Rep: OEB Doc: 12NBC Rev: 0 ONTARIO ENERGY BOARD Volume: 15 15 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 15 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 ROBERT WARREN CAC BRUCE MacODRUM CME SUE LOTT VECC DAVID POCH GEC MURRAY KLIPPENSTEIN Pollution Probe JACK GIBBONS Pollution Probe VINCE DeROSE IGUA PETER THOMPSON IGUA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [19] IGUA PANEL ON DSM: FOURNIER [25] EXAMINATION BY MR. THOMPSON: [31] CROSS-EXAMINATION BY MR. WARREN: [88] CROSS-EXAMINATION BY MR. POCH: [143] CROSS-EXAMINATION BY MR. KLIPPENSTEIN: [327] CROSS-EXAMINATION BY MR. O'LEARY: [406] QUESTIONS FROM THE BOARD: [487] CME PANEL ON ISSUES 9.2 TO 9.5: ROWAN [526] EXAMINATION BY MR. MacODRUM: [532] DECISION AND ORDER ON DISCLOSURE MOTION: [619] CME PANEL ON ISSUES 9.2 TO 9.5: ROWAN; RESUMED [661] CROSS-EXAMINATION BY MR. POCH: [663] CROSS-EXAMINATION BY MR. O'LEARY: [778] CROSS-EXAMINATION BY MR. MORAN: [1039] RE-EXAMINATION BY MR. MacODRUM: [1055] QUESTIONS FROM THE BOARD: [1068] 10 EXHIBITS 11 EXHIBIT NO. K.15.1: LETTER FROM PETER THOMPSON TO Board SECRETARY, DATED APRIL 11, 2003 [55] EXHIBIT NO. K.15.2: COPY OF TWO E-MAILS FROM JUDITH RAMSAY [667] EXHIBIT NO. K.15.3: EXCERPT FROM THE DRAFT MINUTES OF THE CONSULTATIVE MEETING DATED NOVEMBER 22, 2002 [883] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:45 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. I apologize in advance for asking everybody to start a little late. There was an announcement this morning that the Board had a quick meeting to just give us the perspective, and I'm sure all of you have already heard rumours of what that announcement was about. But we won't say any more about it at this time. 17 Before we begin, are there any preliminary matters for the Board's consideration? 18 Mr. Moran? 19 PRELIMINARY MATTERS: 20 MR. MORAN: Yes, Mr. Chair, with respect to the schedule, Mr. Fournier, on behalf of IGUA, is here this morning and is ready to give his evidence on DSM to be followed by Mr. Rowan on behalf of CME. 21 MR. BETTS: Thank you. And, Mr. MacOdrum, Mr. Rowan was scheduled. Is that change okay with you and your witness? 22 MR. MacODRUM: Well, I wasn't consulted on this change, I was informed of it, and -- but whatever the Board sees fit, we will accommodate. 23 MR. BETTS: Okay. Well, we will then proceed on the basis that's been recommended, if you can accommodate that change. 24 Are there any other preliminary matters to be dealt with? If not, please -- perhaps we should first swear in the witness. Mr. Dominy. 25 IGUA PANEL ON DSM: FOURNIER 26 P.FOURNIER; Sworn. 27 MR. BETTS: The witness has been sworn. And, Mr. Thompson, when your witness is organized, please proceed. 28 MR. THOMPSON: Thank you, Mr. Chairman. 29 First of all, Mr. Chairman, Mr. Fournier is, I'm sure, well known to the Board. By way of a preliminary, I'd like to thank Board counsel, Mr. Moran, and others here in accommodating Mr. Fournier's testimony today. He has been tied up quite actively in the TransCanada case where he testified on April 4th and last week he had his IGUA seminar in Belleville. So we appreciated the day's grace to allow him to testify today. 30 The documents you will need, Mr. Chairman, Mr. Dominy and others, for the purposes of Mr. Fournier's testimony are the IGUA direct evidence, which I believe is Exhibit L, tab 13, schedule 1. The DSM component of that testimony is contained in paragraphs 27 and 28 of that document. 31 EXAMINATION BY MR. THOMPSON: 32 MR. THOMPSON: Mr. Fournier, could I have you begin, please, by describing your educational background and experience. 33 MR. FOURNIER: I graduated from UBC with a BA in economics in geography in 1961, then served in the Canadian army as a commissioned officer for 10 years. In September 1970, I joined the staff of the National Energy Board, and from '75 to February of '81 I was the assistant director of the gas branch of the NEB and I was responsible for various gas policy and advisory roles, for administering the natural gas pricing program under the Petroleum Administration Act, and for administering the NEB's natural gas and gas liquids export control programs. 34 In March of '81 I joined the Canadian Petroleum Association. I was manager, regulatory affairs, and I was then in the successor organizations from September '91 to '95. I performed a similar role with the Canadian Association of Petroleum Producers. In May 1997, I became executive director of IGUA and in January '99, the president. 35 MR. THOMPSON: Thank you. Could you briefly describe your regulatory experience. 36 MR. FOURNIER: Most of my regulatory experience has been with respect to pipelines regulated by the National Energy Board, in particular TransCanada PipeLines, but also Westcoast Transmission, which is now Duke Energy, and Trans Quebec and Maritime. And I've been involved since 1980 in virtually every TransCanada toll proceeding in their task forces and in all other negotiated processes with respect to TransCanada's tolls. 37 Since I joined IGUA in 1997, I have now participated in most of the regulatory proceedings and consultative groups regarding Enbridge Gas Distribution and Union Gas before this Board, and with respect to Gaz Metropolitain and Gazifere Inc. in proceedings before the Regie de l'energie. 38 MR. THOMPSON: And finally, before we get to the IGUA exhibit, could you just briefly describe your current responsibilities as president of IGUA. 39 MR. FOURNIER: Yes, I should mention I have appeared before the NEB, obviously, before the BCUC, the Alberta PUB, this Board, and the Regie de l'energie. 40 As president of IGUA, I am responsible for making policy recommendations to my board and to the utility-specific committees that we have in IGUA. I have an Enbridge Gas Distribution committee consisting of a number of members and I provide them with advice and policy recommendations on the applications and other matters involving the two Ontario, two Quebec LDCs and TransCanada PipeLines. 41 MR. THOMPSON: Thank you. Could I now direct your attention, please, to the IGUA evidence, Exhibit L, tab 13, schedule 1, and -- 42 MR. FOURNIER: Correct. 43 MR. THOMPSON: And, in particular, the demand-side management section. 44 MR. FOURNIER: I have it. 45 MR. THOMPSON: The two paragraphs, paragraphs 27 and 28, which you are to speaking to today. 46 First of all, was the evidence of IGUA prepared under your direction? 47 MR. FOURNIER: It was prepared under my direction, yes. 48 MR. THOMPSON: And with respect to paragraphs 27 and 28, are there any corrections to be made therein? 49 MR. FOURNIER: One very minor one. At the very end of paragraph 27, you'll see $9.66 percent. The dollar sign should be removed. 50 MR. THOMPSON: Subject to that correction, do you adopt the contents of these two paragraphs on behalf of IGUA? 51 MR. FOURNIER: Yes, these correctly state our position on DSM in this proceeding. 52 MR. THOMPSON: Another document I'd like to have you identify and file with the Board is a letter that was circulated last week to apprise everyone of the limited scope of the evidence that you will be providing, and I'm referring to a letter that I wrote to the Board of April 11, 2003. Do you have a copy of that? 53 MR. FOURNIER: I have a copy. 54 MR. MORAN: Mr. Chair, that would become Exhibit K.15.1, a letter from Peter Thompson to the Board Secretary, dated April 11, 2003. 55 EXHIBIT NO. K.15.1: LETTER FROM PETER THOMPSON TO Board SECRETARY, DATED APRIL 11, 2003 56 MR. BETTS: Thank you. 57 MR. THOMPSON: Thank you. 58 Mr. Fournier, if I could direct you to this letter and, in particular, the portion of the letter that begins in the third paragraph on the first page where it states that: 59 "You will acknowledge that you have no expertise in DSM." 60 Is that fact accurate, sir? 61 MR. FOURNIER: Yes, I am not an expert in DSM. 62 MR. THOMPSON: Thank you. 63 And it states that IGUA has not been an active participant in the DSM consultative process and that its involvement was primarily -- with DSM issues was primarily through the ADR processes. 64 MR. FOURNIER: Well, I monitor the DSM minutes of consultative meetings that are held. I have attended one or two DSM meetings over the last several years, but in no way could I suggest that we have been truly an active participant. I do keep abreast of the discussions that have been taking place, and from time to time, I've spoken to my counsel to get more advice on a particular issue. 65 But it's absolutely correct. I -- we have not been involved in the same extent many other parties have. 66 MR. THOMPSON: The balance of the letter, Mr. Fournier, goes on to describe the facts to which you will refer to support the suggestions contained in the IGUA testimony. 67 Are the facts stated in the letter true, to the best of your knowledge, information and belief? 68 MR. FOURNIER: I daren't say no when my lawyer has written this. They are correct. 69 MR. BETTS: We'll take that as a yes. 70 MR. THOMPSON: And do you adopt the facts stated in the letter as part of your evidence in these proceedings? 71 MR. FOURNIER: Yes. This should be read as part of our evidence in this proceeding. 72 MR. THOMPSON: Finally, I'd just like to refer you, if I might, to the DSM section of the settlement proposal in these proceedings, which is part of Exhibit N.1, tab 1, schedule 1. And it commences, I believe -- 73 MR. FOURNIER: Is that A.7, tab 5, the settlement proposal of December 23, 2002? 74 MR. THOMPSON: No. It's Exhibit N, tab 1, schedule 1, pages 64 of 93. 75 MR. FOURNIER: All right. I have that. Yes. 76 MR. THOMPSON: And from pages 64 through to the end of the DSM section, pages 64 to 78 of this settlement proposal, there is described a partial settlement with respect to a number of issues, the partial settlement being between Enbridge and Energy Probe, GEC, HVAC, CIELAP, Pollution Probe, and Schools'. 77 For the purposes of IGUA's evidence, apart from the topics that are discussed in the IGUA evidence to which you've referred, has IGUA finalized its position with any of the other issues listed in the settlement proposal? 78 MR. FOURNIER: I believe in all of these issues of this settlement, IGUA is one of the parties that does not agree with the settlement. 79 MR. THOMPSON: And at page 66 of the document, Exhibit N.1, tab 1, schedule 1, at the top of the page, and it appears elsewhere throughout the document, there is the statement: 80 "The parties who do not agree take the position that the Board must review and determine all matters pertaining to Enbridge Gas Distribution's DSM initiatives for the 2003 test year and beyond." 81 Is that IGUA's position? 82 MR. FOURNIER: Correct. 83 MR. THOMPSON: Thank you. 84 Mr. Fournier is available for cross-examination. 85 MR. BETTS: Thank you, Mr. Thompson. 86 Could we first of all receive cross-examination from parties that are in support of IGUA's position. 87 MR. WARREN: I guess that would be me, Mr. Chairman. 88 CROSS-EXAMINATION BY MR. WARREN: 89 MR. WARREN: I have just a couple of questions for you, Mr. Fournier, and in this context, I'd like you to turn up, if you wouldn't mind, a couple of undertaking responses which have been delivered in this case, and they're undertaking responses given by Enbridge to questions which I asked. 90 And the first undertaking response has been marked as Exhibit J.6.5. 91 MR. FOURNIER: I have that. 92 MR. WARREN: The second undertaking response is the one that is Exhibit J.6.6; do you have both of those? 93 MR. FOURNIER: Yes. 94 MR. WARREN: Looking first at Exhibit J.6.5, I asked Ms. Squires and Mr. Ryckman, the DSM representatives of Enbridge, when they were on the stand, to try and express the amount of the SSM claims and actual pay-outs as a percentage of the DSM expenditures, and that is reflected at the bottom of the page. And in 1999, the SSM actual pay-out as a percentage of the expenditure was 70 percent and it declines thereafter to 38 and 37 percent. 95 MR. FOURNIER: I see that. 96 MR. WARREN: Now, do you regard, Mr. Fournier, from the perspective of the representative -- sorry, of the organization which represents industrial gas users, do you regard - whether it's 78 or 38 percent or 37 percent - do you regard that as a reasonable return on an expenditure of varying degrees, 6 million, 9 million, 12 million? 97 MR. FOURNIER: No, I find it extraordinarily large and generous, and of great concern to IGUA. 98 MR. WARREN: Okay. I'm going to return to that last observation in a moment, but I'd like you, just in the -- while we're on the subject, to turn to Exhibit J.6.6 which is the next one. 99 To provide you with some framework for this, Mr. Fournier, I asked again Ms. Squires and Mr. Ryckman, in the course of their testimony, to express -- they introduced - I'm sorry, Mr. Klippenstein, for Pollution Probe - introduced an Exhibit which expressed the prospective SSM payments under the formula which is embedded in this year's ADR settlement. That SSM formula has SSM payments at -- which are calibrated to percentage -- the percentages by which Enbridge might exceed the target savings. 100 Mr. Klippenstein introduced an Exhibit which had the SSM payment amount at each of those calibrated percentages expressed as a percentage of the total TRC benefits. I asked them to restate it as -- the SSM payment as a percentage of SSM's actual budget, and you'll see on the sixth column from the right, under the heading "SSM as a Percentage of Budget," that depending on which percentage of the target they meet, the SSM as a percentage of the budget will range between 18 percent and 60 percent. 101 Do you regard, Mr. Fournier, that kind of return-on-budget expenditures as reasonable? 102 MR. FOURNIER: No, I look at the dollar payment amount and if they exceed it even only by 10 percent, $2.3 million is, I think, excessive, let alone getting up into the $5 million or $7 million range for what is I think in this -- again, I'm no expert, but I think in this day and age we've had -- since really the national energy program of 1980, we've had increasing awareness by the public, driven by government programs and by utility programs, of the need to practice energy conservation, to replace inefficient hot water heaters and furnaces and so forth, upgrading insulation in homes; on and on it goes. We've had that now since roughly 1980, it's been a slow process as anything is, in trying to educate the public. 103 But I think in this day and age in 2003, I think the awareness of the need to reduce one's energy cost is fully out there in the public and I think the price of natural-gas commodity, particularly as we experienced in two spikes in two recent years of cold winters, that this is now a desired objective in society, that is energy conservation, that is self-fulfilling now and needs less not none; needs, I think, less focus by the utility, and I think the rewards which the utility has received in the past as an incentive to put in place DSM programs is now no longer as necessary as it was probably correctly in the past. 104 And I think it's timely now for this Board to review the scope of the program and the costs that it is -- cost impact it is having on all sectors of the end-user community. 105 So the short answer is those are excessive, in IGUA's view. 106 MR. WARREN: I interrupted you a few moments ago, Mr. Fournier. You said the levels of incentive payments and expressed in the first of the two exhibits was a concern to IGUA members. Can you explain why it's a concern to IGUA members? 107 MR. FOURNIER: I was -- I guess the best source I would go to is a number -- that would provide this but in Exhibit L, tab 10, which was revised April 3rd, and this is the evidence of Mr. Chris Neme on behalf of the Green Energy Coalition. 108 Page 1 of his revised evidence shows the, at table 1, Enbridge Gas Distribution DSM program results from 1995 through to 2003. When I see the O&M spending going from 2 million to 11-odd million, and then when I see the shared savings costs that are added to the O&M, I just think that we're -- it's -- it's becoming a large burden on the end-user. 109 When you add the high commodity costs we're facing, we're looking, I think this year, Mr. Chairman, in probably an average prevailing price over the rest of the year for natural gas out of the western sedimentary basin of something like $4 to $4.50. The old days of $1.50 to $2 gas are gone. 110 We're looking at the TransCanada PipeLines tolls that have gone from the range of 85 to 90 cents in 1999 to -- where initially they had applied for $1.30 this year, with some revisions they've made in the current hearing, they are now back down to $1.20, but you add that on to the price of the commodity. 111 TransCanada is trying to get its cost of capital reviewed and they've gone to the Federal Court. If they ever succeeded in that, that would add another 40 cents to the toll and the -- in the year that the three years of accumulated under-recovery in their eyes for cost of capital would be recollected. 112 Then you layer on the cost of the utility margin. Any one of these probably in their own right is 3, 4, 5, 10 cents here or there is probably something we just have to live with. But when you add all these accumulations of extra costs, we are suddenly looking at delivered costs of gas to the -- to my members, that is getting worrisomely high. 113 I've had, over the last three years, a number of members in both Ontario and Quebec, either close their plants or transfer their resource processing operations offshore or to the United States. 114 Don't forget that almost all large corporations in Canada, industrial corporations now are international corporations with operations throughout North America and abroad. 115 And the ability to shift -- one example was ISPAT Sidbec in Quebec, which is Quebec's only steel mill. When the 2000/2001 price spike hit, and when they were faced -- they were buying gas on a spot basis rather than long-term, and they got hit with the 12, $15 in Mcf gas prices of the spot market hit that year. They transferred all of their steel-making to Trinidad where they could buy their gas for 40 cents an Mcf. 116 And once something like that is transferred, it's very hard to see that come back. There's been a little trickle back by ISPAT, but nowhere near where they were before. 117 High prices do have an impact. I'm seeing it all the time in my members. And even if they keep operating, they're all very bottom-line oriented. They have to make a profit. That's what corporations are in the game for. 118 And if their input costs rise, and in many of my members' cases, natural gas is the -- one of the largest input costs. When those costs rise, even if the company keeps operating, keeps producing its product, if it's unable to increase its prices because of prices being set by the world, and that's the case of pulp and paper, of metals, of most processed natural resources, and most of my members are processors of natural resources in the first instance, they can't increase their revenues through higher prices. 119 If they keep operating, what they have to do, then, is cut back within the company. They cut jobs, they freeze salaries, they freeze expenditures, except for the ones that are absolutely necessary. And the economy is hurt, the economy is hit, and we need to recognize that. 120 We're in a very -- I think a very precarious economy right now, because we're still going great in Canada. The G-7 -- and I read OECD this past weekend has predicted Canada will probably have the best economic performance of any OECD member in 2003. 121 It's very precarious, because we're -- as we all know, a mouse beside a huge elephant, and we don't know where the United States economy is going with this war. 122 And to, I think, not give proper acknowledgment of the impact of increasing prices for raw materials to industrials is just not good policy. We must take those into account. 123 So whether it's $2 million only for DSM or SSM or 10 million or whatever, within their total cost of service, yes, it's very small. 124 I noticed from the Exhibit J.6.6 you referred me to that if you looked at the impact of SSM payments as proposed by Pollution Probe, this minimal impact, if you like, on rate of return, but that's not the way to look at it. 125 You have to look at the dollar amount. If you're looking at 20 million or 30 million, it's just one more straw on the camel's back that when we add to all the other increases that the utility seeks, it's seeking an increase to its cost of capital, as we heard later. These are -- these are very worrying to my members. 126 So that was a bit of a speech. I'm sorry, but I will try and be shorter from now on. 127 MR. WARREN: I have just one other question, Mr. Fournier, and it's a follow-up on an observation that you made earlier, and that is this: You spoke about an awareness of or, if you wish, a sensitivity to a fuel conservation. And can you tell the Board, sir, among IGUA members, is there a high, low, medium level of awareness of sensitivity to energy conservation opportunities? 128 MR. FOURNIER: Absolutely. Going back to companies being bottom-line oriented, they have a very strong incentive to take their own measures to achieve energy efficiency. 129 My vice-chairman, Mr. John LaMay of Inco, has just been awarded a very prestigious award by the Natural Resources Canada for leading an energy efficiency program for 2002 amongst all of Canadian industry, and we're very proud of that. 130 Almost all of my members -- we run both an annual conference and an annual seminar, and I have over the past three years had IGUA members making presentations to other IGUA members on the programs that they are putting in place in their plants to improve their energy efficiency. 131 So it's a very real presence. It's a strong incentive within the companies to cut their costs, achieve efficiencies, keep their bottom lines in the black, so yes. 132 MR. WARREN: Those are my questions. Thank you, sir. 133 MR. BETTS: Thank you. 134 Are there any other parties that would like to examine the witness that are supporting this position? 135 Mr. MacOdrum? 136 MR. MacODRUM: Mr. Chairman, CME is very supportive of Mr. Fournier's testimony today, and in the light of that, we have no questions. 137 MR. BETTS: Thank you. 138 Any other parties? 139 May we have questions, then, from parties that would like to -- that are adverse to this position? 140 MR. POCH: Yes, Mr. Chairman, I have questions. 141 MR. BETTS: Mr. Poch. 142 MR. POCH: Thank you. 143 CROSS-EXAMINATION BY MR. POCH: 144 MR. POCH: Mr. Fournier, first of all, as between your written pre-filed evidence and the letter that was filed this morning, may I take it that if we perceive any differences between the positions in those two, we should assume that the letter, being the latter transmission, is the predominant one? 145 MR. FOURNIER: Yes, you will recall there were -- even before the evidence was filed, there were letters sent to parties -- during the early process where there was a letter, for example, dated 16 December from counsel Thompson to Mr. Cass, which I think went to all parties, which laid out the issues of concern to IGUA. There's no mention in there of DSM at all. 146 Later -- 147 MR. POCH: That's all right, Mr. Fournier. 148 MR. FOURNIER: Okay. It does evolve. 149 MR. POCH: And I'll try to get through this quickly. 150 Just as a -- just to make the record complete, you said IGUA hasn't been a particularly active participant in the consultation but -- 151 MR. FOURNIER: Correct. 152 MR. POCH: -- but you'll acknowledge that Mr. Thompson of late has accepted a seat on the audit subcommittee. 153 MR. FOURNIER: Right. 154 MR. POCH: Now, you've said in your recent letter that you agree cost-effective DSM initiatives are in the public interest. May I take it from that that you -- IGUA accepts that there are significant cost-effective energy -- there is significant cost-effective energy-efficiency potential that the market will not capture on its own due to various market barriers and that's the purpose of DSM, is to overcome those barriers. 155 MR. FOURNIER: Yes, as long as they are cost effective. 156 MR. POCH: All right. Now, you did suggest that there's quite an awareness amongst your constituents with respect to energy conservation. I want to first of all ask you, can you agree that there may be instances where there is awareness but there is not action, for example, because business requires a rather short pay-back period than others may on their investment. 157 MR. FOURNIER: There is that. I think, too, depending on the size of the company, you have different degrees of sophistication and knowledge. 158 Enbridge, I know, does have a team who will provide energy-efficiency measurement assistance to industrials and has programs in place where they can assist an industrial if they need to finance changes. 159 MR. POCH: May I point you - and I don't even know if you need to turn this up, it's such a short reference I can read it to you - but in Exhibit L, tab 10, which is Mr. Neme's evidence, at page 4 he produces a table there showing participation rates in various programs where his -- his point being that there is lots of room for more participation. But in the footnote to that table, there is a citation talking about large boiler replacements and it's noted that a recent study in Ontario that Enbridge commissioned, the Jacques Whitford study, showed that the market share for large-scale condensing boilers was only 4 to 7 percent of the market. 160 Does that accord with your understanding, that there are situations like that where the market just isn't, in the main, adopting the efficient technology. 161 MR. FOURNIER: I honestly can't give you an answer to that. 162 MR. POCH: Now, is it fair to say that your concern, your primary concern in front of this Board today is that the SSM payments be kept to a reasonable limit? 163 MR. FOURNIER: Correct. 164 MR. POCH: All right. And would you agree that a reasonable limit is a limit necessary to encourage conservation -- cost-effective DSM, but not excessive in that respect? 165 MR. FOURNIER: Yes. 166 MR. POCH: All right. So the amount that will get the job done and -- you just don't want to reward -- over-reward for no significant added benefits achieved; is that fair? 167 MR. FOURNIER: Yes. I think the O&M budget for DSM that is approved should be scrutinized quite carefully and made sure that the expenditures proposed are real, have a real scope of achieving real results. And then those having -- that budget having been approved, that the company's reward or incentive for making those expenditures and perhaps achieving results even better than what it had forecast has to be kept within reason. A reward, yes; an incentive, yes; but let's not sell the farm. 168 MR. POCH: So just so I recap that last -- your last sum-up: A reward, yes; an incentive, yes. I take it IGUA is not fundamentally opposed to an incentive approach to regulating the utility and getting them to perform well in this regard. 169 MR. FOURNIER: That is correct. 170 MR. POCH: Okay. And so then before I turn to the settlement proposal in that regard, let me ask about the alternative model which you've included. And I appreciate you're not holding yourself out to be a technical expert in this, so we'll try to keep the questioning to a high level. You've advocated applying the allowed equity return percentage to -- multiplying that by the O&M budget and that being a cap on the incentive; correct? 171 MR. FOURNIER: Yes, because it's a known measure and it's an effective measure that nearly all regulators have adopted to provide to the utility that is regulated for capital expenditures, and it's also frequently used as the representative of the cost of capital for the carrying charges of deferral accounts and things like that, so to me it's a visible, real, understood number rather than saying, Let's make it 15 percent. Well, where did the 15 percent come from? It's something that is real that is there. 172 MR. POCH: All right. And you appreciate that the O&M budget is not, in fact, equity being invested? 173 MR. FOURNIER: Absolutely. 174 MR. POCH: And you appreciate that the rate of return that this Board sets for the utility, the purpose of that is to give the company -- 175 MR. FOURNIER: That is return on capital of the rate base. 176 MR. POCH: It's a fair return on their investment, given their risks; is that fair? 177 MR. FOURNIER: Yes. Yes. 178 MR. POCH: And it's not intended -- that rate is not used as an incentive for performance, per se. It's simply to provide them with a fair return, given the risks they face; correct? 179 MR. FOURNIER: The rate of return on rate base and the rate of return on equity is that; correct. 180 MR. POCH: All right. And it's not intended to be an incentive in any sense. 181 MR. FOURNIER: In it's own right, no. But if you are looking for a tool or a method to approve an incentive, we are saying that is a good proxy that you could use. 182 MR. POCH: All right. Now, you've been a party to -- IGUA's been a party to the settlement over the last few years of the transactional services matters? 183 MR. FOURNIER: Yes. 184 MR. POCH: All right. Now, I won't get -- a complex area in itself, but -- 185 MR. FOURNIER: You can detect my -- yes. 186 MR. POCH: That's all right. I'm in the same camp as you, so don't fear. 187 But from my limited understanding, I understand that to be an incentive offered to the company, that it involves a sharing of the risks and the benefits produced by the company or taken by the company in delivering that basket of services; fair? 188 MR. FOURNIER: I'm having a little difficulty, because I haven't really refreshed my mind on it, and I've got the transactional services of Union also there, so keep the two separated is -- but I think what you've said is correct, but I -- but please proceed. 189 MR. POCH: All right. We won't go into it in great depth. I've just -- just -- I was just really trying to make a distinction between the rate that's used for fair return on equity and the fact that in another situation before this Board with this utility where we have a -- we have what is called -- what would be, is it fair to say, a performance incentive for activity in a given services area and that that might be a closer analogy? 190 MR. FOURNIER: I'm familiar with incentives generally, and as -- we've had a host of them with TransCanada. We've got some with Westcoast. We've had -- we have one going on with Gaz Metro right now. 191 So the incentives are where you set them. Sometimes they're 50/50, 75/25, or whatever. But depending on -- it depends on the circumstances of what you are incenting. 192 MR. POCH: Indeed, that's absolutely, and I'm not suggesting that we carry one number over and apply it in the other situation, but I'm just getting you to agree, if you would, that in that case, and in this case, in fact, in this settlement proposal, there is a -- not a straightforward sharing, but a -- because there is -- the company has to get past a certain threshold and so on. 193 But if the company performs particularly well there, I understand that there's a savings -- there's a sharing where the company gets 25 percent of the benefits. Does that accord with your understanding? 194 MR. FOURNIER: No. 195 MR. POCH: Do you have another understanding, or are you simply unfamiliar with the details in that area? 196 MR. FOURNIER: Well, it's a combination of both, that the -- I'm looking for the other side of the sharing. 197 If we said to the company, We will set your O&M at, say, $100 million, and if you can come in at only $95 million, saving $5 million, then we'll share that $5 million saving with you 50/50. And next year, when we rebase your O&M, we'll let you keep 2.5 million as profit, and you'll give 2.5 million of the saving that you recovered from this year's tolls as a credit next year. So that's a pure sharing of an incentive type of plan. 198 And I don't see the sharing side in terms of dollars and cents that ratepayers receive from the DSM/SSM program. 199 MR. POCH: All right. And so I think we're focusing in on why you've found the SSM rate high. 200 I take it that your comparison is really of the -- the -- 201 MR. FOURNIER: Well, there are incentives, and there are incentives. And I think we should -- the company, (a), should, yes, continue to present an O&M budget for DSM matters, and that should be considered by this Board and -- or by a settlement process and ultimately set at some number. 202 And the company, then, should have an incentive to apply that O&M expenditure that's now been authorized to achieve the results they said that spending that money would achieve. If they can achieve better results, then we need to incent them to achieve that. 203 But it's not a sharing. It's something -- it's, I suppose, similar when you say to your son, Run down to the store and buy me a chocolate bar, but I really want that chocolate bar, so if you're back in half an hour, I'll give you 50 cents, or I'll give you a dollar or something. But if you're not back in half an hour, I'll eat the chocolate bar and you don't get any tip for it. So it's really that kind of incentive we're talking about here with Enbridge as opposed to the case of where they can achieve a true dollar saving that could be split in a real way with ratepayers. 204 MR. POCH: Do you know what the total forecast savings are for DSM in 2003 in dollar terms, in financial terms? 205 MR. FOURNIER: I've got the 2000 and the 2001 that's in the settlement. 206 MR. POCH: I was asking with respect to 2003. Have you had an opportunity to learn what that -- what's forecast as the financial benefits flowing from that program, assuming it just meets target? 207 MR. FOURNIER: I'm just looking at Exhibit N.1, tab 1 material here. 208 MR. FOURNIER: I apologize, Mr. Chairman, I've been out in Calgary for six weeks having a fine time with TransCanada PipeLines and, as Mr. Thompson said, I've been in Belleville, so I have not had the luxury of being able to spend as much time on this. If you can point me to it. 209 MR. POCH: I think a convenient place to see it is in the GEC cross-examination materials. 210 MR. THOMPSON: He's looking at Exhibit N.1, tab 1, I think the number is -- 211 MR. POCH: Page 67 of that document. 212 MR. FOURNIER: 130 million TRC savings; is that the number you are focussing on? 213 MR. POCH: That's right. And do you know what -- now that's the net benefits. Are you aware what the total benefits are before costs? 214 MR. FOURNIER: These are claimed. I don't know if they are real or not. 215 MR. POCH: They don't exist yet, they're forecast. 216 MR. FOURNIER: They're forecast. Also, who is doing the measuring and who is doing the forecasting? 217 MR. POCH: You're concerned about the accuracy of that number, I take it. 218 MR. FOURNIER: Yes. 219 MR. POCH: But -- 220 MR. FOURNIER: And what's included in it, what its composition is. Are these -- there's many aspects, and I'm no expert. But I can only ask the questions of the -- it seems like an awfully huge number. And it -- so I've asked questions of myself, What on earth is behind on this? 221 Another thing I took from Mr. Neme's evidence was at page 2, the figure 1 and this shows O&M costs in a bar graph and a TRC net benefits and this just looks unreal, that for what is essentially a flat year-over-year investment in O&M to getting bigger and bigger and bigger net benefits. 222 Now, undoubtedly, part of that is because of the change in the price of the commodity. When gas was a dollar, $1.50, the value of the gas TRC savings would be, let's say, 50. But now that we've got gas price commodity -- commodity price in the $4, $5, $6 range, even higher when you factor the spikes we've been experiencing, does that mean that what used to be 50 is now 200, and it's for no other reason than the fact that the commodity has changed? 223 MR. POCH: Right. So does it concern you that -- would you agree that one of the primary benefits of DSM is saving gas? 224 MR. FOURNIER: Yes, but I think I said earlier, I really think now that the understanding of the consuming public, not just industrials but commercial/residential, they're there. When they get a big gas bill, they're there. This has nothing to do with Enbridge. They don't cause the commodity pricing. But it's happening, the awareness is there. So whatever properly was the DSM program of the past, I think really needs to be revisited and the costs of it need to be revisited. 225 MR. POCH: All right. Mr. Fournier, would you agree, though, that if the Board is satisfied that the -- some significant part of those savings claimed are truly -- that's indicative of truly incremental savings in society, would you agree that it's appropriate to -- if we can spend a dollar to save 8, that's a good thing to do? 226 MR. FOURNIER: Yes, if the Board has approved that, then we move on. 227 MR. POCH: And you are asking that the SSM pay-outs be lower than they have been. If lowering those SSM pay-outs lowers society's savings, that is, the performance of the company and society's savings, such that the benefits foregone far exceed the savings in the SSM pay-out, you agree that would be counterproductive? 228 MR. FOURNIER: If I was satisfied that that genuinely and truly was a measured result. The problem I have is with the measurement and the conclusion of it. I think we're getting into very smoke-and-mirrors, esoteric stuff. 229 MR. POCH: I appreciate your concern that you share with CME that there is some concern about the measurements. But leaving that aside, assuming that we had a good crystal ball, then would you agree with my statement? 230 MR. FOURNIER: Run that by me again, just to make sure I'm agreeing with it -- 231 MR. POCH: That if lowering SSM -- 232 MR. FOURNIER: Results in less savings? 233 MR. POCH: Less savings, and the benefits foregone are significantly higher than the saved incentive costs. That would be -- that would be going too far? That would be counterproductive? 234 MR. FOURNIER: I'll accept that, and I would think if that was the result, then we would all be back again to say, All right, we went too far; we need to correct this to achieve the results we want. 235 MR. POCH: So it's a balancing Act. 236 MR. FOURNIER: Yes. 237 MR. POCH: Now, do you know what the -- may I put this to you, Mr. Fournier. I don't want to take you through the complex -- the numbers, but would you agree with me that there's two ways that rate -- that customers feel the rate impact of DSM, and one is just by the -- because there's an O&M budget and SSM rewards that customers fund -- 238 MR. FOURNIER: There's more than two, but carry on. That's the first one. 239 MR. POCH: Sure. And then the other is because the conservation-inspired results in the fixed costs of the utility being spread over fewer units of gas, so the rate per unit of gas goes up. 240 MR. FOURNIER: That is one potential cost, yes. 241 So I would add to that -- I was asking what -- what's all this smoke and mirrors of DSM costing us? And so I asked the Enbridge team if they had a high-level figure, and very high-level is something in the order of about 250,000 a year it's costing to do all this consultative processes, the audit -- 242 MR. POCH: Sure. And that's part of the O&M budget. 243 MR. FOURNIER: But it's separate from the DSM O&M budget, I believe -- 244 MR. POCH: No. No. I can assure you, sir, it's included in the budget. It's not in the program costs, but it's in the overall DSM budget that's up for approval. 245 MR. FOURNIER: Okay. 246 MR. POCH: But I hear you correctly that that's part of the cost, you're concern of that would have a rate impact. 247 Now, would it surprise you to learn that the -- well, first of all, on the other side of the equation, you would agree there's two forms of benefits that DSM brings. And one is benefits that the particular participant in a DSM program enjoys, largely because they save a bunch of gas; correct? 248 MR. FOURNIER: If that's a physical result, yes. 249 MR. POCH: Sure. And that it would -- of course, we'd have to account for the investment they've made along with the utility to put that measure in place; correct? 250 MR. FOURNIER: Yes. 251 MR. POCH: And there is another category of benefits, and that is benefits enjoyed on the gas system, because the DSM has lowered the systems costs as opposed to the participants' specific costs. 252 MR. FOURNIER: Possibly. I say "possibly" because there's a benefit in a way, and it benefits, not a way. I guess it's a benefit that the gas system didn't have to expand. 253 Had it been at 100 percent capacity before this, and there's an incremental market coming along, without those saved volumes, then the system has to expand. 254 I see on the other side of the coin that a company like TransCanada PipeLines has lost about a third of its throughput, nothing to do with this at all. It's because of the construction and operation of new pipelines. 255 But you know, its tolls have jumped up a third proportionately, because they're under -- under-loaded now. 256 MR. POCH: Sure. It's going to be specific to the situation from time to time, but you'd agree that there is a potential there for -- a potential -- 257 MR. FOURNIER: There's a potential, yes. 258 MR. POCH: All right. And would it -- do you have any understanding for the 2000 year -- 2000 rate year we're talking about how these various rate impacts offset each other? 259 Let's just take a look at that category. The rate-lowering effects of these potential systems savings versus the rate raising impacts of the O&M spending and SSM. Do you have any sense of how those would trade off? 260 MR. FOURNIER: No, I've -- it's a -- 261 MR. POCH: That's fine. 262 MR. FOURNIER: I could have if I was taken through it, but I just haven't been taken through it and haven't done it. 263 MR. POCH: With respect to the second category of rate impacts, that is, simply the spreading of fixed costs over fewer units of gas sold, you would agree that that's a rate impact that flows whenever one of your members embarks on conservation, even if it has nothing to do with the utility; correct? 264 MR. FOURNIER: That's correct. Same way as the weather. 265 MR. POCH: Right. And your support your members engaging in conservation, I'm sure? 266 MR. FOURNIER: Yes. 267 MR. POCH: And you agree that would be appropriate to be encouraged? 268 If we can encourage more of that without any O&M cost, for example, and without any incentive, you would agree that's a great thing for the company to be doing? 269 MR. FOURNIER: Yes. 270 MR. POCH: Okay. Now, just turning to the settlement proposal, the previous SSM arrangement was a straight 35 percent. The benefits above target from DSM, the TRC benefits were shared 35 percent to the company, the rest to the customers. That was reduced temporarily in 2002 in light of a gas price spike. 271 But that the current proposal substitutes for that a rate that goes from 18 percent down to about 6 percent, sort of a declining block rate. The more they overachieve, the lower the rate. 272 And that was -- that's intended to reduce the overall SSM pay-out and to provide some protection against winfalls. 273 Leaving aside the absolute level of the pay-out, and we've heard your evidence on that, is there anything about the particular mechanism that is a problem to you, or is your concern really just that the number -- those percentages be set right so that the reward isn't excessive? 274 MR. FOURNIER: I think the latter is you've hit the nail on the head. This -- when I read this, I appreciate it's an effort to crank them down. The more they save, the less the total reward is, although, the quantum total is increasing. So you have that incentive, but I was just going to say there's nothing scientific in this. Somebody's just said, 18, 15, 12, 9, 6, sounds great, sounds good. But why 15, why 18, why 12, why 10? These are numbers taken out of the blue and it results, in IGUA's view, as you correctly noted, in an excessive award to the company for doing this. 275 MR. POCH: We've heard you on that. Your concern about the absolute level of pay-out, I just wanted to make sure that the difference between us, really, is on that item as opposed to the particular structure that we and others have proposed. 276 MR. FOURNIER: That's right. 277 MR. POCH: Okay, that's fine. Now, with respect to your proposal, you've said you have come up with this number, I think, if I may paraphrase you, you're really saying it was a convenient benchmark which you propose to adapt to this situation and it's to be a cap on the incentive; correct? 278 MR. FOURNIER: Yes. 279 MR. POCH: How does IGUA propose you would structure the incentive within that cap? 280 MR. FOURNIER: I think it's only for the Board to decide or to even refer it back to the stakeholders. But the DSM budget would be approved, then the shared savings mechanism credit would be calculated and we would then take what was achieved in relation to the claim, if I understand, and that they would receive a return on equity on either the original forecast or on the actual up to -- if they've achieved their results, so let me take 10 percent instead of the 9s and -- using Exhibit J.6.5, and -- are you there on Exhibit J.6.5? 281 MR. POCH: I understand what you're saying is it's roughly 10 percent of the O&M budget, so let's call that a million dollars or a million and a quarter. 282 MR. FOURNIER: If the SSM claim for 2001, for example, on Exhibit J.6.5, if you go to that -- 283 MR. POCH: Yeah, I have that. 284 MR. FOURNIER: -- the claim was 13.7. 285 MR. POCH: Yes. 286 MR. FOURNIER: And I don't know what their results were. I guess one needs to look at the total resource cost of TRC results versus what was claimed. But if they met their objective that -- and if the 13.7 was the agreed-upon SSM claim, and then we would give them as an award the 9.54 percent return on equity on that 13.7, if the settlement is 4.6 million, there isn't suddenly going to 9.54 on that settlement -- 287 MR. POCH: Mr. Fournier, let me interrupt you because I think you've probably confused what these numbers are, and I don't want to take advantage of the fact that you've freely acknowledged that you are not completely conversant with the record here. Are you proposing you apply your equity percentage -- 288 MR. FOURNIER: On whatever the SSM level was that was agreed, whether that was set by the Board or as agreed through settlement. 289 MR. POCH: Do you mean the SSM level or do you mean the TRC achieved above target? 290 MR. FOURNIER: I understood it was on the SSM. I maybe need to be corrected and the -- but the rate of return on equity, the 9.54 on this 2001 case should -- no, I think it should apply on the SSM claim, but I may be wrong. The SSM is a result of -- 291 MR. POCH: The SSM claim as structured now is as a result of the difference in the TRC of achieved as opposed to that targeted. 292 MR. FOURNIER: Look at Exhibit J.6.6, looking at 2003. So I think the TRC targeted was 130 million; was that right? 293 MR. POCH: 127 actually, for the purposes of this, but good enough. 294 MR. FOURNIER: And if they achieve that or they exceed it, we would give them a return on equity. Now, the return on equity, I thought -- 295 MR. POCH: I had understood your proposal was that -- 296 MR. FOURNIER: -- was on the 13 million. 297 MR. POCH: I think it's a coincidence of numbers. The 13 million that you were referring to was the O&M budget for the year. You would apply, do I understand you correctly, if I can assist you here, that it's the rate of return percentage times the O&M budget that is the spending of the utility, which is about 10.9 plus the DSMVA makes it about 13 million? 298 MR. FOURNIER: I believe so. If we get to the break, I can -- 299 MR. POCH: Let me just make sure, leaving aside the numbers, there is this -- you crunch that out, it's about a million dollars, roughly, in that ballpark. They get that million dollars if they achieve that TRC target or if they achieve it. 300 MR. FOURNIER: Yes. 301 MR. POCH: So this is not graduated incentive, if you get past the post you win. 302 MR. FOURNIER: Yes. 303 MR. POCH: Do you understand what the company gets if it reaches its target under the settlement proposal? 304 MR. FOURNIER: Well, your settlement proposal is this 18, 16, and so on. So if I look again at Exhibit J.6.6, I believe your proposal is if they exceeded their target by 30 percent, say, they would get 5.85 million. 305 MR. POCH: Okay. Let me -- first of all, let's go back to your -- if they just achieve the target, under your proposal, you get roughly a million out of -- reflecting savings of roughly 130 million, so something under a 1 percent incentive; is that fair? 306 MR. FOURNIER: Depends what you're basing it on. I'm giving it on, I guess, the O&M expenditure. 307 MR. POCH: Just so we can compare apples and apples, I appreciate how you derive it. 308 MR. FOURNIER: If you calculate it on the TRC benefits, yes, it would be less than 1 percent. 309 MR. POCH: So you would get that if they get to the post, as it were. And I was just asking you for the comparable. Do you have a sense in either dollars or percentage what they get if they just achieve the target under the settlement proposal? 310 MR. FOURNIER: Same amount. Excuse me, under the settlement proposal it should be something less than 2.34. 311 MR. POCH: Let me advise you that the settlement proposal has the company receiving zero percent, zero dollars, if they just meet the target or don't meet the target. And if they -- so that's for the first $127 million of net TRC benefits created. 312 Then if -- they get 1.6 percent of the benefits if they exceed the target and deliver 143 million. And if they really perform, and came in 50 percent over target, delivering close to $200 million in bill savings, they'd get 4 percent of that. 313 MR. FOURNIER: I see that. 314 MR. POCH: Expressed in those terms, does that strike you as an unreasonable structure and degree of reward, appreciating -- really I'm asking now, we've moved away from the flat rate, we've come down. Do these kinds of numbers seem out of the ballpark to you? 315 MR. FOURNIER: You see, it's the quantum of what you're giving them. In that case of the 50 percent, you will be giving them nearly $8 million. I believe all of our utilities, and Enbridge especially, are staffed by professionals, are proud of what they do; they have a mission to do; they have people hired to manage and administer their DSM programs, and those people want to perform and have good results. And it's something that a company I think should be doing professionally and it doesn't really need an incentive to do, because it's part of the job of being a gas distributor. In the same way that many corporations will encourage you to be green-friendly or be concerned of the impact of greenhouse gases or whatever else, that this is something the company does. 316 So if they can achieve results, give them an incentive, but I think that there are so many variables that we've already talked about and what goes into the calculation of what that TRC is that it's -- I think you just -- it's getting out of hand. 317 MR. POCH: Mr. Fournier, I think you've heard your point on the concerns you have with respect to the uncertainties involved. Is that fair, is that where you're headed here? 318 MR. FOURNIER: Yes. 319 MR. POCH: Well, let's leave it that and I'll leave my questioning at that. 320 MR. BETTS: Thank you. 321 Are there any other questions? 322 Mr. Klippenstein. Mr. Klippenstein, how long did you anticipate? 323 MR. KLIPPENSTEIN: I think perhaps 15 to 20 minutes. 324 MR. FOURNIER: I'll try and give short answers, Mr. Chairman. 325 MR. BETTS: Thank you, Mr. Fournier, that would be appreciated. Let's proceed with your questions, and if they do go on, we will break before you're done. 326 MR. KLIPPENSTEIN: Thank you, Mr. Chairman. 327 CROSS-EXAMINATION BY MR. KLIPPENSTEIN: 328 MR. KLIPPENSTEIN: Mr. Fournier, as I understood some of the comments you just made, IGUA does see the advantages in Enbridge aggressively promoting energy efficiency, provided it's done cost effectively if the result is it reduces customers' bills; is that fair? 329 MR. FOURNIER: I think in fairness I can agree with all of it except the word "aggressively". I'm not sure how aggressively the company needs to do it today because, as I've expressed the view, I think this is now a matter that's well known in society and they've done their job, as has government. 330 MR. KLIPPENSTEIN: So the idea of having Enbridge assist with programs of energy efficiency aimed at reducing customer bills is something that IGUA agrees with, subject to some of these limits? 331 MR. FOURNIER: Yes. 332 MR. KLIPPENSTEIN: And as I understand it, and I don't think that it's controversial, the idea behind the SSM is that it's a shareholder incentive structure. So the idea of an incentive is key to it; is that fair? 333 MR. FOURNIER: That is correct. 334 MR. KLIPPENSTEIN: And would you agree that having a shareholder incentive structure that gives the company the possibility, the shareholder the possibility of earning some extra money as an incentive will have a motivating effect on the company towards greater efforts for energy efficiency programs? 335 MR. FOURNIER: If the shareholder so directs the company to place more emphasis on that, yes. 336 MR. KLIPPENSTEIN: And that would be, in the abstract, in the shareholder's incentive, in other words, to carry out energy-efficient programs according to the program because there is the possibility of some extra financial earnings. 337 MR. FOURNIER: Yes. 338 MR. KLIPPENSTEIN: And as I understand IGUA's position as you've expressed it today and in the materials, IGUA is quite content to have that incentive structure operate in the SSM up to the point of the cap that you've proposed. 339 MR. FOURNIER: Yes. 340 MR. KLIPPENSTEIN: So now looking at the area underneath the cap, as it were, you're comfortable that incentive idea is a good one and it will probably have some useful effect? 341 MR. FOURNIER: Yes. 342 MR. KLIPPENSTEIN: Now, I guess my concern that appears to me, then, is once you get beyond the cap that you proposed, then whatever incentive benefits there might have existed underneath the cap would seem to no longer exist, because the cap cuts them off above that level. Is there some logic in that? 343 MR. FOURNIER: Well, I find it a little bit odious - maybe that's not the right word to use - but disturbing that we feel that it's necessary to reward the company for something that they're really in the business to do professionally and do well. 344 So let's give them an incentive, if that's what we must do, and I think something in the order of a million dollars a year is a pretty generous reward to them. 345 But to suggest that their DSM managers are going to sit in their offices and do crossword puzzles until such time as this Board awards them -- the company with enough of an incentive that they'll get off their chairs and get to work, I have trouble with that. 346 They are there to do the job. The company is there to do the job. The company, as all companies try and do, is try and tell the world, We are the best; we're giving you good service and so on. 347 So give them an incentive, yes, but to suggest that if you only give them a million dollars, they're only going to go this far, and then they'll stop working and do those crossword puzzles again. 348 I don't accept that. I think the company's got an incentive. The shareholder will say, Get out there and push those programs. 349 And within the company itself, I would expect they have some kind of an incentive program at the employee level, that if the employee reaches the target that he has been given or she has been given, then he or she gets an incentive. And that's a far better incentive to make these things do than, really, the overall corporate one. Let's give you 10 million bucks, and go out there, and see what you can do, guys. 350 Well, I would rather look at the professionalism of the individuals tasked with this job. And give them a reward if we must, but let's keep it in line. 351 MR. KLIPPENSTEIN: Yeah, thanks. I don't think anyone, either you or I, suggest that once a cap is reached that the company staff then put their feet on their desk and do crossword puzzles, but I take your point in one sense. 352 However, do you see my point, that if there is an incentive, which IGUA sees some logic to that operates underneath the cap, that whatever logic there is then doesn't exist above the cap. And I'm not saying that all efforts cease, but the incentive, then, would no longer operate above the cap to the extent that it operates underneath the cap; is that fair? 353 MR. FOURNIER: Well, I think the -- if the company has properly in place employee incentives and targets, and if the company wants to keep earning Brownie points with its customers and look good in the public, it will keep applying these kinds of programs with or without an incentive, is my view. 354 MR. KLIPPENSTEIN: As I understood it, you were agreeing that the incentive programs, speaking now underneath your proposed cap, are a good idea. 355 MR. FOURNIER: Yes. I think it's -- it's government policy, and I think it's accepted, and I'm not arguing with that. 356 MR. KLIPPENSTEIN: Would it be fair to say that if the cap that you're proposing was not put in place, those incentives would continue to exist at somewhat higher levels, just the way they exist -- 357 MR. FOURNIER: Well, it's the existing mechanism now, so if it's not changed, it's not changed. 358 MR. KLIPPENSTEIN: Right. All I'm saying in that scenario is that the incentives that exist below the cap that you've propose would continue to exist to some extent above the cap level if, in fact, there wasn't a cap in place. 359 MR. FOURNIER: I somehow -- I don't want to prolong this, but with your characterization of an incentive below the cap that doesn't exist above. I believe an incentive -- there's either an incentive, or there isn't. 360 If the company had zero incentive, then maybe they would decide they could eliminate their DSM managers and put them over into marketing or something like this, so that's one possibility. 361 And I've read some of the consultants' evidence who talked about before this current mechanism was in place, the company was not spending as much and not achieving as good results. Fine. 362 But what I see now is that this has gotten out of hand and that costs are getting out of hand. And I think the -- I believe an incentive is there and doesn't need to be tied to the results, providing the incentive is fair and reasonable. 363 And I think something like giving them about a million bucks a year as an incentive to achieve their targets is a pretty generous incentive, and I think it's adequate. It's enough. 364 But to suggest that -- and you are not suggesting, but that if you give them bigger and bigger incentives that they'll do more and more and more. Well, who's measuring, who's calculating, who's -- I just think it gets into a lot of time and energy, a lot of smoke and mirrors. It's unnecessary, and we could cut through a lot of the chaff, if we say something like, Right, let's just give them return on equity on their O&M expenditures if they meet their targets, something of that order of magnitude as an incentive. They'll do it, in my view. 365 MR. KLIPPENSTEIN: You've expressed some caution about how real some of these savings are. You've used the term "smoke and mirrors" a couple of times, those sorts of concerns that come with age and wisdom, I'm sure. 366 MR. FOURNIER: Well, I use that term when it comes to depreciation evidence and wizards and rate of return evidence and wizards. It's -- they have -- in the old days, you do it on an abacus, so at least you could see the beads sliding across the scale, but these days it's -- and numbers are -- and unless you're directly involved, and I think some of the others in the hearing are -- probably are, but to me how on earth do they come up with a number of 137 or 153 or even $190 million of savings, it is smoke and mirrors, really. 367 Some of it's real, some of it's imagined, some of it's assumed. 368 MR. KLIPPENSTEIN: Would you agree with me that an intervenor such as my client, Pollution Probe, has a concern if they are really serious about their mandate -- 369 MR. FOURNIER: Absolutely. 370 MR. KLIPPENSTEIN: -- that these savings be real in the same way that you've expressed that concern. 371 MR. FOURNIER: Yes, your client has a very real interest and performs a very commendable function in these proceedings and in the process. 372 MR. KLIPPENSTEIN: So in the sense, I'm not being unfair to say that the concern you expressed about these savings being real is something that a client such as mine also has a very real interest in; namely, that these numbers represent actual real savings in gas and energy? 373 MR. FOURNIER: Yes, but let's keep things in balance. Go back to my first speech. 374 MR. THOMPSON: Not the whole thing. 375 MR. FOURNIER: I'll try and save you from it. 376 But in this last gas spike we had this past February and March, and we had virtually 100 percent interruption of all industrials in the Union, Enbridge and Gaz Metro franchise areas, some of those companies had to go out because they had to keep using gas in their current process so they had to go out and buy gas at $15, $18 Mcf because the utility had taken their gas away. And two of them here in Ontario said to me, Peter, we can't keep doing that. We can't afford to do that. We either shut down a plant or we're very seriously looking at converting to coal. Coal is very cheap, it's also very dirty. It's not a fuel we want to consume if we want to meet our Kyoto obligations, and I think probably a conversion from natural gas to coal and that is something that your client, in particular, would be very, very concerned about. 377 The bottom line of the company is the bottom line. He's got to be profitable or he's out of business. So if it comes to a case of if I'm doing something for society that gives me a warm glow in my heart and I am going to go out of business doing it or am I going to say, I've got to do what I've got to do to keep operating, most companies will take the latter. 378 So we've got to watch that price of gas. It's not just this very small expenditure, there's -- everything adds up. The straw upon the camel's back is a very, very real result, and we've got to be careful, and I mean this very seriously, of the cost increases, rates increases that we've been seeing year after year after year. If we don't get these things in check, we're going to have that conversion to coal with some companies, we're going to close some factories, we're going to lose some jobs. 379 So that's all I'm trying to come here and say. Let's do this but let's do this reasonably and let's look at where we've been spending and let's decide, is that still necessary or can we achieve the same objectives by trying something less than that. That's really all our position is. 380 MR. KLIPPENSTEIN: Suppose your instincts are in the end a little bit factually incorrect -- 381 MR. FOURNIER: It wouldn't be the first time I've been accused of that. 382 MR. KLIPPENSTEIN: I put it as a hypothetical so I don't suggest you've ever been wrong. 383 The SSM mechanism is now intended to only provide payments where there have been quite substantially larger real savings; that's the intention, right? 384 MR. FOURNIER: Yes. 385 MR. KLIPPENSTEIN: And would you agree with me that there's a possibility that if your instincts are wrong and the incentives are cut back, then the logic of the program suggests that some bill savings to your customers might not happen? 386 MR. FOURNIER: With all the qualifiers you have there, I have no problem with that. 387 MR. KLIPPENSTEIN: So you can see how the theory is supposed to work and you can see how there's the possibility that if your instincts about incentives are not correct, that in fact members of IGUA will miss out on some dollar-saving conservation measures. 388 MR. FOURNIER: We'll never know that, of course, until after the fact. And equally, we can take our scheme and limit the incentive and it's possible that there will be no impact, it's possible that the world will go on as it should and we're saving a lot of dollars. So both are possibilities which we won't really know until after we have tried. 389 MR. KLIPPENSTEIN: Right. And -- 390 MR. FOURNIER: And I have already said to Mr. Poch, if we did adopt the IGUA proposal of putting a cap on the incentive and if indeed there was a real measured fall in the DSM activity, that yes, that then one has to go back and say, Uh-huh, we still haven't got it right; let's tweak some more. 391 MR. BETTS: Mr. Klippenstein, if it's agreeable with you, there's a matter that the panel has to deal with with the Board Secretary so it might be a good time to break. You can decide whether you have any further questions of the witness. 392 MR. KLIPPENSTEIN: Well, I was going to say I was finished, but if you give me some time to drum up some more over the break. 393 MR. BETTS: We'll give you that opportunity. 394 MR. KLIPPENSTEIN: I won't have any, Mr. Chairman. 395 MR. BETTS: And we will. I'm going to set a target to be back at 11:30, and I think we all know there's some flexibility in when you return and how you return so we will break now. We will return at 11:30 and continue with questions for Mr. Fournier. Thank you. 396 --- Recess taken at 11:15 a.m. 397 --- On resuming at 11:42 a.m. 398 MR. BETTS: Thank you, everybody. Please be seated. 399 Thank you. I apologize for keeping everybody waiting. I know we said we'd be back at 11:30. 400 We'll state at this time that the Board will be issuing its decision on the motion regarding production of evidence today. It will be some time before or after the lunch break or at the end of the day, but it will be issued today. 401 With that, are there any preliminary matters that have arisen? 402 Mr. Klippenstein, further questions? 403 MR. KLIPPENSTEIN: No, thank you. 404 MR. BETTS: Are there any other questions from parties adverse to this position? 405 MR. O'LEARY: Seeing that there are no others, Mr. Chair, then the company does have several questions for Mr. Fournier. 406 CROSS-EXAMINATION BY MR. O'LEARY: 407 MR. O'LEARY: Mr. Fournier, my name is Dennis O'Leary and I'm here on behalf of Enbridge Gas Distribution today. You'll be pleased to hear that I have very few questions. 408 MR. FOURNIER: I'll try to have very small answers. 409 MR. O'LEARY: I thought I heard you say earlier today that one of your objectives with respect to the DSM programs is they should be running efficiently. 410 MR. FOURNIER: Yes. 411 MR. O'LEARY: And that obviously means that you want to see that the programs, the cost of the programs are reasonable and kept to a minimum. 412 MR. FOURNIER: Yes. 413 MR. O'LEARY: So that the O&M is a reasonable number and the objective is to keep it low. 414 MR. FOURNIER: Right. 415 MR. O'LEARY: Right. Now, I also understand that your feeling is that -- I think you said that a million dollars is a satisfactory incentive mechanism for the company, but essentially what you're saying is that million dollars is based upon a percentage of the expenditures on O&M; is that correct? 416 MR. FOURNIER: Yes. So if the rate of return, we go back to high interest rates, we go back to 12 percent and you go to, let's say, 15 million O&M which is an approved number then, yes, it's going to be 2 million. 417 MR. O'LEARY: I understand that, and I didn't want to get into that debate of whether the Board-approved rate of return is the right percentage figure because I appreciate Mr. Poch covered that already. 418 MR. FOURNIER: We're not saying the million dollars is the cap. You've got to apply some kind of a formula that has some kind of a cap. So whatever the result is, we won't be back another a day and say $2 million isn't too high, we didn't mean what we said two years ago. 419 MR. O'LEARY: But whatever number we arrive at under your recommended methodology, you're saying it is a percentage of expenditure. 420 MR. FOURNIER: Correct. 421 MR. O'LEARY: I'm just wondering if you felt there was something counter-intuitive by the fact that you're saying on the one hand we want to keep our costs to a minimum, but on the other hand you're incenting a company using a mechanism which relates directly to the O&M expenditures. 422 MR. FOURNIER: Well, I recognize that. There will always be a process for stakeholders and, if necessary, for this Board to review and then settle on what the O&M should be. So if there's a settlement amongst stakeholders, obviously that means we agree to the O&M that was reached at the settlement. 423 If we don't settle and we come before this Board, we can all argue our positions and at the end of the day we all will accept that the OEB will determine what is the appropriate number, and we will live with that. 424 So in either case, we will accept what is there. 425 MR. O'LEARY: Fair enough. And both Mr. Poch and Mr. Klippenstein have raised with you or suggested to you certain concerns had arisen out of using your methodology, and I just wanted to suggest one further one; that is, that if I was a cynical intervenor, can you anticipate that you may hear the argument in future rate cases where the company is attempting to inflate its O&M budget to therefore acquire a higher dollar figure under your methodology? 426 MR. FOURNIER: You'd have to be extremely cynical, for anybody to suggest that. 427 MR. O'LEARY: And that would never happen here. That's good to hear. 428 MR. FOURNIER: I mean, in reality, the fact of DSM is something that is accepted as a program which is desirable for the company to follow, and we don't object to that. 429 And yes, that amount that is going to be spent is going to vary from year to year, and the company will come in and make its case, and we'll all debate and discuss. 430 One could, I suppose, going back to your previous question, say that, IGUA, you're being contradictory by saying that you'll give them more if they spend more, effectively. But I think that the check and balance is the fact we should have this settlement process -- discussion process, and if that doesn't achieve the results, the check and balance is this Board. 431 And we -- I certainly wholly support the regulatory process and the -- whatever result that must go for litigation and decision by the Board, by the Tribunal, then in our process in Canada of regulated utilities, accepting then at the end of the day if we can't reach a settlement amongst ourselves, accept what the Board has done, and we'll come back next year. 432 MR. O'LEARY: Sir, is it fair to say, based upon what you've said earlier today and just in the last few minutes, that IGUA does support the DSM initiatives? 433 MR. FOURNIER: Yes. 434 MR. O'LEARY: All right. And you made a few comments about -- I presume it's your own personal observations about the knowledge and level of sophistication of various members of the IGUA constituency as to energy conservation. 435 MR. FOURNIER: Yes. 436 MR. O'LEARY: Are you -- and I know you've acknowledged you're not an expert, but are you familiar with the term "free ridership"? 437 MR. FOURNIER: I've -- I understand what is meant in the context here, yes. 438 MR. O'LEARY: Let me just make sure that we both understand it, and I'm going to try and express it in lay terms as well. But that it's an attempt to calculate that percentage of participants in a DSM program that would have undertaken those DSM energy conservation activities in any event. 439 In other words, had we -- had the DSM group not been there, they would have done it in any event. 440 MR. FOURNIER: That's my -- what -- more or less my understanding, too. 441 MR. O'LEARY: And you are aware that in respect of the fiscal 2000 audit, one of the issues that came up in the context of that was the auditor's determination that the range of free ridership for custom projects was higher than which -- that which had been originally forecast. Does that ring a bell? 442 MR. FOURNIER: It rings a bell, and it's in this binder here. 443 MR. O'LEARY: It is, and without taking you to it, because it's come up enough -- 444 MR. FOURNIER: Thank you. 445 MR. O'LEARY: I'm sure that most people here are familiar with -- 446 MR. FOURNIER: That's Mr. Kai Millyard's report; is that right? 447 MR. O'LEARY: Yes. 448 MR. FOURNIER: Yes. 449 MR. O'LEARY: And the auditor's report, which had suggested and some of the parties have bought into a figure of 49 percent for custom projects. 450 Sir, custom projects would refer to those projects that cater to or facilitate industrial and commercial businesses. 451 MR. FOURNIER: Correct. 452 MR. O'LEARY: All right. So if we look at just that 49 percent figure, we know that at least 51 percent of that industrial/commercial community, then, is not availing themselves of the DSM programs without the assistance of those programs. Would that be a fair statement? 453 MR. FOURNIER: Well, if that is what that particular study says, that's what that particular study says. 454 Whether I would be willing to agree that that is the correct number or not is another -- I'm not expert enough. I don't know. I'm just skeptical enough that it could be equally as wrong as it could be equally as right. 455 MR. O'LEARY: But no one is ever that skeptical here. I thought we -- 456 MR. FOURNIER: Oh, I'm sorry. Yes. 457 MR. O'LEARY: But the evidence of the company's DSM panel is that subsequent to that auditor's report, that with additional information, additional study, additional communications, they have actually determined that the figure would be closer to 30 percent. 458 And without asking you to accept or reject it, would you accept, at least, this characterization that if that is correct, that that means that 70 percent of the commercial/industrial community out there would not have availed themselves of the DSM or would not have undertaken the energy conservation activities, which they did but for the existence of the DSM programs? 459 MR. FOURNIER: I think it would -- what you're following, if that is what that says, I believe that's right. 460 MR. O'LEARY: Fair enough. 461 And is it also a correct statement, then, to say that IGUA has not presented any study or undertaken any expert analysis, which would contradict that particular figure? 462 MR. FOURNIER: Wouldn't want to make the expenditure to increase the cost. No, we have not. 463 MR. O'LEARY: All right. And would it then be fair to say that what we're looking at is a range of somewhere between 51 and 70 percent of the industrial/commercial community would not have engaged in the energy conservation activities, which gave rise to the TRC benefits but for the company's DSM program? 464 MR. FOURNIER: I can't disagree with you, because when you include the commercial and industrial, that's a -- quite a large community of consumers. 465 My members are, on the whole, the larger users of natural gas, but there are a number of industrial companies who are large users of gas in the Enbridge franchise area who are not members of IGUA. In particular, car companies are among those, so I don't know what they do. 466 I don't know what the commercial sector is doing and -- but among my members that I've talked to, they have all, to a man, and I have today about, I think, 47 members, so there's not a lot of members. 467 All the ones I have spoken to over the last several years have all repeatedly emphasized to me that they have implemented programs at their plants, because it's in their very best of interests to do so to make the savings that that achieves. 468 MR. O'LEARY: And of course that's good to hear, but the point is beyond your own personal discussions with these members -- 469 MR. FOURNIER: We have not done a study and when you roll in all the commercial, all the other industrial and I don't know whether to say power plants, or when you look at statistics of what is -- we know what residential is, we certainly know what some commercial is in terms of small ones. But then when you get beyond the small commercials, are they industrial or are they still commercial? There's a lot of grey area in that of who is what. 470 IGUA's criteria is that if they are buying gas under an industrial rate, they are an industrial customer. There's lots of different definitions. But rolling all those people together, I have no dispute of the numbers you have because I have no basis to dispute otherwise. 471 MR. O'LEARY: Right. And I presume you're also aware that under bill 210, which is the government's recent amendment to the Ontario Energy Board Act, they actually mandated the Board to promote energy conservation, it's in passive language. 472 MR. FOURNIER: It's a policy, I appreciate it's a government policy. 473 MR. O'LEARY: And that's what you were referring to earlier, that you accept the government policy on that. And the only reason I raise that is because I thought I heard you question whether or not, or the necessity of the company aggressively pursuing DSM activities. My question to you, sir, is simply this: In light of that policy of the government and in light of what appears to be the fact that the clear majority of industrial and commercial gas users would not have availed themselves of those energy conservation activities, isn't it a fair thing to say that it would be appropriate to aggressively -- to continue to aggressively pursue DSM activities? 474 MR. FOURNIER: Well, let's unpack that one just a little bit. Amongst that huge community of commercial/industrial, if your basis of percentage is one plant or one account, it doesn't matter whether you use a potato chip maker as a store on the corner or something of the size of Dofasco or Stelco, which I appreciate are in the Union franchise. If your percentages are based on a numbers of accounts, then throwing a whole bunch of bucks at a whole bunch of tiny little accounts, I'm not sure what that does, because many of those tiny little accounts are probably marginal operations. 475 On a volume basis, I'm -- I would be interested to see on a volume basis what those results show, because I understand that the large industrial users, and it's only logic that it would have taken every step that it is cost-effective for them to do to put in place energy efficiency initiatives. 476 MR. O'LEARY: Sir, I don't mean to interrupt, but you understand this is your view -- 477 MR. FOURNIER: My view. 478 MR. O'LEARY: And that's fine, and we're just clear that it's your view and it's not substantiated by any empirical data that IGUA has produced. 479 MR. FOURNIER: No problem. 480 MR. O'LEARY: Thank you, Mr. Chair, those are all our questions. 481 MR. BETTS: Mr. Moran, is there anything from the Board counsel? 482 MR. MORAN: Thank you, Mr. Chair, I don't have any questions. 483 [The Board confers] 484 MR. BETTS: Mr. Thompson, is there any redirect at this point? 485 MR. THOMPSON: No, Mr. Chairman. 486 MR. BETTS: I believe the panel may have one or two questions of the witness. 487 QUESTIONS FROM THE BOARD: 488 MR. DOMINY: Mr. Fournier, as I understand it, IGUA has a representative on the audit committee in Mr. Thompson; is that correct? 489 MR. FOURNIER: Yes, I think that's a fairly recent development; last fall, I believe, last November. 490 MR. DOMINY: So I just had a simple question, the question on issues 9.4 and 9.5, which is with regard to the terms of reference with the consultative and the construction of the audit committee. I'm just wondering whether you had any comments on those two aspects because, as a group, you did not accept the settlement of those two issues. 491 MR. FOURNIER: No, that is correct. And Mr. Thompson's participation in the audit committee, when he came to me to obtain my either approval or disapproval of him participating, he's participating, as far as IGUA is concerned, given his long experience before this Board and with Enbridge Gas Distribution matters. He is not there representing IGUA other than the fact that he is IGUA's counsel. But I think he -- like I say he's more there providing the leadership that he provides. He's obviously influenced by what he does by the fact that his client is IGUA. But his participation is from the perspective, can he help the process through his knowledge and expertise. He's not there advocating IGUA's goals and objectives. 492 MR. DOMINY: And just to complete the thrust of the question, do you have any comments with regard to the protocol for the consultative and the process for the audit, or is it something we would wait till argument to receive your views on? 493 MR. FOURNIER: That is something we will wait for argument. 494 MR. DOMINY: Thank you, Mr. Fournier. Thank you. 495 MR. BETTS: Thank you. And I just have a couple as well, just to make certain I understand the position being put forth by IGUA. 496 First of all, as I read the original evidence, there's an indication that -- and I think it's safe to say you're looking at a flat-rate incentive rather than some kind of escalating incentive; is that right? 497 MR. FOURNIER: That is correct, sir. 498 MR. BETTS: You do indicate that you've suggested a number that would be appropriate would be the current ROE-approved value percentage. 499 MR. FOURNIER: Correct, sir. 500 MR. BETTS: Applied to -- and this I wanted to be certain of. You're suggesting it be applied to DSM expenditures. 501 Specifically are you referring to budget or actual expenditures? 502 MR. FOURNIER: The budget, sir. 503 MR. BETTS: And I did understand that from your testimony. It was clear, but I do -- did want to be certain. 504 With respect to that particular proposal, is there -- do you not feel some concern about the pressure that that might apply on the company to spend more? 505 MR. FOURNIER: I would put it differently. I would say a pressure on the company to budget more. And it's natural, but they do the same thing for almost all the balance of the O&M, there's a natural inclination of a regulated utility in putting forward their cost-of-service application to highball, if I can use that term, their various different accounts knowing that some of those are going to get focused upon and cut back. 506 But it's our job as stakeholders, I think, to be the policemen, if you like, and to try and keep them in hand. And if we come to an agreement, that means that we end up with a number that both the company and the stakeholders feel is reasonable. 507 And then when we fail to do that, then we'll come to you not as the policemen but then as you are, as the court, the Board members, the judges, whatever term one wants to use in that generic sense. We'll all put our evidence in, and they'll say it should be 20; we'll say it's 5, and we all expect you to come down with 12 in the middle, or something like that. 508 Whatever it is that you come up with is what we should live with, because that's the way the process works. 509 And I think that for the company to highball, there's going to be different interests at the table, and I think that at the end of the day, the -- they're going to have to justify their numbers. And if they can do that properly, then they'll be rewarded what is merited, and I really can't say more than that, sir. 510 MR. BETTS: Thank you. 511 That concludes the questions from Board Panel. 512 Any need for redirect on those, Mr. Thompson? 513 MR. THOMPSON: No, thank you, sir. 514 MR. BETTS: Thank you. 515 Then it's 12:00 now -- 516 MR. FOURNIER: am I excused, sir? 517 MR. BETTS: Yes, you are. Thank you, Mr. Fournier. 518 I didn't anticipate taking too long, but I appreciate that, and thank you very much for participating in our process. It has been very helpful 519 MR. FOURNIER: I appreciate the Board inviting me to go first. We didn't ask for it, but I appreciate it. It does allow me to get back to Ottawa, and we have to start focusing on argument in the TransCanada case, so it's going to be a major undertaking. Thank you very much, sir. 520 MR. BETTS: Thank you for being here. 521 Mr. MacOdrum, let me hear what your preference is, whether you'd prefer to bring your witness forward now or -- 522 MR. MacODRUM: Certainly, and I think we can complete our examination-in-chief before the lunch break, I think, hopefully well before the lunch break, and then go directly to cross-examination or go to cross-examination this afternoon. 523 MR. BETTS: Thank you, and the Board finds that very acceptable, so please proceed. 524 MR. MacODRUM: I think Mr. Rowan is sworn, and we're ready to proceed. 525 MR. BETTS: Thank you. 526 CME PANEL ON ISSUES 9.2 TO 9.5: ROWAN 527 M.ROWAN; Previously sworn. 528 MR. BETTS: Welcome back, Mr. Rowan. 529 MR. ROWAN: Thank you, sir. 530 MR. BETTS: And, Mr. MacOdrum. 531 MR. MacODRUM: Mr. Chairman, my examination-in-chief of Mr. Rowan is going to deal with two issues on the issues list, issue 9.4, the DSM consultative process, and issue number 9.5, the DSM audit process. 532 EXAMINATION BY MR. MacODRUM: 533 MR. MacODRUM: Mr. Rowan, what is your understanding of the main functions of the DSM consultative? 534 MR. ROWAN: In my view, the DSM consultative has five main roles, two of which are advisory, two are decision-making in the sense of the intervenors participating with Enbridge in arriving at a consensus, and one is what I call an oversight role. 535 The advisory roles are discussions with respect to program design. The second advisory role would be reviewing and commenting on Enbridge's monitoring and evaluation report prior to it being sent to the independent auditor. 536 With respect to the decision-making roles, the first would be participating in the setting of DSM volumes and budgets at least, as I said earlier, in the first instance, where there is attempt to arrive at a consensus. 537 The second decision-making role is one which involves the audit subcommittee, and the first part of that activity involves determining the terms of reference for the independent auditor. And the second part of that audit subcommittee role is in providing general direction to the independent auditor. 538 And finally, the fifth function is reviewing the -- Enbridge's SSM claim, and here, this is an oversight role, in my view, where you look at the claim, and you make a judgment, and each individual intervenor makes a judgment, as to whether the claim is appropriate or inappropriate, and if inappropriate, in their view, one would then go to the next stage of appeal, which might be the -- in this past circumstance, an ADR, and ultimately to a hearing. 539 All of these functions, in my view, are still relevant and should continue. 540 MR. MacODRUM: In Exhibit A.7, tab 1, schedule 1, page 9, paragraph 24, Enbridge proposes that: 541 "A set of standard operating procedures be developed, reinforcing the role of the DSM consultative as an advisory rather than a decision-making body." 542 Do you agree with this statement, and if not, why? 543 MR. ROWAN: Well, first, we agree that there needs to be a set of standard operating procedures; however, we do not agree that the DSM consultative should be solely an advisory body. Also, CME believes that before any standard operating procedures are developed, the OEB should make a determination on the issues identified by the CME as set out in Exhibit L, tab 4, and the title of that is, "CME List of Questions re the DSM Consultative." 544 MR. MacODRUM: May I direct your attention to Exhibit A.7, tab 1, schedule 1, page 7, paragraph 20 and ask whether you agree with the four bullet points set out under the heading "Principles of Change"? 545 MR. ROWAN: The principles as set out are acceptable. Our only problem is we do not accept Enbridge's proposal for how these principles should be put into effect as set out in Exhibit A.7, tab 2, schedule 1. 546 MR. MacODRUM: Does CME support the need for a protocol with respect to the way DSM targets and budgets are set? 547 MR. ROWAN: Yes, we do. 548 MR. MacODRUM: What approach to setting DSM volumes and budgets does CME support? 549 MR. ROWAN: From 1999 through 2002, DSM volumes and dollar budgets were set by agreeing on a volume target first and then deriving a dollar budget from that volume target. 550 This approach proved to be a time-consuming and resource-consuming exercise and ultimately was not very productive. CME believes that the best way to set DSM volumes and targets is to start first with a dollar budget and then derive the volume target from that dollar budget. The key issue then becomes the cost per metre saved. 551 CME's proposed this approach at the November 20th, 2001, DSM consultative but it was rejected by Enbridge. 552 MR. MacODRUM: To what do you ascribe the difficulty in achieving a consensus in DSM consultative with respect to DSM targets and budgets? 553 MR. ROWAN: Well, there have been three main problems. First, Enbridge has consistently lowballed the target. Second, some intervenors, GEC and Pollution Probe particularly, have consistently tried to ratchet up the targets. And then, in 2001, the DSM consultative consensus decision was rejected in the ADR process. So after that date, it was impossible to get agreement on volumes and budgets in the DSM consultative because they had become a pawn in the ADR chess game. 554 MR. MacODRUM: Does CME agree that Enbridge should, and I quote, "shift the target and budget setting away from negotiation and towards technical analysis and commission an analysis of the results achieved by other North American utilities that offer DSM programs to put Enbridge's performance into perspective"? And my reference there is Exhibit A.7, tab 2, schedule 1, page 4 and Exhibit A.7, tab 1, schedule 1, page 8, paragraph 23. 555 MR. ROWAN: No, we don't agree. Negotiation on DSM targets and budgets is important. Moreover, the proposed study is an unnecessary expense and would be of no value with respect to determining a "fair and sustainable level of DSM activity" in Enbridge's service area. 556 MR. MacODRUM: Do you agree with the Navigant statement that target- and budget-setting process is troublesome and non-sustainable? 557 MR. ROWAN: Yes, we do agree, the way in which it's now carried out. 558 MR. MacODRUM: Do you agree with the proposal for an independent facilitator? 559 MR. ROWAN: No. CME believes the facilitator and the cost involved are not necessary. If a facilitator is deemed to be necessary, however, he or she should be independent, appointed by the OEB and with no other financial or other links to Enbridge Inc. or to other intervenors. 560 MR. MacODRUM: Do you agree with the allegation which is from Mr. Warren's cross-examination of Ms. Squires on March 26th, transcript page 52, that the activities of the DSM consultative over the last couple of years was something that amounts to micromanaging of your DSM programs? 561 MR. ROWAN: No, this is not an accurate statement. Over the four-year period 2000 through 2003, there were nine DSM consultative meetings, three in 2000, five in 2001, one in 2002, and none so far this year. 562 Setting DSM targets and budgets dominated the time and agendas of all of the consultatives. Other issues appeared only infrequently. The DSM minutes do not support the micromanagement allegation. 563 MR. MacODRUM: Does CME believe that the DSM consultative is the appropriate form to determine an alternative shareholder incentive system? 564 MR. ROWAN: In our view, no. The DSM consultative is not the appropriate forum. Indeed, it would be a mistake to leave the determination of an alternative shareholder incentive system to the DSM consultative, either in an advisory or decision-making role. 565 If the Navigant and IndEco report is taken at face value, the DSM consultative could only provide advice on an incentive mechanism. Enbridge could decide whether to accept or reject that advice. This approach would be contrary to the testimony given by Ms. Squires. 566 If Enbridge did not proceed unilaterally, Enbridge could, perhaps in collaboration with some intervenors on an incentive system, decide on an incentive system not in the interest of ratepayers and bring a partial ADR settlement agreement to the 2004 hearing. 567 In our view, the OEB should decide what is an appropriate incentive and do so in this rate hearing. Only in this way can ratepayers be confident that whatever incentive proposal is decided upon, assuming the OEB decides to go that route, that it will be fair, equitable, defensible and in the public interest. 568 MR. MacODRUM: Mr. Rowan, I'd now like to turn to issue 9.5, the DSM audit process. 569 Does CME agree that Enbridge should develop an audit protocol as approved by the OEB? 570 MR. ROWAN: Clearly, an audit protocol is essential, but Enbridge should not be responsible for its preparation. An audit needs to be independent. It must not only be fair, but be seen to be fair. 571 Recent experience with financial audits of public companies, Enron, WorldCom, and Tyco, to name three, suggest that the close relationship between company management and the auditor results in the public interest sometimes being held hostage to fortune. 572 In many public companies, the majority of audit committee members are directors that are independent of management. Moreover, when financial auditors recommend changes be made, those changes are made in the year of the audit, not in some future year as proposed by Enbridge. 573 MR. MacODRUM: May I direct your attention to Exhibit A.7, tab 1, schedule 1, page 4, paragraph 12, and the sentence: 574 "Ownership of evaluation and audit decisions has effectively moved from the company to the DSM consultative group and/or the audit subcommittee. Given the difficulty in achieving consensus among competing stakeholder interests, this has led to process delays." 575 Is this allegation correct? 576 MR. ROWAN: In our view, no. The facts show that there were four main causes of the delays related to the 2000 evaluation report and its audit. First, Enbridge was eight months late in the preparation of the evaluation report from the time it first promised it to the time it was received. 577 Second, Enbridge produced an evaluation report that was not ready for the auditor. This resulted in the auditor having to expand the scope of her audit and to compensate for this deficiency. 578 Third, there was lack of prior agreement about key assumptions that impacted on the audit and the calculation of the SSM both between Enbridge and intervenors and among intervenors. 579 And fourth, there was lack of agreement on the application of data and the auditor's recommendations. 580 MR. MacODRUM: Do you agree with the allegation that the DSM consultative micromanaged the audit of the 2000 evaluation report? 581 MR. ROWAN: There is no evidence in the minutes of such micromanagement. 582 MR. MacODRUM: What are the issues CME believes the Board should address within the DSM audit process issues? 583 MR. ROWAN: In our view, the key issues are first whether the 2001 audit committee was properly constituted, given the fact that all of the intervenor participants on the audit committee are signatories of the partial ADR settlement agreement that proposes a $4.6 million SSM payment to Enbridge without an audit of the 2000 evaluation report. 584 Second, whether an SSM pay-out should be made in the absence of an audit. And third, what should be the process for the audit of the 2001 evaluation report? And fourth, what should be the process for the audit of the 2002 evaluation report and beyond? 585 MR. MacODRUM: Can I refer you to Exhibit A.7, tab 1, schedule 1, page 10, paragraph 28, and ask whether CME agrees with the proposal: 586 "The audit will be conducted by an auditor chosen and by reporting to the company." 587 MR. ROWAN: We don't agree with that proposal. The auditor should be independent of the company and should report to an audit committee of the DSM consultative. Only in this way will ratepayers be assured that DSM costs and incentive payments are made in ratepayer interest. 588 MR. MacODRUM: Could I ask you to turn to Exhibit A.7, tab 1, schedule 1, page 5, and ask whether you agree with the statement that: 589 "Evaluation decisions and decisions related to the independent audit have effectively been removed from the hands of the company and placed under the direction of a larger group." 590 MR. ROWAN: No, I don't agree. 591 Let's take the first evaluation decisions. Enbridge is totally responsible for the preparation of evaluation reports. To date, only three evaluation reports have been prepared; one for 1999, one for 2000, and one for 2001. 592 Of these three evaluation reports, only the 1999 and the 2001 reports were available to the DSM consultative for comment. The DSM consultative was not involved in any decision-making related to these reports. 593 With respect to the 2000 independent audit, all decisions made either by the DSM consultative or by the audit subcommittee were made jointly with Enbridge. 594 MR. MacODRUM: Would CME's concerns with respect to representation of the audit committee be alleviated if the Board rules on audit committee membership eligibility, composition, selection process, independence, and the application of recommendations from the auditor? 595 MR. ROWAN: Yes. 596 MR. MacODRUM: What are CME's concerns with respect to the 2001 audit? 597 MR. ROWAN: CME set out its concerns in three letters to the OEB dated November 25th, December 2nd, and December 27th, 2002. 598 MR. POCH: Mr. Chairman, if I may, I thought we had heard from Mr. Rowan on issue 9.6 already, and I object to him having a second kick at the can on this issue. 599 This is issue 9.6. He dealt with it already. We've asked our questions of him already. I hate to see him comment further and us have to go over it again. 600 I think the Board and his counsel this morning indicated that they would only be addressing issues 9.4 and 9.5. I'd ask that that be respected. 601 MR. ROWAN: If I may, Mr. Chairman, when we were dealing with 9.6, you recall that there were questions asked that I said this is getting into an area that is going to be dealt with later in another issue, and we have the -- had a problem then, and we have a problem now of where the issue cuts across a number of the issues on the issue list. 602 The audit process is in issue 9.5. In order to deal adequately with issue -- on the issues list, 9.5, we have to deal with this matter, because it was not adequately, in our view, dealt with when we dealt with the issue 9.6. 603 MR. BETTS: I think to the extent that it supports the discussion of 9.4 and 9.5, I would be interested in hearing the comments of the witness. 604 MR. MacODRUM: Mr. Chairman, I -- as Mr. Rowan observes, we did get into this situation that when process issues were raised in his earlier appearance, there was an interest in deferring them to this time. 605 I think if, perhaps, Mr. Rowan would answer the question basically what -- from -- obviously it's from his experience with the 2001, but whether he has recommendations to make generally with respect to the audit process, that I think that that would be responsive to the Board's concern. 606 MR. BETTS: The Board finds that acceptable, so please proceed. 607 MR. ROWAN: If I may start, then, at the beginning of this answer then, Mr. Chairman. CME set out its concerns in three letters to the OEB dated November 25th, December 2nd, and December 27th, 2002. These letters were filed with the Board in this proceeding, Exhibit K, tab 4. 608 Specifically, CME requests the Board to rule on the appropriate size, composition, qualifications, and selection process for an audit subcommittee; two, whether the scope of the audit should include value-for-money audit, i.e., cost-effectiveness issues; and further, CME believes that the 2001 audit subcommittee as now constituted is not appropriate. 609 The reasons for this belief is that the audit subcommittee is composed of intervenor representatives who signed the ADR partial settlement agreement supporting Enbridge's 2001 SSM claim, even though, as I said earlier, the 2001 evaluation report was not audited at that time. 610 In our view, the current audit of the 2001 evaluation report should be halted and replaced with a properly constituted process and audit committee. 611 MR. MacODRUM: Mr. Rowan, why does CME believe that a value-for-money audit is desirable for Enbridge's DSM programs? 612 MR. ROWAN: From 1999 through to 2003, ratepayers will have spent over $61 million on DSM programs. During this period, there has been no financial audit of how this money was spent. Indeed, only since 1999 has there been any audit at all, and this only to determine the size of Enbridge's SSM claim. 613 In short, the current audit does not audit, one, the organizations through which DSM money are expended, and in this regard, CME has expressed concern in the past that DSM funds paid to Enbridge Home Services, which at that time was an affiliate of Enbridge. And two, the audit does not audit the purpose for which the expenditures are made and, three, the costs per cubic metre of natural gas saved by individual projects. In this regard, CME has expressed concern about the unreasonably high cost per metre saved of some programs. 614 And if one looks at the forecast costs per cubic metre for 27 of the 2003 DSM programs, these costs range from over $2 to less than one cent. Some would argue that a value-for-money audit is not required, because the TRC calculations takes this into account. CME rejects this assertion. 615 MR. MacODRUM: That is my examination-in-chief, Mr. Chairman. 616 MR. BETTS: Thank you, Mr. MacOdrum. 617 I think it's probably an appropriate time to consider our lunch break, and I'll allow cross-examination following that. 618 I will take this opportunity, however, to introduce the Board's decision on the motion, and that will give all the parties an opportunity to review it over lunch. It's a lengthy one, and if there are any questions, perhaps the panel can clarify them this afternoon. 619 DECISION AND ORDER ON DISCLOSURE MOTION: 620 MR. BETTS: The decision and order is in the matter of a motion by the Consumers' Association of Canada, the The Industrial Gas Users' Association, and the Vulnerable Energy Consumers Coalition. 621 I'm going to read from five paragraphs. In fact, I think for this purpose, there's no reason to keep everybody just staring at me. If we can hand out the decision. 622 My purpose in reading from some of the paragraphs is only to establish for the transcripts the substance or essence of the decision. 623 Does everybody have a copy now? Okay, I'll first refer you to paragraph 4.4: 624 "To the extent that an applicant proposes to recover such costs in rates, and to the extent that documents relating to the decision to outsource those functions and the nature of the cost to provide those functions are in the hands of non-parties, this does not mean that they are not to be produced. Such documents are clearly relevant to the decision to be made by the Board with respect to just and reasonable rates." 625 I'll ask you to move to paragraph 4.7: 626 "The Board is of the view that the request made by the moving parties is too broad and not sufficiently focused on what the Board has to decide. On the other hand, the evidentiary record is not sufficient to meet the Board's expectations, as set out in the RP-2001-0032 decision and the subsequent decision on the motion to vary. The Board recognizes that this may stem in part from the fact that the RP-2001-0032 decision was released after EGDI had filed its evidence in the current case." 627 Paragraph 4.11: 628 "The Board, in ordering production, is also establishing a procedure for its implementation. It is the Board's expectation that the parties, in complying with the Board's order, will work together to resolve the disclosure issue without the need for further direction from the Board." 629 And finally, two paragraphs from the Board's order in section 5. First, paragraph 2: 630 "All producing parties and moving parties shall attend a meeting, to be facilitated by Board staff, no later than April 25th, 2003. The purpose of this meeting will be to allow the parties to discuss the specifics of meeting the Board's order to produce relevant documents." 631 And finally I will refer you to paragraph 6 of that order. 632 "At the meeting, the producing parties shall provide copies of all documents subject to a claim of confidentiality to any person who has entered into the undertaking. The parties shall make every attempt to resolve the confidentiality issue. Any unresolved claim of confidentiality shall be brought to the Board on April 29th, 2003. Any party who is of the view that additional production is needed shall raise that issue on the same date." 633 Those are only a few paragraphs from the total decision so I -- it is a requirement that one would read the entire decision to understand its reasons and the substance, as well as to read the remaining portions of the order. 634 Mr. Dominy has suggested, and I think with good reason, that I also read into the record paragraph 4.8, and with the indulgence of our court reporter, I will do that. 4.8 says that: 635 "The Board's focus is with respect to what constitutes just and reasonable rates and in at that context the Board wants to understand: 636 "the basis upon which the decision to outsource was made; 637 "whether the cost is a market-based price and if so what market-based process was used to select the service provider; and 638 "where there is no market for the outsourced service, what is the cost to the service provider to provide that service to the utility. 639 "To the extent that documents not yet filed in this proceeding, and in the hands of EGDI, EI, EOS, ECS, EGS, or CWLP, meet these criteria and are relevant and material to determining:" 640 This paragraph is from the settlement. 641 "The amount, if any, by the O&M expenses envelope of $270 million is to be reduced to reflect the efficiency gains which intervenors say were transferred by Enbridge Gas Distribution to affiliates and then, in part, to a related party between October 1, 1999 and September 30th, 2002, being the term of the Board approved targeted performance based regulation (TPBR) plan, and this is taken from the settlement agreement Exhibit N.1, tab 1, schedule 1, page 36. 642 "The Board requires them to be produced by the moving parties." 643 I will reread that. "The Board requires them to be produced to the moving parties." 644 We will conclude, then, the morning session. We'll break for -- let's try and return here at -- we will resume our session at 2:00, so we will adjourn now until 2:00 p.m. 645 --- Luncheon recess taken at 12:40 p.m. 646 --- On resuming at 2:05 p.m. 647 MR. BETTS: Thank you, everybody. Please be seated. 648 Welcome back. And when we broke for lunch, we were just about to begin cross-examination of the witness, Mr. Rowan. 649 Before we do that, may I ask if there are any preliminary matters that arose during the lunch break? 650 There appear to be none. Then let us proceed. 651 Could I see, first of all, a show of hands of those that would like to cross-examine Mr. Rowan. Those, first of all, in support of the position of the party? 652 Those others, then. Mr. Poch. And is there anybody else? And Mr. O'Leary, yes. And perhaps Mr. Moran will have questions too. 653 Mr. Poch, would you please proceed. 654 MR. POCH: Thank you, Mr. Chairman, and I imagine I will be relatively brief. 655 MR. WARREN: Mr. Chairman, just before Mr. Poch, I have no questions for the witness, and with the Board's permission, perhaps I could withdraw to attend to some matters that have arisen at my office. I have no questions for the witness. I will be back tomorrow. 656 MR. BETTS: You may indeed. 657 MR. WARREN: Thank you, sir. 658 MR. BETTS: Would anyone else like to seize this opportunity to -- thank you. 659 Mr. Poch, please proceed. 660 MR. POCH: Thank you. Mr. Chairman, I will not treat that as -- if anybody leaves, I certainly won't treat it as an insult. 661 CME PANEL ON ISSUES 9.2 TO 9.5: ROWAN; RESUMED 662 M.ROWAN; Previously sworn. 663 CROSS-EXAMINATION BY MR. POCH: 664 MR. POCH: Mr. Rowan, just as a preface to my first question, I'm going to ask Mr. Millyard to distribute and place in front of the witness a printout of two e-mails, which are addressed to, amongst others, Mr. Rowan. And I just would ask those be distributed. 665 MR. BETTS: We should have an Exhibit number for that. 666 MR. MORAN: Yes, Mr. Chair. It will be Exhibit K.15.2, copy of two e-mails from Judith Ramsay. 667 EXHIBIT NO. K.15.2: COPY OF TWO E-MAILS FROM JUDITH RAMSAY 668 MR. BETTS: For the record, there is one copy on either side. Am I reading that correctly, then? 669 MR. POCH: Yes. 670 MR. BETTS: Thank you. 671 MR. POCH: Mr. Rowan, first of all, Judith Ramsay is one of the DSM staff at Enbridge; correct? 672 MR. ROWAN: I believe she's a staff member. I don't know whether she's a contract staff or an employee. 673 MR. POCH: And you are in the recipient field of each of these e-mails. That is you and your correct e-mail address about the fifth -- in the middle of the bunch there. 674 MR. ROWAN: That is correct. 675 MR. POCH: All right. Mr. Rowan, this morning you said that the 2000 evaluation report was not available to the DSM audit committee -- DSM consultative committee, excuse me, for comment. Would you agree with me that on the face of it, these e-mails suggest it was distributed, in fact, on December 27th. And that's the first one. 676 And then over, you were invited to convey, and this is in the penultimate paragraph I'm directing you, it says: 677 "If you have comments on the evaluation report and/or suggested areas of focus for the auditor, please forward them." 678 Have I -- does my interpretation of these -- this e-mail accord with your understanding? 679 MR. ROWAN: You're asking me whether these e-mails were sent? What was your question? 680 MR. POCH: Are you suggesting -- do your comments this morning imply that you did not receive these e-mails? 681 MR. ROWAN: No, I'm not suggesting that at all. 682 MR. POCH: All right. 683 Now, Mr. Rowan, you've urged the Board this morning to come at the target and budgeting-setting process by selecting an O&M budget or by having the consultative or the ADR process propose one and that a, if I heard you correctly, a volume target be derived using a cents per cubic metre approach; is that correct? 684 MR. ROWAN: That is correct. 685 MR. POCH: All right. Now, in setting a dollar budget, do you believe that the -- it's appropriate for the Board and any parties having any input into that, to have regard to the customer bill savings that such spending will achieve? 686 MR. ROWAN: Would you rephrase that question, please. 687 MR. POCH: In selecting an appropriate budget for the year, do you agree it's appropriate for this Board to have regard to the customer bill savings that the efforts being funded are intended to achieve? 688 MR. ROWAN: I think that that's one of the considerations, depending upon the methodology that's used to determine those bill savings. 689 MR. POCH: Okay. Now, Mr. Rowan, you then have this dollar budget, and you've taken account of, presumably, the bill savings and, presumably, the rate impact; fair, in arriving at that? 690 MR. ROWAN: I'm afraid I cannot answer your question, because I'm not certain how you arrived at the bill savings. Could you please explain. 691 MR. POCH: That's fine, Mr. Rowan. I don't need your opinion on that. 692 Having come to a dollar budget, you're saying we should use a cents per cubic metre approach. I want to ask you about that. 693 First of all, cents per cubic metre, you mean O&M spending per cubic metre; is that right? I assume because you are deriving volume from the dollar -- the O&M budget that -- when you talk about cents per cubic metre. 694 MR. ROWAN: That would be one way of doing it. 695 MR. POCH: And that's the way you are recommending it. 696 MR. ROWAN: That is one way. 697 MR. POCH: Is that the way you're recommending? 698 MR. ROWAN: I could recommend that way, but there are other ways in which that could be done. 699 MR. POCH: Are you recommending that way? 700 MR. ROWAN: Certainly that would be the preferred way to go. 701 MR. POCH: Okay, thank you. 702 MR. ROWAN: Having said that, if I just may go on, having said that, one would also want to take a look at each individual program and identify cents per cubic metre that is forecast to be saved. And, as I indicated this morning, the range on 27 programs was really quite wide. 703 MR. POCH: Well, I'm not going to take you up on the numbers you provide this morning since the Board told you not to enter such numbers. So let me just look at the concepts of -- that you propose. 704 Can you agree that when you look at -- that all cubic metres are not the same; for example -- let me give you an example. A construction heater which may live for a year, if it saves X amount of gas, that is a different value to both the user/participant and to society than a furnace changeover which could save that same amount in that same year, but then could save gas for another 15 years; correct? 705 MR. ROWAN: Under those assumptions, that would be correct. 706 MR. POCH: All right. And looking at the other half of the ratio, the dollars, you're using dollars of O&M spending, you would agree there are also dollars that customers spend when a measure is put in place? In fact, in the case of that example of a furnace changeover, we would expect that the majority of spending would be made by the participants; correct? 707 MR. ROWAN: Correct. 708 MR. POCH: So your measure captures neither, in that case, neither -- would capture neither the bulk of the costs nor the bulk of the benefits, would it? 709 MR. ROWAN: Is that a question? 710 MR. POCH: Do you agree? 711 MR. ROWAN: With? 712 MR. POCH: That your measure, if we used simply O&M dollars per cubic metre, we would capture neither the bulk of the cost nor the bulk of the benefits in a program like that. 713 MR. ROWAN: No, but we're talking about what is the DSM effort and cost that the utility is putting into this program. 714 MR. POCH: Thank you. 715 Now, Mr. Rowan, I wanted to turn to the question of consultation. Do you understand that one of the purposes of creating an audit subcommittee is to save time and money; and if you understand that, does CME accept that saving time and money is an appropriate consideration for the consultative? 716 MR. ROWAN: Compared to what? 717 MR. POCH: Let me break that in pieces. Do you agree that it's appropriate for the consultative to be concerned with saving time and money in its own processes? 718 MR. ROWAN: But it's relative to what? I'm sorry, I don't understand what it is you're trying to get at. I'm not trying to be difficult, I just don't understand. 719 MR. POCH: It's just that simple, Mr. Rowan. Do you think the DSM consultative committee should not care about their productivity, or do you think the DSM consultative should properly be concerned about conducting itself in a fashion which is cognizant of the time and money that is involved in its activities? 720 MR. ROWAN: I can agree with that statement. 721 MR. POCH: All right. And so, Mr. Rowan, assuming, and I know you have -- your position is you don't want to see a selection of -- a selection process that comes up with a smaller group for an audit subcommittee. But assuming, and as you have agreed, that that is a consideration, time and money is a consideration, and assuming that the committee has decided a subcommittee is an effective way to further that objective, let's hypothesize as follows: That a criteria that consultative members had in mind when choosing representatives for the audit subcommittee was simply whether or not they had confidence that the individuals were capable of being polite and productive and doing a good job on the audit committee. 722 Now, that's a hypothesis. We can't read people's minds. But with that hypothesis in mind, and I know you oppose this selection process, but if there is to be a subcommittee selected, would you consider those to be valid criteria? 723 MR. ROWAN: As I indicated this morning, if the process that is established is an appropriate process, we have no difficulty with who is on the audit subcommittee. 724 MR. POCH: I'm just asking you to agree, if a selection is to occur, would you agree that choosing individuals who are polite, productive and are thought that they will do a good job, those would be valid criteria, among others? 725 MR. ROWAN: Provided they had no apparent conflict of interest. 726 MR. POCH: Thank you. And just in that regard, the ADR agreement in this case, the 2003 looking forward, you agree with me that it was -- it was negotiated and signed off on by those parties who signed off on it -- excuse me, I misspoke myself. 727 It's the ADR in these proceedings with respect to the 2000 and 2001 LRAM and SSM issues. They were negotiated and signed off on after the selection of the audit subcommittee? 728 MR. ROWAN: That is correct. 729 MR. POCH: And the conflict of interest you complain about, then, would not have been present at the time of the selection of the audit subcommittee? 730 MR. ROWAN: I didn't say which conflict of interest. I did not say which conflict of interest. You're making an assumption. 731 MR. POCH: On the first panel, I thought I had heard that to be a complaint of yours, but -- 732 MR. ROWAN: But you didn't refer to it today. 733 MR. POCH: That's fine, Mr. Rowan. 734 You've mentioned conflict of interest. Were you thinking of a specific conflict of interest or just in general? 735 MR. ROWAN: I was thinking about the interest that the parties that were voting on the selection process, those interests were of a kind that were likely to result in an audit process that was not in the broader public interest. 736 MR. POCH: All right. And you're not saying that was specific to the most recent. You're saying that's a general problem with voting. You feel that people have a conflict of interest in general in voting? 737 MR. ROWAN: Given that -- given the composition of the DSM consultative currently, given the -- what I consider to be the overrepresentation by certain groups that are not specific ratepayer representatives, that the interests that they represent have a predominant and overrepresentation on the consultative and, therefore, can skew the result. 738 MR. POCH: All right. And you understand that of the independent members of the audit committee, two out of three of them are from IGUA and VECC. Those are, you would agree, I take it, ratepayer representative organizations. 739 MR. ROWAN: The voting pattern or the voting -- the voting mechanism that was used is one that I did not agree with -- 740 MR. POCH: I'm sorry. Are you referring about voting on the audit committee or in selecting the audit committee members? 741 MR. ROWAN: I am concerned about the voting and the selection process. 742 MR. POCH: You're not concerned about people on the audit committee having a conflict of interest now? Your concern is that the voting process itself -- 743 MR. ROWAN: Let's separate this into two parts. 744 MR. POCH: Sure. 745 MR. ROWAN: There is the general issue of the overrepresentation of certain interests on the DSM committee and the result of that overrepresentation, given the vote that was taken on November 22nd. That's issue number 1. 746 Issue number 2 has to do with the consequence of the representation on the audit committee, given the fact that we now have an ADR agreement, a partial ADR agreement that the very people who are going to be judging or involved in the audit process have already signed off on the amount of the SSM claim for 2001. 747 MR. POCH: Can we agree that that was a concern of yours that obviously had to arrive after the voting process, because the ADR hadn't been entered into? 748 MR. ROWAN: I've already indicated that. I said there were two issues. 749 MR. POCH: Thank you. Those are all my questions. 750 MR. ROWAN: Before we leave this, if you will, because this handout was given to me without any prior opportunity to review it, I just wondered whether or not I could expand on my response to the question that was asked of me with respect to this -- these e-mails. 751 MR. BETTS: I would say that's reasonable, and I would say, do you need any time to reflect on what it says there? 752 MR. ROWAN: No, I don't. 753 Basically what the issue was, that this morning I said that the 2000 evaluation report was not sent out to the committee in advance so that they could comment on it so -- so those comments could be made available to the -- could be made available to the -- in the first instance to Enbridge and then the pattern would be to the audit subcommittee and then would go on to the auditor. 754 You will note in this e-mail -- the e-mail is dated December 27th. The first meeting of the audit subcommittee that was scheduled after this draft evaluation report -- because it was a draft -- was made available was January 4th. That meeting was cancelled and was subsequently rescheduled for January the 11th. 755 In the EBRO-497-0001 settlement proposal, the company agreed that it would file a comprehensive monitoring and evaluation plan and that, moreover, at the end of fiscal 1999 and subsequent fiscal years, the company will prepare and distribute a comprehensive M&E report, which will include the documentation and application of any changes to the original budget assumptions for the fiscal year. 756 "The M&E report will be subject to an independent audit. Both the M&E report and the results of the independent audit will be reviewed as part of the DSM consultative process during the company's next fiscal year and filed with the Board in the company's next rate case." 757 Now, that settlement agreement was -- and understanding of commitment by the company was reconfirmed, recommitted or reconfirmed by the company in RP-1999-0001 and that the company further agreed to finalize its M&E report and deliver to an independent auditor together with the collective comments of the DSM consultative. 758 Those collective comments were never delivered. There was this e-mail that was sent to the DSM consultative on December 27th. On January 11th of 2002, the first meeting of the consultative took place. There wasn't any time for the comments of the DSM consultative. And indeed, as far as I'm aware, the consultative or the audit committee and the auditor did not receive any comments from the DSM consultative. It was in that context that I made my comment this morning. 759 MR. POCH: Mr. Rowan, if I may, Mr. Chairman, just follow up on that. 760 I just want to make sure I understand. You're not disagreeing that you received the M&E report either late in December or very early in January; correct? 761 MR. ROWAN: Not at all. As a member of the subcommittee, I needed to have that report in order that the subcommittee's work could proceed. 762 MR. POCH: And you're not disagreeing that at the February 4th meeting - this is referred to in the material I handed out - that the subcommittee members decided to go ahead and forward with a dissent to the auditor that evaluation report to start the audit. 763 MR. ROWAN: I'm sorry, was that a question? 764 MR. POCH: You're not disputing the facts? 765 MR. ROWAN: No, no, not at all. 766 MR. POCH: And you're not disputing that people were invited to send their comments along so the committee could collate and forward them along to the auditor? 767 MR. ROWAN: No, I'm not. 768 MR. POCH: And you were in fact on the subcommittee. 769 MR. ROWAN: Yes. 770 MR. POCH: So certainly your comments were sent to the auditor. 771 MR. ROWAN: The auditor was made aware of my comments, yes. 772 MR. POCH: Okay. Thank you. 773 MR. BETTS: Thank you. 774 I'll ask Mr. Moran if he has any questions at this point. 775 MR. MacODRUM: I think Mr. O'Leary has some questions, Mr. Chairman. 776 MR. O'LEARY: Thank you, Mr. Chair. Although I don't want to jump ahead of Mr. Moran if he wants to go first. 777 MR. MORAN: I don't have any questions. 778 CROSS-EXAMINATION BY MR. O'LEARY: 779 MR. O'LEARY: Mr. Rowan, as you know, my name is Dennis O'Leary and I'm representing the company, and I have a couple of questions arising out of your prefiled evidence. 780 If you could turn to your several productions there, Exhibit K.4, I believe is the right letter, starting with your January 3rd, 2003 letter which consists of 17-page document which is attached to that. 781 If you turn to page 9 specifically. 782 MR. ROWAN: Yes, I have that. 783 MR. O'LEARY: All right. Now, I don't intend to go back into an area that Mr. Poch has asked you about, but I thought a little clarification might help. In that paragraph, you -- paragraph 31 at the top of the page, do you have that? 784 MR. ROWAN: Yes, I do. 785 MR. O'LEARY: All right. Page 9 of 17, you indicate that: 786 "Enbridge intends to convene an audit subcommittee and engage an auditor. CME has objected to the process by which the audit subcommittee was selected." 787 Just stopping there. We're referring to the selection of the 2001 subcommittee in November of 2002? 788 MR. ROWAN: Yes. 789 MR. O'LEARY: All right. 790 "As currently constituted" -- I'm continuing along and quoting here -- "As currently constituted, all members of the fiscal 2001 audit subcommittee are signatories to the December 23, 2002, partial settlement agreement." 791 You then state, sir: 792 "The impartiality of the process and the outcome of audit are highly suspect. There is a clear conflict of interest." 793 Are you, sir, now saying that you did not, by that statement, indicate that you had concerns about the apparent conflict of interest of the members that were elected to that audit subcommittee? 794 MR. ROWAN: No, I think I said that in response to Mr. Poch's questions just a few moments ago. 795 MR. O'LEARY: So when we read that statement, none of the people that were elected to the subcommittee, therefore, have a conflict of interest at that time or at this time; is that correct? 796 MR. ROWAN: I'm afraid I don't understand your question. 797 MR. O'LEARY: Well, I'm trying to understand your evidence, sir. You say there is a clear conflict of interest in either the members of the present fiscal 2001 audit subcommittee. Either they do have a conflict of interest, or they don't. 798 MR. MacODRUM: Mr. Chairman, I think Mr. O'Leary should put the whole sentence to him. It says, "As currently constituted, all members..." 799 MR. O'LEARY: I thought I read the entire paragraph word for word, but -- 800 MR. MacODRUM: I think in your questions, you should be clear, Mr. O'Leary. 801 MR. O'LEARY: I don't want to put any words into the sentence that are wrong -- 802 MR. BETTS: Mr. Rowan, do you understand the question -- 803 MR. ROWAN: No, I'm sorry, sir. I don't understand -- 804 MR. BETTS: Then I would ask Mr. O'Leary to try once more with the question. 805 MR. O'LEARY: I'll try again. It could be just me, but you state, sir, in relation to the fiscal 2001 audit subcommittee, which was elected in November 2002, and I quote: 806 "As currently constituted, all members of the fiscal 2001 audit subcommittee are signatories of the December 23rd, 2002, partial settlement agreement. The impartiality of the process and the outcome of audit are highly suspect. There is a clear conflict of interest." 807 My simple question, sir, is: Are you alleging that the members of the DSM consultative that were elected to that audit subcommittee either do or do not have a conflict of interest by them serving on that subcommittee? 808 MR. ROWAN: I'm suggesting that by being a signatory to a partial agreement that involved a payment of $4.6 million as an SSM incentive to Enbridge at the same time as they are on a -- an audit committee that is auditing that very evaluation report and claim, the SSM claim for 2001, that certainly has the appearance of a conflict of interest. 809 MR. O'LEARY: Should they resign, sir? Is that what you're suggesting the Board to do? 810 MR. ROWAN: I think I've already said that this morning, that they should -- that the Board should reconstitute the committee. 811 MR. O'LEARY: I wasn't clear on what you specifically meant by that. 812 So you're asking certain members, then, to resign from that subcommittee, and they would consist of, in your opinion? 813 MR. ROWAN: I'm suggesting that the Board, if you would just let me take a moment to -- so I can get what it is that I said this morning on that point. 814 MR. O'LEARY: Which document are you reading from, sir? 815 MR. ROWAN: I'm reading from the -- my notes that were in answer to the questions posed by my counsel this morning. 816 So if I may take a moment to -- 817 MR. BETTS: Go ahead. 818 MR. ROWAN: Would you like me to repeat what I said this morning, Mr. O'Leary? 819 MR. O'LEARY: No, sir. I just want you to answer my question, which is: Which of the three members of -- the non-company members of the present audit subcommittee you say should resign, because they are in a conflict of interest situation? 820 MR. ROWAN: Those that signed the partial settlement agreement. 821 MR. O'LEARY: And that would consist of... 822 MR. ROWAN: If I understand correctly, the representative from IGUA is a member of that committee and was a signatory of -- IGUA is a signatory of the partial settlement agreement. 823 MR. O'LEARY: All right. And we are talking about the partial settlement agreement as it relates to the fiscal 2001 evaluation monitoring report? 824 MR. ROWAN: That is -- that is correct. The settlement proposal dated December 23, 2002. 825 MR. O'LEARY: Yes. 826 MR. ROWAN: Is that what you're referring to, sir? 827 MR. O'LEARY: I am to referring to that, yes. 828 But just to save time, it's Mr. Thompson of IGUA, Ms. Judy Kwik of VECC, and Mr. Chris Neme of GEC. Would those be the three individuals that you say should resign, because they are in a conflict-of-interest position. 829 MR. ROWAN: I am suggesting that because those organizations represented by those people were signators to the -- the partial agreement, that settlement proposal that -- dated December 23, 2002, there is a conflict of interest. 830 MR. O'LEARY: So should they resign or not? Should they be part of the audit committee or not, sir? 831 MR. ROWAN: I have already offered, Mr. O'Leary, to read the words that I said this morning, and I'm prepared to make that offer again so that you can be quite clear that -- 832 MR. O'LEARY: We're trying to save time here, sir. 833 Are you recommending to the Board that it order these individuals to be removed from the audit subcommittee or not? 834 MR. MacODRUM: Mr. Chairman, Mr. Rowan in his testimony this morning clearly indicated what he recommended. He requested that the Board rule on the appropriate size, composition, qualification, and selection committee for the audit subcommittee. Mr. O'Leary was here and heard that evidence. That's the answer to the question that he's asking. 835 MR. O'LEARY: I did not hear an answer to the question I posed to you, sir, just a few minutes ago. Are you asking this Board to order these individuals to be removed from the audit subcommittee or not? 836 MR. ROWAN: I'm asking this Board to properly constitute the audit subcommittee, its representation, the way in which it's selected, and to ensure that there is not -- there are not members of that audit subcommittee that are in a conflict of interest. 837 MR. O'LEARY: All right. And are you of the view that these members are in a conflict of interest and therefore you're recommending to the Board that they be removed from the audit subcommittee? 838 MR. ROWAN: That's a multipart question. Can we take it one at a time. 839 MR. O'LEARY: It's not that difficult, sir. 840 MR. ROWAN: I don't answer multipart questions with a yes or no. So, therefore, will you break it down? 841 MR. BETTS: Mr. O'Leary, I'm sorry, I should -- I have to interrupt here. I think the Board is satisfied with the witness's response. What I heard earlier didn't talk about resignation or not. 842 If you want to address that one, try to -- don't relate it to what has been said in the past. Just seek an answer on that. I'm not sure, in my mind, that the witness's response earlier today requires a decision -- leads to a decision regarding resignation or not. I'm just not seeing this heading anywhere in a positive direction. But I'll put it back to you. If you can find a different way to ask that question. 843 MR. O'LEARY: Perhaps I could simply ask, Mr. Rowan, whether or not, if Mr. Thompson, Ms. Kwik and Mr. Neme remain on the audit subcommittee, that you would consider that subcommittee to be properly constituted. 844 MR. ROWAN: That would be for the Board to determine because, in my view, and I can only express my view, there is a clear conflict of interest, having signed a partial settlement agreement that recommends giving $4.6 million to the company at the same time they are involved in a process that is auditing the company's claim. 845 MR. O'LEARY: So you'd recommend that because of that they should not participate in the fiscal 2001 audit review. 846 MR. ROWAN: That would be for the Board to determine. 847 MR. O'LEARY: I understand that. I'm trying to understand what it is you're saying to the Board is CME's position on the matter. 848 MR. MacODRUM: Mr. Chairman, I think Mr. O'Leary has asked the same question a number of times and Mr. Rowan has endeavoured to answer it, to the best of his ability. I would suggest Mr. O'Leary move on. 849 MR. O'LEARY: I will, sir. 850 May I ask you, Mr. Rowan, if all of the signatories to the December partial settlement agreement were ineligible to serve on the audit subcommittee, who does that leave? 851 MR. ROWAN: My hesitation is not in terms of it only leaves me. My hesitation is that an audit subcommittee doesn't necessarily have to be composed of DSM consultative members. There is a way in which a proper audit can be constituted. There is a way in which the public interest can be served so that there is not only an appearance of fairness, there is, in fact, fairness. 852 MR. O'LEARY: All right. But you'd agree if you were the sole member of the audit subcommittee, there would not be an appearance of fairness; would you agree with that? 853 MR. ROWAN: I think that's somewhat unfortunately phrased because I've already indicated to you what I'm looking for is a process where it is fair. And I think our members are very concerned about the lack of fairness. And my answer to you in terms of whether these people should resign or not, I think that's up to the Board. I think the Board has to be the arbiter of what is fair, and the public then has to judge whether or not the whole process, the whole regulatory process is fair, by the -- by virtue of the reasons given for one decision versus another. 854 MR. O'LEARY: Thank you for that. 855 Now, just moving on, we're still talking about process. I trust you were here when Mr. Rubin was talking about what he saw as the value added or the high value that resulted from the fiscal 2000 audit subcommittee; do you remember him saying things of that nature? 856 MR. ROWAN: Yes, I do. 857 MR. O'LEARY: And clearly he felt that there was, by his contribution and others on that subcommittee, there was a value to ratepayers; correct? 858 MR. ROWAN: Yes. 859 MR. O'LEARY: And if I understand correctly, that committee consisted of both himself, Mr. Rubin, yourself, and Mr. Neme? 860 MR. ROWAN: That is correct. 861 MR. O'LEARY: All right. Can I ask you if you would agree with me that absolutely nowhere in your evidence do you suggest that the composition of that committee was either too little or too many? 862 MR. ROWAN: That issue did not arise. In fact, let me suggest to you that at that time, there weren't a whole lot of folks who wanted to serve on that committee and therefore the issue of balance was not an issue. 863 MR. O'LEARY: All right. You thought of my next question, then. But you'll agree with me that neither the number on the committee nor the balance of representation on that committee were issues that bothered you whatsoever, because it doesn't appear anywhere in your evidence that it was an issue. 864 MR. ROWAN: No, there were some fundamental discussions and issues that were dealt with throughout that audit subcommittee process. That's not to say everybody agreed, but it was by and large a very constructive process. 865 MR. O'LEARY: Notwithstanding the fact that its balance consisted of two, we'll call environmental groups, and the CME? You would agree with me that it was constructive, even though there appears to be an imbalance of representation relative to the ratepayers? 866 MR. ROWAN: Given the individuals who served, their contribution was a balanced contribution. Having said that, you should also keep in mind that there was no perception or actual conflict of interest. Nobody had signed off on the SSM claim so that was not an issue. 867 MR. O'LEARY: Well, just on that conflict of interest issue, can I remind you that both IGUA and VECC are not signatories to the DSM portion of the settlement proposal in this proceeding. Are you aware of that, sir? 868 MR. ROWAN: I am, and one could ask, Why did they sign off on the other? 869 MR. O'LEARY: Or one might ask you, sir, doesn't that in fact restore some of the credibility you say is lost? 870 MR. ROWAN: No, not at all. It just makes me wonder why they signed off on the other. 871 MR. O'LEARY: If I could turn you then, sir, to what is appendix 2 which is page 15 of 17 of that same production. It's a letter from Mr. Robert Milne of the company to yourself. In paragraph 2B, the company states: 872 "In the interest of time, the company will request that the DSM consultative create an audit subcommittee for fiscal 2001 audit and commence development of the auditor's terms of reference as soon as possible. The concept of a value-for-money audit will be also considered as part of the development of the audit's terms of reference as per the ADR settlement agreement. This schedule should allow the audit process itself to be initiated and completed prior to the fiscal 2003 ADR settlement conference." 873 Do you recall seeing that letter, sir? 874 MR. ROWAN: I have it in front of me. 875 MR. O'LEARY: Is it fair to say that what the company is suggesting to you is that in the process of the development of the terms of reference, the concept of a value-for-money audit would be considered? 876 MR. ROWAN: That is correct. 877 MR. O'LEARY: This is not a promise by the company that it will proceed and engage an auditor to proceed with a value for money, it's simply saying, Let's discuss it as part of the consideration of the terms of reference of the auditor; fair? 878 MR. ROWAN: That is correct. If my memory serves me correctly, however, the ADR settlement agreement that preceded this letter from Mr. Milne committed the company to do just this. 879 MR. O'LEARY: All right. Well, we'll beg to differ on this. But at least the wording of this paragraph, at least, you'll agree with me that what they're suggesting is, We'll discuss it and on a future date; fair enough? 880 MR. ROWAN: Fair enough. 881 MR. O'LEARY: Now, in fact, isn't it true, sir, that at the November consultative, that there was a discussion about the value-for-money audit? I'm going to take you to an excerpt from the draft minutes of that particular consultative. 882 MR. MORAN: Mr. Chair, that would be Exhibit K.15.3, "Excerpt from the Draft Minutes of the Consultative Meeting dated November 22, 2002." 883 EXHIBIT NO. K.15.3: EXCERPT FROM THE DRAFT MINUTES OF THE CONSULTATIVE MEETING DATED NOVEMBER 22, 2002 884 MR. BETTS: Thank you. 885 MR. O'LEARY: In the interest of saving trees and therefore energy, we have not reproduced the entire lengthy minutes but rather the covering page and pages 15 and 16 of the minutes. Do you agree with me, Mr. Rowan, that these draft minutes were circulated to all members of the consultative at some point following the November 22 meeting? 886 MR. ROWAN: Yes, and I made some comments on them. I don't see the comments reflected here but I don't know whether this is the version -- I see draft minutes here. I'm not sure whether these were the, in fact, draft issued by the company or incorporate the comments made by members of the committee. 887 MR. O'LEARY: Did you spend a lot of time working on the minutes and offering suggestions to the minutes, sir? 888 MR. ROWAN: Mr. O'Leary, when I participate in a proceeding, I do so in a professional manner. And when I receive an indication that a meeting is going to be held, I think about that meeting and I offer comments as to what the agenda should be. 889 When I participate in the meeting, and I receive draft minutes, I think it's my responsibility to ensure that my understanding of what took place in that meeting is, in fact, accurately reflected. 890 MR. O'LEARY: Okay. Thank you. I just wanted to know whether or not, then, you had carefully gone over the minutes, and you have now confirmed that you must have, because you take this very professionally. 891 So can I turn, then -- 892 MR. ROWAN: But I don't know whether these minutes that you have put in front of me are the ones on which I commented and that my comments have been incorporated. Could you advise me of that? 893 MR. O'LEARY: I'm simply going to advise you that -- that what you have before you are a copy of the draft minutes, and I would like you to look at the heading under "D," "Draft Terms of Reference for the Fiscal 2001 Audit." 894 And could you agree with me -- and please take a moment to review it, and if you say there are things that are missing, I'd ask you to identify them. 895 But aside from the very first bullet, would you agree with me that the minutes right up until the end of that subheading all relate to a discussion about a value-for-money audit? 896 MR. ROWAN: We're looking at page 15? 897 MR. O'LEARY: Page 15 under the heading "Draft Terms," starting with the second bullet right through to the end on page 16. 898 MR. ROWAN: Yes. Well, I -- I'll take your word for it that every other bullet is -- 899 MR. O'LEARY: Subject to check. I'll certainly accept that. 900 And is it fair to say that based on your recollection that there was a discussion amongst members of the DSM consultative about the, shall we say, efficacies and the cost-effectiveness of a value-for-money audit? 901 MR. ROWAN: There was a discussion. That I will grant you; however, however, the -- in my view, the process that was employed, the facilitator that was used, namely, yourself, sir -- 902 MR. O'LEARY: Did I impair your ability to discuss the value for money at all? 903 MR. ROWAN: You impaired, in my view, the discussion process that took place at that meeting. 904 MR. O'LEARY: I'm sorry. There's nothing in the minutes -- 905 MR. MacODRUM: Mr. Chairman, the subject of -- and I'm, perhaps, speaking to both -- with respect to both the witness and the counsel that I thought the subject of the 2000 -- 2001 audit was the subject of the earlier testimony of Mr. Rowan, which was broken into nine point -- I get my nines mixed up. 906 But I am just wondering, Mr. O'Leary, whether this is not an area which you might have pursued or should have pursued in Mr. Rowan's earlier appearance. 907 MR. O'LEARY: No. Mr. Chair, we heard in his evidence in chief not more than a couple hours ago that this gentleman is now recommending to you the -- that you approve a value-for-money audit, and I'm simply responding to his evidence in chief of today. 908 And Mr. Rowan is agreeing with me. 909 MR. ROWAN: Yeah, I have no difficulty with that. 910 MR. BETTS: Pardon, Mr. Rowan. 911 MR. ROWAN: I have no difficulty with responding. 912 MR. BETTS: Then proceed. 913 MR. O'LEARY: Mr. Rowan, just to take you to the last bullet on page 16 under that subheading, the minutes read: 914 "The point is noted. The company is hearing from the group that there is an overriding interest in keeping the scope of the audit as tight as possible and focusing on the SSM. Whether the company could have delivered the programs with less cost is a very different activity than the present audit." 915 Do you agree with me, sir, that the consensus of the members of the DSM consultative that day, aside from yourself, was that the terms of reference for the auditor would not include a value-for-money audit? 916 MR. ROWAN: I think that's a fair statement. 917 Having said that, our evidence today is that the -- it is inappropriate for the expenditure of millions of dollars of ratepayer money to go unaudited, because the audit that now takes place is not a financial audit. It is a -- it is a methodology to calculate the appropriate SSM payment for penalty to Enbridge. 918 MR. O'LEARY: Sir, can you tell us how much will a value-for-money audit cost? Do you have any responses from an auditor that's prepared to undertake that, that you have entered in evidence? 919 MR. ROWAN: We have already entered into evidence, in response to an interrogatory, and if you will bear with me, I will -- 920 MR. O'LEARY: Isn't that the interrogatory response saying that you would not -- or you declined from answering the question, because you feel it's appropriate to go to the market, so you can receive quotes from the marketplace? 921 MR. ROWAN: I didn't decline to answer. I said it was appropriate to identify the cost of a value-for-money audit through a competitive bidding process. I think that was more -- that more accurately describes it. 922 MR. O'LEARY: I'll accept your correction, then. 923 So you'll agree with me that there is no number on the record for the cost of this. 924 MR. ROWAN: No. The only number that's on the record that I'm aware of is that there is about $61 million of DSM ratepayer money that has been spent that has not been audited, has not had a financial audit. 925 MR. O'LEARY: Thank you, sir. Now, just on the process of the DSM consultatives, in respect of the November 22nd meeting and your subsequent letter, if I can turn you to that, of November 25th, 2002, which is also at Exhibit K.4, it's your letter to the Board. 926 MR. ROWAN: Yes. 927 MR. O'LEARY: All right. Just to move things along, if I may try and paraphrase your concerns, it is that -- 928 MR. ROWAN: Starting where? 929 MR. O'LEARY: It's the second full paragraph on page 1 of your letter. You objected to the limited terms of reference to the auditor, and by that I understand, because the DSM consultative did not agree with your suggestion that the value-for-money audit proceed, you objected to that. Fair enough? We've covered that. You then objected to the selection process used to determine the membership of the audit subcommittee. So I'm going to ask you a question or two about that. 930 Number one, were you offered and afforded a chance to raise your objection to the members of the DSM consultative? 931 MR. ROWAN: Yes, I was, and -- 932 MR. O'LEARY: And you did avail yourself of that opportunity? 933 MR. ROWAN: Yes, I did. 934 MR. O'LEARY: And the members of the consultative heard you? 935 MR. ROWAN: Yes, keeping in mind who the members are and the interest they represent or overrepresent, that the process, I repeat this, the process is not what I consider to be a fair process. 936 MR. O'LEARY: All right, sir. If I take you back to Exhibit K.15.3, which is the draft minutes. The very first page identifies those members of the consultative who were present, including Board staff. Would you agree with me that those individuals were there and participated in the meeting on that date? 937 MR. ROWAN: Well, subject to check, Mr. O'Leary. 938 MR. O'LEARY: Thank you. And is it not also true, as we've heard in the evidence, that a straw poll was taken amongst the members of the consultative to determine whether or not it was appropriate to proceed with an election to the audit subcommittee; do you recall that? 939 MR. ROWAN: Yes, but you're compounding one problem with another. I've already indicated that the process is a flawed process, and by repeating the flawed process over and over again doesn't give a good result. 940 MR. O'LEARY: All right. Would you accept as being correct the fact that everyone that participated in the straw poll felt that it was appropriate to proceed with the election, other than yourself and the CME? 941 MR. ROWAN: I think that's fair. 942 MR. O'LEARY: All right. And is it not also true that after it was decided to proceed with the election, anyone who wished to run that was invited to make submissions to the group as to their qualifications and the reasons why they would be appropriate to serve on the audit subcommittee. 943 MR. ROWAN: That is correct, yes. 944 MR. O'LEARY: And is it not also true, sir, that you stood for election and while objecting to the process, that you also extolled your virtues as a member of the audit subcommittee? 945 MR. ROWAN: I indicated the reasons why I thought this was an inappropriate process and indicated the reasons for -- that should be -- not reasons, but criteria that should be used otherwise, other than the one that were being used. If that's what you mean, yes, I did that. 946 MR. O'LEARY: And you, in the same line, suggested that you had the appropriate qualifications and criteria to serve on the committee. Is that fair to say? 947 MR. ROWAN: That I represented a constituency that was not now -- the values of which were not now being represented, that is correct. 948 MR. O'LEARY: All right. And, sir, we all know that you were not elected on to the subcommittee. Just a quick question: Would you have written your November 25th letter if you had been elected to the subcommittee? 949 MR. ROWAN: My concerns about the underrepresentation of the interests would have been alleviated; however, the process would still be an issue. 950 MR. O'LEARY: All right. 951 MR. ROWAN: And if I may just point out something. You asked me to look at the people who were present on November 22 and I looked down that list and I see your name listed there as listed as Enbridge. And I'm -- I wonder, sir, are you an employee of Enbridge? I don't recall that you are, and it was just -- it just caught my eye. 952 MR. MacODRUM: Mr. Chairman, I'm going to ask that the witness not ask questions of counsel. 953 I have a duty as a member of the bar to protect my fellow counsel. 954 MR. O'LEARY: That's a world of relief, Mr. Chair, I will sleep soundly tonight. 955 MR. BETTS: Thank you. And I think in the interests of trying to keep this line of questioning as mellow as possible, I think it's best if we don't ask the counsel questions. And it's best if the counsel doesn't answer the questions, too. 956 MR. O'LEARY: I would have to retain counsel, Mr. Chairman. 957 Can I turn to your last page of your letter there, Mr. Rowan. 958 MR. ROWAN: Of November 25th? 959 MR. O'LEARY: Yes. Under the heading "Relief Sought." 960 MR. ROWAN: Yes. 961 MR. O'LEARY: You've asked the Board to rule on the appropriate size, composition, and selection process for the audit subcommittee. Those are some of the things you've asked for; correct? 962 MR. ROWAN: That's what it says. 963 MR. O'LEARY: All right. And you'll agree with me that what the company and a number of the intervenors are putting forward is a protocol for both the DSM consultative and the audit subcommittee that sets out and responds to some of the things that you're looking for; is that fair to say? 964 MR. ROWAN: They have proposed a protocol -- 965 MR. O'LEARY: You may not agree with it, but it is setting out the size, the selection process, and the composition of those particular committees; fair to say? 966 MR. ROWAN: From my understanding of the evidence, yes. 967 MR. O'LEARY: And you'll agree that what the company and those intervenors in support of that are asking is that the Board should rule on those protocols and to include them in their decision, should they consider them appropriate in light of the evidence of this proceeding; do you understand that? 968 MR. ROWAN: Or alternatives that they may feel more appropriate, yes. 969 MR. O'LEARY: Fair enough. But to the extent that they do accept the protocols as set out in 9.4 and 9.5, will you abide by and recognize the Board's decision in that respect? 970 MR. ROWAN: If the Board rules that they are the appropriate protocols to follow, of course we'll accept them. 971 MR. O'LEARY: And there will not be the sort of challenges and questions that we see raised in your November 25th letter? 972 MR. ROWAN: There would be no need, no purpose to such -- to use your phrase -- challenges. However, one would hope that the Board, after hearing the evidence, will determine that a protocol which is fair and balanced is more appropriate than the one that the company has proposed. 973 MR. O'LEARY: I just have a couple more questions, Mr. Chair. It may simply consist of this: 974 I thought I heard you say in evidence in your evidence in chief that in respect of the role of the DSM consultative, you indicated that there were, we'll call it, three areas: One, advisory; a second, decision-making; and a third, an oversight role. 975 In respect to the decision-making, I understand that you were suggesting that the audit subcommittee be empowered to set the terms of reference and that it would also direct the independent auditor. 976 Is that a fair interpretation of what you're suggesting to the Board? 977 MR. ROWAN: What I said was determine the terms of reference for an independent auditor and provide general direction to the independent auditor. 978 MR. O'LEARY: All right. And so what you're saying is that the Board should empower an unregulated group to make decisions, which would be binding on the regulated utility; is that another fair way to say it? 979 MR. ROWAN: No, I don't think that that is an accurate description of the process. 980 MR. O'LEARY: Well, if the process is that the audit subcommittee cannot reach a consensus, in that the company does not accept the cost that the remaining members of the audit subcommittee want to incur on a -- for an audit, or do not accept the credentials of the auditor, are you saying that the company has the final decision, or are you saying that the audit committee makes the decision? 981 MR. ROWAN: Well, my experience with the audit committee 2000, the only one that has actually completed its work, was that there were very few issues with respect to the terms of reference, that there were very few issues and relatively easy agreement on who was a -- who was the best qualified auditor. So the selection of the auditor was not an issue. 982 So now we come down to the general direction to the independent auditor by the audit subcommittee. In the 2000 audit process, the only issue that arose that got into cost arose because of the totally inadequate evaluation report that had been prepared and presented to the auditor. 983 And it was only after, as Norm Rubin mentioned the other day, the auditor got into the evaluation report and found some major problems with it, that the question of whether some remedial and additional work had to be done by the auditor. That brought in the issue of cost. 984 There was -- there was no disagreement on the part of the participants, intervenors, or the company -- 985 MR. O'LEARY: We've heard all the evidence about what went on. I am asking in the hypothetical. 986 MR. ROWAN: I don't answer hypotheticals. 987 MR. O'LEARY: Well, you're asking this Board to make a ruling on something that will happen in the future; therefore, it has to be hypothetical. 988 If, in the future, the audit subcommittee cannot agree on the selection of the auditor or the cost, the amount of the money that is to be spent on the audit, who makes the decision, the company or the balance of the audit subcommittee? Which is it you are asking the Board to order? 989 MR. ROWAN: I have just been giving you a description of an actual case, a very difficult case, a very difficult audit. And I'm telling you that issue did not arise and in the hypothetical, I would think it would be remote that that issue that you have just raised would arise. 990 MR. O'LEARY: And if it did, what is your -- what is the position of CME? 991 MR. ROWAN: About what? 992 MR. O'LEARY: About whether or not the company has the final say? 993 MR. ROWAN: In terms of the expenditure of money? 994 MR. O'LEARY: Yes. 995 MR. ROWAN: If the audit cost is such that the company does not want to proceed with the audit as recommended by the audit subcommittee, and I would -- then in that case I would imagine that there would be a -- the company would be in a minority, then the company could take that decision, if it wished. It could proceed at a lower cost, a more limited audit. It would run the risk, however, and now we're making an assumption as to what the audit -- what the purpose of the audit is. But if the purpose of the audit is to justify an SSM claim, the company would be running the risk that when the audit was completed and the claim was made, that it would be challenged at the next rate hearing. 996 MR. O'LEARY: And isn't that the normal regulatory process, that if parties don't like what the company did they have the right to come before the panel and say, We think the company did something either inadequately or wrongly. 997 MR. ROWAN: Yes. However, however, that does not, in my view, suggest that the company should have control of the audit. The audit should be independent and be seen to be independent, otherwise -- 998 MR. O'LEARY: Let me ask another question on that. Your examples, I want you to reflect the words that you used in support of that suggestion. You threw out names like Enron, WorldCom and Tyco. Is there any evidence whatsoever, sir, that Enbridge Gas Distribution has conducted itself unlawfully? 999 MR. ROWAN: If you will read the sentence as a whole, Mr. O'Leary, if you will read sentence as a whole and let me read to you. 1000 "Recent experience with financial audits of public companies, Enron, WorldCom and Tyco to name three, suggest that the close relationship between company management and the auditor results in the public interest sometimes being held hostage to fortune. 1001 MR. O'LEARY: Sir, you're the one drawing the analogy. Either you mean to suggest that Enbridge Gas Distribution has done something akin to any of those three entities, or you don't. 1002 MR. ROWAN: That's ridiculous. 1003 MR. O'LEARY: So you're withdrawing any connection that there's any connection between the two; fair to say? 1004 MR. ROWAN: I'm saying that recent experience with financial audits, financial audits. 1005 MR. O'LEARY: So you are saying that one entity acted unlawfully that this Board should order a regulated utility to hand over the power and control over the auditor of the DSM process, to hand it over to the -- to an audit subcommittee, to a group that are unregulated; is that what I'm hearing you say? 1006 MR. ROWAN: What you're hearing me say is that there should not be a close relationship between the company management and the auditor. And that the audit should be independent. 1007 MR. O'LEARY: Isn't that's what's being proposed in 9.4 and 9.5? 1008 MR. ROWAN: Not to my reading of that. 1009 MR. O'LEARY: Quickly, if I take you to that, sir, at Exhibit N.1, tab 1, schedule 1, issue 9.5, page 76. It's the settlement proposal. 1010 MR. ROWAN: What page, Mr. O'Leary? 1011 MR. O'LEARY: Page 76. 1012 Paragraph number 1: 1013 "The role of the audit committee is to confirm the terms of reference to the independent audit." 1014 Do you see that, sir? That's what you want the audit subcommittee to do, don't you? 1015 MR. ROWAN: We haven't defined independent yet, sir. 1016 MR. O'LEARY: Well, go to the second bullet. The audit committee is there to select the independent auditor. So you'd agree with that objective. Is that a yes? I saw you nod. 1017 MR. ROWAN: It says that, yes. 1018 MR. O'LEARY: Third bullet: 1019 "Provide advice to the independent auditor with respect to the conduct of the audit." 1020 Is that also something you're looking for? 1021 MR. ROWAN: That is correct. 1022 MR. O'LEARY: Fourth bullet: 1023 "Review the auditor's final draft and final reports." 1024 That's what you're looking for as well, isn't it, sir? 1025 MR. ROWAN: That is correct. 1026 MR. O'LEARY: And then we look at see at paragraph 5 that: 1027 "All members of the audit committee will make a good faith attempt to achieve a consensus or a substantial consensus." 1028 You'd will agree with me that there is no evidence that Enbridge Gas Distribution will not conduct itself in a good faith manner? 1029 MR. ROWAN: There is no evidence. 1030 MR. O'LEARY: So therefore it was inappropriate to even raise the names of Enron, WorldCom and Tyco? 1031 MR. ROWAN: No, not at all. 1032 MR. O'LEARY: Not at all; all right. 1033 MR. ROWAN: In the context in which I raised them. 1034 MR. O'LEARY: Those are our questions, Mr. Chair. 1035 MR. BETTS: Thank you, Mr. O'Leary. 1036 Any questions from Mr. Moran? 1037 MR. MORAN: It's always risky to ask a lawyer twice, Mr. Chair. 1038 I have actually one question. 1039 CROSS-EXAMINATION BY MR. MORAN: 1040 MR. MORAN: You indicated, Mr. Rowan, that in your view a facilitator wasn't necessary, in your view, for running the meetings; right? 1041 MR. ROWAN: That is correct. 1042 MR. MORAN: But you went on to say that if a facilitator was necessary in the Board's view, that the facilitator should be independent, appointed by the OEB, and have no financial or other links to either Enbridge or intervenors; right? 1043 MR. ROWAN: That's correct, yes. 1044 MR. MORAN: Who would pay for the facilitator? 1045 MR. ROWAN: I'm sorry? 1046 MR. MORAN: Who would pay for the facilitator? 1047 MR. ROWAN: I would imagine the company would pay for it in this. 1048 MR. MORAN: Is that not a financial link? 1049 MR. ROWAN: If it were a charge that the OEB made of the company and that the actual remuneration came from the OEB, then there would not be that link. 1050 MR. MORAN: Thank you. 1051 Those are all my questions, Mr. Chair. 1052 MR. BETTS: Thank you. 1053 Any redirect, Mr. MacOdrum? 1054 MR. MacODRUM: Just one area, Mr. Chairman. 1055 RE-EXAMINATION BY MR. MacODRUM: 1056 MR. MacODRUM: Mr. Rowan, in your discussion with Mr. Poch, you indicated that you felt -- agreed with him that the consultative process should Act in a productive and cost-effective manner; is that correct? 1057 MR. ROWAN: Yes. 1058 MR. MacODRUM: Now, I want you to turn to the draft and minutes that were distributed of the consultative meeting of November 22nd, 2002. 1059 Have you got that -- those minutes, the cover page? 1060 MR. ROWAN: I'm not quite sure what I did with it. 1061 Yes, I do. 1062 MR. MacODRUM: Mr. Rowan, would you agree with me -- you can even do this subject to check -- that there are 18 persons with the name "Enbridge" beside them attending this meeting? 1063 MR. ROWAN: Subject to check, yeah. 1064 MR. MacODRUM: Including Mr. Dennis O'Leary, who you've mentioned; is that correct? 1065 MR. ROWAN: Yes. 1066 MR. MacODRUM: Those are all my questions, Mr. Chairman. 1067 MR. BETTS: Thank you. 1068 QUESTIONS FROM THE BOARD: 1069 MR. DOMINY: A very clarifying one, and the problem is you may have already answered this in your last appearance, sir. I have difficulty in tracking. 1070 But I know that CME did not sign onto the settlement agreement on the areas of 9.5 and 9.4, and I was wondering in terms of 9.5, was your difficulty with the audit process statement that's in that purely related that -- to the audit committee membership and selection? Is that what the focus of your non-acceptance of that settlement is? 1071 MR. ROWAN: Let me just turn to that, if I may. 1072 MR. DOMINY: It's pages 75 to 77 of the Exhibit N.1, tab 1. 1073 MR. ROWAN: I think that's a fair statement. 1074 MR. DOMINY: So essentially it's that paragraph that -- the two paragraphs there is where your difference or concern with this settlement is. 1075 MR. ROWAN: With this particular settlement, yes. 1076 However, having said that, we thought it was important that the issue of a whole audit process be heard by the Board rather than being encapsulated in a page and a quarter or so or two pages, that there were issues here that the Board should hear and understand before it came to its decision as to what were the right ways to proceed. 1077 MR. DOMINY: I understand that, but if I was to put the question that if one -- if we -- if the audit committee membership and selection process was changed, and in light of the discussion that has taken place, so that the Board has a better understanding what the audit process is about, which is what I think you've just told me, would you find that the settlement agreement would be acceptable with changes to that section -- in this section on the audit process? 1078 MR. ROWAN: I think that that's a fair statement, yes. 1079 MR. DOMINY: Thank you. 1080 And coming back, then, to number 9.4, again, it's a question of recall, and I was trying to skim the transcript while you were answering examination, but I couldn't determine which are the particular elements in 9.4 which you would flag as the areas in which you have difficulty in agreement? 1081 MR. ROWAN: Let me, before I answer that, Mr. Dominy, be clear that if this 9.4 is to supersede all of the other evidence that Enbridge has put forward in terms of the various consultants' reports, then -- if that's what you mean, and that this would be the procedure that would be followed from here on in, is that the -- 1082 MR. DOMINY: I'm just asking to try and get a better understanding of what the areas of your concern are related to this particular agreement -- this particular settlement proposal. 1083 MR. ROWAN: Well, I'm hesitating in answering that, because I'm not certain whether -- if this, then, takes all of the consultants' recommendations and reports that have been entered into evidence and that they'll never be looked at again, and this now becomes, if you will, the protocol for future DSM consultatives, if that's the -- and if you're asking me that question, then I will look through it and I would try to identify if there are any, where the areas of concern are. Because what I wouldn't want to have happen is that the DSM consultative would then go back and look at all of the recommendations that had been made by the consultants and then come up with procedures for how they should go on from this point forward. 1084 MR. DOMINY: I think, Mr. Rowan, perhaps in the interests of time, my best bet would be to say that I assume that in the context of argument if there are specific aspects of this protocol that you are uncomfortable with, that they will be highlighted, or changes that you would propose for this protocol. 1085 MR. ROWAN: Yes. 1086 MR. DOMINY: Thank you, Mr. Rowan, those are the questions I have. 1087 MR. BETTS: The Board panel has no further questions. 1088 Mr. MacOdrum, any need for redirect on those questions? 1089 MR. MacODRUM: No, Mr. Chairman. 1090 MR. BETTS: Thank you, then. That concludes our need for this witness and we thank you very much, Mr. Rowan, for participating in this process. 1091 It would appear to me that we are close to adjourning this session. Are there any items that should be discussed with the panel before we do that? 1092 MR. O'LEARY: We have two answers to undertakings, Mr. Chair, that we'd like to file at this time. 1093 MR. BETTS: Thank you, Mr. O'Leary, let's do that. 1094 MR. O'LEARY: The first is a response to Undertaking J.9.2, which was to file a copy of a document entitled "One Company, One Vision". The second is Undertaking J.10.2 which is to provide a list of significant acquisitions and divestitures of investments that Enbridge has participated in the last three years. And we've have the requisite number of copies and we will be leaving some at the back of the room as well. 1095 MR. BETTS: Thank you, Mr. O'Leary. Anything else for Board consideration prior to our adjournment tonight? 1096 Then we will adjourn at this point and we will reconvene tomorrow morning at 9:30 am in this place. And we will, I believe, receive Mr. Neme's and perhaps, Mr. Poch, I've heard that name pronounced so many different ways since I've been here. 1097 MR. POCH: You do pronounce the last E, as I understand it, "Neme". 1098 MR. BETTS: Thank you. That way I won't have to embarrass the gentleman tomorrow. So thank you very much for that clarification. At this point we will adjourn. 1099 --- Whereupon the hearing adjourned at 3:20 p.m.