Rep: OEB Doc: 12YPC Rev: 0 ONTARIO ENERGY BOARD Volume: 1 5 APRIL 2004 BEFORE: P. VLAHOS PRESIDING MEMBER A. BIRCHENOUGH MEMBER 1 EB-2004-0004 RP-2002-0147 2 IN THE MATTER OF a hearing held on Monday, 5 April 2004 in Toronto, Ontario; 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 Natural Resource Gas Limited for an order or orders approving or fixing just and reasonable rates and other charges for the sale, distribution and transmission of gas as of March 1, 2004. 3 EB-2004-0004 RP-2002-0147 4 5 APRIL 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel SCOTT STOLL Natural Resource Gas Limited PETER BUDD Natural Resource Gas Limited 8 TABLE OF CONTENTS 9 APPEARANCES: [20] PRELIMINARY MATTERS: [28] NRG - PANEL 1 [52] EXAMINATION BY MR. STOLL: [55] CROSS-EXAMINATION BY MS. LEA: [416] QUESTIONS FROM THE BOARD: [685] PROCEDURAL MATTERS: [759] SUBMISSIONS BY MS. LEA: [772] 10 EXHIBITS 11 EXHIBIT NO. 1.1: CURRICULUM VITAE [33] EXHIBIT NO. 1.2: TWO PRESS RELEASES [375] 12 UNDERTAKINGS 13 UNDERTAKING NO. 1: TO PRODUCE AN UPDATE TO PAGES 10 AND 11 OF SCHEDULE 1 [93] UNDERTAKING NO. 2: TO PRODUCE ABOVE-DESCRIBED CALCULATION [638] UNDERTAKING NO. 3: TO PROVIDE THE FINANCIAL STATEMENTS FOR FISCAL 2003 [664] 14 --- Upon commencing at 9:30 a.m. 15 MR. VLAHOS: Please be seated. Good morning, everyone. 16 MR. BUDD: Morning. 17 MR. STOLL: Good morning. 18 MR. VLAHOS: The Board is sitting today to hear the application by NRG regarding its request for an order to amend the balance in the company's purchase gas variance account and related issues. With me today is Mr. Art Birchenough, Board member. My name is Paul Vlahos, for the record I'll be the Presiding Member. 19 Could I have appearances, please? 20 APPEARANCES: 21 MR. STOLL: Yes. Scott Stoll, S-t-o-l-l. I'll be counsel. And sitting to my left is Mr. Peter Budd. 22 MR. VLAHOS: Good morning, gentleman. 23 MR. McCALLUM: Sandy McCallum for Natural Resource Gas. 24 MR. VLAHOS: Okay, Mr. McCallum, perhaps you can wait. Counsel will introduce you more appropriately, I'm sure. 25 MS. LEA: Jennifer Lea, Board counsel. 26 MR. VLAHOS: Thank you, Ms. Lea. I do not see anyone else in the room. 27 Any preliminary matters, Ms. Lea, or Mr. Stoll? 28 PRELIMINARY MATTERS: 29 MS. LEA: I've been given a copy of the curriculum vitae of the witnesses that are before you, and I'd like to mark those as an exhibit, please. I don't think we have an exhibit list for this proceeding so we'll just start at one. This will be Exhibit 1, please. 30 MR. VLAHOS: So make it 1.1 for the first day? 31 MS. LEA: I would just go with 1, sir, but as you please. I'm a simple-minded person. 32 MR. VLAHOS: I'm not too used to simple things, Ms. Lea. 33 EXHIBIT NO. 1.1: CURRICULUM VITAE 34 MR. VLAHOS: Any other matters? 35 Okay. There being none, Mr. Stoll, then over to you. And I'm sorry, I haven't seen you before the Board. Is that true? 36 MR. STOLL: I have appeared on a couple of occasions but not in front of yourself. 37 MR. VLAHOS: Are you familiar with the process, Mr. Stoll? 38 MR. STOLL: I'm fairly familiar. Mr. Budd will help me out where I need it. 39 MR. VLAHOS: I'm sure Mr. Budd will help you. So what we should do next is, perhaps you can introduce your witnesses and they can come forward to be sworn. 40 Do you have anything by way of direct examination? 41 MR. STOLL: We have a few brief questions we'll go through in direct, and then we'll turn it over for -- 42 MR. VLAHOS: Okay. Then we'll turn to Ms. Lea for questions, and the Panel may have questions, beginning, middle, the end, there's no particular order for the Panel. And then we're back to you in terms of redirect. 43 MR. STOLL: Thank you very much. 44 MR. VLAHOS: And hopefully we can finish some time this morning, hopefully, and with an appropriate break then we can come back and deal with the argument phase. 45 MR. STOLL: We're in your hands, and hopefully we can maintain that schedule. 46 MR. VLAHOS: So that's the plan. Then over to you. 47 MR. STOLL: I'll begin with the Panel member closest to you. Mr. Bill Blake. Seated to Bill's right is Mr. Randy Aiken. And seated closest to counsel is Sandy McCallum. 48 MR. VLAHOS: Perhaps, gentlemen, you can come forward to be sworn. 49 W.BLAKE; Sworn 50 R.AIKEN; Sworn 51 S.McCALLUM; Sworn 52 NRG - PANEL 1 53 MS. LEA: Could we have the spelling of the witnesses' name for the record? 54 MR. AIKEN: Randall is R-a-n-d-a-l-l. E-a-r-l. 55 EXAMINATION BY MR. STOLL: 56 MR. STOLL: The CVs have been filed, and just to confirm for the Board, have each of the Panel members testified before the board? 57 We'll start with you, Mr. Blake. 58 MR. BLAKE: Yes, I've appeared before the Board on a number of occasions over the last 25 years or so. 59 MR. VLAHOS: Sorry to interrupt. Let's make sure that the microphones are as close to you as possible. Let's try to do that, and don't hesitate to raise your hand, reporter, so that you can bring it to my attention if you have difficulty. 60 MR. STOLL: If we could just continue, Mr. Blake. You've testified several times. 61 MR. BLAKE: Yes, I have, a number of times before the Board. 62 MR. STOLL: And Mr. Aiken? 63 MR. AIKEN: Yes, I've testified a number of times over the last 15 years. 64 MR. STOLL: And Mr. McCallum? 65 MR. McCALLUM: I have testified on a few occasions in the past seven years. 66 MR. STOLL: If I may ask the Board, is there a need to go through the CVs in any detail or ...? 67 MR. VLAHOS: No, Mr. Stoll, the witnesses are known to the Board, and we do accept them. 68 MR. STOLL: Thank you very much. 69 Before we get into the direct examination, I'll try to clarify a few issues. We have a couple of updates to the numbers. There's some actual detail that became available to us, just by closing out some actual numbers from February of this year, rather than using forecasted numbers. So if Mr. Aiken can just read in the changes. 70 MR. AIKEN: Yes, if I could have everybody turn up schedule 1, updated, page 10 of 12. 71 MS. LEA: Would those be the blue pages, Mr. Aiken? 72 MR. AIKEN: Yes, they are. And I'm starting down on line 23. And I'll indicate what the changes are. 73 In line 23, where it says: "Forecasted February 2004," the update is now -- this is an actual, February 2004. 74 At line 28, again, where it says: "Forecast," it's now actual. The price in that line, the actual price is .277122. 75 MR. VLAHOS: Okay. Just slow on that Mr. Aiken. .027... 76 MR. AIKEN: No. 77 MR. VLAHOS: Sorry. 78 MR. AIKEN: .277122. So 27 cents. 79 MR. VLAHOS: Okay. 80 MR. AIKEN: The cost, in place of the 68191, is 68313, it's a very small change. 81 In line 29, the total cost in place of 567674, is now 567796. 82 The price, instead of .281426, is .281487. That causes a change in line 32, the two numbers that are in bold there. The updated numbers are .281487, at the beginning of the line, and at the end of the line it's .029900. 83 And then, because this was all in a footnote, if you go back up to lines 19 and 20 on the same page, the price differential there, the updated number is .029900. 84 And in place of 60,189, it's 60,312. 85 MR. VLAHOS: Ms. Lea, do we have all those -- should we ask for sort of a page to make sure that we've got it all? 86 MS. LEA: I've certainly noted it down, sir. Would it be difficult to actually reproduce page 10 and have those numbers put in? 87 MR. VLAHOS: Not necessarily today but ... 88 MR. AIKEN: Yeah. We can do that. 89 MS. LEA: Perhaps we can start, then, a list of undertakings. This will be Undertaking 1, please. And the undertaking is to produce an updated schedule 1, page 10. 90 MR. AIKEN: And I just want to add, there's also a change on page 11, updated. And that we can add to that undertaking. But I'll put the number in front of the Board now. 91 And this is at line 8 of page 11, blue page update. The 591,983, which was based on January actuals and a February forecast. The final actual cost there now is 592,106. 92 MS. LEA: Thank you. So we'll update Undertaking 1, or rather we'll say Undertaking 1 is an update of pages 10 and 11 of schedule 1. Thank you. Some other colour than blue pages. Thank you. 93 UNDERTAKING NO. 1: TO PRODUCE AN UPDATE TO PAGES 10 AND 11 OF SCHEDULE 1 94 MR. STOLL: And those are the complete updates? 95 MR. AIKEN: Yes. That's the complete list of the updates. 96 MR. STOLL: Okay. Thank you. And just before we go any further, the three of you gentlemen had been involved in the preparation of the evidence, and adopt the evidence as amended today, as your testimony? 97 MR. AIKEN: Yes. 98 MR. BLAKE: Yes. 99 MR. MCCALLUM: Yes. 100 MR. STOLL: Thank you. Okay. Now, I think where I'd like to start is just a summary of what NRG is asking for. And I think it goes to two levels. So maybe a more general level, which I'll direct to you, Mr. Blake. And what exactly do you think NRG is asking for? 101 MR. BLAKE: Well, in laymen's terms, the company is asking for a recovery of what we feel are prudently incurred costs for gas purchases to be recovered on a prospective basis. And we feel the costs were reasonably incurred on behalf of our customers. 102 And sort of a more detailed response to that question you asked me would be, clause 5 of the application gives sort of a bit more detailed request but that would be a summary of what we are asking for. 103 MR. STOLL: And on a more technical level, as far as the accounting issues, Mr. Aiken? 104 MR. AIKEN: There are two specific things that we're asking for. The first one is the inclusion of the $592,106, which is a debit, in the PGCVA account, the purchase gas commodity variance account, effective January 1st, 2004. 105 And then the second aspect, which is highlighted at line 22 of page 11 of schedule 1 updated, and that is to be able to adjust the reference price and the gas-applied charge effective May 1st, 2004. And that results in an increase of 2.8358 cents per cubic metre. 106 MS. LEA: Could you repeat that figure, please. 107 MR. AIKEN: Yes, 2.8358 cents per cubic metre. And that increase would be on top of the April 1st gas cost that was just recently approved by the Board as part of the latest QRAM application. 108 MR. STOLL: Thank you. Now, one of the issues that was raised was, does NRG consider these additional costs? 109 MR. AIKEN: No, these costs are not additional costs. They were costs incurred for the purchase of system gas. The $592,000 figure - which I provided the update to - that is being requested for recovery through the PGCVA in this proceeding is part of the normally incurred gas purchase costs by the company. 110 If I could distinguish for a moment between this normal cost and what could be called an additional cost, there's two things that come to mind as to what an additional cost would be. 111 One would be for penalties imposed by Union Gas on NRG, under their direct purchase contract, for example, for failing to deliver its obligated DCQ, or daily contracted quantity, on a daily basis. Union would impose a penalty on that for failure to deliver. 112 Union could also impose a penalty for NRG not balancing at the end of its contract year under the direct purchase contract within plus or minus 4 per cent. Those would be, in my mind, additional costs and things that wouldn't occur on an expected basis. 113 Another example of an additional cost would be costs associated with TCPL transportation that NRG uses, that's been allocated to it by Union Gas. The current TCPL rates, as I'm sure the Board is aware, are interim rates. They're declared interim by the NEB. Any difference between those interim rates and the final rates when they're approved by the Board will be billed or rebated to NRG when that decision is made. So that would be an additional cost or an additional reduction of cost, if you will. So effectively, the 592,000 that we're asking to be recovered through the PGCVA are not additional costs, nor are they what you would call retroactive costs. These costs are the normal costs incurred by the company purchasing gas on a month-to-month basis. 114 And in summary, I guess I could say that NRG is simply requesting the recovery of a portion of the gas supply costs that have been incurred to serve its system-gas customers but have slipped through an accounting hole, if you will, in the PGCVA mechanism. 115 MR. STOLL: Thank you. And we'll come back to that hole a little bit later to explain just how it was created. 116 I think one of the other questions we want to address up front is the issue of retroactivity. Does NRG consider what they're asking for a retroactive rate increase? 117 MR. AIKEN: No, we do not. In our opinion, this is not a retroactive rate. As I've mentioned before, NRG is requesting that the PGCVA balance, including the $592,000 that we're asking for in this proceeding, be recovered from customers on a prospective basis. This is consistent with the QRAM methodology that's been used by NRG for the past several years, a methodology to which the other gas companies in Ontario have recently moved. 118 A retroactive rate is a rate that is applied to historical volumes consumed by the customers for gas already used. We're not proposing this. We're proposing to change the gas commodity charge in the PGCVA reference price for gas that will be used by customers starting May 1st, 2004. So this is a prospective rate change, not a retroactive rate change. 119 MR. STOLL: Now, part of the evidence refers to the changing reference price. Can you highlight for the Board why the reference price was changed throughout the past -- or the period of the 15 months? 120 MR. AIKEN: Yes. There were two things driving those changes. One was the trigger mechanism that the Board put in place a number of years ago, such that if the gas costs changed by, I believe it was, $30 per residential customer either up or down from the existing approved reference price, that NRG would be required to come in and seek a change in its reference price or give reasons as to why no change should be approved, even though the costs were significantly different. 121 That was the mechanism that was in place for a number of years. And then, within last year, of course, we've had the legislative changes requiring the Board to review these various accounts on a quarterly basis. 122 MR. STOLL: If I could ask you, Mr. McCallum, can you walk through just the NRG's status as an M9 customer, and what influence that had on the numbers that we're discussing today? 123 MR. MCCALLUM: Certainly. NRG is an M9 bundle-T customer of Union Gas. As a bundle-T customer, we are required to deliver 1/365th of our estimated annual volume on a daily basis into Union Gas's storage account. As an M9 customer, Union Gas will deliver that into our various points with the perimeter of NRG's franchise, and it will also permit us to draft Union Gas's system. By "drafting," I mean we can take out more gas at a particular point in time than what we have put into their account. 124 The requirement under our contracts with Union Gas is that we have to balance one time per year, and for us that would happen to be the same time as our fiscal period, September 30th. We have to balance our volumes to within plus or minus 4 per cent of our estimated annual deliveries into Union. 125 So that is the plan that we work towards each year. We monitor the volumes, and we plan to be within that 4 per cent envelope each year. 126 If we're not within that 4 per cent envelope, we'll be charged penalties by Union Gas if we are short, and we will be charged storage charges by Union Gas if we are over. 127 So the mechanism by which we monitor this is, we monitor it each month. We're provided a report by Union Gas as to our status, it's called a direct purchase status report, which we look at and monitor each month in order to try to get to within that 4 per cent envelope by the end of the year. 128 As a bundle-T customer, we are not able to drop our volumes below what we call our daily contracted quantity, which is that 1/365th estimate of our annual volume. If we do, we're charged a penalty by Union Gas because we failed to deliver what we were contracted for. We can go over it if Union Gas gives us permission to do so. However, we also have to balance that with the fact that we may be over by the end of the year. In which case we would have to shed gas at a point in time when the gas prices have traditionally been much lower. 129 So we don't want to be in the position to buy gas in January/February, when prices are high, and then only to have to shed it in the fall, when prices are low. 130 MR. STOLL: So, just to be clear, drafting is the normal or required way of complying with the Union Gas M9 rate? 131 MR. McCALLUM: Yes. If you look at our historical consumption profile, we start off October 1st by drafting the system almost immediately, and we will continue to do so through the March/April period, at which point in time we will start to replenish that gas. 132 And if you look at Interrogatory No. 11, there is a graph provided. It would be the last page of the interrogatory response. And in this graph the red line represents our daily supply, which, since it's 1/365th per day, is a straight line. The green line represents our demand profile or the amount of gas that Union Gas has delivered into NRG's franchise. And as you can see, we start off above the supply curve immediately. And about the beginning of April, the demand and supply equal, and through to the beginning of September we are supplying more gas to Union Gas than what they are delivering to us. 133 The large increase right at the end of September represents the balancing gas that we brought. In theory, in forecasted demand equals supply, that red line would be straight all the way across. In the case of 2002/2003, with it being a particularly cold winter, we had to buy a fair bit of spot gas in order to balance within that 4 per cent envelope. 134 MR. STOLL: Okay. Thank you. 135 Now, I think we'll ask Mr. Aiken if he could walk us through what caused this accounting error or the number, this $592,000 number, to leak out, for lack of a more precise term, of the PGCVA account? 136 MR. AIKEN: I apologize in advance. I'm going to be fairly lengthy here because I want to go back and start with the history of the PGVA in the context of NRG. 137 The goal of the PGVA, when it was established for NRG, and in fact for the other utilities as well, was to hold both the utility and the ratepayers harmless for the difference between the actual cost of gas as compared to the forecasted costs that were used to set the rate on a prospective basis through the test year rate case applications. 138 In the case of NRG in particular, this PGVA was originally operated on an annual basis. And what I mean by that is, the reference price would be set during the rates case for NRG. And at the end of that fiscal year, when the actuals were all in and everything else, there would either be a credit or a debit in that PGVA account, depending whether gas prices were higher or lower than forecast. That balance was then recovered or rebated to customers on a retroactive basis at the end of the fiscal year. During that period, the PGVA worked fine. 139 Subsequent, and the only reason I'm mentioning this is that sometimes I'll talk about the PGVA and sometimes I'll talk about the PGCVA. At some point a number of years ago, the PGVA, the purchase gas variance account, was split into a purchase commodity variance account and a purchase gas transportation variance account. The transportation variance account deals with the costs to NRG under the M9 contract it has with Union. So it's for transportation and load-balancing services within Ontario. It's the cost to get gas from Dawn storage to NRG's franchise area along with the load-balancing storage services provided by Union. 140 The PGCVA, the commodity variance account, includes upstream transportation, upstream of Ontario. So it includes the TCPL tolls. 141 What the reference price effectively is, is an Ontario-delivered commodity reference price. Because a portion of NRG's gas is delivered at the Alberta border and then transferred or transported to Union with TCPL capacity that NRG pays for. Part of their purchases are delivered gas at Parkway on the Union Gas system. Part of their gas purchases historically have been gas delivered at Dawn on the Union system, plus part of the purchases are for local production from wells within NRG's franchise area. 142 So to make everything mesh, there was an average, Ontario-delivered commodity price that was used as the reference price. And that was the reason for splitting it from the transportation. 143 The crux of the problem that we're now faced with is that the PGCVA mechanism failed to capture the complete gas cost variance when the reference prices changed within a fiscal year. And if you could turn up schedules 3 and 4, the updated -- the blue-page updates, I'm going to walk everyone through the variance or the difference that's caused by the change in the reference price throughout a given period. 144 MS. LEA: Could you wait a moment, please, Mr. Aiken. 145 MR. AIKEN: Sure. 146 I'm going to be starting with schedule 4, updated. 147 MS. LEA: All right. One moment, Mr. Aiken. I'm going to give a copy to the reporter as she doesn't have microphones today. So we'll be looking at schedule 4 and we'll be looking at? 148 MR. AIKEN: Schedule 3. 149 MS. LEA: And schedule 3. 150 MR. AIKEN: Both blue page updates. 151 MS. LEA: Okay. Schedules 3 and 4. One moment. 152 Okay. Thank you, Mr. Aiken. 153 MR. AIKEN: I'm going to walk through the top part of this table first. 154 MS. LEA: We're looking at schedule 4? 155 MR. AIKEN: Yes. 156 MS. LEA: Thank you. 157 MR. AIKEN: This covers the 15-month period where this $592,000 cost that we're requesting has been incurred. Column A, which is labelled "Volume Purchased," is the actual amount of gas purchased by NRG in each of those 15 months, from October 2002 through December 2003. Column B is the actual cost of that gas. Column C -- or, sorry, the actual cost per cubic metre. Column C is the actual cost in dollars. Column D is the reference price that was in effect in October of 2002. I've left the reference price, as you can see, the same through that 15-month period. 158 MR. VLAHOS: Mr. Aiken, just as we go along, the difference between the reference price and -- that's the reference price that is reflected into the rate schedules, or is the reference price to -- sorry, or is the reference price that is reflected in as the base in the variance account, or does it matter? 159 MR. AIKEN: Yes, the reference price is the Board-approved reference price in the PGCVA account. There's a small difference between that and the gas commodity charge that's in the rate schedule. 160 MR. VLAHOS: All right. And we don't care about what that price is in the rate schedules, for our purposes. 161 MR. AIKEN: That's correct. That difference there is because of some of the costs that are allocated through the cost-allocation model into gas costs. 162 MR. VLAHOS: And it's not an issue that is coming in in this proceeding at all? 163 MR. AIKEN: No. No, it's not. 164 Column E is the calculation of the amount that's in the PGCVA each month. The number in brackets means it's a debit. So, at the end of the year, with this reference price, there would have been $1.9 million as a debit that would be recovered from customers in the future. So that's the first section of that table. 165 Starting in column F, we have the total throughput on NRG's distribution system. Column G is the direct purchase volume portion of that throughput. Column H is the system sales, which is the difference between total throughput and direct purchase. Column I is the unaccounted-for gas, and that's been calculated at the Board-approved rate of one-half per cent of the total throughput. And column J is then the -- what I've called volume used, which is system sales plus the deemed UFG. 166 The system sales revenue in column K is the system sales volumes times the reference price each month. So, in total, NRG would have recovered a little over $6 million through its system sales at that reference price. 167 Column L is a deemed revenue, because this is lost gas. But again, based on the unaccounted-for gas volume at the reference price, NRG would have recovered $35,000 if it could actually bill somebody for that. 168 Column M is basically the difference, as you can see there, between columns K plus L, which are the system sales revenue and the deemed UFG revenue, minus the actual cost of gas. So, at the end of the year, NRG failed to recover approximately $1.5 million through its revenue directly from its customers. 169 Columns N and O show the physical, the cubic metres, the monthly inventory balance over this period. And you can see under column O, by the end of December, 2003, NRG was drafting Union's system to the amount of a little over 2 million cubic metres. And you can see how that number varies by season and by month. 170 Column P I'm going to ignore for now because there's nothing in here, but I will make reference to column P when I get to schedule 3. 171 The bottom half of this schedule -- 172 MR. VLAHOS: Just a second. Just before we go to the bottom half, the cost, is that only based on the M9 or does it include all the other sources of the portfolio for NRG? 173 MR. AIKEN: It's actually the other way around. The actual cost here is only the costs that go into the PGCVA. The M9 cost goes into that other deferral account -- that other variance account, sorry. So this is for the commodity cost, including the upstream TCPL transportation cost. 174 MR. VLAHOS: Okay. I want to make sure that I understand that. See, I was under the impression, and I was a bit surprised when you explained this, what is the commodity variance account, that there was a PGVA, an umbrella account, and then I thought that you want to speed that up with commodity and transportation. Have you done that? 175 MR. AIKEN: That's correct. Yes. 176 MR. VLAHOS: Okay. So that's what you said? 177 MR. AIKEN: Yeah. 178 MR. VLAHOS: Okay. I did not hear it that way. 179 MR. AIKEN: Sorry. 180 MR. VLAHOS: So now, on the commodity side, you've got M9 as one source, and you have other supplies as well; correct? If you look at NRG's supply portfolio, there would be the M9 contract and there would be some other sources? 181 MR. AIKEN: Well, the M9 contract is not a supply source. It's a delivery source. 182 MR. VLAHOS: Okay. 183 MR. AIKEN: The supply is gas at the Alberta border plus TCPL transportation to Parkway on Union's system. There's gas purchased directly on Union's system at Parkway, and gas purchased at Dawn. And then that gas is then delivered to NRG through the M9 service contract. 184 MR. VLAHOS: I see. So Union Gas is not a supplier, it's just the truck that carries the commodity. 185 MR. AIKEN: That's right. It's a transporter, not the commodity source. 186 MR. VLAHOS: All right. And this portfolio supply has been approved by the Board -- 187 MR. AIKEN: Mm-hm. 188 MR. VLAHOS: -- for NRG, and that, I guess, goes back to that last main rates case; correct? 189 MR. AIKEN: That's correct. Yes. 190 MR. VLAHOS: Okay. But the commodity, you say now, includes the transportation component on the TCPL system? 191 MR. AIKEN: Yes, because that is part of the cost of gas in Ontario. 192 MR. VLAHOS: Okay. That's why I'm a little mixed up. How does this other variance account -- what's its relationship with the transportation component of the commodity cost? 193 MR. AIKEN: Okay. The PGTVA, the transportation variance account, only records the costs paid to Union under the M9 contract for the distribution and the use of storage and load-balancing that NRG receives from Union. 194 MR. VLAHOS: Okay. It's not upstream at all? 195 MR. AIKEN: No. 196 MR. VLAHOS: All right. Thank you. That clarifies it. 197 MR. AIKEN: And just to clarify why those two accounts were split was because the PGTVA, any variance from that gets recovered or rebated to all customers, the system and direct purchase on NRG's system; whereas the gas commodity variance, of course, only gets cleared to system-gas customers and not to direct-purchase customers. 198 MR. VLAHOS: Right. 199 MR. AIKEN: Okay? 200 Going to the bottom half, now, of that schedule 4, I just want to walk through these numbers here. And these numbers have all been calculated in the top half. 201 The first thing that's calculated there is the total cost of gas to NRG. And there's two components. One is the cost of gas actually purchased. That's the 7.6 million that comes from column C over this period. Then there's a figure of $416,000. That is, as you will note in footnote 1, the cumulative inventory balance, or in this case imbalance, the shortfall of 2 million cubic metres at the end of December, valued at the reference price that's used throughout this example of the 20.629 cents per cubic metre. So that's gas that's been sold, but at the end of December 2003 was yet to be purchased by NRG. And that's part of their gas balancing under the M9 direct purchase account with Union Gas. So their total cost of gas is just slightly over $8 million. 202 The total revenue to NRG has three components: One is the 6 million from column K that I referenced earlier; there's the $35,000 from the deemed revenue for the unaccounted-for gas; and then there's the $1.9 million, which is column E, where I indicated this is a $1.9 million debit in the PGCVA at the end of this period, and that is money that will be recovered by NRG at some point in the future, through the QRAM mechanism. And that adds up to the same $8 million, so there's no difference in this example. 203 And this is the way, as I referenced earlier before, this is the way the PGCVA used to work, and worked fine. What this example shows is that NRG's total costs and their total revenue balance. 204 So this was the good old days, essentially. 205 MR. VLAHOS: Right. 206 MR. AIKEN: When the price didn't change. 207 MR. VLAHOS: Okay. How recent is that those olden days? 208 MR. AIKEN: I probably would say, like, three years ago. 209 MR. VLAHOS: Was there a specific event that anybody will recall? There was a rates case or? 210 MR. AIKEN: No, it was the variance in the projected forecast gas cost that began to trigger NRG's $30 per customer trigger. When the prices started to become more volatile and we were putting in these forecasted prices for the next 12 months, we were outside that $30 threshold. 211 Previously, I mean, you could go easily for a year and not be outside that $30 threshold, and you would just deal with it at year-end. 212 MR. VLAHOS: Okay. I guess what I'm trying to establish here is, what upset this balance is the introduction of new reference prices in the middle of the year, of the test year? 213 MR. AIKEN: Yes, that's what I'm going to go through in schedule 3. 214 MR. VLAHOS: And does that have a starting life? 215 MR. AIKEN: Yeah, obviously there was a first time when that happened. I just can't recall how long ago that was. But there were a number of years. Like, the current PGVA mechanism hasn't been in place for NRG since 1993. And I don't think it was until we hit 2001, maybe even 2001, where we started changing the reference price on a regular basis every three months or six months. 216 MR. VLAHOS: Okay. I don't want to give evidence but my recollection is that we only had a couple of reference price changes. But I will leave that for later on. Maybe Ms. Lea can follow that up. 217 Mr. Birchenough would like to follow up. 218 MR. BIRCHENOUGH: In this schedule on schedule 4, at what point in time was the $30 trigger met? When did you actually exceed the $30 per customer trigger? 219 MR. AIKEN: If you turn to schedule 3, and look at column D, which is the reference price column, you'll see that the reference price change between February and March from 20 cents to 27 cents, two months later it changed to 30 cents, and in October of 2003 it changed to 26.8 cents. 220 In each of those occasions, that was essentially the QRAM application brought forward and approved -- brought forward by NRG and approved by the Board. In each of those cases, it exceeded the $30 trigger mechanism. And in some cases it was an increase in the reference price and in the last one a decrease in the reference price. 221 MR. BIRCHENOUGH: So the first time was March 2003? 222 MR. AIKEN: That's correct. Yes. 223 MR. VLAHOS: Okay. And that was my recollection, Mr. Aiken. I'm not sure if it's still correct information, but I do recall there was a March 1st, 2003 change. And there was a May 1st. 224 MR. AIKEN: Yeah. 225 MR. VLAHOS: Or just shortly thereafter. I recall that time frame. 226 And was this because of a change in the -- we were already into the new reference, the QRAM world? Or not yet? 227 MR. AIKEN: Sorry, no. We were not into the new world yet. 228 MR. VLAHOS: Okay. 229 MR. AIKEN: That was strictly a significant increase in the projected cost of gas that triggered the $30 mechanism. 230 MR. VLAHOS: Right. But then that would also be associated with some -- with the reference in price going forward -- sorry, with a change of reference price going forward? 231 MR. AIKEN: Yes. 232 MR. VLAHOS: The March and the May -- 233 MR. AIKEN: Yes. 234 MR. VLAHOS: -- occurrences? 235 MR. AIKEN: Yeah. 236 MR. VLAHOS: Okay. But would you not -- NRG had not formally adopted the QRAM methodology if you like, at that stage? 237 MR. AIKEN: No. No, we had not. The QRAM methodology really didn't exist at that point. 238 MR. VLAHOS: Right. And the QRAM methodology existed since when? How many QRAMs do we have for NRG? 239 MR. AIKEN: I think probably the first QRAM, QRAM-driven was the change that is reflected in October of 2003. And since then we've been in for a January 1st change, and the recently approved April 1st change. So I believe there have been three QRAMs, QRAM-driven changes, legislative-driven QRAM changes. 240 MR. VLAHOS: So, the October 1st, is this part of the rates case? Is this sort of the starting point as part of the last rates case or it was QRAM? 241 MR. AIKEN: No, it was a QRAM. 242 MR. VLAHOS: It was a QRAM. 243 MR. AIKEN: Yes. 244 MR. VLAHOS: So we have gone through three QRAMs, then, for NRG: October 1st, January 1st, and -- 245 MR. AIKEN: And this April 1st. 246 MR. VLAHOS: And this one, meaning the one just received for April 1st? 247 MR. AIKEN: Yes. 248 MR. STOLL: Correct. 249 MR. VLAHOS: Yeah. 250 MR. AIKEN: I now want to highlight on schedule 3 the impacts of these changes within the year, the changes of the reference price within this 15-month period. 251 Columns A, B, and C are unchanged from schedule 4. Column D reflects the actual reference prices that were approved by the Board and used by NRG. 252 Column E then reflects the change in the dollar value of the PGCVA account each month, and you can see, instead of a $1.9 million debit, there's only a $265,000 debit as a result of that. 253 Columns F through J are the same as on schedule 4, in other words, the throughput is the same. 254 The system sales revenue and the deemed UFG revenue in columns K and L reflect the same sales and UFG levels, but at the Board-approved reference prices shown in column D. So you have $7,242,000 in revenue. 255 Column M just again shows the difference between the revenue received and the actual gas cost. And columns N and O are the same as in schedule 4, again, coming up with the 2 million cubic metre negative inventory at the end of December 2003. 256 I mentioned column P before, but here -- this is the inventory revaluation column that calculates the change in the value of gas, in NRG's case, that has to be purchased as a result of the change in the reference price. 257 MS. LEA: Could you please repeat that? It represents? 258 MR. AIKEN: It represents the value of the gas that has to be purchased by NRG and it's valued at the current reference price, or I should say the change in the reference price. 259 MS. LEA: So each time the reference price changes -- pardon me. Perhaps I should wait, but these figures are based on the reference price that is current at the time the valuation is done? 260 MR. AIKEN: That's right. And I'll walk you through the first one there, the $401,000. 261 MS. LEA: Thank you. 262 MR. AIKEN: And maybe just, myself, to back up for a minute. 263 We have to remember the reference price is based on the 12-month forecast of gas costs for gas to be purchased. So, the reference price, when it takes effect, is the most recent forecast. We have what the gas is going to cost in the future. 264 So this 401,000 change, if you look at column O, at the end of February, there's a negative inventory of 5,530,000 cubic metres. So this is gas that NRG has already sold up to the end of February but hasn't purchased. It has purchased some gas. Its regular deliveries to Union. But this is the drafting level, at that point in time. 265 If you take that amount of gas that has to be bought and you value it at the difference in the reference price, the change in the reference price between the end of February and March 1st, where you go from 20.6 cents to 27.89 cents, which is now our current forecast of what that cost of gas is going to be going forward, that difference of 7.3 cents times the five and a half million cubic meters of gas that needs to be purchased just to balance up to that point in time results in a cost of $400,000. And that's a cost that is not captured in the PGCVA, because the PGCVA only looks at the actual amount of gas purchased each month, and the difference between the actual cost of gas and the reference price. There's no allowance in the PGCVA for this inventory revaluation when a reference price change takes place during the fiscal year. 266 So you will see that there are four inventory revaluation numbers that would have taken place over this 15-month period. The first two reflect high negative inventories and a rising reference price. 267 MS. LEA: Is that high? 268 MR. AIKEN: Yes, high. 269 And the last two reflect low negative inventory numbers and a falling reference price, and that's why those are actually positive numbers. So in total, we've come up with this inventory revaluation for this 15-month period of the $531,000. 270 Another way to calculate that exact same number is to look at the bottom section of that schedule. Again, we have -- the first section shows the total cost of gas to NRG is 7.6 million that they actually purchased; 507,000 of gas to be purchased. That's the 2 million shortfall at the end of December, times the January reference price. 271 MS. LEA: Sorry, what column is that from? 272 MR. AIKEN: Column O, right at the bottom. The 2017. 273 MS. LEA: Mm-hm. 274 MR. AIKEN: Times the January 2004 reference price. That's in footnote 1. 275 MS. LEA: Mm-hm, thank you. 276 MR. AIKEN: So in this case, the total cost of gas to NRG is 8.1 million. Then you look at -- where does the revenue flow into NRG to match this? Well, first, we have the 7.2 million. That's from column K. That's their actual system sales each month, at the reference price each month. You have the 42,000 from column L. Again, this is the deemed UFG at the reference price each month. And then you have the $265,000, which is a recovery in column E of the PGCVA debit that existed at that point in time. 277 Those numbers add up to just under $7.6 million. And the difference between the 8.1 million in actual costs and the actual revenues and what will be recovered through what we now know is a flawed PGCVA comes out to 7.6 million. The difference, again, is the $531,000. So it's calculated two different ways, just to illustrate in the bottom section that there is a mismatch between gas costs and revenue that has been or will be recovered with the existing PGCVA mechanism. And in the top, it just shows when you do the inventory revaluation methodology, you get the same numbers. It's the same cost that is outstanding. 278 So that is essentially the driver of why we're here, is because the PGCVA in schedule 3 doesn't pick up that $500,000 that would have been picked up and is shown as such in schedule 4. Schedule 4 shows that with no change in the reference price during that period, the actual cost and the actual revenue to NRG exactly offset one another. When you change the reference price throughout the period, and nothing else changes - the actual purchases, the actual amounts sold, the amount bought stays the same - NRG is short the $531,000. 279 And I just want to touch briefly on the drivers behind the magnitude of that $531,000. There are essentially four drivers. And probably looking at schedule 3 is the best way to follow along with this. 280 The first driver is the cold winter of '02/'03. That shows up in column O, with a very large negative inventory balance, you know, that peaks in March, I guess it is, at 6.3 million cubic metres. This drafting of Union's system, or this requirement to buy this amount of gas at the end of September of 2003, was very large compared to the historical drafting that NRG had done on the Union system. And that was because of the cold winter. 281 Combined with that is a second factor that is magnifying this problem, and that is that the reference price change was March 1st. There's two things that drive the magnitude. One is the magnitude of the change in the reference price, and the magnitude of the gas in inventory or the negative inventory that you apply it to. If this price change had taken place three months earlier, and the short fall was 2.6 million cubic metres, the dollar impact would have been, obviously, a lot less. 282 So those are the first two. There's the timing and the magnitude, which was driven by the colder weather. 283 The third item driving this increase, or driving the $531,000 figure, was the higher-than-normal price that NRG ended up paying for its makeup gas or its balancing gas that it purchased in the summer of 2003 for delivery by the end of September 2003. This was the gas that it was required to purchase and to balance on the Union Gas system. Historically the price of gas in the summer has come down substantially from the winter prices. In this particular year there are a number of factors that didn't come into play, and the price, while it did come down from the January/February peak prices, didn't come down to the same extent. 284 I've done some rough calculations, and of the $500,000, close to $200,000 is because the price in September of 2003 was - I forget the number - something like 4 cents on average higher than the price it was in September of 2002, which was a "normal year" for the pricing parameters. 285 So the fact that NRG had to purchase a substantial amount of gas in September, which is reflected in that graph that Mr. McCallum referred to earlier - again, a large volume of gas at a price substantially higher than in previous summers - was part of the contributing factor to this $500,000. 286 The fourth and final driver of the magnitude of this problem is really the price volatility. And you can see that on schedule 3. The reference price in October through February was 20.6 cents. And that price was set as of October 2002, based on forecasts at that time. By the time we hit late January, at which time the gas costs application would have been filed with the Board, the forecast was driving that price to go up to 27.9 cents. That's obviously a substantial change. NRG had never had, you know, a change in the reference price of that magnitude. It had always been in in 1, 2, 3 cents. But all the utilities were faced with a substantial increase at that time because of a forecast of gas prices. 287 And you can see that NRG came in shortly again and the Board approved another increase of 30.7 cents, which was further driven by even higher prices that were forecast in the market at that point in time. So with that, I think I'm finished on that section. 288 MR. STOLL: Okay. Thank you very much. That helped. Just a point or two of clarification, just because I'm not an accounting type guy. The schedule 4 is basically for illustrative purposes only, when using a constant reference price throughout the entire year? 289 MR. AIKEN: That's correct. It illustrates -- it is an example of when the current PGCVA mechanism works properly, which is to balance actual costs with actual revenues. 290 MR. STOLL: Yeah. And schedule 3 is the -- what actually occurred to NRG during fiscal 2003 in the first three months of the fiscal 2004? 291 MR. AIKEN: That's correct. Yes. 292 MR. STOLL: Okay. And just to confirm, the two rate adjustments in March and May were driven by the magnitude of the change, or like being over the dollar-per-customer trigger? 293 MR. AIKEN: That's correct; yes. The $30 per residential customer trigger. 294 MR. STOLL: Right. And it would appear from the size of the change in October that a change like that would have been either QRAM or the trigger, it wouldn't have met both criteria? 295 MR. AIKEN: I believe it did meet both, yes. 296 MR. STOLL: Okay. Thanks very much. 297 Now, I think the next question I want to go to is, why was this error not discovered until this year? 298 MR. VLAHOS: Mr. Stoll, if you could just bear with me. I'm just going to go back and just follow up one item, if you don't mind, while it is fresh in my mind. 299 MR. STOLL: Certainly. 300 MR. VLAHOS: Mr. Aiken, I'm on schedule 3. The reference price changes and NRG is not suggesting that the reference price is not going to be changing going forward? 301 MR. AIKEN: No. 302 MR. VLAHOS: You want a mechanism whereby you can capture what is now shown under P, column P? 303 MR. AIKEN: That's correct. And we actually have that in place as of January 1st of this year. 304 MR. VLAHOS: Okay. And that's the GPRA? 305 MR. AIKEN: That's correct. Yes. 306 MR. VLAHOS: And that is not a new mechanism, I mean, Enbridge, for example, would have that. It probably does not have a separate variance account, probably just one little item in their umbrella PGVA account; is that fair? 307 MR. AIKEN: I believe there is actually a separate account but, you're right, it's under the umbrella. But like, Enbridge and Union tend to have multiple variance accounts that are all PGCVA-related. 308 MR. VLAHOS: Right. 309 MR. AIKEN: They have, you know -- I think Union, for example, actually calls it an inventory revaluation account that they make an adjustment to every time the reference price is changed. 310 MR. VLAHOS: And that adjustment, to your knowledge -- to your knowledge, if you don't know, that's fine -- if I have a balance of X in that inventory valuation account, then I would offset what? I would have offset the accumulation in the PGVA or PC ... I'm sorry, PGCVA, in your case? Or what do I do with that revaluation amount? 311 MR. AIKEN: What it does is pick up -- in NRG's case, for example, it's not an offset. It's actually an addition to the problem. If the reference price goes up, and because NRG's in a negative inventory position, that means the gas they have to buy to make up that negative inventory is going cost more than what was previously forecast under the previous reference price. So in that case, if you're increasing the reference price, you've got a negative inventory, and then you come up with, say, the minus $400,000, that's $400,000 more that has to be recovered from your customers. 312 MR. VLAHOS: Right. Because I guess if you're asking for a higher reference price, that means axiomatically, that the inventory valuation would be a negative from NRG's perspective? 313 MR. AIKEN: From NRG's perspective. For the other utilities it works the opposite. 314 MR. VLAHOS: Correct. Well, I was going to say that because NRG does not have -- never has a positive balance? 315 MR. AIKEN: Or very rarely. It may have for one or two months of the year at the very beginning. 316 MR. VLAHOS: Okay. So in the case of Enbridge, for example, just to pick one of the other utilities, there's always a positive physical -- 317 MR. AIKEN: That's right. 318 MR. VLAHOS: So that's what I'm trying to understand, as to -- 319 MR. AIKEN: In their case, an increase in the reference price, because they can't draft their own system, you're right, they always have positive inventory. So that increase in the reference price times whatever amount of gas they have goes up in value. The gas and inventory goes up in value. So that's an offset. And I'm not sure whether Enbridge clears that offset -- 320 MR. VLAHOS: Okay. 321 MR. AIKEN: -- right away or at some point later. 322 MR. VLAHOS: So somehow they have to capture the cheaper gas that they have purchased in the past and is sitting in the storage? 323 MR. AIKEN: That's right. 324 MR. VLAHOS: Which is unlike NRG, where they have to purchase that gas. 325 MR. AIKEN: That's right. 326 MR. VLAHOS: They have to purchase that gas and the higher the reference price, the higher the forecast. And therefore, if that forecast holds, then you're going to be short. 327 MR. AIKEN: That's correct. 328 MR. VLAHOS: And on the other hand, if it's a lower, if it's a lower reference price forecast, then it works to NRG's advantage? 329 MR. AIKEN: Well, it works to the cost of gas advantage. The customer's advantage. Again, if you look at column P, in schedule 3, you have two examples of each -- 330 MR. VLAHOS: I'm sorry, I'm not going to get into argument as to who benefits or who doesn't benefit here. But the $531,000 that shows on schedule 3, we could be talking here about a positive number in different circumstances? 331 MR. AIKEN: Oh, yes. Yes, if the price had come down in March -- 332 MR. VLAHOS: Right. 333 MR. AIKEN: -- and NRG had a shortfall of 6 million cubic metres, and if it came down 7 cents from what the reference price was, instead of going up 7 cents, you would have a positive balance of 400,000 for that one change alone. And that would be a credit to customers, a reduction in their gas costs which, again, would not be reflected in the current PGCVA mechanism. 334 MR. VLAHOS: Okay. Thank you. And just going forward, just to make sure that we all understand, there's no changes into the PGCVA the way that it is operating now, but rather you're introducing the GPRA, which is supposed to capture what is shown on column P? 335 MR. AIKEN: That's right. The GPRA will capture or will fix this problem on a going-forward basis. 336 MR. VLAHOS: Right. And now you've got an approval as of January 1st of 2004. That's the new date for the -- the first date of the GPRA, right? 337 MR. AIKEN: That's correct. 338 MR. VLAHOS: And you're here to seek recovery for this GPRA that did not exist officially, I guess, for up to December 31st, 2003. 339 MR. AIKEN: What NRG is seeking to recovery is the actual costs -- 340 MR. VLAHOS: I understand that. 341 MR. AIKEN: -- that were not recovered. 342 MR. VLAHOS: But the timing. The timing. That mechanism operates as of January 1st, 2004. 343 MR. AIKEN: That's correct. 344 MR. VLAHOS: You're here to deal with up to that date. 345 MR. AIKEN: Yeah. And all the costs incurred and not recovered through that mechanism or the PGVA mechanism prior to January 1st of 2004. 346 MR. VLAHOS: I understand. 347 MR. AIKEN: Yes. 348 MR. VLAHOS: Okay. Thank you. Mr. Stoll? 349 MR. STOLL: Thank you very much. And I think we'll go back to where I was going before. We just clarified a couple of those issues. And I think it goes to the timing of the discovery of the error. And I think one of the questions is, why was this not picked up in a prior year? And I think Mr. McCallum, you are probably the best one to speak to this? 350 MR. McCALLUM: The indication that we had that there was a problem this year did not come to light until close to the end of October of 2003. NRG only performs a balancing once a year with Union Gas as it's required to under its contract. It's at that point in time, were it able to do a financial reconciliation as well. 351 MR. STOLL: A financial reconciliation as well as a ...? 352 MR. McCALLUM: Volumetric. 353 MR. STOLL: Okay. 354 MR. McCALLUM: So we're able to balance the -- we have to balance the volumes in cubic meters or gJs, that we happen to be over or short outside that plus or minus 4 per cent envelope. And it's also at that time we get the final information on what our gas actually cost us. And so we can balance the volumetric and the financial impacts for the full year. 355 We got that information close to the end of October of 2003. And it was at that point in time we noticed a significant difference between the commodity revenue collected from customers and the commodity costs incurred by the company. This is a situation that has not existed in the past. And if you look at the pre-filed evidence on page 7, you'll see that historically, going back to fiscal 1999, which is as far back as we're able to go, because prior to fiscal 1999, the gas commodity and the delivery revenues were combined into one charge for the customer's gas bill. 356 Normally the company would expect there to be a small loss on the commodity side. That would be due to two things. One is we have to expect some unaccounted-for gas, so we're buying the gas but we're not recovering that through commodity sales. So all other things being equal, we would expect to incur a loss at that point. 357 The other difference that will give rise to monthly fluctuations is the program that we use in our system to prorate the gas, essentially, for unbilled gas at the end of one month and into the next, it differs slightly from the even amounts of gas that are delivered into our system and that we're paying for. 358 Our system calculates this proration. It does a portion of it evenly based on the number of days, but a large portion of it is based on degree days, so the number of degree days within a billing period, how much falls within one month versus the other month. And that would make an assumption that all the loads are heat-sensitive loads, which they are not. So it gives rise to an imbalance that can exist at the end of one month and going into the next month. 359 The thing that will happen for those is that, if you happen to be over or under in the first month, it's made up for in the second month, because you've billed out that bucket of gas no matter what. So for the prior four years, we'd always had very small differences that didn't alert us to any potential problem. The differences were all within the realms of expectation. 360 However, in the case of 2003, when we first started to look at the numbers at the end of October, it alerted us to a much more significant problem. And our investigation at that point in time highlighted the fact that the commodity price differences were not all, in fact, captured within the PGCVA as we had all been operating under the assumption that they were. 361 We calculated these differences and we provided this information to the Board in November of 2003. We included it within a gas cost application, since we, at that point in time, assumed it was all commodity-related, which turned out to be not the proper forum for it. But that was the process and the reasons why it was not capturing the costs, and why we didn't uncover it until the end of October 2003. 362 MR. STOLL: All right. Just a couple of points on that. 363 On a going-forward basis from January 1, the new GPRA account will take into account the column P numbers and so you won't end up with this problem in the future? 364 MR. McCALLUM: That is correct. It's anticipated that the recording of the GPRA amount and the inclusion of that in our pricing forecasts to be charged to the customers will take care of this problem going forward. 365 MR. STOLL: And with reference to the four fiscal years that you provide numbers for on page 7 of schedule 1, those years have all been closed, those accounts are all closed? 366 MR. McCALLUM: That is correct. The Board has ruled on everything up to the 2002 PGCVA accounts. They have not closed the 2003 PGCVA account. That won't be closed until our next main rates filing, which will be sometime this summer, when that will be decided and closed. 367 MR. STOLL: Right. So this application really deals with an interim adjustment to correct the flaw prior to a final closing of the account? 368 MR. McCALLUM: That's correct. That year has not been closed, and is still open to adjustment. 369 MR. STOLL: All right. I think we'll just go into a couple other areas. And I think I want to go towards whether there's anything that we know of that would prevent or inhibit what we're asking. And from an accounting or a legislative perspective, are you aware of any prohibitions that would prevent, basically, an accounting adjustment entry? 370 MR. McCALLUM: We're not aware of anything under the current legislation that would prevent NRG recovering what we're asking for. The current legislation has a requirement where the costs in deferral accounts related to gas commodities are reviewed on a three-month basis. This is something new for NRG effective October 1st, 2003, when the legislation took effect. But it doesn't prohibit us from recovering prudently incurred commodity costs that have been incurred in that year. 371 MR. STOLL: Right. And I just want to follow up on the prudently incurred costs. If we could refer to -- I've left a couple of press releases with Board counsel? 372 MS. LEA: Mm-hm. 373 MR. STOLL: And it just refers to comments by the then-minister of NRG, and would outline, from our perspective, the policy. If you could just provide those comments. 374 MS. LEA: Certainly. We'll call these Exhibit 2, please. Exhibit 2 -- I'm putting them together collectively, so Exhibit 2 consists of two press releases. 375 EXHIBIT NO. 1.2: TWO PRESS RELEASES 376 MR. STOLL: Right. And if we could just turn to the May 6, 2003 press release. And if you could read from the third paragraph. 377 MR. McCALLUM: The third paragraph, it states, this is a quote from Minister Baird: 378 "'In the past, we have seen unacceptable lag times in getting good decisions out, and this has had a dramatic impact on consumer and investor confidence,' says Baird. 'No one is denying that utilities must have the ability to recoup legitimate costs. But there must be a balance, and we believe that the Board has a strong role to play.'" 379 MR. STOLL: And in referring to the June 24th, if you could read the -- just from the second line after "said Baird"? 380 MR. McCALLUM: "While utilities must have the ability to recoup legitimate costs, there must be a balance with consumers' needs to manage their energy budgets. This legislation ensures the Board can better meet the needs of both utilities and consumers." 381 MR. STOLL: Okay. So this goes back to, I guess, the overarching principle of the application, which was a recovery of prudently incurred costs. And is this also in keeping with what your understanding of Board policy is? 382 MR. McCALLUM: Yes, it is. It's our understanding that utilities should be able to recover their prudently incurred costs, and I believe this is the OEB's understanding, that utilities should be allowed to recover their costs. 383 The OEB has published such statements on their web site, and some of those were included in the pre-filed evidence on schedule 2. Page 2 of 2 is an excerpt from the OEB's web site, which states that: 384 "It is important to note that the Board does not allow the utility to profit on its gas purchases with the result that the utility has no profit incentive to increase the cost of gas to its consumers. The utility charges its customers the price that it pays to secure the gas for the customers' consumption." 385 And also, on a brochure that the OEB had each of the utilities publish in December or January of 2003 or January 2004, which is -- a copy of which is shown on page 1 of 2 of schedule 2, has similar statements. And it was reiterated again in April 2004 on the brochure that each of the utilities had recently issued. 386 These are brochures that came from the OEB, which, I think, clearly states that the OEB's intent is that utilities should be able to recover their costs, no more or no less. 387 MR. STOLL: And, just being mindful of the time, can you very briefly state whether you feel your request is in keeping with industry practice? 388 MR. McCALLUM: There are a number of precedents within the gas industry where requests have been made for out-of-period adjustments for commodity costs. One happens to be for NRG, going back to 1993, where the company had requested a PGBA account be established at that point in time. The request was not made until September 1993, for the fiscal 1993 period. 389 That approval was granted in April of 1994. The PGBA was then recalculated historically, and there were balances up to $68,000 included in that PGBA account for 1993. 390 Sorry. Yes. Fiscal 1993, which started October 1992. 391 And we have also received some indication that the New York Public Service Commission has indicated that if an error is discovered from a prior or closed year, it would be adjusted for in the next open year and submitted with the annual reconciliation that is submitted for that current open year. 392 In Alberta, there was a recent case in 2003, where ATCO Gas South discovered a measurement error in 2000/2001 and they were permitted to include those costs in their 2003 application, when an error was discovered. 393 In British Columbia, if errors are discovered in the calculation of the gas costs, they would automatically enter through the gas cost reconciliation account, which gets included in the going-forward price that's established by the utility at that time. 394 So I believe there's a number of precedents out there that indicate that what we are asking for is nothing new or different in the industry. 395 MR. STOLL: Right. Okay. And I think, just the final question, and we'll go back to you, Mr. Blake, is, if the Board declines your request, what impact would that have on NRG and the debt-holders or another suppliers to NRG? 396 MR. BLAKE: Well, the impact of the 500 and some-odd thousand that flowed into 2003, into fiscal 2003, was to reduce the after-tax profits of the company by about $355,000. 397 So they went from what would have been probably around 577 down to, I believe, 222. 398 And there was some reference in the interrogatories, interrogatory 9, about the impacts on the debt covenant ratios that exist with the current lender and they have the impact of putting the company offside on two ratios. One was the debt service coverage ratio, and I believe the other was the interest coverage ratio. 399 And the company has just completed its fiscal 2003 financial statements. And we haven't had any discussions as of this time with the principal lender. So we can't really anticipate what, if any, steps they'll take. We're more concerned with what impact it may have on future lenders, since we are searching for new financing for the company, and on any gas suppliers, how gas suppliers may view the financial integrity of the company. 400 We are also concerned that, if this amount is not allowed, then lenders, gas suppliers, et cetera, may see the company as having more risk because it hasn't been allowed to recover all of its gas costs. And the lenders that we have had discussions with see gas utilities as they do electric utilities and so forth, as somewhat less risky than some businesses they'll lend to, in that commodity costs for system customers are viewed as a pass-through of costs, in most cases. 401 And finally, I'd just like to mention the order of magnitude this has. It seems, I guess every company has -- different amounts are important to different companies, but if we were to sort of extrapolate this to the other utilities on a sort of per cubic metre basis, the impact on Union or Enbridge on a similar fiscal year would be something to the order of $70- to $100 million. And in our case, it effectively wipes out our allowed rate of return on our equity for the fiscal 2003 year. And I'm not talking about the portion that would also apply to the first three months of fiscal 2004. I'm speaking just to the fiscal 2003 year alone. 402 So it's extremely important, as you can imagine, for the company in its ongoing operations, in its dealings with its suppliers, debt holders, and its cash flow and so forth. And so we're -- I'd just like to sort of stress the importance of the whole matter. 403 MR. STOLL: Thank you. 404 And that concludes the panel's evidence-in-chief. Thank you very much, Mr. Chair. 405 MR. VLAHOS: Thank you, Mr. Stoll. Perhaps this is a good time to break. It is 11 o'clock, by the clock on the wall. We'll return at 11:30. 406 MS. LEA: Sorry, reconvene at 11:30? 407 MR. VLAHOS: 11:30. 408 --- Recess taken at 11:30 a.m. 409 --- On resuming at 11:36 a.m. 410 MR. VLAHOS: Okay. We're back. Any matters, Ms. Lea, before we turn it over to you? 411 MS. LEA: I'm not aware of any, sir, thank you. 412 MR. VLAHOS: Mr. Stoll, any matters? 413 MR. STOLL: No matters, thank you. 414 MR. VLAHOS: Ms. Lea. 415 MS. LEA: Thank you. 416 CROSS-EXAMINATION BY MS. LEA: 417 MS. LEA: Thank you very much, Mr. Aiken, for your evidence, which was very helpful. I do have a few clarifying questions that arise out of your evidence-in-chief. 418 When you were describing the history of NRG's gas cost variance accounts, you were talking about the original PGVA, and that when it was cleared, it was recovered from customers on a retroactive basis. Can you tell me what you mean in that context, by "a retroactive basis?" 419 MR. AIKEN: The way it was usually cleared back in the early '90s was that any balance in that account at the end of the year would be dealt with in the next rates proceeding. So, for example, if an account had been set up for fiscal '94 and NRG was in for a rates case for fiscal '95 or fiscal '96 - at some point after fiscal '94 was over - and we knew that the actual balance in there would be a credit or a debit, it was usually cleared on a retroactive basis, meaning it was cleared based on historical consumption in fiscal '94. So if there was a charge to be collected from customers, for example, we knew what the actual consumption was and the balance might have worked out to half a cent per cubic metre, then that would have been recovered from individual customers based on their actual consumption over that 1994 period. 420 MS. LEA: Okay. So when you speak about retroactive, then, the basis for using that word is that it would be recovered from those customers who had consumed the gas in the past, in the amounts they had consumed it in the past? 421 MR. AIKEN: My definition isn't quite that -- 422 MS. LEA: Okay. 423 MR. AIKEN: -- all-encompassing. My definition of "retroactive" is that it's recovered from customers who've already used the gas versus "prospective," which is when we recovered from customers based on gas they haven't used yet. 424 And it goes back, I think, to Minister Baird's statement about, you know, allowing customers to be able to budget. Customers can't budget on a retroactive charge because it's a charge that's after the fact. They can budget based on a prospective rate because, for example, they would know that our rate is increasing May 1st to whatever, you know, the new rate is, and customers can budget for that increase. They can't budget for an increase on something they've already used. 425 MS. LEA: Is there a concern about inter-generational inequity given prospective rate recovery? 426 MR. AIKEN: There is always a concern about that, but it's much less than the retroactive recovery, because a large number of NRG's customers are agricultural-based customers who provide services to others; for example, grain-dryers. And it's hard on them to have a charge that they have to pay for and they've already billed their customers for the service they've provided. They can't go out and bill the farmers who have dried the grain at their facilities on a retroactive basis, so they end up eating that as an additional cost that they can't recover. 427 MS. LEA: One thing that I need some clarification about this application, and I think it relates to the questions that I just asked. You've spoken about a desire for recovery beginning at October 2002, in other words, doing the revaluation from October 2002. Are we not recovering amounts from a previous accounting period if the Board were to accede to your request? 428 MR. AIKEN: No, because fiscal 2003 starts in October of 2002. And the PGVA for that period, for that fiscal year, has not been finalized by the Board. And what I mean by "finalized" is, usually when we come in for a rates proceeding, the Board has the opportunity to review the expenses, the gas cost expenses, that went into that PGVA. And when they're satisfied that those expenses were prudent, they will finalize that account and any balance at the end of that year would be either recovered -- the old way was that it would be recovered or rebated to customers -- or the way we do it now is that that balance is rolled into next year's PGVA as a starting balance. And that would be recovered over a prospective period. 429 MR. VLAHOS: Ms. Lea, if I can just interrupt for a minute. But isn't that the very purpose of a QRAM, Mr. Aiken? That when one goes through a QRAM process, then it looks at the balances on the variance, commodity variance accounts? 430 MR. AIKEN: You look at the balances, but -- I'll give you an example. In the Union Gas QRAMs, Union Gas is quite clear that they're not asking for the Board or for intervenors to accept their numbers every time they come in. They always make it quite clear that those numbers can be reviewed at the next main rates case. 431 The QRAM is to change the price only. I mean, the problem is, if you don't do that, then you're going to slow down the QRAM process because intervenors and the Board itself, the Board Staff, have the opportunity to question: Well, you know, were these costs prudently incurred? Or why was this cost incurred now and not before? 432 All of those issues, and the balances in those accounts, are still up for review at the next rate case for the utility. 433 MR. VLAHOS: Just to follow it up, though. To the extent that Enbridge or Union have a revaluation of inventory issue, that is reflected in the QRAM process going forward somehow? 434 MR. AIKEN: Yes, it is reflected in the price changes that get approved. But the actual balances in those accounts are never scrutinized during a QRAM process. 435 MR. VLAHOS: So they're not scrutinized but they're accepted at their face value subject to -- 436 MR. AIKEN: Subject to -- 437 MR. VLAHOS: Subject to review or check or -- 438 MR. AIKEN: To review and finalization at some point in the future. 439 MR. VLAHOS: Okay. But the revaluation process does take place, though, during the QRAM process? 440 MR. AIKEN: Yes, the actual mathematical calculation takes place there, yes. 441 MR. VLAHOS: Okay. Ms. Lea? 442 MS. LEA: Thank you. 443 So I'm not sure if it was yourself, Mr. Aiken, or another witness said that this was an interim measure that you were seeking from the Board. What you're trying to reflect is that an increase in the cost of gas price and reference price now is still subject to review when the account is finally cleared in your next rates case? The second one you talked about was the magnitude in timing of the price changes. Again, to try and put it in laymen's terms that I understand, is there a combination here of a situation where NRG sold a lot of gas at a low price, but then sold less gas in the summer period at the higher reference price? 444 MR. AIKEN: That's right. And that highlights the mismatch that cannot be captured in the PGCVA. You sell the gas in the fall at a low price. You end up buying it at a higher price in the summer. But in the summer, you're selling a whole lot less gas than what you're buying. And even if it's at a higher price, it's not going to have a whole lot of impact, because you're supplying, you know, base load heating load in the summer. And that's where the mismatch of buying and selling at different points in the year occurs. 445 MS. LEA: And that difficulty is exacerbated when the change in the reference price is a large one? 446 MR. AIKEN: That's correct. 447 MS. LEA: There was something I didn't understand, which I believe is related to that question. In Interrogatory No. 4, I wonder if you could turn it up, please. That's Interrogatory No. 4 from Board staff. 448 In that interrogatory we suggested that if the Board was not inclined to allow recovery of the full balance, how about if we talked about gas costs from January 1, 2003. And in the fifth paragraph of your answer, which begins, "NRG notes ...," you argue against that on a principle basis, if I can put it that way, as opposed to merely "we want the whole amount." But there were reasons given. Could you just review that fifth paragraph with me and tell me what it all means? 449 MR. AIKEN: I'll start off, and Mr. McCallum may jump in. 450 MS. LEA: Sure. 451 MR. AIKEN: But if you go back to schedule 3, the blue-page update -- 452 MS. LEA: Yes. One moment. 453 MR. HASSAN: Are they the blue ones? 454 MR. AIKEN: Yes. In column O, the cumulative inventory column, you'll see that after the first three months, which are October, November, December, of 2002, there's a negative inventory of 2.6 million cubic metres. 455 MS. LEA: I'm sorry, sir, tell me again where we are? 456 MR. AIKEN: In column O, the third line down, December 2002. 457 MS. LEA: Okay. 458 MR. AIKEN: There's a cumulative inventory imbalance there, a shortfall of 2.6 million cubic metres. That is the amount of gas that NRG is short after the first three months of their fiscal 2003. By starting this account or this recovery of this amount in January 1st, 2003, you're missing the fact that in part of the current fiscal year you've already built up a substantial portion of the imbalance, the gas that needs to be purchased, in the summer and fall of 2003. 459 MS. LEA: I guess what I was confused about also is the third sentence in that fifth paragraph, or, pardon me, fourth, which reads: 460 "The question proposed does not take into account when the debit balance of $526,924 updated to another figure was created. The first time a cost is incurred is as a result of the March 1, 2003 PGCVA." 461 Now, what does this have to do with the idea of beginning recovery in January? Because, if it's first incurred in March, then it should cover these figures here? 462 MR. AIKEN: No, because it's first -- let me back up. 463 It's first incurred in March because that's when the first inventory revaluation take place, which is shown as that 401,000 figure in column P. 464 MS. LEA: Yes. 465 MR. AIKEN: But the driver behind that amount is the cumulative inventory, which is a cumulative inventory from the beginning of the fiscal year, which is October of 2002. 466 And, in fact, in the response to Interrogatory No. 4, we've provided a revised schedule 3 that shows that the $531,000 figure would be $413,000 if you started with January 2003 and ignored the 2.6 million cubic metre shortfall at that point in time, from the beginning of fiscal 2003. 467 MR. VLAHOS: Are there any more scenarios in terms of those numbers, Mr. Aiken? We've got -- now we've got October 1st, 2002. We've got January 1st, 2003. Did you respond to any other questions from Board staff that would give you a different amount? 468 MR. AIKEN: I don't believe so, no. I think those were the only -- or this was the only alternative suggested by Board staff. 469 MR. VLAHOS: Not suggested, asked. 470 MR. AIKEN: Yes. Yes, sorry. 471 MS. LEA: Mr. Aiken, I've just located the updated schedule 3 to Interrogatory No. 4. I'm sorry, could you just repeat what you were trying to tell me about it? 472 MR. AIKEN: In schedule 3, the total inventory revaluation is $531,000. That number, under the assumptions provided by Board staff in their question, would fall to $413,000, because it ignores 2.6 million cubic metres of inventory shortfall that exist after the first three months of fiscal 2003. In the written part of this question, what we were indicating is that the first numerical calculation doesn't take place until March 1st. But that March 1st calculation on our basis is based on five months of cumulative inventory imbalances, in other words, from the beginning of the fiscal year. Whereas, the response provided here does the same calculation, the same methodology, but starts as of January 1st, 2003, to look at the cumulative inventory imbalance. 473 MS. LEA: Thank you. I think I understand your position on that. 474 MR. VLAHOS: Ms. Lea, I'm sorry, before you go on, if I can just follow up. 475 MS. LEA: Interrupt me at will. 476 MR. VLAHOS: Mr. Aiken, If one were to look at schedule 3 and work numbers with different scenarios, and I'll throw out one. If I were to take, say, November or October 1st of 2003 as the commencement date, how would I look at the schedule to do the calculations? 477 MR. AIKEN: In that example, if you were starting in October 2003 ... I guess I'd have to ask you a clarifying question, first of all, and that would be whether any imbalances created prior to October 2003 would be included in your calculation, or whether you're starting at a zero balance? 478 MR. VLAHOS: No, I'm sorry, I meant a zero balance. 479 MR. AIKEN: Okay. In that case, you would start at October 2003. The first reference price change takes place in January of 2004. So the inventory revaluation would have been based on the October, November, and December monthly inventory balance. If you look at column N, that would be the plus 46,000, the minus 990, and the minus 659. Whatever that adds up to, that would be the cumulative shortfall between October 1st and the end of December. 480 That volume would be multiplied by the difference between the January reference price and the December reference price. 481 MR. VLAHOS: And it would be a debit, a net debit, because of the negative numbers that show as inventory balances for the end of November, end of December? 482 MR. AIKEN: No, actually, in that case it would be a credit, because there's a negative inventory but there's a decline in the reference price. The reference price goes from 26.8 cents to 25.1 cents. So there's a reduction in the gas cost, so a negative times a negative would give us a credit at the end of that three-month period. 483 MR. VLAHOS: Okay. Thank you. 484 MS. LEA: Thank you. Now, these may be questions for Mr. McCallum. I don't know, but anybody is free to answer, of course, at any time. 485 In your evidence at page 6 of schedule 1, you indicate that the problem with the PGCVA was identified and NRG reviewed prior years of gas costs. When was it that that occurred? Was that the end of October 2003 that you spoke about in your evidence-in-chief? 486 MR. McCALLUM: We looked at that, it would have been after that October date. At the end of October we were focusing on 2003 to determine what the problem was. And it was subsequent to that that we went back and looked at prior years to determine if this same situation had existed in prior years. 487 MS. LEA: Okay. When we look, then, at the figures on page 7, when were these figures calculated? 488 MR. McCALLUM: These figures would have been calculated at the time that we were doing those year-ends. These are the numbers off the final financial statements for those fiscal periods. 489 MS. LEA: So at the end of fiscal 2000, you knew you were $102,000 in the hole, if I can put it that way, on your gas cost purchases? 490 MR. McCALLUM: Yes, when the fiscal 2000 financial statement audit was completed we knew that the gas costs exceeded the commodity revenue by $102,000. 491 MS. LEA: And that the following year, in '01, you would have known, when you were doing the calculation at the end of that fiscal year, that you were $107,000 up? 492 MR. McCALLUM: That's correct. 493 MS. LEA: Okay. And you referred to these, I think, in your testimony as "very small differences." 494 MR. McCALLUM: Yes. They were, they were expected differences. 495 MS. LEA: In what way were they expected? 496 MR. McCALLUM: As I explained before, the commodity cost is influenced by two factors. One is the unaccounted-for gas, so gas we have to buy that we are not able to bill for because it's lost somewhere in the system, and the timing for the unbilled revenue that gets calculated by our system. 497 MS. LEA: Yes. 498 MR. McCALLUM: Overages in one month in that case would normally be compensated for in the subsequent month's billings. So if we're over one year, we can reasonably be expected to be under in the next year. 499 MS. LEA: Okay. I guess I was going to ask you if you regard these as very small differences. What's your sensitivity? Because you regard $531,000 as a very large difference. 500 MR. McCALLUM: Well, on a cumulative basis, this only comes to $12,000. 501 MS. LEA: Oh, I see that. I was wondering what you were thinking at the end of fiscal 2000, or of fiscal 2001, for that matter? 502 MR. McCALLUM: At the end of fiscal 2000, the amount of $102,000 can easily be attributed to your gas costs that are attributable to your unaccounted-for gas. 503 MS. LEA: So an amount of $100,000 in any year could be attributed to the unaccounted-for gas? 504 MR. McCALLUM: Potentially, yes. 505 MR. VLAHOS: That would be more than twice what you registered in -- I'm sorry, I'm looking at $42,000 for a period of 15 months. So if I prorate that, say, call it something like 35,000, so we're talking about pretty well three times? 506 MR. McCALLUM: We've gotten a lot better at controlling our unaccounted-for gas in the past few years. And the amount that's shown in schedule 3, that is the Board-approved forecast. That's not necessarily the actual. 507 MR. VLAHOS: So what's the -- so is the actual better than forecast or is it a significant difference? 508 MR. McCALLUM: As I sit here, I don't know what the cumulative amount of actual unaccounted-for gas is for those 15 months. 509 MR. VLAHOS: Okay. But you see my point, is that $42,000 is an amount that I see here, that it relates to 15 months. And if I look at 12 months, and by some original proration, you were off at $107,000 and therefore that's three times the amount of unaccounted-for gas. 510 MR. McCALLUM: I see where you're getting your number from, yes. 511 MR. AIKEN: I don't think that's an unusual variant, because a half per cent for unaccounted-for gas, and triple that is one and a half per cent, that's well within the range that NRG has had over the last five years, of a range of unaccounted-for gas percentages. 512 It's been, you know, 2 per cent, it's been, you know, half a per cent, so it's within the range of what has happened on an actual basis. 513 MR. VLAHOS: Unfortunately, we don't have that evidence, Mr. Aiken, but I thought we have allowed NRG to spend a lot of money over the years. I'm looking back many years now, to bring that number down quite considerably, and I was quite comfortable over the last several years that that number was definitely below 1 per cent. It was -- it was point something. 514 In any event. Ms. Lea. 515 MS. LEA: Thank you. 516 Now, I hope this isn't too stupid a question, but those variances would have been captured in the PGCVA in fiscal 2000 and 2001, or not? 517 MR. McCALLUM: Not. 518 MS. LEA: So NRG was relying on -- if, for example, you wanted to ensure that the company did not bear the cost of $102,000, were you just relying on the next year to make it up, and hoping that year over year, it would even out? 519 MR. McCALLUM: Based on the way that we thought the PGCVA was working -- that if you happen to be over one year, it would make up for itself the next year, which is the results that we see here, that was what we thought the PGCVA was doing for us. 520 MS. LEA: I see. So when we look at the figures on page 7, then, you are saying that these are an illustration of what you had come to expect from the PGCVA; that the net difference over a period of, say, four years - take whatever time period you like - would be small? 521 MR. McCALLUM: That is correct. 522 MS. LEA: Did you ever explore how many years it took to get to a fairly small result? I mean, if, for instance, we'd taken the two-year period, 99-02, you would be $124,000 in the hole there. Was this not a matter of concern? 523 MR. McCALLUM: We looked at all four years that the data was available for us. Going back prior to 1999, the information was not available. 524 MS. LEA: No, I understand that. I'm actually not asking you what you did when you learned about the difficulty that you're bringing forward today. I'm asking you what you did or what you contemplated when you realized, at the end of fiscal 2000, and you saw you had a $102,000 debit here, whether you considered that this was an acceptable debit for the company to bear; or whether you were counting on a compromising or correcting credit in the following year? 525 MR. McCALLUM: We didn't do anything at the end of fiscal 2000 with respect to the $102,000. Again, our assumption was that the PGCVA mechanism was going to take into account any of these variances and it should come through in the subsequent period. 526 MR. VLAHOS: I'm sorry. Could I just follow that up, Ms. Lea. 527 You thought that the mechanism would actually capture it? 528 MR. McCALLUM: That is correct. We were under the operating assumption that all variances in the cost of gas would be captured within the PGCVA mechanism. 529 MR. VLAHOS: Okay. Then, and you must have realized after fiscal 2000, when you came before the Board for -- you've come before the Board numerous time times for rate cases -- that this amount was not recaptured in the PGCVA. You must have recognized that? 530 MR. AIKEN: I think it was more of an issue -- 531 MR. VLAHOS: Mr. Aiken, can I just get an answer from -- 532 MR. AIKEN: Sorry. 533 MR. VLAHOS: Thank you. 534 MR. McCALLUM: We recognized that there was a difference there. But the difference was not significant enough to cause us to go back and re-evaluate the figures. Again, it could be attributed to a 2 per cent gas loss, or a difference in the proration between the amount that was billed versus the amount that was recovered, in the subsequent period. 535 MR. VLAHOS: So you are suggesting that your mind never went to the potential source of that difference being simply that the accounting was not appropriate? 536 MR. McCALLUM: My mind did not turn to that possibility at that stage. 537 MR. VLAHOS: Okay. 538 Ms. Lea. 539 MS. LEA: Thank you. 540 Mr. Aiken, did you want to add something there? 541 MR. AIKEN: Yeah. No, I just wanted to add the comment that the belief was that the mechanism worked properly. And this $102,000 shortfall was simply a timing difference, and it could be a timing difference as short as a month, going from September of one fiscal year to October of the next fiscal year. And that ties in with the change in unbilled that Mr. McCallum was talking about. 542 And, in fact, when you see the results for fiscal 2001, you see that between the two years they basically offset one another, so it's just a timing difference. We never believed that the PGCVA would recover the costs in exactly the same year they were recovered, because the balances were disposed of after the fiscal year was over. 543 So there's always some timing differences that could be involved in the existing PGCVA. And then the first thing, I mean, the first thing that came to mind when I saw these numbers was, well, two out of the four years are very small. The other two years is probably just a timing difference. It was a shortfall in one year that was made up the following year, through the existing PGCVA mechanism. 544 MS. LEA: I guess that goes back to my question, then, what is your sensitivity, then? If a hundred thousand, just over $100,000 is not enough to make you revisit your accounting systems, and we know $530-some is, can you give many me any idea at what point the company believes that its financial integrity is endangered by these losses? Is it at 200,000? Is it at 300,000? 545 MR. BLAKE: I think, in retrospect, after having seen the problem and having analyzed the problem, we have a very -- the number's very low. We would prefer it to be zero. And that's our effort in making this application, is to make it zero so that the customers are paying the appropriate amount. And through the application the application of the new account, the GPRA, or whatever its called, to make that account operate so that the customers aren't at risk and neither is the company. Which is a well-accepted regulatory process. 546 You know, I understand your question, but had we understood that it was a $2 issue, we probably would have adjusted it, because the $2 issue could have turned into a multi-thousand dollar issue. But, you know, what's our sensitivity? Our sensitivity is very low to this. Did we see it and did we recognize it and did we understand that this was happening in 2002? The answer is, no, we didn't. We made applications at the Board. We came and had gas costs applications in good faith that the process was working, that the PGVA calculations were working fine. We've reviewed it ourselves. We've been with staff and reviewed it. And we simply didn't see that it was there. 547 We were operating under the presumption that it was zeroing out, not necessarily in that period, but that at some point in time in the future, it would zero down to nothing. And that there would always be balances in that PGVA account that would roll along, positive balances, negative balances, and so forth. And we would be undercollected or overcollected at certain periods of time. But that the customers, in the end, were paying the correct amount. Not overpaying nor underpaying. 548 And it wasn't until the amount got to be a significant amount that the light went on, and we saw it. And it's unfortunate that it took as long as it did to see that that was the case. But it's also fortunate that over the prior four years or so, that it balanced down to zero and that the customers actually had a small benefit. 549 But it's -- you know, I can't explain to you in any other way than to tell you that it's our goal that the customers pay the appropriate amount. Not underpay and not overpay. And that's the same goal that I know all the other utilities have as well. 550 MS. LEA: Okay. Thank you, Mr. Blake. 551 I wonder if we could now look at the winter of 2003. As you've indicated in your evidence-in-chief, you were aware that you were drafting the system more than usual, it's clear from -- 552 MR. BLAKE: Can I -- I'm sorry to interrupt you but if I could just add, had the situation been the reverse, and had we overcollected from the customers in the amount of $584,000 or whatever the number is, it would not be the company's expectation that we would keep that amount. It would be the company's expectation that that would flow back to the customers. 553 We understand that our rate of return -- that our return is made based on our return on assets. And we under that we make no profit on our gas commodity sales to system customers. And so, you know, had it been the other way -- unfortunately, it is the way it is, but had it been the other way, that we had overcollected from the customers, we would in no uncertain terms have refunded to the customers, and we would have brought the application to the Board to do that in the same timely way that we brought it this time. 554 It was unfortunate that the way we asked for the correction to be made was not appropriate within the parameters, within the regulatory parameters. But it was our effort to bring it to the Board as quickly as we could, and the reason we asked for the accounting to be done in a separate account at that time was because we wanted the collection to be transparent. So that the Board could be assured that we weren't overcollecting, and then, when the collection of the amount was complete, that that account would be closed and the Board would have an opportunity to examine it. 555 So regardless of which way it went, you know, the timing of our application and so forth would have been the same. We didn't recognize it two years ago, but we did when it got to be that amount. We recognized that that could not be just due to timing differences or unaccounted-for gas, or whatever. We recognized that, you know, we had a significant matter, and we've gone through why this one was so much more significant than the changes were in prior years. So you know, we understand why the big change. But the factors were the same: Whether it was a $12,000 difference or whether it was a $120,000 or whether it was a $500,000 difference, the factors that caused it were the same. It's just that the magnitude got to the point where it was something that could not be put aside or, -- or there was no, you know, reason, reasonable cause. And so then we delved deeper into the root cause of it and sought a correction with the Board as quickly as we could. I'm sorry for interrupting you. 556 MS. LEA: That's fine. 557 MR. VLAHOS: Ms. Lea, could I answer as well? 558 MS. LEA: Yes. 559 MR. VLAHOS: Your financial statements, are they available to the Board, Mr. Blake? 560 MR. BLAKE: I don't have a copy of the final, but we have just had them issued late last week. 561 MR. VLAHOS: Okay. $100,000, I'm looking at $102,000 in fiscal 2000, can you put that in perspective? You spoke about, this would be equivalent to $75- to $100 million to one of the larger utilities. 562 In terms of net income for NRG, that would be, what? Up there in terms of -- equal to what, or what percentage of net income would $100,000 be? 563 MR. BLAKE: Had it been a cost that would flow through into an after-tax number -- 564 MR. VLAHOS: Okay. 565 MR. BLAKE: We are probably at a 40 per cent tax rate. So $100,000 would be $60,000, approximately. 566 MR. VLAHOS: I'm sorry, I understand that. But what is the total income as per Board allowance in the last rates case, for example? Or, back in fiscal 2000, what would be a typical number for net income allowed by the Board? 567 MR. BLAKE: I believe it's -- I wouldn't want to be quoted but, you know, in the after-tax numbers, I would say around 4 something? Somewhere, just so that we have a sort of an order of magnitude, we think between 4- and 600,000, sort of depending on which year it was and the circumstances. 568 MR. VLAHOS: Right. So $100,000 would be not an immaterial amount of the company's net income? 569 MR. BLAKE: No, it could flow down the bottom line to the tune of -- $100,000 could flow down to the tune of 50 to 60,000. 570 MR. VLAHOS: So wouldn't something like this be noted in the financial statements, on a note? 571 MR. BLAKE: It was not determined that it was anything unusual. If there were balances that flowed from one year to the other, the thought was it was attributable to -- the PGVA mechanism would pick those up and the company would be compensated the next year. Or that there was a proration of sales due to weather versus numbers of days -- 572 [Audio feedback] 573 MR. BLAKE: Was that me? 574 MS. LEA: It's hard to tell what it is. I put my microphone away. 575 MR. BLAKE: Just give me a second. 576 MR. VLAHOS: Okay. Let's try it now. 577 MR. BLAKE: So I understand your point. You know, is $60,000 or $50,000, you know, is 10 per cent of the net income of the company after tax? And I would say, yes, that is a very significant number. And, as I said before, it's fortunate that one year went one way and the next year went, basically, the other way. And so that it's all evened up. But, you know, there was the potential for this to have had a significant impact on the company's financial standing. And this year it's been a very significant impact. 578 MR. VLAHOS: Okay. Mr. Blake, if I were to look at the financial statements of the company over the last three, four years, would I see any notes, any notes about those net income as to -- and the components of that, and this issue about $102,000, for example, for fiscal 2000? Would I be able to pick that up anywhere in the financial notes? 579 MR. BLAKE: It's not anywhere in the financial statements. We did not recognize it, nor did our auditors. 580 MR. VLAHOS: Thank you, Ms. Lea. 581 MS. LEA: Okay. Thank you. 582 Another aspect I wanted to ask you a bit about is the balancing that you do with Union. I gather that's done on an annual basis; is that correct? 583 MR. McCALLUM: That is correct. 584 MS. LEA: Okay. Could you, on an internal basis at least, try to -- I don't know whether to use the word "balance" or some other word, but get a grip on the amount of volumes you're using and how this might affect your year-end amount of gas you had to purchase. Do you do any kind of calculation or do you keep a watch on the volumes over the year? 585 MR. McCALLUM: We keep a watch on it. That's also provided on the report that we get from Union Gas. It gives us actuals to the end of the reporting month, and it gives us a forecast through to the end of the contract year, which is September 30th. So we look at those on a monthly basis to determine any amounts that we need to purchase on the spot market. And when the price is right, we will buy into that market. But in any case, we have to buy in by the end of September in order to get within that plus or minus 4 per cent. 586 MR. BLAKE: If I could interject as well. We know how much our volume is; we're watching it all the time, because we get reports from Union and so forth, and we know, based on our forecasts -- we use that same forecast for forecasting our volumes with Union as we use to forecast for the Ontario Energy Board, so it's not a different number. 587 And so we know, as we're going through the year, the volumes that we expect we're going to have to purchase. And those forecasts form part of our, you know, now QRAM applications and formerly gas price adjustment applications, so they're all part of those applications. 588 And we know clearly what our forecast is. And I guess to demonstrate that to you, it has formed and does form part of our applications to the Board. 589 So we knew this year, for example, that we were drafting Union hard. We knew that we were -- we were -- had consumed a larger-than-normal volume from them because it was a colder winter during the winter of 2002 and 2003; and that in the fall of 2003, we were going to have to deliver a substantially higher balancing on gas to Union. 590 If you look back at the gas price adjustment applications that we made, I think they were April and May - there were two; March and May, something like that - you can see those numbers all reflected, particularly in the March ones, the high volumes that we were forecasting we would have to purchase. 591 MS. LEA: I guess what I'm trying to get at is, is there something you could have done earlier in the winter of 2003 that might have mitigated the now-high costs that the ratepayers may be facing if this is recovered? 592 It's clear, when we look at schedule 3, that the adjustment to the price was not made until March, and that, as I was saying to Mr. Aiken, you sold a lot of gas at a low price and then didn't sell as much gas at the high price. Could you have done something? Could you have come in earlier? Could you have -- I don't know, I'm asking you: Is there something that you could have done to get that price higher sooner so that you weren't selling all that gas at a price which you realized, I think at the time, was unrealistic? 593 MR. BLAKE: Well, again in retrospect, we probably should have come to the Board earlier, in March, you know; I wish we had anyway. I'm not certain, as I sit here, whether the -- without looking at the pricing structure and going back and looking at when the prices went up last year and so forth. But in retrospect, we probably should have come to the Board earlier. I know that as soon as the $30 trigger is met, then we made the application and the process was started. 594 Could we have done some more to buy gas at a lower price to have mitigated some of the costs for that balancing gas? There probably were opportunities to buy gas during the summer, and I'm sure if we went back, there were probably days where the price was lower. But from a general standpoint, the price of gas remained high all last summer, and there were -- I remember, Sandy and I were just discussing it here a second ago, you know, we did buy a couple of -- at least one or two little spot gas purchases when we saw some dips. But, you know, the forecasts were that the price was going to go down before the end of the summer, and it just never went down. 595 And so we were, you know, caught with the obligation to purchase gas at a relatively high-priced time of the year, which, if you look back on the last, you know, ten years, that has typically been a low time of year, in the August/September period, because storage is full and people can't figure out where they're going to put their gas. In this period, the price never fell off in the summer. And we had all sorts of concerns over shortages; they didn't think there was going to be enough gas to get through the winter. The next winter, we'd gone through an exceptionally cold winter. Storage levels were low, electricity demands were high, and everything was against having low prices. 596 And so, you know, were there opportunities? There probably were some opportunities. Were we able to capitalize on those and use them? We had a couple of small opportunities, but in general, it was very difficult. It was a difficult time for pricing and so forth. 597 MS. LEA: So when I look at your evidence and Mr. Aiken's, then, about the higher than normal price for summer gas, it was your anticipation and hope that you would have been unable to recoup some of these losses, if I can put it in crude terms, by the purchase of summer gas at a cheaper price? 598 MR. BLAKE: That would typically have been how it would have happened, but it didn't happen that way. 599 MS. LEA: But it was your experience in past years that that would have happened. 600 MR. BLAKE: That's correct. 601 MS. LEA: And can I take it that Mr. Aiken valued the amount of that problem, that driver to the problem, did I take it correctly, about $200,000 of the amount we're looking at today can be said to be due to the high price of summer gas? 602 MR. BLAKE: Well, I think the difference in price between the reference price and the amount -- the then-approved reference price and the amount that we were able to purchase the gas for. 603 MS. LEA: Maybe Mr. Aiken should answer that. Just that third driver that you talked -- 604 MR. AIKEN: It's actually not the reference price, it's the actual price paid in September of 2003 versus the actual price paid in 2002, in September of 2002, times the amount of gas that had to be purchased in September of 2003. 605 MS. LEA: So it's the differential between the low reference price in September '02 and the high actual price? 606 MR. AIKEN: That's right. 607 MR. BLAKE: Can I interject again. I'm sorry. 608 MS. LEA: Well, everybody's doing it, sir. I had a half an hour cross-examination. We're going to be here until three. 609 MR. VLAHOS: You're getting good information, Ms. Lea. 610 MS. LEA: No, that's fine. Anything to complete the record. 611 MR. BLAKE: Your question about what else could we do to mitigate or to prevent this from reoccurring, and we said the GPRA was obviously the final answer or the best answer, in that that helps us or that allows us to zero down on the amount. 612 But another thing that we're doing, and we've done with Union, is we've adjusted the amount of our daily contract quantity. So prior to this year, our daily number was relatively lower than what it is now, and so through negotiations with Union and so forth, we are actually delivering a higher load factor, we're delivering a higher daily number into Union's account. So that it better reflects the number, the amount that is 1/365th of our forecasted annual volume. 613 And that number had always been lower than 1/365th, and we were left with a higher balancing number. So in an effort to prevent large volumes at the end of the year, we've negotiated a higher delivery number with Union. And that should help prevent balances from occurring that are as large. And, you know, they could still grow to be significant numbers if there are exceedingly cold winters, or colder than prior experienced winters. 614 But we'd gone through a number of warmer-than-normal winters. Last year was, I believe, slightly colder than normal, and the volumetric difference was significant. Now we've readjusted with Union so we can hopefully prevent as large a drafting as we've seen in prior years. 615 MS. LEA: Okay. Thank you. 616 I'd like to turn to the question of the financial impacts on NRG for the moment, please. And these are set out, I think, in your response to Interrogatory No. 9 from Board staff. And also in your evidence-in-chief, Mr. Blake, you talked about two ratios in particular that were going to suffer as a result of, if no recovery was permitted by the Board. And those were the interest coverage ratio and the debt service coverage ratio. 617 And I understand that you have covenants in contracts with your present lender that these ratios must remain at a certain level, am I correct about those facts? 618 MR. BLAKE: That's correct. 619 MS. LEA: Okay. And you indicated that you had not yet discussed with your present lender the ramifications of going below these ratios. But it appeared to me, from your testimony, that you were more concerned with the effect of non-recovery on the attitude or opinion of the gas suppliers, and potential lenders. Can you comment on that? 620 MR. BLAKE: That's correct. The -- you know, we're concerned about being in violation of any debt covenant with the current lender as well. However, we are attempting to obtain new financing for the company. And as well, gas suppliers review our financial statements from time to time in establishing lines of credit for us for the purchase of gas for our system customers. And some of those lines of credit are in the millions of dollars. We would prefer to keep the financial statements as positive as possible for those viewers. 621 MS. LEA: Have you had any experience, either with NRG or have you observed another person who's supplied with gas, having trouble with these lines of credit? And if so, can you give the Board some idea of the magnitude of the problem that has to exist before there's a real problem with the lines of credit from gas suppliers? 622 MR. BLAKE: I would have -- I can tell you that I've had discussions with other people that have had problems with gas suppliers and lines of credit. But obviously, I can't tell you who those people are. 623 MS. LEA: I don't want to know who, just an idea. 624 MR. BLAKE: Nor who the suppliers are. 625 MS. LEA: Mm-hm. 626 MR. BLAKE: But there is a tightening market, and that has been tightening over the last, probably three or four years with suppliers, in dealing with customers. Sort of, I guess I could say, sort of post-Enron, but it was actually in motion even before sort of the Enron collapse. 627 But gas suppliers recognize that they need to deal with financially stable entities. And, you know, although the financial statements have been issued and the ratios are now -- they are what they are in those financial statements, we believe that an explanation to those people that that $590,000 or 84,000, whatever, will be collected over the next 12 months, and will be sufficient to appease them and to also remove some of the perception that we are somehow at risk of recovering our gas commodity costs. 628 MS. LEA: And have you had any opportunity to quantify in any way the possible effects on your ability to attract debt, to get debt in the market and the cost of that debt if recovery is not permitted? 629 MR. BLAKE: I really -- I couldn't tell you what that would be. I haven't -- I haven't had discussions with lenders. No one is -- the financial statements that we have that have just been issued have not been shown to any lenders, or we haven't had discussions with anyone about a reduction of, you know, $355,000 on the financial statements. 630 MS. LEA: Does anyone have a rough idea of how much recovery of these amounts NRG would need in order to maintain the two ratios that we talked about earlier, interest coverage and debt service coverage, within the ratios required by the covenants? 631 MR. McCALLUM: For the one ratio, the total debt service coverage ratio -- 632 MS. LEA: Yes? 633 MR. McCALLUM: -- we are actually just below it with the 500 and some-odd thousand included. Now, the lender has typically not been concerned if we are just below the limit. 634 However, excluding this amount takes us down significantly below it. So for that particular ratio you would need everything back in it just to get it close. 635 For the other ratio, originally we were at 3.39. It has taken us down, as we indicated in Interrogatory No. 9, down to 1.97. I would have to calculate what would be needed to get us back onside with that ratio. 636 MS. LEA: Mm-hm. Is that calculation very laborious? Could you produce it as an undertaking? 637 MR. McCALLUM: I could certainly produce it as an undertaking. I can't produce it as I sit here now. It is fairly lengthy. 638 UNDERTAKING NO. 2: TO PRODUCE ABOVE-DESCRIBED CALCULATION 639 MS. LEA: Okay. Is it something that would assist the Board, to have that number? 640 MR. VLAHOS: It also depends when you can get it here. 641 MR. McCALLUM: Well, I can do the calculation tomorrow, and get it to you tomorrow, as soon as I get back to the office. 642 MR. VLAHOS: Okay. 643 MS. LEA: The other undertaking was the updated pages to schedule one. Was there any anticipation of when that might occur? 644 MR. AIKEN: Tomorrow. 645 MS. LEA: Okay. Now the schedule one, we already have the information at least. 646 MR. VLAHOS: Ms. Lea, would you accept just another piece of information that we may need, and that's -- perhaps you can follow it up. The availability of 2003, fiscal 2003 financial statements of NRG, and I'm not sure as to what comes into the Board, whether it's the actual statements or it is -- for regulatory purposes, it's all normalized and all those things. I have no idea, but maybe one of the witnesses can assist me with that. 647 MR. McCALLUM: The audited financial statements are included with our regular files. 648 MR. BLAKE: Our regulatory files. 649 MR. AIKEN: Our rates case files. 650 MR. VLAHOS: So you would have fiscal 2003? They're ready now? 651 MR. BLAKE: Just ready, just -- they're fresh. 652 MS. LEA: Ink still wet. 653 MR. VLAHOS: So could those be provided? 654 MR. BLAKE: Those could be provided. 655 MS. LEA: All right. One moment, then. Mr. McCallum, I don't think it's worthwhile putting you through that calculation, in my view, I don't think it adds sufficient information to have that calculation done. 656 With respect to the financial statements, Mr. Blake, you say that these are produced in the rate case, in any event? 657 MR. BLAKE: They're provided as an exhibit in our main rates case filing. 658 MS. LEA: Okay. So, at this time, you would not need to seek any confidentiality of those financial statements, if they are filed in this case? 659 MR. BLAKE: I don't believe so. Like, they're so new that they haven't even been signed by the company's officers yet. I have a -- I have a draft with me that is the final draft, but as far as -- I haven't even seen the printed copies from the auditors yet. 660 MS. LEA: Okay. Would you be willing to provide those as an undertaking? 661 MR. BLAKE: We could. It could take me a day or two by the time we have them signed and so forth, but, you know, it's -- I wouldn't want to promise that I would have them in my hands or I could have them in the Board's hands tomorrow. 662 MR. VLAHOS: That's fine. We'll accept that. 663 MS. LEA: Thank you, then Undertaking No. 2 [sic] is the financial statements for fiscal 2003 for the company. 664 UNDERTAKING NO. 3: TO PROVIDE THE FINANCIAL STATEMENTS FOR FISCAL 2003 665 MS. LEA: Thank you. And the last topic I wanted to deal with was the implementation of any recovery the Board may allow -- I think in your application you propose that this amount would be collected over the period of a year, starting May 1, 2004; am I correct? 666 MR. AIKEN: That's correct. The recovery mechanism is the same mechanism that we use for the QRAM changes in the reference price. So everything is premised on the following 12 months, recovering over that period, realizing that the reference price will be adjusted every three months, for QRAMs, anyway. 667 MS. LEA: So why is 12 months the best time period over which to perform the recovery? 668 MR. AIKEN: It's because it's on an annual basis. You capture all the customers equally. If you just try to recover it over three months, for example, and you were doing it in the summertime, you would hit residential customers with a huge increase because they're essentially the only customers using gas. And the grain-dryers, for example, which only use gas in the fall, would pay nothing, because the three-month period would be up. When you spread it over an annual period, you hit all types of customers. 669 MS. LEA: So you capture seasonal variation in use? 670 MR. AIKEN: That's correct. 671 MS. LEA: And I understand that the way that these amounts are recovered from the QRAM and so on is by an adjustment to the gas cost, as opposed to a rate rider; is that correct? 672 MR. AIKEN: That's correct. NRG does not have the capability to put a rate rider on their bills, so it's included in the gas commodity charge. 673 MS. LEA: Do you think this has been one of the reasons why you haven't had many complaints in the past about gas cost recovery for previous periods in the sense that it's kind of -- it's not made obvious that this is a charge for gas consumed in the past? 674 MR. McCALLUM: I don't really -- I can't really answer whether we would have gotten more questions about it or less questions. Typically we get no questions, every time the rate goes down. And if the rates go up, we will typically get a few questions. 675 MS. LEA: Okay. And you're proposing that recovery start on May 1st of 2004. Is there any benefit in delaying the start of recovery to try and mitigate the amount that might have to be recovered? I'm trying to think, if we go along further in time, will the amount to be recovered potentially decrease? What would affect the amount that would have to be recovered from ratepayers, depending on the timing of the start of recovery? 676 MR. AIKEN: There will be no change from the updated numbers I gave you this morning, as to the amount that would actually go into the PGCVA. Delaying recovery would add to the cost to customers because there would be additional months of interest accumulating on that debit. 677 So the faster we start to recover it, the minimum -- or that minimizes the total cost to customers. 678 MS. LEA: Okay. Because you've updated us with actuals this morning? 679 MR. AIKEN: That's correct; yes. 680 MS. LEA: I think that I was thinking from a time when we didn't have all the actuals. 681 MR. AIKEN: Yes. 682 MS. LEA: One moment, please. 683 Those are my questions. Thank you very much. 684 MR. VLAHOS: Thank you, Ms. Lea. 685 QUESTIONS FROM THE BOARD: 686 MR. BIRCHENOUGH: Just a couple of questions. 687 I think you've responded to Ms. Lea that, in fact, you were aware, if you look at this graph, that you were overdrafting substantially up until I guess it's April of 2003. 688 Now, I guess one of the witnesses used the term "accounting hole," and I've known of lots of terms applied to accountants and accounting, but "accounting hole" is a new one. If, in fact, you're aware of this overdrafting, would your cash flow analysis not also have been a trigger that something was askew here? 689 MR. AIKEN: The accounting hole is separate from the overdrafting on the Union system. The overdrafting on the Union system -- or I should say, the drafting on the Union system is known in advance. That's part of the service that NRG pays Union Gas for. NRG is expected to draft Union's system. They're paying that -- for that service to Union under the M9 rate. 690 The accounting hole I've referred to was the failure of the mechanism, the PGCVA mechanism, to capture all the actual gas costs when the reference price changed within a fiscal year. That was the accounting hole, or the flaw in the mechanism, that I was referring to. 691 MR. BIRCHENOUGH: I understand that you are expected to overdraft during this particular part of the year. But was not the amount being overdrafted out of the ordinary at that time and thereby would normally trigger some concern about having to balance in September to the extent you did? 692 MR. AIKEN: Well, the only other option for NRG would have been to buy more gas in January and February. And in my opinion, that would not have been prudent, because you don't want to buy gas in January and February at the high prices when you expect the price to be lower before the point in time when you have to balance, you know. So why would you buy gas at $6 a gJ when it's forecast to be $5 a gJ three months later? 693 MR. BIRCHENOUGH: Just another question related to the prospective recovery of these amounts. The potential here is for new customers to have to pick up the tab for costs incurred when they weren't customers. Is this a significant problem? 694 MR. BLAKE: We're, you know, adding 200-plus customers probably this year, and those customers would be burdened, if you like, with that increase. But I think in general it's been viewed as a, you know, lesser of two evils sort of thing, a better situation to do that than go back and retroactively charge the customers for prior periods. 695 And I think in general it's become an accepted process. We'd been doing that with our gas price adjustments for quite a long time, and it's actually, in general terms, sort of how the other utilities are now going about it, particularly Union Gas. 696 So it seems to be the process that everyone else is moving to. And I think the thought is that, it is more generally accepted to do it that way than to go on and make the retroactive charges. We have not been making retroactive charges or credits for a number of years now. We've done it prospective. 697 MR. VLAHOS: Gentlemen, just questions in a couple of areas. Does the amount that we're talking about, 590-something thousand, does that include interest? 698 MR. BLAKE: Yes. 699 MR. AIKEN: No. 700 MR. BLAKE: No? Oh, sorry. 701 MR. VLAHOS: Good question, isn't it? 702 MR. AIKEN: The 596,000 would be the amount that goes -- that we're proposing to put into the PGVA effective as at January 1st, 2004. From that point on, there would be interest calculated in the PGCVA. But the original 590-some thousand does not include interest. 703 MR. VLAHOS: Okay. Now, I heard a lot of interesting definitions of "retroactivity" today, and I'm not going to go through it. Mr. Birchenough will know what I'm talking about. 704 But there was another term that was used by Mr. Aiken, and I want to just focus on that. Out-of-period adjustment, you call it. Out-of-period. Do you recall, Mr. Aiken? It was your phrase, I believe. 705 MR. AIKEN: Actually, I don't, but I'll take your word for it. 706 MR. VLAHOS: It is there. Somebody mentioned an out-of-period adjustment. And I just want to get your understanding as to what that may be, whether it's your word or not, your phrase or not. 707 MR. VLAHOS: Does anybody recall who said that, "out-of-period adjustment"? 708 MR. AIKEN: I believe it may have been Mr. McCallum, when he was referring to some of the Alberta or British Columbia -- 709 MS. LEA: I noted the phrase also, Mr. Vlahos. 710 MR. VLAHOS: Thank you. I thought it came from this end first, and then you followed it up. 711 MS. LEA: That may well be. 712 MR. VLAHOS: Yes. 713 MR. McCALLUM: I used the phrase "prior closed cycle" and "open cycle" in reference to the New York Commission. I don't know as it was something I referred to in any of the other cases that I referenced. 714 MR. VLAHOS: So nobody wants to take ownership of that. 715 Mr. Aiken, can I ask you, what is your understanding of out-of-period adjustment, or out-of-period costs? 716 MR. AIKEN: "Out-of-period costs." 717 MR. VLAHOS: Are you familiar with the term? 718 MR. AIKEN: Yes. 719 MR. VLAHOS: Yes. 720 MR. AIKEN: I would consider out-of-period costs costs for a period that was finalized by the Board. And I may have meant out of period in connection with the fact that the 2003 PGCVA has not been finalized by the Board. That's where I may have used that phrase. But that's about the only comment I could make on it. 721 MR. VLAHOS: Okay. So because those 2003 accounting entries have not been finalized by the Board, therefore they're not out of period? Errors of this kind would be acceptable? 722 MR. AIKEN: That's correct. And I think that goes to some of the decisions and comments that Mr. McCallum had in his direct evidence. 723 MR. McCALLUM: And they were, actually, even referring to "closed years." And if there were subsequent errors uncovered at that stage, then they would just be rolled into the current open year. 724 MS. LEA: Are those the authorities that we're going to be seeing in the binder which I think you provided me earlier? 725 MR. STOLL: I provided you some copies, yes. Those were just illustrations of some of the points Mr. McCallum brought up. 726 MR. VLAHOS: Ms. Lea, I also heard about -- I wasn't sure as to where we were going to take this. There was nothing filed in the evidence, so maybe you can just assist us as to what would be the purpose of what you have there? We have not seen that. 727 MS. LEA: I think what this is, sir, is legal authorities related to the argument that my friend will wish to make at the end of the day. And I don't think there's any evidence contained in these binders. I believe it's merely authorities, which, of course, is perfectly legitimate for my friend to produce at the time of argument. And he gave me advance warning that this was his intention in terms of legal authorities. Certainly it's not new evidence. 728 MR. STOLL: Thank you very much. 729 MR. VLAHOS: Okay. And finally, gentlemen, Ms. Lea took you into sort of the one-year prospective rate making, and I understand sort of the basis around doing a shorter time period. You know, you're not taking account of all the cyclicalities that are present in the energy system. Why not over five years? Why not over ten years? I was going to say, why not over two years? 730 MR. AIKEN: Theoretically, it could be done that way, but then that amount would have to be in a separate deferral account and recovered over two years or ten years or whatever. If it's part of the PGCVA, the normal QRAM methodology is to recover whatever the balance is in the PGCVA at the beginning of the 12-month period, along with projected costs of gas over that 12-month period, to recover those costs in that 12-month period. 731 So if the Board were to decide that it should be recovered over two years, I would suggest that a separate account would have to be set up for that so it could be tracked separately. Because it would be recovered over a different time horizon than everything else that's in the PGCVA or the GPRA. 732 The other thing would be, there would obviously be more interest if it was recovered over two years than over one year, in the longer term. 733 MR. VLAHOS: And lastly, I said it was my last question but it isn't. 734 Mr. Blake, just over to you. How would you respond to a customer, when somebody calls you up about this charge, because you had to provide notice, and what do you think the Board's response would be to a customer that calls in our call centre? How would you respond to your customer? You don't have to answer the second question. 735 MR. BLAKE: I guess it would be in the same way that we would respond to a customer now on a QRAM application, in that it reflects, it reflects actual gas costs. These are costs of gas that -- costs for gas that was purchased and sold and delivered to the customer, and we are again not making any profit on this. And the customers are paying their share of the costs. And I think that's the story we'd been telling both from our standpoint and from the regulatory standpoint on all the flyers and leaflets and web sites, and Mr. Baird in his newspaper clips and so forth. And I think that has to be our story, because it's the fact; it's the fact of the matter that this encompasses. 736 I guess if there are some questions about timing, then possibly we have to say that it was a cost that, you know, was overlooked. But regardless of how you look at it, a cost is a cost. 737 MR. VLAHOS: Okay. Thank you for that. Ms. Lea, where do we go from here? It is about five minutes to one. What's the game plan? 738 MS. LEA: Well, does that complete the evidence of the applicant with respect to the application? 739 MR. VLAHOS: Do you need redirect? I'm sorry, I didn't ask you, Mr. Stoll. 740 MR. STOLL: That's quite okay. No, there's no redirect at this time. 741 MS. LEA: And you have no other witnesses to call, sir? 742 MR. STOLL: No. We have no other witnesses. 743 MS. LEA: Okay. I think that would complete, then, the evidentiary phase of the proceeding and we'd move to argument. As my friend and the Board Panel is aware, Board staff does not make argument in these proceedings. I could make a few comments on the record. I don't see much point in me reviewing the facts. I think we have an understanding of that. 744 Perhaps I'll just make a few comments and then we can take a lunch break and my friends can prepare their argument. Would you be willing to argue this afternoon? 745 MR. STOLL: Well, I think we would prefer to review the transcript tonight and come back with argument tomorrow, and also just to file the update, the first undertaking, if that's acceptable? 746 MS. LEA: Okay. 747 MR. VLAHOS: I take it, Mr. Stoll, argument wouldn't be very long, you're going to summarize maybe what are the key issues for this Panel to consider that came out of the cross-examination. I don't think she's going through the facts at all. So it's the Board's -- the panel's preference, that we could complete this thing today. So we're going to give you as much time as you wish over the break, and come back. 748 MS. LEA: I gather, though, that the transcript, of course, won't be ready over the lunch hour. 749 MR. STOLL: When would the transcript be ready? 750 MR. VLAHOS: Reporter, perhaps we can go off the record. 751 [The Board confers with court reporter] 752 MR. VLAHOS: Mr. Stoll, we would like to give you an option. If it is not going to be this afternoon for argument, then you have the choice of a written argument, so we don't have to gather all the troops again tomorrow. So would you like to talk it over with your colleague? 753 MR. STOLL: If I could just have two minutes to discuss it. 754 MR. VLAHOS: Sure. 755 MR. STOLL: Thank you. 756 MS. LEA: Should we excuse the witnesses? 757 MR. VLAHOS: Yeah. The witnesses are excused with our thanks. 758 So now you can talk to your clients. 759 PROCEDURAL MATTERS: 760 MS. LEA: Thanks. 761 [The Board confers] 762 MR. VLAHOS: Mr. Stoll? 763 MR. STOLL: Mr. Chair, if it's acceptable, we would propose that we have the option of going to written. 764 MR. VLAHOS: Sorry, I cannot hear you. Maybe there's something I did here. Can you try again? 765 MR. STOLL: Certainly. Sorry about that. We would prefer to, given the option, go to written and be permitted to submit by close of business Thursday, if that's acceptable. 766 MR. VLAHOS: That's fine. That's acceptable to the panel in terms of written, written form. Now, we don't want to rush you either, so Thursday's fine. Then if you want to take the weekend as well, that's fine. Not beyond that, though. 767 MR. STOLL: Is the Board -- 768 MS. LEA: The Board is not here on Friday. The Board is open on Monday. 769 MR. VLAHOS: So would you -- how about if we call it "as soon as you can" but not later than Tuesday, the end of business Tuesday. Would that be acceptable? 770 MR. STOLL: That's perfectly acceptable. Thank you. 771 MR. VLAHOS: Okay. With that, then, Ms. Lea, do you have any comments? 772 SUBMISSIONS BY MS. LEA: 773 MS. LEA: Very few remarks, sir. 774 One thing, I have not had the opportunity to review the authorities in this booklet as I was provided it this morning. I don't have a problem with that because I expect my friend to address in his written argument the relevance of these cases, and the Board Panel will have an opportunity to look at them subsequent to written argument, if that's acceptable, and I can do so at the same time. 775 It appears that the reason that NRG is before the Board today is the result of an error. I don't think there's any suggestion that there was any deliberate problem or any mala fides on the part of the utility, and, as Mr. Blake indicated, were the equation the other way -- if this amount were owed to the ratepayers, he would expect to be before the Board very quickly trying to refund that money to the ratepayers. 776 And NRG has described the circumstances that led to this difficulty. It appeared to be a combination of factors as described by Mr. Aiken and Mr. Blake. 777 It's also NRG's submission that these were prudently incurred costs, that they were actual costs of gas, that the consumers have used the gas, and the consumers should pay the amount that the gas costs, no more and no less. 778 I'd ask the panel to consider that evidence, but in addition, I'd invite the applicant to address in its argument the question of whether there is some balance to be applied. It was submitted as Exhibit 2, the press releases from the Minister, that -- and the quotes read out from them. I'll repeat the one from the May 6th press release: 779 "No one is denying that utilities must have the ability to recoup legitimate costs. But there must be a balance, and we believe that the Board has a strong role to play." 780 And I'd invite the applicant to address whether the amount to be recovered should be reduced, that a balance should be created, because there was an error on the part of the utility over which the customers had no control. 781 And as a result of that error, which I'm not suggesting is anything more than an honest error, as a result of that error, customers, including those customers who did not consume gas in the past - we accept that - are going to be paying an increased amount going forward for the cost of gas. 782 So that even if this is accepted as an honest error on the part of NRG, should some balance be struck with respect to the interest of consumers, with respect to prices? 783 I'd ask the applicant and the panel also to address and consider the evidence with respect to the financial health of the utility. As you can see in the second objective in the Act. There's an interest of consumers with respect to prices that has to be protected but also with respect to the reliability and quality of gas service. And the ability of the utility to continue on a financially viable basis is probably subsumed in that objective. 784 And I'd invite the applicant to address also, if any recovery is permitted by the Board, over what time period that should be addressed, over what time period that recovery should be made. 785 Thank you. I think that's all I have to say. The evidence is fairly clear on the record. Thanks. 786 MR. VLAHOS: Thank you, Ms. Lea. 787 Mr. Stoll, anything before we adjourn the evidentiary part of this? 788 MR. STOLL: Nothing further. 789 MR. VLAHOS: Okay. Well, thank you very much, all. The evidentiary portion of this proceeding is now complete, and we look forward to receiving your argument. 790 MR. STOLL: Thank you very much. 791 MR. VLAHOS: Thank you. We are adjourned. 792 --- Whereupon the hearing adjourned at 1:03 p.m.