Rep: OEB Doc: 12NB9 Rev: 0 ONTARIO ENERGY BOARD Volume: 13 11 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 11 APRIL 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel COLIN SCHUCH Board Staff SUZANNE TONG Board Staff DENNIS O'LEARY Enbridge HELEN NEWLAND Enbridge ROBERT WARREN CAC CRAIG PARRY Energy Probe MARK MATTSON Energy Probe BRUCE MacODRUM CME SUE LOTT VECC DAVID POCH GEC MURRAY KLIPPENSTEIN Pollution Probe JACK GIBBONS Pollution Probe JACK GIBBONS Pollution Probe 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [21] ENERGY PROBE PANEL ON ISSUES 9.2, 9.5 AND 9.6: RUBIN [69] EXAMINATION BY MR. PARRY: [70] PROCEDURAL MATTERS: [215] EXAMINATION BY MR. PARRY CONTINUED: [234] CROSS-EXAMINATION BY MR KLIPPENSTEIN: [336] CROSS-EXAMINATION BY MR. POCH: [520] 10 EXHIBITS 11 EXHIBIT NO. K.13.1: DOCUMENT ENTITLED "Enbridge GAS DISTRIBUTION INC. FISCAL 2000 RATES: ENERGY PROBE'S SUPPLEMENTARY ADR POSITION PAPER ON SSM DESIGN," BY NORMAN RUBIN [282] EXHIBIT NO. K.13.2: TRANSCRIPT EXCERPT VOLUME 2, MARCH 25TH, 2003 [344] 12 UNDERTAKINGS 13 14 --- On commencing at 11:59 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Welcome everybody to day 13, unfortunately Friday, day 13, of this hearing for anybody who is concerned about luck, and hopefully nobody is. 17 It's the Board's aim to try and deal completely, if possible, with the Energy Probe witness panel today, and I'd ask you all to work with us to try and achieve that goal, if possible. 18 If that isn't possible, then we will be forced to carry it on until Monday. We are prepared to sit a little bit late but some prior engagements will mean we may not be able to go as late as we have in the past. So try and work with us there. 19 The Board will not be able to render its decision on the production motion today. We will be offering our best efforts to try and do that for Monday though -- and again, we're working hard at it but Monday will be our goal. 20 Before we swear in the witness panel are there any preliminary matters for Board consideration? 21 PRELIMINARY MATTERS: 22 MR. O'LEARY: Good morning, Mr. Chairman, Mr. Dominy. A couple of preliminary matters, one relates to the process today. I believe there's an agreement amongst counsel, and I've discussed it with Mr. Moran, that it's somewhat unusual to have both myself and Ms. Newland here who propose to cross-examine Mr. Rubin, but since we have issue 9.6 being a separate issue that Ms. Newland is responsible for, and then I would conduct cross-examination in respect of the other issues which Mr. Rubin would be speaking to, which are 9.2 and 9.5. 23 We believe that the most expedient way to proceed would be to allow Ms. Newland to first go ahead with her cross-examination, if any, and then I would pick up after that. It's somewhat unusual to have two counsel doing it, but under these circumstances I don't believe there's any objection to that. I just wanted to report back to you and request your approval as well. 24 MR. BETTS: Thank you. Are there any objections or submissions on that? The Board panel is quite comfortable with that. 25 Any other preliminary matters? 26 MR. O'LEARY: The other issue, sir, is that yesterday at 5:00 p.m., Energy Probe forwarded to the company a document which they have entitled, "Energy Probe's Supplementary ADR Position Paper on SSM Design." Now, you may recall from Ms. Squires' evidence to the effect that the company had not taken a position one way or the other, neither rejecting it or accepting it, but I understand that Energy Probe proposes to introduce that in evidence today. And the concern and the question that I have flowing from that concern is that it is coming in after the company has already put in all of its evidence in chief and the panels that have given evidence in respect of the SSM had not been given the opportunity to, first of all, consider with the assistance of their consultants this paper, nor to speak to it specifically in chief. That -- the concern that might arise is whether or not there is, therefore, an opportunity for the company to properly respond to it. 27 Now, that being said, it may be the situation where Energy Probe is simply filing this as a matter of information to allow parties to ask a few questions about it but they are not specifically asking the Board to make any ruling in respect of what the paper contains. If that is the case, then the company does not have any objection to the filing of this evidence, even though it is, respectfully, very late in the process. But if it is the intention for Energy Probe to ask the Board to make a ruling to specifically adopt some of the principles set out in the paper, then it is the company's position is that the filing is late and the alternative is to not file it or to, dare I make the request, ask that we bring all of the company's DSM panels back and the consultants and we start over again in some respects. 28 Obviously, we would not prefer that and do not recommend that, but I did want to raise that as a preliminary point. And perhaps Mr. Parry could speak to what the position is of Energy Probe. 29 MR. POCH: Mr. Chairman, I'm wondering if before Mr. Parry speaks it might be appropriate for -- 30 MR. BETTS: Sorry, Mr. Poch? Thank you, I need to catch faces -- I can't see the lips moving at this point. 31 MR. POCH: Mr. Chairman, I'd just like the Board to note, nobody is in fact a signatory to most of the partial ADR settlement with respect to 2003, including aspects that refer to an opportunity in the forthcoming consultative to look at alternative SSM approaches. I take some comfort from that, as we heard the company speak to where they'd love to see things go too, if Energy Probe can confirm that this is in the context of that and that the -- indeed they're not asking the Board to rule on any particular approach, but rather are simply trying to make sure that the discussion remains an open one, we don't have any objection. But I do join my friend in raising the concern. If, however, they are asking the Board to adopt principles that would support a particular approach, then it raises some concern. 32 MR. BETTS: Mr. Klippenstein. 33 MR. KLIPPENSTEIN: Thank you, Mr. Chair. I would repeat the concerns. I am not comfortable with the evidence coming in unless its purpose is very clearly stated and very limited. It comes in at a very late stage and we are prejudiced by not being able to address it properly as well. And I'm sure Energy Probe is well-intentioned on putting it forward, but it causes severe problems, and I'm not sure it should be tabled at all. 34 That would be my respectful submission. 35 MR. BETTS: Any other comments? 36 Is Energy Probe in a position to respond to those concerns? 37 MR. PARRY: Yes, sir. 38 I wish to assure all of my friends that this is strictly for discussion purposes. We are not asking the Board to make any ruling, and it's for that limited purpose that we would intend to tender the document. 39 MR. BETTS: Thank you, Mr. Parry. 40 Is that satisfactory to those that have questioned it? 41 MR. O'LEARY: It is from the company's perspective, if it's understood that there will not be argument made advancing certain principles in that paper for the purposes of the Board adopting it in this proceeding, yes. 42 MR. BETTS: Okay. The Board is satisfied with that exchange, then. 43 And I will ask if there are any other preliminary matters? 44 MR. MacODRUM: Mr. Chairman, Bruce MacOdrum. 45 I expect to have, some time before the Board adjourns today, a copy of some additional direct testimony that Mr. Rowan will speak to when he is reached on Monday, and I'd assure the Board that the data that is used in that document and analyzed is all data and information that is already on the record in this proceeding. 46 MR. BETTS: Thank you, Mr. MacOdrum. And obviously, the parties will indicate if they are concerned with that when it's received. 47 Any other preliminary matters? 48 Mr. Moran? 49 MR. MORAN: Mr. Chair, the document that was just discussed a few minutes ago, I don't know if you have copies of it. We have one copy here, and I thought I should check and see if you have it yet. 50 MR. PARRY: We have more copies. 51 MR. BETTS: I confess that I did receive it yesterday. I do not have it with me right now, nor did I have a chance to analyze it, so I would appreciate a copy, please. We'll need two copies. 52 Just for the record, it's pretty clear that the panel members weren't really aware of what you all were talking about there because, in fact, we have just received this. But as long as all of you are comfortable with that exchange, that's fine. 53 Okay. Are there any other preliminary matters? 54 I would expect, then, that the document that's now been presented to the Board will be introduced as an exhibit by Energy Probe at the appropriate time. 55 MR. PARRY: Yes, sir. 56 MR. BETTS: Thank you. 57 Then I think we're at the stage that we would invite Energy Probe to introduce their witness, and we'll swear that witness in. 58 I wonder, is it Mr. Parry or Mr. Mattson that will be introducing the witness? 59 MR. PARRY: That will be me, sir. 60 MR. BETTS: Would you care for a closer seat, or are you okay? 61 MR. PARRY: I'm comfortable here, but -- 62 MR. BETTS: That's fine. If you're set up there, that's fine. 63 Shall we swear the witness in first, Mr. Parry? 64 MR. PARRY: Yes, please. 65 MR. BETTS: Mr. Dominy, please. 66 N.RUBIN; Sworn. 67 MR. BETTS: Thank you. And the witness has been sworn in. 68 Mr. Parry, please proceed. 69 ENERGY PROBE PANEL ON ISSUES 9.2, 9.5 AND 9.6: RUBIN 70 EXAMINATION BY MR. PARRY: 71 MR. PARRY: Mr. Rubin, I guess the first order of business is you've presented some pre-filed testimony. 72 MR. RUBIN: That's correct. 73 MR. PARRY: I take it you adopt that pre-filed testimony today? 74 MR. RUBIN: Yes, I do. 75 MR. PARRY: I'd like, then, to turn to the issue 9.6. 76 MR. RUBIN: Yes, sir. 77 MR. PARRY: Dealing first, I'd like to discuss the settlement proposal of December 23rd, 2002. And the first issue I'd like you to discuss, sir, is the SSMVA settlement of 3.5 million from the fiscal year 2000. 78 MR. RUBIN: Yes. I believe that the settlement proposal of December 23rd should be rejected by this Board, and I have several reasons to hold that view. Perhaps it would be most helpful if I could list them first and then proceed with the 3.5 million. 79 The first is that, in my view, the SSMVA settlement of $3.5 million for fiscal 2000 is inappropriate. The second is that the SSMVA settlement for fiscal 2001 in that non-unanimous settlement proposal is premature. The third is that the proposed settlement does not include any agreement on the rules of retroactivity and symmetry that are stated in paragraph 25 of the proposed settlement. And in my view, this Board must determine rules of retroactivity and symmetry for at least for the prompt resolution of the fiscal 2002 SSMVA, and perhaps for subsequent years, and might as well decide what those principles are and apply them to 2000 and 2001 at the same time. 80 And finally, number four, the agreement among the signatories to this settlement proposal depends on a cost allocation that is, in my view, inappropriate. 81 Those are the four reasons, and Mr. Parry has steered me to the first of my objections to this settlement, and that is that the $3.5 million settlement for fiscal 2000 is inappropriate. And perhaps I can expand on that a bit. 82 There is quite a bit of evidence in my pre-filed testimony on that matter. In my view, the entire audit process, starting with the terms of reference, clearly are all predicated on the intention that the audit should verify and correct inputs to the SSM calculation for the year 2000. The fiscal 2000 audit in fact did find major discrepancies between the inputs that were provided to the auditor by the company and what the auditor determined to be the best information available; the truth, if you will. And applying those corrections to the proposed numbers and doing the SSM calculation on the basis of the auditor's findings leads to an SSM amount of a small negative amount, 69-odd thousand dollars below zero. 83 MR. PARRY: Mr. Rubin if I could just stop you there, briefly. 84 When you say that it arrives at a small amount of negative $69,000, I take it that's when applying your suggested rules of retroactivity and symmetry. 85 MR. RUBIN: That's correct. The auditor and the audit committee was faced with decisions to make in interpreting the principles set out by ADRs and Board panels on how exactly the SSM calculation was to work. And two of the three independent members of the audit subcommittee agreed on how to apply those principles to the audit findings and I was one of them. And in that application, the result from the formula was, as I said, a small negative number, 69-odd thousand dollars' penalty to the company. 86 The third independent member came out with only slightly more generous a finding. I don't have the exact number in front of me but it was very short in front of $3.5 million. So in other words, I find it very difficult, if not impossible, to stretch and shred the audit findings about what really happened in the year 2000 to justify a number anywhere near as large as $3.5 million's bonus to the company for its performance in that year. 87 MR. PARRY: I understand later in your testimony you will be discussing your preferred methodology in arriving at the SSM calculation. But at this stage, we're going to move to the discussion of the SSMVA settlement for fiscal 2001. 88 MR. RUBIN: Yes. Just before, if I can say that these principles need to be clear for the year 2000 or there will be a serious problem in the coming year as those results head toward audit and SSMVA clearance. Unfortunately, in this hearing there isn't a clear issue category for the year 2002 and the principles that guide it. It's a little bit trapped in the grey zone between future incentives and the year 2000 and 2001 clearance. But in my view, principles must be come out of this process to guide 2002, and those principles that -- the principles that I recommend are, in fact, the principles that, for the year 2000, lead to that negative $69,000 SSM. 89 Turning to your question, Mr. Parry, about the year 2001 SSMVA, the non-unanimous settlement proposal of December 23rd, 2002, includes a settlement of around 4.5 or $4.6 million for the year 2001. I believe that nobody in this room is in a position to say what the correct number is for the year 2001, because that monitoring and evaluation report has -- is in the process of going from the company to an independent auditor under the care of another audit committee, another independent audit committee. The results of that process are not yet before us. They are not just late for the hearing, they do not exist yet. 90 So for this Board to rule on whether $4.6 million is or is not the correct number and to certify that in such -- in the way that the December 23rd proposal does, specifically without reference to any findings that the audit of that -- of those numbers might find, is highly inappropriate and I would dearly love to have that kind of protection on my income tax returns, but I don't know how to get it. 91 MR. PARRY: Do the 2000 audit results increase your level of concern about the proposed SSMVA settlement for fiscal 2001? 92 MR. RUBIN: Indeed, if every audit of Enbridge's monitoring and evaluation report to date had found that all of the numbers were exactly the same as the audit-tested truth, then the need to wait for audit results would presumably diminish. But the fact that the year 2000 independent audit turned up a few rocks and found worms under them increases my conviction that it would be an error for this Board to approve any settlement for 2001 until the auditor is heard. 93 MR. PARRY: Is there anything you wish to add on that subject before moving to the next? 94 MR. RUBIN: No, sir. 95 MR. PARRY: I understand the next area where you have concern deals with the proposed settlement element not having any agreement on the rules of retroactivity and symmetry. I wonder if you could further discuss that. 96 MR. RUBIN: Yes, sir. In paragraph 25 of the proposed settlement, the framer of the document and the signators go out of their way to explain, if I may paraphrase, that this is, in effect, an unprincipled agreement, that there are significant disagreements among the signators on how one should approach these kinds of numbers, and that it would be wrong to read from this agreement, from this proposed settlement principles to guide the solution of similar problems in, for example, the year 2002. 97 Since the Board, in my view, must now set some principles to guide the rapid resolution of the year 2002 monitoring evaluation report audit and SSMVA clearance and give guidance to those who would pursue those activities, this Board must come up with those principles. 98 In coming up with those principles, it is then, I believe, inescapable that there is no regulatory efficiency in adopting an unprincipled agreement for fiscal 2000 and 2001 instead of applying Board-determined principles to those years. And furthermore, there is no good reason to violate those Board-determined principles, whatever they may turn out to be, in settling the year 2000 and 2001. 99 There is no efficiency, because the decisions have to be made anyway on how retroactivity and symmetry must work and must have been intended by past ADRs and past Boards in order for us not to say that they were, you know, severely in error. And having done that, it would not be in the public interest to apply other principles or no principles to the settlement of the first two years that are before this Board. 100 MR. PARRY: I understand your fourth area of disagreement with the proposed settlement deals with the cost allocation of the SSM. I wonder if you could further elaborate on that. 101 MR. RUBIN: Yes. The agreement and decision in EBRO-497, which established the shared savings mechanism states that the allocation of the costs for any shared savings mechanism should be done proportionally to the benefits, the total resource cost test or TRC benefits enjoyed or received by each rate class. 102 That is not a "maybe." That's not a "might be." That is how it should be done. That was approved by the Board. 103 The proposed allocation of the year 2000 and year 2001 SSMVA in this non-unanimous settlement proposal does not follow that principle. Rather, it would burden residential customers with 98 percent and industrial and commercial customers with 2 percent of the costs of this $8.1 million SSMVA payment. 104 The company has conceded in its Undertaking J.1.2 that the actual proportions, in its view, of the TRC benefits are not 98 to 2, but 58 to 42. 105 Our own analysis -- my own analysis, in which the savings on the custom side, which is the industrial/commercial side, are net of free riders whose savings are not properly attributable to the company's activities, puts the proportions at 65 to 35. However, that same calculation that comes to 65/35 also comes with a total SSMVA clearance for the year 2000 of roughly zero, so that issues of cost allocation and retroactivity and a number of other issues do not arise if we are allocating zero. 106 But nonetheless, the numbers -- the range of dispute over the distribution of the benefits seems to range from the company's 58/42 split to my 65/35 split, and does not include the allocation that's proposed in the settlement of 98 to 2. 107 And again, if I can just finish, the wording of this non-unanimous settlement agreement makes it very clear at paragraph 9 that the proposal that is before this Board is a package, that it is not severable, that all aspects are inextricably linked to one another. That as far as one can tell from the document, there is apparently no agreement among the parties -- at least none is certified -- in the absence of this improper cost allocation. 108 So my fourth and final and, in a sense, most technical objection to this panel accepting this proposal is that it hangs on a non-existent and improper thread. 109 MR. PARRY: Just for clarity, when you say your own analysis puts the proportion at 65/35, I just wonder if you could clarify who the 65 would be attributable to? 110 MR. RUBIN: Yes, in all of these numbers, the 98/2, the 58/42, and the 65/35, the larger number -- in some case, just slightly larger -- but the larger is the primarily domestic rate classes who received what we called "prescriptive DSM programs," and the smaller number is the industrial and commercial rate classes which received what we call "custom DSM programs." 111 MR. PARRY: Thank you. 112 Turning to the -- your desire to see the Board clearly articulate principles of retroactivity and symmetry govern not only fiscal 2000 but also fiscal 2001 and fiscal 2002, I wonder if you could outline the principles you recommend. 113 MR. RUBIN: Basically, there are four principles that I would recommend that this Board adopt for retroactivity and symmetry. 114 First, in general, audit results must be incorporated into the audited year's SSM and LRAM calculations. Otherwise, the Board will be giving the company a durable incentive to make errors in its evaluation report and will be violating the principles that have consistently guided the audit since the 1999-001 ADR, and perhaps earlier than that. 115 Two, for what we call "custom programs," all input values, except the avoided cost of gas, should be changed in the actuals to reflect actual values and should not be changed in the budget or target values. This is what is generally called the "no-yes" principle, no-yes. That is, "no," do not change the prior numbers; "yes," do change the actual numbers. 116 In short, actual numbers should be actual, and budget or target numbers should be as budgeted or as agreed when the target was set. 117 Three, for prescriptive programs we believe that all input values, except avoided gas costs, should be changed in both the actuals and the budget, and this approach goes by the label "yes-yes." Although, we are receptive to compromises between this yes-yes position, which we favour, and the no-no alternative, which we do not favour but respect. 118 And four, in the case of avoided costs, we believe that no-no freezing avoided the stream of future avoided costs at the levels that were set before the year began in the target process is probably the best approach, again, without ruling out some form of compromise in this case like rolling averages or smoothing as an alternative to no-no. 119 MR. PARRY: Perhaps we could then pick up on that fourth principle first, then. I wonder if you could explain for us, then, for avoided -- sorry. For avoided costs of gas, why does Energy Probe recommend no-no? 120 MR. RUBIN: The avoided cost of gas is a unique variable in the analysis of DSM activities and therefore in the calculation of the SSM. It is, at the same time, absolutely beyond the control of the company's DSM activities and hugely powerful or high leverage in its impact on the calculation of total resource cost benefits and therefore on the SSM. 121 MR. PARRY: What do you mean by high leverage? 122 MR. RUBIN: I mean a relatively small change in the expected cost of gas over the next 15 years or so has a disproportionately large effect on the benefits of the company's DSM activities, the company's and its customers' DSM activities, and therefore on the calculation that creates the incentive, the bonus that we call the SSM. 123 Unlike changes in other variables, other changes in calculation inputs or variables generally affect a single program, sometimes even a single measure. We decide that showerheads have a different characteristic, there's a different number that goes into the showerhead characteristic or the hot water heater thermostat characteristic. But avoided cost of gas affects every measure and every program across the Board, increasing or decreasing the value of every single unit of gas saved. 124 So if the SSM mechanism were to continue unchanged for many years using our generally preferred yes-yes approach to prescriptive programs, if we were to allow retroactive changes to avoided cost in the actual and in the target, there would be years of increases in avoided costs which could lead to windfall SSM payments. And those, over time, would be balanced out by decreases in avoided gas costs which could lead to disappointing SSM settlements or penalties under SSM. 125 Whether such a regime would be acceptable in its volatility or not is at best questionable, but at least it would average out. I would point out that in our situation, it appears that the existing SSM mechanism that's used for -- was used for 1999 and is to be applied to 2000, 2001 and 2002 at least, that that mechanism is apparently about to be discontinued after four years of operation. So there is no opportunity for any averaging out over the long term of swings in avoided costs. They've gone up and they're still higher than they started. 126 So in this situation, it would appear that the -- there is a need to tune out the external or exogenous influence of this variable, this one bull in the china shop. 127 MR. PARRY: One further question on that area. In a year of large decreases caused by this one factor, how do you see that that may effect what otherwise may have been a successful DSM implementation by the company? 128 MR. RUBIN: Well, the effect of decreasing avoided cost is to decrease the benefit of every unit of gas saved. The company undertakes a bunch of activities, incurs a bunch of costs both their direct costs, their contractor costs and their costs in subsidies and incentives. Those costs don't change, but the benefits of those activities drop. So the actual benefit and the cost-effectiveness of the DSM activities would drop if the avoided cost of gas drops. And in many cases, it -- if the drop is large enough, it could render a number of activities not cost-effective. 129 The downside, the argument against my proposal, if you will -- I'm arguing that the avoided cost stream, that all of these numbers should be frozen in advance. And the peril in that, as I outlined in my pre-filed evidence, is that at the end of a year in which this happens, we may be distributing shared savings to the company in the form of a shared savings mechanism that are not really shared savings because there may not have been any savings, in an extreme case. I am certainly aware of that problem and I don't see an easy way out of it without introducing the kind of volatility and the bull-in-the-china-shop effect that comes from recognizing year-to-year volatility in forecast gas costs. 130 It may be helpful to point out, perhaps everyone in the room knows this when we're talking about avoided gas costs, we're talking about a series of forecast numbers for the current year, next year, the following year, the following year. And for each measure, if we're talking about hot water tank with an expected life of perhaps 13 years, then the benefits of having a better one are the benefits of saving gas for that many years. So we're talking in the TRC test of the present-value calculation of the stream of those savings. 131 So obviously if you significantly change the dollar value of the cubic metre of gas in those years, you will materially change the benefit of improving, in this case, the water heater. 132 MR. PARRY: I wonder now if we could then turn to prescriptive programs and discuss why Energy Probe recommends the yes-yes approach. 133 MR. RUBIN: Yes. To begin, it's important to point out, once again, that I view both no-no and yes-yes as defensible positions in dealing with prescriptive programs for variables that are outside the company's control, once the design of the prescriptive program is established. And in effect, that's what we mean by prescriptive programs, we mean a program that is prescribed in advance. 134 The company will distribute $100-off coupons on high-efficiency furnaces, and they will be distributed through the following channel partners and posted on the following bulletin boards. And we all say yes, do that program. We all review the design of that program and the effectiveness of that program is forecast, but it is out of the company's influence or control, as long as they follow that prescribed set of measures. 135 So in a sense, we're all in it together, saying, yes, do that series of specific tasks, and we see your estimate, and we all approve it, including the Board, your estimate of how many people will accept that offer and what the consequences will be. And the target is set on the basis of those forecasts. 136 When one of those forecast numbers, one of those inputs changes, when it turns out to have been different from the fact, when the facts come in at the end of the year, and it turns out the numbers were different, all of the members of the audit committee, and, I believe, most of the parties in this hearing, agree that those changes, because they are out of the company's influence and control, should not lead to a reward or a penalty to the company in the SSM. The incentive program of the SSM is not designed to set up an incentive for things that come from outside that drop from heaven. 137 And there are two ways of tuning out that external or exogenous effect of a changed number: One is to make believe it didn't change, and that is the no-no approach. We said, Well, we've discovered that this thing didn't work out the way we thought, that it doesn't save as much gas as we thought. We'll make believe we don't know that, and we will give the company a reward or a penalty based on its performance as if things had turned out the way we all agreed we thought they would. That is the no-no approach. 138 The alternative is the yes-yes approach, to use the best evidence we have of what the actual effect was. And to make believe -- in both cases we're making believe -- but in this case, we're making believe that we knew in advance what the truth was. That's the yes-yes. We revisit the target, and we say, Yes, we would have agreed on exactly that same target, except with this change. 139 Although I support yes-yes, given that choice, a compromise between the two may well turn out to be the best solution. What all four members of the fiscal 2000 audit committee agreed on was that for these variables, it was appropriate to impose symmetry. No equals no; yes equals yes. In either case, one uses the same numbers in both the target calculation and in the actual calculation. 140 Notice that this is, in a sense, a violation of normal English language, that we're either fibbing about what the target was in the yes-yes case, or we're fibbing about what the actual is. They both involve make believe, but because the changes are external to the company, and it would be wrong to reward or penalize the company for something that is outside its influence -- there is no public benefit to doing so -- we all agree that symmetry is appropriate in prescriptive programs. 141 And the difference between no-no and yes-yes is the difference between competing principles, and I -- unfortunately, both sets of competing principles have validity. 142 The no-no proponents take the approach -- sometimes in an unkind moment I compared it to -- I think of it as being like a trained animal, an animal trainer approach. The no-no approach is that we have laid out a series of specific tasks for the company to do, and what we really want the company to do is to do those exact tasks and to excel at them, to overperform at them. 143 And if they do exactly what we told them, then we reward them. The seal gets a fish for balancing the ball on its nose. I don't -- I don't mean this personally to anyone, but that is the image that keeps rushing through my head when I hear this justification. But the justification for it is that we all agreed on what the tasks were for prescriptive programs, more or less down to the details. 144 The proponents of yes-yes, among whom I number myself, like to remind people that SSM stands for shared savings mechanism and that it's important that we share real savings and not just somebody's misperception of what those savings might turn out to be. Or that we not share savings that might have occurred if only something hadn't been revealed or something hadn't changed. 145 In addition, yes-yes proponents, including myself, often feel that the company is in the best position to know what the right numbers are and will have more incentive to find those right numbers and to react to them promptly under yes-yes than under no-no, in which we specifically make believe we didn't learn anything new. 146 MR. PARRY: Turning to custom projects, then, I wonder if you could explain to the Board why Energy Probe supports the no-yes approach. 147 MR. RUBIN: Indeed. 148 First of all, we're not talking really about Energy Probe's position here. We're talking about the position of all three independent members of the fiscal 2000 audit committee. We did have some disagreements in other areas on no-no versus yes-yes for prescriptive programs, for example, but we all chose no-yes for custom projects, and specifically for non-participation and for free ridership. And we did so for several reasons. 149 First of all, the argument that I made for symmetry in prescriptive programs a moment ago simply does not apply to custom programs. That argument was, as you recall, that the variables are exogenous. They drop from heaven. They're outside the company's influence and control, because the design of the program is set in advance, was publicized in advance in the plan, and we all signed onto it. 150 That argument does not apply to custom programs. Virtually none of the specific program designs for custom programs are set in advance until the customer meets the company staff or its ESCO representative, and they begin discussions. 151 The custom project budget and target don't have much meaningful content to them other than the bottom line. The company accepts a target and, in effect, promises to produce a certain amount of savings in gas and in TRC present-value benefits. 152 That is the reality of what goes into the year from the target to the year's activities in custom project DSM. 153 Furthermore, instead of dealing with many thousands if not tens of thousands of anonymous customers responding to a discount offer or some other prescriptive program, we're dealing with a small number of large customers that are in close contact either with the company's staff or with the company's ESCO representatives. In other words, the company can clearly influence the nature of the program on a one-to-one basis and the choice of who participates and who doesn't. 154 In the absence of the arguments for symmetry -- and let's be very clear that symmetry means make believe. Symmetry means making believe we knew something when we didn't know it or making believe we're ignorant when we're actually cognizant of it. That's what symmetry means, whether it's no-no or yes-yes. 155 In the absence of arguments for make believe and in a case where the company can influence the outcome, the SSM formula clearly states and has always stated that we compare target and actual values. And again, I would make a special exception for avoided gas costs to keep the bull out of the china shop. This, I freely admit, is a unique variable and must be treated differently or else chaos will ensue. 156 The second argument for no-yes is that it is obviously in the public interest for the SSM incentive mechanism to give the company an incentive to increase rateholder benefits. And increasing the number of legitimate non-free rider participants does increase rateholder benefits, while increasing the number of free riders decreases rateholder benefits. It does so by increasing costs with no corresponding benefit or little corresponding benefit. The subsidies to free riders, I guess, would show up on the benefit side but they would represent a minority of the costs of dealing with free riders, spending company time and money on free riders. 157 And finally, under any other scheme for custom projects, specifically no-no and yes-yes, the symmetrical schemes, the company would normally receive extra SSMVA payments in return for increasing its free riders and could be penalized for decreasing free riders. In other words, no-yes is the only approach that does not create perverse incentives. 158 MR. PARRY: A number of parties to this hearing seem attracted to using yes-yes rather than no-yes in calculating the SSM for the custom programs for the years 2000 and 2002. In your opinion, what would be wrong with that approach? Or one other way of saying it is to say: Are you saying that using yes-yes for custom free ridership would create a perverse incentive? 159 MR. RUBIN: I am. I am saying that using yes-yes for custom free ridership and non-participation would create a perverse incentive. If I am correct in believing that the company can influence the number of free riders who are included in custom programs, then applying the yes-yes approach rewards the company for signing up free riders, or at least for being indiscriminate in including free riders among its custom participants. 160 I am sure that the Ontario Energy Board that approved the SSM design did not intend to reward the company for signing up free riders, and I am absolutely certain that Energy Probe, in signing on to those past ADR agreements, had absolutely no intention of rewarding the company for signing up free riders and custom programs. 161 MR. PARRY: If the rate of free ridership in custom programs rises and we reflect that higher rate in both the actuals and the revised target, how would the SSM reward the company for signing up free riders? 162 MR. RUBIN: First, let me repeat that it does reward the company for signing up free riders. And to demonstrate that -- I think the only way I can demonstrate it is by running through a simplified numerical example to show how the numbers flow. 163 So I will use an approach -- there's a cliche in physics, one of my past fields, that starts by saying assume the cow is a sphere. I will make some similar simplifying assumptions. 164 Let's assume for simplicity that all large custom DSM participants are identical, that they can each save gas equivalent to a TRC benefit of a half a million dollars. Let's assume that the company privately believes in advance that it can find 90 legitimate large custom participants -- legitimate ones, not free riders -- each of which will save gas equivalent to a half million of TRC, and it expects to catch in the net another 10 participants who are actually free riders. Let's also assume for the sake of argument that the company's forecasts are accurate. 165 Under those circumstances, the company, naturally, would never be willing to accept an SSM target equal to its private forecast numbers because doing so would create a totally unacceptable 50 percent flip-of-the-coin probability of a negative SSM. 166 Instead, the company negotiates for and only agrees to a more conservative target, say, 90 total participants instead of 100 with the same 10 percent free riders. So we end up under the scenario with the TRC target for custom programs of 81 legitimate participants, that's 90 percent of the 90 participants, we all negotiate. At half a million each for these 81 participants, the TRC benefits are then $40.5 million. 167 The company in its private meetings, to which I'm not invited, expects to find 90 legitimate participants and 10 free riders, and those 90 legitimate participants will generate a half a million dollars in TRC benefits each for $45 million benefits. 168 So we agree on a target of $40.5 million in TRC benefits and the company expects to be able to get $45 million of TRC benefits. The difference is $4.5 million over target of TRC benefits and under the 35 percent of Delta TRC formula. The company can expect to keep 35 percent of the difference which works out to $1.575 million in an SSMVA payment from the custom projects. 169 MR. PARRY: If I could just stop you there, in a nutshell then, it seems to me what you are suggesting is there's a systemic incentive to low ball. 170 MR. RUBIN: There obviously is an incentive on the company to negotiate as low a target as it can. In fact, I would say of all of the DSM-related activities that company staff does through the year, the one that has the highest shareholder pay-out per person hour of activity is surely negotiating the annual target. That is, as far as I'm concerned, a sad fact, and it's one of the reasons that when we come to 9.2, alternative designs for SSM, I have proposed one that eliminates the annual target setting. 171 MR. PARRY: I'm sorry I interrupted you there. Perhaps I'll let you move on then. 172 MR. RUBIN: Right. 173 Now, recall we're targeting 81 legitimate non-free rider participants out of 90 total, and the company expects to get 90 legitimate participants out of 100 total. 174 Now, let's assume that the company either actively or passively encourages the recruitment of free riders, and that its staff and its ESCOs not only find all the expected participants, the 90 legitimate ones and the 10 free riders, but they also manage to locate and sign up another 60 free riders. Again, this is a simplified example, but demonstrating the answer to the question. 175 So the number of total gross participants under this scenario shoots up to 160, and 70 of them now are free riders, the 10 that were originally expected and the 60 new ones. 176 The actual legitimate TRC benefits generated are still the same as the company expected all along, $45 million, completely unchanged by the free riders, because enlisting free riders doesn't generate any TRC benefits. In reality, actually finding free riders and enlisting them slightly decreases TRC benefits by wasting money, but I'm ignoring that effect in my simplified example. 177 Now, this is where the perverse effect of yes-yes kicks in. In the yes-yes approach, we take this new higher free-ridership rate. It's now 70 out of 160, 43 3/4 percent, and we apply it retroactively by make believe to the agreed-upon target. 178 So instead of having a target of 90 participants, 90 percent of whom -- 81 of whom -- are legitimate, we now revise the target retroactively to 90 participants, only 56 1/4 of whom are legitimate. 179 Fifty-odd legitimate participants, and we make believe that we always assumed that the other bunch of them would be free riders. That lowers the TRC target from 40.5 million to 25.3-odd million, so the same old TRC of 45 million is now almost $20 million over the revised target. 180 And that triggers an SSM bonus, a bonus of almost $7 million instead of the bonus the company originally expected of 1.575 million. 181 By the way, my simplified assumption here that the company would agree to a target that's 90 percent of its expected achievement is, in my view, on the generous side. I did not review a lot of data on this, but for example, Enbridge's Exhibit A.7, tab 2, schedule 2, if you'd find page 11, table 2 -- it's not important to find it now -- but that shows that the company achieved, in its view, an average of more than 130 percent of its pivot point TRC savings in the three years in which SSM has been in place, 1999, 2000, and 2001. 182 While I certainly do not endorse the way those numbers have been calculated, they indicate the level of conservatism or, some would say, the level of gaming that the company brings to the negotiations of targets or pivot points. 183 In other words, if we take those numbers at face value and we assume for the sake of argument that the company's crystal ball was pretty good and that the company had an idea of what it could accomplish in each of those years in advance, then we can conclude from that that the company negotiated a series of targets averaging a little less than 100 divided by 130, a little less than 77 percent of its expected performance. 184 Now, if I had used numbers like that, 75-ish percent instead of my 90 percent, the untoward financial effects of the -- the financial benefits in the company of letting free riders into their programs would have been even more spectacular than in my example. 185 MR. PARRY: I don't take -- 186 MR. BETTS: Mr. Parry, can you tell me how long you might consider your examination in chief to go on? I'm considering when it would be appropriate to break. 187 MR. PARRY: I was just about to ask the one last question. 188 MR. BETTS: Perfect timing. Please proceed. 189 MR. PARRY: I think we're on time for lunch. 190 I take it from what you've just said that it's not your suggestion that the company has set out intentionally to recruit free riders to its custom programs. 191 MR. RUBIN: No, I certainly have no evidence that the company president passed down a directive urging its staff -- his staff to recruit free riders. I also have no evidence that the company took any special care not to enlist free riders. 192 What I am suggesting here is that both the company's preferred no-no approach to custom free riders and the alternative yes-yes approach that's been suggested by some parties in this hearing create very rich incentives for the company to do so, either actively or passively. 193 And I believe the burden of proof is on any party that would suggest that the ADR parties and the OEB created or intended to create such a perverse incentive. 194 I certainly personally believe it would constitute poor regulatory practice far below the Ontario Energy Board standards of regulation to offer a regulated monopoly company a financial incentive in return for a result that decreases ratepayer welfare, and then to accept the company's stated assurances that the unfortunate and rewarded result was unintentional. 195 MR. PARRY: Thank you very much. 196 Those are all the questions I have under the 9.6 issue. 197 MR. BETTS: Thank you, Mr. Parry. 198 We will break for lunch very shortly, then. Can I have an indication of those that would like to cross-examine this witness and first, perhaps, those that would cross-examine who were also in the group that -- 199 Mr. Moran? 200 MR. MORAN: Sorry, Mr. Chair, to interrupt, but my understanding is that the direct evidence will continue on the other 9 series of issues, and then there will be just one set of cross-examination. 201 MR. BETTS: Thank you for clarifying that for me. 202 And so we will continue, then, when we return with examination in chief on the other issues. 203 Is that the understanding, Mr. Parry? 204 MR. PARRY: I had thought the company's request was to start cross-examination on the 9.6 issue before hearing the rest of the direct, but I'm comfortable in approaching it either way. 205 MR. BETTS: I'm going to leave it for clarification during the lunch break, okay. And when I come back I'll hear under preliminary matters where we are. 206 I would encourage -- I would actually ask all parties to try and get together to determine who will be participating in the cross-examination and try to work out how much time is required and, ideally, the order in which you would like to cross-examine. And that would be very helpful for me if I could learn that when we return. 207 Are there any matters that we should consider before breaking? 208 We'll take a relatively short break. We'll aim for one hour, which would target us back here at roughly five after two. 209 If there's nothing further, then we'll adjourn now until five minutes past two. 210 --- Luncheon recess taken at 1:09 p.m. 211 --- On resuming at 2:05 p.m. 212 MR. BETTS: Thank you everybody. Please be seated. 213 We could leave if you need a little bit more time to do what you're doing, but Mr. Moran says that we can start. 214 Welcome back. Before we continue with direct examination of the witness are there any preliminary matters? 215 PROCEDURAL MATTERS: 216 MR. WARREN: Mr. Chairman, I wonder if I could just ask for some direction on something. I was trying to get a sense over the break of how long people would be in cross-examination. My dilemma is this: I doubt that I will have for my client very many questions of Mr. Rubin but neither Mr. Thompson nor Mr. DeRose are here today and they've indicated that they may well have some questions in light of the examination in chief this morning. 217 If we are going to sit as long as it takes to finish today then I will do my best to ask -- Act as their proxy, but if we're not going to finish today then one of Mr. DeRose or Mr. Thompson will be here on Monday morning to cross-examine. My sense from the room is that we have sufficient examination in chief and cross-examination that we'll be into Monday morning. But the unknown in that, sir, how long you intend to sit, whether you want to sit until 6:00 or 7:00 tonight in order to finish the job. 218 My friend Ms. Newland has just let out a gasp of pain at the prospect. 219 MR. BETTS: You will be relieved to know that no, I'm not just someone who likes to work late for the sake of working late. And if there's no -- if it's not going to be possible to allow this witness to be done today, then I don't see a need in being late tonight at all. If we have to bring Mr. Rubin back on Monday then it's reasonable to break at a reasonable time today and finish with that portion of the hearing on Monday. 220 So I would be targeting -- we'll kind of see where an appropriate time to break is, but I would be looking, hopefully, to break around the 4:00 mark again. 221 MS. NEWLAND: There is, after, all a playoff game tonight. 222 MR. BETTS: That's what is behind this is an 8:00 start. 223 MR. MacODRUM: Mr. Chairman? 224 MR. BETTS: Yes, Mr. MacOdrum. 225 MR. MacODRUM: I have been told by our printer that I will have Mr. Rowan's examination in chief in written form not until 4:30. If you do rise before then we will undertake to get it out by the end of the day by the clock in electronic form to everyone. But if we rise before 4:30 and I'm not able to get hard copies here for the Board. But it is basically Mr. Rowan's examination in chief, which should shorten that part of his presentation. 226 MR. BETTS: Thank you very much. And if we do break before then, if any parties want to stick around to have that hard copy that's obviously their choice as well. 227 MR. MacODRUM: Right. Thank you. 228 MR. WARREN: Mr. Chairman, given that we're probably going to be sitting with Mr. Rubin on Monday morning, I wonder if I might be allowed to withdraw. I continue to be profoundly naive with respect to DSM issues. I assumed that we would be done with Mr. Rubin by now and I was foolish enough to plan other things for this afternoon. So if I could leave, I'll see you on Monday morning. 229 MR. BETTS: Yes. Anyone else? 230 MR. RUBIN: I would just like to state for the record that I have not given up hope of finishing today. 231 MS. NEWLAND: Hope springs eternal. 232 MR. BETTS: With that then, I will return things to Mr. Parry, and if you would please continue with your direct. 233 MR. PARRY: Thank you, sir. 234 EXAMINATION BY MR. PARRY CONTINUED: 235 MR. PARRY: So turning, Mr. Rubin, to issue 9.5. 236 MR. RUBIN: Yes, I have two major recommendations concerning issue 9.5. First, this Board should ensure that the substantial benefits to ratepayers from the independent year 2000 DSM audit exercise are carried forward to and duplicated in future years by ensuring that future audits are independently supervised and high value, like the year 2000 audit, and not company controlled and of limited value, like the 1999 audit. 237 Second, this Board should insist on a timely resolution of each year's DSM evaluation and audit activities, not only to avoid unnecessary retroactivity in rates, but so important lessons learned in the evaluation and audit process may be incorporated into the DSM process of future years as quickly as is reasonably possible. 238 MR. PARRY: Turning to the concept of independence, when you say independently supervised, could you please articulate what you mean by that? 239 MR. RUBIN: Yes. In general, I support the kind of process we had in the fiscal 2000 audit with some procedural tweaks, but in general, that an independent committee of which the company is a member and chair and secretariat hires the auditor and is the entity to which the auditor reports. 240 MR. PARRY: And thus the identity of the auditor is determined by a committee that is not just the company, in other words. 241 MR. RUBIN: That's correct. In this audit committee, the company can be outvoted and -- yes, did you speak? No -- 242 I should point out there is a -- an ADR proposal from February or March from this year's ADR involving many issues, one of which is the protocol for the audit committee, for future audit committees. That is one of the few, if not the only part of that general ADR that Energy Probe did not sign on to and the -- our dispute with that is on two points which we were unable to reach agreement on. One is that when push comes to shove, when the rubber meets the road, that proposed audit committee is advisory rather than the employer of the auditor. 243 And the second sticking point was the election or selection procedure for the members of the independent audit committee. In that proposal I'm pretty sure, as it stands, it says that each person or group at the DSM consultative meeting when the audit committee is elected should have three votes for the three members of the -- the three independent members of the audit committee. I believe that three is too high a number that it should not be possible for a bare majority of 51 percent to elect all three independent members of the committee. 244 And I support a compromise between total democratic chaos of one vote per person and a total slate determined by a slim majority, which comes from three votes per person. And I think two votes per person is a nice Canadian compromise that I was hoping we could reach agreement on, but we did not. 245 So the ADR without Energy Probe calls for three votes per person, and I think that is at least one vote too, many. 246 MR. PARRY: So in short, the two votes per person you see as precluding a tyranny of the majority? 247 MR. RUBIN: Yes, I see that as a compromise between total proportional representation, which so far is not very Canadian, and total tyranny of the slim majority. 248 MR. PARRY: I take it part of the reason for your stance on issue 9.5 is the benefits that were seen in 2000 versus what you see as having happened in 1999? 249 MR. RUBIN: That's correct. I think the year 2000 audit, of which I was part, was a breakthrough, created very high public benefits and ratepayer benefits totally disproportionate to its unusually high cost. Its unusually high costs are in the range of $100,000 from start to finish, and we are -- that is an amount that we wouldn't spend much time discussing here. 250 And in fact, we are properly spending quite a bit of time discussing the much larger sums that are at issue, because of the findings of that audit process. 251 And I contrast that with the 1999 audit, which is the one SSM year audit that was under the company's control. And we now know in hindsight, I think because of the year 2000 audit, how wrong the results of the 1999 evaluation and audit were. 252 And we're talking again about millions of dollars that changed hands in bonus that I -- that I believe the evidence shows was not appropriate. You know, it's too late to reopen that. I'm not suggesting that we do that, but I think it's a striking contrast. And I'm not exactly suggesting that a company-controlled audit would be oblivious to what we've learned in the year 2000, but I'm certainly hopeful that future audits will continue to make discoveries that are useful and that are corrective to findings that survive the company's monitoring and evaluation report. 253 MR. PARRY: What do you say to those who would say the 2000 approach was too time consuming? 254 MR. RUBIN: Well, I think I've addressed that, first of all, in the expense and -- well, I've addressed the expense part. 255 In terms of the time, I believe the evidence is quite clear that the majority of the delay or the majority of the elapsed time that passed before the year 2000 audit was complete was not because of the deliberations of the audit committee but was because of actions or non-actions by the company. That is, we waited a long time for the company's monitoring and evaluation report to be complete. 256 When it was complete, it did not do what it was supposed to do, in fact, what it was explicitly supposed to do, according to an ADR. The RP-1999-0001 ADR specifically had a section directing the monitoring and evaluation report to do a number of probes to test, among other things, for free ridership. 257 And part of the explanation in the ADR agreement was that this would make it much easier and quicker for the independent auditor. Well, in fact, the opposite was done, and what we found early in the audit process was that the auditor turned up a few rocks expecting to find nice clean soil underneath and found toxic sludge. 258 And we were faced with an unacceptable choice. We could either say, All right, we don't have an answer; we don't know what the benefits were of this year's program, because all the auditor can tell us is that the monitoring and evaluation report didn't properly evaluate and doesn't have answers. 259 And those initial samples, the turning up of rocks, was normal audit sample. It was not attempting to find a statistically significant sample. It was just making sure that everything was okay. Well, everything wasn't okay. It was overwhelmingly wrong. 260 And so we then chose together, including the company representative, to extend the terms of reference of the audit to do evaluation, to do what the company's report -- what we thought it had done but we discovered in the beginning of the audit it hadn't done. 261 That added time. But it's not because we had a cumbersome project -- process, it's because we had a good process. It's because we had a process that was thorough enough, unlike 1999, to find out what was underneath the rocks. 262 That's not a complaint. That's certainly not a legitimate complaint. 263 MR. PARRY: I think that's the final question I wish to ask you about issue 9.5, unless you think I've made -- 264 MR. RUBIN: No, that's fine. Let's move on. 265 MR. PARRY: Then turning to issue 9.2. If I just may say, I understand that in your review of the shared savings mechanism incentive scheme, you have made a number of proposals in your pre-filed evidence, and I'd just like to just globally deal with what your global proposal is at this point. 266 MR. RUBIN: Yes. In my pre-filed evidence, I made a suggestion -- recommendations for the Board on issue 9.5 basically suggesting that the Board should direct the DSM consultative group to design an SSM for the future to -- that would incorporate certain principles, which I outline in my pre-filed evidence. 267 And among those are the elimination of the annual target-setting process as the crucial exercise and pivot for the calculation of SSM, and to set up a fixed percentage SSM where every dollar's worth of TRC benefit that the company can demonstrate through evaluation and audit was actually produced during that year. For every dollar of TRC benefit, the company should keep some percentage. 268 I now believe that something on the order of 16, 17, or 18 cents, something in that range per dollar is probably the appropriate level. I don't believe that the Board has before it anywhere near enough evidence to choose a number, but I -- as I said in this pre-filed evidence, I am hopeful that the Board can, at some level, support or endorse the principles that I propose. And this is, albeit in outline form in my pre-filed evidence, a third alternative that is before you -- I guess a fourth alternative, including the status quo for a design of an incentive mechanism. 269 The company has provided one, Chris Neme, representing two parties has presented another one and we'll come to defend it on Wednesday. The status quo is presumably an option, although nobody seems to like it, and this flat-rate SSM. And I have left out an important point that I did include in my pre-filed evidence which is that as part of this scheme, the company would pay for its DSM expenditures not as a straight flow-through but out of the, let's say, 18 cents per dollar of TRC that it benefits -- that it produces in benefits. 270 So one of the many advantages I see to this design of incentive is that, for the first time, it would put DSM expenditure into the realm, effectively, of PBR. That is, it would give the company both an incentive to produce results and an incentive to do so efficiently, at low cost. And if it can produce the same results for $1,000 less expenditures, the result is that it keeps $1,000 more of the SSM that would flow under my design. 271 Now, I have done some what-if calculations on how that scheme would flesh out and specifically how it would have applied to past years and how it would apply to forecast years given the numbers that have been circulated. Those numbers are in the document that there was argument about this morning. I circulated them to, I think, all parties, certainly all parties who spoke this morning -- in February as part of the ADR. 272 It would be handy, instead of me claiming that I just calculated these numbers while standing on one foot, it would be handy to point to the chart on page 3 of that document to show what the impact would be according to the calculations I made from the sources I cited. 273 MR. BETTS: Perhaps I'll ask Mr. Parry, do you want to introduce that as an exhibit at this point? 274 MR. PARRY: For that purpose, if there are no objections, then that would be the purpose for the use of that document. 275 MR. BETTS: Okay. Are there any objections to that? I know there were some concerns stated earlier. 276 MR. O'LEARY: Subject to those concerns and my understanding the agreement amongst the parties about the use of this document, we have no objection. 277 MR. BETTS: Mr. Klippenstein, the same? 278 MR. KLIPPENSTEIN: I agree. And particularly the time factor is now an additional factor in terms of the length of the panel. 279 MR. BETTS: Then we will introduce that under those terms, and I'm sure someone will remind me if they're getting uncomfortable with the way the document is being used. 280 So Mr. Moran, can we have an exhibit number. 281 MR. MORAN: Mr. Chair, that would be Exhibit K.13.1, document entitled "Enbridge Gas Distribution Inc., fiscal 2000 rates: Energy Probe's supplementary ADR position paper on SSM design," by Norman Rubin. 282 EXHIBIT NO. K.13.1: DOCUMENT ENTITLED "Enbridge GAS DISTRIBUTION INC. FISCAL 2000 RATES: ENERGY PROBE'S SUPPLEMENTARY ADR POSITION PAPER ON SSM DESIGN," BY NORMAN RUBIN 283 MR. BETTS: Thank you. 284 MR. RUBIN: Before I turn to the chart with some of my estimated impacts, I'm not sure I've done justice to the benefits I see flowing from this general structure. 285 I hope the structure is clear. Every unit of benefit that the company's DSM program produces that survives evaluation and audit that is true earns the company a pro-rata SSM. Out of those payments, the company would recover its DSM expenditures. That's the basic design. 286 The advantages I see include the elimination of the annual target setting exercise, which I view as the most significant instance of gaming in the entire DSM exercise. It eliminates that exercise. In the pure form of my design, it does so completely. 287 MR. PARRY: If I could stop you there. By that you mean the gaming that we were discussing before the lunch break, in the company setting a target that might be below -- or an incentive for the company to set a target that might be below realistic expectations? 288 MR. RUBIN: That's right. The company -- you know, I mean the company is out to make a profit, and properly so, and I'm glad they are. The company is not out to lose money or even break even on an incentive mechanism, and therefore, the company sets out to exceed agreed targets. And one way to do that is to make sure you don't agree to a target that is too big a stretch to exceed. 289 I don't think I'm attributing bad motives to anybody in saying that that is naturally the way any one of us would do business if we were in such a framework. 290 However, the perverse part of that is that if the company can argue a little bit harder or chisel a little bit -- sharpen its chisel a lit bit more and get a target that is a million of TRC lower in that annual negotiation process - which I view as a distasteful and a process and a negotiation between very unequal partners - if it can get the target a million dollars lower, it gets to keep either 35 percent of a million or 20 percent of a million, or some share under the new proposals. It's 15 or 20 percent or 12 percent or -- some percentage of that million dollars goes straight to the company, and that is obviously an incentive for arguing for lower. 291 MR. PARRY: What happens to the issues of retroactivity and symmetry under this -- 292 MR. RUBIN: Retroactivity and symmetry vanish because the first word in the pairs of no-yes, no-no and yes-yes vanish. All of those have to do with, What do you do with this magic pivot point that is so important? Do you revise it, do you not revise it? There is no pivot point in my scheme. The company can, I think, plan its activities on the basis that real results, real savings will be shared, and that the costs of those real savings will be borne out of those savings. I view that as, in the benefit of -- ultimately the benefit of the company as well as in the benefit of shareholders. 293 All of these vexing issues that we were talking about, all of the make believe that I led you all through this morning are gone under this alternative. 294 MR. PARRY: Do you see this new design as being simpler or more complex than the past designs? 295 MR. RUBIN: I think it's absolutely transparent. This one I can explain. The other one I need hours to explain and I have to introduce a bunch of terms that nobody knows, nobody's ever heard before. This one I can explain. 296 MR. PARRY: What do you say to the potential concern of the company who might say, Oh, we have no guarantee we're going to get paid for the DSM expenditures we've made. 297 MR. RUBIN: I think my main response is to turn to the chart that I prepared. It's unfortunately at a page-turn -- between page 3 and 4 of the document that was just introduced. 298 And in that -- that's the second chart in the document. And in that I just did some, what's called, "back casting." I basically said, If the company did exactly what it did in past years, and if it proceeded to do what it says it's going to do in future years -- and I should caution that the year 2003 is probably -- is, no doubt, subject to update, those numbers. 299 The year 2003 numbers have changed a little, but they have changed in the direction of a larger SSM net pay-out to the company, because, as I understand it, the ADR which we signed onto, in fact, came up with -- I believe it's the same TRC target at lower cost. 300 But anyway, the -- I believe the negotiated target for 2003 to the extent that it's -- will be approved by this Board has more net benefit than the one that I had available to me when I prepared this document. 301 But anyway, the -- what you have here is -- what's important is the left-hand column, which shows which year I'm talking about. And the three right-hand columns, what net benefit over cost would accrue to the company at three different values for the key variable in this scheme. 302 And the key variable is how many cents on the dollar the company gets for producing a dollar of TRC benefit. And I have here 12, which I think turns out to be well too low, at least at first; 15 percent, which is getting there; and 18 percent, which looks to me like it's easily rich enough and, perhaps, too rich, given these numbers. 303 And as you can see, if we just look down 18 percent, for the sake of argument, the company's costs would be covered plus $2.5 million for fiscal 1999. That's the top right cell. 304 MR. PARRY: Just so we're clear, I think you originally said page 3 and 4. I think -- the chart you're currently referring to, is that at the bottom of page 4? 305 MR. RUBIN: You're quite right. That's the page-turn of page 4 and 5, I beg your pardon. 306 So the -- again, the right-hand column of that chart shows how far ahead of covering its DSM costs the company would have been, in the top few lines, in those early years if this scheme had been in place. And following down, we go from years that have been audited, to years that haven't been audited, to years that haven't happened, in which case we're dealing with forecast numbers. 307 I certainly don't expect anybody, including the Board, to sign onto the accuracy of these numbers to the last decimal point, but I think what I -- well, what I've urged the Board in my pre-filed testimony to do is to adopt this design in principle and to pass it to the consultative group to work out the details. We're running out of time for a 2004 incentive. 308 Energy Probe, among some others, has signed onto a stop-gap interim agreement, an ADR agreement proposal for the year 2003 SSM. It's not unanimous, but it is before you. It follows the lines of Chris Neme's SSM design. 309 And there is language in that agreement that suggests that the consultative group and the company will work to design a new SSM that would advance a number of principles. And since I helped write the language of what those principles are, I'm pretty sure that those principles are very friendly to my alternative design. 310 And either that kind of language or something more directed would be helpful, I believe, in trying to get a 2004 incentive scheme together in time for the year 2004 that could be transparent and that could eliminate this awful negotiation between a very interested party that knows a lot about the coming year in DSM, and a bunch of parties that know way less and are not quite as interested and keep bouncing back and forth is too high, is too low, Goldilocks arguments in the negotiations. 311 MR. PARRY: So in answer to my last question, if you look at the 18 percent column, I think what you're suggesting is that by and large if you applied this model to past years, you're suggesting, then, that the company in all but one year would have come out ahead. 312 MR. RUBIN: Yes. Given these numbers, which -- only two of which have so far been audited, and that's '99 and 2000 -- and again, I don't want to say that I'm wedded to the 18 percent number, and it's possible that once we see the audit results of the year 2001, we'll decide that it better be 20 percent, or we're running serious risk of a negative SSM. 313 And as I've said in my pre-filed testimony, I'm not sure there are many people in the room who really, kind of, have the stomach to see the company suffer a negative incentive in this regard. 314 So, you know, the idea of the SSM from the start was that the company would exceed at its task and would be rewarded for excelling and exceeding. That's what the SSM was always supposed to do. We've had some surprises since then. 315 This alternative design puts more responsibility in the company's hands. I think there are a number of tweaks that need to be addressed, one of which is cash flow. If the company has to spend $10 million in the rate year and not get it back until later, that has an impact that I did not intend. You know, that's not the purpose of this. 316 So that there are a number of ways to address that. It's not beyond human ingenuity to solve those problems without getting back into this miserable negotiation of the target-setting process that I would like never to have to sit through again. 317 MR. PARRY: Thank you. 318 I have no further questions. 319 MR. BETTS: Sorry, Mr. Parry, that concludes your examination? 320 MR. PARRY: Yes, sir. 321 MR. BETTS: Thank you. 322 Can we hear from -- or now have questions from parties who also were not in support of this particular -- these particular sections in the settlement agreement, and can I first of all see who those parties might be. 323 MR. O'LEARY: Mr. Chair could I just ask a question of clarification. Are you asking for those parties that are supporting -- 324 MR. BETTS: That are supporting, thank you. I can see a lot of question marks out there so maybe that clarified it. The parties that are supporting -- 325 MR. O'LEARY: Supporting Energy Probe's position? 326 MR. BETTS: That's correct. 327 MR. MacODRUM: Mr. Chairman, Mr. Rubin's excellent testimony covered a wide range of issues and certainly we find ourselves in support of much of what he said and we have no questions. 328 MR. BETTS: Thank you. 329 Anyone else in that group that would like to make a comment, even? Very well then. We'll turn to the rest of the parties that would like to cross-examine Mr. Rubin. 330 Is there any established order? 331 MR. POCH: Mr. Chairman, I've agreed to let -- ordinarily I think the practice has been I've been leading off just because of where I happen to be sitting, but I know Mr. Klippenstein has a conflict with a court date on Monday so I've agreed that it would be appropriate for him to go first. 332 MR. BETTS: Thank you. And you would follow Mr. Klippenstein? 333 MR. POCH: If it suits the Board, yes. 334 MR. BETTS: That's a good place to start so please proceed, Mr. Klippenstein. 335 MR. KLIPPENSTEIN: Thank you, Mr. Chairman, and I'm grateful to Mr. Poch for accommodating my schedule. 336 CROSS-EXAMINATION BY MR KLIPPENSTEIN: 337 MR. KLIPPENSTEIN: Mr. Rubin, if you could turn up a copy of the document that's been filed as Exhibit K.1.5, entitled "Pollution Probe Cross-examination Reference Book." 338 MR. RUBIN: Yes, sir. 339 MR. KLIPPENSTEIN: Do you have that? 340 MR. RUBIN: Yes. Yes, I do. 341 MR. KLIPPENSTEIN: Before -- well I guess as part of getting into that and in my first topic of questioning, I would also ask if you could retrieve a transcript excerpt which I believe was provided to you earlier. And I have made some copies available to the parties and to the Board members, if that would be provided to them, which is an excerpt from volume 2, March 25, 2003, and reports the cross-examination by Pollution Probe of Mr. Rowan. 342 MR. RUBIN: Yes, I have that. 343 MR. MORAN: Mr. Chairman perhaps we could mark that as Exhibit K.13.2, Transcript Excerpt, Volume 2, March 25th, 2003. 344 EXHIBIT NO. K.13.2: TRANSCRIPT EXCERPT VOLUME 2, MARCH 25TH, 2003 345 MR. KLIPPENSTEIN: I just want to clarify whether you agree, Mr. Rubin, with some of the evidence put on the record by Mr. Rowan related to the calculation of TRC benefits. If you could turn to the Pollution Probe document book at tab 1, that's Exhibit K.1.5, and at tab 1 we have the excerpt from the audit subcommittee final report prepared by Kai Millyard dated July 31, 2002; do you see that? 346 MR. RUBIN: Yes, I do. 347 MR. KLIPPENSTEIN: And at page 2, we find something called table 1; do you see that? 348 MR. RUBIN: Yes. 349 MR. KLIPPENSTEIN: And at the bottom of the column entitled, "Actual TRC NPV," we have the figure of $74,621,802. Do you see that? 350 MR. RUBIN: Yes, I do. 351 MR. KLIPPENSTEIN: And as I understand it, that figure of approximately $74 million is the net present value of the TRC benefits of Enbridge's 2000 DSM programs as they see it; is that right? 352 MR. RUBIN: That's correct, certainly as they saw it when this was -- when they told Kai how to calculate it. 353 MR. KLIPPENSTEIN: Right. So effective July 2002. 354 MR. RUBIN: Yes, the end of July, correct. 355 MR. KLIPPENSTEIN: And that figure of TRC benefits of $74 million was the intellectual rationale or foundation for their $6.5 million SSM reward claim at that time; is that right? 356 MR. RUBIN: Yes, it was the numerical arithmetic basis for it. From that number compared to the target number, as interpreted by Enbridge, Kai's -- Mr. Millyard's spreadsheet cranks out the SSM which was, as you said, 6.5-odd million. 357 MR. KLIPPENSTEIN: As I understand it, as of that date in July 2002, Energy Probe, however, did not agree that the TRC benefits of Enbridge's 2000 programs was that $74 million; is that fair? 358 MR. RUBIN: That's correct. Enbridge's number includes the TRC benefits that would have flown -- would have flowed from most of the custom free riders had they not been free riders, for example. It includes a number of others. I indicated in my pre-filed testimony the three main disagreements that lead to the vast majority of the numerical disagreement between Enbridge's TRC estimate and that of virtually all three members of the -- all three independent members of the audit committee. CME, Malcolm Rowan, and I agreed perfectly, and Chris Neme was a few hundred thousand dollars off. 359 MR. KLIPPENSTEIN: And if I ask you to turn to tab 5 in Pollution Probe's book, I will find, I believe, the figure that Energy Probe, I guess, based on your advice, believed to be a better estimate of the TRC. And let me just confirm that with you. At tab 5 we have Energy Probe's interrogatory response and at page 2 of 6 we have a table whose bottom line or which contains the bottom line of something over $50 million. 360 MR. RUBIN: That's correct. 361 MR. KLIPPENSTEIN: And as I understand, that is Energy Probe's or your best estimate of what the Enbridge 2000 DSM program TRC benefits are instead of the 74 million; is that right? 362 MR. RUBIN: That's exactly right. 363 MR. KLIPPENSTEIN: And based on that $50 million approximately, as a TRC benefit, when you work through the agreed-upon formula, you get to the $69,000 penalty which you are recommending. 364 MR. RUBIN: Yes. 365 MR. KLIPPENSTEIN: Could I, then, ask you to pick up the transcript excerpt that I provided to you and has been identified as K.13.2 containing the cross-examination testimony of Mr. Rowan. And if you could turn, please, to line 207. 366 MR. RUBIN: Yes. 367 MR. KLIPPENSTEIN: Do you have that? 368 MR. RUBIN: Yes, I do. 369 MR. KLIPPENSTEIN: And I'd just like to read you some questions and answers and ask you about that. 370 At line 207, a certain Mr. Klippenstein asks Mr. Rowan: "You've said this very morning today that you had no problem with Mr. Millyard's figure of $74 million." 371 Answer: "That is correct." 372 Question: "And that's still your position?" 373 Answer: "That is correct." 374 Question: "However, Mr. Rubin uses a figure, a TRC figure of 50 million; is that correct?" 375 Answer: "I don't know what he uses. He calculated a 50 million, but for purposes of this SSM claim, Energy Probe is bound by the $74 million claim, and the mathematics of working through the assumptions arrive at a $69,000 penalty." 376 Question: "So it's your view that Energy Probe is bound by the $74 million estimate for purposes of this process we're all engaged in?" 377 Answer: "I would -- I cannot see how they could not be." 378 Now, my question, Mr. Rubin, to you is: Do you agree with Mr. Rowan that Energy Probe is bound to agree with Enbridge's net TRC benefit figure of 74 million? 379 MR. RUBIN: Mr. Klippenstein, I think we're all entitled to have bad moments, and it's probably easy to have a bad moment on the stand. And I believe Mr. Rowan had one, and it's been brutally recorded here. 380 I believe that Kai's reconciliation report of the end of July will show that basically Malcolm Rowan and Norman Rubin both settled on a TRC figure of approximately $50 million, and that it was from that that the recommendation flowed for our tiny negative SSM. 381 And therefore, I don't feel in any way bound to adopt either the company's estimate of TRC or the company's estimate of how much SSM it has coming to it. 382 MR. KLIPPENSTEIN: Would you agree with me that if one wants to advocate for a penalty of $69,000, it is, due to the nature of the TRC formula, completely inconsistent to accept the $74 million TRC benefit figure? 383 MR. RUBIN: I think -- the calculation that led to the minus $69,000-odd, in fact, does not flow from this 74 or $75 million. Whether one could construct one that does is something I don't want to speculate on. 384 But the -- it does not flow from the company's estimate of TRC benefits, those $74 million. 385 MR. KLIPPENSTEIN: All right. Thank you. 386 If you could then return to tab 1 of the Pollution Probe document book. 387 MR. RUBIN: Yes. 388 MR. KLIPPENSTEIN: And turn to table 2. 389 MR. RUBIN: Yes. 390 MR. KLIPPENSTEIN: It's entitled, "Summary of Impacts of Positions of Intervenor Audit Committee Members"; do you have that? 391 MR. RUBIN: Yes, I do. 392 MR. KLIPPENSTEIN: And this summarizes the SSM pay-out recommendations of the four members of the audit committee, namely, yourself, Mr. Rowan, Mr. Neme, and Enbridge as of July 2002; is that right? 393 MR. RUBIN: Yes. I, perhaps, should point out that subsequently, I don't have the exact date, CME corrected -- clarified a minor miscalculation in their column. And their column as amended now exactly coincides with Energy Probe's rather than differing by 170 or $80,000. 394 MR. KLIPPENSTEIN: Right. And the bottom -- the line near the bottom identified as "company claim" identifies what the company was requesting, namely, approximately $6.5 million? 395 MR. RUBIN: Yes. 396 MR. KLIPPENSTEIN: And the column headed "EP" identifies Energy Probe's position of a recommended negative $69,000 approximately; right? 397 MR. RUBIN: That's correct. 398 MR. KLIPPENSTEIN: And the difference of opinion was based on what we see in that table as adjustments to the budget and the actual TRC benefits; is that right? Correct? 399 MR. RUBIN: Yes, some adjustments to the budget and quite a few adjustments to the actuals. 400 MR. KLIPPENSTEIN: All right. Just so I can clarify that, I'm going to go down through the programs. And the first program I see, the first column is that -- the tank efficient purchase, is the way it's described in the first or second column; is that right? 401 MR. RUBIN: Yes. 402 MR. KLIPPENSTEIN: And when I read the "Proposed Adjustment" column, it says that adjustments will be made to the budget and actual; do you see that? 403 MR. RUBIN: Yes. 404 MR. KLIPPENSTEIN: And I'll read -- well, let me read -- sorry, did you say you see that? Let me read what I'm referring to. 405 MR. RUBIN: Yes. 406 MR. KLIPPENSTEIN: It's in the column entitled "Proposed Adjustment," and it says: "EP --" I guess that stands for Energy Probe. 407 MR. RUBIN: Yes. Correct. 408 MR. KLIPPENSTEIN: " -- reduced tank lifetime to 12.6 years, budget and actual." 409 MR. RUBIN: Yes, I see that. Correct. 410 MR. KLIPPENSTEIN: So it's a change to both budget and actual; correct? 411 MR. RUBIN: Correct. That's what we're calling yes-yes in prescriptive programs. 412 MR. KLIPPENSTEIN: And so that's a symmetric change with respect to the budget and actual -- 413 MR. RUBIN: That's correct. In prescriptive programs I support symmetry and lean toward yes-yes as the smarter way to do symmetry. 414 MR. KLIPPENSTEIN: All right. And I go down one column, and I see again, if that's the next program in that same column, you're agreeing to change both budget actual? So again, a -- 415 MR. RUBIN: Yes-yes. 416 MR. KLIPPENSTEIN: I drop down to the next program, budget and actual symmetric again; right? 417 MR. RUBIN: Correct. 418 MR. KLIPPENSTEIN: And the next program, which is the tank set point, again, budget and actual symmetric; is that right? 419 MR. RUBIN: Yes. 420 MR. KLIPPENSTEIN: I drop down to the showerheads program, budget and actual symmetric; is that right? 421 MR. RUBIN: Right, prescriptive, yes-yes. 422 MR. KLIPPENSTEIN: And then I drop to the custom projects. So all of those, as you say, are symmetric. 423 MR. RUBIN: Yes, until you get to custom projects where it is not symmetric. 424 MR. KLIPPENSTEIN: It is not symmetric there. 425 MR. RUBIN: And it was not symmetric for any of the three independent members of this audit committee. 426 MR. KLIPPENSTEIN: Right. Now, the Board approved Enbridge's SSM mechanism for fiscal 2000 in the case with the Board's decision of December 16th, 1999; is that your understanding? And that's the decision at tab 3 of Pollution Probe's exhibit. 427 MR. RUBIN: That sounds right. Tab 3, is it? Okay. 428 MR. KLIPPENSTEIN: Yes. 429 MR. RUBIN: Excellent. Yes, I'm glad it's here. Oh, you cut it off before my favorite parts, but that's all right. 430 MR. KLIPPENSTEIN: I didn't want you to have a chance to comment on that. 431 MR. RUBIN: I can see why not. 432 MR. KLIPPENSTEIN: I didn't mean that, Mr. Rubin. 433 My question to you is, and I've asked this of other witnesses, can you point to anything in an ADR agreement or a Board decision on or before this date, December 16th, 1999, which says that any input adjustments can be made on an asymmetric basis? 434 MR. RUBIN: Yes, I believe my answer to your interrogatory was that I could not. It's possible that I can do a little better now, and that is actually in the -- I believe that the document you started quoting here contains a passage shortly after -- no, no, it is -- you did quote it. On your second page, at the page turn, there are four variables that are specifically named that say that according to this ADR should be adjusted retroactively and the target on a yes-yes basis. Those four do not include non-participation which is an issue in this -- in issue 9.6, and free ridership which is an enormous issue in 9.6. 435 So I believe it's a principle of law that when somebody says, you know, except you four. The implication is that "except you four" is in the other case. And the words used here are budget or target on the one hand and actual on the other hand, and there is no built-in symmetry between the words "target" and the words "actual". Actual means actual and target means target, and they are applied at different dates. And I see no symmetry and I see an implication here that any input that is not in these four named inputs should be handled in the normal course of events, namely that the company should receive 35 percent of the difference between target and actual. 436 MR. KLIPPENSTEIN: Can you clarify that for me again? You're saying that -- 437 MR. RUBIN: Yes, if one reads this paragraph at your page turn that we all signed on to, including Energy Probe, it says: 438 "The value of the pivot point and the SSM formula for the test year --" which is precisely the year 2000 "-- is increased accordingly --" you know this was about the negotiation "-- subject to subsequent adjustment in order to give effect to the variances, if any, between the forecast net benefits and the actual net benefits, i.e. the net present value of the resource benefits based on TRC using the company's actual gas savings that arise from variances in the following inputs and assumptions." 439 And then four are named: Energy savings per measure, avoided costs, discount rates and measure lives. Unless I'm misreading that, I believe that means that the target should be revisited on a make-believe basis, retroactively, on a yes basis for these four variables, and not for unnamed variables. 440 These four do not include my favorites in the dispute that's before this Board, especially free ridership. And as I say, I believe it is a reasonable inference from this that free ridership is not to be revisited and changed retroactively. And one is left with the definition and the formula that we had which is to find the actual and to find the target, to compare them and apply the formula. That is what I'm proposing. 441 MR. KLIPPENSTEIN: Is that the no-no option? 442 MR. RUBIN: The words yes and no that apply to treating the target as a target and treating the actual as an actual is no-yes. That is the default case. That is the case without what-if revisions, make-believe, and under certain circumstances all parties agree that make believe is the fairest way to go. However, there is no reason to apply make-believe where it is not agreed to do so and where it does not make sense to do so. 443 MR. KLIPPENSTEIN: And can you -- so you say, as I understand it, that these -- that this paragraph suggests that the adjustment, for example, to free ridership should be made, but the budget should not be changed; is that what you're saying? 444 MR. RUBIN: It is not an adjustment to free ridership to record free ridership in the actual column, there's no adjustment in involved that. That just means you are writing the truth under the heading actual. Yes, we are calling that yes, because it is in the normal meaning of actual that yes, it includes the actual number. If you call that a revision, I don't see what you are revising. There was no actual number until the year was complete and we had an evaluation and an audit. That's what actual means. 445 MR. KLIPPENSTEIN: Now, this is a view on this paragraph which you did not respond to when we asked you this question in the interrogatory process; is that right? 446 MR. RUBIN: That's correct. I did not have before me this ADR document and I did not recall at the time -- I believe that's the case. I'm not looking at my response to you, so I can't exactly put myself in that position, but I either did not recall or I did not, at the time, interpret this the way I do now as reinforcement of my position that unnamed, you know, non-exceptions should be treated as non-exceptions. 447 MR. KLIPPENSTEIN: And is it fair to say that no one in this process, including yourself, prior to today has ever suggested the interpretation you've just put to us? 448 MR. RUBIN: I don't think I'm in a position to say what nobody has ever suggested. 449 MR. KLIPPENSTEIN: No, I asked, specifically, to your knowledge. 450 MR. RUBIN: Yes, perhaps not. 451 MR. KLIPPENSTEIN: And indeed, this interpretation of that section is not something you've ever suggested before today. 452 MR. RUBIN: Certainly not in evidence. 453 MR. KLIPPENSTEIN: Or any other way, to any of the parties present here today? 454 MR. RUBIN: My lawyers are present today and I think I may have discussed it with them. 455 MR. KLIPPENSTEIN: Okay. Thank you. 456 And you never suggested to the company at any time in this process that this part of the agreement or any other part of the agreement supported your interpretation and proposal for the treatment of free riders. 457 MR. RUBIN: Mr. Klippenstein, I don't think I did, but, I mean, I'm not a lawyer. The document says what it says. We all agreed to it at the time trying to incent the company to increase TRC benefits, and we're all trying to interpret now what we meant and what we must have meant. It's up to this panel to decide, with the help of its Staff, how to sort this out. I don't expect to be a key resource in deciding what the legal language from 1999 means by omitting free ridership. I'm not sure I'm really a -- anyway I don't see myself at the centre of that discussion. It sounds to me that you will be arguing on that. 458 MR. KLIPPENSTEIN: All right. I was just wondering whether that was something that had appeared before today. 459 Is it fair to say, in line with what you were just saying, that Energy Probe did participate in some of the DSM consultative meetings prior to the audit subcommittee's work? 460 MR. RUBIN: Oh absolutely, most of them. 461 MR. KLIPPENSTEIN: And did you yourself participate in -- 462 MR. RUBIN: Yes. 463 MR. KLIPPENSTEIN: And is it fair to say that no one, including yourself at the time, identified the free ridership issue and concern which we are now talking about today? 464 MR. RUBIN: Oh, I don't think I would agree with that. I think if you look, for example, at discussions of 1999, I believe if you look at the very document you've just presented to me at tab 3, the last paragraph says that there is an agreement to settle this issue, this is 6.1.2. And the part on the following page that you didn't reproduce is also interesting, and in fact I quoted from it earlier or paraphrased it. 465 This is where all parties, including the company, agreed to greatly expand and improve and add independence to the monitoring and evaluation reports starting with the year 2000, including an analysis of free ridership. Specifically, I am quoting now: 466 "Reliance on independent evaluation of impact analysis, including assessment of participation, free ridership, cost and savings and the like ... particularly for programs with significant implications for the SSM formula." 467 I don't think there's anybody in the room who would doubt that free ridership has significant implications for the SSM formula. 468 And the part of the paragraph after your copy breaks off ends with the statement to the effect that having the evaluation done should greatly facilitate the job of the independent auditor. That's the part that I was paraphrasing earlier. Indeed it would have. These were prophetic words. We did a good job writing that part. 469 MR. KLIPPENSTEIN: Is there anything in the paragraph that you've just read which indicates to the company or to the parties or that you identified as intention that the results would be changed retroactively if the free ridership estimates were incorrect? Can you point to any words? 470 MR. RUBIN: Again, I most strongly object to your language in suggesting that filling in actual numbers in the column headed "actual" is some retroactive revision of anything. It is not. It is a filling in of actuals. 471 I'm sorry. I got so excited about that, I've lost your question. Could you repeat it, please. 472 MR. KLIPPENSTEIN: All right. Can you point to anything in the words of that paragraph that identify that the independent auditor will do what you say; in other words, fill in -- 473 MR. RUBIN: Yes. Yes, I can. I can see, even in the part of the passage that is in your cross-examination book at the bottom of your last page of tab 3, it is -- it specifically says that: 474 "The company should rely on independent evaluation for impact analysis, including free ridership, particularly for programs with significant implications for the SSM formula." 475 I would suggest that if properly evaluating free ridership has implications for the SSM formula, it's precisely because actual numbers will be put in the actuals column. 476 If we're going to have make-believe numbers in the actuals column, then there is no implication for the SSM formula of evaluating to find out what the truth is. 477 MR. KLIPPENSTEIN: Is there anything else, or is that what you would rely on? 478 MR. RUBIN: Oh, in terms of biblical OEB texts to strengthen my position, yeah, I'm not sure I can point to anything else specific. Yeah. 479 MR. KLIPPENSTEIN: And although this issue was, obviously, very important to the tune of $4 million, and although you were specifically asked this question in the interrogatory process, you didn't mention this earlier than today. 480 MR. RUBIN: Again, I would have to review my answer to you. It's in your tab, is it? It's in your booklet? 481 But anyway, I have not reviewed that. I'm testifying now a couple weeks earlier than I expected to be testifying only a few tens of hours ago, so I haven't had a chance to review everything that I had planned to review before I sat here. 482 But I answered it as best I could at the time, and I believe that my present reading of this paragraph which may or may not be the Board's or anybody else's, had not occurred to me at the time. 483 MR. KLIPPENSTEIN: Let me ask you a number of questions about some of the specific numbers. 484 Your proposal for the SSM calculation would reduce Enbridge's claim by approximately $4.5 million, I think is the result; is that right? 485 MR. RUBIN: Sorry, that would be the change to free ridership and custom projects alone? 486 MR. KLIPPENSTEIN: Yes. 487 MR. RUBIN: That sounds about right. 488 MR. KLIPPENSTEIN: And if instead -- let me work through some alternative scenarios. If instead of accepting your proposal the Board opts for no change in free ridership and decides that the budget and actuals for free ridership rates should remain at approximately 10 percent, then Enbridge's SSM reward would rise, I believe, by 4.499 million; is that right? 489 MR. RUBIN: That -- as I understand it, that would undo the difference between my proposal and Enbridge's in that category, because Enbridge has suggested that it be frozen no-no, as you've just outlined. 490 So whatever I would cut from them in that regard, I think, would be restored if the Board decided that no-no made the most sense. 491 MR. KLIPPENSTEIN: And this is -- the number I get from Pollution Probe's document book, tab 1, table 2, which we looked at earlier -- 492 MR. RUBIN: Yes, I think that's -- I think it's all correct. 493 MR. KLIPPENSTEIN: That's where you had proposed the $4.499 million? 494 MR. RUBIN: Right. Whatever I would subtract by letting actuals be actuals would not be subtracted if actuals are forecast. 495 MR. KLIPPENSTEIN: And if I work through that calculation, and then if the Board was to accept all of your recommendations except for that free ridership change, then Enbridge's reward would be 4.430 million. 496 MR. RUBIN: Yes, it would be with that cut restored; correct. 497 MR. KLIPPENSTEIN: And if you turn to tab 5, which is your interrogatory answers, and page 6 of that, we've asked you to do a calculation, which you disagreed with. And in the process of your answer quite correctly pointed out that you disagreed with the number. 498 But if the free ridership estimate for the custom projects was symmetrically changed to 49 percent for both budgets and actuals, then the Enbridge award would be approximately $4.2 million; is that right? 499 MR. RUBIN: Yes. That would be the yes-yes for custom free ridership. 500 MR. KLIPPENSTEIN: Right. 501 MR. RUBIN: And again, I've gone through this morning on what I think the perverse impacts of yes-yes are and why I think the Board could not ever have intended that. Because of that, I won't rehash that, but I will flag it. 502 MR. KLIPPENSTEIN: Okay. We looked earlier at your estimate of what the TRC benefits were, and I believe your total was approximately $50 million. 503 MR. RUBIN: Yes. 504 MR. KLIPPENSTEIN: And is it fair to say that that $50 million is your estimate of what the company's 2000 DSM programs have benefited the company's customers by way of aggregate net bill reductions? 505 MR. RUBIN: Not exactly. It's aggregate net bill reductions less a number of cost factors, some of which don't show up on bills. The TRC -- the TRC benefit nets out the customer-side costs of the conservation, for example, so that would be an amendment to, I believe, to the way you put it. 506 MR. KLIPPENSTEIN: In which direction? 507 MR. RUBIN: The total TRC benefits. In order to get that calculation, you subtract out the amount of money that customers spend getting the conservation. 508 MR. KLIPPENSTEIN: I don't want to get too much into it. Let me rephrase it. Would it be fair to say that the $50 million represents an approximation of what the company's customers as a whole would net benefit financially from those DSM programs? 509 MR. RUBIN: Yes. And actually, if they didn't have to pay an SSM, that will be another net cost, if it is imposed. 510 MR. KLIPPENSTEIN: And you've disagreed with some of the company's estimates here, but is it fair to say that those approximately $50 million are real? In other words, the customers have benefited by that. 511 MR. RUBIN: Oh, you're starting to get me to change hats here and to remember old arguments. There are many uncertainties and make-believe aspects and simplification in the TRC calculation which, for the purpose of today's testimony and this hearing's disputes, I am putting behind me and making believe that they don't exist. 512 The TRC calculation is an estimate of a stream of future benefits, the net present value today of a stream of future benefits in some cases 15 years in the future that may or may not accrue. Calling them real, I think, is stretching the word real past its breaking point. They are an estimate of -- they are in many cases a reasonable estimate. During our audit process we found a number of cases, I helped uncover a number of cases in which they weren't reasonable at all. And we've -- that's part of the value that was added in this audit process. 513 So it's a work in progress to try to turn the TRC estimates into something that everybody can have confidence in. For now, it's the best we've come up with, to try to add up the benefits of putting in efficient gizmos instead of inefficient ones. 514 MR. KLIPPENSTEIN: And the -- even given your mix of qualifications and acceptance of reasonableness, I take it you would agree that there is even, you know, whether we're talking about $50 million or $74 million, a pretty substantial amount of actual energy saved in that process. 515 MR. RUBIN: Yes, for sure, a significant amount of energy saved, a significant amount of money saved and especially if it continues to accrue as the calculation forecasted it will. 516 MR. KLIPPENSTEIN: Thank you very much, Mr. Rubin. 517 MR. RUBIN: Thank you. 518 MR. BETTS: Mr. Poch. 519 MR. POCH: Thank you. 520 CROSS-EXAMINATION BY MR. POCH: 521 MR. POCH: First of all, let me ask you to turn up the settlement proposal of March 14th, which is Exhibit N.1, tab 1, schedule 1 and to turn to page 68. 522 MR. RUBIN: I don't believe I have a copy of that before me. Does somebody have a spare for me? 523 MR. POCH: Your counsel can provide you with that. 524 This is the partial ADR settlement proposal with respect to the year 2003. 525 MR. RUBIN: Yes. 526 MR. POCH: And I'm looking at page 68. Do you have that? 527 MR. RUBIN: Yes. 528 MR. POCH: This is the portion on the SSM, and after the bulleted points there is a paragraph there I'd like to refer you to. And I'm going to just paraphrase the first part -- first of all, Energy Probe is a signatory to this portion of the agreement, I see. 529 MR. RUBIN: Yes. 530 MR. POCH: And the first portion says that: "The parties to this partial settlement agree to examine in the DSM consultative alternative incentive proposals for 2004." 531 I take it that that's your hope, then, that your proposal will -- and your intention that your proposal that you've outlined be included in that process of discussion? 532 MR. RUBIN: Yes. I mean the agreement goes on to say -- the sentence that says, "without prejudice and --" 533 MR. POCH: Sure. 534 MR. RUBIN: And I'm actually hoping that this Board will say something stronger than merely endorsing this sentence and will give direction for the year 2004 and forward that will facilitate the adoption of an alternative SSM along the lines that I've proposed. 535 MR. POCH: Sure, and that's exactly what I wanted to ask you about, because I read the last sentence, which I'll read into the record: "The parties of this partial agreement further agree that the settlement on this issue is without prejudice to any party advocating to the Board an alternative SSM methodology or methodology which eliminates the SSM in future rate cases." 536 MR. RUBIN: Yes. 537 MR. POCH: And I'm wondering, are we interpreting that differently? I took that to mean that this agreement here didn't preclude people from in future rate cases before this Board arguing whatever they liked on SSM. And I had thought we had Energy Probe's agreement on what the process was between now and that future rate case. 538 MR. RUBIN: I see the difficulty. Frankly, I think we are reading it differently; however I don't think there is much difference to the distinction or however I'd like just like to say that. 539 As I mentioned before, I -- and as you know, I helped write the phrasing here that for 2004, the shareholder incentive proposal "that may address market transformation, cost effectiveness and administrative ease. " So I do see that as friendly language for the introduction of my alternative, but I also did see the following sentence which I believe is ambiguous as to whether, in future rate cases, it applies to advocating or whether it applies to eliminates -- eliminates the SSM in the future rate cases. I took it as the latter and you're clearly taking it as the former. It certainly could have been written more clearly if it was to mean what you think it means. 540 At any rate, I don't really view my advocacy of my alternative SSM for 2004 and beyond as unfriendly to this agreement, and I think you and I among others worked together to ensure that we were more or less on the same wavelength. 541 There is nothing in this agreement that says what -- that says what the specifics of a 2004 SSM should be, except that it should address these principles. 542 MR. POCH: Mr. Chairman, let me just say this for the record. We obviously have a different view of what that clause means in this ADR agreement. I should say that for GEC and CIELAP's part, we hadn't planned on using this hearing as a platform to advocate our particular preferred alternative for the future in SSM, although you may hear a little bit about the kinds of things we'd like to see it work towards. But I'm prepared to acknowledge there's ambiguity in the language and I'm not asking that Mr. Rubin's evidence be expunged or any such thing. 543 I just think it's appropriate at this point in the transcript to record that the Board may wish to be cautious of the situation as it's arisen because of that, when it decides how far to go to in terms of talking about future alternatives. 544 I don't want to get in argument, I just thought it would be appropriate to mention that at this point in the transcript so it's contiguous with the discussion we've just had. 545 MR. BETTS: Further to that I will maybe just invite other comments on that point specifically, if there are any at this point in the transcript. 546 MR. O'LEARY: Mr. Chair, I was just going to take up your invitation to jump in because you invited us I think at some point to indicate when we reached perhaps Mr. Rubin's testimony as it related to that document which was filed today under those conditions which we spoke about earlier. 547 Again, my understanding and interpretation of the agreement that parties have agreed to is that while Mr. Rubin has been asked to comment on that document which was filed late, it was only for information purposes and that the Board will not be asked to make any ruling or decision in respect to what's contained in that document for the purposes of this proceeding. So it's nice foreshadowing, perhaps, of what might come up in the next rates case, but it is not intended to be something upon which you would base your decision in this particular proceeding. 548 And that's why we raised the point at the outset this morning, because Mr. Rubin's evidence is going in completely unchallenged, in the sense that the company, and perhaps some of the other intervenors, will not have had a chance to put any of their evidence in chief in forward in respect of it. 549 MR. POCH: Mr. Chairman, that was entirely the purpose of my interjection, just that I want the Board to understand I don't wish to pursue this with Mr. Rubin. I'm not going to cross-examine him on the niceties of his proposal or the potential shortcomings. But I just want to Board understand that's not to indicate acceptance in any fashion. It's just that we view that to be a matter for another day. 550 MR. RUBIN: If I may just interject, I would just like it to be clear that I did outline the design of the SSM and the advantages of my alternative SSM in my pre-filed evidence which was not late, and which was the subject of interrogatories. 551 MR. POCH: No dispute there, Mr. Chairman. It's just a question of whether the ADR agreement had ousted that discussion to a future date or not; obviously we disagree. I don't think it needs to be specifically resolved. I just think the Board should appreciate that my not pursuing it now -- it shouldn't take any implication from that that I'm accepting either Mr. Rubin's interpretation of that agreement or the position that they're advocating. 552 That's the extent of my interjection. 553 MR. BETTS: Just allow me to confer with Mr. Dominy for a moment. 554 MR. MacODRUM: Mr. Chairman, just to assist you, I don't want to be giving the impression that Mr. Poch is saying, because the parties to a partial settlement agreement agreed to certain words that that necessarily binds those who did not agree to that partial settlement agreement as to the scope of this hearing, what's appropriate for the scope of this hearing under the issues list that the Board has issued. 555 MR. POCH: Mr. Chairman, I don't take any issue with that. I think everybody's bound in that respect by the issues list, and the issues list says what it says. 556 MR. RUBIN: Mr. Poch, by the way, I would love to have you read that sentence aloud and try to inflect it so that it means what you think it means, because I don't think -- 557 MR. BETTS: Mr. Rubin, I'm just going to ask everybody just to allow myself and Mr. Dominy to confer for a moment. 558 [The Board confers] 559 MR. BETTS: The panel is taking no position on this at this point, so please proceed. 560 MR. POCH: Thank you, Mr. Chairman. I wasn't asking for a ruling. I was just simply alerting the Board to that situation. 561 Mr. Rubin, I think we can probably make haste of the whole questions -- of these questions of symmetry, at least on a forward-going basis. I take it that while you favour yes-yes and some favour no-no, you are a signatory to the agreement going forward for 2003 which is, I guess, no-no with a bunch of exceptions. And it may not be all that different from yes-yes with a bunch of exceptions; is that fair? 562 MR. RUBIN: Yes, it's fair to say that Chris Neme's proposal, which is basically what we adopted for the rate year that's now about half over, has approached -- because of his four classes of exceptions to his general no-no, it has come closer and closer to the yes-yes with one exception, which is my favorite proposal. 563 There's no question that we're close to meeting in the middle. We have not quite met in the middle, but we're definitely approaching each other. 564 MR. POCH: And the approach that informs -- I think probably you would agree -- everybody in this discussion is the one that you've advocated, which is that the company be incented with respect to matters it can control and not with respect to matters outside its control. 565 MR. RUBIN: Absolutely. 566 MR. POCH: All right. 567 Now, turning to the free-rider question. First, in 2000, and presumably for 2001 and 2002, we do have a difference of opinion there that's less tractable. 568 To start with, let's make sure we agree. You advocate a no-yes treatment for the custom project free riders, 5 or 10 percent in the budget, and the 48 or 49 percent mid-point in the actuals, and that the impact of that would be to lower the SSM claim for 2000 by about $4.5 million; correct? 569 MR. RUBIN: That's correct. And that was also the approach of one of the other members, and your representative would have a smaller subtraction. 570 MR. POCH: Well, we'll let Mr. Neme speak on the stand to how his views have evolved on that. 571 MR. RUBIN: Yes. 572 MR. POCH: But I just want to make sure I understand your views. 573 Is it fair to say that presumably that approach for the historic years would have an effect of the same order of magnitude for 2001? 574 MR. RUBIN: I would assume it would. There is -- I have no reason to believe that either the forecasting or the actual recruitment of free riders was significantly different in 2001 from the year 2000, but I have not examined the results pre-audit, and they have not yet been audited. 575 MR. POCH: And we can apply here those comments you've just made then to 2002 as well? 576 MR. RUBIN: Yes, presumably. It's an unfortunate effect of the lateness of this whole discussion that we have so many years in the can, and, you know, while we're making these decisions. 577 MR. POCH: Absolutely. 578 Now, you've agreed that you don't have -- there's no evidence that Enbridge was actively going out and trying to recruit free riders. Would you also agree that the very high free rider rate that was ultimately -- did ultimately show up in the sample of the auditors' sample was unforeseen by all at the time we were setting these budgets for these three years? 579 MR. RUBIN: Let me parse that into two parts, and unfortunately, neither answer is quite as quick as you might have hoped. 580 I don't believe I said exactly what you said in terms of recruiting free riders. I believe that several internal policies of the company may have actually led to the recruitment of free riders. 581 The incentive structure that one sets up internally in a company and in contractual relationships with outside parties like energy service companies to find participants can have consequences and can give incentives that -- I believe in these cases a number of those incentives, in fact, not only did not punish but ended up rewarding or incenting the recruitment of free riders. 582 So what I said was I don't believe there was a policy decision announced within the company's secret meetings or public meetings that said what we've got to do is round up free riders. 583 I don't think there were many people or any people, perhaps, trying to find free riders; however, I believe that they may have set up an environment internally in the company and with their channel partners that, in fact, did encourage the recruitment of free riders. 584 MR. POCH: Let me just ask you: Did you have an opportunity to read the evidence of the company's witnesses earlier in this proceeding? 585 MR. RUBIN: I've read part of it but, again, I did not get a chance to review it just before today. 586 MR. POCH: Let me just advise you there was evidence from the company indicating they were asked specifically about the incentive structure that their DSM crew has, I think, by Board Staff, if my memory serves. And there was an indication on the record that they -- basically, everybody in the company gets a reward for the company's overall performance, but there is no incentive specifically for DSM people to get better DSM results per se. 587 MR. RUBIN: Yes, Mr. Poch, I don't think you or I are privy to this level of internal discussion in the company. I -- I'm sure it's safe to say that nobody on the DSM field staff gets promoted for falling short on the expected number of participants they sign up. 588 Now, you know, I don't know the exact, you know, way that this is done and I'm not sure that the transcript will show it either, but we now know what care has to be taken in order not to create perverse incentives either internally or externally. 589 MR. POCH: Well, let's go back -- I've interrupted you. Let me just refresh the thrust that -- you've reacted to the preamble to my question. The thrust of my question was, Do you agree that the very high custom project free rider rate was unforeseen by all when the budgets for those three years were, in fact, set? 590 MR. RUBIN: And again I'm not privy to what the company foresees. That is one of the things that infuriates me and disgusts me -- I don't think that's too strong a word -- at the annual target-setting exercise. I have no idea what the company knows, and I cannot say that I know that they were surprised when they found out that almost half of their claimed savings were not properly attributable to their actions. 591 They are all nice folks, I really like the people I've worked with at Enbridge on DSM. I don't attribute evil motives to them but nor do I attend their meetings. I don't know if they were legitimately surprised, if they had an inkling, if they had a suspicion, if they had no idea. I can tell you that I was surprised. I saw a forecast I -- Frankly, I believe that a well-ordered incentive structure will drive this free ridership down to the levels that it was forecast. I can't prove that, but I hope I live long enough to say, See, I told you so. 592 I don't know whether they were surprised. Yes, I was surprised. 593 MR. POCH: Okay. Let me ask you to turn up your pre-filed evidence at page 9 of it. 594 MR. RUBIN: Yes. 595 MR. POCH: In the first answer on that page, second paragraph, third line up from the bottom, there's a phrase where you say: "When a literal reading of the rules might dictate a significant negative SSM for 2000." And I just wanted to ask you which rules you were referring -- which rule you were referring to when you referred to a "literal reading". 596 MR. RUBIN: Yes, let me just read the context for a second. 597 Yes. I indicated, I believe, just above the section you're pointing to the steps that the auditor under the specific direction of the independent audit committee took to apply what I've here called mercy. And that -- those steps all involved adjustments to the initial data that came back from the statistical survey that the auditor did. 598 And the recommendations, for example, the recommendations that Energy Probe and CME's representatives made that ended up with the small negative SSM recommendation were subsequent to a number of these adjustments and compromises to be less literal. So perhaps the word rules is inappropriate because it suggests a legalism that I didn't imply. 599 MR. POCH: That's all I was asking. There's no rule here other than what we've -- you've already discussed today, that you are pointing to, that determines which way the 2000 free-rider issue should be resolved. 600 MR. RUBIN: The principles of yes-yes, no-yes, these are certainly in dispute, there's -- I would -- obviously what I was trying to say is a literal reading of actual and budget in this case, for example, led in the first cut of the auditor's results to a large negative SSM. 601 MR. POCH: Okay. One moment, please. 602 Mr. Chairman, I'm just trying to eliminate questions that have already been covered, with your indulgence. 603 Now, you were taken in Mr. Klippenstein's materials to this clause in the 1999 ADR with respect to the year 2000. What that -- may I paraphrase and would you agree that what that clause says is for those four inputs, being energy savings per measure, avoided costs, discount rates and measure lives, you use a yes-yes approach? 604 MR. RUBIN: I believe it says that, but it also says that the target will be as follows except that there will be a yes-yes case in these four instances. I believe that's somewhat more powerful than what your statement says. 605 MR. POCH: Fair enough. And you've said your read of that puts free riders in the other category. 606 MR. RUBIN: Not yes-yes. 607 MR. POCH: Not -- not yes-yes. Can we agree that, obviously, no-yes is not yes-yes? 608 MR. RUBIN: Correct. 609 MR. POCH: And can we agree that no-no is also not yes-yes? 610 MR. RUBIN: Indeed we can. 611 MR. POCH: So in terms of the language of this ADR, there's some ambiguity there. 612 MR. RUBIN: There is ambiguity if one is willing to say that all of the documents that used the word "actual" didn't really mean it, and I reject that interpretation. But if the Board adopts it, then I'm wrong. 613 MR. POCH: Isn't it clear that this paragraph deals with adjusting the pivot point? It starts off with, "The value of the pivot point ..." 614 MR. RUBIN: That's correct. 615 MR. POCH: That this is a clause which is specifically identifying situations where we go back and adjust the pivot point. 616 MR. RUBIN: And we adjust the pivot point in these four cases so that it will more closely conform to the actual. 617 MR. POCH: Yes. And this says -- that doesn't preclude other situations where it may be appropriate to also have symmetry, to not hold the company responsible, but to do it by that other mechanism, no-no. 618 MR. RUBIN: I'm not cross-examining you, but I see no basis for anybody ever saying that we were going to do that or that we wanted to do that. 619 MR. POCH: Haven't you already advocated that one of the items in this list, avoided costs, be removed from this list and be put into a no-no treatment? 620 MR. RUBIN: Yes, I am advocating that. I think we made a serious mistake, and the Board signed onto it. I think you're -- you've, you know, focused on something important. 621 Avoided cost is on that list, and I am embarrassed by that. And I think leaving it on that list creates great havoc and the company would be arguing strongly if avoided costs had dropped, because they would be owing us tens of millions of dollars, perhaps. 622 So I think it was a mistake and I think we should retroactively make believe that we all knew and had thought about it more carefully. 623 MR. POCH: Okay. And if we are, in fact, to apply this clause, the unambiguous part of this clause literally, that is that avoided costs get treated on a yes-yes basis, do you agree that the implications of that -- well, let me do better than in putting this question in the abstract. 624 Can you turn up Exhibit K.1.2. 625 MR. RUBIN: Can you tell me what it is? 626 MR. POCH: As soon as I find it. 627 MR. RUBIN: Okay. 628 MR. POCH: Yes, this is a one-page sheet entitled, "Target O&M SSM 1999 to 2001." I think I pointed it out at the back of the room earlier. 629 MR. RUBIN: Yes, I have it. 630 MR. POCH: And there on row 3 we see the numbers with the customs -- custom free riders treated as no-no, and with the acceptance of the auditor's proposals for prescriptive measures, but with the company applying a literal read of the previous ADR that in other words for avoided costs, you treat them on a yes-yes as you do for the other three in that list, and that gets you for the sum of -- for the two years, 2000 and 2001, about 16.8. I'm adding 5.6 and 11.2. 631 That conforms with your general understanding of what the implications would be of reading that rule literally? 632 MR. RUBIN: I haven't done the math, but it doesn't shock me. That sounds reasonable. 633 There was no support on the audit subcommittee in 2000 for doing so. 634 MR. POCH: Right. 635 MR. RUBIN: That was one of the few terms we were absolutely unanimous on. 636 MR. POCH: Sure. 637 MR. RUBIN: Including the company representative, I hasten to add. 638 MR. POCH: Right. Now, Mr. Rubin, so I think we've agreed there is at least some ambiguity in the rules for treatment of free ridership for that period, and we're trying to fix it on a going-forward basis, and there's at least one rule which applied -- if applied literally would give the company some $4.5 million in the one year, 2001. That's the -- putting avoided costs on a yes-yes basis. 639 Can we also agree that we have a bit of a problem with an accumulated backlog in the regulatory cycle with respect to SSM, and it would be nice to move forward and get the cycle back so we are setting targets in advance of the year -- fully in advance of the year; fair? 640 MR. RUBIN: It would be great to have the regulatory cycle on schedule so we were deciding in advance of the year, for sure. 641 MR. POCH: And in your chief, you went into some great length about yes-yes and no-no and so on, and the incentives these different choices set up, and no-yes for that matter. 642 But can we agree that for the historic years of 2000, 2001, and 2002, they are just that, historic years, and there's nothing we can do today about what incentive drove the company in those years. All we can do today is worry about the incentive going forward in terms of affecting the company's behaviour? 643 MR. RUBIN: That's true. What we can do now, though, is for the years that are done, for the years that are in the can, is we, unfortunately, are left with a bunch of loose ends to make sense of what we and the Board set up as the incentives for those years. 644 That has to be done, and we also need principles to guide 2002, which hasn't been wrestled with yet. 645 MR. POCH: Okay. Could you turn up the Exhibit K.1.3, which is the GEC/CIELAP cross-examination materials? 646 MR. RUBIN: Yes. 647 MR. POCH: And I'd ask you to turn up page 1 of that, which is a table entitled, "Four SSM Cases for 2000 and 2001." 648 MR. RUBIN: Yes. 649 MR. POCH: Okay. Let me ask you this: Given the -- this discussion we've had around the ambiguity and so on with respect to free riders, one option that we -- that we look at here is to simply suspend the application of the SSM to the custom projects for those historic years, and that scenario is calculated in case 1. 650 And I should add, that also rejects the rigid application of the -- of that ADR rule for avoided costs. In other words, it doesn't go yes-yes. It holds that at no-no so that there's -- so it's generous to the ratepayers on that avoided costs question. 651 And it -- well, it neither rewards nor penalizes the company on the issue of free rider for the customs. It simply suspends the SSM; do you understand that? 652 MR. RUBIN: I'm trying to. I haven't examined this until today so I'm afraid I'm missing a few beats trying to wrap my head around it. 653 MR. POCH: Just to be clear, the auditor's recommendations for prescriptive programs were put in as yes-yes. Avoided costs was kept at no-no, which I can take it are both your favourites. 654 MR. RUBIN: Correct. 655 MR. POCH: And we've simply suspended the SSM with respect to custom programs. We've calculated the SSM for the rest of the portfolio including the prescriptive programs affecting the industrial/commercial sector. 656 MR. RUBIN: Yes. Your year 2000, I'm not very familiar with the 2001 numbers and, as you know, my argument is that one need not be yet. 657 MR. POCH: Okay. 658 MR. RUBIN: The year 2000 number, as I recall the dispute between my calculation and the company's, was on the order of 4.5 million and since I ended up with a negative, small number, I would think that your number in 2000 should be more like 4.4 or thereabouts million than 5. But other than that, I have no problem with the year 2000 case number one; I think that's in the ballpark. 659 MR. POCH: Okay. Well, we did -- Mr. Millyard did produce these numbers. I flew them by the company and I had them, while they were on the stand, accept them as approximate. Let's for our discussion assume that they are approximately correct. 660 MR. RUBIN: It's certainly well within a million of what I would have guessed. 661 MR. POCH: That's all I need then. 662 Now, you've mentioned concern about the allocation of the proposed settlement of the SSM as between the customer classes. 663 MR. RUBIN: Yes. 664 MR. POCH: Leaving aside how the parties actually got to the proposed settlement, which we're all sworn not to talk about, if one way of seeing this settlement is analogous to this approach -- actually a few million dollars less than this approach -- would you agree that the allocation that you see in the settlement conforms to the rules? It takes the -- it takes all of the TRC for those sectors affected by the SSM, in this case that excludes the customs, and allocates accordingly and 92 wouldn't be out of -- out of whack for that approach? 665 MR. RUBIN: I'm sorry, Mr. Poch, I don't see it. And I don't see it because nobody is denying the activity happened, the delivery of DSM programs to custom participants happened, the company spent the money, the company's gotten the money. They're not giving it back. 666 A few million dollars were spent on those activities and many more million dollars, even in my calculation, were generated in TRC benefits. There's nobody denying that, including me. I'm the toughest critic of the performance of the custom programs and I say there were significant benefits even after my corrections following the audit. 667 MR. POCH: Let me give you a hypothetical. If we decided on a going-forward basis that we're going to take a certain class or category of DSM programs completely outside of the SSM, we decide, for example, market transformation multiyear efforts don't fit well within this incentive scheme and we pull them out of the SSM on a going-forward basis, when we ultimately wanted to clear that year's SSM variance account, assuming that there was money in it, you agree it would be rational to share the burden of the SSM amongst the rate classes that received the programs in the SSM in proposition to how they benefited from those programs? And if there was some other class of customer that only was participating in this other program that was not incented by the SSM you wouldn't impose that cost on them, would you? 668 MR. RUBIN: I'm not sure. I mean, the principle we've established is that SSM costs are borne by DSM recipients in proportion to the calculated benefits of the DSM programs. I mean, I see -- I believe you're asking me to start from a -- a make-believe -- the SSM didn't apply to custom and from there, to a make-believe that benefits didn't accrue. 669 MR. POCH: No, I'm not -- 670 MR. RUBIN: Or that the benefits, those benefits should not influence the cost allocation. 671 MR. POCH: Let me see if I can make this a little easier. I'm not asking you to accept the approach, I'm just asking you to agree that if we say now there was a problem, there was an ambiguity, we're going to pretend, in your words, the SSM simply didn't apply to custom. If you take that approach and you can disagree with it, that's fine. If you take that approach, then the remaining TRC from all the other programs, it's fair to say that that the split between customer classes would be something similar to what is in that settlement proposal? There's a wee bit of prescriptive affecting industrial/commercial. 672 MR. RUBIN: Yes. If one zeros out the TRC benefits that were delivered to the industrial and commercial classes through custom programs if one believes that they didn't exist then I think 98/2 is the right number. 673 MR. POCH: Sure. 674 MR. RUBIN: I assume it's the within the Board's power to determine that those are the right numbers. I'm arguing against it. 675 MR. POCH: Fair enough. I just want to make sure we didn't disagree on one way you could get to those numbers that's internally consistent, although you don't accept that approach as a whole. 676 MR. RUBIN: And I don't want to sign on to its internal consistency, but would one would end up with 98/2 if one did those make-believes that you've suggested. 677 MR. POCH: Okay. Now just in terms of -- you've stated that it would be appropriate, you would welcome the Board clearing the rules up to speed the clearance of the 2002 accounts which are still a task awaiting us, and that is one of the reasons you've urged, if I understood you correctly, the Board to lay out the principles for the clearance of 2000, 2001 and forward. 678 MR. RUBIN: I believe that in setting principles to guide -- principles for example of symmetry and retroactivity for 2002, the Board will have to wrestle with precisely the issues we're wrestling with and have will have to come up with a decision based on everything it has heard for what the least-bad set of rules is. And having found that, my recommendation is that those least-bad rules should be applied to 2000 and 2001, wherever they lead. 679 MR. POCH: So if you -- your position prevails and the Board agrees that it should be no-yes for 2000 and 2001, it's -- you would suggest that the Board make it clear that that's how they would like to see 2003 go. And alternatively, if the Board finds that the circumstances were such that they aren't prepared to extract -- to lower the SSM payment by that 4.5 million in 2000, you'd agree that it would be helpful for the Board to indicate that approach because it will help speed the clearance of the 2002 account? 680 MR. RUBIN: The Board has before it a partial settlement agreement for 2000 and 2001 that expressly does not include any principles of reciprocity in symmetry, no-yes, or anything else. 681 MR. POCH: Let me interrupt you just to help you along. Assuming the Board is certainly free to not just take it or leave it with this settlement and they can express their -- why they believe the result is appropriate or not, if the Board -- let me extend my hypothetical -- and if the Board finds that in the circumstances where, you know, Enbridge -- there was an ambiguous rule and what have you, they shouldn't face that penalty or a loss of SSM, you'd agree that that would similarly help speed the 2002 clearance, as long as the Board is -- makes clear its view. 682 MR. RUBIN: Yes. If the Board comes up with principles for 2000 that it then applies to 2001 and 2002 or if it comes up with principles for 2002 that it then applies to 2000 and 2001, I don't think I'd care between those two. I would object to your language that calls the granting a bonus of less than somebody hoped to get a penalty. 683 MR. POCH: Fair enough. 684 And we've already agreed, I think, that the situation is a little different going forward where we can still affect Enbridge's behaviour, and you've already agreed to that. 685 Now -- 686 MR. RUBIN: Indeed. 687 MR. POCH: Now, let me ask you this: One aspect of this debate about the 2000, 2001 SSM is whether the company exercised or could have exercised control over custom project free riders. Do you say that they should have known that custom project free ridership was a significant controllable variable at that time, and that's why they should be accountable for it? 688 MR. RUBIN: I don't think anybody ever denied that free ridership and custom programs was something that was under the company's influence, you know. It was not a matter of daily discussion by any means but -- and that's part of the problem that I don't think this collective group or the DSM consultative group or any other group really wrapped its head around, what custom projects -- what they need and what they imply in terms of -- in the SSM framework. And that's why we're here facing this mess. 689 I believe the issue always was under the company's influence. I don't think -- I'm not sure that -- what the company thought if that was the question. 690 MR. POCH: All right. You've signed on, Energy Probe has signed on to the 2003 partial agreement which proposes for 2003 only that would treat free riders in the custom sector on a no-no basis fixed at 30 percent, both in the budget and the actuals, and may I -- 691 MR. RUBIN: And please don't punish me for doing so. 692 MR. POCH: It would be a bad feedback loop. 693 Can I -- I take it that your agreement to that was in part because the issue is being researched further as we speak, and that the hope is that post-2003, we can have a more permanent approach. Presumably you would favour, at that point, no-yes; is that correct? 694 MR. RUBIN: My preference for 2004 and going forward is blank-yes, is that the target not be part of the calculation. Failing that, I suppose the principles I've recommended for 2000, 2001 and 2002 are my favorites going forward but I don't think they're anywhere near as good as blank-yes as a target-free SSM incentive. 695 MR. POCH: I'm just asking you though -- 696 MR. RUBIN: Sorry, one of the main factors, as I probably said already, in my signing Energy Probe on to this not-our-favorite design of SSM for the year 2003 is that the year is half over. And changing incentives for a year that's half over, you know, changing -- the more revolutionary the changes, the stupider it seems. I mean we're just stuck here making a decision late in the year, and so under the circumstances, Chris's design is closer to what the company has been used to than my design, and the idea of putting in a revolutionary -- you know, a more revolutionary, more fundamental change six months into the year just seems, as time went on, it increasingly seemed like a non-starter. 697 MR. POCH: I wasn't focussing on the choice of this target-based SSM as opposed to your non-target-based SSM. I was really just focused on this fixing of 30 percent and why that is palatable to you. 698 MR. RUBIN: Well, it's -- for the six months of the year that are already past, I think it's palatable because we're stuck here. I don't much like it. It was kind of a hold your nose and sign on thing. I think we have to -- to wait another month or two until we get a final decision before the Board knows what incentive structure it has been on for the last 7 months is worse than doing it in six months here, unlike in the set almost of 2000 and 2001, I really do see an advantage in putting something behind us so the company can have some idea of what its incentives are today. 699 You know, waiting for principles to settle 2000 and 2001, at this point, waiting another month doesn't seem to me to be a big delay penalty, on the other hand. 700 MR. POCH: Mr. Chairman, I have a few minutes more cross. I'm here Monday in any event, but it's up to you whether you would prefer to press on now or -- I'm content either way. 701 MR. BETTS: I think if you're going to be here on Monday and I think our court reporter has been working pretty diligently as well, it's probably time for a break and that would mean it's probably time to break for the day and this week. 702 So Mr. Poch, you -- thank you for that offer, and I think I will take you up on that and allow you to begin questioning on Monday morning. 703 Are there any closing items that should be brought to the attention of the Board? 704 MR. O'LEARY: Excuse me, Mr. Chairman. 705 I'm advised, Mr. Chair, that there are several undertakings that we could file and then that would allow parties an opportunity to look at them over the weekend if you will allow us two minutes to bring them up. 706 MR. BETTS: Let's take the time to do that then, and it may be of value for those -- does it relate to the issues that would arise on Monday? 707 MR. O'LEARY: I'm not certain. I don't believe they are DSM-related but I -- 708 MR. BETTS: I think, in that case, I'm going to say bring them up -- if somebody wants them in advance, that's fine. Other than that, we will enter them into the record on Monday. 709 MR. O'LEARY: That's fine. 710 MR. BETTS: With that, I say thank you all. It's been a thorough part of the week for us, and somewhat confusing, but we'll see you all on Monday morning at 9:30. Thank you. 711 --- Whereupon the hearing adjourned at 4:10 p.m.