasury fee of about $900,000 was approved; am I correct on that? 853 MR. LADANYI: Yes. 854 MR. JANIGAN: And I take it this million dollars was a haircut from the 2.3 million that was initially requested by way of a management fee? 855 MR. LADANYI: Yes, it was less than what we were -- initially requested. 856 MR. JANIGAN: Now, is it fair to say that the Board's decision on this was based on the following factors, and I'll ask you if you agree: That the approved fee was based on the services requested by the utility? 857 MR. LADANYI: Where are you reading from, Mr. Janigan? 858 MR. JANIGAN: I'm trying to attempt to summarize the decision and ask you if you agree with my summary of the most important points of the decision. 859 MS. BROOKS: Could I ask you to repeat question, please. 860 MR. JANIGAN: Sure. 861 The first one was: The approved fee was based on services that were requested by the utility? 862 MS. BROOKS: I think the services requested by the utility amounted to the 2.3 million, not the amount approved. 863 MR. JANIGAN: Okay. And that was shaved from that. 864 And the company in the context of its application attempted to apply the Board's EBRO-493/494 criteria for recovery of corporate costs? 865 MS. BROOKS: Yes. 866 MR. MEES: Yes. 867 MR. JANIGAN: And the amount recoverable from the ratepayers was based on an assessment by the Board of the direct benefit to the utility? 868 MS. BROOKS: Yes. 869 MR. JANIGAN: And although not widely used in 1999, a cost-driver methodology was accepted by the Board as part of the framework? 870 MS. BROOKS: Yes. 871 MR. JANIGAN: Now, I wonder if you could go to paragraph 3.4.18. 872 MR. LADANYI: Yes, we have that. 873 MR. JANIGAN: And I just want to read this paragraph: 874 "Given the form and nature of the transaction applied for in EBO-179-05 and the Board's specific terms of approval of that application, the Board finds the company should not have made payments from 1997 or 1998 and should not make future payments to IPLE in excess of the Board-approved amount subject to variances within reasonable limits." 875 MR. LADANYI: Do you want me to explain this? 876 MR. JANIGAN: Yes. 877 MR. LADANYI: Well, again, if I can take you back to our Exhibit K.8.4, and first, if you can check my note under EBO-179-05, that application dealt with 1995 and 1996 fiscal years which was 300,000 for '95 and 400,000 for 1996. And the Board in that decision said that Consumers Gas must demonstrate benefits if it's to continue in 1997. 878 Now, as I explained before, the way the undertakings work and the undertakings were approval to pay an amount but not to recover it in rates. Now, what happened in December of 1998 is the new undertakings came into effect, so the old undertakings were no longer in effect. 879 Now, the old undertakings, which I'm going to refer to as June 21st, 1994 undertakings, required prior approval of the Ontario Energy Board for any affiliate transaction over $100,000. This was no longer required by the new undertakings which came out on December 7th, 1998. So there was no prior approval required after December 7th, 1998 to make payments to an affiliate. 880 The recovery of costs in rates, of course, still remained in effect and that would still be required through the rate case. I hope that makes it clear. 881 MR. JANIGAN: Yes. Now, I wonder if we could turn to RP-1999-001, and in that year a base year of O&M was established. 882 MR. COWAN: Would that be behind your tab number 5? 883 MR. JANIGAN: That's correct. I'm sorry. 884 And can you tell me, was any explicit amount approved by the Board beyond the EBRO-497 amount of a management fee of $1 million plus a treasury fee of $900,000 plus the amount for insurance? 885 MR. LADANYI: There was no explicit approval; however, the regime that we were under in RP-1999-001 was targeted performance-based regulation, which had been approved prior to that time -- which was approved and with the Board's EBRO 497-01 decision. Any affiliate charges would have been included within the O&M envelope and they would not be specifically listed or would require prior Board approval. And remember, as I explained earlier, after December 7th, 1998, there was no prior approval required for affiliate charges. 886 MR. JANIGAN: So the Board had established a global, overall global O&M amount for the base without any reference to the corporate fees or allocations. 887 MR. LADANYI: Correct, yeah. So what was going on in RP-1999-001 is we, or Enbridge, sought approval for recovery in rates of certain costs and these costs were determined by the targeted performance-based regulation formula. There was no specific listing of any affiliate charges. 888 MR. JANIGAN: Now, I wonder if you could turn back to tab 1 of our materials and schedule 2. I note that there's a correction here that should have been made, should have made initially when the materials were put into evidence. Under the first table, 1999, EBRO-497, if you go down that table to "Total Including Enbridge Pipelines," that should be 2.30, not 2.130. 889 MR. LADANYI: Okay. Yes, we see that. 890 MR. JANIGAN: Okay. And as well, I'll just -- typo on the -- one of the columns on the left-hand side or the column on the left-hand side, it's "Total Approved by OEB for Recovery in Rates." 891 MR. LADANYI: Yes, we have that. 892 MR. JANIGAN: Okay. Now, if you could look to the PBR base that's listed for the 1999, RP-1999-001, I take it, then, that the 11.3 million that you've listed there was not specifically approved by the Board? 893 MR. LADANYI: That is right, because the way the performance-based regulation works is that the rates are set based on the formula and whatever the charges the company incurs are to its own account, if it pays more or less its own business and the formula sets the rates. 894 And as I explained, no prior approval was required to make a payment to Enbridge for any affiliate charges after December 7th, 1998. 895 MR. JANIGAN: And similarly, for the 2000 PBR plan and 2001 TPBR and the 2002 TPBR plan, these amounts were all allocations by the company and weren't approved by the Board specifically. 896 MR. LADANYI: That's right, because they did not require specific approval. 897 MR. JANIGAN: So the last approved base amount for these corporate charges is the 1.9 million that we have in EBRO-497? 898 MR. LADANYI: Yes, it is. That's the last time the Board dealt with a specific total of such charges. 899 MR. JANIGAN: Now, I take it you would agree with me that the Affiliate Relations Code for gas utilities superceded the undertakings to the lieutenant-governor-in-council about July 2000. 900 MR. LADANYI: I certainly -- what does "superceded" mean? Does it mean -- you're saying "replaced" or "followed"? 901 MR. JANIGAN: Replaced. 902 MR. LADANYI: No, absolutely not. I do not agree with that. The undertakings are still in effect. 903 MR. JANIGAN: I guess the -- let me ask you to characterize it, then. I don't want to put words in your mouth. 904 MR. LADANYI: Would you like me to explain? 905 MR. JANIGAN: Characterize the effect of the Affiliate Relationships Code. And they govern the relationships between the parent and its affiliate at the current time. 906 MR. LADANYI: Well, the undertakings, when the new undertakings came out, the requirement for prior approval of any affiliate transaction over $100,000 was removed. And that happened December 16th -- on December 7th, 1998. 907 The Affiliate Relationships Code came out the following summer, which is July 31st, 1999, and the Affiliate Relationships Code set out some requirements for shared services and affiliate transactions which were not prior -- were not in existence prior to that time. 908 But the undertakings still remained in effect. 909 MR. JANIGAN: Yes. 910 MR. COWAN: And this is as shown on Mr. Ladanyi's Exhibit K.8.4. 911 MR. JANIGAN: And you agree that the arrangement of Enbridge Inc. in providing services to Enbridge Gas Distribution is an affiliate transaction within the terms of the Code? 912 MR. LADANYI: Yes, it is. Yeah. 913 And it's interesting, when you look at the Affiliate Relationships Code, there is a complaints process under the Code, and I think the intention of the Code was that the Board would not deal with affiliate relationships issues in these hearing -- in a hearing like this, but actually, there was -- there's a complaints process in the Affiliate Relationships Code, and I think what was contemplated by the Board is to save time and money by dealing with these affiliate relationship issues outside the hearing environment. 914 That's the intent. That's not, however, what's happened since that time, but I think that -- if you read the Code, that is my interpretation of the Code. 915 MR. JANIGAN: And pursuant to the requirements of section 2.2 of that Code, which were made under Rule 44, which are a rule made under section 44 of the Act, a service level agreement or SLA is required. 916 MR. LADANYI: Yes, it is, for shared services, one that requires a service-level agreement. 917 MR. JANIGAN: Okay. Now, the next panel, I take it, is going to deal with the specifics of service-level agreements, but without getting into the details of specific SLAs, I want to ask you some questions about the structure -- general form and structure of the prior intercorporate service agreement and service schedules in the context of the next evolution of EI policy on corporate changes during the TPBR plan. 918 And if you could go back to tab 1 of our materials, schedule 2, and in the first table, go to the line "Total Corporate Charge Allocation." If you could put your finger there and leap ahead to tab 7 of our materials, which contains Exhibit A.6, tab 19, schedule 1, page 13 of this proceeding, I'd like to ask you some questions. 919 First, when did Enbridge Inc. change its corporate-cost allocation approach? 920 MR. COWAN: Sorry, the question was when did we change the -- and I missed the last part of your question. 921 MR. JANIGAN: Was it prior to the TPBR or after? 922 MS. BROOKS: It is for the year 2003. 923 MR. JANIGAN: So that is the first year that it commences? 924 MR. MEES: Yes, that's right. 925 MR. JANIGAN: Now, what does the line "Amounts Directly Bill" mean, and what does "Amount Not Recovered From Ratepayers" mean? 926 MS. BROOKS: The amounts billed is the amounts that were billed by Enbridge Inc. to Enbridge Gas Distribution. 927 The amounts -- I'm sorry, what was the second part of your question? 928 MR. JANIGAN: "Amount Not Recovered From Ratepayers." 929 MS. BROOKS: That is the net of the total allocated costs less the amounts billed. 930 MR. JANIGAN: Now, how does that reconcile with the amount that's shown in the -- under the second table of schedule 2 here? 931 MR. COWAN: Is this the table with the code letter B at the top right-hand corner? 932 MR. JANIGAN: That's correct, the bottom table, the page -- this is all schedule 2, the table at the bottom of the page is what I'm referring to. 933 MS. BROOKS: It doesn't correlate directly because the table at the bottom of schedule 2 includes some costs that were included directly in Enbridge Gas Distribution in 1999 plus some costs that were included in the management fee. So if you are trying to compare the schedule at page 11 to -- or even the table at the top of your schedule 2 to the bottom table, you have apples and oranges. 934 The table at the top, your larger table, includes only cost allocations from Enbridge Inc. The table at the bottom includes cost allocations from Enbridge Inc. as well as costs incurred directly in the utility itself. 935 MR. JANIGAN: Well, how much was actually paid? 936 MS. BROOKS: The amounts paid are the -- to Enbridge Inc.? 937 MR. JANIGAN: Yes. 938 MS. BROOKS: They are the amounts that you show in the top table that's -- that is the line less billed charges. 939 MR. JANIGAN: And I may be -- I may be extraordinarily thick, but the reason for the difference again is that there are amounts that are in the second table that are not reflective of the billed charges? 940 MR. MEES: Perhaps I can try to help out. 941 The bottom table was taken from Board Staff 151 so perhaps if you could turn that up I could try to explain that, the purpose of what we are trying to do with that exhibit and that might help. 942 MR. JANIGAN: I think I've got it. 943 MR. MEES: Do you have it now? 944 MR. JANIGAN: Yes, I do. 945 MR. MEES: What we tried to do is show -- because there was a number of changes that have occurred during TPBR as far as shifting of shared services, we tried to show -- tried to put on a bit of an apples-to-apples comparison so we've taken -- these are the costs and if you look at column 1 in the 1999 base. So built into the base was the management fee as we've been referencing, the treasury fee. But there was also centres of excellence; there was departments such as audit, tax, risk management which, over the course of TPBR, so during the period of 2000 to 2002, shifted to centres of excellence. So to try to put it on a apples-to-apples basis of what was billed in 2002, we've shown what those departments would have been if they were in the base and then escalated over. 946 The problem you have is that some of those didn't -- they didn't shift all in one year, they shifted over the course of the time frame but by 2002, they had all shifted into the centres of excellence. 947 Does that clarify it for you? I'm getting shakes no. 948 MR. JANIGAN: They accordingly, when it shifted, if you look at the top table, those costs were picked up -- 949 MR. MEES: Yeah, but this table didn't reflect when they shifted. It tries to show what if they had shifted back in the 1999 base all -- for all years, not when they shifted. 950 MR. JANIGAN: The answer is we can't get there from here. 951 MR. MEES: Yes. 952 MR. JANIGAN: Okay. I wonder if you could turn up tab 8 of our materials which contains VECC interrogatory number 100. And in this interrogatory the company shows that the amounts of corporate costs allocated to the total Enbridge Inc. empire and the amounts paid by EGD during the TPBR plan. 953 Now, when we look at the cumulative effect of the allocations and the amounts, note that EI corporate costs have increased in a major way from 1999; right? You have the 1999 corporate allocation of 23,672,000 to the 2003 corporate allocation of 96 million. Am I correct on that? 954 MR. BETTS: Mr. Janigan, where's your reference on that? 955 MR. JANIGAN: I'm sorry, I'm going to -- on page 3 of the interrogatory and the schedules that are following that. 956 MR. BETTS: Thank you. 957 MR. JANIGAN: I'm sorry. 958 And we find on page 3, the 1999 corporate allocation that the EI costs were 23,672,000 and then when we go to the 2003 corporate allocation on page 7, we're up to 96,535,000. I'm correct that corporate costs have increased in that fashion? 959 MS. BROOKS: Yes. 960 MR. JANIGAN: And why has the amount allocated to Enbridge Gas Distribution increased almost proportionally, even though new enterprises have been added that should share the allocation load? 961 MS. BROOKS: During the period 1999 to 2002 when it is a fee-based methodology, the management fee portion did not change, the percentage that was -- that determined the fee did not change very much. 962 What you do see happening in the allocations is the restructuring and reorganization of the business where, for example, the centres of excellence in the period '99 through 2002, were created, the staff that were in the utility were moved to the corporate office -- not physically, but financially. So the allocation went up accordingly because it was those staff in the utility, their costs were charged back to the utility. 963 In 2003, what you're seeing is -- it's primarily a combination of the change in the allocation methodology and increase in cost primarily due to an increase in insurance premiums. What we learned as we went through the new methodology, which is more rigorous than the management-fee approach, is that in fact certain of the business units had benefitted over that '99 through 2002 period at the expense of our business unit in the south. So, in fact, when we use the cost causality more rigorous drivers, it generated a lower allocation to our business unit in Houston and a proportionately larger allocation to the business unit in the north as well as Enbridge Gas Distribution. 964 MR. JANIGAN: Thank you. I'm going to try to take you through the -- possibly what was two components of my previous question. One, I guess, dealt with the fact that the percentage of corporate allocation attributable to Enbridge Gas Distribution went from 13.61 to the 2003 allocation of 22.55. As I understood, your answer is that there have been functions that are specific to the regulated distribution and indeed that have been transferred to the corporate centre and that was the reason why there was that particular -- in the percentage allocation. 965 MS. BROOKS: For the period 1999 through 2002. 966 MR. JANIGAN: Okay. And for the period from 2002 to 2003, it's on the basis of your new allocation methodology. 967 MS. BROOKS: Yes. 968 MR. JANIGAN: And the second part of my previous question deals with why, if new enterprises are being added, why aren't they sharing more of the allocation load? 969 MS. BROOKS: As I tried to explain earlier, the change in the methodology and the use of the cost drivers to allocate the cost resulted in what we believe to be a fair and reasonable allocation between the business units. What it demonstrated to us at the completion of the work we did was that we had been over-allocated in costs in prior years to a particular business unit and under-allocating to other business units. 970 MR. COWAN: I think it's also fair to say that it doesn't follow that just because the number of entities is larger that the distribution percentages are a function of that? Because the allocation methodology is the combination of all of the drivers and the result of all of that when applied, not just the number of entities. 971 MR. JANIGAN: I'm sorry, I mean from a simplistic standpoint one would think if you have more people to share the costs then the costs proportionally are going to go down. You're saying they won't? 972 MS. BROOKS: Not necessarily. It's important to remember that Enbridge Gas Distribution is substantially larger than all of the other business units in the Enbridge group of companies. So although I agree intuitively that with an increase in the number of lines of business to which you are allocating costs the allocation should go down -- that is the intuitive answer, when the -- although the number of business units had increased, the change in the methodology resulted in a -- an absolute increase in the percentage of the costs allocated to Enbridge Gas Distribution. Remembering that the management fee used for the period '99 through 2002, although in '99 was predicated on cost drivers that were previously discussed in Mr. Boyle's evidence, they weren't updated during the TPBR period. We did adjust the allocation for centres of excellence, but the amounts charged to the utility in respect of the management fee did not change. 973 MR. LADANYI: Mr. Janigan, perhaps -- I don't understand your premise. Because if you look at page 6 of the same exhibit and the growth in Enbridge companies was primarily in transportation south, and in 1992, they were responsible for 31 percent of the allocation and in 1993, -- sorry, in 2002 they were responsible for 31 percent of the allocation and in 2003, they were responsible for 37 percent of the allocation. And then if you look and compare that to Enbridge Gas Distribution, 2003 was 18 percent and it's now 22 percent, roughly. So there has been, in fact, a greater growth in allocation of costs to affiliates where there has been additional assets added, which was in transportation south. 974 MR. JANIGAN: I would be more cheered, Mr. Ladanyi, if that number was going down rather than up, but I take your point. 975 MR. LADANYI: They are both going up but I'm trying to tell you that transportation south is going up faster. 976 MR. JANIGAN: I wonder if you could take us through what was allocated to Enbridge Gas Distribution in 1999 and in this case it was 3.2 million, or 13.6 percent, was allocated from the corporate centre and the increase above the 1.9 million that had been allocated in the last, previous Board decision. 977 I would note here that the rest of the regulated segment of the IPL is allocated about 70 percent and the corporate line with two percent, or 2.5 million and 10 percent which was allocated here. What did that concern? 978 MS. BROOKS: The 2.5 million? 979 MR. JANIGAN: Yes. 980 MS. BROOKS: In corporate? 981 MR. JANIGAN: Yes. 982 MS. BROOKS: Basically the amounts left over that are not allocated to the business units. Under the old methodology, there was a portion of costs that were not allocated to the business units, and they related specifically to the corporate business unit activities, so things like business development costs and things like that for the enterprise as a whole. 983 MR. JANIGAN: Now, is it residual, or does it reflect services provided and consumed by the utility? 984 MS. BROOKS: It would be an element of both, residual and services provided. 985 MR. COWAN: But the services were provided to the corporate office, not the utility. 986 MR. JANIGAN: Yes. I'm sorry. Okay. 987 If you go to 2002 on page 6, there's -- the total corporate cost here is 85.9 million, and the percentage now for allocated in Enbridge Gas Distribution has jumped to 18.11 percent. 988 And once again, the same -- because you're still on the same allocation that was applicable up to 2003, the same comments would apply to items under your non-regulated segment? 989 MS. BROOKS: Yes. 990 MR. JANIGAN: Okay. And on page 7, this is the first year of the application of the new methodology, and Enbridge is -- has been allocated 22.5 percent of the costs. 991 MR. LADANYI: That's right, and you have to notice also the note at the bottom, because that increase reflects the fact that we have reabsorbed into Enbridge Gas Distribution primarily the IT department, which was previously in Enbridge Commercial Services. 992 MR. JANIGAN: Now, since 1999 the corporate centre of Enbridge Inc. has grown over four times, and the costs allocated to Enbridge Gas Distribution have increased ten times. Is my arithmetic correct? 993 MR. LADANYI: We'll take that subject to check. 994 MR. JANIGAN: And if you look on tab 9 of our materials, you have set out some schedules there that give an analysis of the corporate changes. And in particular, I want to note the benchmarking analysis on page 2 of that tab, which shows the corporate centre costs per 100,000 customers increasing from 1999 at about a level of two, to the current level, a level of about 14. 995 Would you agree that these charts accurately set out -- 996 MR. MEES: I would agree that it's accurately set out. I think it is misleading. There has been a number -- as I mentioned, there's a number of -- shifting of functions, including risk management, including insider risk management insurance premiums. 997 So insurance premiums have, as we all know, have sky-rocketed. And so in 1999 there was no insurance premiums within the numbers that you are calculating, but they would be, for example, in 2003. 998 MR. JANIGAN: And how much were they? 999 MR. MEES: Well, insurance premiums in 2003 are $4.3 million alone, and that's not to say -- there's other functions that have transferred since then, as we have indicated, the centres of excellence. There's been shifting in the accounting policies function to the corporate office, so it is a bit of an apples-to-oranges. 1000 MR. JANIGAN: In general terms, though, it shows an alarming -- for ratepayers it may seem -- an alarming trend in terms of increase in amounts paid to the corporate centre over a period of years, which amounts to almost a four-fold increase. 1001 MR. LADANYI: I think it reflects a different operating model, and as I've -- that's what I've been trying to explain. 1002 Certain charges, which were not carried out through the corporate centre in 1999, are now being carried out, certain functions, at the head office. That's nothing unusual with that. That just reflects the corporate structure in existence in 2003 as one compares it to in 1999. 1003 MR. COWAN: I would go further than Mr. Ladanyi and suggest that to draw conclusions from these curves, we'd have to be satisfied that the data inputs into them are relevant apple-to-apple in terms of as Mr. Mees has stated. I'm not at this point of that opinion. 1004 MR. JANIGAN: However, you agree with -- and, I take it, your evidence on O&M in this proceeding seems to set out an endorsement of the use of benchmarking and benchmarking trends to look at company costs. 1005 MR. COWAN: Not -- I don't have any problem with benchmarking. In fact, I believe the company does demonstrate good performance when compared to benchmark O&M costs per customer. I'm not -- I don't have any concern with that at all. In fact, I believe that's a valid way to approach the question. 1006 The concern here is whether the data going into the table and the graphs are -- is comparable year-to-year. And as Mr. Mees has pointed out by reference to schedule 151 or Board Staff interrogatory 151, we need to be very careful to make sure that the data is comparable. 1007 MR. JANIGAN: Well, I invite you to make any changes to the data that has been produced here to in effect allow for the differences that you see in the data from year-to-year and to reproduce these tables accordingly. 1008 Is that something you could do? 1009 MR. COWAN: We would be prepared to undertake that in -- and I -- present what we believe is the appropriate comparison. 1010 MR. MORAN: Mr. Chair, that would be Undertaking J.8.6, and I wonder if I could get Mr. Janigan to describe for the record just exactly what he's asking for. 1011 MR. JANIGAN: I'd like you to take the tables with at -- at least the parameters of the tables and then make sure that what is being measured by the tables is apples to apples from year to year. 1012 UNDERTAKING NO. J.8.6: USE TABLE PARAMETERS TO ENSURE APPLE-TO-APPLE, YEAR-TO-YEAR COMPARISON 1013 MR. JANIGAN: So effectively it's our equipment, but your -- 1014 MR. COWAN: That's fine; we understand. We would be adjusting the numbers where we believe it's appropriate and be prepared to speak to the alternative. 1015 MR. JANIGAN: And we can provide a copy of the Excel disk, if that's helpful. 1016 MR. COWAN: That's okay. 1017 MR. JANIGAN: And I take it the other way in which benchmarks should be examined is to also examine the corresponding benefits that may arise from any increase in charges; do you agree with that? 1018 MR. COWAN: I would agree with it except with one word; remove "increase." I believe the obligation is to be sure that there is a benefit associated with the cost, that exceeds the cost, not just an increase in the cost. 1019 MR. JANIGAN: I wonder if you could turn up tab 10 of our materials. 1020 MR. BETTS: Mr. Janigan, just in case our minds aren't working in parallel at this point, I'm just curious how much longer you might think you might want to cross-examine. 1021 MR. JANIGAN: I'm about halfway through. 1022 MR. BETTS: So it's unlikely we will complete your cross-examination tonight. 1023 MR. JANIGAN: That's correct. Certainly it's -- at any appropriate -- 1024 MR. BETTS: Is this an appropriate time, or do you want to complete some -- 1025 MR. JANIGAN: This would be as appropriate time as any. 1026 MR. BETTS: Okay. I think, then, we will break for today and resume tomorrow at 9:30 a.m. 1027 Any submissions at this point from any parties with respect to that plan? None? 1028 MR. CASS: No, Mr. Chair. I do still have the answer to Undertaking J.8.1; if we might just take a minute now to distribute that. 1029 MR. BETTS: Let's do that. Thank you, Mr. Cass. 1030 Are there any other items that we should discuss before we adjourn? Then if not, we will adjourn now and resume at 9:30 tomorrow morning. 1031 --- Whereupon the hearing adjourned at 4:00 p.m.