Rep: OEB
Doc: 12NBD
Rev: 0













ONTARIO ENERGY BOARD

Volume: 16

16 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
16 APRIL 2003

5
HEARING HELD AT TORONTO, ONTARIO


6
APPEARANCES

7

PAT MORAN

Board Counsel

COLIN SCHUCH

Board Staff

SUZANNE TONG

Board Staff

DENNIS O'LEARY

Enbridge

HELEN NEWLAND

Enbridge

ROBERT WARREN

CAC

SUE LOTT

VECC

DAVID POCH

GEC

MURRAY KLIPPENSTEIN

Pollution Probe

JACK GIBBONS

Pollution Probe

MARK MATTSON

Energy Probe



8
TABLE OF CONTENTS

9

PRELIMINARY MATTERS:

[16]





GEC PANEL ON ISSUES 9.1 TO 9.6: NEME:

[29]




EXAMINATION BY MR. POCH:

[30]





CROSS-EXAMINATION BY MR KLIPPENSTEIN:

[190]





CROSS-EXAMINATION BY MS. LOTT:

[303]





CROSS-EXAMINATION BY MS. NEWLAND:

[354]





CROSS-EXAMINATION BY MR. O'LEARY:

[393]





CROSS-EXAMINATION BY MR. MATTSON:

[438]





CROSS-EXAMINATION BY MR. WARREN:

[593]





CROSS-EXAMINATION BY MR. MORAN:

[719]





QUESTIONS FROM THE BOARD:

[793]






PROCEDURAL MATTERS:

[856]





DECISION:

[883]





10
EXHIBITS

11

12
UNDERTAKINGS

13

14
--- Upon commencing at 9:39 a.m.
15
MR. BETTS: Thank you, everybody. Please be seated.

16
PRELIMINARY MATTERS:

17
MR. BETTS: Good morning, everybody. Again, welcome back to this hearing and day 16 of this hearing.

18
Just a couple of preliminary announcements. First, the Board is to issue its oral decision on EnTRAC after lunch today. We do need some time to just finalize that decision, but certainly, this afternoon it will be delivered.

19
Secondly, we would ask the parties that are here at least to take some time during the day to consider a schedule for arguments. To assist you in that, we just wanted you to know that the Board is quite flexible. Certainly, there's time issues that I'm sure all of you will work towards minimizing, anyway, but we are prepared to consider arguments either written or oral or a combination of written or oral. That would be -- certainly it would require the agreement of the parties to do that.

20
And Mr. Dominy and I are even prepared to accept oral arguments -- Mr. Dominy is prepared to accept oral arguments in his absence if there is any benefit to that and if you agree to that and if the schedule supported it. But again, we are most interested in having complete arguments to support this decision, so that's the primary concern.

21
I think with that, and before we swear in the first witness panel, I will ask if there are any preliminary matters to be considered by the Board.

22
There seem to be none.

23
So Mr. O'Leary -- it is not Mr. O'Leary, it is Mr. Poch. Is this the opportune time to swear in your panel, or would you like to introduce him?

24
MR. POCH: I would like to introduce Mr. Chris Neme and ask that he be sworn.

25
MR. BETTS: Thank you, Mr. Poch, and welcome, Mr. Neme.

26
C.NEME; Sworn.

27
MR. BETTS: And the witness has been sworn in.

28
Mr. Poch, please continue.

29
GEC PANEL ON ISSUES 9.1 TO 9.6: NEME:

30
EXAMINATION BY MR. POCH:

31
MR. POCH: Mr. Neme, you are the author of Exhibit L tab 10, a review of Enbridge Gas Distribution fiscal 2003 DSM proposals?

32
MR. NEME: Yes.

33
MR. POCH: And you adopt that as your evidence in this producing?

34
MR. NEME: I do.

35
MR. POCH: And the interrogatories bearing GEC as -- were prepared by you under your direction?

36
MR. NEME: They were.

37
MR. POCH: And you adopt them as your evidence in this proceeding?

38
MR. NEME: I do.

39
MR. POCH: Your curriculum vitae is attached as appendix B to your evidence, you are the director of planning and evaluation at Vermont Energy Investment Corporation.

40
MR. NEME: Yes.

41
MR. POCH: Known as VEIC. You are an economist, practicing for over 15 years in analysis of utility resource planning; is that correct?

42
MR. NEME: That's correct.

43
MR. POCH: As part of your work, I understand you are director of consulting services of VEIC?

44

MR. NEME: Yes, that's correct.

45
MR. POCH: What kind of consulting does that entail?

46
MR. NEME: A variety of different things. We do an analysis of efficiency renewable energy measures. We do analysis of the markets for those measures, assessments of their potential, assessments of their cost effectiveness, assessments or assistance with the design of programs to capture a portion of that potential assistance to folks who are running those programs and refining their implementation to make it more effective. And at the back end, we do some evaluation planning and evaluation -- actual evaluation of some of that work.

47
MR. POCH: How big an organization is VEIC?

48
MR. NEME: VEIC is currently about 80 individuals.

49
MR. POCH: And I take that that some of those individuals are involved in actually delivering DSM programs in Vermont.

50
MR. NEME: The majority of them. We have -- three years ago, VEIC won a contract let by our Public Service Board which would be analogous to the Ontario Energy Board, and when the created a state-wide efficiency utility and took responsibility for managing efficiency programs away from the utilities, they put that responsibility out to bid. We bid and won that bid, and so for the last three-plus years have been implementing all of the state-wide electric efficiency programs in the state.

51
MR. POCH: I understand VEIC is a non-profit corporation.

52
MR. NEME: We are.

53
MR. POCH: You've given expert evidence before this Board in Ontario on past occasions on gas.

54
MR. NEME: On numerous occasions, yes.

55
MR. POCH: And you've done so in other jurisdictions?

56
MR. NEME: Yes, I have.

57
MR. POCH: And from your CV I see you routinely are an invited speaker on issues such as DSM planning and evaluation.

58
MR. NEME: Yes, that's correct.

59
MR. POCH: Thank you.

60
Mr. Chairman, I would ask, subject to any questions anybody might have, that my witness might be accredited as an expert witness in this proceeding on DSM analysis and planning.

61
MR. BETTS: Are there any questions?

62
There appear to be none, and the Board is quite satisfied with the witness's credentials. Thank you.

63
MR. POCH: Thank you, sir.

64
Mr. Neme, first of all, are there any updates, clarifications or corrections to your testimony?

65
MR. NEME: Yes, two. First, and I believe this has been filed already and circulated to the various parties, there were updates to table 1 and figure 1 on the first two pages of my testimony, as well as the text on those pages that refers to those tables. And that -- those updates are associated with revisions to the fiscal year 2003 savings, net benefits, and so on that flowed from the partial settlement agreement in the ADR process. We use -- or I updated those numbers to replace the ones I had previously had in my testimony which were based on earlier information. So that's one change.

66
The second thing that I wanted to note was that -- see if I can find the page here. On page 14 of my testimony where I talk about a number of different reasons to support clearance of the 2000 and 2001 SSM and LRAM consistent with the partial settlement agreement, one of the several reasons that I suggested be used or would support that position was the interpretation I had at the time of reading the 1999 ADR settlement agreement.

67
And I have to say that after having some of the transcripts of the discussions with other witnesses prior to my arrival, and having reread the 1999 ADR settlement agreement several times, that I now find it a lot more ambiguous than I did when I first drafted my testimony.

68
I'll leave it at that.

69
MR. POCH: All right. Now, could you -- you were referring a moment ago to table 1 and figure 1. Can you tell us what the point of those tables and figures are and whether they are in dispute in any way in this proceeding.

70

MR. NEME: Sure. It is my understanding that they are not in dispute. I have -- well, I haven't read every word of every transcript. I am unaware of any challenge to the numbers presented in those tables.

71
The purpose that I had in mind in putting them into my testimony in the first place was to make sure that in discussing a lot of, kind of, important and perhaps to some people arcane details about how the process works, to make sure we don't lose sight of the big picture. And I guess I would flag a couple of things in that regard.

72
First, that we are talking about over the course of the last number of years that Enbridge has been running DSM programs net benefits to the consumers and to the Ontario economy of over $500 million, quite substantial for spending for a company of less than 70 million. Second, that there are significant environmental benefits that accrue as well that haven't been monetized. Third, that the benefits are growing faster than the costs, substantially faster than the costs. And fourth, that virtually every Enbridge consumer -- well that may be a little bit too strong. A significant majority if not an overwhelming majority of Enbridge consumers have participated in at least one program or with at least one efficiency measure since Enbridge began delivering DSM.

73
And that's important, because it's a critical way of -- one of the -- perhaps the most critical way for mitigating any concern about rate impacts to the extent that there are any such concerns associated with lost revenues, which is the primary driver, if not the exclusive driver in any rate impacts, is to make sure that all consumers get a chance to participate. Even if rates go up slightly, if everyone is participating their bills ought to be going down.

74
So that's part of the -- that's part of the big picture here that this is overall -- what's been happening with DSM is a very good news story.

75
The second kind of critical component to this is that the SSM mechanism that's been in place is critical to that success. If you look -- if you were to bifurcate the tables I present and look at the years prior to when the SSM was adopted and then the years after the SSM was adopted, you'll see dramatic differences both in terms of whether Enbridge met its target and in the magnitude of the savings and net benefits.

76
And then the last thing that I think is critically important to keep in mind here as we discuss all the different issues on the table is that there remains enormous, untapped efficiency potential that ought to have several times greater, maybe even orders of magnitude greater, net benefits possible for consumers.

77
MR. POCH: Mr. Neme, in referring to the greater that $500 million in net benefit, there's been some debate about the free-rider rate and custom projects and the significance of it in evaluating that for the year 2000. How have you treated that in this table?

78

MR. NEME: In this table, for the years 1999 through 2002, we wanted to be conservative -- I wanted to be conservative when I was developing the table and I made sure that the calculations for those four years reflected a free-rider rate of 48 percent, which is what the auditor for the 2000 fiscal year essentially recommended was appropriate.

79
MR. POCH: So to the extent we have heard evidence that the free-rider rate may be lower than that, the consequence is --

80
MR. NEME: To the extent that the free-rider rate is lower than that, the $546 million that are in my table would go up.

81
MR. POCH: Thank you. Now, further with respect to those values, could you indicate to the Board what your confidence is in that, in the numbers?

82
MR. NEME: Sure. I guess in big-picture terms, I would start by saying that my view of the $546 million number here is that is very conservative, and I say that for several reasons.

83
First, there is -- well, there was an attempt on my part -- is the example we just got into earlier with respect to custom free riders, to incorporate as many conservatisms in the assumptions as -- regarding measure costs [inaudible] as possible, most of which came out of a fairly rigorous evaluation and auditing process associated with the fiscal year 2000 Enbridge plan.

84
In that process I recommended to the audit committee, and they accepted my recommendation, to hire a firm and an individual who I consider to be the pre-eminent expert in the country -- or on the continent on these kinds of programs and efficiency measures.

85
And building on, you know, a wealth of knowledge that's been developed all over the place over the last 20 years of DSM experience, she critically reviewed the various -- you know, there are hundreds of inputs that are embedded, ultimately, in any DSM portfolio savings claim and net benefits claim. She reviewed those or at least all of the most important ones, identified a few where revisions were appropriate, and presumably numerous others where they -- where there was no reason to cause -- to question them.

86
So because it's gone through that kind of rigorous review, that's one reason I would suggest -- and I've adopted any kind of significant revisions that she suggested, that's one reason I'd say that they are at least relatively accurate.

87
Then that's kind of abounding the lowland, if you will.

88

On the other hand, I'd guess I'd say that there are a number of reasons to think that the number, in reality, ought to be higher. The first one is that the net benefits that are shown here for each year were calculated using the avoided costs that the company was using at the time in each of those years. The current avoided costs for gas are generally higher than they were in previous years, so if you were to value previous years' efficiency investments based on current years' avoided costs, you'd come up with numbers for each of these years that are higher than the numbers that are currently in the table.

89
The second thing I'd suggest is that the avoided cost that the company is using and upon which these estimates are predicated, in my view, are conservative. For example, they do not currently account for any potential deferred investment in pipes. Probably even more importantly, they don't account for a number of risk-mitigating benefits associated with efficiency assessments that are starting to be recognized in other jurisdictions, and we're just kind of only at the beginning of this process.

90
But in California, for example, with the electric utility sector, my understanding is an analysis has been done looking at the effect of efficiency in reducing price spikes at the time of system peak, and found that the benefits in reducing the effects of those price spikes, the efficiencies benefits in reducing the effects of those price spikes that accrue to all consumers whether they participate in the program or not may be worth twice as much as all the other avoided cost benefits combined. That's a different jurisdiction and it's a different fuel, but there's no reason in principle why some element of that wouldn't apply to Enbridge gas as well.

91
There are other risk-mitigating benefits of energy efficiency which are also not captured like reducing the risk of gas price volatility in the future, reducing the risk to consumers, that is, reducing the risk of the costs of compliance with future environmental regulations and so on.

92
So this -- this kind of -- all of -- as any business will tell you, there is a cost associated with risk and therefore, if you mitigate risk, there's a benefit that accrues. Those benefits are not currently captured in Enbridge's avoided cost, and I don't want to suggest that Enbridge is, you know, unique in that case, because they aren't. There are a number of jurisdictions that are only beginning to grapple with this, but it is potentially non-trivial and, in fact, it could potentially lead these numbers to be several times greater than they were presented in the table in my evidence.

93
MR. POCH: All right. You paint a nice picture. Are you suggesting that nothing needs to be changed?

94
MR. NEME: No, I'm not. In fact, my evidence recommended several changes. First, I recommended that for fiscal year 2003 we adopt a different SSM mechanism that should have benefits to both the company and consumers. I also suggested a process for all of the parties involved to explore, perhaps, more fundamental change in the SSM mechanism for future years. And finally, I suggested that there's a need for clarity from the Board on the rules that govern how the SSM gets calculated so that many of the issues that we've been grappling with here can be avoided in the future.

95
MR. POCH: Let me just ask you -- interrupt you and ask you if the -- given the partial settlement that has come about since the time you wrote your evidence, if the Board were to approve that settlement, would that satisfy or reflect -- does that settlement reflect the recommendations you've made that you've just referred to?

96

MR. NEME: Yes. I think the settlement agreement embodies pretty much my recommendations with respect to the change, the interim change for 2003 with respect to a different SSM structure, and it also provides the clarity I was referring to with respect to the rules for calculating SSM awards.

97
MR. POCH: Your proposal to modify the SSM structure to one where Enbridge Gas Distribution received a gradually decreasing percentages of net benefits has been, as we've just spoken of, have just been incorporated largely into the partial settlement agreement. Why do you believe this is the appropriate way to go?

98
MR. NEME: Several reasons. First, I think it's critical that any incentive mechanism that we adopt send the right signals to the companies in terms of the outcomes that we wanted to achieve and that we be very careful that it doesn't create any potentially perverse incentives. And I think that this mechanism satisfies that kind of most fundamental test.

99
It provides a reward for the company to generate economic benefits to consumer, ratepayers and the economy over and above a target, pure and simple; that's all it gives an incentive for.

100
Having said that, I believe it also -- in the way it deviates from the way the SSM has been calculated in the past reduces risk to both the company and ratepayers. On the company's side, there's no risk of a penalty for underperformance. On the ratepayer's side, the marginal incentive that we're giving the company would be substantially lower than it is currently, particularly as they get deeper and deeper into the savings pool, or put another way, as they get further and further above the target.

101
Actually, I'll add one last thing. I think that it's also -- it strikes, to me, the right balance between being rich enough, if you will, to get enough of the company's attention to go after the substantial economic benefits that are there to be had for ratepayers and consumers, while at the same time not paying them more than is really necessary to persuade them to do that.

102
MR. POCH: IGUA has proposed an alternative approach that would cap the SSM. In fact, it would be a "get past the target and you get it" approach. And the value you get is the product of the equity return, approved equity return rate from time to time, and the DSM O&M budget from time to time. Can you comment on that proposal?

103
MR. NEME: Yes, I have a couple of concerns about that proposal. First, it suffers from one of the perverse incentives I noted earlier in that since it's a rate of return on spending or it's an incentive tied to the amount of spending, it provides a perverse incentive to the company to increase spending for the sake of increasing spending, which is not something we want to do.

104
Secondly, and probably more importantly, it confuses the purpose of a rate of return on equity. DSM O&M spending is not equity. And very much related to that point, the purpose of the SSM is very different from the purpose of the rate of return on equity.


105
The purpose of the SSM, or any other reward mechanism, whatever you want to call it, is to induce the company to get enough of the senior management's attention at the company to invest in capturing as much of the efficiency potential that's out there as is reasonable, because it has such enormous benefits to consumers on the one hand, but on the other hand there are - and again Enbridge is not unique in this case, this is true of most utilities in my experience - there are - not all utilities - there are kind of inherent barriers, cultural and otherwise, within utilities to pursuing efficiency that effectively reduces their throughput.

106
So as I understand IGUA's proposal, they would essentially provide an incentive for meeting a target of something on the order of a million dollars. If you look at what the company got in 1999 as well as for the moment just accept the -- what's on the table for the settlement agreement for 2000 and 2001, they've been getting incentives on the order of $4 million. So that would be about a 75 percent reduction in incentive to the company.

107
75 percent or $3 million in total. Now, as an economist, I would suggest that a $3 million savings to consumers is a good thing as long as it doesn't result in more than a $3 million reduction in benefits to consumers somewhere else. If you squeeze the balloon one place it pops up somewhere else.

108
And the company has estimated or the settlement agreement has suggested -- the partial settlement agreement had suggested that the fiscal 2003 plan would get $127 million in net benefits to consumers.

109
So if you think that reducing the incentive to the company from something on the order of 4 million to 1 million would not result in a reduction in the net benefits from the efficiency investments of the company of -- going from 127 million to less than 124 million then it may be a good deal.

110
I, personally, have a hard time -- now this is somewhat of an art and not a science, but I personally have a tough time buying the argument that a 75 percent reduction in the company's incentive will result in a less than 3 percent reduction in the net benefits that the company is able to generate from its investment in efficiency programs.

111
MR. POCH: Just for clarity to the record, if they did in fact earn a $4 million SSM, that would imply, would it not, that the TRC would be higher than 127?

112
MR. NEME: That's correct.

113
MR. POCH: One question that occurs to me arising out of your comments just now in terms of the perverse incentive effect of the IGUA proposal, does the SSM proposal in the settlement agreement incent cost effectiveness in O&M spending?

114
MR. NEME: I'm sorry, say --


115
MR. POCH: That's the danger of going off script, Mr. Chairman.

116
I'm just wondering if the SSM proposal, as structured in the settlement agreement, provides an incentive for the company to be cost effective in its O&M spending. Try to --

117
MR. NEME: Sure, sure. And the reason for that is that the company gets -- the company's incentive is a function of net benefits, over and above the target. And if the target is 127 million and they achieve net benefits of 137 million, they get a fraction of that $10 million increment.

118
Part of the net benefits calculation is how much they spend on O&M, so to the degree that they can acquire the same level of savings and benefits on the one side at lower spending levels and therefore lower costs on the other side, there is a -- you know, if they can acquire the same level of savings for $1 million less of spending, they get a share of that $1 million savings. It goes to the shareholders.

119
MR. POCH: Turning to the 2000 and 2001 SSM issues, can you summarize why you believe the partial ADR settlement for the 2000 and 2001 SSM is fair and reasonable?

120
MR. NEME: Yes. Well, I'll first start by saying that depending on where you're -- where you're starting from in terms of the different numbers the company has put on the table, the $8.1 million that's part of the partial settlement agreement represents anywhere from 60 to 70 percent reduction of the company's original proposal, something in that neighbourhood.

121
Secondly, and more importantly, more to the point, I think that the only way one could objectively get to an SSM reward that would be less than that would be to basically take all of the changes to savings, calculations, that have been put on the table and that, you know, one could imagine potentially were part of the that settlement discussion - I was not personally involved in all the details of that settlement discussion - and then also suggest that the free-rider rate for custom projects be 48 percent, that the auditor found, be applied to calculations of actual benefits, but not retroactively offer represent retrospectively also applied to the budget. And the effect of that is essentially to penalize the company for poor performance on custom projects.

122
In my view, adopting that perspective that -- that we're going to treat custom projects as if they have a negative impact on the SSM calculation because of an application of rules of using 48 percent for actuals and the old budget numbers for the budget would be unfair.

123
MR. POCH: Could you expand on why that would be unfair in the context.

124
MR. NEME: I -- there are several reasons. First, the 5 or 10 percent numbers that were used in the budget were, in all honesty, somewhat pulled out of the air. There was no market data available upon which to base them at the time that they were developed.

125
And I don't think any party, myself included, that's been close to the deliberations that have been part of this proceeding and also a number of previous proceedings have ever really anticipated that the free-rider rate, once it was subject to somewhat rigorous evaluation, would approach anywhere as high as the number that the auditor for 2000 came up with.

126
The second point I'd make is that, as I noted earlier, the 1999 ADR agreement, which is the only document that we have that presents or attempts to present the rules that will be used to determine how calculations of SSM rewards will be conducted, is ambiguous at best. I have to say I've read it, I've reread it, I've read it again, and every time I reread it something else pops up to me that suggests, you know, additional conflicting interpretations. It's very unclear. It's ambiguous.

127
The third thing I'd say is that if you are going to suggest, as some others have, that the company should, for purposes of the SSM calculation, use actual numbers for free riders and budget -- in the calculation of actual savings, but the budget numbers for the purposes of pivot point so you have an asymmetrical application of information, if you're going to argue that, then that argument needs to be premised on the notion that the company has control over free riders and custom projects.

128
And I'll start by noting that -- and this was the auditor herself noted this, that something on the order of a third of all custom projects become projects not through contact that the company initiates with the company, but through contact that trade allies like HVAC contractors and so on initiate with customers. It's hard to imagine on a participant-by-participant basis how one would suggest that the company has control over whether free riders get enrolled or not when, you know, the HVAC contractor is the one that's bringing them into the program. So that's for that portion of the participants.

129
Fourth, I guess I think it's worth suggesting that there is no evidence on the record that I'm aware of to suggest that the company actually actively recruited free riders. And I guess the last thing I'll say, and in some respects this may be the most important point, is that the more I've thought about this, the less clear it's become to me that on a participant-by-participant basis it's really possible to screen out and control for free riders. That the ability to control for free riders is much greater with respect to changes in program design than it is with respect to being able to identify folks up front.

130
Very few customers approach the company with, you know, free rider stamped on their forehead, and it's -- there are -- there are some who probably do, not quite in that way, but close enough, but they are likely to be a very small number, at least in my experience, after having had conversations with a variety of folks that deliver these kinds of programs.

131
So to kind of summarize all of that, assessments of free riders are a somewhat complex processes. This is not an easy thing to get one's head around and, in fact, really the best we can do is make sure that we have someone who is intimately familiar with the nuances and intricacies of how one tries to identify free riders, and that means an evaluation expert. And those evaluation experts typically have several series of questions that try to get at that question for individual participants that they talk to in several differ ways so that they have several different checks on what they're getting.


132
And even then, I think any evaluation expert will tell you that it is highly likely that the conclusion that they draw with respect to one participant is likely to be inaccurate for some portion of them, and they ultimately rely on the fact that they have a large enough sample of 50 or 100 or however many folks that they talk to, that on average that the incorrect answers balance each other out and they have a statistically reasonable basis for drawing conclusions.

133
That's not something that the company can easily do on a participant-by-participant basis or that we would even want them to do on a participant-by-participant basis as they're implementing programs.

134
MR. POCH: Just with respect to that, then, there have been a couple of proposals that the company should prescreen individual applications. Can you just relate your comments now to that proposal?

135
MR. NEME: I think that that would be foolhardy.

136
Again, it's very difficult to assess that up front. And in fact, one of the things that the company, or any company that's trying to influence investments in efficiency on the part of businesses, one of the fundamental things that they need to do to be successful in my opinion - and my organization has been wrestling with this for the last several years - is to find ways to earn the confidence of the businesses, to develop a relationship with them. So that even if you don't get -- even if you don't succeed in getting an efficiency investment this year or if you succeed in convincing them to do something small that may not have been worth your time now, you're building a relationship for the future, so that two years from now maybe you can actually get them to do something.

137
To suggest that the company should then be asking a bunch of questions that in some respects put them in an antagonistic position to the business would undermine their ability, I think, to develop the kind of effective relationships we want them to develop and result in foregoing a lot of cost-effective DSM that we don't want them to forego.

138
I think that's one of the -- the fundamental problems with the notion that you can and/or ought to try screening these things up front.

139
The other thing I'd suggest which is just as important is that even if you tried, customers aren't stupid and they'll fairly quickly figure out that the answers to the questions you're giving them will determine how much help you're going to give them. And not only will you put the company in an adversarial position with respect to their customers, you'll be getting biased answers back.

140
MR. POCH: I understand that last summer you articulated a different position on whether the company had some control over custom project free ridership, at least with respect -- not with respect to the 30 percent of the programs delivery by ESCOs, but by the 70 percent. Is that true, and if so, what changed?

141

MR. NEME: It is true. At the time we were having those discussions last May, June and July, I had been talking with a couple of program managers within my own organization. With respect to the efficiency programs we run in Vermont, my role has historically been at a relatively high level in terms of providing guidance on program planning and the way they ought to design programs and implement them, and other folks have been much more responsible for the actual on-the-ground implementation.

142
And I had several -- at the time we were having these discussions within the audit subcommittee, I had a couple of program managers, coincidentally at that time, approach me with questions like, "I have a customer who wants to make some efficiency investment. They're going to make an efficiency investment, they've told me. Can I give them an incentive?" Actually I even had one or two questions that said, "The customer has already made an efficiency investment and they want my incentive. Can I give it to them?"

143
Those questions infuriate me a little bit within the context of my own organization because no one should be asking them in the first place. If someone has already made an investment, why are we putting money on the table for them?

144
And I think that my judgment at the time that the company had control over free riders was influenced by those internal conversations I was having within my own organization.

145
Subsequent to that, a couple of things changed. One is that I decided to probe internally within my own organization the degree to which these problems were arising. And when I did that, I found out that while they do periodically come up, they come up in a -- they come up much less frequently than my limited, kind of anecdotal experience over the course of several weeks seemed to suggest.

146
And so, you know, my own personal suspicion, and I don't know this for a fact, that the company has experienced some of this, but if they're anything like my organization, they've experienced -- those experiences are by far the exception rather than the rule.

147
The second kind of critical point I would raise is, at the time I was thinking about this in the audit subcommittee, does the company have control over free ridership and custom projects, I was focusing very hard on the term "custom." In my mind, when I think of custom DSM measures or custom projects I'm thinking of things that are usually very unique, either unique to a particular process or particular business, or almost unique. So that you'd -- you'd hardly -- you'd -- you might do them once a year, or maybe not even that often, or maybe a couple times a year.

148
And that's kind of important, because those rare cases, what I would call, you know, truly custom applications, to effectively interact with a customer on those you really need to do a lot of work to understand their business, their operations, how they work, what those custom applications might be, because you don't have them in the can. They are very specific and specifically applied to a unique set of circumstances.

149

The more you have to get into understanding how the customers' operations work, the more -- the greater the likelihood you are going to understand the customers' motivations as well and that gets to, you know, the question of being able to identify whether they're a free rider up front.

150
As it turns out, much of what the company was calling custom measures at the time, in retrospect, I would not call it custom. I kind of wish we had sorted this out years ago, but we didn't. We're talking about large boilers. Large boiler was called custom measure. The only difference between a large boiler and a small boiler, which we call prescriptive, is that a large boiler is larger.

151
Well, I take that back. That's not entirely true. There are some other differences in terms of the barriers, the market barriers to their adoption -- the adoption of efficiency measures, because the customer segments are a little different. The residential market barriers are a little different than commercial.

152
But nevertheless, it is a relatively well-understood technology. It's something that's purchased, you know, many thousands of times annually, probably, across the province, or at least hundreds of times every year among -- when you consider all the different businesses that are out there.

153
It's -- and the mechanisms that the company ought to have for promoting investment in efficient boilers, I would presume, are relatively standard. It's an easy thing to explain to the customer how much it's going to save them, how much it's going to cost you. You don't need to understand nearly as much about the customer's business operations as you would for what I would consider a truly custom project, and as a result, you are less likely to get far enough into the nuances of the customer's motivation to be able to determine up front whether they are a free rider or not.

154
I'll say two other -- those are really the big things for me. There are two other things just worth noting in passing. One is that the free-rider rate that was estimated by the auditor for the 2000 SSM application intentionally, I think largely at the behest of Mr. Rowan, tried to get at customers' perceptions of where gas prices were going and to account for that in determining whether they were free riders or not.

155
And I guess I would just make the point that to the extent gas prices were changing or that there was an expectation that gas prices were changing, that's something that none of us could suggest that the company has significant control over.

156
And then lastly, there's been a lot of focus on free riders and appropriately so, but one thing we haven't talked at all about is the concept of spillover or free drivers. And that is customers who adopt an efficiency measure because they were indirectly influenced by the company, but did not receive an incentive or have the kind of interaction with the company that would enable the company to even know that they've made that adoption because of their efforts. And therefore, their savings aren't logged as part of the record.

157

And increasingly in other jurisdictions, people are not even talking about free riders, they are talking about net-to-gross ratios. And net-to-gross ratios means accounting for both free riders on the one hand and free drivers on the other hand. And once you kind of account for both of effects, you have a net-to-gross ratio that represents the combined effect of those two factors. We've only looked at one.

158
So for all of those reasons, and getting as well back to the point I made earlier about it being -- that most of the control that I believe the company has over free ridership is associated with program designs that are known up front rather than the ability to single out individual customers who may be free riders. As I've thought more and more about this, I've readily acknowledged that I think I've made an error in the position I was taking last year.

159
MR. POCH: Another matter that came up in the course of the hearing for the first time was what this Board should do about the rules for 2002, given that this problem will hang over into the 2002 year. Could you comment briefly on that, any recommendations you might have?

160
MR. NEME: Sure. I think it's a legitimate concern. It would be really nice for the collective grand "we" here to catch up on the process here and have a -- as quick as possible, a resolution to the 2000 SSM issue. And I guess the guidance I would give to the Board with respect to that would be that we need some rules. And my suggestion would be to apply what has been called the no-no principle to prescriptive measures, and that is that we use the budget values for both the budget -- point calculation and for the actuals, just as has been proposed in the settlement agreement for 2003.

161
I acknowledge Mr. Rubin's point that reasonable people can disagree about whether no-no or yes-yes is the right way to go. I personally prefer no-no. In any case, whatever is done should not be asymmetrical with respect to prescriptive measures.

162
Then with respect to custom projects, my recommendation would be to simply delete them altogether. Don't count any benefits or -- don't make them contribute in an either positive or negative way. And I don't know, without having seen any of the results of 2002, I don't know which way they skew the result, and that's probably a good thing, because I'm making a recommendation without knowing the outcome of my recommendation, but take them off the table.

163
MR. POCH: By that, you mean suspend the application of the SSM to custom projects --

164
MR. NEME: That's correct.

165
MR. POCH: -- for purposes of 2002 SSMVA?

166
MR. NEME: That's correct.

167
MR. POCH: Finally, may I ask you: Is the devil in the details and the calculation of the SSM, and if so, is the contentiousness of this proceeding inevitable and likely to be repeated every year?


168
MR. NEME: Let me start by saying that the details are important, but in my view, and I think that this proceeding has demonstrated this quite adequately, at least as far as what I can tell from reading the transcripts thus far, the policy framework is more important.

169
And to the extent that this proceeding can shape the policy framework in a positive way, and in particular by providing clarity on how the rules will -- what the rules will be for calculating the SSM, as well as striking the right balance between rewarding the company -- providing an incentive for the company to pursue DSM but not too much of an incentive, will have gone a long way towards eliminating much of the discussion that has taken place today.

170
That said, I think two other points are worth making. The first is that the SSM calculations for each of the years we're talking about are built up from -- I haven't counted them, but I know it's at least hundreds, maybe there's even thousands. I don't know. There's at least hundreds of assumption from a whole range of efficiency measures and a whole variety of attributes to those efficiency measures.

171
I sense that as this proceeding has gone on at length, it's possible for someone who is kind of not intimately familiar with all of the detailed nuances of how these things work to get the sense that we're, you know, we're going to be constantly arguing over a bunch of arcane details, but the reality is that for 99 percent of the assumptions, there is no disagreement.

172
I think CME has hundreds of interrogatories that relate, at least in part, to this, and maybe with one or two exceptions, still has not been able to identify any additional assumptions that warrant re-examination. The auditor went through hundreds of these things and identified only a handful of them that were worth, you know, kind of focusing the attention on revising.

173
And from that handful, it's really -- the conversation here has been dominated by one assumption in particular, the free-rider rate for custom projects.

174
So I just want to kind of step back and look at -- I think it's worth it for everybody to step back and look at the big picture and say we actually agree on almost everything. It just so happens that the one thing we've got some substantial disagreement on is an important one. And to the extent that we can resolve that in this proceeding, I would suggest that effort in future proceedings ought to be a lot less contentious.

175
And the last thing I'd say about all of this is that we're only -- the 2000 SSM -- the fiscal year 2000 was only the second year in which we had an SSM in place. And it's not unreasonable when you're putting a new mechanism that has some complexity on the table to expect to have to learn a little bit as you go. And the notion that we've had to learn a little bit into the second year of the program and make some refinements seems perfectly reasonable to me, and it's not something I would necessarily expect to happen on a regular basis as this process matures and our understanding of how it works matures.

176
MR. POCH: Thank you.

177
Mr. Chairman, thank you for your indulgence for such a long chief. We felt it would be of assistance to the Board to comment on some of the issues which have really come to the fore in the oral hearing process.

178
The witness is available for cross-examination.

179
MR. BETTS: Thank you, Mr. Poch.

180
We will first receive questions, cross-examination, then, from parties that are supporting the GEC position.

181
MR. KLIPPENSTEIN: That would be Pollution Probe.

182
MR. BETTS: Are there others? If I could just get an indication now.

183
MS. NEWLAND: Mr. Chairman, the company may have some questions, but I'd like an opportunity to have a short conversation with Ms. Squires before I commit to that.

184
MR. BETTS: Okay, we'll leave you to last, and we will probably have an opportunity to break prior.

185
MR. O'LEARY: And the company may have some other questions as well, in employing the Mutt and Jeff routine

186
MR. MATTSON: Mr. Chairman, in terms of my client, in the areas where we are in agreement with Mr. Neme, we will not have any questions and I will just reserve my questions for areas where there may be some contention in the evidence.

187
MR. BETTS: Thank you.

188
Then we will proceed with Pollution Probe, please.

189
MR. KLIPPENSTEIN: Thank you, Mr. Chairman.

190
CROSS-EXAMINATION BY MR KLIPPENSTEIN:

191
MR. KLIPPENSTEIN: Good morning, Mr. Neme.

192

MR. NEME: Good morning.

193
MR. KLIPPENSTEIN: I wonder if I could ask you to turn to page 1 of your testimony, the table 1 that you referred to earlier.

194
MR. NEME: The updated version?

195
MR. KLIPPENSTEIN: And it's the updated version. Do you have that?

196
MR. NEME: I do.

197
MR. KLIPPENSTEIN: And if I could direct your attention to the figure you mentioned of $546 million, being in the column of "Financial Net Benefits, TRC". Do you have that?

198
MR. NEME: Yes.

199
MR. KLIPPENSTEIN: And that means, I guess, of course, as I read it, that your estimate of the financial net benefits on a TRC basis in total for Enbridge DSM programs to date is a benefit of $546 million?

200
MR. NEME: That's correct, with all the intentional conservatisms I've described earlier.

201
MR. KLIPPENSTEIN: Okay. Let me just try to understand that in plain language, and I know that means I have to incorporate some technical definitions with some care, but tell me if you think this is an accurate, plain language understanding of what that $546 million means.

202
It seems to me it is a representation of the total or aggregate net reductions in the energy costs of Enbridge's customers.

203
MR. NEME: Not quite. Net benefits includes all of the energy costs on the benefits side, all of the energy costs reductions for -- actually, it includes some water cost reductions as well, that consumers see.

204
On the cost side, however, it also includes all of the costs the company incurred in doing what needed to be done to get the consumers to make those investments, as well as all of the costs the customers incurred themselves in making those investments.

205

So I think there are two caveats to what you said. The first is that the $546 million includes some water benefits as well as some energy benefits, and the second thing is that if you were looking only at the benefits, the number would be larger than this. If you were looking at energy benefits, the number would be larger than this because the customers were making investments themselves in more expensive furnaces or whatever the efficiency measure may be, and those are netted out to come up with these numbers.

206
So the energy or the resource, if you want to include water, the resource saving is actually greater than this number.

207
Just to give an example, the 2003 number is $127 million but the resource benefits are $198 million, I believe. You have to subtract from that 198, 67 -- $71 million, part of which is the company's spending a -- a relatively small part of which is the company's spending and then the other part is the consumer's extra investments themselves.

208
MR. KLIPPENSTEIN: Let me just try and understand the two points you made. The first point was that this includes water benefits?

209
MR. NEME: Correct.

210
MR. NEME: Meaning --

211
MR. NEME: Water cost savings.

212
MR. KLIPPENSTEIN: Energy saved with respect to water used; is that right?

213
MR. NEME: No, not energy saved. Some efficiency measures save energy and some -- some efficiency measures save both energy and water. A low-flow showerhead both reduces the amount of hot water that you use, and therefore -- reduces the amount of hot water you use and that has effects. One is there's less water used, and the other is there's less gas used to heat the water. So both of those components are there.

214
MR. KLIPPENSTEIN: I see.

215
And with respect to the second caveat, which was some customer expenses, those have been netted out in this figure?

216
MR. NEME: That's correct. So again, if you were to ask, What are the customer savings on their bills, on their gas bill and water bill, the number would be appreciably higher than this number.

217

MR. KLIPPENSTEIN: So the, if I change my question slightly to think about bill reductions, the total aggregate net reductions in the energy bills of Enbridge's customers would be even higher than this 546 million?

218
MR. NEME: I would expect so. I'd have to do the calculation just to make sure that the additional gas bill savings were not offset by the water savings, so that's why I lump water and gas together. If -- their gas and water bill savings in combination would be substantially greater.

219
MR. KLIPPENSTEIN: Still on that table, I'd like to ask the different -- or address a different category, and this refers to the last column where you talk about O&M cost per cubic metre saved; right?

220
MR. NEME: Yes.

221
MR. KLIPPENSTEIN: And I take it from the bottom that your estimate for fiscal 2003 is a forecast O&M cost per each cubic metre of saved is about 15.8 cents?

222
MR. NEME: Correct.

223
MR. KLIPPENSTEIN: Now, that's almost the same as 2002 and lower than 2001 and 2000?

224
MR. NEME: Correct.

225
MR. KLIPPENSTEIN: So the cost to save a metre of gas has been somewhat trending down?

226
MR. NEME: Yes, it has, and I put this column in my testimony because I know that's been an issue of concern to some folks. I personally would suggest that you -- we, the grand "we," ought to be careful about placing too much emphasis on that number because we're talking about the cost per annual cubic metre saved, and annual cubic metres are not all the same. Some measures have -- save cubic metres for one year, some save cubic metres for 30 years, and those differences aren't captured there.

227
Furthermore, to the extent one focuses exclusively on that number, you are essentially encouraging what is commonly called in the field "cream skimming," going after the easy low-hanging fruit and not necessarily the stuff that's more difficult to get, at least in the near term, but that may have greater payoffs in the long term. But your point is right on that spending per first-year cubic metre has declined, I'm just cautioning about the reasons I think that -- that column is less important that the other ones.

228
MR. KLIPPENSTEIN: Would you agree with me when you're comparing gas and cream, you're comparing apples and oranges? I'm not serious. It was the fruit that threw me off.

229

If you can turn -- sorry, so your point is that that should be read with caution, I take it, when we're looking at the trend in the cost to save a metre?

230
MR. NEME: I'm not so much saying that you should read it with caution, I mean, it is what it is. The trends are what they are. They're going down.

231
I'm just saying that, you know, from a bigger public policy perspective, if there were -- if I were to pick one or two of the columns that I'd be worried about here and worried about the trends, that would be the last one I'd pick. The other ones are more important. That's the only point I was trying to make.

232
I know there's at least one other party that feels differently, but that's my own perspective.

233
MR. KLIPPENSTEIN: I take it you were, with your comparison, saying if you focus on that figure you will -- you will pressure the process to ignore some savings that are real but not quite as economical.

234
MR. NEME: Yes, that's a good way of putting it. Yes, you -- inordinate attention to that number creates perverse incentives. It encourages you to look at things which aren't necessarily in the best long-term interest.

235
MR. KLIPPENSTEIN: Could I turn your attention to a table filed by Pollution Probe as Exhibit K.4.2.

236
MR. NEME: I'm not sure I have those in front of me.

237
MR. KLIPPENSTEIN: We have a copy if you don't have one handy.

238
MR. NEME: Thank you.

239
MR. KLIPPENSTEIN: I don't know if you've had an opportunity to glance at this before.

240
MR. NEME: I have. I've -- I've looked at it. I haven't spend hours with it.

241
MR. KLIPPENSTEIN: And this table tries to set out the proposed framework for 2003 potential SSM payments. The first row shows that if Enbridge exceeds the forecasted or targeted savings by 10 percent, then the SSM payment would be $2.34 million; do you see that?

242
MR. NEME: Yes.

243

MR. KLIPPENSTEIN: And that would be in a context where the total TRC benefits would be 143 million; right?

244
MR. NEME: Yes.

245
MR. KLIPPENSTEIN: And if you look at that SSM payment of $2.34 million in relation to the total saved of 143 million, we would get a percentage of 1.6 percent?

246
MR. NEME: Yes, that looks about right. I haven't checked the math.

247
MR. KLIPPENSTEIN: And we have calculated the impact of that SSM payment on Enbridge's after tax return on equity using the assumptions described below, and that comes outside to 14/100ths of 1 percent. Can you take that, subject to check? Does that seem reasonable to you?

248
MR. NEME: Subject to check.

249
MR. KLIPPENSTEIN: Then subsequent rows work through the other scenarios at different levels in the proposed SSM incentive regime; is that correct?

250
MR. NEME: Yes.

251
MR. KLIPPENSTEIN: Now, given those SSM payments and the benefits that they are connected to, you talked about balancing those. You think that this incentive system is in the -- in the interest, in the financial self-interest of Enbridge's residential consumers?

252
MR. NEME: Absolutely. I -- to go back to one of the points I made in response to one of the Mr. Poch's questions, as a whole, if an extra million dollars in incentive to the company is enough to generate $1.1 million in net benefits from additional efficiency investments to consumers, that's a million dollars well spent.

253
And what we're seeing here in the table that you've presented, you know, we're increasing net benefits to consumers by tens of millions of dollars. And when you get down to the bottom line it's, you know, approaching a $70 million increase relative to the target for an SSM payment of less than eight. That's a nice ratio for consumers.

254
MR. KLIPPENSTEIN: Let me ask the same question in relation to commercial and industrial customers. And we've had some testimony from people in that sector expressing sentiments along the lines of, well, this is all fine and good from a societal point of view or environmental point of view, but I have to watch my bottom line, or I'm out of business, and what's in it for me.

255

The SSM regime as we've just looked at in this table, is that in the financial self-interest of commercial and industrial customers of Enbridge?

256
MR. NEME: Let me say a couple of things. One is that, as I said earlier, as a whole, this is in the interest of financial consumers as a whole, the way you've laid this out.

257
The -- when you start talking about individual rate classes and whether it's in their interest, you need to talk not only about what the benefits are as a whole, but also how many of them are accruing to each rate class as well as what portion of the SSM payment is accruing to the rate class. And assuming that they are, you know, kind of roughly proportional, then as a whole, commercial and industrial customers ought to be better off, just as on the whole residential customers are better off.

258
Now, there are folks here who argue, Well that's fine and good when you look at things as a whole, but for individual customers it may not be true, because all the benefits accrue to the participants and some of the costs accrue to non-participants.

259
And I guess there's -- there is a couple of -- I don't buy that argument for a couple of reasons. One is that there are benefits that accrue to all customers. There are system benefits associated with efficiency investments, and in fact, the numbers I've seen suggest the system benefits significantly exceed DSM spending. So that the only thing that might cause -- DSM spending and this level of SSM reward in combination. So the only thing that might be of concern to consumers, residential or CNI who haven't participated in the program, is rate impacts associated with lost revenues.

260
And there's a couple points worth noting about that. The first is that if you are going to develop policies which hypothetically constrain DSM investments because of concern about lost revenues, that's tantamount to saying that we ought to be, in the extreme, running information campaigns encouraging consumers to waste energy because it lowers rates, and that makes no sense to me.

261
The second point I would make is that for some of the reasons I articulated earlier, I suspect the system benefits that are currently being calculated as part of the avoided costs that lead into the SSM calculation are being understated, and perhaps dramatically understated.

262
And if they are significantly understated, those system benefits may be offsetting not only the DSM expenditures of the company but also any lost revenue effects, and it's possible that over the long term they were actually having the effect of reducing the rates of non-participants as well as participants.

263
And I guess the last thing I'd say is that -- even to the extent not that's not true, if you -- that the best way to mitigate rate impacts is to do what you can to give everybody an opportunity to participate in one or more of the program offerings that you have.

264

Because then even if rate goes up slightly due to lost revenues, if everybody's participated, and this, I think, is arguably -- may not be exactly everybody, but it's pretty close to it on the residential side, at least, their bill impacts more than offset any rate impacts.

265
So for those three reasons, then, I would suggest that assuming that costs are allocated in rates in relatively closely -- relatively close proportion to the way benefits are accrued by those rate classes -- rate classes then it's a good deal for everybody.

266
MR. KLIPPENSTEIN: Thank you.

267
There's been a number of points addressed to the procedural aspects of the consultative, and I want to ask you a few questions about that, both looking backward and forward.

268
I understand that Union Gas established an independent DSM audit committee as well; is that right?

269
MR. NEME: That's correct.

270
MR. KLIPPENSTEIN: And do you know who were its members?

271
MR. NEME: I believe I do. I believe it's the representative from the company, Mr. Millyard, representing GEC, I think -- was Judy on that one? Julie is on that one, and Peter representing some of the industrial folks. Do I have that right?

272
MR. KLIPPENSTEIN: My understanding --

273
MR. POCH: Mr. Chairman, it's a matter of record, it's actually Randy Aiken in that instance.

274
MR. BETTS: Thank you.

275
MR. KLIPPENSTEIN: And assuming that's, as stated, on the record, namely, Mr. Millyard, then Julie Girvan and Randy Aiken. That's a different composition than the committee whose work has been criticized in this hearing; is that right?

276
MR. NEME: That is correct.

277
MR. KLIPPENSTEIN: And did that Union Gas committee make a unanimous recommendation with respect to the clearance of Union's LRAM?

278
MR. NEME: That's my understanding.

279
MR. KLIPPENSTEIN: And were the recommendations of that Union committee unanimously approved by the DSM consultative committee?

280
MR. NEME: I believe that's true, but again, I wasn't party to that process so I -- I'm not absolutely positive.

281
MR. KLIPPENSTEIN: Can you tell me whether or not that was also approved by all the parties at the Union ADR process?

282
MR. NEME: I believe that was true.

283
MR. KLIPPENSTEIN: Switching to -- back to Enbridge's situation. Are you a member of the Enbridge year 2001 audit committee?

284
MR. NEME: I am.

285
MR. KLIPPENSTEIN: Can you comment on the progress of that committee; in other words, is it making some progress, no progress, good progress?

286
MR. NEME: I think we've made some progress, probably not as much as might have been expected at the beginning up to this point, simply because we kind of put things on hold as this proceeding got further underway, there was a ADR settlement process and so on. But I think it's fair to say that we've reached resolution on the issues that we've tackled thus far fairly expediently.

287
MR. KLIPPENSTEIN: All right. Thank you, Mr. Neme.

288
And thank you, Mr. Chairman. I have no further questions.

289
MR. BETTS: Thank you.

290
MR. DOMINY: Mr. Klippenstein, I just want to ask a question. I think you referred to an SSM committee of Union. Is there such a committee?

291
MR. KLIPPENSTEIN: I think I misspoke myself. Thank you, Mr. Dominy. I meant the DSM consultative and the audit subcommittee. I apologize.

292
MR. DOMINY: Thank you.

293
MR. BETTS: Mr. Mattson, has anything arisen for Energy Probe in terms of questions?

294
MR. MATTSON: We do have questions in terms of cross-examination, but we don't have questions in terms of support of the witness's evidence --

295
MR. BETTS: Okay. Sorry. Thank you.

296
And Ms. Newland, you indicated a preference to have an opportunity to speak to your experts before you question the witness?

297
MS. NEWLAND: Yes, sir. I may or may not have questions, depending on the outcome of my discussion with the Enbridge -- my Enbridge client. If I could just have five minutes.

298
MR. POCH: Mr. Chairman, I was going to suggest that VECC has some questions which would fall into this category and may take us a little further.

299
MR. BETTS: Thank you, and I didn't notice you Ms. Lott --

300
MS. LOTT: I wasn't quite sure what category I fit in, Mr. Chairman.

301
MR. BETTS: I'm a little confused at this point anyway, but I'm going to entertain your questions right now under any category. So please proceed.

302
MS. LOTT: Thank you, Mr. Chair.

303
CROSS-EXAMINATION BY MS. LOTT:

304
MS. LOTT: Hi, my name is Sue Lott. I'm counsel for VECC, which is the Vulnerable Energy Consumers' Coalition, and I just wanted to ask you a couple of questions around agents this morning.

305
First of all, just -- you made some mention in your evidence in chief with Mr. Poch about California initiatives to reduce the effect of price spikes. Could you talk a little bit more about that.

306
MR. NEME: Sure. It's actually interesting. Before I got here -- Mr. Poch and Mr. Millyard and I got here a little early this morning and we went onto the web and looked at yesterday's electricity prices. And you could see the demand in megawatts as it proceeded from hour to hour, and then you could see the spot market prices as it ebbed and flowed with that demand.


307
And at around 6:30 in the evening, the peak demand or the cumulative demand on the system peaked, and it went up about, you know, a couple percent above where it had been for the previous several hours.

308
At the time that it went up for that little extra peak the price in terms of dollars per megawatt hour, the spot market price, went up about 50 percent, and this is what has been colloquially referred to in several places as the hockey stick effect, something folks in Canada should appreciate.

309
And extreme examples of that have been realized, particularly in California, but also in New England and a variety of other jurisdictions. I'm not intimately familiar with how it's worked here, but what happens is when supply becomes constrained, at times of system peak typically, the marginal cost of energy goes up in a hurry. And to the extent that you could use energy efficiency investments to generate even a relatively small reduction in overall consumption on those peak hours, you can drive the marginal price that's paid by everybody, whether you're a participant in that program or not, well down that stick of the hockey stick. Those benefits can be substantial.

310
And in fact, it's my understanding that attempts to quantify them in California suggests that they, at least on the electric side, are potentially worth twice as much as all the traditional avoided cost benefits combined.

311
That kind of analysis hasn't been done in a lot of other places. I do know there was an attempt to look at the effects of, I couldn't say one day, one peak day in one year in Massachusetts a couple of years ago and they found the effect of one day's effect in that energy efficiency program saved them -- I can't remember the exact number, but I believe it was something on the order of $5 million to $7 million, benefits that accrued to all customers, because it drove the spot market price down which was a benefit that accrued to all customers whether they participated in the programs or not. That's just one day in one year, even though those programs have effects over all days over multiple years.

312
So the point I was trying to make is that there are -- there are potentially substantial benefits from efficiency investments, and driving down prices at the time of peak is only one of them, that accrue to all customers that are not currently captured, you know, in the $546 million number that I was talking about earlier, for example. Or, for that matter again, this is not unique to Enbridge, in almost any other utility's calculations of avoided costs.

313
These are things that I guess I would characterize as the next evolutionary step in analysis in regulatory efficiency in regulatory jurisdictions all over the continent is to try to quantify some of the risk-mitigating benefits of energy efficiency, recognizing that the limited attempts to do so thus far have suggested that they may dwarf some of the other benefits that we've been counting all along.

314
MS. LOTT: And in that jurisdiction, in California, was there an SSM in place?

315

MR. NEME: I'm not intimately familiar with the details of how the utilities are compensated there. I'm pretty sure that there is some form of reward mechanism. I don't know the nature of that mechanism.

316
It may also be worth noting that in California, in part because of this recognition and for a variety of other reasons, as they tried to get into things a little bit more deeply, I think things are changing. Things are changing in a hurry.

317
I was -- I spent the last two days at an energy efficiency conference in Washington DC, and one of the speakers at the conference was a representative from San Diego Gas and Electric, a dual fuel utility in Southern California. And he talked about a filing that the utilities there just made yesterday, and they made it in response to an order from their commission that says, you know, We've been -- in the past we've said you guys should spend about this much on energy efficiency, and that's how much the utilities have been spending every year. But we're starting to recognize these huge benefits and as well as the significant costs that have occurred, you know, to society from occasional blackouts and so on, and from this day forward, before you invest -- you are obligated to -- you utilities are obligated to spend as much as it takes, no cap, to capture every single unit of cost-effective energy efficiency that you can.

318
So even though they were already on schedule to spend $1.2 million over the next five years, U.S. dollars, on energy efficiency, the utilities finally yesterday said, We've identified at least another $700 million worth of investments that are cost-effective. And following the order from the commission, they're proposing to go after that.

319
And I say all of this to kind of, you know, again come back to the larger policy context here. There are substantial benefits to efficiency investments that we have not adequately recognized in the past that are only starting to be recognized in different -- in different places, and I think it's important for that conversation to start here as well.

320
MS. LOTT: Thank you.

321
You've talked in your testimony this morning and in your prefiled evidence about the importance of high take-up of DSM programs, and how that's important because it mitigates concerns about overall rate impact.

322
Our issue is that our client group. Which are low-income and fixed-income individuals, have limited participation, particularly in, you know, the high-end cost of these energy-efficiency programs, and you know, they can't participate and realize savings, and then they're also impacted because they have to subsidize those that can afford to participate.

323
I guess my question to you would be: In your view, how do you mitigate the rate impact for low-income residential ratepayers?

324

MR. NEME: Sure. A couple of things. First of all, as I noted earlier in response to Mr. Klippenstein's question, to the extent there are any rate impacts, they are due to lost revenues. And we need to be careful about -- about how we deal with that, because those lost revenues occur whether there's a DSM program that induces them or folks are just naturally conserving on their own without any influence from the company.

325
Having said that, the point I was just making is that there may, in fact, be no adverse rate impacts once we actually adequately account for all of the benefits of energy efficiency. There may be rate decreases which would accrue to low-income customers as well as everybody else.

326
The third thing I'd say is that you're absolutely right that low-income customers face unique market barriers to participation in many energy-efficiency programs, but for some of them, for example, the efficient water heater program, where the company has succeeded at essentially no incremental cost in getting manufacturers to rachet up the efficiency, at least to some degree, anyone who's getting -- who has gotten a water heater over the last number of years has effectively participated in an Enbridge efficiency program, low income or not. So I suspect that in actuality, a large fraction of low-income customers have participated.

327
The last thing I'll say is that there are, nonetheless -- it's nonetheless likely that there are some who haven't, even if it's a relatively modest number, and we ought to be concerned about them. This is something that my organization has long been concerned about. We participate in a nation network in the U.S. of low-income advocates to try to deal with concerns about low-income energy issues, and one of the kind of additional ways beyond the ones I've already articulated for dealing with that problem is to explicitly recognize that the market barriers for some customers like low-income customers are different, and to design programs specifically targeted to the low-income sector.

328
Most jurisdictions, actually, I can't currently think of one that doesn't do this, where DSM is a significant part of the portfolio of what utilities are doing have so-called low income programs. I think the situation here is somewhat unique in that it doesn't, and I would support the notion that we ought to look at potentially targeting a program to low-income customers in ways that represent the unique barriers to they face to participation in other programs.

329
MS. LOTT: Could you give me some examples of those programs and how they work, who they partner with, what kind uptake they have and what kind of success rate they're finding?

330
MR. NEME: Sure.

331
In my own state, the program that we run -- in fact, our board, our regulatory agency, as part of our contract, requires that we spend, I think it's at least 15 percent of our DSM funding on low-income customers, and we do that in a couple of different ways.

332

We -- we work with local community action agencies, who are already delivering weatherization services through state and federal funding, and piggyback on what they are currently doing, the provision of additional efficiency measures that they currently don't have the funds to pursue.

333
We also work a lot with, kind of, a network of institutions, private and public, who have responsibility for, at some level, construction of affordable housing, so the new construction market, either rehab of existing buildings or construction of new buildings, and treat them a little bit differently in terms of somewhat richer incentives and so on to encourage the construction of affordable housing to be more efficient, just like we encourage construction of more market-rate housing to be efficient, but it's a little bit different level of emphasis. It requires a different form of outreach to effectively deal with the folks who are those developers and the agencies that support them. It's both different marketing and different levels of incentives, and so on that recognize the barriers they face.

334
In New Jersey, where I've done a lot of work recently with both electric and gas utilities, they have been running comprehensive, low-income programs that are designed to recruit, you know. They telemarket to low-income customers and recruit them into programs that provide comprehensive weatherization services, lighting retrofits, replacement of inefficient refrigerators and so on, regardless of the fuel that they consume for space heating. And they are getting to thousands of customers a year through those programs. And similar things are being done all over the place.

335
MS. LOTT: That's helpful. Thank you.

336
Just one last question. I wanted to ask you to comment on an alternative way of financing DSM.

337
And in the EBO-169-3, which is the critical Board decision to initiate DSM programs on the gas side, there was mention made about long-term DSM investments being included in the rate base, and short-term expenditures expensed as part of the utility's cost of service. Are you aware of utilities that rate base their DSM costs?

338
MR. NEME: Off the top of my head, I am not. There may be, but the ones that I am familiar with, whose procedures I'm familiar with, expense their costs rather than rate base them.

339
MS. LOTT: Those are my questions. Thank you very much.

340
Thank you.

341
MR. BETTS: Thank you, Ms. Lott.

342
I think it's an appropriate time to break now. Let us try to reconvene -- we'll stretch it a little bit and say at 11:35, so 25 minutes to 12. I think with that, we will adjourn at this point and reconvene at 25 minutes to 12.

343

--- Recess taken at 11:11 a.m.
344
--- On resuming at 11:38 a.m.
345
MR. BETTS: Thank you, everybody. Please be seated.

346
Are there any preliminary matter before we continue with questions of this witness?

347
There appear to be none.

348
Who would like to cross-examine the witness at this point?

349
MS. NEWLAND: Mr. Chair --

350
MR. BETTS: Ms. Newland.

351
MS. NEWLAND: I will have a few questions for Mr. Neme related to issue 9.6, which is the clearance of 2000 and 2001 SSMVA and LRAM. They are more in the nature of follow-up question from Mr. Neme's examination-in-chief this morning. I recognize we are on the same side of the issue, and I won't stray too far into friendly cross-examination.

352
MR. BETTS: Thank you. Please proceed, then.

353
MS. NEWLAND: Thank you, sir.

354
CROSS-EXAMINATION BY MS. NEWLAND:

355
MS. NEWLAND: Mr. Neme, were you involved in the negotiations or discussions that led to the RP-1999-0017 proposal?

356
MR. NEME: Yes, I filed testimony in that proceeding, and in fact, I believe my evidence is cited in the settlement agreement as one of the documents supporting it. I was -- if my memory serves my right, I was involved only, however, peripherally in the actual negotiations themselves, and that Mr. Poch or Mr. Millyard bore the brunt of the responsibility on GEC's behalf.

357
MS. NEWLAND: All right, sir, and I do see that your, "Evidence for Chris Neme for GEC" is one of the documents cited in support of the settlement, so you're absolutely correct about that.

358

The next questions I have for you really concern your recollection of the events around the discussions leading up to the settlement proposal. There has been some disagreement about those events and what was in fact agreed upon, so to the extent that you can assist us with your recollections, we would appreciate that.

359
Do you recall that there was any agreement that the actual gas savings for fiscal 2000 would be calculated on the basis of an actual, overall free-rider rate, that is, a no-yes basis?

360
MR. NEME: I'll start by saying this is a number of years back now, and my memory is a little hazy, and as I said, I wasn't involved in all of the details discussions. But I don't recall -- with those caveats, I don't recall those conversations that would lead one to think that everyone had bought into a no-yes perspective on that issue.

361
MS. NEWLAND: Do you recall whether there was even any discussion or suggestion that a no-yes approach would be used to calculate the actual gas savings for that fiscal year?

362
MR. NEME: Again, with the caveats of my hazy memory, I don't recall those conversations.

363
MS. NEWLAND: Okay --

364
MR. POCH: May I just caution the witness and my friend. I assume you're asking about Mr. Neme's involvement with the consultative discussions as opposed to the ADR discussions. Mr. Neme, I should stress to you that it's not appropriate to comment on the internal discussions within an ADR.

365
MS. NEWLAND: That's right. In the consultative leading up, and I should have said that as well, you're absolutely correct, Mr. Poch.

366
Were there ever any discussions in the consultative about the company administering a screening test to identify free riders in custom projects?

367
MR. NEME: Not to my knowledge. I participated in some of the -- I have participated off and on in some of the consultative meetings. I have not participated in all of them, although I do hear back from the ones that I don't participate in typically from either Mr. Millyard or Mr. Poch. So to the extent I've had access, either directly myself or indirectly through other folks, I'm unaware of those conversations.

368
MS. NEWLAND: Okay. Mr. Neme, you characterized the RP-1999-0001 settlement proposal this morning as ambiguous, and I think that you're not alone in characterizing it as such. In fact, I would venture that there is general agreement on this point, even on the part of Pollution Probe. But could you tell me what your reasons are for characterizing that agreement as ambiguous?

369
MR. NEME: Sure.

370
The first time -- actually, not the first time, but a couple of weeks ago, I read a portion of the settlement agreement, specifically, the portion that begins on the bottom of page 28 and spills over onto the top of page 29 where it talks about essentially what budget assumptions should be revised retrospectively, and then identifies four categories of things. And I noted the discussion -- that that discussion left unaddressed the question of what happens in calculations of so-called actuals.

371
So while it was relatively clear about what should happen to the budget values, it was -- it didn't say -- it was silent on how actuals should be treated.

372
Then I read Mr. Rubin's -- the transcript of Mr. Rubin's testimony, and -- which continued on to the following pages, I believe onto page 30 of the settlement agreement, and it's like, well, I can start to see where he's going in terms of -- I guess it's the language at the bottom of page 29 and spilling over onto the top of page 30, where it says that some impact of evaluation including assessment of free ridership -- I'm paraphrasing here -- will enable the company to maintain program design flexibility while ensuring measured results are adequate and credible for the SSM formula, although it doesn't specify which year's SSM formula. So there's still some ambiguity there, but I can start to see, as I go through up to that point, where Mr. Rubin was going.

373
But then last night I read it again, and I went to the last page or second last page, page 32, and if you look at the second bullet on page 32, it says:

374
"As a result of the interrogatory process and settlement discussions the transparency and completeness of the inputs and assumptions that will be used in calculating the respective values of the actual net benefits --" my emphasis "-- and forecast net benefits --" again my emphasis "-- for the test year are now satisfactory for the purposes of SSM formula and the 2000 SSMVA."

375
And when I read that, I thought to myself, well, gosh, that seemed to take me full circle back to my original interpretation that no-no is the right approach. Because we've identified -- if we've gotten clarity on the assumptions that will be used in the 2000 SSMVA, and that's what it says, for actuals and forecast, that that would seem to support that position.

376
So I think there are just different -- it's not absolutely clear. There are different competing portions of the text here. I am partial to the language Mr. Rubin used when asked a question about something Mr. Rowan said, where he suggested that -- that any witness can suffer bad moments on the stand. And I guess I would suggest that that suggestion extends to bad moments in drafting settlement agreements.

377
We did not do -- the grand "we" did not do a great job of making clear what we intended here. That's the only interpretation I can come to at the end.

378
MS. NEWLAND: Thank you, sir.


379
Now, I hesitate to do this, but I do feel I have to make some effort to redeem the reputation of my colleague, Mr. O'Leary. There has been some suggestion --

380
MR. O'LEARY: Everybody is looking after me.

381
MR. NEME: Was that called into question?

382
MS. NEWLAND: Well, you may not have been following this, Mr. Neme, and I don't blame you if you haven't, actually, but there's been some suggestion that Mr. O'Leary, in his role as facilitator at the meeting last year at which the audit subcommittee was elected, that during that meeting Mr. O'Leary railroaded the process and -- ramrodded the process, and actually, in all seriousness, shut down discussion so that it wasn't a fair and democratic process. And you're the only one available to us under oath who was also there, although, I understand you were there via telephone; is that correct?

383
MR. NEME: That's correct.

384
MS. NEWLAND: Would you agree with the characterization of Mr. O'Leary's method of facilitating as ramrodding?

385
MR. NEME: Let me start that by saying being on the phone at these meetings, one is at somewhat of a handicap in terms of being able to read body language and occasionally even being able to clearly understand what everybody's saying.

386
With that caveat, when you ask me how I would characterize the approach he took, ramrod would not be the first word that would come to mind. I would suggest that everyone, including Mr. Rowan, was given an opportunity to state their position and to try to solicit support for their position from other parties, but when it became clear that such support was not forthcoming, he was relatively firm in forcing us to move on, as he should have been, in my perspective.

387
I think that part of the reason that some of the issues on the table in this proceeding are on the table is that we probably -- again, I'm talking about the grand "we," so not assigning individual responsibility, we probably have not been as disciplined as we should have been throughout some of the consultative meetings as well as throughout some of the audit subcommittee meetings.

388
But in terms of focusing on efficiency, making sure that everyone has an opportunity to say what they need to say and to try to persuade others, but where agreement isn't possible, to document it and move on.

389
And I would characterize what happened at that meeting, to the degree I'm capable of doing so from the telephone, as letting that process happen, where folks were able to say what they wanted to say. When agreement was impossible, we documented it, and moved on.

390
MS. NEWLAND: Thank you, sir.

391
Those are my questions on issue 9.6.

392
I believe Mr. O'Leary may have some questions.

393
CROSS-EXAMINATION BY MR. O'LEARY:

394
MR. O'LEARY: I do, and we will not be going back to the November consultative meeting in the course of my questions.

395
MR. NEME: Thank you.

396
MR. O'LEARY: And I will be brief.

397
If your evidence in chief, Mr. Neme, you referred to an area that we've only touched on during the course of this proceeding. There have been a couple of questions that have been raised, but there hasn't been any real extensive discussion, and that is the issue of free drivers. And I'm wondering, perhaps, if you could expand upon your experience and advise whether or not there's any empirical data that you're aware of that you could share with the Board to indicate what may or may not be the impact of free drivers in this particular jurisdiction.

398
MR. NEME: Well, let me start by saying that I'm not familiar with analyses of free drivers in Enbridge's service territory that would enable one to draw reasonably definitive conclusions about what free driver percentages might be for one or another of their programs.

399
There is a non-trivial amount of research that's been done in other jurisdictions all over the continent that have attempted to, and with some success in some cases, quantify such effects, the magnitude of free drivers. I use the term free drivers and spillover interchangeably.

400
MR. O'LEARY: Could you explain what you mean by the difference between the two?

401
MR. NEME: You use them interchangeably. I consider them the same.

402
MR. O'LEARY: What do you consider encompassed by those terms, then.

403

MR. NEME: My definition of both those terms are consumers who make investments in energy efficiency who would not have otherwise made them had the company's DSM programs not been in the field, but who were not directly tracked by the company. And just to -- that sounds somewhat arcane, but just to given an example.

404
In my state, in Vermont, one of the programs that we run is a retail rebate for compact fluorescent screw-in light bulbs. We started off paying $7 or $8 per lightbulb several years ago and we're down to about $3 per lightbulb now. We have a program design that's intended to -- two what we call circuit riders, two individuals whose full-time job is, a couple times a month, call on every store in the state that sells lightbulbs to educate their sales staff, to make sure point-of-purchase material are available, to have rebate coupons available, to interact with management of these stores to encourage them to buy these products and so on.

405
A recent evaluation -- draft evaluation, it's not yet final -- suggests that for the year 2000 and 2001, for every lightbulb that we rebated there was anywhere from half to one lightbulb that was sold by those stores that wasn't rebated, and that can happen for a number of reasons.

406
Consumers don't notice the rebate coupons, or they think that they're too much of a hassle to fill them out. I could think of a whole variety of reasons.

407
But the argument in the evaluation study in this case is that, were it not for our program doing the outreach to retailers, getting them to stock the products in the first place -- because we also did a comparison in the state of Maine where sales were one-hundredth in comparable stores than what they are in Vermont. Were it not for this program, these products wouldn't even be there in the store in the first place, and that and as a result, consumers are being indirectly affected by our program even though they aren't participating in a way that enables us to track them. We can only directly track the number of consumers who receive rebates.

408
That is an example of a spillover -- in this case a 50 to 100 percent spillover, or free-driver effect.

409
MR. O'LEARY: Are you aware of any attempts being made to try and quantify, say in percentage terms or in societal benefits, on a monetized basis what the free riders would contribute to particular utility programs, DSM programs?

410
MR. NEME: Free riders or free drivers?

411
MR. O'LEARY: Free drivers, I meant to say. I apologize.

412
MR. NEME: I think the answer to the question is that it's very -- (a), it's very market specific. The free driver or spillover rate on compact fluorescent lightbulb sales, just because of the nature of the channels through which they occur, will likely be different from the free driver or spillover rate through, all other things being equal, for, you know, large boilers, because they're different -- they're different markets.


413
The other thing that's really critical is the program design. Some program designs are intentionally oriented towards long-term market transformation. And to the extent that they are, they're doing things not only to get participants to participate now but to increase awareness, to increase -- to offer tranining to increase the ability of trade allies to sell practicals and so on. The more of that that happens beyond just providing incentives or interacting on a one-on-one basis with individual customers, the higher the free driver or spillover rate will be.

414
So the answer is, it really does depend. And one needs to do very specific evaluation for specific programs targeted, specific markets to quantify that effect. In my experience it can range anywhere from zero and can't be anything less than zero percent to -- I've seen numbers as high as 140 percent.

415
MR. O'LEARY: Could I then take you just back to your prefiled evidence and your updated table 1, which is at page 1 of 16. And in the fourth column there, you've added up all of the financial net benefits which have accrued in each of the various fiscal years. Could you tell me what would be the impact if we were able to quantify the free drivers on your figure of 546 million?

416
MR. NEME: I can tell you directionally the impact would be to increase that number. The big question mark is by how much, and I'm not capable of answering that question without additional research specific to Enbridge's activities.

417
MR. O'LEARY: Thank you.

418
Moving on, and I'm somewhat hesitant to do this, because Mr. Poch had an opportunity to ask you questions about some of the other SSM proposals out there and he did ask you questions about IGUA as general questions, but he didn't ask you specifically about whether you have any views about the Energy Probe proposal which Mr. Rubin was here and gave evidence about.

419
I'm just curious if you have any comments, thoughts, as to the Energy Probe proposal which, you may know, involves a shift over from the ratepayers to the shareholders who will then finance the programs, and then the recovery of the cost of programs would be based on a percentage of the actual resource benefits recovered in a particular year.

420
MR. NEME: Sure.

421
On the face of it, it has some intellectual appeal, but I have several concerns of about it, to the extent I've thought about it. And I haven't, to be honest, completely exhaustively thought through all of the ramifications and whether there are mechanisms by which some of my concerns could be addressed. And I presume that that, along with a variety of other issues that other parties may bring to the table, could be addressed in the ongoing consultative discussions if the settlement agreement proposal to -- perceive such discussions as adopted.


422
But with that caveat, I have several initial concerns. The first is that Mr. Rubin's proposal essentially ups the risk factor for the company. And what I mean by that is that instead of the company, under of the current mechanism, being at risk for either getting a reward or not or perhaps even getting a penalty, they're now at risk not only for whether they get a reward or not but whether they even recover their costs. And that's a substantial increase in risk.

423
If you're going to increase risk, you need for sweeten the pot to offset that risk, and this is the way mutual funds work. If you invest in a very low-risk bond fund, you get a relatively low rate of return. But if you're going to invest in much more fluid, small growth firms, the risk may be a lot greater, but you're also expecting a lot greater return.

424
So in this case, if you wanted to get the company to pursue DSM as aggressively under Mr. Rubin's proposal as you would under, for example, the current settlement proposal for 2003, you would have to increase the percentage of net benefits that you're given. That would be my perspective.

425
The second point I would make is that one of the things that's initially attractive about Mr. Rubin's proposal is his suggestion that we no longer need -- if we adopt his approach, no longer need to worry about setting targets, and all of the concerns about asymmetrical information and everything else that goes into that.

426
I, after thinking about it, think I've come to the conclusion that that simplicity is illusory, and I say that for the following reason. Under his proposal now, all of the focus goes no longer from what is the target but what is the percentage of net benefits that the company gets. And let's say we succeed in the first year in setting some number, whatever it may be, and it turns out that after that first year, that the number we picked resulted in, you know, a $20 million reward to the company, net of their costs.

427
I would suggest to you that if that happened, you'd see a bunch of people back in the room arguing about the need to change the percentage. And when we start that argument about what the percentage should be, what it will ultimately get us back to is, Well, what could we reasonably expect them to get, because we want to set the percentage high enough so that it gets them a little bit further than that. And when we do that, we're right back to target setting. It's just kind of an indirect route to target setting.

428
And I guess the last thing I'd say is that when -- under his proposal, as I understand it, the stakes on the evaluation report and the audit report become a lot higher than they currently are, because again, we're no longer talking about a few million dollar or however many reward, but that reward, plus 12 or however many millions of dollars worth of spending. There's just a lot more money at stake. So to the extent that there is friction, if you will, over that process, it can only be exacerbated.

429
Again, those are my initial reactions. Maybe there are fixes to those problems. Frankly, my own perspective is -- there are other things that I think are more important to fundamentally change, in the long run, about the current reward mechanism.


430
My concern about the current approach that we have on the table is that because it rewards the company for net benefits generated in one particular fiscal year, it encourages what I called earlier cream skimming, getting the easy stuff you can get right away so you can log it in this year and get a reward. And this encourages, implicitly, spending on longer-term kind of transformation efforts which may cost more up front but have greater benefits down the road, but because the benefits are down the road and the reward applies only to this year, there is not adequate incentive to pursue them right now.

431
So I think Mr. Rubin's proposal, ideas for how to address encouragement of longer-term market transformation and perhaps others, ought to be explored further, as the partial agreement suggests, through a consultative process that would follow this proceeding.

432
MR. O'LEARY: Thank you, Mr. Neme.

433
Mr. Chair, those are our questions.

434
MR. BETTS: Thank you.

435
Who will be the next questioner?

436
Mr. Mattson?

437
MR. MATTSON: Thank you, Mr. Chairman.

438
CROSS-EXAMINATION BY MR. MATTSON:

439
MR. MATTSON: Mr. Neme, I am counsel for Energy Probe and thereby to Mr. Rubin. There's a few areas I would like to go into. To begin with, the 9.6 issues.

440
I'd like to, with the assistance the Board, go into this issue of control, the ability of the company to control free ridership. You discussed that this morning, and you indicated you might have had a change in your opinion from last year to this year.

441
When you're thinking of the word control, are you thinking of the ability of the company to predict and foresee free ridership? Is that what you mean by control?

442
MR. NEME: When I say control, what I mean is the ability of the company to affect the aggregate free-rider rate that will occur over the course -- on average, over the course of a particular year. In the broad sense of the term, that's what I mean by control.


443
MR. MATTSON: So you'd agree that using the word control, that would include the ability to influence customers; is that fair?

444
MR. NEME: I'm not sure what you mean by the ability to influence customers. To do what?

445
MR. MATTSON: In terms of free ridership, the ability to influence the rate of free ridership.

446
MR. NEME: Yes, the ability to influence what the free -- what the aggregate free-rider rate will have been for a class of customers in a particular program.

447
MR. MATTSON: There's no other party that has that control other than the company in terms of the current SSM formula; correct?

448
MR. NEME: Yes, that's largely true. My only hesitation when you say that is -- I get back to the distinction I drew with respect to the issue of control, between controlling it on a participant-by-participant basis and controlling it in more aggregate terms through the way you design and deliver your programs.

449
And to the extent that some of us might have ideas that the company -- we might want to encourage the company to adopt in advance of a particular fiscal year, maybe we could indirectly have some influence upon what the ultimate may free-rider rate is.

450
MR. MATTSON: And for the year 2000, 2001 - we might as well talk about both - the SSM is in effect a bonus to the company for its ability to influence the free ridership in the custom programs as well as the prescriptive programs; is that fair? It was the company that we're rewarding for its DSM programs in 2000 and 2001?

451
MR. NEME: It was the company that we were rewarding, but I don't think the first part of what you said necessarily follows from that.

452
MR. MATTSON: Which was the control?

453
MR. NEME: That you said that we were rewarding the company's ability -- if I understood you correctly -- that we were rewarding the company's ability to affect free-rider rates.

454
MR. MATTSON: And that's because you don't think they could, or because you think they shouldn't be rewarded, or because you don't think they had enough control?

455

MR. NEME: Well, there are a whole bunch of policy questions about what the -- what the rules could or should have -- and/or what we all thought they were. To the extent there was kind of telepathic consensus which, in retrospect, appears --

456
MR. MATTSON: You're referring to the ADR agreement?

457
MR. NEME: Yes. Right.

458
I mean, the purpose of the SSM is to provide an incentive to the company to do well at capturing DSM, that absent DSM incentive -- that capture the benefits of DSM that, absent the incentive, they otherwise wouldn't have captured.

459
There are a lot of pieces that go into that, including kind of clearly defining, in my perspective, what the company has control over and what they do not have control over. And I was suggesting this morning and I would suggest again that with respect to free-rider rates for custom projects, my current thinking is that on a participant-by-participant basis, the company has probably some small amount of control related to the -- to the exceptional examples that I raised earlier, you know, that's my own direct experience with similar kind of programs. But that those are probably the exception rather than the rule, and that the principal form of control is a function of the design of the programs to go out and capture savings, which efficiency measures are being promoted, how they are being promoted, the extent to which trade allies are used to promote them, et cetera.

460
MR. MATTSON: So, Mr. Neme, just on that -- and again, it's important, and maybe my questions earlier weren't clear in this area, the individual customers on the custom program side, I put to you that the company had the control because they had the ability to influence those customers and their decisions. And the fact that they didn't do that does not mean they didn't have control, it means they didn't exercise it. They didn't put in place programs, screening devices, et cetera, to exercise that control.

461
But my point is, would you agree with me that they had the ultimate control to influence those activities? Would you agree with me just on that point?

462
MR. NEME: Not the way you stated it.

463
MR. MATTSON: Why not?

464
MR. NEME: I believe that once the program design was in place the -- and I think this is true today, too. Once the program design is in place, the company has very limited ability to screen out customers who are easily identified as free riders.

465

MR. MATTSON: Why would you -- why would the company want or why would we want or the Board want programs that have that flaw? Where once the design is in place, you can't screen out free riders; why would we want that?

466
MR. NEME: I don't think you have any choice. Any kind of program -- different program designs will tend to increase or decrease free rider rates, but, of course, they also -- different program designs have other effects, too, on budget and so on.

467
Once you've selected a program design, you're -- until you change it, you're kind of stuck, at least up to a certain point. And again, I'm granting that there are certain small number of exceptions to this, but I think you're stuck to a large extent with what you get for free riders unless you're actually going out and intentionally recruiting them, which there's no evidence that I'm aware of to suggest occurred.

468
So you're question about why -- so why -- should the Board accept that, and I guess the short answer to that is because notwithstanding, even if the 48 percent free-rider rate that the auditor came up with was right, the net benefits to consumers as a whole are swamped with spending that the ratepayers are making through the utility as their agent to generate those net benefits.

469
MR. MATTSON: Are we both -- we're both talking about the custom projects; correct?

470
MR. NEME: Correct.

471
MR. MATTSON: It seems that -- so the custom projects, if those custom projects are designed such that they're not tailored to the individual customer, are you saying no one has tried that -- your premise there, you were saying that that -- you didn't see that taking place where they were dealing with the customer on a one-on-one basis. I thought that was the idea behind the custom projects, that's why they were called "custom" as opposed to "prescriptive."

472
MR. NEME: Right. And I think there's two things to say about that. The first is, as I noted earlier, I think the term custom was somewhat of a misnomer, at least with respect to the broad range of things to which it was applied or has been applied historically. That many of those measures I do not consider custom. A large boiler from my perspective, for the reasons I articulated earlier, is not custom.

473
There are undoubtedly efficiency measures promoted through that program that are custom, that are relatively unique and do require a lot of interaction with the customer, but I get back to the other thing I said this morning with respect to screening.

474
Through the course of the interactions with the customer, it is necessary -- for those truly custom measures, it is necessary to understand their operations. It's possible you may identify cases where the customer is really intending to do this on their own and they're just kind of looking for a handout for the company.

475

MR. MATTSON: Right.

476
MR. NEME: And to the extent that the company identifies those, they ought not pay that incentive. That's my perspective. I take that perspective with my own firm's operations.

477
MR. MATTSON: Right.

478
MR. NEME: But that information has to come to the company, I would suggest, as a result of their normal interactions with the firm in their attempt to understand their processes so that they can try to maximize cost-effective efficiency investments and help that business.

479
If you try -- so if it happens naturally like that, great. If you are suggesting, however that we should go beyond that and try to impose a series of screening questions that the company should run through with every customer with which they interact, I think that's really problematic, again for the reasons which I stated this morning that it will undermine the ability of the customer -- of the company, rather, to develop the kind of relationship with the customer that's non-adversarial and necessary for them, particularly over the long haul, to work to get as much cost-effective efficiency investment as possible.

480
And yes, part of the price for that may be that we have slightly higher, and sometimes maybe even more than slightly higher free-rider rates than we otherwise would have, but I guess I would suggest that the flip side to that concern is that if we did try to impose some sort of screening process, you will end up with even less -- the fewer efficiency measures you're able to install because of your inability to develop a relationship with the customer to a degree you would like it to be developed will be -- those losses will be much greater than the losses associated with higher free ridership, even if you thought that you could get perfectly unbiased and honest answers from the customer when you go through this screening process, which I think is also highly debatable.

481
MR. MATTSON: So are you saying that in terms of this control issue and the ability to influence the customer and to try and rid ratepayers of free riders, are you saying that any effort to try and -- by the company to try and exercise some influence over that might, in fact, undermine their ability to develop cost-effective DSM? Or are you saying that it should be tried, but we should be cautioned that there's this concern that if it was done properly it could, in effect, undermine DSM programs?

482
MR. NEME: Let me put it this way. I can't currently think of a way that you could try to assess beyond kind of the normal course of interaction with the customer that you would want to pursue, in an objective way, whether they are likely to be a free rider, you know, without undermining that relationship.

483
I'm open to suggestions about how one could make that happen and you would maybe be able to convince me otherwise, and perhaps that's something that, you know, the grand "we" ought to talk a little bit about.

484

But my bias would be that any such screening shouldn't be pursued if we think it will put the company in an adversarial position with the customer. And because free ridership is such a difficult thing in most cases to get your hands around, particularly on a customer-by-customer basis as opposed to across a portfolio of customers, my bias is to think that that's -- would be not really possible to do, and that we should err on the side of letting the company develop their relationships with customers that will generate tens, if not hundreds of millions of dollars of net benefits rather than try and undermine that process with the intent of screening things out.

485
Again, even assuming that you could effectively screen them out without creating a bunch of dishonest answers coming back from the customers because they know what they need to say to get the incentives or any other assistance.

486
MR. MATTSON: As I'm sure you're aware, Mr. Neme, and I know you have spoken to Mr. Rubin on a number of occasions in the consultatives, Mr. Rubin believes that a incentive could be put in place for the company to screen out free riders. Are you familiar with Mr. Rubin's concept in that respect?

487
MR. NEME: No, I'm not. I'm not -- again, I've heard what you've just articulated in broad general terms, but I'm not familiar with his proposal for how that would work. And I'll have to say that I'm unfamiliar -- I'm not familiar with any other DSM program targeted to commercial/industrial sector that tries to impose such a screening today. And I think that's in large part because no one has found a way to make it work.

488
MR. MATTSON: Right, and I think Mr. Rubin indicated in his testimony that it hasn't been tried. And you certainly can confirm that it hasn't been tried; correct?

489
MR. NEME: Not to my knowledge.

490
MR. MATTSON: But if it could be done, certainly the reduction in free ridership would be a greater benefit to the public and to the ratepayer; correct?

491
MR. NEME: If it could be done so that free ridership went down without sacrificing the relationship to the customer to the point where it resulted in foregoing other efficiency investments, that would be a good thing and we ought to make it happen. And I would love to hear any ideas about how we could do that.

492
MR. MATTSON: Now, you indicated that in your state, in Vermont, the control over DSM programs has been removed from the utility to an independent party; I think it's your company?

493
MR. NEME: It is.

494
MR. MATTSON: Why was that?

495

MR. NEME: There were a variety of reasons, but I would -- one of them is that there was concern among several parties about how well the utilities had done in pursuing the mandate that they had from our regulators to acquire cost-effective efficiency investments. Concern that perhaps their less than stellar performance was due, in part, to a inherent disincentive within the company or lack of interest within the company in aggressively pursuing it. Some parties brought that perspective to the table, which I think has some validity to it.

496
Interestingly enough, the creation of the efficiency utility in Vermont grew out of a docket in which there was a settlement proceeding that utilities themselves signed onto. And they signed onto it -- I'm putting words in their mouth, from my perspective -- because they got tired of being beaten over the head all the time about how well they were or weren't doing, and decided at some point that it wasn't worth the headache anymore and they were happy to give it away to somebody else.

497
MR. MATTSON: Would you agree that the same concerns that existed in Vermont prior to the transfer from utility-led to public-interest-led DSM programs exist currently in Ontario?

498
MR. NEME: I would hypothesize that they would.

499
MR. MATTSON: You've been involved in consultatives, you've been up here, you've met with many of the groups. I'm sure you have some pretty direct information to go on in that respect. Can you --

500
MR. NEME: Yes, you know, let me say this, I've had my differences. I've been -- I submitted evidence in proceedings dating back to the fiscal '95 -- the first Enbridge DSM case in this jurisdiction, and as well similarly on the Union Gas side, and I have certainly had my differences with the companies over the years on how aggressive they've been, the program designs they've adopted, and so on.

501
Having said that, I think that particularly in the last several years, particularly for Enbridge, things have gotten a lot better, and I think the SSM is largely responsible for that. And -- and, you know, I have great respect for the work that Pat Squires and others have been doing at Enbridge, even though I still have some disagreements with them about some of the things that they're doing.

502
Could, you know, an efficiency utility along the lines of what we have in Vermont work in Ontario and work more effectively? I don't know.

503
I think --

504
MR. MATTSON: Mr. Neme, I'm not asking that question. I'm just asking whether or not here in Ontario we have the same concerns with respect to the inherent conflicts and the doubt as to whether the utility-led DSM can achieve the savings -- the maximum amount of savings that the ratepayer wants. Those concerns are here.

505

MR. NEME: I would suggest that the generic concerns that applied in Vermont probably apply here at some level and that the question is just one of degree.

506
MR. MATTSON: Now, still sticking with the 9.6 issues you discussed this morning. You are on the 2001 audit committee for Enbridge?

507
MR. NEME: I am.

508
MR. MATTSON: And yet that committee has not finished its audit; correct?

509
MR. NEME: That's correct.

510
MR. MATTSON: And yet you're here to support a clearance of the SSM prior to that committee finishing its audit; is that fair?

511
MR. NEME: Yes.

512
MR. MATTSON: Why?

513
MR. NEME: Because -- and, you know, this is necessarily, to some degree, a judgment call, but the reduction in the SSM for 2001 that's part of the settlement relative to what the company was originally proposing is fairly dramatic.

514
The audit that will be conducted in 2001 which is being conducted by the same firm and same individuals that did it for the year 2000, in my estimation, is not likely to turn up the kind of major issues that they turned up in 2000. Because in 2000, you know, we directed them to look at the things that mattered the most. They looked at them closely. They identified some problems, and it -- you know, they got the big enchiladas, I think. And while we could potentially all be surprised, my suspicion is that they aren't likely to turn up big enchiladas in 2001.

515
Given that, and given that I think there is a legitimate case to be made that the 4.6 million for 2001 is a reasonable deal for ratepayers and that there is also some value in kind of trying to move the process along to catch up, I think it's not -- I think it's a reasonable -- I think support of that settlement agreement is reasonable.

516
I understand the concerns on the other side, and these are things on which reasonable people can reasonably disagree, but that's my perspective.

517

MR. MATTSON: But clearly, any agreement to clear the 2001 SSM would -- would in effect go against -- or would be contrary to what the parties set out in the ADR agreement back in 1999 with respect to monitoring, evaluation, audit. The process that was put in place is not complete.

518
MR. NEME: Absolutely, but we're -- there are a number of other areas -- to the extent that that settlement agreement in the few places where it's clear, there are -- there are things that they -- that are made within that settlement agreement that no other party to this proceeding supported either, including the yes-yes avoided cost. We've all learned something since then, so I wouldn't necessarily put too much stock in that -- in the fact that it was in the ADR agreement.

519
I think as a general principle, it's a good thing to be evaluating the results at the end of every year and auditing them at the end of every year, and I would continue to strongly support that approach going forward. It's just a judgment call at this point given (a), how far behind we are; (b), the relatively good deal that's on the table now, and the risk that it -- the audit may suggest it goes up as well as much as anything; and (c), the fact that I don't think, given the stones we've unturned thus far, that we're likely to find a lot more of Mr. Rubin's toxic sludge, that it's a reasonable position to suggest that we ought to move forward.

520
MR. MATTSON: How will we know, Mr. Neme, without an audit, how reasonable this settlement is? How will the Board now know how reasonable the settlement is without the input of the audit first?

521
MR. NEME: We won't know with absolute certainty until the audit is completed. As I said, it's really a judgment call at this point about whether you want to weigh -- in terms of how you want to weigh the risk that it can go in different directions.

522
MR. MATTSON: And you think it's really a good principle to put in place here, before the Board, that it should make the decisions based on the SSM -- make decisions with respect to the SSM prior to the audit being complete? You think that's a good principle that we should be agreeing to at this point?

523
MR. NEME: I don't think anyone is suggesting it's a principle that we should -- when I think of the term principle, I think of something that kind of becomes the bedrock upon which everything we do going forward is based. And I don't -- I think that we're talking about an exception, rather than a principle.

524
MR. MATTSON: So you're saying this is a one-off exception, asking the Board to approve the SSM for 2001 prior to the audit being complete?

525
MR. NEME: Yes.

526
MR. MATTSON: And you're saying the reason for that is because, in your opinion, and without having to provide the Board with any evidence as such, that you think the reduction is fair and that the audit won't likely turn up issues such as were turned up in the 2000 audit; is that fair?


527
MR. NEME: Yes.

528
MR. MATTSON: You talked about -- I think I'm finished with 9.6. Just a second.

529
MR. BETTS: Mr. Mattson, could I just get a sense of how much longer you might go on with your questions?

530
MR. MATTSON: Since I'm finished with 9.6, Mr. Chairman, I'm turning to -- I have no questions on 9.5 and I should be fairly brief with 9.2, which is the 2004, we were signatories to the 2003, so -- five minutes.

531
MR. BETTS: That's fine.

532
And then Mr. Warren, I believe you're the last questioner, and how long would you anticipate?

533
MR. WARREN: At this stage, sir, I don't know. I expect about 20 minutes, sir.

534
MR. BETTS: Well, it would certainly be, I think, an objective of all of ours to try and complete our questioning of this witness prior to the lunch break. So we're going to work towards that if we can, and if we have to stretch a little bit longer, I hope you will all bear with us to do that. That will allow parties that don't need to come back this afternoon to get on with other things.

535
So Mr. Mattson, please continue.

536
MR. MATTSON: Thank you, Mr. Chairman.

537
MR. MATTSON: Mr. Neme, just to discuss briefly your understanding of Mr Rubin's proposal, if we call that, some of the principles he'd like to see going forward, I'd suggest it's more like. You're familiar with -- it's called K.13.1, that document.

538
MR. NEME: I'm not familiar with that particular terminology.

539
MR. MATTSON: I just want to briefly take --

540
MR. NEME: You're talking about what it should it be going forward in 2004 and beyond?

541
MR. MATTSON: Yes.


542
MR. NEME: And could the company recover their costs as part of the SSM, or whatever, payoff?

543
MR. MATTSON: I'll just put to you what he considers advantages of his proposal to your proposal for 2003. Can I just get you to comment -- and for time, this is really the only area I'll take you to on 9.2 -- but the first is, he says:

544
"The annual target setting exercise, the most significant instance of gaming in the entire DSM and SSM process, is completely eliminated." I don't need you to comment on whether or not his proposal is realistic, but would you agree that if you could eliminate that annual targeting exercise, that would be a good thing going forward?

545
MR. NEME: Without putting it in context, I don't think I can answer that question.

546
MR. MATTSON: Do you think it's currently a strength of the current process or do you think it's just a necessity of the current process? You're not sure if you could get rid of it?

547
MR. NEME: It's not clear -- well it's clearly part of the current process. Could you come up with an alternative process that eliminates it, that would be better; I don't know. I haven't heard of one yet. At least in my mind that would be better, but it's hard to kind of look at that one piece and isolation and say, If we could do that one thing, that would be good, without understanding the broader context into which it would fit.

548
MR. MATTSON: So that's something you would say you would have to study further?

549
MR. NEME: Yes, and as I said earlier in response to the company, I don't actually think -- at least my initial thinking about it, in the end this proposal gets us out of target setting anyway.

550
MR. MATTSON: Because you feel you just get back to the issue -- once you get through this issue of target setting, you're then into a discussion of what the percentage should be with respect to the SSM?

551
MR. NEME: Right. And we'll always be picking a percentage that will provide the company, or we think will provide the right amount of payout, given our expectation of how much they can accomplish. And that expectation of how much they can accomplish is kind of tantamount to the target.

552
MR. MATTSON: But isn't it fair that by getting -- if we get in place a process that actually -- where we're not setting these targets that may have perverse incentives or lead to perverse incentives, at least we're discussing percentages that, in effect, show the system is working on its face and we're just trying to cut back the bonus, really?

553

MR. NEME: I'm not sure what perverse incentives you're talking about, and I'm not sure why you think you'd end up cutting back the bonus.

554
It seems to me, as I said earlier, since there's a lot more risk in the proposal, you might have to actually increase the bonus to offset that risk.

555
MR. MATTSON: Yes, that's true. But I think the issue here is really whether or not, Mr. Neme, from your experience, I mean you are quite experienced in this, is whether or not this annual target-setting exercise is or has a significant instance of potential gaming in the entire DSM and SSM process, and if it is, if eliminating that would be a good thing. That's really the principle I'm trying to get at.

556
MR. NEME: And I guess I'm struggling with your question, because it's -- it seems to me that the purpose of a -- any kind of reward mechanism, no matter how its structured, is to encourage the company to achieve excellence. And to achieve excellence, we need to define what excellence is, and in defining what excellence is, ultimately, whether directly or indirectly, gets us back to target-setting.

557
I'm unaware of any regulatory jurisdiction in which incentives are provided for DSM performance that don't involve targets. And it seems to me that ultimately for Mr. Rubin's proposal to work, you need to pick, you know, a payout percentage of net benefits to the company that is implicitly based on a target.

558
MR. MATTSON: One of the Mr. Rubin's concerns is that the current annual target-setting exercise is not transparent, because we don't know the information that the company has on hand. Would you agree with me if, after you have thought about it yesterday and you came up with the second type of target-setting exercise which is the 18 percent, 12 percent, at least it would be more transparent than the current target-setting exercise?

559
MR. NEME: No.

560
MR. MATTSON: You don't think so? Why not?

561
MR. NEME: I don't -- I don't see the distinction.

562
If you were -- let's say, just to pick a number out of the air, that Mr. Rubin -- and again, this is not -- he hasn't proposed this, but I'm trying to make this concrete.

563
Let's say everyone thinks that the -- under his proposal, that the percentage of the SSM that should accrue to the company is 30 percent. It's fine to talk about that in kind of broad, conceptual terms, about, Okay, now we've set that number and we've eliminated this whole problem of target setting. But no one is going to agree to a 30 percent number without understanding, at some level, what its expectations are, what the expectations of what the company is going to achieve are.

564
So everyone is going to go back through the exercise of trying to figure out, Okay, so how much is the company going to have to spend to get how much savings and how much net benefits. And if they got 30 percent of those net benefits, will they recover their costs? Will it provide them a reward above their costs? Is the reward that it would provide them too rich?

565
And if it is, then they'll start saying, Well, no, it ought to be more like 22 or 23 percent or whatever the numbers are. And then we're right back to target setting, and we're right back to any of the difficulties which are naturally inherent in target setting associated with asymmetry of information between the company and the parties. I think that's just a necessary element of the process, and that all we can do is try to make sure that as much of the information that we need to determine what the target should be as possible is on the table.

566
MR. MATTSON: Would you agree that the TRC is not, though, however, -- is not transparent to the public or to the ratepayer? Is that fair, in your experience? They don't really understand it.

567
MR. NEME: Sure. The ratepayer doesn't understand it, but I'm not sure that that necessarily means that we should be -- there are a whole bunch of things related to PBR and everything else ratepayers don't understand either. Then don't understand that their energy bills don't actually reflect, on a time-differentiated basis, the true cost of providing energy. Does that mean that we should automatically have time-abuse rates, hourly time-abuse rates for every customer? I don't think so.

568
We shouldn't -- let me put it this way, we shouldn't be designing policy so that the average person in the street can understand it.

569
MR. MATTSON: No, but I think the point is more that you can try and have it transparent so the average person in the street can understand it is a benefit to the regulator and to the regulation; would you agree with that?

570
MR. NEME: All other things being equal, if that were possible, I'd say yes. But I don't think all other things are equal.

571
MR. MATTSON: I thought that we did agree that if they are equal and one is more transparent than the other, it's a good thing.

572
MR. NEME: Right. But I don't think that one is more transparent than the other, or that all other things are equal.

573
MR. MATTSON: All right.

574

Finally, on 9.2 issue, you talked about your proposal as having some elements of change from the past, from what was in place in 2000, 2001, and 2002, and you said you would like to see more fundamental change even than that, going forward.

575
What fundamental change were you referring to? What type of fundamental change do you think is necessary going forward?

576
MR. NEME: Well, I'll start by saying that I haven't -- I don't have a detailed concrete extensive proposal, you know, well thought out to the nth degree, but I have at least some concepts that I would put on the table. And one of them would be that some portion of the reward for which the company would be eligible for good performance, at least, ought to be carved out and set aside for meeting specific targets towards transforming specific markets.

577
And I'll give the example in my own organization, the contract that we have with our regulatory agency. We have some kind of broad, overall goals, you know, analogous, for example, to TRC benefits. In fact, it is one of our goals. But we also have very specific goals, that are -- and some of the incentive that we're eligible to receive for good performance is assigned to those individual market goals, like doubling the share of new homes constructed in the state to the Energy Star standard, just to give one example. Or one that was in our last contract, increasing the market share for clothes washers, Energy Star-rated clothes washers to a certain percentage.

578
I -- I would like to see a portion of the reward for which the company is eligible carved out and set aside for specific targets, specific important markets for which there are prospects for long-term market transformation.

579
MR. MATTSON: Mr. Neme, that's something different than what I anticipated. I was thinking more of Mr. Rubin's proposals being a fundamental change. Yours seem to be more of new variations. Your proposal, though, you would see it going forward, fundamentally, it's not to change. You might put new improvements, you might see different ways of doing things, but you're not proposing something fundamentally different than what you're currently proposing with respect to the SSM.

580
MR. NEME: Maybe fundamental is in the eye of the beholder.

581
MR. MATTSON: Right.

582
MR. NEME: But I would suggest that the current mechanism is we do nothing but pay a percentage of net benefits to the company for exceeding a target. What I'm suggesting is that for at least some portion of the pot of money that they might be eligible to earn, that it might not be related at all to net benefits. In many respects I would suggest that's more fundamentally different than Mr. Rubin who is still basing his payout entirely on net benefits.

583
So I guess maybe it's a question of semantics and your interpretation of the term fundamental.

584
MR. MATTSON: Would you say that Mr. Rubin's proposal -- would you agree it's a fundamental change?

585
MR. NEME: Yes.

586
MR. MATTSON: You would agree?

587
MR. NEME: I think his proposal is fundamentally different that what we currently have, and I think mine is as well.

588
MR. MATTSON: I thought maybe you were going to say it's similar.

589
MR. NEME: No, no. It's worth further discussion.

590
MR. MATTSON: Thank you. Those are all my questions. Thank you, Mr. Chairman.

591
MR. BETTS: Mr. Warren.

592
MR. WARREN: Thank you, Mr. Chairman.

593
CROSS-EXAMINATION BY MR. WARREN:

594
MR. WARREN: I have three questions initially arising out of your examination-in-chief this morning. First, let me take you to an exchange you had with my friend Mr. O'Leary in which you were offering observations on Mr. Rubin's proposal for an SSM.

595
And as I understand it, you were saying that one of the problems with Mr. Rubin's proposal for an SSM is that it doesn't sufficiently -- there isn't a sufficiently close link between risk and reward; is that fair?

596
MR. NEME: Well, I don't think he has fleshed it out enough to draw that conclusion. The point I was trying to make was slightly different, which is that once you would start getting into the details of his proposal, and specifically, what percentage of net benefits you would have to pay to the company, you would have to account for the risk/reward trade-off, and that that would lead you to having to pay the company more because the risk is greater.

597

MR. WARREN: I am sorry, that was really just a prelude to the question I wanted to ask, which is this: Should the Board understand from your testimony that in deciding what the appropriate level of an SSM is that it should be tied to the degree of risk of the company?

598
MR. NEME: In part, among other things.

599
MR. WARREN: The second area I wanted to follow up on is I just wanted to understand what your recommendation is going forward with respect to SSM, and it's this issue. My note of your testimony was that you wanted -- you thought the Board should, in its decision in this case, decide what the rules are for the SSM. That's my note, and it could be wrong.

600
I want to understand what the relationship is between the Board's function in doing that and the ADR proposal which says that the consultative will decide what the SSM should be for 2004 going forward. Do you understand --

601
MR. POCH: May I interrupt. My friend is posing something that's not in the settlement. It's not saying that the consultative will decide, it says the consultative will discuss and that this Board will have an opportunity to decide in future.

602
MR. WARREN: I have absolute confidence that the witness could get along without that help, Mr. Chairman, but let's take Mr. Poch's gloss on it, that the consultative will discuss it.

603
Do you take my point, Mr. Neme, that if the Board decides that there's nothing for the consultative to do, I want to know, in your view, what does the Board decide and what does the consultative do going forward?

604
MR. NEME: My understanding of the process that's been proposed in the settlement agreement, and one which I would support, is that a very specific set of rules are on the table with respect to 2003, that with -- because we're so far into the year we just need to get that decided, and that the Board has an opportunity, if they adopt the ADR agreement, to basically enshrine those rules or put their imprimatur on them.

605
With respect to 2004 and years beyond, that the consultative would discuss potential modifications to the rules that were in place in 2003, again assuming the Board approved them, but that ultimately the Board would have to approve -- let's say the consultative could reach consensus on them. Even if the consultative could reach consensus, the Board, I would think, would ultimately have to approve that consensus, or if there wasn't consensus, have to choose from among the differing perspectives put forward.

606
MR. WARREN: Do I understand it correctly that what the Board would be asked to do in this case for 2003 is to agree on, sorry -- set the rules for the design of the SSM, and having done so, the consultative would then review those in their entirety with the view to whether something different should be adopted in 2004 going forward; is that fair?

607
MR. NEME: I think so.

608
MR. WARREN: Just on that point, Mr. Neme, I want to get a sense of whether -- of the likelihood that there can be any consensus arising out of the consultative on what SSM should look like for 2004 and beyond. And let me just see if you and I can agree on this. There is, at least in a greater or lesser degree of specificity there is an IGUA view of what the SSM should look like; correct? You understand that?

609
MR. NEME: Yes, there's been at least an initial suggestion of what it ought to be.

610
MR. WARREN: I said in varying degrees of specificity. There is Mr. Rubin's view on what the SSM should look like; correct?

611
MR. NEME: In concept.

612
MR. WARREN: You have your own views of what an SSM should look like right; correct?

613
MR. NEME: Correct.

614
MR. WARREN: Enbridge Gas Distribution has its own views of what it should look like; correct?

615
MR. NEME: Correct.

616
MR. WARREN: We have the IndEco review proposal, which may or may not be the same with what EGD goes forward with; correct?

617
MR. NEME: Yes. And we may or may not have some CME view of what an SSM should look like; correct?

618
MR. NEME: Perhaps.

619
MR. WARREN: By my count, we now have six or seven different views of an SSM. In light of that, sir, what's the likelihood that a consultative is going to come up with an agreement for 2004 and beyond?

620

MR. NEME: I'm not sure. I think that part of the problem here is that we've got a number of different proposals. Some of the ones that you articulated that -- that have been put forward, really, for the first time in a litigated proceeding, where there hasn't been any significant opportunity to bandy them back and forth among various parties and to try to convince our colleagues on the left or the right or the front or the back, that I suspect that, at a minimum, there is significant potential to significantly narrow the range of differences that you just articulated. And even that would be a significant service to the Board, if we could narrow it down to two or three competing alternatives, as opposed to the six or seven that you were explaining. And perhaps we might be able to do better than that.

621
MR. WARREN: Your last response is a segue then into my next question, and in that context, if you could turn up Exhibit L, tab 10, which is your prefiled evidence, and my reference would be page 11 of that.

622
MR. NEME: Okay.

623
MR. WARREN: And my notes -- my point of reference, Mr. Neme, is the footnote, which begins -- I'm sorry, in the last paragraph, the second to last sentence on that page, it says in reference to the operation the consultative, it says:

624
"It could also serve to substantially reduce the need for cost of litigation."

625
There's then a footnote which reads as follows:

626
"EGD indicated in its evidence that the cost of the consultative process has increased significantly. However, it does not address whether that increase has been more than matched by significant litigation cost savings - as I suspect it has due to a number of settlements made easier to reach."

627
And then going on, after the footnote to the next sentence:

628
"To the extent that litigation is needed to resolve differences of opinion, a process that started from the goal of consensus will ensure that issues have been discussed enough to reduce costs of litigation (e.g. by reducing the need for some interrogatories and by defining and narrowing issues)."

629
Okay. Now, against that, sir, I'd like to test that hypothesis about: (a) reducing costs and refining or narrowing the issues by reference to the experience that's been testified to in 2002.

630
Now, if I can, in the interests of time, I'm going to give you a very crude summary of an exchange which I had with Ms. Squires in which we talked about the number of consultative meetings that had been held in 2002. In addition to that, there were somewhere between 19 and 22 audit committee meetings; do you agree with that?

631
MR. NEME: That sounds about right.

632

MR. WARREN: And that as a result of those consultative meetings and the audit committee meetings there was no consensus on that for 2000 and 2001; do you agree?

633
MR. NEME: No consensus on what the SSM payout should be?

634
MR. WARREN: No consensus on many of the issues with respect to 2000 and 2001, but certainly not on the SSM payout; correct?

635
MR. NEME: I -- there was no consensus. However, I do believe that notwithstanding the somewhat tortuous process that it was at the time, that there was still significant value in it and that that value shows up in several different respects.

636
One is it made clear that lack of clarity on rules which we've been talking about here -- or you guys have been talking about here for a number of days now. It's something -- we went through the whole '99 SSM process without actually flagging that as a critical issue, and it clearly is one. And the fact that it came out of the 2000 SSM audit or evaluation report audit, I think, is great value to the process going forward.

637
I would also suggest that we flagged a number of important issues related to the reasonableness of the savings estimates and other factors that were before us, and that could potentially, you know, reap huge rewards for consumers down the road in the form of different program designs or lower SSM payments or in a variety of other ways.

638
And then I'd guess I'd like to come back again to something I said earlier, which is that we actually reached consensus on quite a number of points.

639
If you look at -- and this is -- there are, as I said earlier, hundreds of assumptions that are on the table in any assessment of SSM. And in the end, we were only quibbling about half a dozen of them, and really most of the quibbling focused around one of them. So while it's clear we haven't reached consensus about all of them, especially about that one, I don't want to lose track of the fact that there are a whole bunch of other thick things that everybody has agreed to not raise.

640
MR. WARREN: Thank you for finding that gold on the dross, Mr. Neme, but I want to continue with the process, because I was only part way through.

641
MR. NEME: Sure.

642
MR. WARREN: We got to the end of the 22-odd committee meetings and then we got to a three-week ADR before Christmas, and there was no ADR agreement coming out of that, was there? Do you understand?


643
MR. NEME: No. Yes, I believe.

644
MR. WARREN: And then we had, roughly speaking, about a week-long ADR after Christmas in relation to this case, 203, and there was no agreement out of that either, was there?

645
MR. NEME: Only a partial one.

646
MR. WARREN: So in terms of the savings of litigation process, may I suggest to you that the consultative on the record of 2002 didn't seem to save much in the way of litigation time; is that fair?

647
MR. NEME: Perhaps. It's always difficult to envision exactly what would have happened in the absence of the process that we went through. It's certainly possible that in -- with respect to the activities of 2002 that had they not taken place, that the overall cost of that process plus litigation would have been lower, but there might have been some other societal cost disadvantages, as I've articulated earlier.

648
MR. WARREN: Now, the next issue I want to turn to, then, is the question of refining the issues, I presume by means of exchange of information so on and so forth, as flowing from the consultative process.

649
Now I've just gone through the history of 2002; the consultative meetings, the audit committee meetings, the ADR process prior to Christmas. Now, it's my understanding, this is the information I've been given, that one of the parties to the proceedings who was an active participant throughout that entire history in 2002 delivered -- if you individuate the questions -- something in the nature of 500 DSM questions to Enbridge Gas Distribution; is that your understanding?

650
MR. NEME: Yes.

651
MR. WARREN: So if we use the delivery of some 500 individuated DSM questions as a measure of the extent to which people were more knowledgeable or more informed, it seems that at least one party didn't benefit from the process; is that fair?

652
MR. NEME: Gosh, I'm not sure exactly how to answer that question. What does benefit -- what does benefit from the process mean?

653
MR. WARREN: Mr. Neme, I don't want to be a smart aleck with you. All I was trying to do with a track your statements on pages 10 and 11 of the evidence about the value of the consultative in reducing litigation time, reducing litigation costs and having the benefit of having everybody more informed. And all I want, in the interests of time, is to suggest to you that the record in 2002 doesn't really support on a broad basis the assertions in your prefiled evidence. Is that not fair?


654
MR. NEME: At some level, I think that's fair, but I guess I would also say that 2002 was a learning process, and that a lot -- at least some changes have been put in place to both the audit committee process and the consultative process, as a result, that I think will make things a lot better going forward.

655
And particularly, limiting the ability of any one individual or party to slow things down, granting the necessity for due process, which I think is probably something that we wrestled with a lot last year.

656
MR. WARREN: Just two final areas of cross-examination, Mr. Neme, one of them is just to understand something in your prefiled evidence. If you could turn up Exhibit L, tab 10, page 7.

657
MR. NEME: Yes.

658
MR. WARREN: And as I understand your evidence, and I'm the world's most profoundly ignorant person on the matters of DSM, but as I understand it, your recommendation as set out in your prefiled evidence was that you thought a reasonable target for 2003 would lie in the range of 70 to 85 million cubic metres --

659
MR. NEME: I'm sorry, which page are you looking at?

660
MR. WARREN: Page 7 of 16 at the paragraph that concludes at the top of the page, and it's the 2003 budget.

661
MR. NEME: Yes. Okay.

662
MR. WARREN: And the last sentence, just was the one I quoted and it reads:

663
"A more reasonable target for 2003 would lie in the range of 70 to 85 million cubic metres, depending on time of approval and the budget made available."

664
That was your original recommendation on the target; is that right?

665
MR. NEME: I'm sorry, for some reason, that's on page 6 on my version.

666
MR. WARREN: I'm looking at the copy --

667
MR. NEME: Yes, I see what you're reading.

668

MR. WARREN: I'm sorry, this is the pagination that came out of my printer, so there may be something different about it. I have got the quote accurately, have I?

669
MR. NEME: Yes.

670
MR. WARREN: And the ADR agreement -- if you could turn up the ADR agreement that was ultimately arrived at.

671
It's, for the record, Mr. Chairman, Exhibit N.1, tab 1, schedule 1, and I'm looking at page 66 -- sorry, 64.

672
And as I understand it -- do you have that, Mr. Neme?

673
MR. NEME: I do. I do.

674
MR. WARREN: The ultimate ADR agreement sets a target at 72.5 million cubic metres; correct?

675
MR. NEME: That's correct.

676
MR. WARREN: That's some roughly 12.5 million cubic metres below the upper end of your target range; is that correct?

677
MR. NEME: That's correct.

678
MR. WARREN: Do you agree, Mr. Neme, notwithstanding your prefiled evidence, that that's an appropriate target, or should it be higher?

679
MR. NEME: I was not personally involved in the negotiation of the settlement agreement. If I had my druthers, I would like to see both a higher target and a higher budget to go with it.

680
MR. WARREN: And this question may be --

681
MR. NEME: Based on -- just as a caveat -- not a caveat, but to explain in big picture terms why.

682

As I indicated earlier, there's lots of cost-effective DSM potential that remains untapped, and given all of the benefits that accrued from those investments and the significant benefits that haven't yet even been attempted to be quantified, I think we ought to be on an upward trajectory over time. And so again, it's not a -- I wouldn't characterize it as a bad target, but I would -- I personally would have liked to have seen it higher.

683
MR. WARREN: Would you still like to seen it in a range of 70 to 85 million cubic metres?

684
MR. NEME: Given what I understand about the changes in availability of certain DSM measures that -- to which the company has had access in the past, I think that that's not an unreasonable range. My personal preference, again, would be for the higher end of that range.

685
MR. WARREN: Mr. Neme, if you would, please, to be generous to my ignorance in these matters, is it fair for me to conclude though that the lower you set the target, the greater is your chance that you're going to get a piece of the SSM reward at the end of the day?

686
MR. NEME: That depends on where you also set the budget. The target and the budget go hand in hand. So if you lower the target without lowering the budget, then what you say is absolutely true, but if you lower them both, it's not necessarily true. In fact, it depends on how well you do both of those things, it could be more difficult.

687
MR. WARREN: My final question to you -- series of questions to you, Mr. Neme, has to do with another provision in the ADR agreement. And if you can turn up Exhibit N.1, tab 1, schedule 1, and beginning on page 74.

688
This is that portion of the settlement agreement which falls within issue 9.4 under the rubric of a review of DSM consultative processes, and it posits a set of rules or procedures in which the ADR agreement contemplates the Board, in effect, approving.

689
When I look at about the middle of page I see the following: "All consultative participants must abide by the following procedural rules."

690
Bullet point number 2: "Participants will not speak out of order as determined by the facilitator or Enbridge acting as coordinator"

691
Third bullet point: "Participants will respect other participants' right to speak."

692
And fourth bullet item: "Participants will request time out for side conversations and will not initiate side discussions while the consultative is in progress."

693
First of all, Mr. Neme, can you and I agree that these are behavioural rules?

694
MR. NEME: Sure.

695
MR. WARREN: And I'm going to call upon your experience, sir, and your status as an expert. Have you seen any written set of rules like this in any of the other DSM-related activities that you've participated in over the years?

696
MR. NEME: Well, I think the first and fourth bullets are things that I've seen in other situations governing -- they're just kind of expectations about how participants in discussions are expected to act.

697
The second and third are examples that I don't think I've seen before.

698
MR. WARREN: Now, as I read this with a group of -- I'll characterize them as serious-minded, responsible individuals proposing a set of rules like this. This suggests to me -- it's like astronomer, you know, who observes this behaviour over here in the sky and says, I conclude from that that there's something existing over here that I can't see. I look at these rules and I'd say, there's some pathology at work that we're trying to cure. Is that a fair assumption on my part?

699
MR. NEME: Yes.

700
MR. WARREN: Since the Board is being asked to approve these rules, can you tell me what's the pathology that's we're trying to cure with these rules?

701
MR. NEME: Well, as you're probably aware at least up to some point, there have been some difficulties in the process over the last year, year and a half, that relate, in part, to the bullets that are at least the second and third ones, that are articulated here.

702
And this is, I think, an attempt to make clear from the get-go that these kinds of actions cannot be tolerated; that we need a more efficient process and a more respectful one, and one that allows everyone kind of an equal opportunity to both voice their concerns but also to learn from others and to move on when we can't agree.

703
And that -- I think that that's what we're trying to -- what you, really, the folks who signed on to the agreement, the grand "we", are trying to get at here.

704
There are -- there have been problems, in my own opinion and to the degree I've participated in some of these meetings, with the items that are listed here, and that's why they've been listed here, to try and correct these problems.

705
MR. WARREN: My final question in this context. I had this exchange with Ms. Squires and I asked her how she envisaged these rules operating if, for example, somebody violated the rules and was barred on a temporary or permanent basis from participation in the process. I asked Ms. Squires how she envisaged a kind of appeal from that process.

706
And in that exchange, I think we agreed, subject to what Mr. O'Leary may correct for the record, I think we agreed that disputes about the proper application of the rules would be brought forward to the Board for resolution as part of the hearing process.

707
And with apologies for this, this strikes me, if correct, that the Board would become a kind of appellant nanny, you know, deciding on what behaviour was appropriate or not appropriate. And if Ms. Squires and I are right about that, is it not fair to say that putting these rules and procedures in place will increase the time and complexity of the litigation process in relation to DSM? Is that not a fair conclusion on my part?

708
MR. NEME: Probably. I don't think I would have made that recommendation, that any time someone disagrees with the rules that the Board has to get pulled into it.

709
My own perspective --

710
MR. WARREN: Let me interrupt you. Ms. Squires and I didn't agree on that. It was that these disputes would go to the Board as part of the annual hearing process. We didn't suggest that every time there's a dispute about the rules we would have to convene the Board to resolve those disputes.

711
MR. NEME: If what you meant is that if there is a substantive dispute, for example about the approach one took to target setting or designing an SSM for a particular year or whatever, that a party who disagreed with others on that particular issue has the right to bring it to the Board in the context of the DSM plan, review, annual DSM review that the Board would undergo. That would seem to make sense to me.

712
It would -- I guess I would also suggest that -- I don't necessarily think that -- I think that it's necessary to have that out, number one. Number two, I don't think it means that the consultative process wouldn't have value, and frankly, if -- as I said earlier, if the consultative process does nothing but narrow the range of differences, it certainly makes the Board's job a lot easier going forward. And I guess kind of related to that, and maybe at the risk of going back to your previous question, I just want to make clear I didn't leave the wrong impression about the need for these rules.

713
I don't think -- you asked me whether there was a pathology, and I think at some level there may have been. But I don't think it's ubiquitous among the participants in the process. I think there was one kind of particular problem that we're wrestling with here, and to the extent that we can kind of corral that problem, we can be productive going forward even if there isn't unanimity.

714
MR. WARREN: Thanks, Mr. Neme. I'm sure that the Board, having heard all the DSM evidence, will reach a conclusion about whether and to what extent the efforts of the consultative have assisted them in doing so.

715
I appreciate your answers. Thank you very much.

716
MR. BETTS: Thank you.

717
Mr. Moran.

718
MR. MORAN: Thank you Mr. Chair, I have just a few questions.

719
CROSS-EXAMINATION BY MR. MORAN:

720
MR. MORAN: Mr. Neme, I think you've indicated that the main point of dispute from your perspective has to do with the free ridership issue, and I want to explore that issue just a little bit with you.

721
And at the crux of the debate is, as I understand it, on the one hand, the company estimated a 10 percent free ridership assumption going into the -- into the budget, and when the audit was done, looking back at the results, there was sort of a medium of -- view that maybe 49 percent was a better view of the free ridership assumption; right?

722
MR. NEME: Yes, the only twist -- two slight modifications to that, is that it varies -- for some measures it's 5 and for some measures it's 10 percent that was in the budget. And then secondly, while clearly the company owns that assumption, the way that it was arrived at, through discussions within the consultative, meant that others had input into that number as well, or those numbers.

723
MR. MORAN: With that qualification, though, the dimension of the debate is a debate between roughly 10 percent going in and 49 percent coming out?

724
MR. NEME: Correct.

725
MR. MORAN: And it's fair to say, I guess, if the company had used the assumption of 49 percent, plus or minus, depending on the program, and the audit confirmed that that was reasonable, we wouldn't be having this debate; right?

726
MR. NEME: That's correct.

727
MR. MORAN: Because it would have matched up. Maybe to paraphrase Mr. Rubin, we could assume a cow is a cow.

728
MS. NEWLAND: Sphere.

729
MR. MORAN: No. The cow would turn out to be a cow rather than a sphere.

730
MR. NEME: Right.

731
MR. MORAN: In that regard, if we could turn to Mr. Millyard's reconciliation report. Mr. Chair, I apologize I've lost track of the actual reference for the evidence on this, but you know what I'm referring to.

732
MR. NEME: I believe I do, but it would be helpful if I had a copy in front of me.

733
MR. BETTS: Mr. Moran, what was that reference?

734
MR. MORAN: Sorry, this is the Kai Millyard reconciliation record, it's entitled "The F-2000 DSM Audit SSM Replication Final Report." As I said, I've misplaced the evidentiary reference.

735
MR. BETTS: Can anybody help the panel with that reference?

736
MR. MORAN: It accompanies the audit report. There were two reports.

737
MR. BETTS: Thank you. We've been aided in finding it in the company's black binder under tab 4.

738
MR. MORAN: Thank you.

739
MR. BETTS: Yes, that was Exhibit K.1.1.

740
MR. MORAN: That's right.

741
MR. NEME: Whatever it's called, I think I have it in front of me.

742
MR. MORAN: Prepared for the audit subcommittee, it's dated July 31st, 2002.

743
Now, in appendix B, table B-4 of that document, there's a table which, as I understand it, reflects the impact on the SSM claim if 49 percent, for example, had been used up front, and therefore -- and turned out to be 49 percent. And we see a column for low, medium and high, and I'm referring in specific to the medium table --

744
MR. NEME: Yes.

745

MR. MORAN: -- column, sorry, which shows a net decrease in the SSM claim of just under $200,000 if the proper assumption had been built in in the first place.

746
MR. NEME: Yes.

747
MR. MORAN: First of all, let me ask you this: Is this an appropriate way to measure the impact of failing to make the right assumption with respect to free ridership?

748
MR. NEME: Just to be clear on your question, you're -- are you -- one needs to understand what the $200,000 reduction is being compared to. And if you're comparing it to, for example, Mr. Rubin and Mr. Rowan's suggestion that we apply the no-yes principle, which results -- and this is the yes-yes approach, then if we're comparing minus 200,000 to minus 4.5 million.

749
MR. MORAN: No. Perhaps I haven't set it up properly.

750
As I understand it, what this table shows is the difference between what the SSM claim was and what it would have been if 49 percent had been used to begin with.

751
MR. NEME: It's the difference between what the company's original SSM claim was using both 5 and 10 percent in the budget and in the actuals, and what the company's SSM claim would have been used 49 percent in both the budget and the actuals.

752
MR. MORAN: Right?

753
MR. NEME: Yes.

754
MR. MORAN: So in that context, is that an appropriate way to measure the impact of not using 49 percent to begin with?

755
MR. NEME: Within that context, yes.

756
MR. MORAN: Now, given that, and given the overall philosophy of the DSM program, how critical would you describe the free ridership issue as it has come up in this hearing? For example, is the failure to use 49 percent instead of the 10 percent that was used, is that -- how does that measure out in the big picture? Is the DSM program a failure?

757

MR. NEME: No. I don't -- I'd have to do some poking around to look at some numbers, but the fact that the free-rider rate is 49 percent rather than 5 or 10 percent does not mean that the company's commercial/industrial programs are a failure from the grand, public policy scheme of things. They could still be providing significant benefits to consumers. It's just that they're providing fewer of them.

758
That said, the way you've phrased your question initially, how important are free riders, from my perspective they're extremely important, particularly in these kind of programs, because they have significant effects on savings that we are actually getting. And regardless of what you think about the implications of that with respect to looking back at what kind of reward the company should get for work in the past, they have enormous implications for the future as well, in terms of understanding what's a reasonable target going forward. There are things we've got to look at in program design that warrant change and so on.

759
MR. MORAN: All right.

760
And one further question on that point, then. Given, I guess what's been described in different ways by some, perhaps, as a failure on the part of the company to get the free ridership assumption right, given how it turned out, it started off as a 10 percent estimate on the company's side and then there was an audit done after the fact and the auditor suggested that perhaps the free ridership assumption was too low and gave other numbers, how would you characterize the -- that finding? We heard Mr. Rubin, for example, describe that as the auditor discovering toxic sludge. How would you characterize that problem? Would it be in the same -- to the same degree, or would you have a different view on that?

761
MR. NEME: I'm not nearly as colourful as Norm, unfortunately. I think it's critically important that the auditor found it. I think it's one of the really important things that came out of the audit process, and frankly, it's not even really an audit process. It's really an evaluation task. Usually we talk about the auditor evaluating, or reviewing or auditing other evaluation work that's been done. In this case, because no evaluation work had been done on this particular issue, we thought it might be important. We had the auditor not only do an audit but perform an evaluation task as well, and I think that's extremely important that that happened and that we understand its implications.

762
It was a surprise to most of us that it was as high as the auditor estimated it to be, and I think a little bit of a wake-up call about looking at things, which I think on the whole are probably still quite beneficial, but making us consider whether there are ways going forward, we can make them even more beneficial.

763
MR. MORAN: The expression "toxic sludge" suggests that somebody deliberately buried something. Would you view it that way?

764
MR. NEME: No, I don't think there's any evidence on the table to suggest that either the company pursued free riders or that they knew or anybody else knew ahead of time that the number was going to be that big.

765
MR. MORAN: Mr. Neme, you've been involved in Union's DSM program; right?

766

MR. NEME: Yes, although I have not participated on their audit subcommittee.

767
MR. BETTS: Mr. Moran, can I just interrupt for one second. You're starting into a new line. I'm just curious how long you'll want to continue.

768
MR. MORAN: About three or four minutes, Mr. Chair.

769
MR. BETTS: Please continue.

770
MR. MORAN: Does the Union DSM program have an SSM?

771
MR. NEME: No, they do not.

772
MR. MORAN: And does it deliver benefits?

773
MR. NEME: It does. But if you look at the trajectory of savings that Union has achieved over the last several years and compare them to the trajectory that Enbridge has received in a period during which they had an SSM, the contrast is striking. Union has not had significant growth in savings in net benefits to consumers and Enbridge has.

774
MR. MORAN: One last question. I wonder if you could give the Board the benefit of your views with respect to the pros and cons of utility-led demand management programs.

775
MR. NEME: I think there are pros and cons. One of the advantages for the utilities is that they have existing and sometimes good and extensive relationships with their customers, and if you were to vest responsibility for doing DSM with another entity, that entity would have to kind of start from scratch most likely in developing these relationships, so that's clearly an advantage that utility administration provides.

776
A disadvantage is that it is a comparatively small part of what most utilities do, in terms of their business and, therefore, may not receive the kind of attention or focus that an independent administrator whose sole job is to do this would give it. There are also probably some cultural/structural barriers that utilities have to overcome to be successful in administering DSM programs.

777
And I think, kind of, one other point I would make about all of this is that, you know, I believe in the independent administering model. I think it can work really well. I think you have to be really careful if you're going to go down that road, how you do it.

778

One of the great advantages that we had in Vermont when we went down this road is that my organization already had 25 to 30 energy-efficiency professionals, more than any other utility in the state. We were already administering some of their programs. We had expertise on the ground, and so the transition was not -- it wasn't easy, but -- but it was doable.

779
The other thing is I think there is a real advantage, if you're going to go the independent route, to vesting responsibility for administration with an entity that is (a) local, and (b) non-profit. They may have partners who are not local, but the ultimate responsibility -- we were both local and non-profit in the case of Vermont, and that certainly made things, I think, easier and more effective.

780
And then, I guess, lastly I say that if anyone thinks that that's the route to go here, then you would have to be careful about transition issues so that things are as -- that we don't spend in kind of years of down time waiting to kind of ramp up some alternative effort in ways that would forego substantial cost-effective savings and many of which are lost opportunities, and perhaps even worse, potentially sour relationships with trade allies who need consistency in these things, who are ultimately important to the long-term effectiveness of these efforts.

781
Does that answer your question?

782
MR. MORAN: Thank you, Mr. Neme.

783
Those are all my questions, Mr. Chair.

784
MR. BETTS: Thank you.

785
We've been sitting now for two hours without a break, and I'm sensitive to our court reporter's needs along with my own at this point. I think we will take a 15-minute recess, allow everybody to stretch their legs. If anybody is in the room that can still discuss the original Board question of a schedule for arguments, because it appears that we will be able to conclude the DSM matters today, perhaps we could firm something up through that break. I would like to get it on the record, if possible, some time today.

786
But I'll allow you that 15 minutes to do that. So we will adjourn now and return in 15 minutes, which will make it 1:45.

787
--- Recess taken at 1:28 p.m.
788
--- On resuming at 1:46 p.m.
789
MR. BETTS: Thank you, everybody. Please be seated.

790
We will resume at this point with any redirect from Mr. Poch, and I know that there are a few questions of the Board and we will allow you redirect after those.


791
MR. POCH: I have no redirect at this time, Mr. Chairman. Thank you.

792
MR. BETTS: Then we will move to question from the Board.

793
QUESTIONS FROM THE BOARD:

794
MR. DOMINY: Earlier on in your statement, Mr. Neme, you talked about that you thought was important for the Board to, in this hearing, establish a policy framework or to give some clarity to a policy framework. I was wondering what the scope of your reference to -- was it just in relation to the SSM, both the design of the SSM and the calculations, or was it a broader reference you were making with regard to policy framework?

795
MR. NEME: When I made the comment, I was referring, in particular, to the way the SSM functions. However, I do think that there are probably some other issues that it's not realistic to address in this proceeding but that there would be value to you addressing, in the more medium term, related to some of the other developments that are occurring in other parts of the continent that I mentioned, including looking at the role of efficiency as part of a portfolio and the risk mitigating benefits it provides, refining assessments, the way cost-effectiveness is calculated to capture those benefits and potentially instructions to utilities or whoever else about the level of DSM that they should be going after.

796
Those are really big picture things that are not the subject of this proceeding that I do think are worthwhile looking at down the road. But my specific comment earlier was to the SSM.

797
MR. DOMINY: Another point you suggested, and I just wanted to understand -- I assume it's within the context with 2002 SSM. You made a reference to not address custom programs or custom -- am I correct that that's the extent of the reference to remove custom programs from an SSM, it's only for that one year?

798
MR. NEME: It's only for that one year.

799
MR. DOMINY: In that context, I had noted a piece of evidence that you may not have seen, K.15.1, which was a letter filed by the counsel for IGUA, and in it, there's a statement which says:

800
"IGUA supported the settlement of competing claims under custom projects for debits or credits in the amount of about zero dollars because it eliminated the risk of rate increases for contract rate classes."

801
And I was making inference, and you may perhaps not be allowed to answer this question, but is this impact part of the rationale as to why we have a settlement agreement for 2000 and 2001, namely that it removes any effect or impact on that class of customers?


802
MR. NEME: Well, I actually myself wasn't personally involved in the final negotiations that led to the settlement agreement, so I -- even if I could speak to that within the boundaries of your rules, I'm not sure I could.

803
But having said that, I think that the -- if you were to look -- if you would look at what the proposed settlement agreement is with respect to 2000 and 2001 and you were to crunch the numbers, and I've done this only on the back-of-an-envelope way for myself rather than in infinite detail, it's probably not far off, although I think it's probably a little bit lower than the effects that you would realize from essentially taking the customer projects off the table altogether from the SSM calculation. So I think it's an even better deal than just taking them off the table, but not dramatically, so --

804
MR. DOMINY: Another question related to the Vermont Energy, VEIC. And I just wanted to understand, how is it funded and who sets the level of funding?

805
MR. NEME: Just to be clear, the VEIC, the organization for which I work, is a non-profit organization that does a variety of different things, some of -- most of what I do is consulting out of state on the design and assessment of efficiency programs and so on.

806
MR. DOMINY: Could I stop you just there. I think I asked the wrong question. I was thinking more of energy programs, not particularly VEIC, but how are those funded.

807
MR. NEME: Each of the utilities' --

808
MR. DOMINY: Yes, how are they set?

809
MR. NEME: Yes. They are funded through a surcharge on the electric bill that the electric utilities collect and pass on to the regulators, who are our bosses. The regulators are the ones that hire us for Public Service Board.

810
MR. DOMINY: In terms of the program that your organization develops, the regulator supervises that, or is there some other body, the government or somebody like that?

811
MR. NEME: Ultimately, we're answerable to the Public Service Board, the organization analogous to yours, but they have some help. They have also hired a -- I forget what they call it now. They hired an individual who -- they call him the contract administrator, and his responsibility, to some degree, is to be their eyes and ears a little bit on a more ongoing basis, to give them some sense of comfort that we're being fiscally responsible and not cooking the books and so on.

812

And then there's also a -- another agency of State government which is kind of like our State energy office that have some folks that have some energy efficiency expertise. They get involved in working with us to develop estimates of savings that we would use for different efficiency measures and so on, as we track progress towards goals.

813
So there are a couple of other entities which would help them out, but ultimately we're answerable to our Board, the Public Service Board.

814
MR. DOMINY: Thank you.

815
You did mention San Diego Gas and Electric, and you said that they had made a proposal increasing their activity, or level of activity. Is that a proposal to increase a budget which is approved by a regulator, and do they have an SSM on top of it or is it just related to their SSM?

816
MR. NEME: A couple of points of clarification. This was a presentation made by a representative of San Diego Gas and Electric, but it applied to all of the California utilities. And they are following, I believe, an order from the regulatory commission, the Public Utilities Commission, to go after all energy efficiency that's cost effective.

817
Now, California, for a number of years now, has had what we call a system benefit charge, you know, a levy on everybody's bill that creates a pool of funds that are then used to fund efficiency-program investments. And some of those funds are administered by the utility, some of them have been -- have been provided to independent parties that the regulators have essentially hired to administer programs. So they have had that relatively steady stream of funding for several years.

818
What's happening now, the kind of interesting twist to all of this that's happening now is they have said, you know, this kind of steady stream of funding we've been having is not good enough, we're leaving way too much cost-effective efficiency behind, and you utilities are obligated as part of managing a portfolio of resources that you will be using to meet your customers' energy-service needs. You're obligated to get whatever the existing system benefit charge doesn't get, you're obligated to spend however much more it takes to get stuff that would be cost effective on top of it.

819
The mechanics of exactly how that will work, I don't think, have yet been sorted out, and there are some issues that clearly need sorting out there. But it's -- I think the big picture point is that they've -- that the state of California has made -- it's kind of shifted policy direction. Rather than having a somewhat arbitrary level of spending on an ongoing basis, the level of spending is going to increase substantially and be consistent with what is necessary to capture the maximum achievable efficiency, the cost-effective efficiency.

820
MR. DOMINY: I was looking for the reference in your paper, but I, I'll try and -- here it is.

821

You were saying that you thought that the SSM should be -- some part of it should be segregated to reward for the development of market transformation programs. And I just wondered whether there are any existing schemes where a system like that is included as an SSM to a utility to do that.

822
MR. NEME: I think we have to be careful with the term SSM, and I think that term has actually caught us up a little bit in this process over the last several years. I'll call it a reward mechanism rather than shared savings.

823
There are -- yes, there are reward mechanisms in other jurisdictions which set aside rewards that are achievable and can accrue to shareholders or, in the case of my non-profit organization, to our fund balance, if you succeed in meeting certain targets that are deemed to be indicators of targets towards market transformation.

824
One example from my own organization I gave is doubling the market share of homes built to a certain efficiency standard. A number of other jurisdictions have similar approaches, as well as providing rewards for meeting more kind of aggregate savings targets akin to what the current SSM is designed to accomplish.

825
MR. DOMINY: So let's take that as an example. There's a budgetary approval and then there's these rewards. In the case of -- approval of a revenue requirement or a rate, part of the action of the Board is to approve a level of spending that can be reflected in the revenue requirement. So in something like that, you would still have a budget you would approve as to how much they might spend in that area, and then on top of that, a reward to make sure they do it or do better. Is that the concept?

826
MR. NEME: Yes, and the specifics of how that plays out, if you don't, for example, earn your -- when the reward that's earned or not earned gets rolled into rates or not is -- may vary -- I'm not intimately familiar with all the details of how that works, but I think the general point you're making is accurate that there's both the budget established for efficiency programs as well as an expectation that at least some portion of a potential reward will be earned depending on the performance of the programs.

827
MR. DOMINY: Last question, a very simple question which I probably understand but I want to confirm it.

828
But in the context of these free riders, a free rider is a participant in the program, but would have done this regardless of whether the program existed or not; is that correct?

829
MR. NEME: Correct.

830
MR. DOMINY: But the free rider may have -- if there's, suppose, a cost assistance or something like that, would probably have received that cost assistance outside the utility's budget for DSM. Is that also --

831

MR. NEME: It could -- the company could be identifying that -- in that firm or that household as a participant for one of several ways. They could either have paid an incentive to that homeowner or that firm that, you know, wasn't necessary because they were going to do it anyway, or they could have provided some technical assistance to that household or that firm that wasn't necessary because they would have done it anyway, or they could have gone and installed a low-flow showerhead themselves, but it wasn't necessary, because the customer was about to do it anyway.

832
The key point is that some entity or some household or firm who is trapped in the utility's tracking system as having participated in the program and savings associated with that participation are logged, but who would have done it anyway absent the company's programs.

833
MR. DOMINY: And I was trying to work out this question of pre-identification. I know you don't support that, but if one did pre-identify the person who might do it in any case, would your expectation be at that point the assistance, whether it's advice or financial, from the utility would cease? Is that the concept you have when you talk about it?

834
MR. NEME: I want to be careful about absolutes. I -- if there were a way to know -- if one of those customers approached you with free rider stamped on their head, I think it would be appropriate not to provide them an incentive, particularly in a program that's called, you know, custom.

835
I don't know that I'd go so far as to say you shouldn't talk to them at all. As a matter of public policy it's probably a good idea to be able to provide and willing to spend some time and effort providing information, whether the customer ultimately needs it or not, just as a matter, you know, of good customer service. And frankly, in the end, that may actually pay off several years down the road when there is something that they wouldn't ultimately have done, but you've developed a relationship and you're able to actually work with them on something else later.

836
MR. DOMINY: Thank you, those are my questions.

837
MR. BETTS: Mr. Dominy has left me with only one question, and a minor one at that, but it's just to help me understand, I think, the larger concept of net benefits to this.

838
And you, in an exchange with Mr. Klippenstein, you were talking about your table, and you don't need to refer to it, but you did refer to the fact that water savings were included in the net benefits. I did understand that correctly?

839
MR. NEME: That's correct.

840
MR. BETTS: Can you explain to me how water and energy kind of fit together or how you deal with water savings? I think of water as a volumetric item that's liquid and energy is something different. How do you get those into that table?


841
MR. NEME: Well, to start with, as I indicated earlier, there are some efficiency measures which save both, so that's one thing.

842
And then the question is, Do they both have value, and they clearly do.

843
If you were able, for example, to, you know, reduce the City of Toronto's need to supply 10 percent of the water that they're currently supplying to customers, they would realize a number -- you know, some significant cost savings in both the provision of water and, for that matter, the provision of sewage treatment. You know, the exact magnitude of it I can't put my finger on. And so those are -- those are resource benefits that are real.

844
And you know, the next question is, Okay, so how do we -- so we accept that there are benefits there. How do we assign monetary values to them? And you know, water utilities in some respects aren't all that different from gas or electric utilities, and the methodology one might, you know, develop to try to quantify those benefits.

845
But in the end -- I mean, I think this grew out of EBO-169, and I think it's the right policy, to -- we are judging whether something is cost-effective based on the resource benefits that it provides to Ontario ratepayers of all stripes.

846
Does that answer your question?

847
MR. BETTS: I think so. Would it be fair to say that the largest component in the net benefits in dealing with water, then, would be the cost of processing the water before and after consumption? Are those the major factors that would represent dollars here?

848
MR. NEME: Potentially, although, I'm not positive. It could very well be that there are infrastructure developments, more capital-intensive infrastructure developments that are deferred as a result of saving water. You know, just somewhat very much analogous to the electric and gas sides.

849
MR. BETTS: Okay. That has helped me. Thank you very much.

850
Mr. Poch, any need for redirect on that?

851
MR. POCH: No, thank you, sir.

852
MR. BETTS: Then I'll certainly say thank you very much, Mr. Neme, for your contribution. It has helped us quite a bit, particularly at this stage, and, in a sense, has helped summarize things for us.


853
So you are welcome to pack up and take your trip back.

854
MR. NEME: Great. Thank you for having me.

855
MR. BETTS: Again, thank you for coming on this schedule.

856
PROCEDURAL MATTERS:

857
MR. BETTS: There are just a couple of minor procedural things, if we just can cover those off before we break. And I do appreciate everybody's flexibility in letting this thing go to this time without a lunch break, but I think it has been a useful way to manage our time today.

858
In terms of procedural items, has there been any agreement on a schedule for arguments?

859
Mr. Moran?

860
MR. MORAN: Yes, Mr. Chair. Based on the discussion with the parties on the break, I think there is a proposal. The company would file its argument-in-chief by May 5th. The intervenors would file their arguments by May 9th, and the company would file its reply by May 16th.

861
MR. BETTS: Thank you. And at least to all of the parties that are here, is there any disagreement to that?

862
MR. POCH: No, Mr. Chairman. I've spoken to a number of intervenor counsel, and we all agree. Insofar as the intervenors are concerned, I think we have a universal preference for written submissions on our part. I don't know if there's any strong feelings about the company.

863
MR. BETTS: Anyone else different from that?

864
That's fully understandable that written arguments would be best in this circumstance. And I look at that schedule and say it's quite an aggressive schedule, and thank you all for working hard on trying to achieve that as well.

865
There was one other item that -- or one other date that came forward as a result of the Board's decision on the motion yesterday. There was a target to establish a meeting date of the parties involved prior to the 25th. This may not have happened, but has there been any discussion to firm up a date on that?

866
Mr. Moran, perhaps you could --

867
MR. MORAN: Mr. Chair, there has been a discussion, and based on all the people that I've been able to talk to, it looks like we are going to be holding that meeting on the 24th with the 25th available if we need to continue, and rooms have been booked and so on. I still have to confirm with a few more people, but that's -- there is that consensus so far.

868
MR. BETTS: The Board doesn't need to know that, particularly, other than the Board Staff, but it might be helpful to have that date in the transcript at this point, so we can hear from anyone else that might have a concern with it.

869
So we will just leave that as it is and say that that is at this point a tentative date established by the parties here, anyway.

870
Finally, the Board panel will be breaking now, along with everybody else, for lunch, if they choose to do that. It is our intent to return this afternoon and deliver orally a decision on EnTRAC, which will allow the company, at least, to know where it stands as we go into this break. We're not certain how long that might take.

871
Can I first see a show of hands as to parties that would be interested in hearing that oral decision. And believe me, the only person that's important to have here is the court reporter in this case, so if you have other commitments, don't feel that the Board will be concerned.

872
One thing we could do is to, probably, a half an hour before we're ready to come back in this room is to call someone on the telephone and indicate that we're coming back.

873
In that case, I do see some company representatives that say they would like to be informed of that, and we do have Energy Probe as well.

874
Perhaps before, then, you leave, if we can get a contact number, and perhaps Mr. Schuch would be the best one to take those. We'll make sure we contact you with about 30 minutes' notice on when we're returning.

875
With that, any closing comments as we finalize this phase of our hearing?

876
There appear to be none. Then we will adjourn now until some time this afternoon. Thank you, and apart from that, I guess we see everybody on the 29th of May.

877

MR. POCH: Mr. Chairman, you're unlikely to see one or two of us, whose interest in this hearing is pretty well closed as of today. I just wanted to thank you for the opportunity to be heard.

878
MR. BETTS: Well, thank you. And that's right, too. We will not be seeing you, probably, for the remainder of the session, and thank you all for your contribution to date.

879
We will now adjourn.

880
--- Luncheon recess taken at 2:10 p.m.
881
--- On resuming at 4:47 p.m.
882
MR. BETTS: Thank you, everybody, those of you who are remaining. Everybody please be seated. Just give me a minute to catch my breath. I ran up -- well up and down several flights of stairs just moments ago.

883
DECISION:

884
MR. BETTS: Welcome, everybody, as we reconvene this session.

885
The Board was asked earlier to make its best efforts to issue an early decision on the issue 6.4 relating to EnTRAC, and the Board is now in a position to issue that decision orally.

886
The Board has reached a decision on Issue 6.4 relating to Enbridge Gas Distribution Inc.'s Energy Transaction, Reporting, Accounting and Contracting (EnTRAC) information technology project.

887
The Company's position is summarized as follows:

888
The Company is seeking Board approval of the EnTRAC project in four areas:

889
(1) the EnTRAC project in principle;

890
(2) an expenditure of up to $18 million;

891
(3) to close $6 million to rate base in fiscal 2003; and

892
(4) the appropriate methodology to allocate costs.

893

EGD argued that its existing legacy systems are aging and are not capable of managing the increasingly complex direct-purchase agreements and the growth in direct-purchase customers. EGD also indicated that the existing systems lack the flexibility to respond to changes in the market environment such as changes contemplated by the Gas Distribution Access Rules (GDAR).

894
EGD explained that the existing systems do not provide up-to-date information. Hence, the Company is not able to accurately forecast and determine purchasing requirements for load-balancing supply and system gas customers which, in turn, results in customer impacts through the PGVA.

895
EGD submitted that EnTRAC will produce benefits to all ratepayers in the areas of: reduced contract processing effort, legacy application maintenance, hardware and software reductions, reduced gas costs, shortened Banked Gas Account settlement periods, service provider savings, liability exposure, load growth potential, reduced future development costs, customer satisfaction, and employee satisfaction. EGD indicated that these benefits would be available to all ratepayers, not simply those with direct-purchase agreements or large-volume consumers.

896
With respect to the proposed cost of $18 million, EGD argued that the amount is reasonable and that no separate board of directors' approval was necessary for the EnTRAC project because it forms part of the company's overall budget that has already been approved by EGD's Board of directors. Moreover, EGD submitted that the company's executive team has endorsed the project.

897
EGD stated that a detailed development of project parameters was conducted and a formal Request For Proposals (RFP) was released. The Company asserted that the RFP process was objective and impartial to all participants.

898
With respect to cost allocation, EGD proposed to allocate EnTRAC costs on a basis similar to other information technology projects. In EGD's view, EnTRAC will generate benefits to all customers due to the impact on global system customers.

899
Mr. Dominy, would you continue.

900
MR. DOMINY: Turning now to the positions of intervenors.

901
First, on costs:

902
VECC, CAC and School Boards were concerned about the prudence and reliability of the project cost proposed by EGD. These parties were of the view that the RFP process was problematic.

903
School Boards and Schools argued that EGD did not properly conduct due diligence reviews on Sapient's financial health. Schools went on to argue that the Board should require the Sapient contract to include conditions to mitigate ratepayers' risks.

904
VECC noted that it is difficult to understand the underlying rationale of EGD's cost estimate.

905
In CAC's view, EGD is seeking an advance approval for an expenditure before there is evidence that the proposed investment would be used and useful.

906
CAC argued that other than EGD's assertion, there is no compelling evidence that EnTRAC is the appropriate solution, and that the proposed cost is appropriate. In particular, CAC argued that the RFP process is not in and of itself a measure of appropriateness of the cost.

907
School Boards and Schools were concerned that there is lack of information regarding the $3 million already spent and closed to rate base. Schools argued that the $3 million was closed to rate base without Board approval in 2002. As such, no return on that capital should be permitted going forward and that the amount of return paid should be credited back to ratepayers in 2004 rates.

908
School Boards was concerned that the NPV calculations include certain benefits, but exclude certain associated costs relating to those benefits. School Boards proposed that the Board authorize only the amount that can generate an NPV of zero or better.

909
Schools was of the view that the EnTRAC solution would allow EGD to respond to changing market conditions more quickly and effectively. However, Schools shared the concerns of other intervenors that it is difficult to judge whether the proposed cost is reasonable.

910
Schools proposed that the EnTRAC costs should be capped at $18 million or any amount determined by the Board. A cap should also apply to the proposed costs involved in ongoing system management of $400,000 per annum. In addition, Schools was of the view that EGD should not be allowed to seek further approval of additional costs incurred for scope change given the detailed work and the $3 million already spent in the design phase.

911
Schools was concerned that there is not sufficient evidence regarding the $3 million in costs related to the involvement of Customer Works Limited Partnership (CWLP).

912
IGUA supported EGD with respect to the necessity of the EnTRAC project. However, IGUA had concerns and questions with respect to the proposed budget. In particular, IGUA argued that EGD has not provided sufficient reasons to justify the selection of the most expensive bid response. IGUA was also concerned about the significant increase in non-vendor costs. IGUA submitted that it would be appropriate for the Board to approve the project but with a limited budget at this time with the proviso that the company can return to the Board in the next rate case and demonstrate the prudence of further expenditures.

913

With respect to the benefits achieved by EnTRAC within CWLP, IGUA recommended the Board direct EGD to track the benefits that EnTRAC would provide to CWLP, and to direct EGD to demonstrate in future rate cases that those benefits are being transferred back to the company.

914
OESC supported the company's EnTRAC initiative. OESC submitted that the evidence demonstrates that the project has been well conceived and well planned. OESC noted that the EnTRAC solution will be GDAR-compliant and will reduce the level of costs that would have been otherwise required to comply with GDAR on a stand-alone basis.

915
OESC submitted that the total cost estimate of approximately $18 million appears to be reasonable as it is comparable to the costs of the Union Line project estimated at $15.7 million. OESC noted that in its view, the Union Line project has not been designed with GDAR functionality in mind.

916
With respect to the cost allocation, VECC was concerned that the principle of cost causality was not relied upon. Both VECC and CAC argued that the benefits of EnTRAC are primarily enjoyed by large-volume customers and direct-purchase customers.

917
CAC argued that EnTRAC is correcting problems that system-gas customers didn't cause in the first place. Hence, it is unfair to require residential customers to pay for the cost of fixing a problem that they didn't create.

918
VECC and CAC proposed to allow recovery of EnTRAC costs through the Direct Purchase Administration Charge (DPAC). CAC argued that a user-pay approach will enable a closer connection between cost causality and the payment of costs.

919
CAC was of the view that Union's unbundling proposal should not be adopted as there are clear differences between Union's and EGD's proposals.

920
IGUA and OESC argued that the EnTRAC project would result in benefits to all ratepayers. These parties therefore opposed the user-pay approach. Both parties supported EGD's cost allocation proposal. However, IGUA and OESC submitted that in the event the Board is convinced that there should be a departure from EGD's proposed allocation, the methodology approved in the Union Gas unbundling decision RP-2000-0078 should be applied.

921
In its reply submission, the Company argued that the EnTRAC project cost passes two tests of reasonableness. Firstly, it has been developed through an independent competitive bidding process. Secondly, the cost is comparable to Union Line, the only other comparable project in Ontario.

922

In response to intervenors' concerns about the extent to which the Company undertook to review Sapient's financial results, EGD submitted that Sapient is the service provider which was referred to the Company by Union and therefore Sapient has already demonstrated its credentials in that project. The Company was of the view that it is the shareholders' money that is being invested in the project and is at risk. To the extent that the project is developed and produces benefits, it would then be closed to rate base.

923
In addition, EGD submitted that the $3 million already spent on EnTRAC was the subject of a complete settlement in the fiscal 2002 rate case and is not a live issue that the Board needs to address in this proceeding.

924
The Company reiterated its position that the cost allocation methodology should recognize not just the costs but also the system wide benefits.

925
MR. BETTS: Now, the Board findings:

926
The Board notes that there was no settlement of this issue in the settlement agreement, except as addressed in issue 6.1, "Rate Base of the Settlement Agreement" addressing the amounts included in the 2003 capital budget. While parties were in general support of the objective of enhancing at a reasonable cost the information system required to manage agreements with large-volume customers and direct-purchase customers and associated gas supply management issues, there was less than full acceptance that the Company had proven that EnTRAC was the best way to achieve the necessary improvements.

927
The Board is convinced that improvements to the gas supply management system are required. There was no evidence contradicting EGD's assertion that EnTRAC was a reasonable solution to achieve the required improvements. The Board also accepts the Company's position that the EnTRAC project will accommodate the changes required by GDAR at a lower price for ratepayers than if the changes were done on a stand-alone basis.

928
Although intervenors raised concerns regarding the Company's RFP process, the Board is prepared to accept the selection of Sapient as a reasonable choice of service provider for the EnTRAC project. However, the Board is concerned with the increase in the non-vendor costs between the Company's original and updated proposals. In the Company's original proposal, $2.9 million out of a total cost estimate of $19.5 million was non-vendor cost whereas in the Company's updated proposal, $8.6 million out of a total cost estimate of $18 million was non-vendor cost. This represents an increase of $5.7 million in non-vendor costs between the two proposals. The Board notes that the Sapient cost is reduced from $16.6 million to $9.4 million while at the same time Sapient is taking on responsibility for more tasks in a fixed price contract.

929
With respect to intervenors' concerns about Sapient's financial health and the potential risks to ratepayers, the Board notes that prior to costs being closed to rate base, it is the shareholders' money that is at risk. However, this does not preclude the need for the company to conduct a thorough financial due diligence analysis of any investment.

930

The Board is prepared to accept this project in principle on the basis that the costs not exceed $18 million. The Board accepts the $9.4 million Sapient component of the project cost as being reasonable. However, the Board agrees with the intervenors that the remainder of the costs, that being the non-vendor costs, have not been fully justified. The Board is of the view that these non-vendor costs, including the arrangement with CWLP, are within the control of the Company. The Board directs the Company to set up an appropriate deferral account to record these non-vendor costs as they are incurred. Any amounts recorded in this account will be examined for reasonableness at the time of disposition.

931
With respect to cost allocation, the Board expects that the EnTRAC project will produce system-wide benefits. Given the nature of the benefits, the Board is of the view that the most equitable approach to cost allocation is a cost allocation methodology where 50 percent of the cost will be allocated to rate classes on the basis of volumetric consumption, and 50 percent of the cost will be allocated to rate classes on the basis of customer count.

932
And that is the Board's decision.

933
Are there any questions?

934
MR. O'LEARY: Mr. Chair, no questions.

935
MR. BETTS: Thank you.

936
Then I believe that concludes, first of all, today's session, and certainly a major phase of this hearing. I've already had the opportunity to thank the intervenors who have participated in this part of the process, that being the DSM portion. I wish to take this opportunity to thank the company. We have appreciated your contribution to this, your openness, and your full support in aiding the Board, as we have dealt with at least the DSM issue so far.

937
Thank you very much.

938
MR. O'LEARY: Thank you, Mr. Chair, and Mr. Dominy and to Board counsel and Board Staff. On behalf of the company, I'd like to express our thanks for the juggling that you've done to fit EnTRAC into the schedule and permitting us to jump ahead, and the speed that you've taken to make your decision and we respect and appreciate what you've done.

939
MR. BETTS: Thank you very much as well.

940
I also want to take this opportunity to thank our reporting and transcription supporters here, Viva Voce Reporting. They have shown wonderful flexibility as well as endurance, I think, and also a real commitment to time. All of our transcripts, as everybody has known, have been delivered on time and in a very high-quality basis. So thank you.

941

And finally, and last but not least, I want to express for the record that the outstanding support that this panel has received from its staff members so far. We have been working, as you might expect, unusual hours. You all have as well, but ours have extended into the evening at times to deal with decisions that had to be made throughout this process.

942
So on behalf of Mr. Dominy and myself, let me thank them. I thank you everybody else for their participation. It's been tough but worthwhile so far.

943
MR. MORAN: Thank you, Mr. Chair.

944
MR. BETTS: We look forward to resuming our part of it as a panel on May 29th, and I know some of you have some work to do -- I said that wrong, April 29th. That was wishful thinking. April 29th. I know you all have a lot of work to do before that date.

945
Are there any statements anyone would like to make before we close today's session?

946
I think, then, that conclude it is. We will adjourn at this point and reconvene on April 29th. Thank you.

947
--- Whereupon the hearing adjourned at 5:09 p.m.