Rep: OEB Doc: 12QQU Rev: 0 ONTARIO ENERGY BOARD Volume: 23 26 MAY 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 26 MAY 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel COLIN SCHUCH Board Staff SUZANNE TONG Board Staff FRED CASS Enbridge Gas Distribution JAY SHEPHERD School Boards BRIAN DINGWALL HVAC Coalition MICHEAL JANIGAN VECC TOM ADAMS Energy Probe VINCENT DeROSE IGUA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] ENBRIDGE GAS DISTRIBUTION O&M PANEL: LOWRY, PLAYER, MEES, CHIOTTI [25] EXAMINATION BY MR. CASS: [32] CROSS-EXAMINATIN BY MR. JANIGAN: [99] CROSS-EXAMINATION BY MR. DeROSE: [445] PRELIMINARY MATTERS: [612] CROSS-EXAMINATION BY MR. SHEPHERD: [623] CROSS-EXAMINATION BY MR. ADAMS: [671] CROSS-EXAMINATION BY MR. MORAN: [733] RE-EXAMINATION BY MR. CASS: [822] QUESTIONS FROM THE BOARD: [843] PROCEDURAL MATTERS: [883] 10 EXHIBITS 11 EXHIBIT NO. K.23.1: CURRI CULUM VITAE OF DR. MARK LOWRY [55] EXHIBIT NO. K.23.2: CROS S-EXAMINATI ON MATERIALS FILED BY VECC [103] EXHIBIT NO. K.23.3: EXCE RPTS FROM THE OECD WEBSITE [108] EXHIBIT NO. K.23.4: TABL E DERIVED FROM IGUA INTERROGAT ORY RESPONSE NO. 4, FILED BY IGUA [547] EXHIBIT NO. K.23.5: DOCU MENT ENTITLED "PPPS FOR GDP HISTORICAL SERIES" FROM THE OECD WEBSITE [617] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.23.1: TO PROVIDE BUDGET INSTRUCTIONS FOR YEAR 2000 FOR O&M [166] UNDERTAKING NO. J.23.2: UNDERTAKING TO COMPLETE THE ATTACHMENT TO EXHIBIT A, TAB 5, SCHEDULE 1 [183] UNDERTAKING NO. J.23.3 :TO PROVIDE A DOCUMENT GIVING AN OVERVIEW OF THE SCORECARD PROGRAM [276] UNDERTAKING NO. J.23.4: TO UPDATE PAGES 3 THROUGH 5 OF EXHIBIT A.6, TAB 1, SCHEDULE 2, USING PPP RATHER THAN CURRENCY FACTORS [433] UNDERTAKING NO. J.23.5: TO PROVIDE THE 2003 CPBR BUDGET IN THE LEVEL OF DETAIL AVAILABLE AND APPROPRIATE, GIVEN TIME CONSTRAINTS [474] UNDERTAKING NO. J.23.6: TO DETERMINE WHAT POSITIONS REPRESENTED BY THE 2.3 MILLION, IN ADDITION TO THE O&M BUDGET, HAVE BEEN FILLED [530] 14 --- Upon commencing at 9:36 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 PRELIMINARY MATTERS: 17 MR. BETTS: Good morning, everybody. 18 We are now commencing day 23 of this hearing to deal with application RP-2002-0133. 19 Before we -- I was going to say "introduce the new panel," but I recognize a lot of familiar faces. Before we move into examination-in-chief of the panel, are there any preliminary matters to deal with? Before we do, I'll bring up one from the Board's point of view. 20 The Board finds it necessary to break this afternoon at 1:30 because of a prior commitment. It's been suggested by Mr. Moran that there's possibly an opportunity for counsel to get together and talk about a couple of issues, specifically to begin to think about how they'll deal with arguments on a confidential/non-confidential basis and so on. So perhaps those that are representing the various intervenors and applicant can meet with Mr. Moran at 1:30 today and begin those discussions. 21 Are there any other preliminary matters? 22 Mr. Cass, would you like to introduce the panel, and we'll swear in those that haven't -- 23 MR. CASS: Yes. Thank you, sir. 24 The panel here today to address O&M issues consists of Mr. Scott Player, Mr. Mike Mees, Dr. Mark Lowry, and Mr. Lloyd Chiotti. I believe that all these witnesses have been sworn except for Dr. Mark Lowry, so if Dr. Lowry could go forward and be sworn by Mr. Dominy, please. 25 ENBRIDGE GAS DISTRIBUTION O&M PANEL: LOWRY, PLAYER, MEES, CHIOTTI 26 M.LOWRY; Sworn. 27 S.PLAYER; Previously sworn. 28 M.MEES; Previously sworn. 29 L.CHIOTTI; Previously sworn. 30 MR. BETTS: Thank you. The witness has been sworn in. 31 Please proceed, Mr. Cass. 32 EXAMINATION BY MR. CASS: 33 MR. CASS: If I might begin with some introductory comments, Mr. Chairman, about the scope of the evidence of this panel. As the Board will be aware, in the settlement proposal there were unresolved O&M issues called "policy issues" to be addressed in the hearing, notwithstanding the overall settlement on an O&M number. These were listed under issue 7.45 of the settlement proposal. At that point in the settlement proposal, there are six unresolved policy issues that are listed. 34 Now, of those six, I believe that numbers 5 and 6 have already been addressed by other panels. Number 5 is the cost allocations from the Enbridge Inc. Corporate office. We had two other panels on that. And number 6 is the WAMS project, which also was addressed by another panel. So the remaining issues from issue 7.45 would be within the scope of this particular panel. 35 Also, as reflected at issue 7.45, there is some overlap, I think, between O&M issues and outsourcing. 36 Now, I will have a brief examination-in-chief that will not touch on anything of a confidential nature. It would be the applicant's hope and expectation, as to the extent that there are continuing questions about the confidential information, that those could be retained for the outsourcing panel that will be returning. And then with that, it may well be possible to do this panel entirely without having to go in camera and deal with confidential information. 37 That would, of course, be subject to the cross-examinations, and I don't know what those are. But that's certainly what the company would propose that we try to do so that this panel could be done entirely on the record. 38 MR. BETTS: Any submissions with respect to that objective? 39 MR. DeROSE: I can speak for myself. 40 MR. BETTS: Mr. DeRose? 41 MR. DeROSE: I certainly can conduct my cross-examination without getting into confidential information, and I believe if it does become necessary to get into confidential information, it's something that I could alert the panel well in advance. 42 At this point, I don't anticipate referring to the confidential information. 43 MR. BETTS: Is that -- Mr. Janigan? 44 MR. JANIGAN: I don't anticipate referring to confidential information as well in my cross-examination. 45 MR. BETTS: That's excellent. Actually, it will satisfy the Board's concerns, too, to be as public as possible. 46 And if any of the intervenors do find it necessary to enter into or use information that was acquired through the confidential process, then we will certainly try to address that. So don't restrict yourselves, but hopefully that won't be necessary. 47 Please continue, Mr. Cass. 48 MR. CASS: Thank you, sir. 49 Now, before I come to my few questions for this panel, we have Dr. Lowry here as an expert in regulatory economics. I believe his CV, his resume, has been provided to everyone. I can go through a series of questions with him to qualify him as an expert, but perhaps before embarking on that, perhaps I should check if there is any objection to Dr. Lowry being qualified as an expert. 50 MR. BETTS: Are there any questions with respect to Dr. Lowry's credentials? 51 It appears there are none. The Board and the intervenors will accept Dr. Lowry as an expert. 52 MR. MORAN: Just before Mr. Cass begins, I don't know if Dr. Lowry's resume has been marked as an exhibit. I think it would be appropriate to do that. 53 MR. CASS: I don't think it has, so I think it would be appropriate to give it a number. 54 MR. MORAN: Mr. Chair, that will become Exhibit K.23.1. 55 EXHIBIT NO. K.23.1: CURRICULUM VITAE OF DR. MARK LOWRY 56 MR. BETTS: Thank you. 57 MR. CASS: If I could turn to you, Mr. Mees, and ask if you could update the cost per customer O&M evidence to reflect the numbers flowing out of the settlement proposal, please. 58 MR. MEES: Certainly. The ADR settlement amount for O&M was $270 million plus an additional $10.9 million for demand-side management for a total amount of $280.9 million. The company's cost per customer evidence is located at Exhibit A.6, tab 1, schedule 2. If you could turn to that, I would appreciate it. 59 Again, that was A.6, tab 1, schedule 2. Specifically where I'm going to update is page 9. 60 As you can see at page 9 of this exhibit, it contains a table that shows the O&M costs per customer since 1993 in constant dollars. If the company were to update this table for the ADR settlement on a comparable basis to the historical numbers, the 2003 cost per customer would be 129.73. 61 This represents a decrease of over $54 per customer, which is a decrease of 29.6 percent on a constant-dollar basis from 1993. 62 MR. CASS: All right, then. Dr. Lowry, in relation to your work, could you please comment on this level of O&M expenses that Mr. Mees has just described. 63 MR. LOWRY: Yes. Well, my previous benchmarking work addressed two things: One was the historical performance of the company, the historical efficiency of their O&M expenses from 1999 to 2002. And then it also took a look at the proposed numbers for the year 2003. 64 Now, if we were to replace the company's originally-proposed numbers with those that result from the settlement proposal, there would be a considerable difference in the benchmarking outcome. 65 If we looked at the benchmarking both to compare the settlement numbers to the company's previous historical numbers, or if we make the comparison to those of other companies, the assessment of cost efficiency would be much more flattering and much more favourable to the customer. 66 MR. CASS: Thank you. 67 And then back to you, Mr. Mees, with one final question. There has been discussion in this case about the level of O&M savings achieved during the targeted PBR plan. Can you explain for the Board, please, how this has been reflected in the company's earnings during the PBR plan. 68 MR. MEES: Certainly, Mr. Cass. I can answer this by referring to one of the company's interrogatory responses. 69 Again, if you could turn to Exhibit I, tab 1, schedule 43, so that's Board Staff 43. 70 The table on page 2 of this exhibit shows the OEB-approved return on common equity in column one -- 71 MR. BETTS: Mr. Mees, just one moment. 72 MR. MEES: Sorry. No problem. 73 MR. BETTS: Thank you. We're set. 74 MR. MEES: Sorry. I'll start again. 75 The table on page 2 of this exhibit shows the OEB-approved return on equity in column one and the actual return on common equity in column 2. 76 So if you look at the actual return for the years 1999 through to 2002, they were below the Board-approved amounts in each year except for one, which was 2001. And as we have indicated in evidence, from 1999 through to 2002, the company's distribution margin was impacted by the warmer weather by $132 million. 77 So I'll just -- if you look specifically at each year during targeted performance-based regulation, so starting in 2002, the OEB return on equity was -- OEB-approved return on common equity was 9.73 percent, and the company was able to achieve an actual return of 8.23 percent, which was 1.5 percent below the allowed return. 78 The underage was driven by the warmer weather -- the warmer-than-normal weather. So if you look at the actual degree days for that year, they were 35.69, which was 360 degree days below the OEB-approved amount of 39.29. And so this resulted in the distribution margin being below budget by $42 million. 79 So the company took a number of short-term actions to mitigate this impact, but it was unsuccessful in mitigating all of the impact. 80 So if we look at 2001, the OEB-approved ROE was 9.54 and the company was able to achieve an actual return on equity of 10.8. 81 This variance above the Board-approved amount was driven primarily by two factors: The actual degree days were 37.66 which were 50 degree days below the OEB-approved degree days of 38.16. 82 Even though the company experienced lower than budgeted degree days due to the timing of the degree days, this resulted in a favourable weather impact on the distribution margin of $14 million. 83 The other reason for the variance was the positive impact of unaccounted-for gas. This is the difference between the amount of gas entering into the company's distribution system and the amount delivered to customers. 84 The favourable impact of this in 2001 was $20.9 million. So following this experience, the variance account for unaccounted-for gas was proposed by the company and has been established. And through this account, in 2002 the ratepayer benefited from this variance account by approximately $16 million. 85 So now if we turn to 2002, the Board-approved ROE was 9.66 percent, and the company was only able to achieve an actual return on equity of 8.98, which was 0.68 percent below the OEB-approved amount. So this variance was primarily due to the very warm weather. 86 The actual degree days for 2002 were 33.62, which was 338 degree days below the OEB-approved degree days of 3,700. 87 This underage in degree days result in a decrease in distribution margin of $47 million. So during 2002, the company took a number of short-term actions to mitigate the impact to the warmer weather on earnings, but as you can see from the actual return, it was not able to mitigate all of the impact. These actions included a hiring freeze, training and conference restrictions, just to name a few. 88 Operating and maintenance expense is the largest controllable expense available to management to mitigate unfavourable impacts. The 2003 budget for O&M expense as originally filed contained a reinstatement of a number of these short-term actions, and the amount of these reinstated activities was $10.7 million. 89 The 2003 applied-for budget of 305.1 also included expenses for continued customer growth, upgrade to the company's systems, cost to meet increasing inflationary pressures, and costs to meet the need to grow the business and promote the usage of natural gas. 90 I hope this recap of the actual return on equity achieved and the weather experienced during targeted performance-based regulation provides a better understanding of why management had to take the actions it did during that time. 91 MR. CASS: Thank you, Mr. Mees. 92 Those are my questions of the panel, Mr. Chairman. Thank you. 93 MR. BETTS: Thank you, Mr. Cass. 94 We now have the opportunity for cross-examination by intervenors. Has there been any order established? 95 Mr. Janigan? 96 MR. JANIGAN: Yes, Mr. Chairman. I'm going to go first. 97 MR. BETTS: Okay. Please proceed. 98 MR. JANIGAN: Thank you, Mr. Chair. 99 CROSS-EXAMINATIN BY MR. JANIGAN: 100 MR. JANIGAN: In my cross-examination, I'm going to be referring to a couple of documents. The first is a brief for the cross-examination on O&M policy, Vulnerable Energy Consumers Coalition, April 2003. It basically is a collection of materials that are found elsewhere but have been collected in one -- under one cover. And I believe both the panel and the Board have been provided with copies of that. 101 If I could have that marked as an exhibit. 102 MR. MORAN: Mr. Chair, that would become Exhibit K.23.2, cross-examination materials filed by VECC. 103 EXHIBIT NO. K.23.2: CROSS-EXAMINATION MATERIALS FILED BY VECC 104 MR. BETTS: Thank you. 105 MR. JANIGAN: And the second document, and I'm uncertain whether or not the Board has a copy of that; the company has a copy. It's materials from the website of the Organization for Economic Cooperation and Development. The top has a page 1 of 9, and it deals with purchasing power parities, and I'm going to be referring to that document in the course of my cross-examination as well. 106 If I could have that marked as an exhibit. 107 MR. MORAN: Mr. Chair, that would become Exhibit K.23.3, excerpts from the OECD web site. 108 EXHIBIT NO. K.23.3: EXCERPTS FROM THE OECD WEBSITE 109 MR. BETTS: Thank you. 110 MR. JANIGAN: And I'd like to start with some budget-process questions. I was wondering if the panel might have a copy of the transcript from EBRO-497-01 still available. I'm going to read a short segment if it's not available, but if it is, then it's page 374 of EBRO-497-01. 111 MR. LADANYI: Which volume? 112 MR. JANIGAN: I've just got the page reference, unfortunately. It's page 374. 113 MS. HARE: Volume 3. 114 MR. MEES: We have that, Mr. Janigan. 115 MR. JANIGAN: Okay. And I just wanted to refer to a -- one passage on page 374 that starts with, "The company has historically ..." 116 "The company has historically or for the past number of years prepared an O&M budget." 117 You say: "We would have prepared our 2000 budget in the fall of 1998 for the purpose of rate-making. Under a PBR formula, that O&M level would be defined; and therefore, there's not the same need to develop an O&M budget two years in advance. So the timing for preparing an O&M budget may change; however, the fundamental process for preparing that budget, we do not see that as changing." 118 In your view, was the budget process significantly different during the PBR regime than it had been previously under cost-of-service? 119 MR. MEES: No. I would agree with what, I guess, Mr. Grant is indicating, that the process hasn't changed fundamentally. Perhaps just the timing has changed. 120 MR. JANIGAN: Okay. Now, was it different in 2003 than it had been before PBR in the old cost-of-service regime? 121 MR. MEES: No, I don't think there has been a fundamental change since then. 122 MR. JANIGAN: Okay. And it was the -- obviously, then, it was the same as was used during PBR? 123 MR. MEES: Yeah, we still had the same reviews, the same grass-roots build-up by each of the individual budget preparers. That fundamentally hasn't changed. 124 MR. JANIGAN: Now, I'd like to look at some of the documents associated with the budget process, and we've taken some of these documents from CAC interrogatory number 4, and there's a table that's provided in document A or tab A of our Exhibit 23.2 that I'd like to refer to. 125 MR. MEES: Yes, we have that. 126 MR. JANIGAN: And from this response in the IR, it appears that the O&M budget declined sharply from 1999 to 2000, the first year of TPBR, and that the budgets were below 1999 levels in each of 2000, 2001, and 2003 -- sorry, 2002; do you agree? 127 MR. MEES: I would agree with everything but 2001. I don't think it's -- I mean, it is slightly below, but it's really at the budgeted level, so it can't be 2001. 128 MR. JANIGAN: Is this a normal experience for O&M budgets to decline from one year to the next, particularly over a period of years? 129 MR. MEES: Is there a particular year that you're referring to? 130 MR. JANIGAN: Well, I guess I'm looking at the experience under -- of these years and compare it to the experience of years previous to these years and asking you whether or not it is usual for O&M budgets to decline in this fashion from one year to the next? 131 MR. MEES: The only year that declined was from 1999 through to 2000, so the budget in 1999 was 280 million, and it went to 239.1 in 2000. 132 And the primary reason for that was due to the unbundling of the services business to Enbridge Services Inc., and then after that, the budgets increased as you would expect them to. 133 MR. JANIGAN: Okay. Let's stay below the '99 figure. 134 MR. MEES: As you heard in my examination in chief, the weather that we had to try to mitigate during those years was substantial, the weather impact was substantial. 135 MR. JANIGAN: And how usual is it for O&M expenditures to come below budget on a consistent basis? 136 MR. MEES: I'm not sure I could say whether it's usual. As I indicated in 2000 and 2002, we had some unusually warm weather. 137 MR. JANIGAN: But your expenditures came below the budgeted amount. 138 MR. MEES: Yes, it is. As I indicated, O&M expenses is probably the largest controllable expense and this is what we had to -- we reduced O&M with some short-term actions to help mitigate the weather. 139 MR. JANIGAN: And put it below budget in the fashions indicated. 140 MR. MEES: Yes, but just like the distribution margin was below budget. You can't focus just on O&M here when you look at the weather we had to mitigate. 141 MR. JANIGAN: And once again in cost of service, weather is a risk that the shareholders bear? 142 MR. MEES: Yes, it is. 143 MR. JANIGAN: And under PBR, it was the risk that the shareholders bear. 144 MR. MEES: Yes, it is. 145 MR. JANIGAN: Now, some additional documents have been provided in response to CAC interrogatory 114 and collected, once again, in the context of our briefing book and I'd like to look first under tab B which is the '99 budget letter which appears to have been issued from Joanne Gould on July 22nd, 1997 and it would relate, as I understand, to a budget that would be effective October 1st, 1998 some 14 months later; am I correct on that? 146 MR. MEES: Yes, that's correct. 147 MR. JANIGAN: And I'd like to find out on page 3, there is a title at the top entitled or a heading at the top entitled, "Productivity credit." And in the course of that paragraph that ensues there is a $3.8 million amount that shows up as a general cost reduction of 3.8 million. 148 Now, would the reductions that make up this number be permanent? 149 MR. MEES: I'm sure some of them would be permanent. I look at the last one, insurance savings, and as you've seen in our evidence, the insurance costs have been -- have doubled since 1999, so I'm not sure if we can say that that's permanent. 150 MR. JANIGAN: So how do we know when we look at this that -- which reductions are sustainable or unsustainable? 151 MR. MEES: I'm not sure. You'd have to have the knowledge to know what went on in coming up with this productivity credit. 152 MR. JANIGAN: So you'd have to drill down beneath the title of each of these individual items? 153 MR. MEES: Yes. 154 MR. JANIGAN: Now, I wonder if you could turn over to tab C in our brief and this I believe is the 2000 budget letter, it's issued on August 21st, 1998 from Ms. Beattie, and it would be again almost 14 months in advance of the effective date of the 2000 budget; am I correct? 155 MR. MEES: Yes, that's correct. 156 MR. JANIGAN: And at page 2, of the letter, it indicates that about three quarters of the way down the page that, "There will be a 2000 budget process to support the operating and management needs of the company as well as the information requirements of the company's board of directors. The process is expected to begin in March and instructions will be provided at that time." 157 That would be March of 1999, I assume. 158 MR. MEES: Yeah, I would assume. 159 MR. JANIGAN: All right. Now, in any of the productions in this case, have you provided us with those instructions? 160 MR. MEES: No. That's funny, when I was reviewing this over the weekend, I noticed that there is a gap but this was all of the instructions that we were able to find. I'm not sure exactly where the 2000 instructions were. 161 MR. JANIGAN: So you are not aware of where these are and cannot find them? 162 MR. MEES: At the time we couldn't find them. We can try to undertake to look again. 163 MR. JANIGAN: I wonder if you could do that, please. 164 MR. MEES: Certainly. 165 MR. MORAN: Mr. Chair, that would become Undertaking J.23.1, undertaking to look again for the budget instructions for year 2000. 166 UNDERTAKING NO. J.23.1: TO PROVIDE BUDGET INSTRUCTIONS FOR YEAR 2000 FOR O&M 167 MR. MEES: Specifically for operations and maintenance or O&M? 168 MR. MORAN: For O&M. 169 MR. BETTS: Thank you. 170 MR. JANIGAN: I wonder if you could turn over to document -- to tab D of our brief on page 15, there is the 2001 budget letter which was sent on July 30th, 1999 by Joanne Gould, again about 14 months prior to the effective date of the budget; is that correct? 171 MR. MEES: Yes, it is. 172 MR. JANIGAN: Now, at page 2 of this letter, those that are receiving the letter are advised of the -- that opportunities for operational efficiency gains should be identified and as well are told that, "Your EMT member will provide specific guidance related to your business unit to you." 173 How would this guidance have been provided? 174 MR. MEES: It most likely would have been verbally. 175 MR. JANIGAN: Is there any -- is there any written documents associated with this guidance? 176 MR. MEES: No, there was not. When we looked again, to fill these two requests, both CAC 114 and 115, nothing showed up. 177 MR. JANIGAN: Okay. And I also note that only the even pages of the attachment appear to have been copied for this response to the IR, is it possible to get the odd pages too? 178 MR. MEES: Certainly. Yeah, my copy doesn't have -- isn't missing anything. 179 MR. JANIGAN: It may well be my copy is deficient, the attachment. 180 MR. MEES: Sorry, it is missing. We can file that. 181 MR. JANIGAN: Okay. 182 MR. MORAN: Mr. Chair, that would be Undertaking J.23.2, undertaking to complete the attachment to Exhibit A, tab 5, schedule 1. 183 UNDERTAKING NO. J.23.2: UNDERTAKING TO COMPLETE THE ATTACHMENT TO EXHIBIT A, TAB 5, SCHEDULE 1 184 MR. JANIGAN: Now, at page 25 of our briefing document, page 12 of this letter, managers in paragraph 2 are told about how to budget for labour costs and specifically they are told that all budgeting -- budgeted positions must have a PCN or a position control number attached to them. Can you explain this requirement, was it a new requirement and what was its purpose? 185 MR. MEES: No, it was not a new requirement. I think prior to 2001, we -- and continuing during 2001, we budgeted by position within using our brass system and our system was -- it extracted information from our HR system and populated itself to show the position control numbers, which essentially are the individual positions within a department. 186 MR. JANIGAN: So this reflected no new requirement? 187 MR. MEES: No. 188 MR. JANIGAN: Now, on tab E of our brief, this correspondence also refers to the -- appears to relate to the 2001 budget, and the term that appears is the business -- 2001 business unit budget. 189 Is this a new budget? 190 MR. MEES: As we indicated, it's more timing than anything else. This is done for monitoring purposes, and it's done prior to the beginning of the fiscal year, so it was done not 14 months in advance. In this case, it was done three months in advance. 191 And if you look, we call it the estimate. It's just almost like a bridge year estimate. 192 MR. JANIGAN: So this would be done about 12 months in advance rather than the -- 193 MR. MEES: No, this was done in July and August of 2000, where the fiscal year for 2001 would begin in October. So three months in advance. 194 MR. JANIGAN: Three months in advance, okay. 195 And the footnote at the bottom of the page states that something called: "The regulated budget for 2002 will have a separate process and instructions that will be communicated at a later date." 196 Can you explain what that budget is in relation to the 2001 business unit budget? 197 MR. MEES: The 2002 regulated budget would be the budget that's prepared two years in advance, so similar to the traditional cycle. So this would be used for filing. 198 MR. JANIGAN: So the regulated budget refers to the budget that would be done with -- 14 or so months in advance. The business unit budget refers to the budget that's coming on-stream three months in advance? 199 MR. MEES: Closer, yes, so it's a better estimate. 200 MR. JANIGAN: Why the difference in nomenclature? 201 MR. MEES: It's actually for -- probably for clarity so that people understand that this one is done two years in advance, and the other one is done less than a year in advance. 202 MR. PLAYER: Mr. Janigan, you can probably blame me for that. 203 When I came into the company, I was not used to these budgets being done so far in advance, and so I wanted some clarity that when you do the one far in advance, we were doing it for regulatory purposes, how we set up the company, how we're going to run it. 204 But then as you get closer to the date when you -- you've got more factual information in front of you ready to launch, let's call that the business-unit budget or an estimate, if you will, like Mr. Mees has made in his comment. 205 MR. JANIGAN: Now, I wonder if you could turn over to page 2, and it would appear at the bottom of the page in number 2 that PCNs were now being scrapped. 206 MR. MEES: Yes. And that's what I, sort of, indicated, that prior to 2001, we used PCNs. After that, we focused more on a dollar basis. 207 So that, for example, if somebody could do something cheaper without a position; they could do it with temporary staff or consulting, then we shouldn't be tracking the positions. It's the dollars that really matter in somebody's budget. That's why we changed. 208 MR. JANIGAN: So the focus went to the overall dollar envelope rather than the number of positions? 209 MR. MEES: Yes. But again, I don't view that as a fundamental change. It's just a change -- slight change in focus. 210 MR. JANIGAN: Now, page 3 of this same letter under "Operations and Maintenance Expense" states that: 211 "Similar to last year, total O&M for the company has been determined through the company's long-range planning process. Further to that, budgets and planning has worked with the EMT to establish respective totals for each department, which reflect all the changes described above. Account managers will be expected to work with their respective EMT member to ensure that their budget is consistent with the department's budget as a whole." 212 This sounds to me like a top-down approach rather than the former grass-roots approach. 213 MR. MEES: No, it's -- it is a top-down. We use both a top-down and a bottom-up approach. 214 MR. JANIGAN: Okay. And was this not a new technique? 215 MR. MEES: No. We've had a long-range, five-year forecast for many, many years. So this is consistent with that, the use of that forecast. 216 MR. JANIGAN: And does this approach ensure that O&M budget levels can be kept lower than might be the case if only the grass-roots process were followed? 217 MR. MEES: No, because again, it is just a guideline that we use through our long-range planning process. 218 If the bottom-up approach comes up to a number, and there's cost pressures that are there that are required for people to run their business, that will be incorporated in the budget. 219 MR. JANIGAN: But I guess, are you saying that both processes operate at the same time, or may they operate in sequence? 220 MR. MEES: Again, the long-range planning process is done in advance of a budget. 221 MR. JANIGAN: But this instruction is being given three months prior to the budget being put in place. It strikes me that it would be difficult for a grass-roots project, grass-roots approach to take effect within the same kind of time frame. 222 MR. MEES: No. A grass-roots approach to this, normally we open up our system for budgeting by individual preparers for three to four weeks. And then it's compiled and reviewed. That normally takes, probably, two months to prepare. 223 MR. JANIGAN: My understanding was that was the reason why there was -- 14 months were taken to plan the budget process to allow for the grass-roots process to take place. 224 MR. MEES: No. The reason why it's 14 months in advance is because -- so that we could present it to the OEB for their approval and the review process, and this process takes a long time so that we can have a decision in place prior to our fiscal year. 225 MR. JANIGAN: Okay. And in effect, you can put that in place within the three-month time window? 226 MR. MEES: If we didn't have the production of evidence, the reviews, and the OEB decision, yes, we did. In this case for 2001, it was done in three to four months. 227 MR. JANIGAN: Now, I wonder if you could turn over to tab F, page 36 of the brief, which appears to be the budget letter for both 2002 and 2003, dated May the 30th, 2001; am I correct on that? 228 MR. MEES: Yes. 229 MR. JANIGAN: And again, the process for the 2002 budget seems to be much shorter than in earlier years. Can you explain that? 230 MR. MEES: I think in this case, the 2002, budget was done in a shorter period to try to get us back on schedule with the -- in hoping to get a rate decision prior to the fiscal year, beginning of the fiscal year. 231 And just -- I wanted to clarify. In the 2003 budget, this -- you may have noticed we filed the 2003 budget letter. The 2003 budget, in this case, as it indicates on page 1 in the second paragraph, was required to assist the company in planning and preparing the comprehensive performance-based regulation. So it was not used for rate filing. 232 MR. JANIGAN: Now, there were some additional documents that were provided as part of CAC interrogatory 115, and I have a few questions concerning those documents, which appear at tab G. 233 MR. MEES: Yes, we have that. 234 MR. JANIGAN: And on page 2 of this document, there is a bullet point that mentions a 1999 estimate scenario for operating and maintenance expense. Can you explain to me what that is? I'm trying to recall on my memory. I believe that this was used again for planning purposes. It was a challenge that was put out to the organization. I think it was to increase the O&M in 1999 by only two percent and then you can see, in this case, we wanted to assess the risks of this possible scenario. 235 MR. JANIGAN: And it appears that after this scenario was generated that some budgeted items in the 1999 budget were to be dropped; is that correct? 236 MR. MEES: I'm not sure where you get that from, Mr. Janigan. 237 MR. JANIGAN: That -- in fact, that -- if you read on, "In terms of review the business initiatives that will not take place as a result of meeting the 1999 estimate scenario for operating and maintenance expense," I assume that the business initiatives that will not take place were budgeted items that were now to be dropped because of this scenario. 238 MR. MEES: No, I wouldn't agree with that assumption. I think what we're trying to do here is assess the risk and what things would drop off if we had to only hold our costs to only a 2 percent increase, and I'm sure after review, and I can't remember because it has been a long time since October 1998, but I'm sure there were certain things that were brought forward and say we can't do without those things. It was a scenario to get people thinking to see if what they could cut. 239 MR. JANIGAN: With respect though, I mean the second sentence here indicates that, "This would include initiatives included in the 1999 budget and new initiatives that cannot be undertaken as a result of the scenario." 240 So you had initiatives in the budget, you had new initiatives that could not be undertaken as a result of the scenario, and there was a 1999 estimate scenario for operating and maintenance expense that took place that led to the dropping of initiatives presumably in both categories. 241 MR. MEES: That's why I'm not sure that you could make that assumption because this is for -- again, it's for reviewing the '99 estimate and after reviewing it, this is for discussion, so we would review the business initiatives that would not take place and if we still felt they should take place, they are included in the '99 estimate. 242 MR. JANIGAN: So we don't know what happened after you -- this, to your way of thinking, is simply an account that -- of what -- what had to be done. 243 MR. MEES: It was a challenge put out to the organization to see if they could keep the cost increase to only 2 percent and what would be the impact of that. 244 MR. JANIGAN: Okay. And what documents or what decisions and what documents came as a result of this particular estimate scenario? 245 MR. MEES: The '99 estimate would -- for O&M and expense would come out of this at the end of all of the reviews. 246 MR. JANIGAN: Okay. And is there any documents that are associated with the process that you outlined earlier? 247 MR. MEES: In order to fill CAC 115, we've searched all the documents we could and these were the ones we could find. 248 MR. JANIGAN: Those are the only ones you have, okay. 249 I wonder if you could turn the tab to -- turn to tab H, please. This is a letter from Mr. Riedl to the leadership group dated July 23, 1999. 250 MR. MEES: Yes, I have that. 251 MR. JANIGAN: And on page 2 of the letter in the second paragraph, Mr. Riedl says that specific budgeting guidelines will be addressed in a separate document. Now, was this document produced by the company in response to any IR or at any time in this proceeding? 252 MR. MEES: No, I believe this would have been the budget letter that would have been filed. 253 MR. JANIGAN: Which document are you referring to? You mean the budgeting guidelines are contained in the budget letter that I previously referred to? 254 MR. MEES: Yes. If you look at -- it would be the budget letter that was done by Ms. Gould -- no, in 1997, July 22nd. So it would have been under tab B. 255 MR. JANIGAN: Tab B is '97 and this one's '99, is it not? 256 MR. MEES: Did I pick the wrong one? Sorry. It would have been Joanne Gould under tab D, sorry. 257 MR. JANIGAN: So this refers to tab D? 258 MR. MEES: Yes. 259 MR. JANIGAN: Okay. Now, Mr. Riedl emphasizes that the need to improve productivity and to deliver the benefits promised by performance-based regulations to both customers and shareholders, and he also says, and I'm looking at page 2 here, that "From a shareholder perspective, introduction of the targeted O&M PBR plan represents a very significant step forward in improving efficiency, reducing regulatory burden, and enhancing returns for our investors. Given the worldwide climate of increasing investor expectations and opportunities, we must take maximum responsible advantage of the opportunities for enhanced savings presented by PBR so as to contribute substantially to the ongoing attractiveness of Enbridge equity to investors." 260 Can you explain what was meant or what you believe was meant by the term "maximum responsible advantage"? 261 MR. MEES: When I read that paragraph, and others can jump in, I view this as the company is to try to deliver the benefits of PBR, so deliver, through productivity, through long-term productivity the benefits and savings during this targeted performance-based regulation and as you've seen by the previous panel, I think we've done that. 262 MR. JANIGAN: And you also -- what was your understanding of the increasing investor expectations? 263 MR. MEES: I think the investor realizes we were entering into a new performance-based regulation and that not only do we have it from the perspective of the customer, the shareholder would like to see some benefits coming out of performance-based regulation. 264 MR. JANIGAN: Now, given that targeted O&M PBR plan related only to operation and maintenance expenses, are the enhanced earnings referred to here simply reductions in O&M expenditures each year below the level of those allowed in rates? 265 MR. MEES: I would think so given that it says targeted O&M PBR plan and that's where -- it seems to be the focus of the paragraph. 266 MR. JANIGAN: Now, Mr. Riedl refers to a balanced scorecard program and he notes that where appropriate, these are coincident with the PBR targets. What is the balance scorecard program? 267 MR. MEES: Since this time, we have put out scorecards and we're -- for both the company and for each individual employee. We are really proud of our scorecard implementation and by the end of this year, we're hoping to have scorecards in place for all employees, so specific performance measures for individual employees. 268 MR. PLAYER: In terms of the balanced scorecard, I think you would have heard Mr. Riedl, over time, speak of his three-legged stool, so he refers to employees, customers, and shareholders, and if you don't serve all three of those and do it in a proper manner you're not successful, and that's really what this scorecard relates to. When we built on had that scorecard concept that Mr. Riedl put in place, and we've continued to focus on performance metrics increasingly, certainly through that PBR period. 269 And as Mr. Mees has said, by the end of this year, every individual in the company will have a scorecard, specific metrics that they're accountable for and can control and can drive for a better performance. 270 And it's not just around efficiencies, but it's -- certainly efficiencies is a part of that, but it's also around service performance, safety is another issue, absenteeism, et cetera, et cetera, in order to operate this company continually in an operational excellence manner. 271 MR. JANIGAN: Now, without getting inundated with information, I wonder if -- is there any documents that outline this program and the directions given to managers that could be produced? 272 I don't want to see the scorecard for every employee in the company. 273 MR. MEES: I'm sure we can undertake to file a document that would give an overview of the balanced scorecard program. 274 MR. JANIGAN: Thank you. 275 MR. MORAN: Mr. Chair, that would be Undertaking J.23.3, undertaking to provide a document giving an overview of the scorecard program. 276 UNDERTAKING NO. J.23.3 :TO PROVIDE A DOCUMENT GIVING AN OVERVIEW OF THE SCORECARD PROGRAM 277 MR. BETTS: Thank you. 278 MR. JANIGAN: Now, I want to look to some directions that were filed -- that were given in preparation for the 2003 budget and the letter that was filed at A.1, tab 6, schedule 1 in the evidence. That's not in my brief. I wonder if you could turn that up. 279 MR. MEES: Yes, we have that. 280 MR. JANIGAN: And as I understand it, these directions were given about six months before the effective date of the budget and are very brief compared to the other budget directions that we have seen. 281 Were there any other documents that expand on this direction? 282 MR. MEES: No, I don't think there was. 283 MR. JANIGAN: And I think as you indicated, the preparation of this budget would be comparable to the preparation of budgets both prior and during the TPBR period. 284 Now, it's common knowledge that these budgets would be usually initiated some 14 or 15 months in advance of their effective date. Can you explain why it was possible to complete the budget process so much more quickly. 285 MR. MEES: I don't think it was done more quickly. This was started in March, and we completed the budget in, I think it was, September. 286 But I think what this -- the timing reflects is the fact that we were behind on the regulatory schedule, and that's why we're here during fiscal 2003. 287 MR. JANIGAN: So it effectively was accelerated? 288 MR. MEES: No. I don't think it was accelerated. 289 MR. JANIGAN: So it was the same process? 290 MR. MEES: Essentially the same process. There might have been -- you know, where in the past there was three to four weeks for somebody to complete their budget, they might have 2 1/2 to 3 weeks, but there was not a dramatic change in timing. 291 MR. JANIGAN: All right. And was this a grass-roots process? 292 MR. MEES: Yes, it was, as it indicates in the budget letter. 293 MR. JANIGAN: And for the 2003 test year, the company proposed an O&M budget of 305.1 million, which was at that time up more than 16 percent from the 2002 actuals of 262.3 million; have I got that correct? 294 MR. MEES: No, I don't think you have. I think the actuals were 246 million. 295 MR. JANIGAN: I think you're right; 262 was the target. 296 MR. MEES: Was the budget. 297 MR. JANIGAN: Was the budget. So it was up 15 percent from the budget and up about 20 percent, I guess, from the actuals; am I correct on that? 298 MR. MEES: Yes. Subject to check. 299 MR. JANIGAN: Now, if this budget arose from a grass-roots approach where you go back to the individual departments and look at the -- look at the expenditures, is it not surprising how high the amount that was requested was in relation to the -- both the 2002 budget actuals and projected? 300 MR. MEES: Yes and no. I mean, the 2002 actuals reflected the significant mitigation activities that occurred, so a cut-back on a lot of training, and staff vacancies were held open. So it is no surprise that you would see an increase from that level. 301 But given that there were a number of cost pressures, some of which I've indicated in my examination in chief, and I think that's -- that took a lot of review. We took a lot of time in discussing this budget because of the substantial increase to make sure we're comfortable with that budget. 302 MR. JANIGAN: And the evidence that's at A.6, tab 1, schedule 1 indicates that almost 20 percent of the increases in the O&M budget originally proposed by the company consisted of so-called unsustainable mitigation actions in the 2002 budget that you referred to earlier. 303 MR. MEES: The $10.7 million, yes. 304 MR. JANIGAN: Now, are there any documents that were provided concerning the budget process for the 2002 fiscal year that directed managers to reduce their budgets in an unsustainable way? 305 MR. MEES: I'm not sure if this helps, Mr. Janigan, but CME interrogatory number 4 provides copies of communications which were primarily verbal but does provide some communications on the need for the mitigation efforts in trying to reduce the impact of the warmer weather. 306 Is that what you're looking for, Mr. Janigan? 307 MR. JANIGAN: Yeah, but we could certainly go to that. 308 MR. MEES: You can see that through the server, there's a number of e-mails asking for -- to take mitigation action. 309 MR. JANIGAN: And when would managers have been given such directions? 310 MR. MEES: During 2002 would have been done probably early in the year, because it was very warm in the first three months of the year of 2002, if I remember. So I think it was in the January, February, March time frame. 311 MR. JANIGAN: And the e-mail memorandum in the CME interrogatory 4, I think, shows that -- some material relating to O&M mitigation on April the 12th, 2002, and which you term "budget bleeding," I think, on July the 12th, 2002. 312 MR. MEES: Yeah. I think there was one e-mail that indicated budget bleeding, yes. 313 But you can see, throughout the whole year there was a number of communications that went on looking for anything that could be -- anything that could be done to minimize the cost. 314 MR. JANIGAN: And these reductions to O&M within the TPBR formula, those benefits would have accrued to the shareholder, would they not? 315 MR. MEES: The O&M benefits would have, but then, again, they were done to offset the warmer weather, so the decrease in margin. 316 MR. JANIGAN: And I believe I have a quote here that the -- what was to be done was to protect the shareholder from the losses due to warmer weather, however you can. 317 MR. MEES: Sorry, Mr. Janigan, where do you refer to that? 318 MR. JANIGAN: Sorry. That may not be a quote -- 319 MR. MEES: Yeah, because I don't think -- because I don't think wherever we can, we would do that. 320 MR. JANIGAN: That may be a precis. Is that a correct precis? 321 MR. MEES: No. Because we would not impact safety. 322 MR. JANIGAN: Okay. I think within the limits of your -- within the limits, it would be operationally allowed. You were looking for the -- as much mitigation as you could afford to the shareholder? 323 MR. MEES: Without impacting safety, yes. For example, there would be other things that would have to be looked at, but all things were examined. 324 MR. JANIGAN: I wonder if you could turn up Board Staff interrogatory 75, which is tab 1, schedule 75, IT.1. 325 MR. MEES: Yes, we have that. 326 MR. JANIGAN: And there is a list there in -- of a number of mitigation actions. 327 MR. MEES: Yes, that's the amounts identified, the reinstatement of the mitigation action. 328 MR. JANIGAN: Can you explain the first of these relating to success sharing? 329 MR. MEES: Certainly. It is the biggest component that was reinstated. Success sharing is what we term our employee bonuses because in 2002, because of the warm weather, employee bonuses were only half what they would be targeted to be and this is just reinstating that to targeted levels. We don't think that the employees should be -- this is a budget and the employees deserve a bonus. 330 MR. JANIGAN: Now, my understanding is that this saving of O&M money in this fashion would happen automatically when weather was warmer because the amounts of success sharing are tied to the achievement of certain volumes. 331 MR. MEES: The success sharing pay-out is tied to the balanced scorecard, so it's impacted by earnings, the customer, as Scott indicated, to all stakeholder measures. 332 MR. JANIGAN: But if you experience warm weather, whether you're under TPBR or under cost of service, you're going to be initiating these mitigation actions which will include reduction of the success year; right? 333 MR. MEES: I guess you can generally say that, but if it's not that warm and we're still able to offset the warm weather, that we still have a significant pay-out. It's based on -- the one measure of many is based upon the company's earnings. 334 MR. JANIGAN: Okay. So it depends, I guess, on the severity of the warm weather. 335 MR. MEES: Yes. 336 MR. JANIGAN: And if it's severe, the 3.7 million, I guess, would be saved. 337 MR. MEES: Yes, but so would -- distribution margin would be offset significantly, I would assume. 338 MR. JANIGAN: And that leaves about 7 million that was saved through budget bleeding. 339 MR. MEES: Sorry, Mr. Janigan, what was the ... 340 MR. JANIGAN: Of the 10.7 that we've been discussing, 3.7 would have been saved in the warm weather -- saved in the severe warm weather year and leaves about 7 million that was saved through budget bleeding. 341 MR. MEES: Through mitigation activities, yes, things like staff -- I think staff lags contributed about 2.3 million in total of the remaining 7 million. 342 MR. JANIGAN: And had these savings not been made, it would have been the shareholder that would have been $7 million poorer. 343 MR. MEES: Again, if you're looking just at O&M, you're right, but you have to look at the full picture. 344 MR. JANIGAN: Okay. 345 MR. MEES: You saw the returns on my examination in chief; they were not substantial, that's for sure. 346 MR. JANIGAN: I wonder if I could turn to benchmarking. And I wonder if I could just clarify what is involved in benchmarking studies and if I could address this question to Mr. Lowry, looking at your study which was provided in response to Board Staff interrogatory number 79. This was a study which attempted to compare EGD's O&M expenses to those of utilities of a similar nature to see how productive EGD was compared to those utilities. Am I correct? 347 DR. LOWRY: That's right. 348 MR. JANIGAN: And this particular study covered the years 1999 to 2003; correct? 349 DR. LOWRY: Yes. 350 MR. JANIGAN: And could you have included a longer time period in your review? 351 DR. LOWRY: I think so but I don't recall whether that information was proffered to me. I think at the outset, we just thought that was the relevant period so that's what we focused on, that that would be the relevant span. So I'm not sure. 352 MR. JANIGAN: Okay. I take it that the longer the period of observations, the more -- in a general way, the more confidence one can have with the results. 353 DR. LOWRY: Well, the results for the company don't necessarily have to be brought back farther to have confidence in the results. I think the issue of confidence in the results in the size of the sample has to do with the benchmarking sample that you compare to the company and we have, in this case, a very sizeable sample. 354 MR. JANIGAN: But if you only had, for example, one year, I assume that that probably would not be enough to make an assessment. When you get two years, it's a little better, three years a little better, four years -- 355 DR. LOWRY: Now, do you mean the sample for the other companies? 356 MR. JANIGAN: That's correct, and for the company itself to compare it. 357 DR. LOWRY: Well, again, to say that -- well, I think there were enough years for the company. There can be a question of whether the sample for the benchmarking is large enough, and we used that year because it was the most recent available. We thought to balance considerations of the freshness of the data and the size of the sample, you'd like to have the fresh data because the productivity of the industry is going to improve a little bit from year to year so the more recent the year, the tougher the standard that's being used. 358 Now, since we submitted that study, we have done some additional work in an effort to assess the settlement proposal level of O&M, and since we had more time available, we did take the opportunity to update to yet another year which is 2001 and we also used -- we thought that the actual cost -- econometric cost model that was used to come up with the output quantity index could itself be used as a very sophisticated benchmarking tool that actually controlled for more conditions. 359 As you may recall from the report, there is this model and this is based on the sample from some 40 utilities that goes all the way back to the year 1990. So when you have like 40 to 50 utilities over that many years, you have quite a sizeable sample. 360 So in fact, in assessing the settlement proposal, we did avail ourselves of this econometric model that is a very rich source of data and we found the results were just great for the company; that if you looked at this settlement proposal that the model projected a cost that was 32 percent higher than the actual amount in the settlement proposal. 361 MR. JANIGAN: Now I'm looking at other factors that may affect the reliabilities of your study and, in particular, I'm looking at whether or not the fact that a company is undergoing radical changes in organization and business during the period of time that you are observing. Might that effect the results of the study? 362 DR. LOWRY: No, I don't think so. I mean the bottom line to the customer is the dollar figure and the company, I think, to its credit, tried to do something with this TPBR, tried to do something more than negligible to improve its cost efficiency and so it would have been disappointing if they didn't try to do something interesting over this period. 363 But as I say, for the customer, what matters in the end is that dollar figure, in this case, the most relevant thing, is the settlement proposal dollars and that, as I say, compares very favorably to the cost standard in the industry as a whole. 364 MR. JANIGAN: Were you aware when you did your study that the company had embarked upon an outsourcing strategy? 365 DR. LOWRY: Yes, and in fact, that was one of the things that intrigued me about working for the company in this proposal because plainly there are complicated issues when you get into outsourcing and I think it makes it more important to bring quality benchmarking methodologies into play to help assess the fairness and I think it's very much to the company's credit that they commissioned the study that is pretty much the state of the art in terms of cost benchmarking for gas distributors and indeed for all gas utilities. 366 MR. JANIGAN: I guess when we look at the changes that the company is taking -- is going on with in the company and looking at tasks that were before you, it might be that I may be imparting more to your analysis than you were asked to do. 367 You're not looking at whether or not these changes could be sustainable over the long-term or commenting upon what the impact of changes might be on long-term productivity. You're looking at the numbers and seeing how they match up against other utilities across the board; is that correct? 368 DR. LOWRY: Well, I think that the methods that have been used here are pretty much for the long run of what -- you know, thinking of the matter in the long run; what is a sustainable level of O&M expenses? 369 When you have a large sample, you basically -- that's the flavour of the benchmark is what is the sustainable level? 370 MR. JANIGAN: Well, yes. But I mean, you're not -- you weren't looking at -- in terms of the outsourcing that took place and whether or not any of the outsourcing gains would be rebased to the -- to the company or whether or not any of these particular reductions would be sustained over the long term, that wasn't your job? 371 DR. LOWRY: Well, in principle you could look at a very micro level, but that -- and -- that's rather difficult to do. I'm not saying we couldn't have done it; we just didn't do it. 372 But the fact of the matter is that there is an alternative, which is just, Let's look at overall O&M expenses, and are they -- do they represent good value for the customer? And my research suggests that they certainly do. 373 MR. JANIGAN: Well, I think what I'm getting at is Mr. Riedl indicated in his correspondence that Enbridge Consumers Gas will undergo, arguably, the biggest transformation in its history, to take it from the quote. And Dr. Bauer in his evidence suggested as well that meaningful benchmarks must control for exogenous factors that influence O&M costs. 374 I guess what I'm saying is that where in your study did you deal with the fact that the company was undergoing a period of change, as it were, and whether or not this change is relevant in terms of our analysis of where the company stands vis-a-vis benchmarks? 375 DR. LOWRY: Well, I think first of all that yes, Dr. Bauer talks about you have -- how benchmarking has to control for various special business conditions beyond the control of the company, and I think that the original study did a very good job of that. I mean, it was controlling for differences of input prices and various outputs. And then we also made controls for whether it was a gas-only company, whether it's a large company. 376 Then with the new work, the econometric work that we worked on to look at the settlement figures, even a more sophisticated level of control that includes how spread-out the system is and how severe the winter weather is in the service territory, it's really a state-of-the-art model. So I mean, I think we did -- we did exactly what Dr. Bauer recommended. 377 And as I said, these studies are the absolute state-of-the-art for benchmarking. 378 MR. JANIGAN: Well, let me refer you to the CME interrogatory number 67 and the response to the company at IT.4.S.67. 379 And as I understand it, one of the factors used to develop the comparison of the company with other companies is labour costs. And in this interrogatory, which asks for annual labour productivity data, the response notes that: 380 "With many changes that have recently occurred, a year-over-year comparison of labour costs per customer would be misleading." 381 I guess I'm having a hard time understanding why, if we look at -- if the company indicates with respect to labour productivity data that in a time of change a comparison would be misleading, why we would -- why the benchmarks that are produced during this time of change would not also be misleading? 382 MR. LOWRY: Well, I think the point of -- this is the first time I've seen this interrogatory, but I think the point is is that to look at a highly micro level can be misleading. Basically, I think you would find, because of the outsourcing, a dramatic improvement in the company's labour productivity, but that was to some degree offset by higher other O&M expenses. 383 And so I think what matters to the customer is the macro level of the overall cost, and so it just makes sense to evaluate it at the O&M level as opposed to at a more micro level, because there are a lot of trade-offs between various types of inputs that are used in the gas-distribution business. 384 MR. JANIGAN: So in your studies, when you look at the O&M -- the overall O&M level, that if labour cost changes from paying an employee to paying a service charge to an affiliate or related company to provide a service, it doesn't affect the labour inputs in your study? 385 DR. LOWRY: Well, it would affect the labour inputs, but I mean, what the customer cares about is the balance of the two or the sum of the two, and so it's more appropriate to look at the overall level than it is to look at the individual level. 386 And I think in this case, the company, as I say, would look great if you just focused on the labour, because they had made -- had dramatic labour cost savings. 387 MR. JANIGAN: Well, let's say directly, during the TPBR period, some 700 employees were transferred to Customer Works, which gave rise to outsourced service costs of some 70 million that increased eventually to almost 100 million. 388 Would your study have taken these changes into account? 389 DR. LOWRY: Well, again, the study is -- I mean, is looking at the -- the -- you know, what matters to the customers, which is the overall level of O&M expenses. That's what we take into account. 390 I mean, we -- what we're trying to look at and should look at, I think, is the end result of these various adjustments that the company made. And as I said, that -- you know, you would hope that the company would do something significant during the TPBR period. 391 So that -- you know, with just the bottom line at the end, that is the appropriate focus for the benchmark. 392 MR. JANIGAN: Now, finally, Dr. Lowry, I want to ask you a few questions with respect to purchasing power parities and your use of them, and I note that on page 13 in the -- your materials that were provided in response to Board Staff interrogatory 78 or 79, I believe. Appendix -- I think it's in your appendix -- 393 DR. LOWRY: Oh. I'm sorry. Just a moment, please. 394 MR. MEES: Mr. Janigan, was that page 13 of Board Staff 79? 395 MR. JANIGAN: Yes. In the Pacific Economic Group Report itself. 396 DR. LOWRY: I'm sorry. Bear with me for just a second. Oh, yes. Okay. Yeah. 397 MR. JANIGAN: And I notice that the way you constructed your index was that you used the purchasing power parity for the Canadian economy derived from the OECD. 398 DR. LOWRY: I used a purchasing power parity for the Canadian economy. 399 MR. JANIGAN: Yes. And I just -- I have a document that I believe has been provided to you. We've marked that as Exhibit K.23.3, and I've taken this from the OECD web site, and it contains some information concerning purchasing power parities and why they're used. 400 And in particular, I'll refer you to page 2 of that exhibit, and it indicates that: 401 "Purchasing power parities are the rates of currency conversion but equalize the purchasing power of different currencies by eliminating the differences in price levels between countries." 402 And you've constructed your index so that the differing price levels between the countries does not affect your comparison between the American data and the Canadian data, as I understand it. 403 DR. LOWRY: Yes. Well, I think the point is is that you want to be attentive to the difference in prices between the two countries for the inputs, and that the purchasing power parities I thought were appropriate for my study. 404 MR. JANIGAN: Okay. And I wonder -- and it appears that purchasing power parities were used for the price index relating to all inputs except labour; am I correct on that? 405 DR. LOWRY: Actually, the OECD purchasing power parities were used only for the other O&M expense category, kind of the catch-all category. 406 MR. JANIGAN: Yes. They weren't used for labour? 407 DR. LOWRY: No. 408 MR. JANIGAN: Can you explain why you did not use them for labour? 409 DR. LOWRY: Well, we had better information on labour. I mean this is something you use if you don't have other information. 410 MR. JANIGAN: Can you explain to me why? 411 DR. LOWRY: Well, you want the most accurate possible price comparison. So if you have an input where you have data then you use that data. If you have a catch-all category where you don't know, then you use a -- then in my case, I thought it appropriate to use a purchasing power parity for the catch-all category. 412 MR. JANIGAN: But why in -- from the extent that it -- that purchasing power parities captures what a dollar actually purchases in the setting of the utility, why wouldn't you use that particular measurement in relation to labour? 413 DR. LOWRY: Well, the issue is how the labour prices differ in the two countries, and why would you use some measure of the prices of final goods and services in the economy when you had data from Stats Canada about the difference in the labour prices. 414 MR. JANIGAN: What impact did that decision of yours have on your -- in terms of your final results? 415 DR. LOWRY: I -- how do you mean by an impact? 416 MR. JANIGAN: Well, if you would use purchasing power parities in relation to labour costs, what impact would have that had on your study? 417 DR. LOWRY: Well, if I had inappropriately used a purchasing power parity or better data was available, I suppose that the -- I think in this case, the comparison would have been probably less flattering for the company. 418 MR. JANIGAN: Could you undertake to provide me with that comparison using a purchasing power parity? 419 DR. LOWRY: I'm sorry, I don't understand the question. 420 MR. JANIGAN: Could you undertake to use purchasing power parities rather than the currency exchange factor that you used? 421 DR. LOWRY: Well, if we did, we'd want to do it in both studies because in the econometric method, that cut the other way. If we had used a purchasing power parity instead of what we know about construction costs in Canada versus the United States, it would have been a far higher level than the one that we actually used. So that's -- so it would -- in that case, it would have the opposite effect of making the comparison for the company more flattering, in the general principle of using the best available data. 422 MR. JANIGAN: If you did those adjustments in the fashion that you've indicated, would that involve a lot of work for you? 423 DR. LOWRY: It would involve a fair bit of work, yes. 424 MR. JANIGAN: Okay. Well, let me look at this another way. I'll go through this from the company rather than through Dr. Lowry. 425 If you could turn up Exhibit A.6, tab 1, schedule 2, and actually it's starting on page 3, there's a number of different measurements that have been provided here on O&M cost per customer. And as I recall, all of these measurements have been done with respect to a currency conversion factor of about 1.5. 426 MR. MEES: I'm not sure about these specific factor, but it is using an exchange rate, yes. 427 MR. JANIGAN: Okay. I wonder if these could be recalculated using the purchasing power parities material that I've furnished to you, Mr. Ladanyi. It's a spreadsheet that contains the appropriate numbers. 428 MR. MEES: Yes, certainly I think we can update it. 429 MR. JANIGAN: Thank you. Those are all the questions for this panel. 430 MR. MORAN: Mr. Chair, just before we leave the undertaking, I'm still looking for the references that are to be updated in the document. 431 MR. JANIGAN: From page 3 through to page 5. 432 MR. MORAN: So Undertaking J.23.4 is an undertaking to update pages 3 through 5 of Exhibit A.6, tab 1, schedule 2, using PPP rather than currency factors. 433 UNDERTAKING NO. J.23.4: TO UPDATE PAGES 3 THROUGH 5 OF EXHIBIT A.6, TAB 1, SCHEDULE 2, USING PPP RATHER THAN CURRENCY FACTORS 434 MR. BETTS: So the Board understands the intention, it was to use the PPPs in K.25.3. 435 MR. JANIGAN: In fact, that's the definitional materials for PPPs. There's another spreadsheet which I provided to the company which is from the OECD site, which outlines all the PPPs per year. And certainly we can produce that as well, but I assume that the company was going to produce it as part of the undertaking. 436 MR. BETTS: Thank you. 437 And, Mr. Janigan, that concludes your cross-examination? 438 MR. JANIGAN: Yes, it does, Mr. Chairman. 439 MR. BETTS: And next, Mr. DeRose, do you have questions? 440 MR. DeROSE: Yes, I do, Mr. Chair. 441 MR. BETTS: I think what the Board would like to do would be to break perhaps somewhere in the next -- let's say by about 11:30, we'll take an extended break and then come back and sit through until the 1:30 termination. 442 So when you find an appropriate time over the next 15 to 20 minutes, perhaps you could volunteer a break. 443 MR. DeROSE: Mr. Chair, I was actually going to say that I anticipate being 20 minutes to half an hour, so I'll try my best to be done by 11:30. But perhaps if I go over five minutes, we could just complete mine, if that's fine with the Board. 444 MR. BETTS: That sounds like a very good plan. Thank you. 445 CROSS-EXAMINATION BY MR. DeROSE: 446 MR. DeROSE: Good morning, panel. My name is Vince DeRose, for those of you who haven't met me. I'm here on behalf of the Industrial Gas Users' Association. 447 If I can, first of all, take you to the brief provided by VECC by Mr. Janigan to you this morning. And I apologize, I missed the exhibit number. I believe it would be K.26.1. It's the brief that Mr. Janigan took you through with a number of -- I'm sorry, 23.2. And if I could take you to tab F. 448 Now, first of all, Mr. Mees, Mr. Janigan took you through this morning that this document sets out calling for both the 2002 and 2003 budgets. First of all, is it normal practice to have two budgets for two fiscal years being developed simultaneously? 449 MR. MEES: When we do a budget for -- let's say 2003, for example, we would also do a bridge-year estimate, so the 2002, we would do an updated estimate. So the terminology might be slightly different, but we do -- because we're doing it two years in advance, we do two -- an estimate and a budget for the two years. 450 MR. DeROSE: Okay. So the 2002 budget being developed here, are you saying that's a bridged budget? Or that's the 2002 budget. 451 MR. MEES: Sorry, yeah, I should clarify, because in this case, it was just the -- 2002 was the test year budget, and 2003 was used for planning purposes for incentive regulation. 452 MR. DeROSE: Okay. And I take it that the company would have developed a -- what is referred to here as the 2003 budget for assisting in the preparation of comprehensive performance-based regulation. 453 MR. MEES: Yes. 454 MR. DeROSE: And if I can refer to that as perhaps the 2003 CPBR budget, is that different than the 2003 rates application budget that's filed in this case? 455 MR. MEES: Mr. DeRose, I've never seen the 2003 CPBR budget, so I would not know. 456 MR. DeROSE: Is it fair to assume that the company would keep a record of that? 457 MR. MEES: It may have. I just -- like I said, I have not seen it personally. 458 MR. DeROSE: I would be interested in seeing if there's a difference between the CPBR 2003 budget and then the 2003 test-year application budget, the one filed in this rates case. 459 Perhaps you could undertake to determine whether the 2003 CPBR budget was retained, and if so, produce it. 460 MR. MEES: I guess I struggle when you say "produce it," because I'm not sure what -- the level of detail it's in, whether the appropriate regulatory adjustments have been made. I'm not sure what can be produced, Mr. DeRose. 461 I can undertake to provide, perhaps, in total or to the extent -- 462 MR. DeROSE: Perhaps if you could -- if in total is the best that you can do, so be it. What would perhaps be of the most use, if it's not too much work, is in a number of places in the evidence you've broken out the 2003 -- what I've been calling the test-year application O&M budget by various departments. 463 MR. MEES: Yeah, I know. I figured that's what you wanted, and I'm not sure it's available. 464 MR. DeROSE: And I think if that is possible without -- 465 MR. MEES: Too much work? 466 MR. DeROSE: Without too much work, that would probably be the best comparison. 467 And just so that the Board and you understand where we are coming from, we would be interested in knowing whether the budget changed when you were preparing for CPBR as opposed to the application in its current form. 468 MR. MEES: We can undertake to provide something, Mr. DeRose. 469 MR. BETTS: Mr. Moran? 470 MR. DeROSE: That's a little bit of a complicated undertaking. 471 MR. MORAN: For purposes of the record, I wonder if we could just have a clear statement of what "something" might be, Mr. Chair. 472 MR. MEES: The company will undertake to provide the 2003 CPBR budget in the level of detail available and appropriate given time constraints. 473 MR. MORAN: That would be Undertaking J.23.5, Mr. Chair. 474 UNDERTAKING NO. J.23.5: TO PROVIDE THE 2003 CPBR BUDGET IN THE LEVEL OF DETAIL AVAILABLE AND APPROPRIATE, GIVEN TIME CONSTRAINTS 475 MR. BETTS: Thank you, Mr. Mees. 476 MR. PLAYER: Assuming we've got one. 477 MR. DeROSE: I believe that was assumed into the question. 478 MR. MEES: Yeah. We'll -- if available. Both of us have not seen it, so -- 479 MR. DeROSE: Okay. It's just it's referred to when you explained it, so I assumed that it existed and you would keep a copy of it. 480 MR. MEES: Yeah. 481 MR. DeROSE: For the next section of my cross-examination, if I can have you turn up two documents. I will be referring to them periodically. 482 The first is Board Staff interrogatory number 75, which is found at Exhibit I, tab 1, schedule 75. It's four pages. And the second document is evidenced at Exhibit A.6, tab 1, schedule 1. 483 Mr. Mees, if I can first take you to Exhibit A.6, tab 1, schedule 1, page 6 of 11, in paragraph 14. Now, this is the paragraph which you set out a number of examples of reasons or rationales for non-sustainable O&M reductions. 484 And one of the reasons that you list is deferral of certain utility programs; do you see that? 485 MR. MEES: Yes, I do. 486 MR. DeROSE: First of all, can you describe for me what you mean by "certain utility programs," or perhaps this is Mr. Chiotti? 487 MR. CHIOTTI: Yeah, I'll attempt to answer that for you. 488 A good example of that would be deferring government inspections. In fact, that was the primary program. 489 MR. DeROSE: Okay. And would you know, out of the $10.7 million non-sustainable gains, would you have an amount that you could attribute to deferral of certain utility programs? 490 MR. CHIOTTI: I think we, in fact, outlined that in the evidence on O&M regional operations. It would be Exhibit A.6, tab 7, schedule 1. 491 MR. DeROSE: What page? 492 MR. CHIOTTI: It would be page 7 of 13. 493 MR. DeROSE: Yes. 494 MR. CHIOTTI: In paragraph 18 it says: 495 "There is an additional $300,000, which is associated with government inspections deferred from fiscal 2002 to fiscal 2003." 496 MR. DeROSE: So that 300,000 would be what has been referred to in the evidence as deferral of certain utility programs? 497 MR. CHIOTTI: Right. 498 MR. MEES: I think that's one example. 499 MR. CHIOTTI: That's one example. 500 MR. DeROSE: Would there be more utility programs? 501 MR. CHIOTTI: Well, as I say, that was the primary one. 502 MR. DeROSE: Okay. And am I right to understand that with government inspections, this is not something that you would have to do on a year-by-year basis? You don't do it annually? 503 MR. CHIOTTI: No, we do do it annually. Government inspections are done every year. 504 MR. DeROSE: So for 2002, had you conducted the government inspections, you would be doing it again in 2003? 505 MR. CHIOTTI: That's right. 506 MR. DeROSE: Okay. So you just got a by, so to speak? 507 MR. CHIOTTI: Well, the reason why that particular deferral is not sustainable is because we have a certain number of government inspections that have to be done every year, and clearly you get yourself into a catch-up situation that it's untenable if you try to sustain them. 508 MR. DeROSE: Okay. So would it be fair to say in that case that you're required to do more government inspections in 2003, because you were able to defer the government inspections in 2002? 509 MR. CHIOTTI: The actual number of government inspections that has to be done each year is based on a sampling procedure, so each year we sample, and that determines, so there is some fluctuation from year to year based on the sampling. 510 But to the extent that we had deferred $300,000 worth of government inspections, there were that many more that would have to have been added on to the example. And in fact, the 2003 sample produced even more government inspections to be done than sampled in 2002. 511 MR. DeROSE: Okay. Okay. Thank you. 512 Now, Mr. Mees, you told Mr. Janigan this morning in talking about staff lags that the staff lags or staff vacancies which were kept open comprised about 2.3 million of the 10.7 million? 513 MR. MEES: Yes, I think that's the number. 514 MR. DeROSE: And are these positions which -- first of all, am I right to assume that some or all of these positions would have been vacant in 2001 as well, or are these new positions? 515 Perhaps, Mr. Player -- 516 MR. PLAYER: Yeah, I was going to say, this tends to rotate. I mean, you may be short in one area for a period of time. You fill that, but then you go short in another area. It's how long you put up with that shortness and putting the load on everybody else. 517 MR. DeROSE: Okay. 518 And, Mr. Mees, would you have the information available to determine whether the positions that comprised the $2.3 million were new positions in 2002 or whether they were -- it just came to a point where you said, We need to hire these people, even though we haven't had them for previous years? 519 MR. MEES: I would hazard a guess to say that most would be -- they would not be new positions. There might be the odd one that would be new, but I would say that these were positions hat became vacant during the year. 520 We had what I've called a hiring freeze, a replacement freeze, and we just held them vacant for six months. 521 And just to make sure the record is clear, not all of these were then put back into the budget in 2003. Only $2.3 million of those vacancies were. 522 MR. DeROSE: And, Mr. Mees, perhaps by way of undertaking if you don't know this information off the top of your head, and I suspect you don't, out of the vacant positions that comprised $2.3 million, would you be able to tell us how many of those have been filled to date? 523 MR. MEES: Of those exact positions? 524 MR. DeROSE: Well, you've identified a number of positions, which you say comprise $2.3 million. And what we would like to know is: Out of those positions that you've identified, how many have you filled, because we're seven months into 2003. 525 MR. MEES: Yeah. I guess you can sense by my hesitation, 2003 we now have this ADR agreement and we again have a hiring freeze on, because we have to get down to our level of $280 million so -- from our original budget of -- and what we had planned on of 305. 526 So I would say that some of those would -- probably didn't get filled again. But we can undertake to see of those ones that were identified, how many -- how much are still vacant. 527 MR. DeROSE: And so if I understand you right, some of these positions -- the decision is being made to delay them another year or however long. 528 MR. MEES: Yeah. We had to mitigate a substantial amount, you know, from the original 305 down to a number of 270. 529 MR. MORAN: Mr. Chair, that would be Undertaking J.23.6, an undertaking to determine what positions represented by the 2.3 million, in addition to the O&M budget, have been filled. 530 UNDERTAKING NO. J.23.6: TO DETERMINE WHAT POSITIONS REPRESENTED BY THE 2.3 MILLION, IN ADDITION TO THE O&M BUDGET, HAVE BEEN FILLED 531 MR. BETTS: Thank you. 532 MR. DeROSE: Now, Mr. Mees, if I can take you to Exhibit A.6, tab 2, schedule 1, page 11 of 16. 533 MR. MEES: Yes, I have that. 534 MR. DeROSE: If we look at paragraph 27, and I'll read the second sentence: 535 "Departments across the company made a strong effort to reduce the deferred expenditures where possible." 536 I just want to confirm. You told Mr. Janigan this morning that the instructions which would have been given out to various departments to reduce and defer expenditures were attached to CME number 4; is that correct? Or would there be additional directives telling various departments to reduce and defer expenditures where possible? 537 MR. MEES: My understanding of CME number 4 is, to the extent available, all of the information was provided. 538 MR. DeROSE: And would there have been oral instructions given? 539 MR. MEES: A significant amount of oral, yes. 540 MR. DeROSE: Okay. And do you know who would have been giving those instructions, or would there be a team? 541 MR. MEES: I would assume that it would be from the executive management team; for example, in doing my mitigation, Mr. Player would tell me, Do what you can to mitigate. 542 MR. DeROSE: Okay. Now, finally, if I can take you, and I'll give you a document which I gave you this morning, and I'll hand it up to the Board. 543 Mr. Chairman, this is a document which has recreated all of the -- the numbers all come from IGUA number 4, which we've seen referred to a number of times. IGUA number 4 at times can be difficult to read; the numbers are quite small. So this is really just a representation of numbers previously provided. 544 And for this set of questions, Mr. Mees, I'll -- 545 MR. BETTS: I think, Mr. DeRose, we'll give it an exhibit number for clarity. 546 MR. MORAN: Mr. Chair, this would be Exhibit K.23.4, a table derived from IGUA IR number 4, filed by IGUA. 547 EXHIBIT NO. K.23.4: TABLE DERIVED FROM IGUA INTERROGATORY RESPONSE NO. 4, FILED BY IGUA 548 MR. BETTS: Thank you. 549 MR. DeROSE: Now, I realize, as I'm looking at this pile, I may have handed up one that had handwritten notes on it. If I did, just to ensure that the Board doesn't have my handwritten notes, not that there's anything secret on there. 550 MR. BETTS: We're clear. 551 MR. DeROSE: Okay. I didn't want to be handing secret notes up to you. 552 Now, Mr. Mees, I'd like to ask you a few questions about this document, in fact, Panel, if there's someone better to answer them. And I'll be asking the questions in part in the context of Board Staff interrogatory number 75, which I also ask you to bring out. 553 Do you have that there? 554 MR. MEES: Yes. 555 MR. DeROSE: Now, first of all, in terms of Board Staff number 75, Mr. Janigan's already taken you through the success sharing, and I think it's fair to say that the success sharing, in some ways, is separate from the other items on that list. It can be separated because it's, as you've set out, tied to company performance, et cetera. And it would not normally have a -- well, you haven't listed it as a separate department or component in any of your O&M budgets; is that fair? 556 MR. MEES: That's fair. 557 MR. DeROSE: Okay. So I'm just going to deal with the items below it, which total $7 million, okay? 558 Now, first of all, Mr. Mees, would you accept, subject to check, that if we take out, just for the moment, customer support, gas supply operations, which has the "bracket EOS" after it, energy policy -- and, I'm sorry, I'm referring to the sheet which I've just handed to you which says "EGS" and IT which says "ECS", that the remaining departments, by and large, for the years 2000 to 2002, the company did quite well in that the actuals were less than the Board-approved. You succeeded in pushing out efficiencies of the remaining departments. 559 MR. MEES: Subject to check. 560 MR. DeROSE: Okay. And I should note, Mr. Chairman, that there are a couple of departments that, in single years, have about $100,000 difference. But I think my question is prefaced more on significant amounts of money. 561 And one of those which I will, though, ask about is regulatory affairs, and this is one of the issues which you have listed in Board Staff interrogatory number 75 as a reinstatement of mitigation actions. 562 MR. MEES: Yes. 563 MR. DeROSE: Correct? 564 MR. MEES: Yes. 565 MR. DeROSE: Now, do you see that, that if you follow the exhibit which I've just handed up to you, under 2002, the actual is greater than the Board-approved for 2002? 566 MR. MEES: Yes, by 100,000. 567 MR. DeROSE: Was there a reason for that? Was that the warm weather? 568 MR. MEES: No, I would assume that it would probably be due to regulatory costs, such as this OEB hearing. 569 MR. DeROSE: Okay. And the single largest increase in the actual budget is the customer support; is that -- do you agree with that, for each of the years 2000, 2001, and 2002? So for customer support, in 2000, the Board-approved was 54.9 million and the actual was 76.4 million. For 2001, the Board-approved was 58.3 million and the actual was 98.4 million. And for 2002, the Board-approved was 61.4 million and the actual was 98.6 million. 570 First of all, did I read those numbers correctly? 571 MR. MEES: Yes, you did. But there is a bit of an apples-to-oranges comparison in those numbers, because there was some things that also got -- that did contain some IT, information technology, costs that shifted up into that line into the actuals. But what we did in IGUA 4, we took what was contained in the budget, in the Board-approved, and just escalated it. We didn't transfer any or shift any of the costs to where they appropriately went. 572 MR. DeROSE: And I take it that another unique aspect of customer support is that that was outsourced. 573 MR. MEES: Yes. But if you look at the confidential document, and maybe I can address that with any outsourcing panel, or Mr. McGill can answer that, we have tried to put it on an apples-to-apples comparison in that document. 574 MR. DeROSE: Well, I think the simple point I'm trying to make here, Mr. Mees, and I think you've agreed with me, subject to wanting to put a gloss on it in the outsourcing panel, is that customer support is the one department where there -- well, I think you -- first of all, would you agree with me that the amount that the actuals exceeded the budget-approved amounts for 2000, 2001 and 2002 as listed in that document would constitute significant exceedances? 575 MR. MEES: It would. I would -- 576 MR. DeROSE: As listed in this document? 577 MR. MEES: As listed in this document, but again, it's a bit of an apples-to-oranges comparison. 578 MR. DeROSE: Okay. But these are the numbers that you prepared? 579 MR. MEES: Again, as we said -- we took the '99 Board-approved and just escalated it. We didn't transfer -- if there was any transfers between departments within the Board-approved, we did not make any adjustments. 580 MR. DeROSE: With either the numbers that you prepared and -- 581 MR. MEES: -- I personally prepared them, yes. 582 MR. DeROSE: And that this is the single largest increase in the budget for each year, in the actual budget in excess of the Board-approved numbers? 583 MR. MEES: I think it is, probably, one of the biggest customer growths. As we increase customers, we have to send out more bills; we have to send -- we have more credit activities. 584 MR. DeROSE: In terms of the numbers provided in IGUA number 4, is that the largest exceedance over -- over Board-approved numbers that you provided in number 4 is in customer support? 585 MR. MEES: Yes. 586 MR. DeROSE: Yes. And that's the item that was outsourced, customer support? 587 MR. MEES: Yes, but I don't think you can make the link. 588 MR. DeROSE: Okay. Those are all my questions. Thank you. 589 MR. BETTS: Thank you, Mr. DeRose. 590 MR. DeROSE: Right on time. 591 MR. BETTS: Pardon me. 592 MR. DeROSE: I said, "Right on time." I think I said 11:30. 593 MR. BETTS: You're right on time. 594 Who of the intervenors that are here now still intend to question this panel? 595 Mr. Shepherd? 596 MR. SHEPHERD: Mr. Chairman, I may have five minutes. I'm not sure. 597 MR. BETTS: And, Mr. Adams? 598 MR. ADAMS: Mr. Chairman, I just have a very few minutes of questions as well. 599 MR. BETTS: Just a few minutes. 600 And, Mr. Dingwall? 601 MR. DINGWALL: I don't believe I'll have any questions of this panel, sir. 602 MR. BETTS: And I think I have surveyed everybody that is present. 603 So we do not have a lot of questioning, but I think it's probably appropriate to take a bit of a break. I see a lot of nods of approval. 604 So we will -- perhaps we don't need to take as long a break as I anticipated, because it looks as though the afternoon session may be shorter than anticipated. 605 So what we'll do, we'll break for 20 minutes. That -- let's aim to be back at 12 o'clock, and then we will conclude the questioning at that point. 606 So we will adjourn now until 12 p.m. 607 --- Recess taken at 11:40 a.m. 608 --- Upon resuming at 12:02 p.m. 609 MR. BETTS: Thank you, everybody. Please be seated. 610 Thank you. And we are resuming now to continue the cross-examination of this witness panel. 611 Are there any preliminary matters to deal with? 612 PRELIMINARY MATTERS: 613 MR. JANIGAN: Yes, Mr. Chairman. Following -- or at the break, I conferred with the company, and we agreed it might be a good idea to put in the hard copy of the spreadsheet series that I referred to. And they have graciously photocopied the hard copy, and I believe it's before you entitled, "PPPs for GDP Historical Series." 614 MR. BETTS: Thank you. 615 And, Mr. Moran? 616 MR. MORAN: Mr. Chair, that would be Exhibit K.23.5, "PPPs for GDP Historical Series" from the OECD website. 617 EXHIBIT NO. K.23.5: DOCUMENT ENTITLED "PPPS FOR GDP HISTORICAL SERIES" FROM THE OECD WEBSITE 618 MR. BETTS: Thank you. 619 Any other preliminary matters? 620 Then we will proceed with questioning. 621 And, Mr. Shepherd, you're up. 622 MR. SHEPHERD: Thank you, Mr. Chairman. 623 CROSS-EXAMINATION BY MR. SHEPHERD: 624 MR. SHEPHERD: I just have a few questions for Dr. Lowry. 625 Dr. Lowry, I'm trying to understand your benchmarking report. Not being an economist, it's a little bit dense. 626 But as I understand what you're doing, you are assessing the cost-efficiency of the company's non-gas O&M using a productivity analysis; is that right? 627 DR. LOWRY: That's correct. 628 MR. SHEPHERD: In the context of an outsourcing component, that's sort of an indirect way of assessing the reasonableness of the transfer price, isn't it? 629 MR. LOWRY: Well, it could be if you focused on that one piece. 630 Part of the problem is that if you -- I mean, you could look at that cost category for other companies, but there's DSM expenses that are also in there. 631 And so it's -- it's -- we didn't elect it because of the complications, not to focus on any one piece but rather to look at the overall efficiency of the O&M expenses. The broader the scope for benchmarking that you can go with, the more accurate the results are going to be. 632 MR. SHEPHERD: Well, it also means, doesn't it, that within the O&M envelope you can have areas where the company is highly successful relative to other universities, and areas where it's doing poorly, and you wouldn't identify those in your studies. 633 MR. LOWRY: No, but as I say, the -- it's very hard to look at the individual categories, sometimes because there's trade-offs between one and another. 634 You could achieve, for example, very low O&M expenses by having very high -- or, sorry, very low labour expenses, for example, by having very high non-labour O&M expenses. And so that's an example of why you might want to look at the total instead of just one piece of it. 635 MR. SHEPHERD: It's also true, isn't it, that in the context of management of the utility, you would want to be able to identify the areas where you don't perform well relative to other utilities and try to get down to similar levels; isn't that true? 636 DR. LOWRY: Generally speaking, yes. I mean, you're looking to do as well as you can in all areas, but at the same time, you can't necessarily do everything at once. I mean, sometimes you're going to prioritize, and you're going to focus on some areas where the greatest gains can be achieved in the short run and put off to another day. 637 And another consideration is that it isn't the case that there are equal opportunities for cost savings in all areas. So it's very hard -- that's yet another reason why it's very hard to look at the very fine level of detail when doing benchmarking. 638 MR. SHEPHERD: Leaving aside the issue of whether it's split up into categories, just looking at it on an overall basis, how does the assessment that you make relate to the concept of fair-market value or market price, as it were? Are they similar concepts? 639 DR. LOWRY: Well, I'm thinking because I'm not -- I guess I'm not sure exactly what fair-market value is, but it's a -- I know that if you have a market price for a specific service that that can be a very good benchmark. 640 Benchmarking of -- statistical benchmarking of the sort that I've done is another way to try to assess the reasonableness of a given level of O&M expenses. 641 MR. SHEPHERD: Is this like the difference between top-down and bottom-up analysis? You're doing a top-down analysis, and if you looked at market prices, that would be part of a bottom-up analysis? 642 DR. LOWRY: I don't know -- I don't know if I'd necessarily consider the market-value approach to be a bottom-up approach so much as, perhaps, another top-down approach. It's just that it's often so hard to get that type of a market data. 643 And, you know, that would be ideal, that it was a completely competitive market for this one service, and you could go and find the price -- maybe there's a trade press publication that says, Well, the price of this service today is such and such. 644 In the absence of that, though -- and it's not the end of the world, and one of the things I noted in Dr. Bauer's testimony is very concerned that there is no perfect way to evaluate the company's costs. I mean, benchmarking isn't perfect, and there isn't a perfect market valuation. 645 And then he turns around and says, Well, of course, we could always do things using cost-of-service regulation, without even addressing the issue of whether cost-of-service regulation is perfect. 646 I mean, plainly somebody thinks that cost-of-service regulation is an imperfect way of assessing justness and reasonableness, because there is PBR today; there is elaborate restructuring of industries to try to create competition where competition is possible. 647 So I think that using, for example, utility information to compare the justness and reasonableness of Enbridge's O&M expenses is highly relevant. And if it turns out that they do very well compared to other utilities, that is an extremely informative piece of information. 648 MR. SHEPHERD: The -- you don't consider, then, because you're not deconstructing the numbers; you're looking at it on a statistical basis, you don't consider any evidence of market price in your analysis; correct? 649 DR. LOWRY: Well, we have the prices of the inputs. I mean, for example, there was a discussion a moment ago about using market price of labour and market price of miscellaneous goods and services as part of a benchmarking exercise. But the actual price of a specific service, no, we don't. We don't do that. We're doing the other thing. 650 One of the -- basically, one of the legitimate things, potentially legitimate things that Dr. Bauer said is that you use benchmarking. And Dr. Bauer -- I mean, I don't consider him to be an expert on benchmarking, but I think he said a couple of useful things in his testimony. 651 One is that benchmarking is potentially useful and also that benchmarking has to be done right if it is to be useful. And I think that what Enbridge essentially did is to do benchmarking right for purposes of this proceeding and basically did, you know, as Dr. Bauer would have recommended. 652 MR. SHEPHERD: Now, one of the shortcomings, and I don't mean this to be critical, but one of the limitations of statistical benchmarking is that it doesn't deconstruct -- it doesn't divide up the broad -- the global category into individual categories; correct? 653 DR. LOWRY: Well, it could be done. It's just that generally what bottom line to the customer is what's the -- in this case, the overall O&M expenses. I mean you could even expand it to look at the total cost of the company. But in this case the issue is the O&M expenses. I think the bottom line to the customer is this, and so I don't see anything really deficient about this. I can understand why you would be curious to know about the detail. In principle, one could look at that. We didn't in this case, and it's actually not usually done. 654 Benchmarking is really used in regulation now in many countries around the world, and typically they look at fairly aggregated levels, such as O&M expenses at a minimum, if not, indeed, looking at total costs. Now, in a United States proceeding they would focus on the total cost, actually. 655 MR. SHEPHERD: After this discussion, I take it I'm right in assuming that it would not be appropriate to conclude, from your study, that any component of the Enbridge costs are reasonable. They are overall reasonable; in fact, they are better than the mean. But any component, however large, your study doesn't show that it's reasonable. 656 DR. LOWRY: No, but -- that is correct. But essentially with the benchmarking approach that we've taken here, I think it does create a basis for a level of comfort that the overall benefit to the customers are quite substantial. I think that's what matters in the end. 657 MR. SHEPHERD: You looked at -- you looked at about $300 million of O&M expenses in total, roughly, in that range. 658 DR. LOWRY: Well, that was when we were looking at the proposed O&M expenses for 2003. Of course, the settlement figures are considerably below that. 659 MR. SHEPHERD: And what you found is that EGD was 32 percent above the mean. 660 DR. LOWRY: In terms of its productivity, yes. Now, in the updated productivity work we did when we looked at 2003 settlement expenses and then compared that to the latest data, which is for 2001, we found that it's -- the productivity was up to 40 percent above a standard that not only included all the American companies in the sample, but then we added BC Gas to the sample, thinking that it would be good to have a Canadian company. 661 Now, I understand that BC Gas is a company that, in its last PBR proceeding, made the claim that they were the top O&M cost performer in Canada. And so we thought, Well, let's put them in and see how we compare to what they claim was such a great number, and found that actually the company's productivity in the proposed settlement was superior to that of BC Gas. 662 MR. SHEPHERD: Okay. So that means, putting this in my simple way of understanding it, EGD is 40 percent better than average. 663 DR. LOWRY: The productivity implicit in it is 40 percent better. The value to the customer, 40 percent better than the norm. 664 MR. SHEPHERD: If you knew that -- hypothetically, if you knew that out of those $270 million of expenses, 100 million was really too much for one category of expenses, it really should have been 80, I understand that that wouldn't affect your analysis, right, because that part of the detail is irrelevant to you. 665 DR. LOWRY: Well, all I can say is that our focus was on the total and those were the results that we obtained. We didn't look at individual categories and therefore there is no evidence that any individual category was good or bad. But somehow or other, they achieved a terrific overall result. 666 MR. SHEPHERD: Mr. Chairman, those are all my questions. 667 MR. BETTS: Thank you, Mr. Shepherd. 668 Mr. Adams, you indicated you might have a few questions. 669 MR. ADAMS: Yes, Mr. Chairman, I do. 670 MR. BETTS: Please proceed. 671 CROSS-EXAMINATION BY MR. ADAMS: 672 MR. ADAMS: My questions are directed to Dr. Lowry, and I thought it might be of benefit to Dr. Lowry if I introduced myself. 673 My name is Tom Adams, I represent a small consumer and environmental advocacy organization called Energy Probe. 674 DR. LOWRY: I believe I met you in Banff; didn't I? 675 MR. ADAMS: And also by way of introduction to the panel introducing my questions, I wanted to indicate that Energy Probe is a signatory to the ADR agreement and we don't want to create any suggestion that we resile in any way from the agreement by virtue of asking a few questions of this panel. We're not attempting in any way to colour our signature to that agreement. 676 I also want to indicate that in general, Energy Probe is highly supportive of benchmarking as a contribution to the regulatory process. 677 Dr. Lowry, I wonder if we can just kind of establish just a simple concept here that the benchmarking studies can be useful in a number of ways but one of which is to compare between utilities and another is to compare utilities' performance over time; right? 678 DR. LOWRY: That's correct. 679 MR. ADAMS: And so when -- if we're comparing the utilities' performance over time, if the policy environment is relatively stable, the trend line -- we can identify the trend line with some fairly high degree of accuracy, relative to the level of accuracy that we might be able to apply into jurisdictional comparison where the policy environment may be of greater variability; is that fair? 680 DR. LOWRY: Yes, I think that's generally true. 681 MR. ADAMS: You made a remark in response to Mr. Janigan's questions earlier that your study took into account the density of customers, the -- you referred to how spread out customers were in relative utilities. 682 DR. LOWRY: That's right. In the new econometric work that we did to appraise the 2003 settlement proposal figures, we did use a sophisticated econometric benchmarking model that was similar to the model that appeared in this study but in that context was just used to create parameters for the output quantity index but when -- and in that model, the benefit of the econometrics is that we can control for a broader range of business conditions. 683 The study that we did, and that is in the original report has -- covers the big ticket items, the size of the system as mentioned by a couple of variables, and then also the input prices but it doesn't go into control for anything else, and you could think of a few other things. Well, one is the -- whether or not it's a gas-only system and perhaps you could refine also your estimate of the scale economies but then there are a few other things. 684 One might be how spread out the system is and another might be the issue of how severe the winter weather is because if the weather is especially severe then typically they are going to have to dig deeper in laying pipe and the season for construction is going to be less so things can go hay wire on a really, really cold day and so generally costs will be higher. So in the econometric model, we're able to build in some more of these conditions and even after doing that, the company looked really great. 685 In the settlement proposal, they were 32 percent below the model's prediction of what a long run sustainable level of O&M expenses would be. 686 MR. ADAMS: Let me see if I understand. The study that's presented here in evidence in response to Board Staff 79, does that -- is there a discussion in that study that reflects on this question of the variable density of the utility? 687 DR. LOWRY: No. See, that's one of the things that you'd be better served by going to an econometric model for. But we've done that and we found that, in fact, it came in as you would expect. The model suggests that the more spread-out a system, the higher the cost is, and the company's degree of being spread-out was in the study. And nonetheless, even with those additional controls, it looked very good. 688 MR. ADAMS: Okay. My questions are addressed to the study that's in evidence. 689 DR. LOWRY: Okay. 690 MR. ADAMS: In this city of Toronto, which is the main service territory for Enbridge, there is -- in Ontario generally there's been a -- in recent years, a great increase in construction activity in the condominium sector, a lot of urban infill in a kind of post-industrial urban environment. Would that -- and, I mean, this is just a general geography development in our urban environments here. 691 If you accept this observation, would that -- all else equal, would an increase in this type of development where many of these customers are on gas generally be of assistance to the company's productivity in the indices that you've measured here? 692 DR. LOWRY: I think that the indexes that we use are -- do reflect that to some degree, yes. 693 The best treatment, however, is in the econometric model, but both of them do take some account of it. Because recall that in our output quantity index, a really crude one would just be the number of customers; but we do something that no one else does, which is to come up with weights for various output quantity measures that are reflective of the real drivers of cost. And so we do take some account of the density issue through that -- by that means. 694 And by the way, I mean, if the company wanted to look really good, they would use the delivery volume. They would use cost per volume of delivery, because this is one of the colder climates served by a gas distributor in North America. 695 So that would be the most self-serving thing, but the company didn't elect to do that. 696 MR. ADAMS: In your answer were you referring to your econometric model or the model in evidence here? 697 DR. LOWRY: Let's say both do take some account of that, because the output quantity index is based on an econometric study. 698 MR. ADAMS: I see. 699 Another factor that we have here in the Ontario policy environment is a high degree of unbundling. Enbridge is a highly unbundled utility in that it has only modest commodity responsibilities with its customers. Many customers are buying their gas from non-utility providers. 700 Is that factor reflected in your study? 701 DR. LOWRY: We have looked in the past into whether or not there needs to be a control for that, and we have not found any evidence to suggest that it would. 702 The proper way -- you know, when you're in the benchmarking business, you want to have as rich and credible a model as possible, and -- but you have to have a certain discipline in terms of what gets added to the model and what doesn't. 703 And statistical -- proper statistical methods give you that discipline, because you could think of a variable that sounds like a great idea, and if you stick it in, and you don't get a statistically significant result, then you can't keep it in the model. So we have never had luck with that issue, as not to mention quite a few others. 704 What we have in either our productivity work or our econometric work is only what the data says should be in the result with, you know, each one of those. Because otherwise you have, sort of, a black box that people just don't have credibility in, and it's best to stick with the really proper methods. 705 MR. ADAMS: In very recent years, Enbridge has moved its entire appliance business out of regulation. 706 DR. LOWRY: Mm-hm. 707 MR. ADAMS: So all of the customer care functions associated with it are now outside of the utility. Would that factor have, all else equal, the effect of increasing the apparent productivity of the utility? 708 DR. LOWRY: I'm not sure about that, but I know in terms of -- I mean, that would be more an issue about the trend. But I know also that that is -- that type of an appliance business is very rare in the U.S. sample that's the main part of our focus, so it certainly doesn't compromise that. 709 It also should be noted that apparently there is a piece of -- that there was a non-comparability in our original study because of some credits from various types of services that for purposes of consistency should have been applied to the original O&M figure. So that's one thing I know that works the other way -- one thing I know for sure works the other way. 710 But we went back and redid this and put in some $10 million of credits for that. It would improve the trend issue -- would make the company look better on a trend basis. 711 MR. ADAMS: As I understand it, many comparable large U.S. gas utilities are required by their regulators to provide lifeline rates in urban development, and they have urban-development mandates in some regions of the United States. 712 These factors are not present in our regulatory environment here. How is that reflected in your study? 713 DR. LOWRY: I do a lot of work in the United States, and I -- plainly -- and I wasn't aware that that's a big-ticket item, and neither do I know how it would really affect a benchmarking study. 714 MR. ADAMS: In comparisons between gas utilities in Ontario, one of the factors that's made it difficult for us to compare is that we have -- well, historically we had utilities serving customers with very different soil types. 715 In northern regions, the service utility was, because of geography, serving customers in areas where it was difficult to get pipe below frost line; whereas, Enbridge is mostly serving customers in regions where the soil conditions are more favourable to construction activity. 716 Is that reflected in your study? 717 DR. LOWRY: Well, you happen to be on the edge of the Laurentian Shield here, and yeah, you're -- providing gas service up on the Laurentian Shield, it will be a challenge to lay pipe, but the -- you know, our sample of substantially American distributors, not to mention BC Gas, also is not located on the Laurentian Shield. 718 Actually, don't forget, though, that Enbridge, you know, its service territory gets pretty far north, too. It does include some of the cottage country, and you are getting into some more -- and of course, in the eastern region also, you know, quite substantial frost depth, and that's a cold area. 719 So those are challenging conditions for the company, so it's not as if -- I would say overall that the company's soil type, to my knowledge, is at least of an average level of challenge, and then it's -- for the frost depth, it's much greater than most companies'. 720 MR. ADAMS: But frost depth is one of the factors that you've controlled for here -- 721 DR. LOWRY: Yeah. 722 MR. ADAMS: -- and it's not influencing the results. 723 DR. LOWRY: So if you were just comparing Enbridge to a company on the Laurentian Shield, the Canadian Shield, that would be one thing, but the companies in our sample are not so situated. 724 MR. ADAMS: And finally, how does your study accommodate the difference in DSM intensity between regions? 725 DR. LOWRY: Yeah, I'm glad you asked that, because you would think that the higher DSM cost would make a difference, but -- and it's hard to put in a control for that. We've never had much luck with that when it comes to gas. 726 And so there is no control for that, and that's something that plainly cuts against the company's interests, because they probably have considerably more DSM expenses than most gas utilities in the sample. 727 So it's one thing that we would like to have controlled for. It would have served the company's interests, but the science did not permit us to make such a control. 728 MR. ADAMS: Thank you very much. 729 Thank you, Mr. Chairman. 730 MR. BETTS: Thank you, Mr. Adams. 731 Mr. Moran? 732 MR. MORAN: Thank you, Mr. Chair. I only have a few questions as well. 733 CROSS-EXAMINATION BY MR. MORAN: 734 MR. MORAN: Let me start with you, first, Dr. Lowry. Just a couple of follow-up questions on some of your evidence earlier. 735 You were talking about the data that was used for the labour inputs in your analysis and that you didn't use PPP data for that; you used different data. 736 Could you just indicate what that data was again. 737 DR. LOWRY: I could almost literally -- if I dug it up here, literally line and verse, but it's a Stats Canada data on the salaries and wages of employees of -- in Ontario. 738 MR. MORAN: All right. 739 DR. LOWRY: And then you compare that to an analogous figure for the United States. And you have to understand that in a productivity study, you're trying to adjust cost comparisons for two things: the input prices and the output quantities. Well, if you are making an adjustment for the input prices, you want the most accurate possible data on input prices. And labour obviously is a big part of the total, you want the labour price. 740 The purchasing power parities, they are not input prices, they are output prices. They are the prices of the final goods and services that are consumed in the economy. So let's talk specifically about what those are. There is the goods and services consumed by consumers and those consumed by the governments and those -- and something else called capital equipment. And that's what's -- you know, so if you have purchasing power parities, it's like they went and looked at a thousands of different consumer goods and goods purchased by government and pieces of capital equipment and what the relative prices are. 741 Now, why you would use something like that to control for labour price differences when there was official Stats Canada labour price data available, I wouldn't know. 742 MR. MORAN: And in order to compare the labour cost between Ontario -- the Stats Canada data and the American data, how would you go about doing that? You would just simply apply a currency exchange rate to that? 743 DR. LOWRY: Well, no. You take the labour price in Canada and compare it directly to the labour price in the United -- well, what you really want is one that is specific to Enbridge's service territory. So it wouldn't be accurate to use Canada, you would want to use Toronto, ideally, because that's the biggest chunk of the service territory, as the gentleman said before. So actually it's a comparison, using Stats Canada and U.S. Bureau of Labour Statistics data, of labour prices in the Toronto area compared to labour prices in the United States, in general. 744 MR. MORAN: All right. So if the labour prices in Toronto are priced in Canadian dollars and the labour prices in the United States are in American dollars, with the obvious exchange rate difference, how do you control for that in your -- 745 DR. LOWRY: Well, but the costs are also denominated that way, so it's a -- you have the costs in Canadian dollars and you want to look at the inputs in Canadian dollars versus American dollars, to keep it all consistent. I mean, that's what a purchasing power parity does. It's the same thing. It's Canadian prices in Canadian dollars versus American prices in American dollars. 746 MR. MORAN: Right. And just moving, then, to purchasing power parity, the purpose for using that in the areas where you used it was to be able to compare apples to apples, as I understand it. You don't want to look at how much it costs for me to use Canadian dollars, convert it into American dollars and buy something in the United States. You want to know how much I can buy with my Canadian dollars in Canada; right? 747 DR. LOWRY: That's right. That's what I thought was appropriate for the study I did. But, again, purchasing power parities will typically be for a grab, catch-all category, and you would never use them if you had more specific data available. 748 MR. MORAN: All right. And in the absence of more specific data, what would you identify as being the advantages of using purchasing power parity over simply applying exchange rates? 749 DR. LOWRY: Well, in my particular study, you want to know what the price of a good is in Canada versus the price of the same good in the United States, and that's what a purchasing power parity is; the summary of that over, usually, a bunch of different products. I mean, at the extreme, for the economy as a whole, it's for all the final goods and services in the economy. 750 MR. MORAN: I assume from your answer, then, that's something you couldn't get using exchange rates. 751 DR. LOWRY: The exchange rates would yield a different figure. 752 MR. MORAN: And from your perspective, which approach would be preferable? 753 DR. LOWRY: Well, for my study, I thought that the purchasing power parities would be preferable. 754 MR. MORAN: Now, as I understand the analysis that you did, it's essentially a comparison amongst utilities; is that fair? 755 DR. LOWRY: Yes, although indirectly there's also a comparison of Enbridge to itself at an earlier point in time. Although, as I've said, that's been a bit -- I would want to update that if that was the goal, because I wasn't aware of some credits that were not properly taken out of the original expenses for 2003. 756 MR. MORAN: And and to the extent that you are doing a comparison of utilities, you essentially take the utilities as you find them; right? 757 DR. LOWRY: Sure. 758 MR. MORAN: So the American utilities, for example, are subject to a variety of different regulatory regimes; different states have different regimes, different approaches. 759 DR. LOWRY: That's right. 760 MR. MORAN: And some of them might be more stringent in terms of requiring productivity gains to be realized in lower rates than others? 761 DR. LOWRY: Well, I don't think they typically formally address that issue. But they have -- different regulatory systems have different incentive properties. 762 MR. MORAN: Right. And it's fair to say, based on the fact that this is just a comparison, that some of the utilities that you're looking at might be less productive than others; right? 763 DR. LOWRY: That's right. And I'll say this: The regulatory lag in the United States is typically longer than in Canada. I mean, it's going to be, I would say, normally, three years, and I understand that for the gas companies in Ontario, it's more or less an annual rate case cycle. So I would say perhaps -- I mean, to the extent I know anything, it will tend to be longer -- stronger incentives in the U.S. than here. I mean, there are companies in the U.S., gas companies that will go even 10 or 15 years without even having a rate case. 764 MR. MORAN: And in that context it would be difficult to understand what degree of productivity they've actually gained. You're just taking the data as it comes out of that scheme, whatever it happens to be; right? 765 DR. LOWRY: Well, it certainly is a reflection of their productivity versus Enbridge's productivity, yes. 766 MR. MORAN: Your study doesn't talk about whether the utilities in the States that you compared Enbridge with are more productive or less productive overall than Enbridge; right? 767 DR. LOWRY: Well, that's exactly what it does say. It says Enbridge is a lot more efficient than the typical U.S. utility. I mean, that's -- there's strong evidence of that. 768 MR. MORAN: Right. But your study doesn't talk about how productive individual utilities actually are on a case-by-case basis; it couldn't do that. 769 DR. LOWRY: Well, we could get into it, but I don't know that that's relevant to Ontario. It gets into some confidentiality things. Sometimes we get data that is deemed to be confidential. But, yes, there's certainly a range of productivity exhibited by the American utilities, and Enbridge is way, way towards the top. 770 MR. MORAN: Okay. Thank you, Dr. Lowry. 771 I've got a couple of questions for you, Mr. Mees. And I thought the easiest way to set these questions up was to have reference to one of the confidential documents, or one that has been marked confidential. But I don't believe that the data that I'm going to refer to is itself confidential. 772 So with Mr. Cass keeping a fine eye on where the question goes, perhaps we can continue in the public session and see how it works out. 773 The exhibit in question is Exhibit X.21.1, and it's the 1.B tab. 774 MR. MEES: We have that, Mr. Moran. 775 MR. MORAN: And behind tab 1B there are two pages of -- with two tables. If you turn up the first page, it's entitled "Impact During the TPBR Period"; do you have that? 776 MR. MEES: Yes, I do. 777 MR. MORAN: Looking at the first set of figures, "TPBR cost base recovered in rates," am I correct in assuming that those numbers are not confidential? 778 MR. MEES: No, they're not. 779 MR. MORAN: They're not confidential. And looking at the second set of numbers, "Actual Outsource Service Provider Charges," am I correct in assuming that those are not confidential? 780 MR. MEES: Yes, that's correct. 781 MR. MORAN: Okay. So we can talk freely on the public record about those two sets of numbers. 782 MR. MEES: Yes. 783 MR. MORAN: Thank you. 784 Which means that perhaps I should point out, Mr. Chair, to Dr. Lowry, since he hasn't signed the undertaking, he's not allowed to look over Mr. Mees's shoulder at the remainder of the page, which probably is confidential. 785 All right. If you could then just take these numbers and pull up Exhibit K.23.4, which is the single-page table O&M by department, the data out of the IGUA Interrogatory response number 4. I just want to try to understand the relationship between the two sets of numbers, if I could. Looking at the TPBR cost-base recovered in rates, the customer care line in the X.21.1 document. 786 MR. MEES: Yes. 787 MR. MORAN: And comparing that to the customer support line in K.23.4 for the Board-approved customer care amount for 1999, the number there is $85.7 million and on K.23.4 it's $53.9 million. Could you advise on the relationship between those two numbers? 788 MR. MEES: In this case, in the impact during TPBR, we made those shifts, as I talked about earlier, so we shifted some costs up. Things like employee benefits has been shifted up and I think, Mr. Moran, there's an undertaking that's going to reconcile IGUA 4, which is essentially the same as K.23.4, so we'll able to -- 789 MR. MORAN: If you're already looking at it by way of undertaking. 790 MR. MEES: I believe that's the case. If not, we can undertake to do that, but I'm pretty sure that was an undertaking. 791 MR. MORAN: All right. 792 MR. BETTS: Perhaps then, just for the record, let's modify the original undertaking to include that. 793 MR. MORAN: Yes. Mr. Mees may be correct. I wasn't sure of the scope of that undertaking, but I can double-check it. 794 MR. MEES: We can extend it if that's the case. 795 MR. BETTS: Let's do it that way. 796 MR. MORAN: The easiest way would be as you suggest, Mr. Chair, perhaps rather than checking it now. 797 MR. BETTS: All right. 798 MR. MORAN: Then rather than going through all this, perhaps we can agree that the undertaking as given will be expanded to reconcile the TPBR cost-based figures that we see in X.21.1 and the customer support lines that we see in Exhibit 23.4 for customer care and the same thing for the customer care line in the next set of figures, actual outsource service provider charges. 799 MR. BETTS: Is the intent to have all of the information in these two sections that have now been declared non-confidential somehow reproduced? Because otherwise, we're talking -- I'm a little uncomfortable that we're talking about something that is not part of the public record at this point. 800 Can someone help me on how we can do that? 801 MR. MORAN: Yes. Well, currently, Mr. Chair, those two sets of numbers aren't on the public record in this form, as I understand they're derived numbers. It may be useful to produce a redacted version of this page on the public record and mark that. 802 MR. BETTS: That's kind of where I was heading if possible. 803 MR. CASS: Perhaps, Mr. Chairman, that could be part of the undertaking response, to present these figures that are non-confidential as they appear in that document, and then to reconcile those as appearing in the undertaking response over to K.23.4. 804 MR. BETTS: That would be very satisfactory. 805 MR. MORAN: And we've now discovered the number of the undertaking, Mr. Chair, that this would modify, it's Undertaking J.21.4. 806 MR. BETTS: Thank you. For clarity, that undertaking will be on the public record, and non-confidential. Thank you. 807 MR. MORAN: Okay. Mr. Mees, moving on, then, if we go on to the total lines on K.23.4, again, just to trying to understand your evidence earlier, you indicated that some mitigation measures took place with respect to 2002, and I think the amount was 10.7 million? 808 MR. MEES: The mitigation number, the mitigation within 2002 would be even more than the 10.7, but the 10.7 has been put back into the 2003 budget, only 10.7. 809 MR. MORAN: All right. Okay. I understand you. The 10.7 that is now factored in -- I assume that when you say it's been factored back in it's factored back in to the 305 million -- 810 MR. MEES: That's correct. 811 MR. MORAN: -- for the 2003 and the mitigation that you're talking about is what led to the 246.4 number, the actual for 2002? 812 MR. MEES: Yes. 813 MR. MORAN: Okay. And that's as against the Board-approved budget for 2002 of 259.9? 814 MR. MEES: Yes. 815 MR. MORAN: So to understand the relationship between 2002 and the 2003 amount, we would compare 305 to the 246.4? 816 MR. MEES: Can you say that again, just so I -- 817 MR. MORAN: If we wanted to understand properly the relationship or the change from 2002 to 2003, given that you had a Board-approved budget of 259.9 for 2002, but you mitigated that and reduced it to 246.4, and then out of that mitigation, you took 10.7 of that difference and added it back into 305, the net change is the change that we see between 246.4 and 305; is that fair? 818 MR. MEES: Yes, that's correct and that's what we -- within my evidence at A.6, tab 1, schedule 1, we talked to that change. 819 MR. MORAN: Okay. Thank you very much. Those are all my questions, Mr. Chair. 820 MR. BETTS: Thank you, Mr. Moran. Any questions in redirect, Mr. Cass? 821 MR. CASS: I had just a few, Mr. Chairman, thank you. 822 RE-EXAMINATION BY MR. CASS: 823 MR. CASS: Dr. Lowry, just during Board counsel, Mr. Moran's cross-examination, you talked about some of the U.S. situations in the benchmarking work that you've done and you mentioned something about different incentives and companies not coming in for rate cases as frequently as once a year, as would be the case here in Ontario. 824 Could you just elaborate on the nature of the incentive that you were saying that that would constitute for companies that don't come in as frequently? 825 DR. LOWRY: Yes. Well, it's a generally-established principle of regulatory economics that the longer is the lag between rate cases, the stronger is the incentives to cut costs. So you would expect utilities that don't have rate cases frequently on average, and of course there are going to be exceptions to this rule, to have superior productivity. Some of the most celebrated -- I will give you a case in point. 826 I do a lot of benchmarking in all sorts of utility industries and there's the utility in Kentucky called Kentucky Utilities that managed to state out of a rate case from about 1982 until the late 1980s (sic). And they were about number 2 out of 100 companies in terms of their cost efficiency, and it was across the board, it wasn't just their generation, but also their wires business, they are just amazingly good. 827 So, generally, you would expect that where you have longer regulatory lag, more productivity and a higher standard. 828 MR. CASS: Thank you, Dr. Lowry. 829 Now, in a question to Dr. Lowry, Mr. Adams had just referred -- 830 DR. LOWRY: May I just say another thing? 831 MR. CASS: Sorry. 832 DR. LOWRY: The productivity trend in the Canadian gas industry generally is, according to Stats Canada, actually negative. Not so in the United States. 833 MR. CASS: In question to Dr. Lowry, Mr. Adams had used the word modest with respect to the number of system supply customers. Could someone else on the panel just indicate roughly how many system supply customers Enbridge Gas Distribution has? 834 MR. MEES: I think approximately it would be about 50 percent of our customers are on system supply, so approximately 700- to 800,000. 835 MR. CASS: Thank you, Mr. Mees. 836 And then I think the final question I have did get cleared up with Mr. Moran's questions, but I just want to be sure. 837 Mr. Mees, Mr. DeRose was asking you about Exhibit K.23.4 and you were making a point that there was an apples to orange comparison, and I had wanted to ask you what we would need to do to see an apples to apples comparison? Is that covered in what you discussed with Mr. Moran and what would be done in the undertaking response? 838 MR. MEES: Yes, I believe it is. 839 MR. CASS: All right. That's good. Thank you. 840 Those are my questions, Mr. Chairman. Thank you. 841 MR. BETTS: Thank you, Mr. Cass. I believe the Board has a few questions. 842 Mr. Dominy. 843 QUESTIONS FROM THE BOARD: 844 MR. DOMINY: They're merely questions of understanding some of the language that has been used. 845 If we look at, say, K.23.4 and we have a column called "Board-approved" and we have a lot of individual items. My understanding is those aren't Board-approved items, but the total that fits within the PBR envelope. So what is approved, in effect, is the total at the bottom; is that correct? 846 MR. MEES: Yes, that's correct. 847 MR. DOMINY: So the individual item is -- the company's decision of how to allocate it? 848 MR. MEES: That's it exactly. 849 MR. DOMINY: I just wanted to clarify. 850 The second question. You used the question of reinstatement of mitigation actions, and that's the 10.7, that is, you've add the back into the budgets $10.7 million worth of expenses that you say are unsustainable mitigation measures; is that the meaning of it? 851 MR. MEES: Yeah, so there were some reductions that occurred in 2002 that we have to have back into our budget. So it's more to when you look at 2002 and how that compares to 2003, $10.7 million would -- of the variance is due to that. 852 MR. DOMINY: I understand. 853 And the third simple question is you or somebody made reference to the return on equity -- I, tab 1, schedule 43 -- and I want to understand the third column. I think I do, but I just want to make sure. 854 You identified that to indicate how the actual return on equity was less than the proved level of return on equity and you have the statement called "Based on Normal Weather" where you see an adjustment upwards. Am I correct that in that calculation the only thing that's adjusted is the revenue, so that when you have a based on normal weather and you produce a new return on equity -- the adjustment for normal weather is to increase the revenue to reflect greater, in the case of warmer weather -- to increase greater revenues because you'd have sold more. So the only side of that question that is, in that case, adjusted is the revenues; the costs are the same as they were in calculating column 2? I just want to understand that. 855 MR. MEES: Just to be clear, I think it wouldn't just be revenues, distribution margins. So it would be the revenue less the gas cost of that initial volume. 856 MR. DOMINY: So it's the distribution margin. 857 MR. MEES: Yes. That's the only thing being adjusted for. 858 MR. DOMINY: But if you were to do the calculation, the costs that are reflected in column 2, in terms of the costs incurred by the company, would be the same but you would show a higher margin and that would be used in calculating the return. 859 MR. MEES: Yes. 860 MR. DOMINY: I just wanted to make sure I understood. Thank you. 861 And there was just a question for Dr. Lowry. You made some comment about reviewing the performance of BC Gas and you made a statement that in fact, despite the claim -- at least my hearing it; I may have been wrong in my hearing it -- but despite the claims of BC Gas saying they're the most "productive of the Canadian utilities," you question that, making a statement that sounded to me that you said in fact they were less productive than Enbridge; is that correct? 862 DR. LOWRY: That's right. That we -- in the -- in our work to appraise how fair the settlement proposal was on balance, we thought it would be appropriate to get one or more Canadian companies. 863 The problem with Canadian companies, though, is that so many of them are so small that, plainly, Enbridge is going to do better against the small guys because it's a huge company. It's one of the biggest companies in North America. 864 But BC Gas would be one that is, you know, a good sized company, a large company and they also happen to have claimed that they were the best in Canada so we said, Well let's use better methods and see if -- how Enbridge stacks up and in fact, they do do better, that that what's in the productivity in the 2003 settlement proposal is bet are than the productivity of BC Gas. 865 MR. DOMINY: The other thing that intrigues me as I read all the stuff and yet we have one other large gas utility in Ontario, Union Gas, and there's never any reference to any comparisons with that utility. 866 DR. LOWRY: Well, we were unable to get data for Union Gas and so we didn't, plainly, report anything on that. 867 I seem to recall that Union Gas one of the issues in their last proceeding was did they have a proper -- not to mention the fact that it would be years old now, but that there was even a question about did they properly report their costs. So the data situation was kind of a mess. 868 MR. DOMINY: That's an interesting observation. I'm not quite sure where that leads me. 869 Mr. Mees, has there been any attempt to compare Enbridge to Union Gas by the company? 870 MR. MEES: My understanding is we did try to get the information we were just unsuccessful. 871 MR. DOMINY: Thank you. 872 Those are my questions. Thank you. 873 MR. BETTS: Thank you. 874 I just had one question for Dr. Lowry and it popped up very late in your testimony and it was with reference to Stats Canada's assessment of productivity of gas utilities, I believe, and you indicated that it was negative. Could you just explain what that reference was? 875 DR. LOWRY: Well, Stats Canada produces productivity trend estimates for a number of Canadian industries including the gas distribution industry and the trend in the gas distribution industry of Canada is negative. It has been for some time. 876 MR. BETTS: You have to explain. Does that mean that the productivity is lessening, they are becoming less productive every year? 877 DR. LOWRY: That's what Stats Canada says. 878 MR. BETTS: Have you, in your review, could you draw any different conclusion than that or ... 879 DR. LOWRY: Well, we've looked at that data somewhat to believe that there is some credibility to it, but I mean I -- I didn't -- I haven't redone it myself, but it's -- you know there are certainly a number of good methods used. Whether they're ideal, I cannot say. 880 MR. BETTS: Thank you. That concludes the Board's questions. 881 Mr. Cass does that require any redirect from you? 882 MR. CASS: No, Mr. Chairman, thank you. 883 PROCEDURAL MATTERS: 884 MR. BETTS: Then we've finished both within the Board's target and certainly earlier than expected. I would like to thank sincerely the witness panel for helping the Board with the decisions that it has to make and helping us understand your evidence. 885 Are there any matters that we should deal with before we close? I guess one that's coming to my mind is the schedule from this point forward because we now have a bit of a hole in the planned schedule. 886 Mr. Cass, is there anything you can help us with at this point? Is there just an assumption that we will not be back together until Thursday, or can anything be done to fill that time? 887 MR. CASS: I'm not aware, Mr. Chairman, that we have anything to plug that hole. We had a discussion with Mr. Moran during one of the breaks as we realized that it appeared that there would be a gap in the schedule. The only thing left other than the panel that's returning on Thursday are different intervenor witnesses and it doesn't seem possible to move them forward to put them in that gap. So unfortunately, it appears that we don't have anything before Thursday. 888 MR. BETTS: Okay. Well that's -- if that's the case then it will be Thursday morning at 9:30, then. 889 Obviously today's record will be completely public so we can get back -- and I'm sure our court reporters will be pleased to hear that we can get back to a norm schedule in terms of the production of that one, anyway. 890 There was a bit of an outstanding matter in terms of the final review of those transcripts that had to be redacted and perhaps, Mr. Moran, could you tell the Board where we stand on that. 891 MR. MORAN: Yes, Mr. Chair. At the break I checked my e-mails and there was an e-mail from the producing parties that indicates what sections they propose to be redacted and treated confidentially, but I haven't had a chance to do anything with that and perhaps I can raise it with the parties when we break in a few minutes. 892 MR. BETTS: Very well. Apart from that, the schedule as presented last week is still the target schedule? 893 MR. MORAN: Yes, I guess with this proviso: I don't know whether we want to come back at 4:00 today to resolve any disputes, they may be capable of being dealt where on Thursday, given that we're breaking until Thursday, if there's any issues about how much should or shouldn't be redacted. 894 I guess we would also have tomorrow or Wednesday to deal with that issue if it needed to be dealt with, so perhaps I can discuss it with parties and see where it takes us. 895 MR. BETTS: There may be some benefit in having the Board -- at least the Board come back to -- if the Board has to make any decision prior to Thursday, my interest is simply to get that into all parties' hands as quickly as possible. So we will stay with the current schedule. Obviously we will not be back at 4:00 to resolve that. 896 MR. MORAN: So if I understand you, Mr. Chair, if there's something that needs to be resolved in relation to the confidential transcripts perhaps we would deal with that tomorrow morning with appropriate notice to the parties. 897 MR. BETTS: That would work fine. 898 Mr. DeRose? 899 MR. DeROSE: Sorry if you're done that one point I just wanted to advise the Board I've had discussions with the company with respect to Mr. Foreign yeah, there was an issue last week as to him obtaining the confidential transcripts. The company's now advised and I've already checked with Mr. Moran, the company has advised they will not be cross-examining Mr. Fournier and Mr. Moran has indicated that Board staff will not be cross-examining Mr. Fournier and as far as I can tell, nobody will be cross-examining Mr. Fournier. I think it's important perhaps to put it on the public record so that those parties that are not here with read it but at this time, we do not anticipate Mr. Fournier having to testify so that will open up one additional day next week. It will also deal with one of the confidentiality issues because if he's not testifying we don't need him to review the confidential transcripts. 900 So that's just more to advise the Board of what looks like is the situation. I don't anticipate it changing. 901 MR. BETTS: Thank you. And that obviously does resolve a few issues and helps us with planning so thank you Mr. DeRose. 902 Well I think then we've probably done both our housekeeping and -- Mr. Janigan. 903 MR. JANIGAN: Just one small matter. I note with respect to the recent Exhibit K.23.3 that when we printed the hard copy inadvertently left off the 2001 and 2002 data series and so what I have done is I've gone back to the electronic copy, separated out that data, sent a copy of that to Board Staff and to the company and hopefully it can simply be appended to the exhibit and continue on from that basis. 904 MR. BETTS: Thank you. And procedurally that seems fine. So thank you for catching that and making the change. Anything else? Then I'm pleased to say we will adjourn now until Thursday morning at 9:30 a.m. Thank you. 905 --- Whereupon the hearing adjourned at 1:33 p.m.