Rep: OEB Doc: 12NB3 Rev: 0 ONTARIO ENERGY BOARD Volume: 9 3 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 3 APRIL 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel COLIN SCHUCH Board Staff TURGUT HASSAN Board Staff FRANK CASS Enbridge Gas TANIA PERSAD Enbridge Gas ROBERT WARREN CAC JAY SHEPHERD OPSBA VINCE DEROSE IGUA MICHAEL JANIGAN VECC ROGER HIGGIN VECC THOMAS BRETT OASBO 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 7.45 CONTINUED: BROOKS, COWAN, MEES, TURNER, LADANYI [27] CROSS-EXAMINATION BY MR. JANIGAN CONTINUED: [33] CROSS-EXAMINATION BY MR. WARREN: [872] CROSS-EXAMINATION BY MR. DeROSE: [1388] 10 EXHIBITS 11 12 UNDERTAKINGS 13 UNDERTAKING NO. J.9.1: UNDERTAKING TO PROVIDE THE BACKGROUND DATA FOR THE NUMBERS SET OUT ON PAGE 3 OF 3 OF EXHIBIT I, TAB 1, SCHEDULE 164 [64] UNDERTAKING NO. J.9.2: UNDERTAKING TO FILE A DOCUMENT, "ONE COMPANY, ONE VISION", RELATED TO STRATEGIC PLANNING [98] UNDERTAKING NO. J.9.3: TO PROVIDE A COPY OF THE PRESENTATION OF cost-allocation methodology TO CORPORATE LEADERSHIP TEAM. [129] UNDERTAKING NO. J.9.4: CALCULATION OF CAPITAL EMPLOYED AND HOW IT WAS DERIVED FOR EGDI AND A COMPARISON WITH THE EGDI RATE BASE [214] UNDERTAKING NO. J.9.5: UNDERTAKING TO COMPARE THE COSTS OF CERTAIN CENTRES OF EXCELLENCE WITH THE 2003 BUDGET [261] UNDERTAKING NO. J.9.6: UNDERTAKING TO PRODUCE THE LETTER OF ENGAGEMENT WITH ERNST & YOUNG [545] UNDERTAKING NO. J.9.7: UNDERTAKING TO PRODUCE THE LIST OF DOCUMENTS REVIEWED FOR THE PURPOSE OF PREPARING THE ERNST & YOUNG REPORT AND TO PRODUCE COPIES OF DOCUMENTS THAT ARE NOT IN EVIDENCE, SUBJECT TO CONFIDENTIALITY ISSUES [583] UNDERTAKING NO. J.9.8: TO PROVIDE FOR EACH BUSINESS UNIT FOR THE YEARS 1999 TO 2003 THE CAPITAL OR TOTAL ASSETS, THE REVENUE AND THE NUMBER OF EMPLOYEES [1167] UNDERTAKING NO. J.9.9: FOR EACH LINE OF BUSINESS WITHIN EI, AN UNDERTAKING TO PROVIDE THE DATE THE LINE OF BUSINESS WAS ACQUIRED BY EI, AND THE SITUATION WHERE IT WAS ACTUALLY ACQUIRED; AND THE DATE [1177] UNDERTAKING NO. J.9.10: UNDERTAKING TO PROVIDE A COMPARISON OF THE O&M EXPENDITURES AND THE CORPORATE COST ALLOCATIONS FOR 1999, 2000, 2001 AND 2002 UNDERTAKING NO. J.9.11: TO PROVIDE A LISTING FOR ALL OF THE CATEGORIES OF CORPORATE COST ALLOCATIONS THAT ARE LISTED ON EXHIBIT A.6, TAB 19, SCHEDULE 1, PAGE 10, OF WHERE, IN THE PRE-FILED EVIDENCE, INCLUDING THE INTERROGATORY RESPONSES, A DESCRIPTION OF THE SERVICES THAT ARE TO BE PROVIDED GIVING RISE TO THOSE COSTS CAN BE FOUND [1293] UNDERTAKING NO. J.9.12: TO DETERMINE WHETHER THE INTERCORPORATE SERVICES AGREEMENT DATED OCTOBER, 2002, WAS REVIEWED BY THE EGDI BOARD [1328] UNDERTAKING NO. J.9.13: UNDERTAKING TO DETERMINE IN THE PRIOR AGREEMENT BETWEEN EGD AND EI: 1) IF THERE WAS A RIGHT TO AUDIT BY EGD; 2) IF THE RIGHT WAS EVER EXERCISED; 3) IF SO, TO PRODUCE THE RESULTS OF THE AUDIT [1349] UNDERTAKING NO. J.9.14: MR. TURNER TO CHECK IF THERE ARE PREVIOUS DRAFTS AND TO PROVIDE A LIST OF CHANGES BETWEEN THE DRAFTS AND THE FINAL REPORT [1404] UNDERTAKING NO. J.9.15: TO HAVE MR. TURNER CHECK WITH HIS STAFF AND INTERVIEW NOTES AND DETERMINE WHETHER ANY DEPARTMENTS IN EGD VOICED CONCERNS OR DISAGREEMENT WITH RESPECT TO THE BENEFITS AND SERVICES PROVIDED AS PART OF THE COST ALLOCATION [1447] 14 --- Upon commencing at 9:30 a.m. 15 MR. BETTS: Thank you, everybody, please be seated. 16 PRELIMINARY MATTERS: 17 MR. BETTS: Good morning, everybody, and welcome back to day 9 of this proceeding. Yesterday we ended the day having heard approximately half of the cross-examination from VECC, and we will continue with Mr. Janigan's questions today. 18 First before we do that, are there any preliminary matters? 19 MR. CASS: Mr. Chair, on the table in front of me has appeared the answer to Undertaking J.6.4. Again, like yesterday, I haven't even given me a moment's glance, but it could be handed out at this time, if that's appropriate. 20 MR. BETTS: Thank you. Let's do that. 21 Do they really appear magically, or is someone responsible? 22 MR. CASS: I didn't see it appear, sir. I looked down, and there it was. 23 MR. BETTS: Thank you, Mr. Cass. Is there anything else? 24 MR. CASS: That's all, sir. Thank you. 25 MR. BETTS: Any other preliminary matters? 26 Then I welcome the panel back, and I would ask Mr. Janigan to please continue with your cross-examination. 27 ENBRIDGE GAS DISTRIBUTION PANEL ON ISSUE 7.45 CONTINUED: BROOKS, COWAN, MEES, TURNER, LADANYI 28 K.BROOKS; Previously sworn. 29 W.COWAN; Previously sworn. 30 M.MEES; Previously Sworn. 31 R.TURNER; Previously Sworn. 32 T.LADANYI; Previously Sworn. 33 CROSS-EXAMINATION BY MR. JANIGAN CONTINUED: 34 MR. JANIGAN: Thank you, Mr. Chair. 35 I wonder if you could turn up tab 10 of our materials, marked at Exhibit K.8.3. 36 And it's response to interrogatory from -- 164 from CME, and on the second page of that interrogatory, you cite a 19 full-time equivalent savings, and present a benefit analysis. 37 Now, first of all, with respect to these 19 positions, these were absolute position reductions? Were they from the -- from the Enbridge Gas distribution? 38 MR. MEES: Yes, they were, so those were the ones where we specifically identified that one person was reduced. There were some other half positions, but these were the full positions that could be identified. 39 MR. JANIGAN: And on -- and in the next column of position reductions, allocated positions, these are the positions that are currently at the corporate centre which are allocated back through your process in Enbridge Gas Distribution; is that correct? 40 MS. BROOKS: Yes. 41 MR. JANIGAN: So the savings on that are the 3.1 position times, I guess, probably an average of 100,000 per year? 42 MS. BROOKS: Yes. 43 MR. JANIGAN: I believe that shows up, does it not, on page 3? There's reduced employee costs under the savings. 44 MR. MEES: Yes. The $0.3 million. 45 MR. JANIGAN: And this 0.3 is where -- is derived from the position reductions on page 2? 46 MR. MEES: Yes, it is. 47 MR. JANIGAN: Now, do you have a detailed cost-benefit analysis in support of all these claimed savings? 48 MR. MEES: Which -- sorry, Mr. Janigan -- 49 MR. JANIGAN: On page 3. 50 MR. MEES: Do we have a detailed on each of the identified savings here? 51 MR. JANIGAN: Yes, we do. Yes, we do. 52 MR. JANIGAN: Has that been produced anywhere in the evidence? 53 MR. MEES: No, it has not. 54 MR. JANIGAN: Can it be produced in evidence? 55 MR. MEES: We could provide some back-up to those numbers, yes, if would be helpful. 56 MR. JANIGAN: It would be helpful. If you have a consolidated study in particular. I'd like to see what you people looked at when you were making the decision associated with this methodology. 57 MR. MEES: Sorry, this wasn't as a result of a study that was undertaken. 58 MR. JANIGAN: This was the result of the methodology? 59 MR. MEES: Yes, and identifying the methods of the methodology. 60 MR. JANIGAN: That would be fine. If you could produce the more detailed results of the cost-benefit analysis that was done that generated that. 61 MR. BETTS: Mr. Moran, can we establish an undertaking number for that? 62 MR. MORAN: Yes, Mr. Chair, that would be Undertaking J.9.1, undertaking to provide the background data for the numbers set out on page 3 of 3 of Exhibit I, tab 1, schedule 164. 63 MR. BETTS: Thank you. 64 UNDERTAKING NO. J.9.1: UNDERTAKING TO PROVIDE THE BACKGROUND DATA FOR THE NUMBERS SET OUT ON PAGE 3 OF 3 OF EXHIBIT I, TAB 1, SCHEDULE 164 65 MR. JANIGAN: And on page 3 of all these costs are avoided costs that are associated with the savings; is that correct? Or are they real reductions, reduced employee costs and reduced positions? 66 Let me rephrase this. Are these avoided costs or actual reductions to the budget amounts? 67 MR. MEES: They would be both. As we identified, there's been a reduction in the positions of the 3.1 people that we've identified there, along with some avoided costs. 68 MR. JANIGAN: Presumably, this kind of information will show up in your detailed material that you're going to provide me under that undertaking. 69 MR. MEES: We can include that as part of it, yes. 70 MR. JANIGAN: And are these savings for cumulative, or are they for 2003 only? 71 MR. MEES: They are for 2003 only. 72 MR. JANIGAN: Now, I want to go back to some testimony that we heard yesterday concerning how this methodology came to be. And I believe, Ms. Brooks, you testified that back in 1999, Enbridge Inc. came up with a policy that was titled something like one vision, one strategy, all for one, one for all, something of that nature; is that correct? 73 MS. BROOKS: One Company, One Vision? 74 MR. JANIGAN: One Company, One Vision. 75 MS. BROOKS: Yes. 76 MR. JANIGAN: Was that incorporated into a particular document that was presented to the board? 77 MS. BROOKS: Which board, I'm sorry? 78 MR. JANIGAN: Either, Enbridge Inc. or Enbridge Gas Distribution? 79 MS. BROOKS: So the board of directors? 80 MR. JANIGAN: Yes. 81 MS. BROOKS: Not this Board. It would have been as part of the strategic planning process. 82 MR. JANIGAN: Is that document anywhere in evidence in this proceeding? 83 MS. BROOKS: No. 84 MR. JANIGAN: I wonder if you could produce that document. 85 MR. CASS: Mr. Chair, if I might, I've never seen it myself, so I'm speaking to something I'm not familiar with. 86 My concern is that Ms. Brooks referred to this as a strategic planning document or at least part of the strategic planning. I believe that this Board has, in fact, given some recognition to the fact that strategic planning, even for the regulated utility, is a very difficult process if it's to be carried out under the notion that strategic planning documents will later be filed on the public record. 87 In relation to Enbridge Inc., I think that concern would be even greater, given that is not a regulated company itself. So I do have a level of concern that a strategic planning document would be placed on the public record here. Again, this is without having seen it myself or knowing anything more about it other than what Ms. Brooks just said. 88 MR. JANIGAN: Mr. Chairman, I think what we are interested in retaining the document for is to look for the -- behind the movement of what was termed to be a hold-co. strategy associated with the corporate centre to a shared-resources strategy for the corporate centre. And the rationale for doing so, and the likely cost of benefits associated with that, where they were going to be allocated and whether or not, frankly, the utility was going to be the beneficiary of any benefits associated with that. 89 And certainly, to test the evidence before us, it's important that we have the source document that gave birth to this particular method of ongoing operations and the allocation of costs. 90 I'm certainly not interested in the overall strategy of Enbridge's positioning in the market or anything that's competitively sensitive, and for that matter, I'd be -- if there are matters that were to be redacted that reflect that, then that is satisfactory. 91 But in terms of looking at, essentially, what is -- how the operations of Enbridge utility are going to be structured in the future, and how this document plans for them, I think that's a perfectly appropriate question. 92 MR. BETTS: The Board feels that the document does potentially have information in it that would help in this proceeding. What we will ask is that, Mr. Cass, you have a look at the document. As Mr. Janigan has suggested, anything that can be redacted that is not pertinent to the information that Mr. Janigan is pursuing, then please go ahead and do that. 93 If there is still information on the document that you feel is sensitive or confidential, then we would ask that you file it under the Board's confidentiality guidelines. So may we have an undertaking for that, please. 94 MR. MORAN: That would be Undertaking J.9.2, undertaking to file a document related to strategic planning. 95 MR. BETTS: And that was called, One Company, One Vision. 96 MR. MORAN: In relation to the concept of One Company, One Vision. 97 MR. BETTS: Thank you. 98 UNDERTAKING NO. J.9.2: UNDERTAKING TO FILE A DOCUMENT, "ONE COMPANY, ONE VISION", RELATED TO STRATEGIC PLANNING 99 MR. BETTS: Thank you. 100 Mr. Janigan? 101 MR. JANIGAN: Yes. Following the process along, at some point in time it was decided that a new methodology was needed to reflect the operations that were being undertaken in conformation with the One Company, One Vision strategy. Did I get that evidence correctly, Ms. Brooks? 102 MS. BROOKS: Yes. 103 MR. JANIGAN: And it was decided -- who decided that a new cost methodology should come about? 104 MS. BROOKS: The finance group did. 105 MR. JANIGAN: And did they seek approval for this with the individual Enbridge Inc. units, such as Enbridge Gas Distribution? 106 MS. BROOKS: When I said the finance group, I was referring to the finance group across the enterprise. 107 MR. JANIGAN: Do you have the copy of the document that came to that conclusion from the finance group? 108 MS. BROOKS: No, it was a verbal discussion held at a controllers' group meeting. 109 MR. JANIGAN: Did you keep any minutes of that meeting? 110 MS. BROOKS: No, we did not. 111 MR. JANIGAN: And when you came up for that meeting, who did you report to? 112 MS. BROOKS: The results of the meeting to? 113 MR. JANIGAN: Yes. 114 MS. BROOKS: I would have discussed them with the CFO, and the business units staff would have discussed the results with their respective senior financial officers in their business units. 115 MR. JANIGAN: And nowhere along the line was anything reduced to writing to reflect the fact that you were going to undertake a cost methodology? 116 MS. BROOKS: Not in a limited form, no. We have a substantial amount of documentation describing the events and processes that we went through to develop the methodology. 117 MR. JANIGAN: Prior to that, there was no document that was generated that set out the need for this costing methodology? 118 MS. BROOKS: No. 119 MR. JANIGAN: Well, let's get into the costing methodology. 120 Did you develop a document that was presented to -- well, let me stop there. 121 As a result of your -- of the development of this methodology, which I assume was developed -- I think you said -- by a team of senior finance officers across the various units, did you develop a particular document or report that was presented to the Enbridge management? 122 MS. BROOKS: At the conclusion of the process, yes, we did that. We made a presentation to the CLT, the corporate leadership team, which includes all of the business unit heads as well as the corporate senior officers, in September of last year. 123 MR. JANIGAN: Is it possible to get a copy of that presentation? 124 MS. BROOKS: Yes. 125 MR. MORAN: Undertaking J.9.3, undertaking to produce a presentation. 126 I'm wondering if I could get a description of what that presentation would be? 127 MS. BROOKS: cost-allocation methodology to corporate leadership team. 128 MR. MORAN: Thank you. 129 UNDERTAKING NO. J.9.3: TO PROVIDE A COPY OF THE PRESENTATION OF cost-allocation methodology TO CORPORATE LEADERSHIP TEAM. 130 MR. BETTS: Thank you. 131 MR. JANIGAN: Was there any other significant document that was presented to Enbridge management or the board, your board? 132 MS. BROOKS: Nothing was presented to the board of directors. This is not something that would normally be taken to the board. 133 I think the other significant documents have been -- have been filed as evidence, being the methodology itself and the service agreement with Enbridge Gas Distribution, as well as the sign-off as to the agreement on the costs. 134 MR. JANIGAN: Now, I wonder if you could turn up the new inter-corporate services agreement. When was this agreement executed? 135 MR. MORAN: Mr. Chair, just for the record, I wonder if we could have a reference for that. 136 MR. JANIGAN: I think that was put in evidence yesterday, was it not? 137 MR. MORAN: So we're referring to Exhibit K.8.1? 138 MR. MEES: Sorry, that was the previous service agreement. The current one would be contained within Board staff 71 -- 139 MR. JANIGAN: Schedule 71, I'm sorry. 140 MR. LADANYI: You mean Exhibit I, tab 1, schedule 71, attachment. 141 MR. JANIGAN: That's correct. I'm sorry. 142 When was this agreement executed? 143 MS. BROOKS: I don't remember the exact date. 144 MR. MEES: The agreement was effective the 1st of October, 2002, but I'm not sure when the actual document was signed. 145 MR. JANIGAN: I'm just curious. My information is that it was executed in December 2002, and I was wondering what happened between September 30th and December 2002? 146 MR. COWAN: I think it's correct that the schedule that is attached to it that identifies the money amounts was completed and executed as an attachment to this agreement in December, but I can't comment on the details of what happened in between, other than to say that the parties were, in fact, finalizing how the money amounts would be settled and exactly what the services were during the period of time of finalizing the agreement and bringing the schedule to completion. 147 MR. JANIGAN: Now, I wondered if you can turn up in tab 11 of our materials, IGUA interrogatory 100. 148 MR. COWAN: We have that. 149 MR. JANIGAN: And I take it that is an example of a confirmation notice? 150 MR. COWAN: That is the confirmation notice to which I just referred. 151 MR. JANIGAN: And that was executed December 16th? 152 MR. COWAN: Between the 16th and 20th of December of 2002. 153 MR. JANIGAN: Now, I wanted to just briefly look at how the new arrangement works at Enbridge Inc., and I wonder if you could turn up your main evidence at Exhibit A.6, tab 19, schedule 1. 154 MR. MEES: Was there a particular page, Mr. Janigan? 155 MR. JANIGAN: Yes, on page 5, paragraph 13. 156 MR. MEES: Yes, we have that. 157 MR. JANIGAN: Now, I read Mr. Turner's description of the -- definition of one-step, one-way allocations, but I'm not certain if I've completely grasped what that means. Would you try and explain that to me? 158 MS. BROOKS: Perhaps I could explain it by describing what happened under the old methodology versus what happens now. 159 So under the old methodology, we had two-step or sometimes multiple-step allocations, whereby, for example, costs would be allocated to Enbridge Inc. and then Enbridge Inc. would allocate those costs to another business unit. 160 Under the new methodology, to the extent that a business unit is allocating costs to Enbridge Inc., instead of having those costs come first to Enbridge Inc. and then allocating them to a business unit they're allocated directly from one business unit to another. 161 An example of that are the EPI charges that you see in the allocated costs to Enbridge Gas Distribution. 162 MR. JANIGAN: Now, could you also briefly explain the differences, and I guess the reasons for the classifications themselves, between corporate departments, centres of excellence and general expenses, at the corporate level. 163 MS. BROOKS: Perhaps I will start with the centres of excellence, because the corporate departments are everything else. 164 The centres of excellence are those departments that I referred to yesterday that are functional areas that provide services that are deemed to be of strategic importance to the enterprise as a whole or have been created to generate cost savings. An example of that would be the risk-management group, them using our portfolio approach to place the insurance program. 165 MR. JANIGAN: I'd like to stop you there. The centres of excellence can be located in locations elsewhere than the corporate centre; am I correct on that? 166 MS. BROOKS: That's correct. 167 MR. JANIGAN: Then the allocations are done through the corporate centre throughout the Enbridge empire? 168 MS. BROOKS: That's correct. 169 MR. JANIGAN: Go ahead, sorry. 170 MS. BROOKS: So the employees in the centres of excellence are Enbridge Inc. or corporate employees, regardless of where they sit. They can sit in Toronto or Calgary, which was typically the case for the centres of excellence. 171 The balance of the corporate departments are those that provide service related to policy and strategy and standards to the rest of the organization. Some of the departments act as informal centres of excellence. For example, the controllers group, which has staff in every location where we have a business unit, has an informal reporting relationship to me but a direct reporting relationship into the business unit. So some of those groups are informal centres of excellence where a consistent application of standards and policies is very important to the enterprise as a whole. The balance are corporate departments just providing services to the other business unit groups. 172 The general expense category: Those expenses typically relate to large third-party expenses that you would allocate on a different basis, other than departmental expenses. The departmental expenses consist primarily of staff and staff-related costs. 173 Again, an example is insurance premiums, where they fall under my empire, but insurance premiums we believe should be allocated on the basis of assets insured which is different from how my departmental costs are allocated. So we have split out those large third-party expenses so we can apply a different allocation factor to them if that is appropriate. 174 MR. JANIGAN: I wonder if we can turn the page, and I'm looking at the last bullet on paragraph 13. It indicates: 175 "Where appropriate, service-level agreements are replaced by a combination of confirmation notices signed by the service providers and service recipients and the cost-allocation methodology." 176 I wonder if you could explain why service-level agreements were required in the prior agreement and are not now required. 177 MS. BROOKS: The service-level agreements or service-level schedules have been replaced, I believe, only for the costs covered by the cost-allocation methodology. We believed we could delete the service-level schedules, because we still have the service agreement, because the methodology paper, which is attached to the service-level agreement, covers the services provided by the corporate group to the various business units. 178 That -- actually, much of the form and content of the methodology paper itself was developed to satisfy the requirements of EGD in order to eliminate the administrative burden of creating the service-level schedules. 179 One of our underlying principles in developing this methodology was to ease the administrative burden associated with the allocation in intercompany charging process, so we are trying to develop a methodology that encompassed many of the areas contemplated by the service-level schedules. 180 MR. JANIGAN: And I take it that it is the company's view that the confirmation notices, coupled with the underlying cost-allocation methodology, are sufficient to meet the requirement for service-level agreements under the Affiliate Relationships Code? 181 MS. BROOKS: Combined with the agreement itself. So there are really three items. 182 MR. JANIGAN: Now, this is a matter we touched on yesterday in paragraph 14, the capital employed. Can you tell me how the capital employed for Enbridge Gas Distribution differs from rate base in terms of a -- in terms of a number? 183 MR. LADANYI: Perhaps I can first help by explaining what the rate base is. The rate base is an average of averages of net plant and service, so it is not a year-end number or an end of accounting period number. It's an average number for the year. It's an average of monthly averages. That's what rate base is by definition. 184 MR. JANIGAN: All right. Well, let's compare that to your capital employed number. 185 MS. BROOKS: Well, capital employed, because it comprises total assets, may include more assets that are included in rate base. As well, as certain amounts are deducted, as described on -- in the first bullet on paragraph 14, there is a certain current liabilities and deferred credits deducted from total assets. 186 MR. JANIGAN: And I'd like to get at what the quantum of that difference is for any given year, particularly for 2003. 187 MS. BROOKS: Between rate base and capital employed? 188 MR. JANIGAN: Yes. 189 MR. COWAN: I wonder if I could just seek a little clarification, Mr. Janigan, in the interest of trying to make sure we're going to do the right thing here. 190 What we are trying to find in terms of a cost driver is a basis within the enterprise, the group of companies. We're trying to find a term, a means that is common amongst the companies, a basis of allocation that can be used as common currency within the family in order to do the allocation. 191 And the term capital employed speaks to that and addresses the requirement that we try to find something that can be used in all instances. 192 The rate base is a particular requirement, as Mr. Ladanyi has indicated, that is developed in the context of the regulatory requirement. 193 So the purpose for which we are attempting to do the allocation is particular in terms of identifying an appropriate amount of the cost to apply in the utility as opposed to meet the requirements that are typically associated with a return on rate base calculation or any other calculation that uses a rate-base value. 194 So what I'm saying is, I'm not quite clear on what we're going to gain by trying to identify the differences between the two, because I'm suggesting the purposes are different. 195 MR. LADANYI: There would only be a complete coincidence that it would be the same because rate base is an average, an annual average, and it also has a working capital calculation, as you know, which includes a working cash calculation, and capital employed would obviously be listing current assets on the asset side. And whereas working capital is a completely different type of calculation, as you know yourself. 196 So the numbers will be different, and I think the rate base is something that's used in developing cost of service rates. It actually has no other meaning apart from that. 197 MR. JANIGAN: Well, I'm still going to want the number, but I just want to develop a few more question from what you told me. 198 I take it that capital employed will include assets that are not included in rate base? 199 MS. BROOKS: It may, depending on what is included in rate base. 200 MR. JANIGAN: But it could include assets which are part of the unregulated activities of the company. 201 MS. BROOKS: Not for a particular line of business, no. 202 MR. JANIGAN: Wait a minute, I got two answers there. 203 MR. LADANYI: Can you restate your question so we can understand what you're asking? 204 MR. JANIGAN: I would assume that capital employed would include assets which are not -- which don't form part of the regulated business of the utility? 205 MR. LADANYI: Well, we're having difficulty with the understanding of the word "utility." Utility, in our sense, would be only the costs that are used in calculating risks, that's the utility so, if you say -- utility, by definition, wouldn't have unregulated businesses. 206 MR. JANIGAN: Okay. But capital employed could have unregulated businesses? 207 MS. BROOKS: Only for those businesses for which we're calculating a capital employed number that is unregulated. For example, the capital employed number we used for Enbridge Gas Distribution is based on the regulated assets of Enbridge Gas Distribution. 208 MR. JANIGAN: You're saying there's no assets in capital employed that are not included in rate base? 209 MS. BROOKS: There will be assets that are not included in rate base depending on how rate base is calculated, but all of those assets will be the assets of the regulated utility. 210 MR. JANIGAN: Okay. I think what I would like is the calculation of capital employed and how it was derived for Enbridge Gas Distribution compared with rate base, and if you want to put any numbers underneath that or any qualifications under that reflect, for example, Mr. Ladanyi's statement that it's an average on averages, which I understand, that's fine; but I'd like a comparison between those two numbers. 211 MS. BROOKS: We can provide that. It will be a forecast number. 212 MR. MORAN: Mr. Chair, that would be Undertaking J.9.4, calculation of capital employed and how it was derived for EGDI and a comparison with the EGDI rate base. 213 MR. BETTS: Thank you. 214 UNDERTAKING NO. J.9.4: CALCULATION OF CAPITAL EMPLOYED AND HOW IT WAS DERIVED FOR EGDI AND A COMPARISON WITH THE EGDI RATE BASE 215 MR. JANIGAN: Now, on page 7 of your evidence, there's a bullet there. I realize it's only a minor amount, but given the state of Canadian-American relations, I thought I'd have to raise it. 216 The pollution emissions of one Canadian line of business divided by the total of all Canadian-based pollution measures are tracked, but at this point, there is no tracking of U.S. pollution emissions. Is there a cross-subsidy that will result in that? 217 MS. BROOKS: We don't believe so, no. The unallocated amount is left in corporate. 218 MR. JANIGAN: Now, I wonder if we can move ahead to pages 10, 11, and 12, and in particular on page 11. 219 And in looking at this table, I had a hard time understanding what was going on between these centres of excellence and the corporate partners. I understand the rationale behind the centres of excellence, but I don't understand what occurs when you have backed out of the centres of excellence model and how those costs are subsequently tracked to the individual corporate departments or units of Enbridge that attract costs. Can you explain that to me? 220 MR. MEES: I think it would be best to provide it in an example. 221 So if you look at the taxation group, I guess that would be the fourth line down in the centres of excellence, that centres of excellence started in fiscal 2000, and was in existence through to 2002. 222 As has been previously mentioned with the sale of Enbridge Services Inc. and the wind-down, I guess, with respect to Enbridge Commercial Services, the centres of excellence for taxation no longer were required, so that was brought back into the utility and you would find those costs now within the finance group, so within the finance department costs. 223 MR. JANIGAN: Of the utility itself? 224 MR. MEES: Of the utility itself, yes. 225 MR. JANIGAN: Is it fair to say that when the centres of excellence were operating there were more units that were sharing a particular quantum of costs? 226 MS. BROOKS: No, I don't believe so. 227 The costs, for example, for taxation in Toronto, those individuals were pretty much devoted entirely to carrying out work related to the utility, so the corporate-office costs are in a different department, and they would be continued to be shared over the same number of business units. 228 MR. JANIGAN: Are you telling me that when the centres of excellence were disbanded or discontinued that the total cost for the function that was previously provided by the centre of excellence didn't go up for Enbridge Gas Distribution? 229 MS. BROOKS: I think what we have said is that the cost for the Toronto staff moved back into the direct utility costs. 230 MR. JANIGAN: But previous to that, that staff -- the cost of that staff has been allocated in some way across the board to all the rest of the Enbridge companies, including Enbridge Gas Distribution? 231 MS. BROOKS: To the extent the Toronto staff would have been doing work for other business units, yes. 232 MR. JANIGAN: Is it possible -- I don't want to burden you with endless undertakings here, but is it possible that you can show what the cost was of any particular functions of the centres of excellence prior to their discontinuance, the costs to Enbridge Gas Distribution when the officers for excellence were operating, and the costs to Enbridge Gas Distribution when the centres of excellence were not operating for the individual functions of the centres of excellence? Do you understand what I'm getting at? 233 MR. MEES: Yes, we're just trying to remember if there's an interrogatory response that addresses that. 234 MR. JANIGAN: Okay. 235 MR. LADANYI: Mr. Janigan, if you could look up Board staff 149, page 2. 236 MR. JANIGAN: The Board has organized their materials in a different way. It's Board staff interrogatory 151? 237 MR. LADANYI: 149. 238 MR. JANIGAN: Yes, I've got it. 239 You're going to refer to the eye chart on page 42. 240 MR. LADANYI: Yes, I think you were asking how much has been allocated to Enbridge Gas Distribution. It shows right there. 241 MR. JANIGAN: That chart -- how would I find out the difference between what Enbridge Gas Distribution was paying for a service rendered by a centre of excellence and how much it's paying now that the centre of excellence has been discontinued? If you can just take me to those. 242 MR. LADANYI: Weren't you asking on how much was being charged by the centre of excellence to Enbridge Gas Distribution? 243 MR. JANIGAN: No, I want to know the difference. I want to know -- before, when you were operating a centre of excellence, you were getting a service for X amount. I want to know now that the centre of excellence has been discontinued, whether or not there's been an increase in the amount that you're paying for that service. Would this chart help me? 244 MR. MEES: No, but I'm trying to think if there's another chart that could help. 245 If you turn to Board staff 151. The -- if you look at the first column there, it's the 1999 base, and it lists what was contained in the 1999 base for each of the centres of excellence. So you can see for audit, it's 1.1 million, tax it's 0.3, risk management, 6.9. 246 MR. JANIGAN: Were these all centres of excellence or were they departments too? 247 MR. MEES: Those were the departmental costs in the '99 budget for those -- what shifted to centres of excellence. So those were the costs as you can see for each of those -- four of those departments. 248 MR. JANIGAN: I'm sorry, were all of these centres of excellence? 249 MR. MEES: At one point in time, in fiscal 2002, they were all centres of excellence, yes. It's listed there that the audit, tax, risk management, employee communications, learn and leadership, and labour relations and finally public and government affairs. Those were all centres of excellence. 250 MR. JANIGAN: Centres of excellence, sorry let me just tick them off as you're going. Would you start at the top again? 251 MR. MEES: Yes audit services was a centre of excellence, tax was a centre of excellence, risk management, employee communications, learning and leadership, labour relations, and public and government affairs. 252 So those, they are listed in the '99 base, those are the costs for those departments, not including benefits, but just employee expenses and employee costs for those departments. 253 MR. JANIGAN: I would -- sorry? 254 MR. MEES: And what we can undertake to do is compare those costs to the 2003 budget. 255 And I would hazard a guess that the costs would be much lower, because if you look, for example, at risk management, it was providing risk management services out of the centre of excellence, to Enbridge Inc., Enbridge Commercial Services and Enbridge Gas Distribution. When we brought that back into the utility, there were -- individuals who were doing work for those companies went with those companies. 256 So a lower amount of people came back into -- for risk management, for example. 257 MR. JANIGAN: Well, wouldn't that have been caught in your allocation under 2002, the fact that they were doing work for somebody else? 258 MS. BROOKS: In 2002, yes. I think Mr. Mees is referring to 1999. 259 MR. JANIGAN: I don't think so. 260 MR. MORAN: Mr. Chair, I guess we have an Undertaking J.9.5, undertaking to compare the costs of certain centres of excellence with the 2003 budget. 261 UNDERTAKING NO. J.9.5: UNDERTAKING TO COMPARE THE COSTS OF CERTAIN CENTRES OF EXCELLENCE WITH THE 2003 BUDGET 262 MR. MEES: We would have to then layer on benefits and try to make it as apples to apples as we could through that time. 263 So you want 1999 as compared to 2003? 264 MR. JANIGAN: No, I want 2002, because the centres of excellence started to disappear in 2003, did they not? 265 MR. MEES: Yes. 266 MR. JANIGAN: Getting back to my question. You indicated that the reason they would probably go down was in 2002 the centre of excellence was providing services for more than Enbridge Gas Distribution? 267 MR. MEES: Yes. 268 MR. JANIGAN: But my question was: In 2002 weren't you allocating those costs? 269 MR. MEES: Those costs, the departmental costs for, if we use risk management as an example, were contained within Enbridge Inc., and for any services that they were doing on behalf of Gas Distribution, we were charged appropriately. So we weren't charged for any services not provided, so those provided to other entities. 270 MR. JANIGAN: I'm afraid I -- that answer has altered my original understanding of what centres of excellence were. I thought they were located within the individual -- they could be located elsewhere other than the corporate centre? 271 MS. BROOKS: That's correct. 272 MR. JANIGAN: And risk management was located in Enbridge Consumers Gas? 273 MS. BROOKS: And Calgary. 274 MR. JANIGAN: And Calgary. And those were the locations of the centres of excellence? 275 MR. MEES: The people were located in Toronto and Calgary. 276 As Ms. Brooks had indicated earlier, the salaries were captured within an Enbridge Inc. department. They were being charged to Enbridge Inc., initially, and then we would have been charged the appropriate level of costs into Enbridge Gas Distribution. 277 MR. JANIGAN: So let's say in your example of risk management, Enbridge Inc. was charging you more for risk management than you needed to pay when it was transferred back to Enbridge Gas Distribution. You indicated that under the corporate centre it was providing services for both Enbridge Gas Distribution and a variety of other Enbridge companies, and the amount that was being allocated to Enbridge Gas Distribution was higher than the amount that it paid when it was transferred back to Enbridge Gas Distribution. 278 So to some extent, you guys were overpaying them, right? 279 MR. MEES: No. 280 MR. JANIGAN: Why not? 281 MR. MEES: We weren't being charged for any services other than those being provided to Enbridge Gas Distribution. 282 So to go back to my risk management example, there were individuals doing work for Enbridge Services Inc. Those individuals were then being charged to Enbridge Services Inc., the appropriate levels of costs to that group. 283 MR. JANIGAN: So that won't be a reason for the amounts to go down in 2003? 284 MR. MEES: But in the '99 budget, back before, when we were a bundled utility including Enbridge Services Inc. -- the services that Enbridge Services Inc. did, it was a bigger group. 285 MR. JANIGAN: Yes, so -- 286 MR. MEES: So they left, went to Enbridge Inc., and have come back as a smaller group. So that's where I get my -- saying that the costs have gone down. 287 MR. JANIGAN: What I'm going to get at is what the costs were in 2002 for the services rendered by the centres of excellence and what the costs of these services were in 2003 run by Enbridge Consumers Gas; right. That's what I'm going to get in that undertaking? 288 MR. MEES: Yes, so it's just 2002 and 2003. 289 MR. JANIGAN: 2003, yes. 290 MR. LADANYI: You mean Enbridge Gas Distribution, do you? 291 MR. JANIGAN: That's correct. 292 Now, I wonder if you could turn up page 13 of your own evidence, Exhibit A.6, tab 19, S-1. It's reproduced in tab 7 of the materials. 293 MR. MEES: Yes, we have that. 294 MR. JANIGAN: And this table on page 13, these are the actual costs that were billed to EGD? 295 MS. BROOKS: Yes. 296 MR. JANIGAN: That's not corporate allocation that's shown on page 11? 297 MS. BROOKS: There's a portion thereof. 298 MR. COWAN: And the same total appears -- from page 13 is carried back to the second-last line on page 11. 299 MR. JANIGAN: And you may have given this to me yesterday, but perhaps you could do it again. What was the reason for this difference? 300 MS. BROOKS: For the years 1999 through to 2001, we billed amounts consistent with the amounts that were included in the TPBR case for 1999, and in 2002, a decision was made to bill Enbridge Gas Distribution for the majority of the costs incurred on its behalf. 301 MR. JANIGAN: Now, I'd like to go to the table once again on page 13 which is also at tab 7 of our materials, and I'm not going to go through this line by line, but I want to look at some year-by-year changes. 302 Why were allocations from 8 corporate partners of 3.2 million added in 2000? Is this part of the One Vision, One Company strategy? 303 MS. BROOKS: That reflects the creation of the centres of excellence in 2000. So it's really the transfer of the Toronto employees that were previously in the EGD cost base to the corporate cost base. 304 MR. JANIGAN: And I note that there was a $2.3 million increase in insurance premiums in 2001. What was the reason for that? 305 MS. BROOKS: A general hardening of the insurance market in that year due to higher energy losses experienced by the underwriters. 306 MR. JANIGAN: So was there any offset at Enbridge Gas Distribution? 307 MS. BROOKS: Pardon me? 308 MR. JANIGAN: Was there any offset offsetting cost reduction at Enbridge Gas Distribution? 309 MR. MEES: Sorry, Mr. Janigan, I just want to clarify something, just to make sure. 310 In 2001, the risk management centre of excellence was started up, and that's why you see the insurance premiums. The risk management and the legal fees associated with risk management claims and damages start to be billed during 2001. 311 MR. JANIGAN: And the reason for that quantum would reflect two things. One, there were -- there was a removal of that function from Enbridge Gas Distribution, and secondly, for the reason that Ms. Brooks said? 312 MR. MEES: Yes, so there would be two reasons. 313 MR. JANIGAN: So there would be an offset for some but not all of that amount in Enbridge Gas Distribution costs? 314 MR. MEES: Right. Because it was -- rather than -- where it was billed within Enbridge Gas Distribution before, it's now within Enbridge Inc. and then charged to us, to Gas Distribution. 315 Yes, you're correct. 316 MR. JANIGAN: And the addition of 16 new departments in 2002, that was once again driven by the strategy, the One Vision, One Company strategy? 317 MR. COWAN: I wonder if we can clarify your reference here. Before we -- we need to answer the question directly with regard to the vision of the company and whether it reflects the strategy. 318 But first of all, these are not departments at the bottom there. This grouping is, in fact, the general expense categories for the most part. So one needs to be careful as to understanding whether we're talking about creating new departments or just an allocation of costs. 319 If I could go to the bigger question that you're asking about whether this reflects the general strategy, over this time period from 1999 through to 2002, the company was moving in the direction of One Company, One Vision. So as that has been evolved, yes indeed, that is a direction that is underlying all of these years. 320 MR. JANIGAN: And let me take the first part of your response and ask you to delineate which of the new additions in 2002 are the centres of excellence, corporate departments, or general expenses. Or is that information I could obtain elsewhere? 321 MS. BROOKS: That information can be obtained by comparing page 11 of the evidence to page 13. 322 MR. JANIGAN: That's fine, then. 323 What I'm getting at is the addition of these 16 items of expense -- of the expenditure were -- was part of the overall company strategy, which I believe you testified to earlier concerning the sharing of resources? 324 MS. BROOKS: That was one element of the reason for the increase. The other reason was that the company believed that we should be charging the appropriate level or the level of allocations to Enbridge Gas Distribution to reflect the services being provided to them. 325 So up until 2001, the premise for the billing was consistency with the amounts included in the 1999 costs. In 2002, we expanded the cost that we charged to EGD, as I said earlier, to reflect the services that were being provided to them. Because by 2002, the shared services environment was substantially complete. 326 MR. JANIGAN: So what you're saying was that for -- previous to 2002, Enbridge Gas Distribution was underpaying for those services? 327 MS. BROOKS: Yes. 328 MR. JANIGAN: Was there some kind of study that was done to substantiate that? 329 MS. BROOKS: It falls out from the work done on the allocation methodology and just by virtue of the fact that the allocation, even under the old methodology, to EGD produced a cost base higher than what was being billed to them. 330 MR. JANIGAN: Well, I can understand that when you went to the new methodology in 2003 that it's going to reflect increases in costs, but I'm curious as to what changes were made in the methodology between 2001 and 2002 that resulted in these new charges being allocated to Enbridge Gas Distribution? 331 MS. BROOKS: There was no change in methodology. The allocated amounts were the same. It was the billed amount that changed. 332 MR. JANIGAN: So previously, the allocations had come out that Enbridge Gas Distribution was underpaying, but they weren't being billed for it? 333 MS. BROOKS: They were paying what they were billed for, which was less than the allocated amount. 334 MR. JANIGAN: And Enbridge Inc. was aware of the fact that it was underbilling? 335 MS. BROOKS: Yes, we were. 336 MR. JANIGAN: Enbridge Gas Distribution? 337 MS. BROOKS: Yes. 338 MR. JANIGAN: And it was then decided that in 2001, that next year, that you would be billed for the entire amount? 339 MS. BROOKS: It wasn't the entire amount, most of the amount. 340 And part of the reason for doing that, if I could just clarify why that decision was made, is that to measure the performance of your business units, you should have fully allocated costs charged to those business units so you can measure their performance rateably across the enterprise. As long as a portion of the corporate costs were not being charged to EGD, those measures across the enterprise, such as return on equity or whichever measures you choose to use, were not comparable. 341 MR. JANIGAN: Now, in 2002, why was nearly 600,000 added for the offices of the CEO and the CIO? 342 MR. COWAN: Excuse me, Mr. Janigan. Where are we finding that information? 343 MR. JANIGAN: If you look down your list about two-thirds of the way down, you have the CEO. 344 MR. COWAN: On page 13? 345 MR. JANIGAN: That's correct. 346 MR. COWAN: Thank you. 347 MR. JANIGAN: And the CIO, and the total of those is roughly around 600,000. 348 MR. COWAN: Okay, we -- 349 MR. JANIGAN: 580,000. 350 MS. BROOKS: Could you repeat your question, please? 351 MR. JANIGAN: Why were these costs added in 2002 for these two offices? 352 MS. BROOKS: For the reason I just described. The decision was made to bill virtually the entire allocated amount to EGD for the year 2002. Those amounts had not been billed in the past. 353 MR. JANIGAN: Well, doesn't EGD have a CEO and an IT department director? 354 MS. BROOKS: In -- to manage the day-to-day operations of EGD, yes. These amounts relate to strategy, policy, standards. 355 MR. JANIGAN: And we were getting a bargain from Enbridge Inc. up until 2002, and after that they decided to bill for their services? 356 MS. BROOKS: I would not describe it as a bargain. 357 MR. JANIGAN: I wouldn't either. 358 MR. COWAN: The extent of the difference is seen, as you are probably aware, at the bottom of page 11 with the unbilled amount. 359 MR. JANIGAN: Now, on the aviation line, I note that we see aviation increasing from 103,000 to 215,000 in 2002. What happened there? Why did that double? 360 MS. BROOKS: For much the same reason as I've described before. The 103,000 that was billed for the years '99 through 2001 was the amount that was, I would say, deemed to be included in the TPBR base, for lack of a better word. In 2002, the billed amount is the actual amount of the allocation to EGD. 361 MR. JANIGAN: Now, that actual amount in 2002, was that based on time docketing? 362 MS. BROOKS: Time docketing? 363 MR. JANIGAN: Yes. 364 MS. BROOKS: No. 365 MR. JANIGAN: Well, how was it based? How was it based in 1999, 2000, and 2001? 366 MS. BROOKS: It was part of the management fee charge. 367 MR. JANIGAN: But wasn't it allocated based on flight time, in accordance with EBRO-497? 368 MS. BROOKS: In 1999, yes, that would have been the basis, and then that amount was discontinued for the subsequent two years. 369 MR. JANIGAN: So in 2002 you abandoned time docketing on that particular category? 370 MR. COWAN: As we discussed, the formal change was made for the 2003 determination. That's when we went through with the kind of rigour that we were describing and reviewed each and every area to assure that under this methodology we had a complete framework with the appropriate drivers. 371 MR. JANIGAN: I'm aware of that, but there seems to be some significant changes between 2001 and 2002. And I guess I'm wondering, is there some methodology or study that drove these changes? 372 MS. BROOKS: The amounts were held flat for the years 1999 through 2001, so they do not reflect any increases in cost, in actual cost or any changes in the management fee. 373 In 2002, the amounts reflected for those first six lines of data with the exception of "treasury," reflect the actual costs that would have been allocated in 2002. 374 MR. JANIGAN: But Ms. Brooks, I think we've just established that for at least one category, aviation, the allocator was changed as well. Is it -- 375 MS. BROOKS: No, it was not. 376 MR. JANIGAN: Well, let me just attempt to clarify what you've told me. 377 Back in 1999, the aviation figure was established on the basis of time docketing in the passengers logs as per EBRO-497. I think that's what you've told me; right? 378 MS. BROOKS: Yes. 379 MR. JANIGAN: Remarkably -- if you put another allocation, it remarkably landed on the same number for the next two years in a row? 380 MS. BROOKS: We did not remarkably land on that number. They were just held flat. 381 MR. JANIGAN: That's based on passenger logs -- 382 MS. BROOKS: No, not for -- 383 MR. JANIGAN: The initial one for 1999 was based on passenger logs and time docketing, I think that's what you told me. 384 MS. BROOKS: Yes, for 1999. 385 MR. JANIGAN: You didn't change that. You didn't use time docketing in your passenger logs for 2000 and 2001; correct? 386 MS. BROOKS: To determine the allocation, that is correct. 387 MR. JANIGAN: That's correct. And you went to a different allocator in 2002? 388 MS. BROOKS: No. 389 MR. JANIGAN: You said you did not use time docketing for 2002? 390 MS. BROOKS: Well, no, time docketing -- we used flight logs, not time docketing. 391 MR. JANIGAN: Okay. So you used flight time, flight logs to get this $215,000 figure; is that correct? Are you sure of that? 392 MS. BROOKS: Yes, based on what -- you will recall we've said earlier that the allocation for the years '99 through 2002 were based on a management fee approach, so the flight logs and the other allocation factors in '99 were extrapolated each year to the cost through the end of 2002. So the allocation factors did not change in that period of time. 393 MR. JANIGAN: So the same cost allocators that were used in EBRO-497 were used to determine the management fee in 2002; is that what you're saying? 394 MS. BROOKS: Yes. 395 MR. JANIGAN: And the reason for the difference between 2001 and 2002, for example, in these 16 categories is that the -- the -- these services which previously had been allocated costs were now to be billed? 396 MR. COWAN: I think you're right, except one of it backwards. I think the costs were previously -- that were allocated in 1999 would continue to use the same allocation methodology, and the billed amount is not adjusted in certain areas. And you can see the difference when you compare the values on page 11 for aviation with the values on page 13 for aviation. 397 Where you'll see on page 13 that they are constant for the first three years at $103,143, and yet on page 11 you can see the actual amounts that would be allocated if the allocation was fully recovered has increased over that same time period from 130,000 in 1999 to 150 in 2000, 154 in 2001, and 205 in 2002. 398 MR. JANIGAN: And the 2003 allocation, I believe -- what was the amount for aviation in 2003? 399 MR. COWAN: For 2003 it's $598,987 as per page 11. 400 MR. JANIGAN: And that's the cost allocation to Enbridge Gas Distribution? 401 MR. COWAN: That's correct. 402 MR. JANIGAN: And that's based on your new allocator? 403 MR. COWAN: That's correct. 404 MR. JANIGAN: Is there any document or a report that contains these directions that amounts that were previously allocated to Enbridge Gas Distribution will now be billed in 2002? 405 MR. COWAN: I think it's fair to say that all the way through the piece, they've always been billed. The question is whether or not the full amount that could be allocated was actually recovered and billed. We've always had this concern. If the question is if there's a document that says that's what we're going to do, that is the previous methodology. 406 MR. JANIGAN: Well, no, but in terms of if somebody had to make a decision whether or not they would be recoverable. Who made that decision? 407 MS. BROOKS: Whether they would be billed? 408 MR. JANIGAN: No. I think Mr. Cowan said they would be billed, but whether they would be recovered or not was another decision. Who made that decision? 409 MS. BROOKS: I would need clarification around -- in what context you're using the word "recovered." Recovered by Enbridge Inc.? 410 MR. JANIGAN: I'm taking Mr. Cowan's evidence and giving it to you. I can't clarify Mr. Cowan's evidence. He's going to have to do that. 411 MR. COWAN: Let me try to do that. In that I've said that the billed amount differed from the -- or the recovered amount differs from the amount that would be allocated I believe your question is was there a management decision or some decision about how much was actually going to be recovered and whether that was a year-by-year decision is, perhaps, the question. 412 MR. JANIGAN: Yes. 413 And the answer is? 414 MS. BROOKS: There was a management decision to increase the amount of the billings to EGD, yes. 415 MR. JANIGAN: Who made that decision? 416 MS. BROOKS: I don't recall. I would have been part of that decision. 417 MR. JANIGAN: Well, somebody, somewhere must have told you to charge this to Enbridge Gas Distribution. I mean it can't be that difficult to find who told you. 418 MS. BROOKS: As I said, I would have been a part of that decision. I don't recall being told. 419 MR. JANIGAN: Can you undertake to find me any information concerning the decision -- let's just take the one year -- from 2000 to 2002 to allocate or to recover additional amounts from Enbridge Gas Distribution in accordance with the allocation? 420 MS. BROOKS: The only documentation that would exist would be the bills, the invoices themselves. There would be no written documentation of that decision. 421 MR. JANIGAN: As I understand Mr. Cowan, at some point one year you get the bill, and you say yeah you don't have to pay that. That's just our bill, you're not going to recover that. And then the next year after that -- 422 MR. COWAN: I don't believe that's what I said or -- what I was attempting to say is that the allocation, if one were to apply the allocation, you would find an amount that's greater, as shown on page 11. 423 MR. JANIGAN: Yes. 424 MR. COWAN: As the amount that would be attributed to Enbridge Gas Distribution in each of those years. However, the amounts actually billed has been short recovered, hasn't been able to bill through the billing process for that full amount. 425 MR. JANIGAN: But there must exist something, somewhere, a decision or report, a study, a direction, that says even though under this allocation Enbridge Gas Distribution should be -- should collect this amount, we're not going to collect it. 426 MR. MEES: Yes, let me see if I can -- there won't be a study or a documentation, but if you look at page 13, the first five amounts total up for 1999, 2000, and 2001, they total up to $1 million, so that was the $1 million that has been approved to be included in rates, and that's the amount of what was billed. 427 As Mr. Ladanyi talked and discussed yesterday, with the new undertaking, once we decided -- with those new undertakings to bill more than just the million dollars but bill the full amount of allocated costs. 428 MR. JANIGAN: But you didn't, though. What happened was that in 2002, as I went through earlier, in 2002, this is a recovery. These expense items are recoveries for amounts that Enbridge Gas Distribution were underpaying in previous years. 429 So at some point in time, somebody must have said -- made a decision (a), you guys aren't going to pay all of your allocation and (b), okay, time is up, now you pay all of those allocations. I mean somewhere in -- there must have been a decision of some kind to that effect. 430 MS. BROOKS: There was. That decision was made, yes. 431 MR. JANIGAN: Okay, now let's take the first decision, the decision that Enbridge Gas Distribution was not going to pay. Who made that decision? 432 MS. BROOKS: For the first three years, '99 through 2001, the billings were in accordance with what has been included in the TPBR base. 433 In 2002, for performance measurement purposes, a decision was made to allocate bill the majority of the cost to EGD. 434 MR. JANIGAN: Okay, let me just go back and see if I understand that. 435 There was an earlier decision in 2000 and 2001 to include a particular amount in the TPBR base for Enbridge Gas Distribution. Am I correct on that? 436 MS. BROOKS: Yes. 437 MR. JANIGAN: Okay. How was that decision made, and who made it? 438 MR. LADANYI: Maybe I can help. First with the TPBR base, you can see the Board's decision in EBRO-497 limited the total amount that could be put in the base to $1.93 million, and that's in the first column on page 13, and that is the first five items -- are there five -- yes. They add up to a million dollars, and the additional item is $930,000 for treasury, which is mentioned in the Board's decision. 439 As I explained, in December of 1998 a decision came out from the Board that there should be new undertakings and that Enbridge Gas Distribution did not need prior Board permission to pay higher amounts than that to its parent for different services. And that's reflected in the change that's shown in the column for 2000 and 2001, and 2002, TPBR rates remained in effect up until the end of 2002. So the column -- numbers that are in the column 1, which are the first column for 1999, were embedded in rates that were charged during that period. 440 MR. JANIGAN: Okay. So the 11.3, is that what you're saying, was embedded in rates? 441 MR. LADANYI: No, it was the 1.93 million that was embedded in rates. 442 MR. JANIGAN: I wonder if you could go to our schedule 2 which is right at tab 1 of our materials. That might be easier for me to follow. If you look at the first table. 443 What you're talking about in EBRO-497 is 1.9 million that was approved by the Board, and the total approval for recovery in the base was the 1.9 in the TPBR base. 444 MR. LADANYI: That's right. But to really better understand what we're talking about you also have to refer to Board staff interrogatory number 151. 445 MR. JANIGAN: That's where it came from, I think. 446 MR. LADANYI: Yes. 447 And if you have that page 1 turned on. Board staff 151, you'll notice that the $1 million I was speaking of is on the first line for a management fee, and then the 0.9 million was the treasury fee, and these are the items I was discussing are embedded in rates. 448 The other charges below that were in the O&M envelope for TPBR, and they were Enbridge Consumers Gas, at that time, departments that were included in the O&M base. And in subsequent years, those departments became centres of excellence. 449 MR. JANIGAN: Can I stop you at that level? 450 At that time, you decided to roll in more expenses. I understand -- I understand the rationale behind it. What I want to know is how was that roll-in accomplished and pursuant to what methodology and who made that determination? Because I'm trying to track it from -- track it along here, why -- why we're ending up in a particular spot. 451 MR. COWAN: The reason on schedule 151 that those line items are included is to allow us to compare the costs between 1999 on a comparable basis with what's in 2002. And in fact, as Mr. Ladanyi has pointed out, the first two items were named specifically in the decision, and the other items were embedded within the O&M base. 452 MR. LADANYI: I think we're talking at cross purposes here. 453 MR. COWAN: Okay, maybe. 454 MR. LADANYI: Maybe I can explain it further. If you look back to page 13, Exhibit A.6, tab 19, schedule 1, which is our evidence, and you look at the column for 2000. You'll see what's happening there is that the centres of excellence are being created. 455 So some of those departments -- for example, the one we were discussing as risk management, we also discussed taxation. That would be a good example. The taxation centre of excellence was created, and that's why you see a charge for 2000 under billed amounts, but in '99, that was prior to the creation of the taxation centre of excellence, and that was included in the O&M base. 456 MR. JANIGAN: Reminds me of the saying when you're up to your hips in alligators, it's frequently hard to remember your original purpose was to drain the swamp. 457 I want to go back to what my initial point was concerning the allocation. The 2002 allocation and the expense -- the additional expense items, it was indicated that Enbridge Gas Distribution had been underpaying through the years, and there was a decision only to bill them for a certain amount. 458 And we went back to the different years of 2000, 2001, and it was indicated that these amounts were based upon the amounts that were put in the TPBR plan. And my question was: Who decided to put these amounts in the TPBR plan and was that done pursuant to the allocation methodology in 497? 459 MR. LADANYI: Actually, I don't understand your question. They were originally -- the Board decided what is inside the TPBR base and the Board made that decision in EBRO-497. There were some adjustments in RP-1999-001, but there was no corporate decision what was in the base. The decision of what was in the base was based on the Board's decision. 460 MR. JANIGAN: But the last Board decision put 1.9 million in the base. You guys added to that base. 461 MR. LADANYI: No, we didn't. That's what we're trying to explain to you. The base remained unchanged, for rate setting purposes. However, some of the departments which were originally within Enbridge Consumers Gas, were subsequently created, became centres of excellence. So they were no longer inside the corporate identity. Their charges were being charged in, but they were still the same services which had originally been in the base, such as taxation. 462 So for example, tax department, all of their employees and their salaries were the O&M base. Then they became a centre of excellence, and then their charges in 2000, 2001, and 2002 were being charged in to the extent those employees were doing work for Enbridge Gas Distribution. 463 MR. JANIGAN: Well, Ms. Brooks, I believe, told me that, in fact, the amounts in 2000 and 2001 were based upon the TPBR base. That's not the case? 464 MS. BROOKS: Based on the amounts included. Mr. Ladanyi expressed it better than I did. 465 MR. JANIGAN: But the only amounts included in the TPBR base is the 1.9 million, and after that we get the various charges for the centres of excellence? 466 MS. BROOKS: Yes, and I think what I said, was that the amounts that were charged -- were billed were consistent with the amounts. We kept the same principals through the years '99, through 2001. So to the extent that functions transferred out of EGD into the corporate office, those costs were charged back to EGD to be consistent with what was included in the 1999 costs. 467 MR. JANIGAN: Now, did you get -- was EGD billed for the full amount that it was allocated for those years, 1999 to 2001? 468 MS. BROOKS: No, I don't believe they were. 469 MR. LADANYI: Again, I think the difference is shown on the bottom of page 11, as you pointed out. That's the last line on page 11, is the difference between what Enbridge Gas Distribution was billed and what costs were allocated to it. 470 MR. JANIGAN: Okay. Now, who made the decision not -- that Enbridge Gas Distribution was not going to be billed for the full amount, and who made the decision in 2002 that they would be billed for the full amount? 471 MR. BETTS: Mr. Janigan, while the witnesses are considering that, it's 11 o'clock. Would you think about an appropriate time to take a break. 472 MR. JANIGAN: That's fine, Mr. Chairman. 473 MR. BETTS: We will wait for the witness's reply and we will break then. 474 MR. LADANYI: Mr. Janigan, we can't come up with a single decision. These numbers were developed as part of the budget process and we are struggling with pointing out -- I think you were looking for a single decision that we can identify, but we cannot. This is part of an annual budget process that occurred and we cannot identify a single decision that we can give you. 475 MR. JANIGAN: So the decisions came about as -- sorry, Mr. Chairman. 476 MR. BETTS: Please continue until you're ready to break. 477 MR. JANIGAN: So these decisions came about as a result of the annual budgeting process at Enbridge Gas Distribution? 478 MR. LADANYI: Yes. 479 MR. JANIGAN: And in the annual budgeting process this year, you determined that you're going to include these additional items? 480 MR. MEES: For 2002, yes. 481 MR. LADANYI: Because there was a change in cost-allocation methodology. It was a part of the overall change of how corporate costs were going to be allocated. 482 MR. JANIGAN: No, 2002, Mr. Ladanyi. 483 MR. LADANYI: 2002? 484 MR. JANIGAN: Yes. 485 MR. LADANYI: Okay. Well, I misspoke. 486 MR. JANIGAN: I won't go down that road again. 487 MR. JANIGAN: Thank you, Mr. Chairman. This would be an appropriate time to break. 488 MR. BETTS: Okay, we will break at this time, and we will reconvene at, say, 11:25. 489 --- Recess taken at 11:01 a.m. 490 --- On resuming at 11:26 a.m. 491 MR. BETTS: Thank you, everybody. Please be seated. 492 And Mr. Janigan, please continue with your questioning. 493 MR. JANIGAN: Thank you, Mr. Chair. 494 Now, I wondered if you could undertake to provide the details of the corporate charges that have been allocated to and approved or applied for as recoverable in rates for all regulated entities owned by EI over the period 1999 to 2003. 495 MR. LADANYI: We already provided it in Board staff 149 for 2003, so you mean for other years? Is that what you're suggesting? 496 MR. JANIGAN: Yes. 497 MR. COWAN: But also in VECC interrogatory 100, which I believe is behind your tab number 10 -- tab 8, excuse me, we've shown the amount by segment of the business, broken out the regulated versus the non-regulated, we've shown Enbridge Gas as a component of the regulated amount. So when you're asking for an undertaking, I'm not clear what additional things you would like. 498 MR. JANIGAN: What you've shown there is the allocation. What we would like is what costs have been approved or applied for as a recovery in rates by other regulated entities. I assume that your applications follow your allocations, but what has been approved for the years -- for all regulated entities owned by EI over the period 1999 to 2003? 499 MS. BROOKS: For most of the regulated entities that are included in the amounts under "regulated segments," the amounts are approved on an envelope basis for a period of years, so I don't believe we can provide you with specific approvals by company, by year. 500 MR. JANIGAN: Well, just give me what you've got, I guess, if you can -- if that is not segregated out. 501 MR. COWAN: This is it. 502 MS. BROOKS: This is why we provided it in this particular format, because I believe your interrogatory requested by company, and going back five years with the discussions with the other business units, we believed this was the best information we could provide you in response. 503 MR. JANIGAN: And what has been allocated has been approved? 504 MS. BROOKS: In the context of a cost envelope that runs for a period of years. 505 MR. LADANYI: Mr. Janigan, if you'd look at VECC interrogatory 100, page 2, the paragraph there that explains the status of approvals. 506 MR. JANIGAN: Now, on transportation north, what you're saying is that that requires a specific application for recovery? 507 MS. BROOKS: For the change -- for the change in the methodology from 2003 onwards, so that will be negotiated with CAPP as part of the renegotiation of the incentive tolling agreement. 508 MR. JANIGAN: What about the charges from 1999 to 2002? 509 MS. BROOKS: They were included in the cost envelope that was negotiated with CAPP -- actually there were two separate negotiations, one incentive tolling agreement ended in 2000, and the other is currently in force. 510 MR. JANIGAN: There's no breakdown that -- for transportation north be provided. 511 In transportation south, although it's regulated on a cost-of-service basis, there's not been a rate hearing since 1991 -- sorry, since 2001? 512 MS. BROOKS: The majority of those regulated entities were acquired as a result of the acquisition of Midcoast Energy Resources in May of 2001 and they were primarily interstate or intrastate gas pipelines which have not been to hearing since we acquired them. 513 MR. JANIGAN: This new methodology hadn't been proven anywhere to this date? 514 MS. BROOKS: This methodology, specifically, no, has not been approved by another regulator prior. 515 MR. JANIGAN: I wonder if it's possible to find out how many individuals are employed by all of the companies in the EI empire. 516 MS. BROOKS: It's approximately 4,400. 517 MR. JANIGAN: And how many are in regulated and how many are unregulated? 518 MS. BROOKS: In total, in the Enbridge group of companies? 519 MR. JANIGAN: Yes. 520 MS. BROOKS: I don't have that number readily at hand. 521 MR. JANIGAN: And in Enbridge Gas Distribution? 522 MS. BROOKS: Approximately 1,700. 523 MR. JANIGAN: And -- 524 MS. BROOKS: Excuse me, 1,900. 525 MR. JANIGAN: And there's 160 at the corporate centre? 526 MS. BROOKS: About 155. 527 MR. JANIGAN: That 155 are included in the 4,400 figure? 528 MS. BROOKS: Yes, they are. 529 MR. JANIGAN: And the 1,900 in Enbridge Gas Distribution, those are all in -- all those employees are engaged in regulated activities? 530 MS. BROOKS: Yes. 531 MR. JANIGAN: I wonder if I could look at the Ernst & Young study. 532 MR. MORAN: Just for the record, Mr. Chair, I wonder if Mr. Janigan could state the reference. 533 MR. JANIGAN: Certainly. Exhibit I, tab 13, schedule 55, the attachment to that interrogatory. 534 First thing I'd like to know is when did EGD first retain Ernst & Young? 535 MR. COWAN: We entered into discussions with Ernst & Young about this engagement in early November of 2002. 536 MR. JANIGAN: Is it possible that you could provide us with a copy of the RFP, the terms of reference, and the letter of retention? 537 MR. COWAN: We have a letter of engagement with regard to the retention of Ernst & Young. Unless there is an objection, I have no concern about providing that. 538 MR. JANIGAN: No problem. 539 MR. COWAN: Okay. 540 MR. JANIGAN: Would the letter of retention or engagement set out the terms of reference? 541 MR. COWAN: Yes, it does. 542 MR. JANIGAN: Would you undertake to provide that? 543 MR. MORAN: Mr. Chair, Undertaking J 9.6, an undertaking to produce the letter of engagement with Ernst & Young. 544 MR. BETTS: Thank you. 545 UNDERTAKING NO. J.9.6: UNDERTAKING TO PRODUCE THE LETTER OF ENGAGEMENT WITH ERNST & YOUNG 546 MR. JANIGAN: Is it possible to obtain a copy of the RFP as well? 547 MR. COWAN: The selection of Ernst & Young did not use an RFP process. 548 MR. JANIGAN: Can you explain to me how it came about? 549 MR. COWAN: The selection of Ernst & Young was based on their acknowledged expertise in this area and their prior experience with the subject, in particular given that they had some knowledge of the matter relating to the Westcoast case. And on that basis, we believed that they were suitably expert to assist us on this matter. 550 MR. JANIGAN: Has Ernst & Young done any related work for Enbridge Inc. or Enbridge Inc. subsidiaries before their retainer? 551 MS. BROOKS: With respect to cost allocations? 552 MR. JANIGAN: Well, let's take it first with respect to cost allocations? 553 MS. BROOKS: No, they have not. 554 MR. JANIGAN: Have they done any related work -- have they done any work for EI and EI subsidiaries on transfer pricing? 555 MS. BROOKS: Not to my knowledge. 556 MR. TURNER: Not to my knowledge. 557 MR. JANIGAN: And what was the cost of the study? 558 MR. TURNER: I believe it was $40,000. 559 Do you remember? 560 MR. JANIGAN: My questions from herein will likely be directed to Mr. Turner. If there is a need for assistance, perhaps I can call upon the other members of the panel to assist him, but I would particularly like Mr. Turner to be responsive to the questions that I ask. 561 Now, on page 2, you list nine departments that you reviewed. 562 MR. TURNER: Yes. 563 MR. JANIGAN: Can you tell me why the office of the CEO was not included in that review? 564 MR. TURNER: In accordance with the terms of our engagement, we were to look at all cost allocations in excess of $500,000, and since the CEO's departmental allocation was less than that amount, it was not within the scope of our review. 565 MR. JANIGAN: How was your departmental review accomplished? 566 MR. TURNER: As I outlined yesterday in direct, we carried out a series of interviews with personnel of EI in Calgary and as well as personnel of EGD in Ontario to identify the services that were being provided, to discuss the value proposition from both the provider and recipient's perspective, and to confirm that there was no duplication of services. 567 MR. JANIGAN: And would this approach have been different if the parties had not been related companies? 568 MR. TURNER: I believe that if the parties had not been related companies the issues would not have arisen. They would have got -- sorry, they would have gone through normal commercial negotiations or whatever. 569 MR. JANIGAN: Now, how would you take into account the fact that Enbridge Gas Distribution has to obtain approval for its allocations? How would you take into account -- I guess in effect, that regulatory risk that a board may not allow EGD the recovery of all its costs? 570 MR. TURNER: From our perspective, we would not really take that into account. 571 MR. JANIGAN: So your allocations do not contain any contingency or contingency risks of the amount recovered? 572 MR. TURNER: No, they do not. 573 MR. JANIGAN: Now, on page 3 you indicated that you were provided a certain amount of information by EGD and EI. Can you provide us with a detailed list of those documents that you were provided by EGD and EI? 574 MR. TURNER: The information would have consisted of various types of information, not all of it would have been written. A lot of it was gathered through personal interviews or discussions. 575 I can provide you, if required, a summary of the types of information that we gathered. 576 MR. JANIGAN: I'm not interested in -- well, I may be interested in it, but for the purposes of this undertaking I'm just looking at a detailed list of the documents that were provided to you by Enbridge Gas Distribution or EI which you used to perform your cost methodology report. Is that possible? 577 MR. TURNER: It would be possible, yes. 578 MR. JANIGAN: And in the event that there -- there are documents that are not in evidence, is it possible that you could produce those, produce copies? 579 MR. TURNER: Subject to any confidentiality, strategic issues. 580 MR. JANIGAN: Understood. 581 MR. MORAN: Mr. Chair, it would be Undertaking J.9.7, undertaking to produce the list of documents reviewed for the purpose of preparing the Ernst & Young report and to produce copies of documents that are not in evidence, subject to confidentiality issues. 582 MR. BETTS: Thank you. 583 UNDERTAKING NO. J.9.7: UNDERTAKING TO PRODUCE THE LIST OF DOCUMENTS REVIEWED FOR THE PURPOSE OF PREPARING THE ERNST & YOUNG REPORT AND TO PRODUCE COPIES OF DOCUMENTS THAT ARE NOT IN EVIDENCE, SUBJECT TO CONFIDENTIALITY ISSUES 584 MR. JANIGAN: Now, at page 11 of your report, you present some data from EGD'S financial information form. 585 MR. TURNER: Yes. 586 MR. JANIGAN: And some other scale factors for EGD, for example, employees and unionized head count. 587 MR. TURNER: I'm sorry, I didn't hear the whole question. 588 MR. JANIGAN: On page 11, you present some data from EGD's financial information form. 589 MR. TURNER: Yes. 590 MR. JANIGAN: And some other scale factors for EGD, for example, employees and unionized head count. 591 MR. TURNER: Yes. 592 MR. JANIGAN: Now, are these the same scale factors that relate to the defined selected cost drivers for the allocation methodology? 593 MR. TURNER: If I could refer that question to Ms. Brooks. 594 MR. JANIGAN: Well, what's your -- you were the -- I'm looking at your understanding of what's been done here, or what do you understand that to be? 595 MR. TURNER: This is a high-level summary of material extracted from the annual report. Numbers actually underlying the computations may have varied because the annual report is at a point in time that is not the same point in time in which the cost allocations were developed or the budgets were developed. 596 MR. JANIGAN: Specifically, what's the length between these and the cost drivers? 597 MR. TURNER: The intention of these numbers is to put it in perspective -- the company profile in perspective. 598 I would expect that the actual numbers used in the cost allocation study are very close to these numbers. 599 MR. JANIGAN: But you don't know? 600 MR. TURNER: I do not know without going back and looking at the file. 601 MR. JANIGAN: Now Mr. Turner, are you familiar with the regulatory concept of utility rate base? 602 MR. TURNER: I am aware of it, yes. I am not intimately familiar with it, no. 603 MR. JANIGAN: And you were present for the discussion this morning. Were you aware of the difference between rate base and capital employed when you did your report? 604 MR. TURNER: I understand that there are differences that will arise because the rate base is determined in accordance with regulatory procedures, whereas financial accounting procedures are followed for other determinations, and that they do differ. 605 MR. JANIGAN: And for the regulated segment of Enbridge Inc.'s subsidiaries, why wouldn't rate base be a reasonable cost driver or allocator for some of these components? 606 MR. TURNER: I believe that in earlier queries this morning it was described that the operations of the Enbridge Group as a whole include regulated and non-regulated. In that case, it would be appropriate to find common drivers or measurement tools, and it's my understanding that in this case, the common tool, other than -- we talk about employees, et cetera -- would be the capital employed. 607 MR. JANIGAN: If you decided to use that tool, however, you would likely want to make an adjustment to reflect the fact that regulated rate base differs from capital employed after you've done that allocation, would you not? 608 MR. TURNER: The answer is one that's in many respects hypothetical, because one would have to first assume that a difference would arise, and that may not be the case. It would depend upon the actual computations. 609 MR. JANIGAN: Now, are you familiar with the methodology employed in the Westcoast -- for the Westcoast corporate centre? 610 MR. TURNER: I have not looked at that finding for quite some time in terms of the detail. I vaguely recall it, yes. 611 MR. JANIGAN: And I think it's reflected in the 493 decision -- 612 MR. TURNER: Yes. 613 MR. JANIGAN: -- you looked at. Is it fair to say that rate base is used in that decision, in that methodology by Westcoast? 614 MR. TURNER: I do not recall. 615 MR. JANIGAN: Now, at page 13 of your evidence, the principles that underlie Enbridge's cost-allocation methodology, and I'd like to know, are these Enbridge Inc.'s criteria or are they suggested by Ernst & Young as best practices? 616 MR. TURNER: These are the criteria that we summarized from the methodology developed by Enbridge without consultation with us, and I believe that is in evidence. 617 MR. JANIGAN: Okay. And how was the methodology conveyed to you? Was it -- 618 MR. TURNER: We were provided with a written copy of the policies that had been adopted by Enbridge, and then we discussed those with various personnel at Enbridge and EGD. 619 MR. JANIGAN: And presumably we will see a list of that document and possibly the document in that undertaking. 620 MR. TURNER: That document, I believe, is in evidence. 621 MR. JANIGAN: That's the same document that's in evidence? 622 MR. COWAN: It is. 623 MR. JANIGAN: Okay. 624 Now, you indicated in your evidence, I believe, that you're familiar with the Affiliate Relations Code that was made as a rule under Section 44 of the OEB Act. 625 MR. TURNER: Yes. 626 MR. JANIGAN: Okay. Now, the ARC, or Affiliate Relations Code, or ARC, specifies that a service level agreement is required for affiliate transactions and that the prior agreement have service level schedules established for each major component. 627 You're aware of that? 628 MR. TURNER: I do recall that, yes. 629 MR. LADANYI: Maybe I can make a correction here. It actually doesn't say a service level agreement, It says "services" agreement under Section 2.2.1. The word "level" is not used. 630 MR. JANIGAN: Thank you for that correction. 631 MR. LADANYI: And I think that's an important distinction, because we're strictly following the requirements of the Affiliate Relationships Code under a sharing of services resources section, which is under Section 2.2, and we do have a services agreement. 632 MR. JANIGAN: I'll attempt to, if I can confine my questions to Mr. Turner, I think I'm getting at his evidence and his understanding of that Code when he made his report. 633 Is the new corporate allocation arrangement, in your view, an affiliate transaction? 634 MR. TURNER: I would expect the answer would be yes. 635 MR. JANIGAN: Is it also an untendered affiliate services arrangement that falls under the ARC? 636 MR. TURNER: I believe so, yes. 637 MR. JANIGAN: Now, you state in your qualifications that you're familiar with similar arrangements and other regulated businesses. 638 MR. TURNER: That is correct. 639 MR. JANIGAN: Could you provide us with a list of those that you considered to make that assertion? 640 MR. TURNER: I do not believe I can, due to client confidentiality. 641 MR. JANIGAN: You cannot indicate in what regulated businesses you have received -- 642 MR. TURNER: I can tell you the type of business. They are regulated energy companies. 643 MR. JANIGAN: You're familiar with -- I guess I'm not -- I don't necessarily mean to get to the purpose of your retainer or when that retainer was but, in particular, what regulated businesses are you familiar with? 644 MR. TURNER: I would prefer not to disclose that. Because of the limited number of companies in this field, it would become obvious which companies they might be. 645 MR. JANIGAN: Okay, I'll leave that. 646 Now is transparency of service agreements and transactions to the regulator and customers important in your experience? 647 MR. TURNER: I believe transparency is important not only to regulators, it's important to other parties as well. 648 MR. JANIGAN: What did you find out about transparency in this case and the need for the OEB to examine the details of the transaction? 649 MR. TURNER: I think that's two questions. The first part, I believe that the methodology described is very transparent and open. With respect to the requirements of the Board, that's not an area of expertise that I have. 650 MR. JANIGAN: I wonder if you could turn up in our book of materials the confirmation notice which is set out, I think, in -- under tab 11 at the attachment. 651 MR. TURNER: Yes, sir. 652 MR. JANIGAN: It's on the line of business services confirmation notice. 653 Now, in your view, does this confirmation notice provide an appropriate level of disclosure of the level of services that EGD is procuring from EI and the related cost to allow for regulatory transparency? 654 MR. TURNER: I would say this was signed after our report was delivered, and in and of itself I can also say that we did supplemental work that is not necessarily reflected in this written document. 655 I'm not in a position to answer the question. 656 MR. JANIGAN: Okay, but you would agree with me that what we have here is likely not sufficient? 657 MR. TURNER: I would make no such agreement or disagreement. 658 It is a document that acknowledges. I have no knowledge or understanding what the underlying oral discussions or contracts may be underlying that agreement. 659 MR. JANIGAN: But surely, sir, as an expert in this area, and you've indicated that you've looked to these -- looked to what the company has provided with a view to determining -- making a determination on transparency, surely you can indicate whether or not you think this confirmation notice provides sufficient transparency of the level of services being provided between EGD and EI. 660 MR. TURNER: I think together with other materials put in evidence it would constitute transparency. 661 MR. JANIGAN: What other materials? 662 MR. TURNER: There are materials such as the schedule behind it. There are materials such as those evidenced in the report. There are materials such as those evidenced in the services agreement. There are materials such as those evidenced in the company's methodology. 663 MR. JANIGAN: And you said you worked on some other matters after you filed your report in relation to transparency? 664 MR. TURNER: In which context? 665 MR. JANIGAN: Well, when I first asked you a question concerning transparency, you said this came up after I filed my report. 666 MR. TURNER: Yes. 667 MR. JANIGAN: We worked with some other matters with the company touching upon transparency; is that correct? 668 MR. TURNER: I'm afraid I still don't understand the question. 669 The only work that we had done was conducted in November and December -- 670 MR. JANIGAN: Yes. 671 MR. TURNER: -- with respect to the preparation of our report and over the period of the last seven days or so in preparation for this hearing. 672 MR. JANIGAN: So I misheard you. I thought you said you did some further work after the date of your report. 673 MR. TURNER: No, I meant to say that this -- this particular confirmation notice was signed after we had completed our work and delivered the report. 674 MR. JANIGAN: This is the first time you've seen it, is it? 675 MR. COWAN: In fairness, Mr. Turner was provided with this as part of the evidence, but his staff was aware that the company was completing the terms and conditions finalizing the agreement between Enbridge Gas Distribution and Enbridge Inc. during the course of the completion of their work. So it's correct, the simple fact is that this document you referred to was not finalized until after the Ernst & Young report was delivered. 676 MR. JANIGAN: Well, -- 677 MR. TURNER: I think that question is better answered when we provide you with a list of the documents upon which we relied. 678 MR. JANIGAN: That's fine. 679 Now, at page 16 of your evidence, you set out the various definitions of costs as well as the drivers for these costs. 680 First of all, am I to understand that fully burdened costs and fully allocated costs are virtually the same terms? 681 MR. TURNER: I would say so, yes. 682 MR. JANIGAN: Now -- 683 MR. TURNER: There is one potential difference in the common application of fully allocated costs, which I would distinguish between fully burdened and fully allocated costs, that outside of the regulated industry, it is common for fully allocated costs not to include any costs of capital or interest charges. 684 My understanding is that in practice, fully burdened costs may include those costs in the regulated environment. 685 MR. JANIGAN: I'm going to sort of leave that point and just want to clarify something. 686 Do you know whether or not the fully burdened costs include additional cost elements in this particular case? 687 MR. TURNER: Well, the whole issue of service centres or shared services and costing is that there are direct costs. For example, if you had a group of employees and that group of employees were paid compensation, their direct costs would normally include their compensation. 688 However, there are additional costs to the corporation, there's the cost of space, there's the cost of other support to support the efforts of those employees, and those employees may or may not receive employee benefits. 689 So a direct cost in the narrowest sense may just be an allocation of their compensation, whereas a fully burdened cost would incorporate not only the direct cost of that employee but the cost of supporting that employee, and therefore the cost of supporting that service. So a fully burdened cost would exceed the amount of direct cost. 690 MR. JANIGAN: But the fully burdened costs would not necessarily include a rate of return? 691 MR. TURNER: The fully burdened cost would not normally include a rate of return, nor would it include a profit element. 692 MR. JANIGAN: Do you know whether in this case the fully burdened cost includes a rate of return or profit allocation? 693 MR. TURNER: There is no profit element, nor is there a rate of return on that. 694 MR. JANIGAN: Now, on page 16, there are two allocation bases that are proposed and are used. One is the fixed-parameter basis which is used to allocate costs based on identifiable parameters, such as full-time equivalence, capital employed, kilometres/miles of pipe, square footage, et cetera. The other one is the time base estimate? 695 MR. TURNER: That is correct. 696 MR. JANIGAN: Now, if I look on pages 17 and 18 of your evidence, you've set out the Board's criteria which is derived from two sources. One is a first set that flows from the undertakings of IPLE to the Lieutenant-Governor in Council, now supplemented by the ARC, and the second set is the Board's EBRO-493, 494 decision. 697 MR. TURNER: That is correct. 698 MR. JANIGAN: And could you briefly indicate to the Board your previous experience with regulators concerning criteria that have been implemented to prevent abuse of corporate power. 699 MR. TURNER: I was with you until the last comment about abuse of corporate power. So maybe you could clarify that for me, please. 700 MR. JANIGAN: I guess I'm going on a general sense, where one corporation may potentially be able to -- 701 MR. TURNER: I was -- 702 MR. JANIGAN: -- influence the other in a way in which would be contrary to the order of the market conditions. 703 MR. TURNER: As was on the public record with respect to Union and Centra Gas, we were engaged by Union and Centra in conjunction with its proceeding, and in the context or the course of preparing for that, we had occasion to review a number of statements of policy or questions as to what the policies might be. 704 The -- and I'm speaking entirely from recollection here, and this was a number of years ago. 705 I believe at that time there was great concern as to how related party or intercompany transactions between regulated and unregulated entities could be fairly priced, and I believe that there was a -- I don't know if there was a forum or a meeting or a conference where these issues were discussed. 706 And my recollection is that at that time of the Centra Union hearings, this was very actively under development. 707 It's my recollection that there had been some other regulators in Canada that had looked at the issue of intercompany charges and expressed concerns. I believe that the evolution of the code of -- the Affiliates Code were attempts to resolve the concerns. I believe that the decision in 493 and 494 was a codification in -- I guess in -- from the Ontario Energy Board's perspective to a decision of what the general principles would be in application. 708 I'm aware that there is considerable uncertainty or concern on how these principles should be applied or can be applied and that the matter continues to evolve. 709 MR. JANIGAN: Now, I'm going to take you to pages 19 and 20 of your evidence where you discuss your interviews at Enbridge Inc. and Enbridge Gas Distribution. I wonder if you could provide us with a list of questions that were used for each, and if possible, a compilation of the results. 710 MR. TURNER: I can provide you currently with an overview of the type of information that we requested. 711 The -- we asked for each department who was responsible for the activities of that department, where it was located, what the budget was, the number of personnel. We then asked for a summary of the services that were provided by that department in Enbridge Inc. We then asked for a summary of the benefits provided, again, this was from the perspective of the provider. 712 We then looked at the cost drivers that were being used as -- and then we discussed the value proposition with the provider. 713 We then had separate interviews with the people in EGD that would have familiarity with the service being provided. We asked them the nature of their department, the scope of their services, whether they considered the services provide by EGI to be duplicative, supportive, not provided within EGD itself, i.e., unique to EGI. Those were the questions, in general, that we asked. 714 In the course of those discussions, the actual discussions themselves would have covered a number of topics just coming out of those general questions, and it depended on not only the interviewee, but it also depended upon the service or department you were interviewing. 715 MR. JANIGAN: And presumably after this process is over, you made some sort of compilation of the results to reflect the study? 716 MR. TURNER: We have notes in our files, and the company was asked to document various materials internally. 717 MR. JANIGAN: Now, without revealing the names of the sources, is it possible to get -- to get your compilation of the data such as it is? 718 MR. TURNER: The compilation was undertaken in the end by Enbridge Inc. Our files had more of the original source material. 719 MR. JANIGAN: Why would Enbridge Inc. do the compilation? This was an independent study. 720 MR. COWAN: I wonder if the -- the question is best answered by referring to the back page of Mr. Turner's report, wherein -- which is appendix A to the report. It's on page 38, which is the same information that we have seen in the material on page 11 of the exhibit we were looking at before. 721 This is a compilation, if you like, or a good view as to all the elements that make up the cost allocation in the corporate family total, 96.5 million as shown on the bottom right of this table, and for Enbridge Gas Distribution, the 21.764 million shown in the first column of numbers. 722 This, in fact, was the reference point that we used in setting up the engagement and the work that was to be done. So in some sense then it provides some view of what the compilation is against what Mr. Turner, perhaps, is remarking. 723 MR. JANIGAN: Well, this is the end result. I think what we're looking at here is a study which sought to independently review what you've done through a system of interviews. 724 And those interviews formed, I would assume, a significant element in his testimony here today whether or not your methodology is sound. 725 MR. TURNER: Yes, perhaps I can clarify that. 726 I listed for you the topic areas that we covered in our -- what we call functional analysis interviews, and we carried out those interviews ourselves. 727 We provided the -- these headings to the company, and rather than us writing a detailed or summarizing our interview findings and writing them down and compiling them into a written report, we relied on the information we gathered in the years themselves and suggested that the company itself document the -- this information in written form. We were not -- we were engaged to do our review and carry out the procedures we thought were appropriate. 728 We were not engaged to, if you like, act as a recording secretary, to prepare a formal written report with respect to those functions. 729 MR. JANIGAN: Let me just make sure I understand what you did. 730 You did the interviews that you described; you told the company -- you gave some sort of report to the company that there was -- touched upon those interviews or what -- what did you give to the company? 731 MR. TURNER: If it would help, I can give you the blank template that we gave to the company. 732 MR. JANIGAN: The company got a blank template? 733 MR. TURNER: Yes, sir. 734 MR. JANIGAN: And what was it to do with the blank template? 735 MR. TURNER: We recommended that the company, for its own internal records, complete the template subsequent to our interviews and retain it. 736 MR. JANIGAN: Yes. And they went out and completed the template, which is the compilation -- which represents the compilation of what you found? 737 MR. TURNER: No, we went out and we used the template for our own questions and made handwritten notes, okay, and we used -- 738 MR. JANIGAN: I thought what you gave the company was the results of your interviews. 739 MR. TURNER: I don't recall giving them the results of our interviews. They participated in the interviews, and then the people in the departments whom we interviewed had this in order to complete it themselves after the interviews took place. 740 MR. JANIGAN: Let me start from the beginning. It might be that the sequence of tasks here has confounded me. 741 What did you do to commence this -- to commence your departmental review? 742 MR. TURNER: Okay. The first thing we had to do was to take a look at the overall service agreements to understand what they encompassed. The second thing we had to do was take a look at the results of the allocations, that is, what numbers were we looking at what, departments were we looking at. 743 We then entered into a discussion with the company with respect to the scope of our engagement. Had we looked at -- and I can't remember the exact number, the 30-odd, 25-odd, whatever number of individual line items there are in this appendix A to our report, it would have been an undertaking that would have been very difficult to accomplish in the time available. 744 So we then agreed with the company as to what level of expenditure they felt and we felt was appropriate for our review. That's how the $500,000 was determined. 745 We then informed the company that our procedures that we would apply would involve interviews not only of the provider, but as well of the recipient. We also informed the company that we would need to ensure that the dollar amounts and the expense categories as reflected in the summary provided by the company were consistent with what the company's scope of -- sorry, with what the department's or cost centres, whatever, scope of operations was. 746 So we told them that we needed to take a look at the underlying cost build-ups from a -- not from an accounting review procedure, but more just looking to make sure that there was consistency in what costs were being done and being captured. We then asked to interview the various people who would have the best knowledge of the activities of the department and we asked the company to provide us with contact names. 747 We then contacted - or my staff, more accurately - contacted the various people, arranged the interviews, and carried out the questioning along the lines as I outlined in the topical areas. We provided to the company a -- let's call it a template, blank outline as to the types of information to be completed, and suggested that they -- we would follow this line of questioning in our interviews. This is the kind of information that we wanted -- 748 MR. JANIGAN: Can I stop you there, Mr. Turner, just so I don't misunderstand. 749 MR. TURNER: Yes. 750 MR. JANIGAN: I thought you had already conducted the interviews at this point. 751 MR. TURNER: No, sir. I'm telling you that what we had done is when we came to do the interviews, we asked the company for the names of the individuals to contact, and we knew -- we informed the company as to the type of information that would be required. 752 That preceded the actual interviews, because we wanted to know the individuals who would be most familiar with the information required for us to conduct our review. We then interviewed those individuals; we made handwritten notes. 753 The company has our template that they can use to document what they believe the pertinent -- what is the pertinent information for their purposes, but we did not rely on the company's compilation or summary of what those functions were. We relied on our interview process. 754 MR. JANIGAN: Okay, let me just stop you there. The company -- you said the company has the template, which they can complete. Where precisely did they get the information to complete that template? 755 MR. TURNER: They would get it internally. 756 MR. JANIGAN: And the company's completion of that template is reflected in your report, is it? 757 MR. TURNER: No, sir. That information was not compiled by the company at the time we did our report. We did our own interviews and relied on our interview procedures. 758 MR. JANIGAN: After you finished your interviews, did you compile that information? 759 MR. TURNER: It is in handwritten form in our files. 760 MR. JANIGAN: How did you set about to do what appears to be a fairly methodological and intensive exercise of examining all these cost drivers without some kind of compilation in some fashion of the interviews that took place? 761 MR. TURNER: When we do our interviews, we kind of know what we're looking for when we're asking, and from our interviews we get a sense of what the department does. We look for the consistency. We rely on our knowledge from other similar engagements, whether they be regulated or unregulated industries. 762 We rely on the information gathered from those personal interviews, and then we relate that information based on our knowledge and expertise in the transfer pricing area, we relate that to the underlying data and the review of cost drivers. 763 MR. JANIGAN: So the process is to some extent is anecdotal, qualitative rather than quantitative? 764 MR. TURNER: As I mentioned yesterday in direct, this is an art; it's not a science, and if you'd like an authority for that, it's in the Organization for Economic Cooperation and Development's own guidelines on intercompany pricing, where they refer to it as an art rather than a science. 765 It's a matter of trying to, based on your experience, get the relevant facts, put them in context and then reach your conclusions. 766 MR. JANIGAN: Now, how did you, in particular, quantify the value proposition that you've set out in your report? 767 MR. TURNER: I believe as I mentioned yesterday, the value proposition was out of our scope in order to evaluate or to quantify. 768 MR. JANIGAN: So you didn't quantify the -- quantitatively assess the value proposition in terms of cost benefit? 769 MR. TURNER: That is correct. We were looking at the -- I think, the various criteria that I outlined yesterday, as well as the fact that in looking at the allocation of services that are of a managerial or support basis, shared or joint management costs, that we're looking for a fair or appropriate allocation amongst the parties, as well as the Board's statement of an overriding principle that the cost driving -- cost driver methodology for non-utility cost allocation offers significant reductions in administrative efforts, as well as being forward-looking, i.e. is an accepted approach. 770 So we were looking to the principles of costs and allocation of those costs. 771 MR. JANIGAN: So is it fair to say that your report is more of an opinion than it is an analysis? 772 MR. TURNER: Yes. 773 MR. JANIGAN: On page 25 of your evidence, you state that: 774 "Based on the functional analysis provided by EI in the value proposition, departmental services provide value to EGD." 775 I take it you're not in a position to say how much value is provided by your service. 776 MR. TURNER: That would be correct. 777 MR. JANIGAN: And on page 26, you say cease the -- you conclude the general expense category services provide value to EGD; you're not in a position to say how much value? 778 MR. TURNER: That is correct. 779 MR. JANIGAN: And similarly, did you look at the centres of excellence? 780 MR. TURNER: Yes, we did, the ones that were over 500,000. 781 MR. JANIGAN: And your conclusions on them would be where in your report? 782 MR. TURNER: They would be included in the department categories. We would regard a centre of excellence as a department. 783 MR. JANIGAN: As a department? 784 MR. TURNER: Yes. 785 MR. JANIGAN: Further on in your conclusions, summary and conclusions -- 786 MR. TURNER: Is this tab 7 of our report? 787 MR. JANIGAN: That's correct. What were your conclusions about the Enbridge CEO office? 788 MR. TURNER: We did not review the CEO office so we have no conclusions, except in a general package to say we're not really aware of anything that would be inconsistent with the conclusions reached with respect to the departments we did take a look at, but we did not review that department. 789 MR. JANIGAN: Now, I don't want to visit all of the different cost drivers that are used by Enbridge, but I wanted to look at a couple. And for some reason our old favourite, aviation, lends itself to this. You're aware that in the past at IPLE, aviation services were charged on the basis of a time log? 790 MR. TURNER: That's correct. I understand that to be the case, yes. 791 MR. JANIGAN: Since flight records and numbers of trips and passenger logs are all available, how can Enbridge justify going to a cost driver approach that's based on capital employed? 792 MR. TURNER: There may be a number of bases upon which a particular cost driver is selected over another. 793 As is referred to in general terms in our report, and, I think, consistent with overall principles, one would like the most direct cost driver. One would actually like the most direct costing or charging methodology. 794 If one is looking at aviation services, there may be a number of potential cost drivers. I think one also has to be guided by a principle or a desire for administrative ease and simplicity. So one is left with balancing the desire for precision against the desire for administrative ease and convenience, and when one is trying to balance those sometimes conflicting demands. It's definitely not a perfect world. If it were, we would have administrative simplicity and ease of direct relationship. 795 We did discuss this cost driver with -- with the company, and in the course of our discussions we found that the aviation department wasn't just a particular aircraft going from point A to point B, but there were a number of things that this department did. 796 It was responsible for transportation of personnel. It was used for pipeline surveillance. It was responsible for overseeing contracts with third parties for supply of aviation services to fulfill those functions. 797 We understand -- and we did not review flight logs. We understand, and this would be based on experience with other companies that began looking at flight logs, that they're not always fully comprehensive as to what was done, why it was done, for whom it was done, or whom was involved -- who was involved. 798 We understand that from the company's perspective, the overall benefits to the group as a whole are best measured by reference to the capital that is employed. The reason for that is, given the extensive nature of this, it's not just looking for a particular task or a particular individual, it also does involve surveillance of the assets which may vary from time to time, that, on that basis, a cost driver that would be considered and was adopted by the company was that of capital employed. 799 Is it the best cost driver in all situations, or is time that the aircraft are in the air the best in all situations? I think it's a matter of judgment. 800 We were satisfied with the company's explanation as to why the company felt it was the appropriate cost driver for that cost. We have to go back to a basic principle of trying to develop cost drivers, in addition to ones that I mentioned about the conflict between directness and administrative convenience, and we have to take into account that if you are looking for alternate cost drivers, one has to ensure that there's some degree of logic or conductivity between the direct charge and the allocation tool or cost driver itself. 801 And we were satisfied from our discussions that based on the company's analysis that a cost of capital cost driver was acceptable in the circumstances. Is it the best cost driver? Is it the only available cost driver? Is it, you know -- where does it stand? 802 All we can say is it is one of the available cost drivers that makes sense in the circumstances. 803 MR. JANIGAN: Mr. Turner, let's say in this circumstance you wished to choose the most accurate or the cost driver -- or the cost method that's likely to give the best allocation. Would you agree with me that it is likely to be time logs? I believe you -- 804 MR. TURNER: Subject to the particular circumstances, your first choice would be to look at time logs. I would agree with that. 805 MR. JANIGAN: I believe you recommended that in EBRO-493? 806 MR. TURNER: That is probably the case. I don't recall specifically, but I wouldn't be surprised. That would be your first starting point to say: Why aren't you using flight records? And then you look at the other factors that are taken into account, including the ease of interpreting and applying the data that comes from the flight records. 807 MR. JANIGAN: One other driver that interested me was the use of a corporate FTE for matters such as -- or enterprise FTE for things like corporate human resources, and I think on page 28 you set out the cost drivers. 808 MR. TURNER: Yes, sir. 809 MR. JANIGAN: Enterprise FTE is calculated as the weighted average of all basis of allocations for all of the lines of business, multiplied against the head count for the entire enterprise. 810 MR. TURNER: Yes, sir. I'm not certain why that would be superior to a simple head count of employees, figuring you're allocating things like pension benefits. 811 MR. TURNER: I want to reflect -- this is the one I ran through with my staff. If I could just run through another example to illustrate the concept. 812 If you look -- it was alluded to earlier. I just have to find the reference in the report. 813 MR. JANIGAN: I'm sorry. It should be the corporate FTE one that I've -- I would refer you to. Sorry, Mr. Turner. 814 MR. TURNER: Okay, that's great, because that's the one I'm prepared to discuss. 815 MR. JANIGAN: And that's the -- the definition, I think, is located on page 29. 816 MR. TURNER: Yes. 817 MR. JANIGAN: At the top. 818 MR. TURNER: Yeah. Reference was made earlier this morning, and I just can't pinpoint it right now, but to the one time, one directional charge philosophy, and I'll try to explain this as best I can. 819 If we have a -- a service group that provides services not only to the end users directly but also provides services to the service providers, it's necessary in looking at fully burdening or charging through the costs of what I will call -- and I apologize if it's confusing -- indirect-indirect, that is, costs support the service providers, and it's not direct to the end user. It's indirect to them. 820 In a normal cost allocation or a typical cost-allocation approach, one would attempt to identify core indirect-indirect cost centres, i.e., the ones that provide services, perhaps, only to the service providers or perhaps to a combination of the service providers and end users. These are one-on-one direct -- these are the interfaces. 821 So if I have a -- take, for example, a human resources group. The human resources group, if they had a centre of excellence that had a hundred employees, is in most cases providing human resources support to the -- this centre of excellence. 822 And in principle, one would take the -- the costs of the human resources department, and let's say they were -- just to keep numbers simple -- there were a total of a thousand employees: 900 out in the direct users and a hundred in the centre of excellence. 823 And normally we would take HR expenses and allocate them on some basis of employees, and you can get into subcategories. 824 So one would take one-ninth of the expenses of the HR department -- sorry, one-tenth of the expenses of the HR department and allocate them to the centre of excellence. The remainder would go directly to the end users. 825 Then you would do a second allocation. You would take the direct costs of the centre of excellence, plus the accumulated indirect costs, and they might include the chief information officer, they might include treasury, they might include personnel, whatever they include. 826 You fully burden those costs with the first-step allocations, and then you would allocate them out to the direct end users on the basis of whatever the cost driver was appropriate for that particular centre of excellence. We would call that a "two-step." 827 The -- one of the difficulties in doing that kind of an allocation, as you find that there's often -- HR supports CIOs, supports HR. And unless you want to apply regression analysis, you really can't do -- at some point you have to decide which -- what point is going to be your starting point and how you're going to burden the intermediary departments. 828 The methodology that the -- that Enbridge has taken is rather than first burden -- and in our case, the HR department -- sorry, the first burden, a particular centre of excellence with HR costs. They decided to make the charge directly from HR to the end users, bypassing the intermediary allocation. 829 Because of the way that the determination has been made, the end result approximates -- and we think very closely -- that it approximates the same result in terms of the dollars that get allocated in that they have -- rather than first make an allocation in our case to the CEO and then make an allocation out, they have effectively combined the two factors. 830 What were -- what was the department allocating out for its direct costs? And then we will apply a combination of people and allocation formula allocation to derive, for example, the HR costs out. 831 So it approximates -- in fact, it may be identical, but it certainly approximates the indirect allocation method. 832 MR. JANIGAN: If I could just stop you there. Why wouldn't you just assume that the numbers of employees would recapture all those costs, if you've got the costs right to begin with? 833 Why do you have to look at -- what I understand the corporate FTE is is it uses drivers -- the average of drivers from the rest of the company and then multiplies that -- 834 MR. TURNER: No, I think the -- the FTEs, actually, are based on people, and that would just be a singular cost allocation or cost driver, being people. 835 But for some of the departments that are -- are supported, let's say, by the personnel function at the corporate office, they are charging their costs out on some basis other than FTEs. 836 So the way that you get purity of the system or consistency of the concept is you first derive those costs out on the basis of people, but, you know, the secondary cost allocations are going to be on the basis of other allocations. 837 So in order to achieve administrative simplicity and, I believe, approximately, if not exactly, the same result, it's, Start with this department, calculate the weighted average, and then derive the costs out. 838 MR. JANIGAN: But as I understand from what you've told me, it's because the other departments allocate on a different -- 839 MR. TURNER: That is correct. 840 MR. JANIGAN: -- on a different scale, but you can't do it for this particular set of services even though -- 841 MR. TURNER: Correct. 842 MR. JANIGAN: -- even though intuitively that's the way you would do it. Okay. 843 Thank you, panel. 844 Mr. Chair, I believe those are all my questions. 845 MR. BETTS: Thank you, Mr. Janigan. 846 I think it's almost perfect timing for us to take a break for lunch. I think I will challenge everybody to be back here at -- that will be 2 p.m. We will resume at that point. 847 And I believe, unless a list is compiled otherwise, it would be Mr. Warren, Mr. Shepherd, Mr. Brett, and -- 848 MR. MORAN: Mr. DeRose. 849 MR. BETTS: Oh, and Mr. DeRose. He was back in a comfortable chair there. 850 Is there anything we need to consider prior to breaking for lunch? 851 MR. JANIGAN: Mr. Chair, I believe that this panel's cross-examination is going to extend into tomorrow. Accordingly, I'd like to take my leave and spend Friday in Ottawa. 852 MR. BETTS: You're welcome to do so. 853 MR. CASS: Mr. Chair, just on that subject, it brings me to the point of the schedule. I think the current version of the schedule shows the O&M policy panel for tomorrow, without having the schedule in front of me. 854 That panel includes Dr. Mark Lowry, who comes from the United States. I think based on where we are in this cross-examination, it probably doesn't make sense for us to bring Dr. Lowry up for tomorrow and have any expectation that that panel will be reached. 855 If anybody disagrees, perhaps through you, Mr. Chair, that might be addressed, but I think at this point in time, we would, perhaps, tell Dr. Lowry that there isn't any reason for him to come for tomorrow. 856 MR. BETTS: Any comments on that proposal? 857 I don't see any objection to that. That would, I think, suggest that it's partial -- or it's possible we would only be sitting for a partial day on Friday? 858 MR. CASS: We would sit as long as it takes to finish the panel we have now, Mr. Chair. 859 MR. BETTS: And there's nothing that we can bring into the hearing that would be appropriate for a short period on Friday? 860 MR. CASS: Not that I'm aware of. We were discussing that. I think we've used up all of our small things that could be moved around. 861 MR. BETTS: It appears as though no one would object to that, and it does seem reasonable, and certainly it would be wise not to have your witness travel on that day and possibly not be used. So we will adjust the schedule accordingly. 862 MR. CASS: Thank you, sir. 863 MR. BETTS: Anything further? 864 Then we will adjourn now until 2 p.m. 865 --- Luncheon recess taken at 12:41 p.m. 866 --- On resuming at 2:00 p.m. 867 MR. BETTS: Thank you, everybody. Please be seated. 868 When we adjourned just before lunch Mr. Janigan had finished his line of questioning, and he indicated that Mr. Warren would begin his cross-examination when we returned. 869 Before we do that, are there any preliminary matters that arose during the break? 870 There appear to be none. 871 Mr. Warren, please proceed. 872 CROSS-EXAMINATION BY MR. WARREN: 873 MR. WARREN: Thank you. 874 Panel, my questions to begin with are directed to Mr. Turner. And you were qualified as an expert, Mr. Turner, with which I obviously have no quarrel. But may I assume that the report which is in evidence is the product of your - and when I say "you," I mean Ernst & Young - your independent analysis, conclusions and writing; is that correct? 875 MR. TURNER: Yes. 876 MR. WARREN: Now Mr. Janigan touched on this briefly, but I just want to get the time line on this. I believe you said you began discussing a retainer some time in November; is that correct? 877 MR. TURNER: That is correct. 878 MR. WARREN: And that the actual time of doing the interviews and producing the report was over what period of time? 879 MR. TURNER: I believe it's approximately four to six weeks. 880 MR. WARREN: And the -- as I understand that time line, and correct me if I'm wrong -- the allocation methodology which is before the Board in this case, it had been finalized by EI and EGD before you began your work; is that correct? 881 MR. TURNER: That's correct. 882 MR. WARREN: And I don't know that you need to turn it up, but attached to one of Mr. Janigan's -- I believe it's tab 11 of his material, there is an interline of business services confirmation notice. 883 Mr. Chairman, it's in Mr. Janigan's book Exhibit K.8.3. It is at tab 11. 884 MR. TURNER: Yes. 885 MR. WARREN: It is an attachment to IGUA interrogatory number 100. 886 That, as I read that document, Mr. Turner, it would appear to be an agreement between -- I'll characterize this fairly; I don't want to mislead you -- but it would appear to me to be in effect a confirmation by EI and EGD of the amounts that fall out of the new cost-allocation methodology for the year 2003; is that correct? 887 MR. TURNER: It would appear to be so to me as well. 888 MR. WARREN: But I take it that your work took place both before and after this document was signed; is that right? 889 MR. TURNER: Our work was completed with the delivery of this report. I do not recall the exact date. I believe it was the -- I was in Europe at the time -- I think it was either the final report, Bill, or the final draft of the report went to you, and that was the beginning of December. 890 MR. WARREN: Beginning of December? 891 MR. TURNER: Yes. It was the first or the second full week or -- of December. I don't recall the exact ... 892 MR. WARREN: Mr. Turner, could you turn up your report, which for the record is an attachment to Exhibit I, tab 13, schedule 55. 893 If you could turn it up, Mr. Turner. And looking at page 1 you say that the purpose of your report is, "to assess the reasonableness of the overall methodology used by EI to allocate 2003 budgeted costs of the corporate office." 894 Now, it's your use of the word "budgeted" I just want to stick with for a moment. As I confessed to you prior to the afternoon session and I'll confess it for the record, that I'm profoundly ignorant with respect to matters of accounting, so I have to come at this the way a person would come at it from the top of their kitchen table. 895 MR. TURNER: That's fair. 896 MR. WARREN: My kitchen table, because it's done badly at my kitchen table. But a budget, can I understand that when we use the term budget we mean a forecast done in advance to being spent over a period; is that fair? 897 MR. TURNER: That is -- that is fair, yes. 898 MR. WARREN: When you use the term "budgeted" in this context, we're talking about a budgeted allocation that is arrived at at or around the time of the beginning of the fiscal year, in the fall of 2003, to be spent over the course of fiscal 2003 up to next September or October or whatever it is; is that fair? 899 MR. TURNER: It's hard to say exactly what the timing would be. I have clients that do the budgeting process on a reiterative basis, go through extensive budgeting processes in summer and early fall, say, for the next calendar year, and some of them actually tune them up as they go through the cycle. I don't know what Enbridge's budget cycle is. 900 MR. WARREN: Subject to check with the four folks who are sitting to your immediate left, when we talk about the 2003 budget, can you accept from my basis of ignorance that the fiscal year would run from -- 901 MR. TURNER: January to -- 902 MR. WARREN: No, from October to October. 903 MR. TURNER: Yes. 904 MR. WARREN: So for the purposes of the topic we're talking about today, we're talking about an allocation methodology from which falls out an amount which is a budgeted amount of corporation allocations over the course of fiscal 2003; have I got that right? 905 MR. TURNER: I believe so, yes. 906 MR. WARREN: Now, I'm a little bit ahead myself on this, but one of the terms we use in the perhaps somewhat incestuous community of regulatory lawyers is the term of "true-up," and what's meant by that is you true up your budget according to the actuals spent. Is that a term that -- 907 MR. TURNER: That's a common term, yes. 908 MR. WARREN: Common term. 909 Can you help me out with this Mr. Turner? The amount that's budgeted for corporate allocations, does the methodology contemplate or allow for or acquire, for that matter, some true-up at some point to compare what's budgeted with what's actually spent? 910 MR. TURNER: I believe, and -- it's been a while since I've read the services agreement, but I believe the services agreement does not provide for any true-up, except if there's a material change or material circumstance that would cause a change. I believe that's the case. 911 MR. WARREN: Now, I'd like to touch just briefly, because you reviewed this with my friend Mr. Janigan. I'd just like to touch briefly with you on some of the limits on the scope of your work. 912 Looking at page 2, you reviewed -- your review is limited to the procedures performed on certain selected departments in general expense categories, and I think you said that the principal limitation was a $500,000 floor; is that correct? 913 MR. TURNER: That's correct. 914 MR. WARREN: And the information, if you look at page 3, you indicate that the report -- this is in the last full paragraph -- sorry, second last full paragraph on page 3: 915 "The conclusions of this report rely upon the accuracy and completeness of the information that was furnished by EGD and EI during the course of the engagement." 916 Can I take it from that that you did not rely on any -- first of all, you didn't rely on information from any other source; is that correct? 917 MR. TURNER: That would be correct, yes. 918 MR. WARREN: And just in this connection, if you turn up page 27 of your report -- 919 MR. TURNER: If I can just clarify -- clarify the point on that. 920 Any factual information relating to Enbridge or EGD, we relied on the information we got from the company. In looking at the principles to be applied, we relied on other information, most notably the reports 493, 495 -- 921 MR. WARREN: Fair enough. Thank you for that clarification. 922 And if you look at page 27, at the top of the paragraph, second sentence: 923 "In accordance with the scope of our engagement, we did not audit or independently verify the budgeted costs." 924 I take it from this observation and from an answer you gave to Mr. Janigan that E&Y did not -- essentially did not undertake any assessment of the accuracy of the numbers; is that fair? 925 MR. TURNER: That is correct. As I mentioned this morning, we did look at the groupings to make sure that they appeared to be consistent with the activities of a particular department. So, for example, if we were looking at aviation, it didn't include something that obviously had no relationship to the aviation, but other than that, your comment is correct. 926 MR. WARREN: I'd like then, sir, to turn to the principles of cost allocation. This appeared in section 4 of your report, beginning on page 17. And your report indicates that you had reference to the -- what you refer to in the second paragraph as a number of guiding principles established in 1997 by the OEB. And you refer specifically in a footnote to the decision of the Board in EBRO-493/494. 927 Now, of those four principles, I'd like to take them, sir, seriatum, and the first is: "The transaction is shown to be of benefit to the utility and not to the detriment of any of its customers." 928 And I'd like you, if you can, in the next series of questions, Mr. Turner, to focus on that -- the second clause in that statement, which is the -- not to be to the detriment of any of its customers. 929 Now I confess, Mr. Turner, and I may well have missed this in reviewing your report, but I don't see anywhere else in your report that this criterion or this principle is referred to. 930 MR. TURNER: Yes. 931 MR. WARREN: First of all, am I correct in that? 932 MR. TURNER: You are correct. 933 MR. WARREN: And would it be fair for me to conclude -- please chastise me if I'm being unfair -- would it be fair for me to conclude that because it's not mentioned it was not employed as one of the principles you used in assessing the allocation methodology? 934 MR. TURNER: That would be fair. I would like to partially qualify that comment. 935 The whole concept of benefit and detriment has a number of attributes. And so in looking at the charges, if it were obvious that there was a detriment, and by "obvious" from the scope of the engagement we were doing, that is correct there was no rationale or support or reason or for a particular cost to be related, then one would assume that would be to the detriment. 936 We felt that in looking at a description of the methodology there was a rationale, and then there was no obvious situation in which there was a detriment. But that was -- we were not specifically looking, and it is very difficult to evaluate that latter -- 937 MR. WARREN: It's difficult to evaluate detriment to any of its customers, but we can agree it is one of the principles -- 938 MR. TURNER: Yes. 939 MR. WARREN: And would it be fair for me to conclude then, Mr. Turner, that to the extent that you did not use one of the principles articulated by the Board, that your report then -- we can't fairly conclude that your report assesses the reasonableness of the methodology against the principles employed by the Board if you didn't use one of those principles. 940 I'm sorry for the convoluted question, but you take my meaning, I hope? 941 MR. TURNER: I'm not sure, but I think so. 942 I think if -- if the question is -- in looking at all of the principles outlined by the Board, is there any reason to know or anticipate that there is a violation of the principles espoused by the Board, I would say that the work we have done would indicate that there was not. 943 If you said, Have you done each of and comprehensively all of the points espoused by the Board? I would say, No we have not, because some of them, I think, are really at the discretion of the Board as to whether they feel that criteria is met. 944 MR. WARREN: Thank you for that gloss, Mr. Turner. 945 Now Mr. Turner, in response to a question by my friend Mr. Janigan just before the break, and I apologize, I can't find it in my notes so I'm going to have to paraphrase it, and correct me if I'm wrong. You were talking to Mr. Janigan about the principles of transfer pricing, and I believe you said that they are more an art than a science, and that they are evolving. I think that's the term you used. Is that a fair gloss on your answer? 946 MR. TURNER: I definitely said they were an art, not a science. 947 I think my comment in respect to evolving was really with respect to the regulatory environments in Ontario, but having said that, the general principles of transfer pricing do continue to evolve because business conditions change as events unfold in the normal course. So they're not static. 948 MR. WARREN: They're not static. And one of the - this is a bad pun for which I apologize - drivers for evolutionary change is the regulatory process. And can you and I agree that over time, as the Board looks at issues of transfer pricing and outsourcing and all of those cluster of issues, that the Board may either amend earlier criteria or add additional criteria; is that fair? 949 MR. TURNER: I believe that's within the purview of the Board to do so, yes. 950 MR. WARREN: Now, you indicate on page 17 of your report that you listed the decisions of the Board that you looked at. Did you look at any other decisions of the Board with respect to the cluster of principles that were to be applied? 951 MR. TURNER: Specifically, no. I outlined this morning some of the understandings of the development and evolution of the principles, and they were taken into account. 952 MR. WARREN: In particular, Mr. Turner, did you take a look at a decision of this Board which was issued in December of last year in respect to an application by Enbridge, and a decision under the docket heading RP-2001-0032? Did you take a look at that, sir? 953 MR. TURNER: I don't know. 954 MR. WARREN: You don't know whether you did or you didn't? 955 MR. TURNER: I don't know. I'd have to go back and look through our files to see what materials we had at the time, and I don't recall. 956 MR. WARREN: You don't recall that specifically -- 957 MR. TURNER: I don't recall, no. 958 MR. WARREN: That's a fair answer, sir, and then -- I have to be fair in the questions that I'll put to you. 959 In that decision, sir, there was an extensive discussion by the Board on the issues of the principles that should obtain (sic) for outsourcing and also for transfer pricing. And one of the criteria that -- one of the criteria that the Board articulated that it should use is that the pricing mechanisms should be -- the Board should be able to conclude that they are of benefit to ratepayers. Are you aware of that criterion? 960 MR. TURNER: I understand that criterion, yes. 961 MR. WARREN: And the criterion of benefit to ratepayers, did you apply that criterion or that principle in assessing the allocation methodology? 962 MR. TURNER: We looked at the benefit to EGD and did not break that benefit amongst its stakeholders, whether they be shareholders or whether they be the ratepayers. We looked at the benefit to EGD. 963 MR. WARREN: Can you and I agree, sir, that the Board certainly made a distinction or appeared to make a distinction in that decision between the benefit to EGD on the one hand and its benefit to ratepayers on the other. Can you and I agree that a benefit to EGD, as a corporate entity, may not necessarily be a benefit to its ratepayers? 964 MR. TURNER: I would agree that it may be a benefit to one or the other of the stakeholders; it may be a benefit to both. 965 MR. WARREN: But if I've understood your evidence in applying the principles, you didn't assess the question of benefit to ratepayers. 966 MR. TURNER: That is correct. 967 MR. WARREN: Okay, thanks. 968 Now, I want to turn, then, to the question of the Board's criterion on page 17 citing the 494 Board decision of benefit to the utility, that's the first bullet item. And if I could turn up page 19 of your report, you say that -- 969 Sorry, Mr. Chairman, my eyesight is failing. I can't even find the quote I'm looking for, but if you'll bear with me, I'll get it. 970 MR. TURNER: No problem. 971 MR. WARREN: I'm on page 19 here at the bottom of the paragraph: "The functional analysis included an assessment from Enbridge Inc.'s perspective as the service provider of the benefits provided to EGD and then, in addition, the functional analysis described the value proposition to Enbridge Gas Distribution in having the services performed by EI as opposed to performing the services internally." 972 And then, as I've understood your methodology, you interviewed folks at EI? 973 MR. TURNER: Yes, we did. 974 MR. WARREN: To look at their perspective. And you also interviewed folks at EGD to get their perspective; is that correct? 975 MR. TURNER: That's correct. 976 MR. WARREN: And you say on page 20 in the second paragraph that: "We conducted a series of interviews with the department heads at EGD who are identified as the appropriate service recipient in order to validate the services provided by EI and the benefits received by Enbridge Gas Distribution." 977 MR. TURNER: That is correct. 978 MR. WARREN: Now, on page 24 of your report, in the last full paragraph: "In order to corroborate the functional analysis prepared by Enbridge, E&Y confirmed directly with the appropriate EGD personnel the nature of the services provided by EI and that there is a benefit to the Enbridge Gas Distribution organization from these services." 979 And then a little bit further on, next sentence -- two sentences later: "This review was performed in order to ensure that the services provided by Enbridge Inc. were not duplicative in nature, which would suggest that an intercompany charge is not warranted." 980 And then just to complete the circle, you say that -- on page 25, the penultimate sentence in the first paragraph -- this is in reference to the IT: "The IT interview confirmed that the services provided by Enbridge Inc. provided benefits to the Enbridge Gas Distribution IT department." 981 Mr. Turner, I have an immature tendency to be a bit of a smart aleck, and I'll try and constrain that, but it doesn't surprise me, Mr. Turner, that the folks at the subsidiary would say in response to a question, if you ask the question, Are the services you're getting of benefit to you? It doesn't strike me as at all surprising that they would say, They sure are. Or to put the question negatively, surely, it's not likely that an employee of the subsidiary would say, We don't need these services, they're duplicative and they sure aren't worth what we're paying for them. 982 MR. TURNER: Au contraire. As a matter of fact, we get that answer more than we get the other, to be honest with you. 983 We do a lot of work relating to cross-border services, and even though you are within the same company, we often -- I would say more often than not encounter situations where there is a difference in perception between the user and the provider as to the benefits or lack thereof from various services. 984 We've learned through the -- numerous times when we conduct these interviews that there are differences of opinion and differences of views, and so whether in a particular case somebody would indicate there was a benefit when I really didn't think there was one or vice versa. You go into these things with a bit of a grain of salt in trying to understand. 985 And so we do go and we try to look for secondary indicators. For example, if we -- if we found -- one of the departments here is the pension administration, just pulling one out, and if we found that there was no -- although there were pension plans at EGD, there was no pension administration department, one would have to assume that the pension plans have to be administered and there would be a benefit. 986 So if we -- you know, if you got the personnel of EGD saying there's no benefit to the pension administration, well, they may not see it, because it's indirect to them. 987 On the other hand, if you saw that both groups or both enterprises had fully functional and not overlapping -- or possibly overlapping, but if they had fully functional groups, then you would go and say, well, I really want to understand why there's a benefit when you've got it. Take the CIO, the IT department, how do you interact with one another, how do you define the lines of delineation, what are the lines of overlap. And so it's through that -- and that's why we go and do the interviews, is to draw people out to get a fuller understanding of what their biases are, what their perceptions are. 988 And then you take all of that evidence and you go back to, okay, how do I give weight to what we've heard? Based on what we've heard before, based on what's in the accounts, based on the descriptions of the overall functionality as performed at the local level and at the corporate level, how do I reconcile the information that I've received? 989 MR. WARREN: You don't feel like Hans Blix, you have to fly them out of the country in order to get the answers? 990 MR. TURNER: I do not feel that we have to fly them out of the country to get the answers. 991 I think Hans was saying you don't have to fly; I think it was Bush said you did. 992 MR. WARREN: The -- I never want to be seen as a surrogate for George Bush. 993 I want to understand the extent to which E&Y does an independent assessment of the nature and extent of the benefit received by EGD. And is it as you've just described, by doing these secondary checks? 994 MR. TURNER: Yes, it is. There are two elements to benefit. There is whether the potential for a benefit exists, and then there's the more difficult task of identifying the quantum. 995 And if we go back, I believe -- and I'm probably totally misquoting, but the understanding in looking at shared services or management services, a cost allocation is an accepted way of making charges for these services. We're looking at the benefit from the context of is -- is there -- based on you're business experience, do organizations have these kinds of departments or these kinds of costs? And there are some differences between regulated industries, which tend to have, for example, more comprehensive cost accounting than other departments because of the regulated base concept and all of the accountability to various regulatory bodies. And so is the way the company is set up kind of consistent with your understanding on how companies in this industry would be set up and established. 996 So is it common or typical for these bundle of services to be somewhere in the enterprise. Factually, where are they located or how are they divvied up or isolated or whatever, and applying that, plus the interviews, and your knowledge of general principles to be applied, you make an assessment overall; Does it make sense. It's not a guarantee it's absolutely right, but does it make sense and is it fully transparent to the readers as to what the policies are. 997 MR. WARREN: Does it make sense that they're getting benefit; is that what you're saying? 998 MR. TURNER: Does it make sense, yes. The potential for benefit. 999 MR. WARREN: The potential for benefit. 1000 MR. TURNER: There's two dynamics: One is the potential or an opportunity for benefit, and normally if you're looking at shared services, would you be a user, would you be prepared to go and pay somebody for it. It doesn't answer the second question as to what is the exact quantum that would be paid, although, when it comes to shared services operations, cost is generally agreed to be a proxy for value. 1001 MR. WARREN: But as I take it from your answer to Mr. Janigan this morning, it wasn't part of your retainer and you did not, in fact, examine the quantum question. 1002 MR. TURNER: That is correct. 1003 MR. WARREN: Okay. 1004 Now, again, referring to the criteria that you've cited on page 17 of your report, and perhaps you could just turn it up, Mr. Turner. You said at the bottom of the page: 1005 "In addition, the OEB also considers the following criteria in determining the appropriateness of an allocation of costs by a corporate centre." And the first bullet item is cost incurrence. "Are the corporate centre charges prudently incurred by or on behalf of the companies for the provision of services required by the Ontario ratepayers." I want to deal with two components of that if I could, please. 1006 The first is "prudently incurred." In making your assessment of the reasonableness of Enbridge's cost-allocation methodology, how did you apply this particular principle of determining whether they were prudently incurred, if at all? 1007 MR. TURNER: Well, there actually are two aspects to this as well. 1008 In terms of granularity and going in to make a determination as to whether a particular expense or grouping of expenses was prudently incurred, I think one has to make a degree of assumption and one can test the assumption. 1009 The one assumption is that -- and I'll pick up on a theme that was raised this morning about the rate base, if there's no assurance that a cost can be included in a rate base and therefore passed on or recouped, and when you look at accountability, corporate accountability to shareholders overall, there's a -- and I think it is a generally true - one could point to some excesses, or it may not be - but it's generally true that an organization is motivated to control its costs overall. In fact, that's one of the corporate initiatives giving rise to more and more shared service, not only in this regulated environment, but in the general corporate environment in an attempt to get more done with the same or fewer head count, with the same or fewer resources. 1010 And so there's, if you like, a general principle that a business will try to run most efficiently overall. So one would assume the expenses would be prudently incurred. There is risk, for example, in the regulatory environment you're not going to be able to recoup them, for example. 1011 The question, then, is to whether -- if I can go to the second part of the principle, the provision of services required by Ontario ratepayers -- 1012 MR. WARREN: Just before you get to that, I don't see anywhere else in your report the terms -- the words "prudently incurred" referred to. 1013 MR. TURNER: That is correct. 1014 MR. WARREN: Is that because there is an assumption that these two businesses are going to act reasonably in their own interest and not -- I have too many negatives in this -- that they won't imprudently incur these costs. Is that the reason why it's not referred to? 1015 MR. TURNER: That is correct. In order to do that, we would have to go far beyond the scope of our engagement and do a lot of benchmarking. 1016 I did say there is another way of just doing a sanity check. We did have discussions with the company and asked them where their cost by ratepayers stood, and we were told -- do we understand that they perform very well relative to their peers. 1017 MR. WARREN: But I take it there is another benchmarking analysis that you can apply for whether costs are prudently incurred or not; is that fair? 1018 MR. TURNER: I don't think you can ever get the perfect answer. 1019 MR. WARREN: But there is another analysis -- 1020 MR. TURNER: You could do further analysis. You could do more extensive benchmarking. You could look at, for example, costs of IT. 1021 If I can get out of this particular situation, this is for another client, we were looking at their -- their information technology department and one of the questions that came out was, how effective were they? And when you look at the information technology, there are -- there are leaders and there are followers, and amongst the followers are various categories, there's second wave, third wave, fourth wave followers. And your philosophy, your corporate philosophy as to whether you're going to be a leader in implementing new technology or whether you're going to be a follower can affect your cost or head count. 1022 Now, if, strategically, an organization has decided that it wants to be a technology leader and developing technology -- for example, Wal-Mart is well-known for its relationship in investment and technology and dealing with its supply chain. They have made a gamble or they took a gamble at one point. It's been very successful for them and paid off dividends. 1023 Now, when they decided to be a technology leader, was that prudent to do that; yes or no? It depends on the strategies that they've adopted. So you can go back and benchmark and say, Well, Wal-Mart spends X number of dollars of IT as a percentage of their general and administrative expenses, whereas The Bay only spends this. Which one is more prudent? It depends on strategies. You can benchmark, but does that mean that the benchmarking gives you the right answer? 1024 MR. WARREN: All that you and I can conclude though is that it was not part of your retainer to determine whether or not costs were prudently incurred. 1025 MR. TURNER: That is correct. 1026 MR. WARREN: All right. I interrupted you sometime ago when we were going onto the second part of that criteria which is required by Ontario ratepayers. What were you about to say? 1027 MR. TURNER: Yes. This is, again, a very judgemental or subjective area. 1028 In looking at the services required by EGD in the conduct of its business, we can only look and say, Yes, you do need some degree of information technology. Yes, you do need some degree of corporate governance. 1029 The environment, vis-a-vis the corporate governance has changed. The importance of IT has changed. We have seen difficulties occurring in IT networks due to viruses, et cetera. Those clearly would benefit EGD to provide this. 1030 Now, one could find one party who would say, Yes, but those things benefit EGD and its shareholder in the form of corporate governance. And another party could, perhaps, just as validly say, if not more validly say, Well, the fact that the operation can continue its existence and continue to operate and not undergo these troubles, that if they did not do this is of benefit to the ratepayers. 1031 It's very difficult to come back and say, once you've determined there's a benefit to the enterprise, how do you divvy up? 1032 MR. WARREN: Is it fair to say though that you've made no independent assessment of whether or not the costs incurred were required by Ontario ratepayers? 1033 MR. TURNER: We did not go that extra step. That is correct. 1034 MR. WARREN: Now, the last of the criteria I wanted to refer to on page 17 is there are two bullet items in the middle of the page, both of which have the term "fair market value," at or above or at or below fair market value. 1035 And again, I didn't see anywhere else in your report that you used the term fair market value. I may have missed it. But my question is: Did your assessment -- E&Y's assessment -- assess how prices are set within the EGD -- EI methodology? 1036 MR. TURNER: I would answer your question, perhaps, in a different direction. 1037 MR. WARREN: You're the expert and I'm not, sir. 1038 MR. TURNER: Well, when given a specific example, one looks to that example as taking precedent over the general statements of a principle. And I believe the Board was very specific as to what to do with respect to management cost or shared or joint administrative services, and they do refer to costs. 1039 So on that basis, I would have interpreted the fourth bullet as overriding the second and third bullet. 1040 But in the event that that's not the case, the costs that are being incurred are expenditures to third parties, ultimately. And those expenditures take place at arm's length through negotiation, whether they be employee contracts, union contracts, supplier contracts. And so the fair value being the cost of putting those things together, I think, can be assumed by virtue of the fact that it's very directly linked to a transaction with a third party. 1041 MR. WARREN: That's the assumption that you used? 1042 MR. TURNER: Yes. 1043 MR. WARREN: Did you, as part of your analysis, sir, take a look at the costs in the various categories in the attachment to your -- to make any assessment by looking, for example, at the market to see whether or not those costs are -- 1044 MR. TURNER: No, we were not -- we were not engaged to go out and independently benchmark any of the costs underlying the budgets. 1045 MR. WARREN: Thank you, sir. 1046 Now, I want to -- in the next question I will truly reveal my profound ignorance of transfer pricing, and this is really at my kitchen table level. There are benefits, so the EGD argument goes, there are benefits conferred on EGD by virtue of its being part of the larger enterprise. 1047 MR. TURNER: Yes, I understand that is their assertion, yes. 1048 MR. WARREN: That's their assertion, fair enough. 1049 Is it fair for me to reverse the flow and say that there are benefits conferred on EI by virtue of its having, as part of its enterprise, EGD? 1050 MR. TURNER: There may be circumstances where that would be the case, yes. 1051 MR. WARREN: Now, does the methodology that we're considering here today recognize that back flow, and if so, how? 1052 MR. TURNER: I think if you come back to the point underlying the company's methodology, and I can never find the reference, but it is referred to in our report. This is the one way, one time, one direction. 1053 MR. WARREN: Right. 1054 MR. TURNER: The company's methodology, other than by indirectly, would not reflect the other direction. And when I say other than indirectly, for example, I believe one of the benefits enjoyed is the cost savings to the synergies of the overall group through its purchasing power. That purchasing power is increased by virtue of the synergistic impact of all of the operations combining to acquire these supplies or negotiate with end-suppliers. So that is a benefit that's there by virtue of association with EGD, but because we're only passing on costs, then that benefit is -- flows back. 1055 MR. WARREN: But that's the one example. 1056 MR. TURNER: That's an example. We did for the -- we did not specifically look for situations where there may be services or information provided coming out of the EGD that were of benefit to EI or another regulated entity. Based on the departments we looked at they would appear to be diminimus, if not zero. 1057 MR. WARREN: But you didn't look at them? 1058 MR. TURNER: We did not look at that, no. 1059 MR. WARREN: Now, if I could take you back to page 8 of your report, the top paragraph says: "The corporate office sets corporate strategy, policies and standards. The business units operate in accordance with those corporate policies and standards. Enbridge Inc. has centralized certain administrative services to satisfy its strategic objective of operational excellence and to ensure consistency across the enterprise." 1060 And if you could just also look at paragraph -- sorry, page 24. In the context of your comments on the IT department, about two-thirds of the way through the first paragraph on that page: "The corporate CIO office sets the Enbridge-wide strategy, policies and standards, and Enbridge Gas Distribution's IT department operates within those defined parameters." 1061 I wanted to use those two observations in your report to ask you this question. We have a circumstance where a utility in Ontario that has a function, a defined function which is to distribute natural gas and a number of other collateral activities, is part of a larger enterprise. Now, the fact that Enbridge Inc. is spending money to have uniform policies across the entire enterprise, can you explain to me, Mr. Turner, how the establishment of the uniformity across the enterprise is required by Ontario ratepayers and is a benefit to them? 1062 MR. TURNER: If I may refer to some of the notes that we relied upon and looked at in the context of the CIO's department, the chief information officer's department, with respect to policies and standards, the CIO at Enbridge does the following: It develops enterprise-wide policies and standards for the use of information technology, including IT architecture, planning, security, purchases and records, document management. They are designed to reduce the cost of operations through effective coordinated automation of routine functions to ensure broad but secure access to data and information generated by the company in its business activity, this would be any of the participating groups, and to enable new opportunities for the business units through innovative use of information technology. 1063 Those are how it describes its IT policies and standards. Those are applied -- from our interviews, those strategies are centralized, are established on a central basis, and they form the umbrella for the individual units to execute those strategies, so I would say yes. 1064 MR. WARREN: What I wanted to get at to though, sir, and this may be beyond your area, beyond your mandate, it strikes me, just on an intuitive level, that there will be certain costs incurred at the EI level that are a function of its being a parent of a large enterprise. Can we agree with that on an intuitive level? 1065 MR. TURNER: Yes, sir. 1066 MR. WARREN: And that those costs, because they were incurred as a result of its being at the top of the food chain over this enterprise, that those costs would not necessarily -- certainly would not necessarily be costs incurred by EGD if it were a stand-alone utility; fair enough? 1067 MR. TURNER: Depending on the facts, I would say it's fair. They could be or they could not be. 1068 MR. WARREN: Intuitively. At an intuitive level. 1069 MR. TURNER: Yes. 1070 MR. WARREN: And what I'm wondering is in your examination of the methodology, is there some component of the methodology that filters out or blocks, from allocation to EGD, those costs which are a function of the huge enterprise? I apologize for the somewhat pejorative adjective "huge," for it being an enterprise? 1071 MR. TURNER: I think it was disclosed in evidence yesterday by Ms. Brooks that there are no residual costs at the corporate level. That all of the costs were flowed out to the operating units. 1072 MR. WARREN: I apologize, sir, I don't know how that's an answer to my question. In terms of the fair allocation of costs, because fairness is one of the criterion? 1073 MR. TURNER: Yes, fairness is. 1074 MR. WARREN: In fairness is one. It would be unfair for EGD -- leaving aside its ratepayers, we will look at that -- unfair for EGD to bear costs which were a function of EI being at the top of the food chain over all these enterprises. My question was: Is there something in the methodology which blocks the allocation of those costs? 1075 MR. TURNER: I think you are asking two questions, so I'll break my response into two parts. 1076 Firstly, as in any cost allocation approach, one must first define what costs are to be allocated. Secondly, having defined what costs will be allocated, one must develop a method of allocating those costs and a rationale for the allocation of costs. 1077 The company has identified the pool of costs to be allocated as all of the costs incurred by EI, I believe, or all or substantially all of the costs incurred by EI, and it has made its allocation on the rationale that all of those costs benefit the enterprise as a whole. And that because of the nature of the business being one that is dependent upon a number of factors, such as government relations, the capital markets, particularly because of the regulated business being driven by cost-efficient access to capital, that the activities undertaken -- that one might intuitively say that corporate governance at the top level do benefit the end users. 1078 And so if you go and you look at the nature of the costs, they are fully disclosed and adequately described in what we've attached as appendix A to our sheet. The method of allocation of each those departments which is in excess of $500,000 is referred to and discussed in our report. 1079 I can say to you that some parties or other parties may, in looking at that information, come to a different conclusion than the company has reached with respect to some of these costs, but I think that when you're looking at the methodology, it has been consistently applied. The methodology that has been applied is transparent, and based on the facts and circumstances as outlined by the company as to the causal relationship, it's a reasonable allocation consistent with the principles. 1080 That is not to say that a party or other parties would reach differing conclusions as to the appropriateness of including certain costs in the allocation. It comes back, and I think I mentioned this yesterday in response to a query that -- a question was raised with respect to director's fees, I believe, in the Westcoast decision, and the way I would -- or the way that I had interpreted it and the way I had looked at that it was not a de facto statement by the Board that says directors' fees could never be charged. 1081 I took it in the facts and circumstances as being represented by Westcoast in that case that the Board was not persuaded the company has proven its case that they were a benefit. So that's what we confined it to. 1082 MR. WARREN: May I conclude from that that for the Board to determine whether or not individual allocations were properly borne by EGD they would have to look at -- they would have to drill down through to look at what services were provided and at what cost, and then try and assess what benefit, if any, of that; is that fair? 1083 MR. TURNER: I'd say that's at the discretion of the Board as to what it would do. 1084 MR. WARREN: Isn't that what your saying you would have to do in order to determine if any individual allocation was a reasonable cost to be borne by EGD and its ratepayers? You'd have to look at what the services were? 1085 MR. TURNER: Yes -- 1086 MR. WARREN: And what the costs were? 1087 MR. TURNER: Yes, and so if you go back -- and that's what we've attempted to do in the methodology we've applied. What are the costs, what are the activities, how do they relate, what are the potential benefits, and then what is the underlying concept or policy for developing a driver, and in that case, what is the most appropriate driver. 1088 MR. WARREN: I'd like to stay with that for a moment. If you could turn up your attachment to it, which is this 2003 cost allocation. 1089 Mr. Ladanyi, can you help me, is this in some more readable form in some other part of the evidence, since this is blindingly small? 1090 MR. COWAN: It's in our prefiled Exhibit A.6, tab 19, if I'm not mistaken. 1091 MR. WARREN: Is it page 4 -- 1092 MR. COWAN: Excuse me. 1093 MR. LADANYI: I believe it's in Board Staff 149. 1094 MR. TURNER: Same size. 1095 MR. LADANYI: It's about the same size font, just a little clearer copy. 1096 MR. WARREN: Let me try and read what's there. Your eyes are presumably better than mine. 1097 MR. TURNER: I wouldn't make that assumption. 1098 MR. WARREN: I'm going to pick one of these at random, okay? Corporate law. 1099 MR. TURNER: Yes, sir. 1100 MR. WARREN: What we have is a budgeted item for EGD that they are going to pay $122,319 in 2003 in the category of corporate law. Have I read the document correctly? 1101 MR. TURNER: Yes, sir. 1102 MR. WARREN: Now, do you know or can I presume that within the category of corporate law there will be a number of services provided, individual services within the umbrella of corporate law? 1103 MR. TURNER: Yes. You realize you picked one we did not look at. 1104 MR. WARREN: Let's pick one that you looked at, to be fair to you. 1105 MR. TURNER: Your pick or mine? 1106 MR. WARREN: You pick, sir. 1107 MR. TURNER: Let's pick -- let's pick the controller. 1108 MR. WARREN: Corporate controller. And the number to that is 670 something -- I can't read -- 1109 MR. TURNER: It 670,964. 1110 MR. WARREN: 670,964. Thanks. Now with the 670,000 can I fairly assume - tell me if I'm wrong - that there are likely to be a whole panoply of services that are provided for $670,000? 1111 MR. TURNER: And I think you can also assume that there are a number of activities that account for that, the 670,000. 1112 MR. WARREN: And a number of activities that account for that? 1113 MR. TURNER: Yes. 1114 MR. WARREN: Is it the case, in understanding this allocation, that in order for us to understand whether or not this is a fair allocation, we'd have to look at what services are provided for 670,964 and what the cost of those services was; is that not fair? 1115 MR. TURNER: That is fair, and that is what we did. 1116 MR. WARREN: Did you look at all of the services that were provided within that umbrella, the 600 corporate? 1117 MR. TURNER: We looked at the envelope of services, and in particular for that department the envelopes of services were practices and policies, consolidated financial results, ^bucked and forecasting, external financial reporting, and I believe EGD has some public debt, enterprise-wide financial accounting systems, and related research on accounting methods. 1118 For example, those were the activities that we looked at. Now, did we go down to, What did you do yesterday? No. 1119 MR. WARREN: Okay, but isn't it fair for me to say that in order for me to determine whether or not the 670,000 was justified, I've got to, What did you do yesterday? 1120 MR. TURNER: I'm going to bring it back to some comments. I can't remember whether I made them yesterday or this morning, but I know I made them some time in the last 36 hours, that there is a trade-off or a balance between the desire to get granularity, specific activities and, What did you do yesterday, and the desire to make things administratively simple and to avoid the burdensome costs. 1121 And I believe the Board in previous findings has indicated that it accepts the cost driver mechanism as an acceptable way of achieving that result. 1122 So while I would agree 150 percent with the -- the desire to say, what did you do and track for time, lawyers and accountants, for example, we're in the business of doing that and being accountable to our clients for our time. 1123 In -- if you asked us how we accounted for our time internally as to what we were doing that indirectly benefits clients, we would have no idea, because we don't account for that time. 1124 So in our experience, it's extremely rare, with the possible exception of engineering firms, it's extremely rare for people to have internal time dockets. 1125 So while it might be true in a perfect sense, it's more theoretical than practical and so you have to find some way of making an allocation. 1126 When you look at the allocations for the corporate controllers' department, I believe it's allocated on the basis of capital employed, and without question, in my experience when you're looking at the controllership function, that is -- that is -- other than a time-based accounting system, that is most reflective of what the controllership departments actually do and how you would expect them to expend their efforts. 1127 As an example -- I'll let you pick one this time. 1128 MR. WARREN: I can't read them, so I'm -- can I ask you to go to page 1 of your evidence. 1129 MR. TURNER: Yes, sir. 1130 MR. WARREN: In the third full paragraph on page 1 you say at the last sentence: "In Enbridge's case, another significant objective of cost allocation is to ensure that there is no cross-subsidization between the regulated and non-regulated businesses." 1131 Again, sir, I didn't see any reference to this concept or this objective throughout your paper. How have you applied this consideration into your analysis? 1132 MR. TURNER: This is, in part, a statement of fact as to what their governing principles are when they establish it, although not addressed specifically, in answering or dealing with some of the principles and following the general principles of cost allocation, in looking for consistency between what's provided and what's received, consistency between the costs and the services being provided, in looking for an appropriate driver, the overall objective of that is to ensure that cross-subsidization does not take place. 1133 So I think you have to take the report as a whole to say that that point has been addressed. That's one of the fundamental parts of why you're doing cost allocation studies or why you're doing the cost allocations. 1134 MR. WARREN: So if cost allocation works, there's no cross-subsidy? 1135 MR. TURNER: That's correct. Or I think to be more accurate, once you divert from direct allocation of expenses, cause and effect, and once you are using cost drivers as your allocation methodology, that there is no unreasonable cost subsidization. 1136 You could always go: Hey, I found this $4 over here. It's our postage expense. You didn't send that registered letter. That comes with the granularity issue. 1137 MR. WARREN: Thank you very much, Mr. Turner, for your answers. 1138 I'd like to turn to the rest of the panel for a few questions. 1139 First of all, panel, this evidence -- this information I'm going to ask for may be in the record somewhere, and I'm sure if it is, you'll be quick to tell me, but if it isn't, I wonder if you could assemble it for me. 1140 For each of the business units in the Enbridge enterprise, the entire thing, could you tell me for each of them over the years, '99 through 2003, the amount of capital, the number of employees, and the revenue? Is that possible to do? 1141 MR. MEES: It's not in evidence, Mr. Warren, but we can undertake to get that to the best that we can. 1142 MR. WARREN: Thank you. 1143 For the sake of my friend, Mr. Moran, the witness and I understand what we're doing, so I'm not going to be asked to repeat it; is that fair? 1144 MR. MORAN: Undertaking J.9.8 an undertaking to provide for each business unit for the years 1999 to the year 2003, the capital, the revenue, and the number of employees. 1145 MR. MEES: Can we just clarify in "capital," what you would mean by that? 1146 MR. WARREN: Well, actually, I was using your -- the term -- 1147 MR. MEES: Capital employed. 1148 MR. WARREN: Capital employed. 1149 MS. BROOKS: We do not have that calculation for the years 1999 through 2002. 1150 MR. WARREN: For capital employed? 1151 MS. BROOKS: That's correct, because it was not needed for anything in those years. I should -- 1152 MR. WARREN: Is there a proxy for that concept for those years? 1153 MR. COWAN: Could I just seek a little clarification here. The three elements that you mentioned, you thought your question was clearly understood -- 1154 MR. WARREN: I was hoping to get out of town before I was asked for an explanation. 1155 MR. COWAN: You said capital, and we've qualified capital employed, revenue and number of employees. If we're not successful with capital employed, are you still finding it useful for us to deal with the other elements? 1156 MR. WARREN: Yes, please. 1157 MR. COWAN: Okay. 1158 MR. WARREN: I was asking Ms. Brooks and Mr. Mees if there was a proxy for capital employed that you can use? 1159 MS. BROOKS: If you're just looking to get at the general size of each business segment, total assets. 1160 MR. WARREN: Total assets will do. 1161 MR. WARREN: When I talk about business units, I'm not talking about northern, southern, I'm talking about each individual component within that. 1162 MS. BROOKS: The lines of business? 1163 MR. WARREN: Yes. 1164 MS. BROOKS: I -- I think we can undertake to do it subject to the availability of information maybe in 1999 and 2000. 1165 MR. WARREN: If you could advise your counsel if it's not doable, and I'll take your word for it, Ms. Brooks, if it's not doable. If it isn't doable, to use Mr. Turner's term, "level of granularity," can I at least get it for the big blocks, for the northern and southern? 1166 MS. BROOKS: I believe so. 1167 UNDERTAKING NO. J.9.8: TO PROVIDE FOR EACH BUSINESS UNIT FOR THE YEARS 1999 TO 2003 THE CAPITAL OR TOTAL ASSETS, THE REVENUE AND THE NUMBER OF EMPLOYEES 1168 MR. WARREN: Now a second item, another data point I would like, if you wouldn't mind, is for each of the -- each of the businesses within the enterprise, can you tell me the date on which it was acquired by Enbridge Inc.? Is that doable? 1169 MS. BROOKS: Each of the lines of business? 1170 MR. WARREN: Each of the lines of business. 1171 MS. BROOKS: So the same information. 1172 MR. WARREN: Or the granularity level, each of the lines of business? 1173 MS. BROOKS: That information should be readily available -- as long as you understand that not all of them were acquired; some of them were just divisions of businesses. 1174 MR. WARREN: Fair enough. I understand. 1175 MR. MORAN: Undertaking J.9.9: For each line of business within EI, an undertaking to provide the date that that line of business was acquired by EI, and the situation where it was actually acquired. 1176 MR. BETTS: Thank you. 1177 UNDERTAKING NO. J.9.9: FOR EACH LINE OF BUSINESS WITHIN EI, AN UNDERTAKING TO PROVIDE THE DATE THE LINE OF BUSINESS WAS ACQUIRED BY EI, AND THE SITUATION WHERE IT WAS ACTUALLY ACQUIRED; AND THE DATE 1178 MR. BETTS: Please proceed. 1179 MR. WARREN: I suppose, panel, and correct me if I'm wrong, there may be -- and it's my fault I analyzed this. It may be the case that some of those entities were divisions or spin-offs of a larger -- they came into existence at some point, whether they were acquired or otherwise, came into existence; is that fair? 1180 MS. BROOKS: That's correct. They were either constructed or purchased. 1181 MR. WARREN: Can I add then as a gloss to that undertaking, the date on which they were either constructed or acquired? 1182 MS. BROOKS: Recognizing that we're always constructing new facilities, yes. I mean for example, the date you will receive for the main line oil pipe will be about 1955, and it's obviously expanded probably to about four or five times that size since that date. 1183 MR. WARREN: That's still helpful information. 1184 Now, the next sort of data point I was interested in, panel, is I want to try if I can to compare the level of the corporate cost allocations in the last four years with EGD's O&M in each of those four years. 1185 Now, there is data which can be vacuumed up from various points in the record in this case. So can you first provide me with a comparison for 1999, 2000, 2001 and 2002, the O&M expenditures and the corporate cost allocations in each of those years? 1186 MS. BROOKS: For the corporate office only, or combined? 1187 MR. WARREN: Combined. 1188 MS. BROOKS: The corporate allocations are already in evidence. 1189 MR. WARREN: EGD's O&M compared to their burden for the corporate-cost allocations in each of those years -- 1190 MR. MEES: So within the EGD O&M there's a certain portion of their corporate charges, so show them both? I'm trying to think whether -- no, I don't think that's in evidence. We can prepare that, we can provide that. 1191 MR. WARREN: All of these bits -- this bit of data is somewhere in evidence. All I'm asking you to do is just glue it together. 1192 MR. MEES: Yes, not a problem. 1193 MR. BETTS: Mr. Moran. 1194 MR. MORAN: That will be Undertaking J.9.10. 1195 MR. BETTS: Thank you. 1196 UNDERTAKING NO. J.9.10: UNDERTAKING TO PROVIDE A COMPARISON OF THE O&M EXPENDITURES AND THE CORPORATE COST ALLOCATIONS FOR 1999, 2000, 2001 AND 2002 1197 MR. WARREN: Now, on the following question, panel, I'm going to lead with my chin, but I'm a brave person. 1198 Now, as I look at the global numbers in very rough terms, from looking at 1999 to what was claimed originally for 2003, there has -- there was an increase from -- I'll get the numbers wrong -- something like 260 million, roughly, in O&M in 1999, and what was originally sought in your application here, which was roughly 305. So there was an increase in those numbers of approximately 45 million. 1199 And in the same period, if I've got the numbers right, there was an increase in the allocation burden from 1.9 to $21 million, roughly; have I got that right, panel? 1200 MR. COWAN: I don't think that's quite right. Because I do believe if you're going to compare the $21 million in 2003 to something back in 1999 you need to be able to do the apples-to-apples comparison that we discussed yesterday as providing to perfect one of the tables that -- we've already taken an undertaking to address that issue. 1201 So if you're looking at 1.9 million, you know that there are only two components included in that, and in one of our interrogatories, which is at -- that's the Board Staff interrogatory 151, we give an indication of some of the differences, such that back in 1999, to show a comparable figure, you find 11.3 million is the amount -- 1202 MR. BETTS: Let's take your number, Mr. Cowan, you go from 11 million to 21. You say that's the true comparison; is that right? 1203 MR. COWAN: No, I'm sorry. I'm indicating that in this particular table, we went from 1999 to 2002. When we are -- to do the comparison between '99 and 2003, one is looking at additional line items in 2003 as we were discussing this morning with Mr. Janigan. 1204 So that if one is to do a comparable analysis, one needs to take all of the line items in 2003 and identify their counterparts back in 1999 in order to be whole and fair and balanced in the comparison. 1205 MR. WARREN: But isn't it fair, sir, that in 1999, the Board said you could recover $1.9 million in costs? 1206 MR. COWAN: That were through the allocation process. 1207 MR. WARREN: That were through the allocation process. 1208 MR. COWAN: Correct. 1209 MR. WARREN: And your claim in 2003 is for $21 million. That's what you want to pay. 1210 MR. COWAN: For additional items than were included in 1999. 1211 It's my -- your -- the literal truth of the statement is that the amounts allocated were 1.9 in 1999 and 21.7 is the amount proposed for 2003, but it needs to be qualified in such a way that you understand that they are apples and oranges in terms of their content. 1212 MR. WARREN: I have your argument on that, Mr. Cowan. I'll keep it in mind, certainly. 1213 Now, I'll ask you panel, I need to understand, if I can, how the corporate cost allocation operates generally. Have I understand it correctly that you start with a $96 million global figure in EI and you apply the costing methodology, and what falls out of that methodology is a burden on EGD of some $21 million; is that correct? 1214 MR. COWAN: Correct. 1215 MR. WARREN: If you wish, it's a top-down process? 1216 MR. COWAN: It's a result of applying the methodology to the 96.5 million, and the resulting amount of shared services allocation to us is the $21 million that you referred to. 1217 MR. WARREN: And it's done in advance of the fiscal year, so there's a budget; is that right? 1218 MR. COWAN: As best as possible. In this particular year, being the first year of the application, we were a little bit after the start of the year before we get finished getting it in place. 1219 MR. LADANYI: And it was also budgeted in every one of the previous years as well. And if you look at page 11 of Exhibit A.6, tab 19, schedule 1, which is our evidence -- 1220 MR. WARREN: Mr. Ladanyi, all I asked about was 2003. 1221 MR. LADANYI: Yeah, yeah, but I wanted to point out that it was always budgeted, and that's the key. 1222 MR. WARREN: There was nothing implicit in my question that this was something new. I simply wanted to know how the process works in 2003. 1223 I'll tell you when you need to fight, okay, Mr. Ladanyi? 1224 Now, what I want to try and understand, panel, from the EGD perspective -- I apologize. Maybe it's better to understand the common person's understanding of the relationship between a budgeted amount which was fixed in September or October in going forward at the end of the year what's actually spent for services that are rendered during that period. 1225 Now, is there a true-up at some point between budget and actual the way there is in other categories of O&M expenses? 1226 MS. BROOKS: The methodology allows for a true-up in a case where there's a substantial or significant change in business circumstances. As a matter of course, we would view the actual expense relative to what has been budgeted. Typically, the amounts are pretty close. 1227 MR. WARREN: How do you do that truing up, Ms. Brooks, of the comparison of actual -- 1228 MS. BROOKS: What is the mechanism -- 1229 MR. WARREN: What is the mechanism? 1230 MS. BROOKS: -- that would adjust Enbridge Gas Distribution's amount? You would issue -- you would just do an intercompany entry that would relieve the expense or add to the expense in the utility's books. 1231 MR. WARREN: Let's, if we can, turn up your pre-filed evidence at Exhibit A.6, tab 19, schedule 10 -- sorry, schedule 1, page 10. 1232 Now, for each of the categories that are looked at there, starting on page 10 for 2003, that's the budgeted amount that flows out of the application of the methodology; is that right? Is that right? 1233 MR. COWAN: That is correct. 1234 MS. BROOKS: Yes. 1235 MR. WARREN: Now, the question I have, I guess, is is this -- it's a difficulty I have in understanding, which no doubt reflects my ignorance. How does the Board, as it sits here today, know exactly what services are being provided in each of these categories? Can you find it in the pre-filed evidence, Mr. Cowan, is there a listing of the exact services that are to be provided? 1236 MR. COWAN: I believe so. The descriptions are provided in the response to the Board Staff interrogatory number 71, wherein the procedure which is attached as schedule 1, to attachment 1 of that interrogatory response includes a listing of each of the various services provided in appendix C. 1237 I'd best stop there if you wish to find that, because I've given quite a lengthy reference. 1238 MR. WARREN: Well, this is the -- this is the -- what you're referring to, I take it, Mr. Cowan, is the attachment to the services agreement; is that right? 1239 MR. COWAN: And the attachment for that attachment, yes. 1240 MR. LADANYI: Also Mr. Warren, if, for example -- 1241 MR. WARREN: Can I just stay with Mr. Cowan's explanation for 30 seconds, Mr. Ladanyi. 1242 MR. LADANYI: Okay. 1243 MR. WARREN: Can you point me to the exact pages on which the services to be provided are described? 1244 MR. COWAN: Yes. On page 17 of 23 it begins with the CEO department at 16.3.1.2 in our procedure and continues, then, department by department through to page 23, if I'm not mistaken. 1245 MR. WARREN: Let's use an example, Mr. Cowan, since you've referred to it first, on page 17 of 23 on the CEO. I'm going to read into the record a description of the services the CEO provides: 1246 "The office the CEO provides leadership and strategic council to the organization. It provides business units with senior executive advisory services and oversight in the areas of corporate governance, ongoing contact with major energy customers or suppliers, and liaison with other companies in the energy industry. This assists the business units in anticipating and responding to the current and future needs of customers in the marketplace. 1247 "The office of the CEO is also instrumental in developing and negotiating the first comprehensive incentive tolling agreement in Canada by a regulated pipeline company." 1248 Now the last sentence is a bit of historical gloss, isn't it; that's something they did in the past? 1249 MR. COWAN: I would refer to Ms. Brooks as to the facts related to that particular sentence. 1250 MR. WARREN: I'm looking at the verb, and its past tense, "was also." 1251 MS. BROOKS: Correct. 1252 MR. WARREN: So it's not a description of what the CEO is going to do next year, is it? 1253 MS. BROOKS: No, nor is this description -- it's intended to be a fairly general description of the services provided. I think it's important to remember that this methodology is applicable to all the business units as well as the corporate office. It's a cost-allocation methodology, so as such the descriptions provided here are fairly high level. So they apply to all of the business units and not just the utility. 1254 MR. WARREN: But, Mr. Cowan, when I asked him for a description of the services quite properly referred me to this text. And what I'm trying -- I mean, as I read this, Ms. Brooks, and I think you've just agreed with the proposition, it's at a very high level of generality, this description, isn't it? 1255 MS. BROOKS: It is at a high level. 1256 MR. WARREN: It's at a high-level of generality, Ms. Brooks. And my question is how do I go from that -- it seems to me like he's doing -- he or she is doing a lot of big thinking about the big corporate issues. How does this Board go from that to $373,058? 1257 MR. COWAN: We can help you with that, because, fortunately, CME asked an interrogatory exactly on that question. 1258 MR. WARREN: I'm never happy with whatever the CME does, sir. But that's another question. 1259 MR. COWAN: It's interrogatory number 163 wherein the benefits of the CEO's office provides (sic) is outlined. 1260 We -- 1261 MR. WARREN: Bear with me. I want to turn up -- Though the CME's interrogatories are always close to my heart, at this point they are ... 1262 I apologize Mr. Cowan, I'm having a hard time turning it up. I'm sure it will come to me. CME interrogatory 163, you say? 1263 MR. COWAN: Yes. 1264 MR. WARREN: Sorry, it's in Mr. Janigan's materials, which I now have to find. 1265 MR. COWAN: It's behind tab 12 of Mr. Janigan's material. 1266 MR. WARREN: Okay. 1267 MR. COWAN: Although I must tell you, that's not where I was finding them. 1268 MR. WARREN: Sorry? 1269 MR. COWAN: That wasn't the particular place I found them, but it certainly is convenient that we can find it there. 1270 MR. WARREN: The CME's question was: "Please list and quantify the benefits that the CEO office of Enbridge Inc. provides." 1271 MR. COWAN: Right. And insofar as it is characterizing the benefits or describing those benefits, one can understand what the nature of the services are that are being provided. 1272 MR. WARREN: Let's take some of the bullet items at that appear here. Bullet item number 5: "To involve the chair of the board in the corporation's strategic planning process." 1273 At a high level, that's not worth 363,000 bucks. What I'm trying to get to, Mr. Cowan, I mean it's late in the day and let's try and get to the nub of it: Where in the material -- you pointed the Board to two instances, CME 163 and that part of the services agreement which describes the functions of the CEO. Is there anywhere I can find a description of precisely what the CEO is going to do to earn 360,000? 1274 MR. COWAN: Well, what I can tell you is that we would be better directing our attention to the question of what his value is as a CEO and looking at it at a corporate level than talking about the allocation methodology, because it's through the allocation that the amount that you cite is referred to us as a receiver. 1275 So I'm having difficulty with establishing exactly the amount, but what I'm anxious for you to understand is that we believe that the particulars that we've set out, notwithstanding your characterizing it a high level, do provide insight as to what the work is that the CEO is doing for Enbridge Gas and for other member companies in the family of Enbridge. 1276 So -- 1277 MR. WARREN: Panel, you're here to talk about methodology and about numbers that fall out from that; is that right? And there will be another panel talking about services? 1278 MR. COWAN: Correct, and I expect that the next panel will have something to say about the CEO's offices. They are more intimately knowledgeable about the details of what he is providing for the enterprise. 1279 MR. WARREN: What I'd like you, as the numbers panel, to do for me is for each of the categories that I'm finding on page 10 of 15, tell me where in the pre-filed evidence I can find a description of exactly what will be done -- 1280 MR. LADANYI: Am I allowed to answer a question now? 1281 MR. WARREN: I haven't finished the question yet, Mr. Ladanyi so -- in order to justify the numbers that appear on the right-hand column. Do you follow me? 1282 MR. LADANYI: Yes. And the -- first for CEO, because I didn't have an opportunity to -- you keep cutting me off every time I want to answer a question. A description of the CEO's activities and why they are justifiable is listed in Exhibit A.6, tab 18, schedule 1, which is 2003 non-departmental O&M expenses. And there's discussion there, for example, of the allocation of the CEO's cost from Enbridge Inc. 1283 But also if you look throughout our O&M evidence, which is all filed under tab A.6, there will be a discussion of all the activities that have been allocated from Enbridge Inc. For example, under human resources there will be a discussion and explanation of what the human resources are, and you go and look into every section, to legal department and so on. So they are all really listed in the O&M evidence. 1284 MR. WARREN: Mr. Ladanyi and members of the panel, rather than having me go hunt and peck for it, since you're the ones here who want to justify the numbers, can you do that job for me? For each of these numbers, I want to find out where in the pre-filed evidence is a description of what's going to be done that warrants spending this amount of money. Do you follow me? 1285 MR. LADANYI: We could provide you an index, although in the case, itself, already has an index, but we will be willing to provide you a second index. 1286 MR. WARREN: Thank you very much, Mr. Ladanyi. 1287 Could I have an undertaking number for that? 1288 MR. MORAN: That will be Undertaking J.9.11. 1289 I wonder if Mr. Warren, for the record, could describe exactly the undertaking he's looking for. 1290 MR. WARREN: The undertaking I've asked for, panel, is this. I'd like you, for all of the categories of corporate cost allocations that are listed on Exhibit A.6, tab 19, schedule 1, page 10, for each of those, would you please refer me to where, in the pre-filed evidence, including the interrogatory responses, I can find a description of the services that are to be provided giving rise to those costs. 1291 MR. MEES: Yes, we can undertake to do that. 1292 MR. WARREN: I'm not so much worried about you. It's Mr. Moran that I'm worried about. 1293 UNDERTAKING NO. J.9.11: TO PROVIDE A LISTING FOR ALL OF THE CATEGORIES OF CORPORATE COST ALLOCATIONS THAT ARE LISTED ON EXHIBIT A.6, TAB 19, SCHEDULE 1, PAGE 10, OF WHERE, IN THE PRE-FILED EVIDENCE, INCLUDING THE INTERROGATORY RESPONSES, A DESCRIPTION OF THE SERVICES THAT ARE TO BE PROVIDED GIVING RISE TO THOSE COSTS CAN BE FOUND 1294 MR. BETTS: Mr. Warren, for my benefit, what level of detail are you looking for from the panel? 1295 MR. WARREN: They can just give me the page references if they want, sir. 1296 MR. BETTS: There has been some reference to some general statements that you weren't satisfied with, and if that reference comes up -- 1297 MR. WARREN: If that's all there is, sir. I want to know what there is in the record that justifies these numbers. 1298 MR. BETTS: And if there's multiple references, you'd like to know those too? 1299 MR. WARREN: I want to know -- 1300 MR. BETTS: Fair enough. Thank you. 1301 MR. WARREN: Although this seems on the surface, and perhaps it is, an irritating and burdensome responsibility, it's a whole lot less irritating than my spending the next four hours asking about them. So that there is -- supplying a crude cost-benefit analysis. 1302 Now, the final series of questions I have, panel, is just about the corporate services agreement, which appears as an attachment to Exhibit I, tab 1, schedule 71. Board staff interrogatory number 71. Exhibit I, tab 1, schedule 71. Do you have that? 1303 MR. MEES: Yes, we do. 1304 MR. WARREN: Can you tell me first, panel, who negotiated this? Was it negotiated between Enbridge Inc. and Enbridge Gas Distribution Inc.; is that correct? 1305 MS. BROOKS: Yes. 1306 MR. WARREN: And was each side separately represented by counsel? 1307 MS. BROOKS: Yes. 1308 MR. WARREN: Can you advise me who the counsel were? 1309 MS. BROOKS: That was internal legal counsel in both cases. 1310 MR. WARREN: So there was internal counsel of EGD and internal counsel of EI? 1311 MS. BROOKS: Yes. 1312 MR. WARREN: And the internal counsel of EGD, he or she reports to whom? 1313 MS. BROOKS: With -- I'm not sure exactly who she reports to, but the reporting relationship is within the business unit, not to the corporate office. 1314 MR. WARREN: And was this agreement reviewed by the board of directors of both EI and EGD? 1315 MS. BROOKS: No, not to my knowledge. No. 1316 MR. WARREN: Not? 1317 MS. BROOKS: No. 1318 MR. WARREN: You're quite certain about that, that it was not reviewed by EGD? 1319 MS. BROOKS: No, I said not to my knowledge. It has not been reviewed by the Enbridge Inc. board, and I'm not certain about the EGD board. Most of those activities are carried out by written resolution, so we could certainly find out. 1320 MR. WARREN: Can you undertake to determine whether or not this intercorporate services agreement was reviewed by either one of the EI board or the EGD board? 1321 MS. BROOKS: Yes, I can respond now that it was not reviewed by the EI board. 1322 MR. WARREN: So I don't need an undertaking, so Mr. Moran can't make me repeat it. 1323 MR. MORAN: Undertaking J.9.12: To determine whether the intercorporate services agreement dated October, 2002, was reviewed by the EGDI board. 1324 MR. BETTS: Sorry, did we not conclude that it was not -- 1325 MR. WARREN: I think Ms. Brooks said that to her knowledge it was not reviewed by either board; is that right? 1326 MS. BROOKS: I know that it has not been reviewed by the EI board. It's the EGD board I'm not certain of. 1327 MR. BETTS: Thank you for that clarification. So as you read it, Mr. Moran, is correct. 1328 UNDERTAKING NO. J.9.12: TO DETERMINE WHETHER THE INTERCORPORATE SERVICES AGREEMENT DATED OCTOBER, 2002, WAS REVIEWED BY THE EGDI BOARD 1329 MR. WARREN: Now, if we could turn up section 5(b) of the agreement. There's a reference in both 5(b) and 5(c) to "the enterprise widely." Is that a defined term, and if so, what the definition of it? 1330 MS. BROOKS: I think it's referring to the benefits the service recipient or the enterprise, in a global sense. 1331 MR. WARREN: Do you mean the entire EI family of companies? 1332 MS. BROOKS: Yes. 1333 MR. WARREN: Can you help me, panel, why an intercorporate services agreement between Enbridge Inc. and Enbridge Gas Distribution Inc. would have any reference to expenses or benefits to the enterprise widely? Why is it relevant in a corporate services agreement between the two? 1334 MS. BROOKS: I don't know specifically. I would have to check with the EGD counsel who drafted the agreement. 1335 I suspect it relates to costs like directors' fees or other fees. All the general expenses are listed in the evidence that was filed, so this clause is specifically relating to those types of expenses, which include things like insurance premiums which are of direct benefit to EGD and other general expenses, which are of indirect benefit. 1336 MR. WARREN: Would you turn up section 16, panel. This indicates that "the service recipient" -- which in this case would be EGD; correct? 1337 MS. BROOKS: Correct. 1338 MR. WARREN: "-- has the right to audit, to verify the accuracy of any statement, charge, or computation made pursuant to any provisions of the agreement." 1339 Now, was there a similar provision in the agreements that existed prior to this? 1340 MS. BROOKS: Just bear with us. There's no index to that agreement. 1341 After a very quick perusal, I don't see a similar section. 1342 MR. WARREN: Ms. Brooks, to save time late in the day, can I ask for this undertaking. I want to give you an opportunity to review it at greater length. Can you determine (a) if there's an audit right in there, and (b) if so, if that right was ever exercised by EGD? 1343 MS. BROOKS: Yes. 1344 MR. WARREN: And I suppose the third component to it, Ms. Brooks, is that if the audit right was ever exercised, can you produce the results of the audit? 1345 MS. BROOKS: Yes. 1346 MR. WARREN: So the undertaking, Mr. Chairman, is to determine if in the agreement that existed prior to this one between EGD and EI, (a) there was an audit -- a right to audit by EGD, and number 2, if the right was ever exercised, and number 3, if so, to produce the results of the audit. 1347 MR. MORAN: That will be Undertaking J.9.13, Mr. Chairman. 1348 MR. BETTS: Thank you. 1349 UNDERTAKING NO. J.9.13: UNDERTAKING TO DETERMINE IN THE PRIOR AGREEMENT BETWEEN EGD AND EI: 1) IF THERE WAS A RIGHT TO AUDIT BY EGD; 2) IF THE RIGHT WAS EVER EXERCISED; 3) IF SO, TO PRODUCE THE RESULTS OF THE AUDIT 1350 MR. WARREN: My final question, panel, is a reference surprisingly enough, to a CME interrogatory number 164. This is for the record Exhibit I, tab 4, schedule 164. 1351 MR. MEES: Yes, we have that. 1352 MR. WARREN: Now, the question that CME asked was with respect to benefits, and the answer was that some of them were quantifiable and some of them were not quantifiable. And going to page 3, there's an attempt to determine quantifiable benefits. And there's a list of about 10 or 15 categories where the benefits would be quantifiable. Have I read the exhibit correctly? 1353 MS. BROOKS: Yes, you have. 1354 MR. WARREN: Now, I'd like you to just to compare at that list there, going back to your prefiled evidence, Exhibit A.6, tab 19, schedule 1, page 10. Do you have that? 1355 MS. BROOKS: I do. 1356 MR. WARREN: And the list of categories of cost allocations is substantially longer than the list of categories of quantifiable benefits; can we agree on that? 1357 MR. MEES: Yes, we can agree on that. 1358 MR. WARREN: And is it not reasonable to expect, Mr. Mees, since you're the one who volunteered the answer, is it not reasonable to expect that there should be quantifiable benefits for EGD in each of the categories of cost allocation listed on page 10 of your prefiled evidence? 1359 MR. MEES: No, I disagree. In certain cases, there can't be quantifiable benefits. 1360 I think back to an example. If you look at the corporate controllers' group, one of the things that they provide is they do our accounting policy, our accounting standards. They're looking at -- how do you quantify the benefit of not having proper accounting policies? 1361 And so -- in putting together this -- the CME 164, we tried quantifying where possible, but there's certain things that just aren't quantifiable, but the risk of not having them is great. 1362 MR. WARREN: But the benefits, you'd have to agree, in the non-quantifiable category are very much in the eye of the beholder. And if there are benefits, which you feel from EGD's perspective, are of value to you; correct? 1363 MR. MEES: Right. Correct. 1364 MR. WARREN: Can we not agree, Mr. Mees, that outside of the eye of the beholder, they are not objectively verifiable? 1365 MR. MEES: I'm not so sure, so I'll use my accounting -- standard accounting policy. 1366 If we didn't have proper accounting standards, we've all seen examples of it out in the marketplace of not having those standards, and what the -- so other people see it out in the external market, the benefit of having proper accounting standards, for example. 1367 MR. WARREN: But at the end of the day, how is the Ontario Energy Board supposed to put a number on something which you agree is not quantifiable? 1368 MR. MEES: That's why we've chosen to look at it in totality, and in totality, there is more benefits than there are costs. 1369 MR. WARREN: Those are my questions of this panel. Thank you. 1370 MR. COWAN: It's of note, if I may, that the categories -- 1371 MR. WARREN: I quit, Mr. Cowan. 1372 MR. COWAN: You may be, except I don't think we've been quite whole in allowing you to see the link between the two exhibits. So if I might comment on the reflection that on the CME 164, for instance, there is a line item referring to reduced financing costs, and one can see that there's not a one-to-one correspondence between that list and the list that we supplied on page 10. 1373 So there are a number of things that benefit the corporation in the form of reduced financing costs that are collected through a number of different line items on page 10. 1374 So I would suggest that when the next panel is here, that Mr. Wilson may well be able to assist in showing how broadly the organization is involved in achieving reduced financing cost and that, indeed, it isn't just one line item that's matched up one to one between these two exhibits. 1375 MR. WARREN: Well, Ms. Brooks and Mr. Mees, your names are on this interrogatory response. You're the ones who generated the numbers; correct? 1376 MS. BROOKS: Yes. 1377 MR. MEES: Yes. 1378 MR. WARREN: Can you please undertake to provide me with all of the back-up material that allowed you to arrive at the numbers that are set out on page 3 of 3? 1379 MR. MEES: We are going to provide that as part of our previous undertaking. 1380 MR. WARREN: Was that part of the cost benefit analysis that Mr. Janigan asked for? 1381 MR. MEES: Yes, he asked for the details behind these numbers. 1382 MR. WARREN: Thank you very much. Those are my questions. 1383 MR. BETTS: Thank you, Mr. Warren. 1384 Mr. DeRose. 1385 MR. DeROSE: Mr. Chair, if I may, over the past day and a half, I've been striking out large portions of my cross-examination, and I believe I'm down to probably less than ten minutes. 1386 I've checked with both of my friends that are ahead of me, and they've kindly said that I could jump the queue if the Board is willing to sit for another 10 to 15 minutes so that I may hop on a plane and go back to Ottawa tomorrow. Would that be acceptable? 1387 MR. BETTS: That sounds like a very good plan. Please proceed. 1388 CROSS-EXAMINATION BY MR. DeROSE: 1389 MR. DeROSE: Good afternoon, panel. 1390 First of all, Mr. Turner, Mr. Warren and Mr. Janigan have gone through, in great detail, your report that you provided to the Board, and I have only one question in that regard, and it's with respect to the drafting of your report. 1391 Did you provide a draft version of the report to either Enbridge Inc. or to EGD? 1392 MR. TURNER: Yes, we would have. 1393 MR. DeROSE: And subsequent to putting that draft to -- well, first of all, did you put the draft to both companies? 1394 MR. TURNER: We provided the draft to EGD, which engaged us. 1395 MR. DeROSE: And what changes did you make after discussions with EGD and after they reviewed your draft? 1396 MR. TURNER: I do not recall specifically. I would describe them as not extensive. 1397 MR. DeROSE: Do you recall if you eliminated anything? 1398 MR. TURNER: I do not recall. 1399 MR. DeROSE: Would you be able to check your earlier drafts and provide us with a list of any changes that you may have made? 1400 MR. TURNER: I may be able to. Our policy is not to retain drafts. 1401 MR. DeROSE: Would you make best efforts? I would be satisfied with that. 1402 MR. BETTS: Can we establish an undertaking for that? 1403 MR. MORAN: Undertaking J.9.14, Mr. Turner to check if there are previous drafts and to provide a list of changes between the drafts and the final report. 1404 UNDERTAKING NO. J.9.14: MR. TURNER TO CHECK IF THERE ARE PREVIOUS DRAFTS AND TO PROVIDE A LIST OF CHANGES BETWEEN THE DRAFTS AND THE FINAL REPORT 1405 MR. BETTS: Thank you. 1406 MR. DeROSE: Thank you, Mr. Moran. 1407 Now, Mr. Turner, one last point, and if I misquote, you please tell me. I was trying to take the best notes I could, but it was going along fast. 1408 MR. TURNER: You expect me to recall what I said, yes. 1409 MR. DeROSE: Well, I expect this is just a clarification question. 1410 MR. TURNER: Yes, sir. 1411 MR. DeROSE: You may recall you were discussing with Mr. Warren the issue of cross-subsidization? 1412 MR. TURNER: Yes, I do. 1413 MR. DeROSE: What I managed to write down in my notes is that you said: Once you were using cost drivers, there was no unreasonable cross-subsidization. 1414 I believe you said that as a general principle. 1415 MR. TURNER: As a general principle, if you've got the cost bases right, the participants in the cost-sharing arrangement, or the cost services agreement and the cost drivers are reflective of what's being received, then subject to the -- I'll go back -- I don't want to use the granularity word, but I will, you know, the most direct one is obviously, I did this and you did that. Once you deviate from that, there is inherently some approximation of rough justice. 1416 So subject to the rough justice comment, then there would be no cross-subsidization. 1417 MR. DeROSE: I take it you would agree as a general proposition, though, that it is possible that a cost driver chosen, may be inappropriate. There are times that that could happen. 1418 MR. TURNER: It -- well, one would like to think that it doesn't happen or you have a rational -- a rational explanation as to why the cost driver arises, but certainly if you, either due to errors of fact, or it turns out with hindsight that other cost drivers are available that would provide a more direct or causal relationship, yes, you can have differences of opinion. 1419 MR. DeROSE: So you would agree that if you use an inappropriate cost driver, that could lead to cross-subsidization, even though you're using a cross-driver? 1420 MR. TURNER: It may or may not. It's -- 1421 MR. DeROSE: But it's possible? 1422 MR. TURNER: Yeah, it's possible. 1423 MR. DeROSE: And, panel, if I could just have you turn to schedule 71 -- I'm sorry. Exhibit I, tab 1, schedule 71, attachment 1, and then it's page 13 of 23. This is the cost-allocation methodology. 1424 MR. COWAN: We have it. 1425 MR. DeROSE: And referring to section 13, which is the dispute resolution process, Mr. Janigan this morning asked you a number of questions about this section. I believe it was Ms. Brooks that answered, but I could be wrong on that. 1426 And my question is that -- has that dispute resolution process been engaged at all? 1427 MS. BROOKS: It was not required through the process that we used for the 2003 budget. 1428 MR. DeROSE: And then if I can have you look at Exhibit I, tab 13, schedule 100. This is IGUA interrogatory number 100. 1429 And if it's easier, this is also contained in VECC's book of documents, K.8.3, tab 11. 1430 MR. MEES: We have that. 1431 MR. DeROSE: And this is the confirmation notice that sets out the agreement with respect to the allocated costs. 1432 Can you tell me whether the amount of $21,159,838, which is the final number, was that the first number proposed by EI? 1433 MR. MEES: No. The first number that was proposed, I believe, was in our original filed evidence. It was 19.7 million. 1434 MR. DeROSE: So with respect to discussions on the nature and level of services, it increased? It didn't decrease? 1435 MR. MEES: It increased initially to 21.8, and then after further discussions, went down further to 21.2. 1436 MR. DeROSE: And are you aware of any of the departments within EGD, after reviewing the proposed allocations, voicing any concerns or indicating that they did not believe that that was a fair allocation? 1437 And this question could either be to the panel or to Mr. Turner, as I understand Mr. Turner did a number of interviews to the departments. 1438 MR. MEES: Not on the -- on the final amounts, there's no -- they've all been signed off. They're all comfortable with the level of service. 1439 Now, initially there was some changes, as I indicated. One example I used in my examination in chief was the labour relations, which was initially high, and then we -- it got knocked down, for example. 1440 MR. DeROSE: And, Mr. Turner, in your interviews, did anybody say, No, I don't think I'm getting the benefits that people are saying I'm getting? 1441 MR. TURNER: I'd have to ask my staff. They did the interviews. I'm not aware of any. 1442 MR. DeROSE: Would you be able to check that and let us know whether anybody voiced any opposition? 1443 MR. TURNER: Yes. 1444 MR. MORAN: Mr. Chair, that would be Undertaking J.9.15, Mr. Turner to check with staff with respect to whether -- 1445 MR. DeROSE: Rather than saying "voiced opposition," perhaps if Mr. Turner could check with his staff and with respect to -- check the interview notes and determine whether any departments in EGD voiced concerns or disagreement with respect to the benefits and services provided as part of the cost allocation. 1446 MR. BETTS: Thank you. 1447 UNDERTAKING NO. J.9.15: TO HAVE MR. TURNER CHECK WITH HIS STAFF AND INTERVIEW NOTES AND DETERMINE WHETHER ANY DEPARTMENTS IN EGD VOICED CONCERNS OR DISAGREEMENT WITH RESPECT TO THE BENEFITS AND SERVICES PROVIDED AS PART OF THE COST ALLOCATION 1448 MR. DeROSE: Mr. Chair, thank you very much for the indulgence. Those are all my questions. 1449 MR. BETTS: You did very well. I think you only took five minutes. 1450 Has anyone got, let's say, six or seven minutes' worth of questions? 1451 Then we will conclude this tomorrow. 1452 Thank you very much. It has been a long afternoon, and the panel has stood up very well, as have the intervenors, by the way. So we will adjourn at this point, and we will reconvene tomorrow morning at 9:30. 1453 I understand that there is potentially bad weather coming tomorrow. If somebody is caught in it that's -- and I would assume it's going to be either Mr. Shepherd or Mr. Brett that will be the key intervenors, and members of the panel, and Mr. Cass who will be also key for tomorrow's exercise. If weather does delay you, we will certainly understand, and if you can just get word to the Board as to when we might expect you. Hopefully no one will have any problems. 1454 With that being said, let us adjourn now and reconvene at 9:30 tomorrow morning. 1455 --- Whereupon the hearing adjourned at 3:53 p.m.