Rep: OEB Doc: 12QQV Rev: 0 ONTARIO ENERGY BOARD Volume: 1 26 MAY 2003 BEFORE: P. VLAHOS PRESIDING MEMBER S.F. ZERKER MEMBER A. BIRCHENOUGH MEMBER 1 RP-2002-0147 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Schedule B); AND IN THE MATTER OF an Application by 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 commencing October 1, 2002 and commencing October 1, 2003. 3 RP-2002-0147 4 26 MAY 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 MIKE LYLE Board Counsel JAI PRASHAD Board Staff NEIL YOUNG Board Staff RICHARD KING NRG Limited 8 TABLE OF CONTENTS 9 APPEARANCES: [19] PRELIMINARY MATTERS: [28] NATURAL RESOURCE GAS LIMITED - panel 1; AIKEN BLAKE MCCALLUM: [60] EXAMINATION BY MR. KING: [66] CROSS-EXAMINATION BY MR. LYLE: [127] QUESTIONS FROM THE BOARD: [223] FURTHER CROSS-EXAMINATION BY MR. LYLE: [369] FURTHER QUESTIONS FROM THE BOARD: [502] FURTHER CROSS-EXAMINATION BY MR. LYLE: [645] FURTHER QUESTIONS FROM THE BOARD: [782] 10 EXHIBITS 11 EXHIBIT K.1.1: PREVIO USLY FILED EVIDENCE FROM RP-2000-0126 AND RP-1999-0031 [189] 12 UNDERTAKINGS 13 UNDERTAKING J.1.1: TO PROVIDE THE REVENUE REQUIREMENT IMPACT ON THE ASSUMPTION THAT THE NORFOLK EAST PROJECT DOES NOT MATERIALIZE IN FISCAL YEAR 2004 [315] UNDERTAKING J.1.2: TO PROVIDE THE IMPACT IF THE Board WERE TO DISALLOW X PERCENTAGE OF THE PROPOSED BUDGET WITHOUT SPECIFYING A SPECIFIC PROJECT, ON THE DISCRETIONARY SIDE; PER 10 PERCENT OR $100,000 [318] UNDERTAKING J.1.3 TO OBTAIN COSTING INFORMATION FROM COURT REPORTING COMPANY [844] 14 --- upon commencing at 9:30 a.m. 15 MR. VLAHOS: Good morning, everyone. 16 The Board is sitting today to hear evidence on NRG's obligation for rates fiscal years 2003-2004. 17 With me today are my colleagues Sally Zerker, and Arthur Birchenough. 18 For the record, my name is Paul Vlahos. Could I have appearances, please. 19 APPEARANCES: 20 MR. KING: My name is Richard King, I'm counsel for the applicant, Natural Resource Gas Limited. 21 MR. VLAHOS: Good morning, Mr. King. 22 MR. LYLE: Good morning, Mr. Chair, my name is Mike Lyle, counsel for Board Staff. With me is my colleague Jai Prashad. I'll spell that for the court reporter. It's J-a-i P-r-a-s-h-a-d. 23 MR. VLAHOS: Thank you, Mr. Lyle. 24 Mr. Lyle, are we properly constituted? 25 MR. LYLE: Yes, Mr. Chair, affidavits of service and publication have been filed with the Board. 26 MR. VLAHOS: Thank you. 27 Certain matters before we proceed. 28 PRELIMINARY MATTERS: 29 MR. VLAHOS: The plan is to sit every day from 9:30 to about 1 o'clock, and the Board has only today, tomorrow and Wednesday available to this hearing, so I would ask the parties to keep that in mind. 30 I know there is the issue of the argument and perhaps we can wait until perhaps the end of the day today or tomorrow to have some indication of whether we should entertain oral argument or written argument by the applicant. 31 Any preliminary matters? Mr. King. 32 MR. KING: A couple, if I could. I was just going to point out to the Board two filings of last week to make sure you had them. 33 The first was the revised evidence that NRG sent in to the Board last week on May 21st, and that evidence was revised to reflect two things. The first was a May 1st, 2003, gas cost increase; and the second adjustment to the evidence was reflecting a change to the tobacco quota, so that evidence should be before you, and also filed last week was an exemption application from certain provisions of the Affiliate Relationships Code for gas utilities. 34 It is a very similar application to the one that the Board -- that NRG put before the Board in the 1999-0031 case, and I am not sure -- Mr. Lyle and I had a chance to speak on a couple of occasions last week. The one thing we didn't talk about was whether that application might be joined with this application. In the 1999-0031 case, there was a settlement agreement, and as part of that settlement agreement, the ARC exemptions were built into that. 35 So I am not sure whether the Board wants to deal with that in the context of this hearing or not. 36 MR. VLAHOS: Can you just tell us the nature of the exemption requested, Mr. King? 37 MR. KING: Um-hmm. 38 MR. KING: Yes, there are I think four exemptions requested. 39 The first one is with respect to section 2.1.3 of the Code, and that deals with the requirement to have one-third of the board of directors of the utility independent from any affiliate. 40 The second one, the reference is 2.2.1 of the Affiliate Relationships Code, and that is the exemption from having a service agreement for shared services. 41 The third exemption being requested, the reference is section 2.2.3 of the Code, and that deals with shared employees between a utility and an affiliate in the context of confidential information. 42 And the fourth exemption deals with section 2.5.3 of the Code, and that is the provision dealing with similar logos. 43 MR. VLAHOS: I'm sorry, with what? 44 MR. KING: Similar logos. 45 MR. VLAHOS: Similar logos. Now, can anybody help the Board whether those exemptions requested were reflected in the notice? 46 MR. LYLE: I believe the application for ARC exemption would only have been filed with the Board last week, so it wouldn't have been reflected in the notice. 47 MR. VLAHOS: All right. 48 Mr. Lyle, anything to add? 49 MR. LYLE: Mr. Chair, I only became aware that the ARC exemption had been filed in speaking to Mr. King on Sunday. I think Board Staff would be prepared to proceed to address that issue tomorrow, subject to the Board deciding that that was the appropriate course to follow. 50 [The Board confers] 51 MR. VLAHOS: Yes, the Board is prepared to allow this issue to be part of this proceeding, as long as we get the information, the application itself, Mr. King, here, the panel, hopefully, by the end of the day today. If you have extra copies, we'll welcome them before the day is over; otherwise, we'll probably make arrangements through Staff to receive those. 52 Are we talking about a lot of pages of prefiled material? 53 MR. KING: No, maybe five pages. So I can have copies made at the break. 54 MR. VLAHOS: All right, thank you for that. So we'll add this to the issues list then. 55 One moment, please. 56 [The Board confers] 57 MR. VLAHOS: Okay, in terms of proceeding, Mr. Lyle or Mr. King, I see a panel here. I suspect that will be the panel for the full duration of the hearing; would that be fair? 58 MR. KING: Yes, it is a panel of three. The closest to the Board is Mr. William Blake; seated to his left, Mr. Sandy McCallum; and then to Mr. McCallum's left is Mr. Randy Aiken. If they could be sworn 59 MR. VLAHOS: Okay, could the panel come forward, please, one at a time? Thank you. 60 NATURAL RESOURCE GAS LIMITED - panel 1; AIKEN BLAKE MCCALLUM: 61 R.AIKEN; Sworn. 62 W.BLAKE; Sworn. 63 S.McCALLUM; Sworn. 64 MR. VLAHOS: Mr. King, anything by way of direct? 65 MR. KING: I do have some, sir. 66 EXAMINATION BY MR. KING: 67 MR. KING: Mr. Blake, you are the president and general manager of Natural Resource Gas Limited, the applicant in these proceedings? 68 MR. BLAKE: Yes, I am. 69 MR. KING: And your curriculum vitae is filed as Exhibit A, tab 11, schedule 2, page 1 of 9; is that correct? 70 MR. BLAKE: Yes, I believe so. 71 MR. KING: And did you participate in the preparation of NRG's prefiled evidence and responses to interrogatories? 72 MR. BLAKE: Yes, I did, along with our other staff. 73 MR. KING: And do you have any amendments that you would like to make to that evidence or the responses to the interrogatories? 74 MR. BLAKE: No, I don't. 75 MR. KING: Then do you adopt those portions of the evidence and interrogatory responses for which you are responsible as your evidence in these proceedings? 76 MR. BLAKE: Yes, I do. 77 MR. KING: Mr. McCallum, you are the financial manager of Natural Resource Gas Limited? 78 MR. McCALLUM: That is correct. 79 MR. KING: And your curriculum vitae is filed as Exhibit A, tab 11, schedule 2, page 2 of 9. 80 MR. McCALLUM: That's correct. 81 MR. KING: And you also participated in the preparation of NRG's prefiled evidence in responses to interrogatories. 82 MR. McCALLUM: Yes, I did. 83 MR. KING: And do you have any amendments or revisions that you would like to make? 84 MR. McCALLUM: No, I do not. 85 MR. KING: And do you adopt those portions of the evidence and responses for which you are responsible? 86 MR. McCALLUM: Yes, I do. 87 MR. KING: And finally, Mr. Aiken. You are an independent consultant, and the principal of Aiken and Associates? 88 MR. AIKEN: That's correct. 89 MR. KING: And your CV is filed at Exhibit A, tab 11, schedule 2, page 3 of 9. 90 MR. AIKEN: That's correct. 91 MR. KING: And I take it that you were engaged by NRG to provide consulting services and to assist in the preparation of the prefiled evidence in the responses to interrogatories. 92 MR. AIKEN: That's correct. 93 MR. KING: And do you have any amendments or revisions that you would like to make? 94 MR. AIKEN: No, I do not. 95 MR. KING: And do you adopt the evidence and answers to derogatoriness for which you are responsible. 96 MR. AIKEN: I do. 97 MR. KING: I'd like to turn to Mr. Blake. He does have a brief opening statement. So maybe he could give that now. 98 MR. BLAKE: I just wanted to try and assist the Board and familiarize the Board with some of NRG's history. We have not appeared before the Board for a few years, and the company continues to evolve into a more mature gas utility operation. 99 The company and the gas utility started its operations in the early 1900s, largely as a gathering system from some local wells that were drilled at that time, and evolved over the years through one family's ownership until the mid-1970s. When that family sold it to another two individuals who were attempting to modernize the system and actually went into financial trouble and the company went into receivership in 1979. 100 So at that time in 1979 when it was taken over by our group, the company was in very, very bad shape, a lot of leaks, old steel line, non-temperature-compensated iron gas meters, everything was in bad shape, the buildings, facilities and everything. 101 And over the last 23 years, 24 years of ownership, we have virtually replaced everything. We have established, you know, new operating procedures, training, replaced pipelines, expanded pipelines, and this past year, we have sort of completed the final step which was building a new office and service facility in Aylmer. 102 So we currently have about 400 kilometres of pipeline, almost entirely plastic pipelines. We are serving about 5600 customers. We have, on average, around between 16 and 18, sometimes a few more, employees during some parts of the season. 103 We are actually operating with fewer employees now than we were probably ten years ago, largely through efficiencies in our office and in our physical plant operation. 104 We continue to add customers, although the years of sort of larger expansions sort of come to an end, we now have gas service in all the communities and on all of the streets in all of the communities; whereas, when we purchased the company, there were a number of communities that did not have gas service and a number of areas in those communities did not have gas service. 105 So we now have gas accessible to virtually every household and business in each community, and we also have quite a large number of the rural roads that have concentrations of homes and things, that we have gas lines on them. 106 And we brought a map, I am not sure that you can see it from where you are, but if I can maybe just describe briefly where the service area is. This would be the City of London in the top corner, and we actually have a couple of small lines that go into the newly amalgamated City of London. This is the highway 401 along here. Ingersoll is here, and I am not sure if you have seen the CAMI auto plant along the highway, along the 401 of Ingersoll. 107 And the rest of it is all south and east of London, this being the north shore of Lake Erie, and Tillsonburg would be here and St. Thomas over here. 108 So when we took the system over, it had a bare skeleton of pipeline. We had a line on Highway 74, a line down a country road, a couple of lines down through here, and one small line into the Houghton/Norfolk County area. A number of lines we built in the last couple of years to expand the service. 109 We are proud of our safety record for the company. We have never had any major incidents. We feel we have created a safe and reliable gas utility, and we think that's largely through some risk management that we have done, training, operating procedures, replacement of facilities, upgrading facilities and so forth. 110 One of the issues that -- one of the items that was on the issues list was the retention of the ancillary services, and I would like to just sort of speak about that for a moment. 111 Our company is unique in that we have a fully integrated service department, and those employees do work not only on the utilities side of the meter, but they also do work on the customer side of the meter. 112 And we think it is important that our company retain that ancillary business, that service and installation business, because it allows us the scope that we need that we can have the employees and the facilities to answer emergency calls and to take the sort of high points out of our service department needs. In other words, when we get a lot of service calls in the beginning of the winter or during an emergency or outages and that sort of thing, we have enough scope of operation that we can handle all those situations. 113 And the program has continued to produce positive returns. It earns greater than the rate of return from the Board, and so that it actually contributes to reducing gas rates. 114 The final thing that I would like to just go over was sort of the last major phase that we see in our development on the replacement of the old system, and that was the new building this year. 115 And the building, in the evidence we have given you some pictures of our old facility, which were World War II barracks from an air force base that was located north of Aylmer that were moved to the location that we were on Spruce Street, and they were moved there, I believe in the 1950s, by the former owner. 116 And the site was about a 14- or 15-acre site, largely flood plain designated land, and we had about three or four acres on the high ground where the buildings were located. 117 And the buildings were in terrible condition. They were -- we made very few improvements on them over the years because we always anticipated that they would be replaced, so we just did the bare essential improvements over the years, a little bit of panelling, a little bit of drywall and replaced a carpet here or there, but the buildings were -- they had dirt floors in a crawl space under large portions of them. The roof on the building three where we kept our equipment was badly deteriorated and leaking. The building three was in such poor shape that the only thing you could consider it is almost outside storage for pipe. 118 And so when the opportunity arose that we could sell the buildings, we really had no choice other than we had to sell them and we had to move on to the new facility. 119 So our new location is on a two-acre site in Aylmer and in an industrial serviced -- a small industrial serviced area. It is right across the road from the police station, the Aylmer police station, so we get lots of exposure. We are not on the main street, we are only about two building lots off the main street, visible from the main street. 120 The footprint of the building is about 8500 square feet and it is a pre-engineered steel building, Steelway building, which might be similar -- you might be familiar with the Butler building, they are very similar. 121 So it is a steel building, and we have an office in one end and then our service department, and we have our trucks and equipment and so forth in the other end of the building, very functional. And so obviously, it gives us, you know, a much better working condition for our employees, and as well, it gives us an enhanced image in the community rather than operating out of the old facility. 122 We've had numerous, numerous comments about, I don't know how you ever lasted in the old building. You're new building looks so nice, and the company looks so much more professional, and so forth and so on. 123 And so anyway, I just wanted to sort of touch base on those items and sort of stress that the company is moving forward. We consider our company as becoming more mature in our evolution, and think we've positioned ourselves to go forward in the future and operate again in a safe and reliable utility operating in our area. 124 MR. BLAKE: Thank you very much. 125 MR. VLAHOS: Thank you, Mr. Blake. 126 Mr. Lyle? 127 CROSS-EXAMINATION BY MR. LYLE: 128 MR. LYLE: Thank you, Mr. Chair. 129 Gentlemen, I'm going to be taking you through your evidence, as it is prefiled, and I will be going essentially issue to issue as it's outlined in your evidence. I won't be dealing with all of the issues that arise out of your evidence but rather focussing on a few particular matters. 130 And with that, I'm going to start on the rate base questions, and would refer you to Board staff interrogatory number 5, and that is Exhibit I, tab 1. 131 Do you all have that, gentlemen? 132 MR. BLAKE: Yes. 133 MR. LYLE: And I understand from your answer to this question that the old land and buildings was sold for $156,000, approximately, that you reduced the rate base by the remaining net book value of approximately $67,000 and the remaining gain of $88,000 was recorded as income in 2002; do I have that correct? 134 MR. BLAKE: Yes, that's correct. 135 MR. LYLE: Given that the ratepayers had paid through their rates for the old land and buildings over time, did you consider whether it was appropriate to give that gain or some portion of that gain to the benefit of the ratepayers? 136 MR. BLAKE: I think from -- our standpoint was that the old building was replaced with a new building and so the new building is coming in as a replacement to the old facility. 137 MR. LYLE: And the entire value of the new building is being added to rate base, obviously; correct? 138 MR. BLAKE: Yes. 139 MR. LYLE: So ratepayers are going to continue to pay going forward for that new building; however, the gain on the old building was kept entirely by the shareholder. Does that seem fair to you, given that the ratepayers have in fact been paying for that building over many years? 140 MR. BLAKE: I am not certain as to what the normal treatment is of that. From an accounting standpoint, the event occurred in fiscal 2002 and we took the normal accounting practice with respect to recording it on our books. 141 MR. LYLE: Do you have any views on that, Mr. Aiken? 142 MR. AIKEN: No, I don't. 143 MR. LYLE: Thank you. I want to ask you somewhat more of a theoretical question then, which is if utilities do not share some portion of their gains on asset dispositions, doesn't that give utilities an incentive to flip assets, realize a capital gain, then add the entire new cost of new assets onto the rate base with negative impact on the ratepayers? 144 MR. BLAKE: I think in our case, this is really the only asset that we have sold in 23 years that -- it is an unusual event. We are not in the business of buying and selling assets for the purpose of flipping. We simply accounted for it in, you know -- the transaction occurred and we accounted for it in a normal accounting procedure, with normal accounting procedures. 145 So I guess, you know, there may be an incentive for utilities to do that. We are not in the business of doing that, and we don't have any assets that we would typically be buying and selling. The treatment -- the same treatment would occur with this I guess on a smaller scale, you know, if we had a vehicle or something like that, it would be the same accounting treatment. 146 MR. LYLE: And you have, as you say, have had no other significant asset sales then since you have been in control of the company; is that correct? 147 MR. BLAKE: I can't recall anything that was sort of close to this 100 and whatever thousand. I think we have sold a few vehicles and a little equipment over the years, but -- so that would be the only thing that would be similar. 148 So for us, I guess it is a one-time sort of event and occurred in fiscal 2002. 149 MR. LYLE: Now, is NRG the sole occupant of the new land and buildings? 150 MR. BLAKE: Yes, it is. 151 MR. LYLE: And there is no affiliate that's carrying on business out of there? 152 MR. BLAKE: Once in awhile there is some work that occurs. Because NRG Corp. hires Natural Resource Gas Limited to maintain some oil and gas wells, or some gas wells in the area, that is one of the activities. Once in awhile there is some parts or something that they have to use to put on some facility that comes in, but it is a rare occasion. 153 MR. LYLE: I'm sorry. So they store parts in your warehouse occasionally, is that what you are saying? 154 MR. BLAKE: One of the things that NRG, Natural Resource Gas Limited employees do while they are in the operation of the gas wells, one thing, for example, would be that they install desiccant in driers, which is a material that goes in a drier. 155 So the material comes into Natural Resource Gas Limited's building, and then Natural Resource Gas Limited employees place that desiccant in the driers as part of their maintenance facility on those wells. 156 So that sort of process happens occasionally, but there is no -- those are, you know, sort of rare and few and far between. 157 MR. LYLE: And are there any employees that NRG shares with affiliates? 158 MR. BLAKE: Sandy is an employee that is shared with an affiliate through the management agreement we have with Cornerstone Properties. 159 MR. LYLE: And is Sandy working out of this particular building? 160 MR. BLAKE: Yes, Sandy works out of our office. He has an office in our office. 161 MR. LYLE: And how much of Sandy's time is spent working for Cornerstone? 162 MR. BLAKE: I think we -- 75 percent for Natural Resource Gas Limited, 25 percent for other companies. 163 MR. LYLE: And while working for those other companies, is Sandy also in part providing services back to NRG? 164 MR. BLAKE: I'm not certain what you mean. 165 MR. LYLE: So I understand Cornerstone, for instance, provides management services to NRG? 166 MR. BLAKE: Right, Cornerstone provides management services to NRG, and Sandy is an employee of Cornerstone Properties. So Sandy spends approximately 75 percent of his time on Natural Resource Gas Limited work; the other 25 percent he provides -- he spends his time on other associated companies. 167 MR. LYLE: But Sandy then is actually an employee of Cornerstone and not an employee of NRG? 168 MR. BLAKE: That's correct. 169 MR. LYLE: I see. And including Sandy, how many employees are located at the buildings? 170 MR. BLAKE: We have 7 -- well, 8 counting our salesperson that have offices in our Aylmer office. 171 MR. LYLE: So if the Board was going to allocate some cost of the buildings to Cornerstone, would it be appropriate just to say that Sandy is -- like what is Sandy's last name, by the way? 172 MR. BLAKE: Sandy McCallum, he is sitting right here. 173 MR. LYLE: Right, sorry. I should ask him then. Would it be appropriate to take one-eighth of the cost of the land and building and allocate that to the affiliate, or is that not an appropriate methodology? 174 MR. BLAKE: Well, you have to take -- not that I agree with the process, but it would be one-eighth of the one person sort of thing, you know. 175 MR. LYLE: One quarter of the one person. 176 MR. BLAKE: Well, one quarter of the one person I guess, but there are eight people and then you would have to try and allocate the building. 177 But typically, Sandy does work in other locations. He will do work in our London office or he does work at home or he does work in other places as well, so I don't -- 178 MR. LYLE: But you have incurred some fixed costs in order to have Sandy be able to work out of the Aylmer office, though, have you not? 179 MR. BLAKE: Obviously we do, yes. 180 MR. LYLE: And I am correct in saying then that of the other seven employees who work out of the Aylmer office, that none of them do any work with respect to affiliates? 181 MR. BLAKE: Well, you know -- 182 MR. LYLE: They have interactions with affiliates, but they don't actually provide services to affiliates; is that fair? 183 MR. BLAKE: You know, the people that do the service, the wells, you know, they obviously -- you know, that sort of thing. So there is some interaction with those people as well, but for all intents and purposes, you are correct in your first statement. 184 MR. LYLE: Okay. 185 MR. McCALLUM: That well servicing is charged for. 186 MR. LYLE: I want to take you now, gentlemen, to your capital expenditures. Mr. Prashad is going to hand out copies of some evidence that has been previously filed in other proceedings, RP-2000-0126 and also RP-1999-0031. 187 And I am going to take you through some of those numbers and also some numbers that are filed in this proceeding with respect to capital expenditures. And perhaps, as we go through, gentlemen, you may want to write these numbers down. 188 Mr. Chair, I suggest that we mark the previous year's filings that Mr. Prashad has handed out as Exhibit K.1.1. 189 EXHIBIT K.1.1: PREVIOUSLY FILED EVIDENCE FROM RP-2000-0126 AND RP-1999-0031 190 MR. LYLE: And the first exhibit in the prefiled evidence that I would like to turn you gentlemen to is Exhibit B.4, tab 2, schedule 3. 191 And taking you to the bottom of the page, you'll see that total capital expenditures for 2002 actual were approximately $585,000, and the Board-approved capital expenditures were approximately $573,000. 192 I suggest maybe you might want to write these numbers down as we go along; they might be easier to trace as we go through. 193 MR. VLAHOS: Mr. Lyle, could you just repeat that exhibit number? It was Exhibit B.4, tab 2, schedule 1? 194 MR. LYLE: Schedule 3. 195 MR. VLAHOS: Schedule 3, sorry. 196 MR. LYLE: And looking at the material that was handed out to you by Mr. Prashad, you'll see on the first page RP-2000-0126, I guess the first page, Exhibit B.3 -- no, sorry, Mr. Prashad has got a different -- it's the second page, 2000-0126, Exhibit B.3, tab 2, schedule 1, and you'll see the forecast for 2002 was 1,027,000, approximately. 197 If I move you back then, back to your prefiled evidence, and to Exhibit B.3, tab 2, schedule 3, you'll see at the bottom of that page that the figures for actual for 2001 was approximately $570,000 and the Board-approved was $601,000. 198 And moving back then to the material that Mr. Prashad handed out, RP-2000-0126, Exhibit B.4, tab 2, schedule 1, total capital expenditures proposed were $691,000. Staying then with the materials that were -- is everybody with me so far? 199 Staying then with the materials that were handed out, Exhibit B.5, tab 2, schedule 3, this is RP-2000-0126, you'll see that the actual capital expenditures for 2000 were $663,000 and Board-approved were $775,000. 200 And finally, the proposed for that year you'll find in the evidence that was prefiled in RP-1999-0031, Exhibit B.3, tab 2, schedule 2, and you'll see at the bottom of that page the forecast for 2000 was approximately $948,000. 201 So just to recap, you should have, gentlemen: Actual in 2002, $585,000, Board-approved, $573,000, proposed $1,027,000; actual in 2001, $570,000, Board-approved, $601,000, proposed $691,000. 202 And then, going to the year 2000, actual of $663,000, Board-approved of $775,000 and proposed of $948,000. 203 Now, there appears to be a significant gap between what has been proposed and the actuals, and I understand that in the year 2002, that the proposed originally included the new land and buildings, so that might have been a bit misleading for 2002. But in light of this pattern, would you think it is appropriate for the Board to cut back your proposed capital expenditures, say, by 10 percent? 204 MR. BLAKE: No, I think that, in fact, this year I think we are being very conservative in our estimates, and in fact, in the revised or updated information, we actually reduced the amount of our forecast capital expenditures for fiscal 2003 and moved some of those projects actually into 2004, and some of the 2004, I believe, we moved on out into actually 2005, which is beyond the scope of what we are talking about here today. 205 There is no question that during the last proceeding, during the ADR session, we negotiated and we reviewed the capital projects with Staff, and there were substantial revisions to the capital project list, so that it reflected the agreed-upon amount that was included in the agreement. 206 And in fact, I think if you look at the numbers particularly for 2002, we were slightly over what the Board allowed, and in 2001 we were slightly under. But I think on average I think if you aggregate those two together, some of that could be because some projects get moved in and out of one year or the other because of scheduling or whatever, you know, I think we are within -- I didn't do the math on it, but $15,000 or so -- is that what that would work out to be? 207 MR. AIKEN: Approximately that, yes. 208 MR. BLAKE: For the two years, which I think on a 5 or $600,000 budget, you know, per year or on a million dollar, 1,200,000 over two years, appears to be within $15,000, I think is very reasonable. 209 And with respect to the amount -- I see where you are going, that there were larger amounts proposed in our evidence to the Board, but through negotiations with Staff in the ADR process, they were adjusted down and we adjusted our program in order to handle those adjustments. 210 If you take the building out of this, the million and 27,000, it would have been 637 that was proposed, and the Board-allowed number was 574. 211 We spent 585. 212 But I think that, sort of, this is part of what I was speaking about at the beginning of the hearing, was that the company is becoming more mature in its development. 213 We have fewer capital expenditures that are required that may be unplanned. 214 We have fewer expansions. 215 Our replacements, we are doing -- we don't have the same level of replacements that we had of old leaking lines and older facilities, and we can now better budget what capital expenditures are going to be required in the upcoming years. 216 And I think that's part of what -- you know, in the update where we moved that 300-and some thousand dollar capital expenditure out of 2003 into 2004, was because there was a recognition that there had been some more rationalization in the tobacco industry and we had -- our capital expenditures for this year were substantial because they did include the building and that it was better for everyone concerned to move those capital expenditures into the next year. 217 And I think those are the sorts of things that we are now able to do given the stage we are in our progression or evolution as we grow toward a more mature gas distribution utility. 218 So the initial question I think was, do I think that the Board should adjust our forecast. 219 I think our forecast is very accurate, and sort of our year-to-date figures and the projects that we have completed this year, we think we are going to be very much on target with our 2003 capital expenditure program. 220 MR. LYLE: Mr. Chair, those are all the questions I have on rate base. 221 If the panel has any questions at this time. 222 MR. VLAHOS: Thank you, Mr. Lyle. 223 QUESTIONS FROM THE BOARD: 224 MR. BIRCHENOUGH: I would just like to get back to the issue of the new building -- 225 MR. VLAHOS: For the record, it is Mr. Birchenough. 226 MR. BIRCHENOUGH: How many square feet are included in the new building? 227 MR. BLAKE: I am not sure I have the exact number. We'll find it. 228 The footprint I believe is about 8400 square feet, and there is a second floor over the office portion, some of which forms part of the warehouse, back-shop as we call it, and the other part forms part of what is in the office, and there is a firewall between the two. 229 And so it is sort of like -- almost like a two-floor office on one side upstairs, and a mezzanine on the other side where we keep some records and parts. 230 MR. BIRCHENOUGH: Could you estimate what percentage of the floor space is devoted to office and how much to service area? 231 MR. McCALLUM: If you go to Board Staff interrogatory number 7, it states there that the office area in the new building is just shy of 2700 square feet; whereas the warehouse/garage portion is just under 5500 square feet. 232 MR. BIRCHENOUGH: And how many employees occupy the 2700 square feet, then? 233 MR. BLAKE: There are -- before I sort of mentally added them up, eight employees that occupy that area. 234 So there are individual offices and a small meeting room on the main floor and then washrooms. There is a customer service area in the front, a salesman's office, that sort of thing. And then there is a core area in the middle where actually our technicians come in and do -- we have a mercury alarm link system that -- and they are linked to our remote metering facilities and there is sort of a central area in the middle where we have a couple of computer staff where our technicians come in and record the valve and meter records. 235 They are not permanently there, but periodically they come in for an hour in the morning or afternoon, here and there. Oh, and there is an accounts payable person in that area too, in that central core area. 236 There is a ring of offices and washrooms around the outside, and in the centre there are workstations with positions for three people 237 MR. VLAHOS: Dr. Zerker? 238 DR. ZERKER: Good morning. 239 Mr. Lyle has been asking you a question that is concerning, and that is that there may indeed be a pattern of overestimation. 240 And it's the pattern that concerns me, that over time, we see the same level -- or not necessarily the same level, but the same indication of overestimation and I wondered how you would respond to that. I am talking about capital expenditures, of course. 241 MR. BLAKE: It depends to some extent on what time frame you look at. 242 There are -- I recall this being a question at ADR in the last proceeding as well, and Board Staff brought forward a schedule that indicated that we were overestimating our capital expenditures. 243 And we actually brought forward a schedule that took a longer time period and it showed that, you know, there were just as many years that we were underestimating as there were that we were overestimating. 244 So I'll agree with you that it has been the case that we have overestimated the capital expenditures during certain years leading up to the 2001-2002 period, but those have all been for a number of reasons. 245 There were market conditions or pipeline conditions that allowed us to either not build the pipeline job or something occurred, and those were largely because of events that have gone away now with our maturity level. 246 And we now have a good handle on how many meters we are going to have to replace. We have our meters on a program where we are receiving seal extensions. We send them to an accredited meter shop now and they are handled much more efficiently. So we have a better handle on our meters. We have a better handle on our regulators that we require. 247 We are not sort of in the large growth pattern that we were several years ago where we were building $700,000 pipeline expansions to serve industries, and we are not -- we have most of the rural areas, for example, Port Bruce was one community that we had all the pipelines in the south part of the system down in here, we forecast for one year, and we didn't do those projects; they were delayed for several years. So that during those years, those projects -- or those projects caused higher numbers to be forecast, but the projects weren't completed; they were delayed to another year. 248 So I don't think those events or those circumstances are with us today, and I think we are much better able to forecast the capital expenditure levels and the budgets. 249 You can see the numbers, you know, our capital expenditures typically in years gone by, in many years, have been well over a million dollars, and we are now down into the 550, $575,000 capital expenditures, which are really what -- are really at the level that we have been seeking for several years. 250 We think that $550,000 is sort of the ideal capital expenditure level for this company as we go forward, and we are trying our best to get to that level. And we think that even when we go beyond the 2003/2004 fiscal years, we think we'll be in that approximately 550, to 575,000 dollar capital expenditure level. 251 MR. AIKEN: Maybe I can add on to that. 252 If you look at the stability of the level of capital expenditures for the last couple of years and compare that to what is forecast, in 2001, the actual level of capital expenditures were $570,000. In 2002, it was $585,000. 253 Now, the forecast for 2003 is for 1.34 million, but when you back out the new building and land, that leaves approximately $590,000 in that year, and then in 2004 the forecast is for $921,000, included in that is one large project which by itself is $376,000. 254 So if you back out that large project, the remaining capital expenditures are $545,000. 255 So as Mr. Blake indicated, that level of the 550 to 600,000 dollars per year with the new building in one year and a large project in the other test year I think shows a stability of that underlying level of capital expenditure. 256 DR. ZERKER: Could you refresh my memory about the projected large project in 2004? 257 MR. AIKEN: It is called, I believe, the Norfolk East project, and I think Mr. McCallum can point out where it is. 258 MR. McCALLUM: It is running from this Union Station or southeasterly down this road, terminated here and then there was some east-west branches off of that line. It is identified on the map that's filed in section A. 259 DR. ZERKER: Yes. 260 MR. AIKEN: There are a number of -- the customer additions there are primarily the seasonal or the tobacco curing customers. I believe there are ten customers forecasted in the first year, and I believe another 15 residential customers on that line. 261 DR. ZERKER: I suppose what I am asking here, what comes to mind is, on the basis of what Mr. Blake has said, how can I depend upon that forecast of that work being done in 2004? Have you got some secure understanding of the project going ahead as you predict or as you propose? 262 MR. BLAKE: The only reason the project would not go ahead that I would foresee right now is if there is a total collapse in the tobacco industry, and we have seen some decline in the tobacco quotas over the last few years. And, in fact, in our evidence we have revised our forecast to reflect the May 15th quota forecast from the Ontario Flue-Cured Tobacco Growers' Marketing Board. 263 A substantial portion of the project is -- the cost of the project is to pay Union for an aid to construction for the upgrade of what we call the Walsingham station, and in order to have adequate supplies to take on those additional customers that are in that Norfolk East expansion, Union have advised us that it will cost us approximately $130,000 for them to build some pipeline and upgrade the facility there. 264 So of the total $370,000-some project, I believe it is $130,000 of that is an aid to construction to Union to help them upgrade. 265 So as I say, you know, no one can foresee what will happen with the tobacco industry. It is in a state of decline and farmers are consolidating. That area is an area that the farms do not seem to be declining in as quickly. The quota -- I am not sure if you understand how the tobacco business works, but each farmer has so much tobacco quota, and as the business declines, what typically happens is some farmers fall out and the other farmers pick up that quota and then they grow that quota. 266 The farmers in that area that we are contemplating the expansion are well-established farms with relatively new equipment and so forth, and we think that they are good candidates for, you know, long-term viability in the tobacco business. 267 So the question is, you know, how can we know we are going to build that? I guess we can't know with a hundred percent certainty, although we are confident that, you know, given the recent forecast and so forth, that the tobacco business is still going to be around at least for the foreseeable future and that that project would be viable next year. 268 DR. ZERKER: Thank you very much. 269 MR. VLAHOS: Thank you, Dr. Zerker. 270 Gentlemen, just to follow up on this, based on the answers you provided to Mr. Lyle, it seems to me also there is a pattern between what you have proposed and what the Board-approved or what was decided in an ADR in a settlement proposal, which leads me to believe that there is an element of discretion in terms of capital expenditures going forward. 271 Would that be a fair assessment; there is always a degree of judgment or discretion as to what may not have to be spent as originally thought by the company? 272 MR. BLAKE: I think in some categories in the capital expenditure program, that's true, there are. And, for example, on this pipeline project where the money is being spent to serve more customers, I think that that is true on that. I think there are other areas where it is not true, and that would be on meters and regulators and those sorts of categories. It is, you know, very difficult to -- you know, when the meter becomes out of date, you have to either replace it or rebuild it or, you know, whatever. 273 So there isn't a lot of discretion on that part of the capital expenditure budget. Vehicles are another one. You know, sometimes you can prolong the life of a vehicle by doing some maintenance or something like that and delay those expenditures. In some of those items, pipelines, I think if you look back at the items that were adjusted in ADR were pipelines, vehicles and those sorts of things. 274 And, in fact, when we did our budget this year, we pushed out, you know, a substantial number of vehicles out of the capital budget into past 2004, and we did that by doing some overhauls to some trucks that we had, some larger trucks and trailers we overhauled and some of our equipment we had it all overhauled during the winter and so forth. So that allowed us -- that was one of the things that we already did to reduce the level of capital expenditures in the budget. 275 I would say, you know, if someone said, "Well, okay, you are required to take out $300,000 out of the capital budget," it would likely and largely come out of the pipeline part of it. 276 MR. VLAHOS: So there is some discretion, just not much, you are suggesting? 277 MR. BLAKE: On the pipeline projects that we have forecast for the next few years, they are not major and most of them are not -- there are some minor replacement projects. We have very little steel pipe left in the system. We have some small portions of steel pipe where we have pipes suspended on bridges, and we have forecasted to directional drill those under the watercourses, because we think we have got some exposure there with them being on the bridges and they have been there for ten years-plus, and they are difficult to maintain. 278 So those are about the only replacement projects we have on our slate. We have one replacement project in Aylmer where we have a piece of pipe that runs through a couple of properties where the right of ways are not -- there is some concern that the right of ways may not be valid, and we are rerouting those pipelines off of those right of ways. But aside from that, those are the only replacements we have. We have some minor pipeline additions, we have a project called Red Oak, which is an extension to serve a small trailer park and a small residential subdivision, and we have another project that is in 2003, for example, which we call Cloden, and that project is -- by the time I get back after this hearing, it will substantially be complete. 279 So I think if we were to narrow down on the capital budget and take some projects out, I think they would have to come out of the pipeline and those projects that are in there, I think, are pretty much essential projects, except for this Norfolk East project, which I think we could have some discretion on whether that is constructed or not. 280 The part of the project that is difficult is that we couldn't say, Let's do 80 percent of the Norfolk East project because we have to pay Union $130,000 to expand the station and then we have to build the pipeline to the customers and those are what we think are 2004 fiscal projects. And in fiscal 2005 we actually have some other legs off that project that also contribute to the economics of the main project that serve some additional customers. 281 So if the decision was, you know, spend 300,000 let's say on that $370,000 project, we would have to cancel the whole project because you couldn't do just part of it. 282 MR. VLAHOS: Mr. Blake, what in-service date are you forecasting for the Norfolk East project? 283 MR. BLAKE: We are hoping to have it complete and constructed by the tobacco season in fiscal 2004, which -- the tobacco farmers typically start curing around August the 1st, sometime late July, but typically August 1st. 284 MR. VLAHOS: The summer, that's of the year 2004? 285 MR. BLAKE: Yes. 286 MR. VLAHOS: And your fiscal year ends September? 287 MR. BLAKE: September 30th, yes. 288 MR. VLAHOS: Thirtieth. So am I to take, then, of the $376,000 that is included in the budget that the impact on rate base is only for those couple of months? 289 MR. BLAKE: I am not sure just exactly how it gets -- 290 MR. AIKEN: On a forecast basis, we don't forecast in-service dates for individual pipeline projects. The capital expenditures are put in on an even basis, on a monthly basis. 291 MR. VLAHOS: Even on a lump sum of $376,000 which is associated with a specific project? 292 MR. AIKEN: Yes. 293 MR. VLAHOS: So the impact on rate base then is quite uniform for the fiscal year 2004; it does not reflect on a two months operations? 294 MR. AIKEN: That's correct. Basically the capital expenditures would be weighted by 50 percent in converting them into rate base. 295 MR. VLAHOS: Right, okay. And Mr. Aiken, are you familiar with the Union or Enbridge rate-making treatment of capital expenditures? 296 MR. AIKEN: Somewhat. If you are leading to the question, Do I know if they have in-service dates for each of their projects, that I don't know. Is -- 297 MR. VLAHOS: I am always very easy to read. 298 MR. AIKEN: I don't know if they do that on major projects or any projects. I don't know. 299 MR. BLAKE: I think the same sort of thing happened in reverse with the building. In fact, the building was occupied in June of 2002 but didn't really come into rate base until 2003, so that is sort of the opposite situation where, you know, some capital expenditures -- I guess what I am saying is some capital expenditures could occur very early in the fiscal year, or, in that case actually, in the prior fiscal year. 300 MR. VLAHOS: But from a rate-making point of view, there is a long-standing regulatory practice that the rates should be impacted upon the date -- commencing with the date of the in-service of the project. 301 MR. AIKEN: I think what Mr. Blake is saying is that if NRG has a pipeline project to add residential customers, for example -- 302 MR. VLAHOS: Mr. Aiken, can I ask you to bend towards the microphone? 303 MR. AIKEN: I think what Mr. Blake was indicating is if NRG has a pipeline addition project, that is to say, serve a residential neighborhood, those customers -- that project would most likely be completed in the fall of the year, which is the beginning of their fiscal year, so that you would capture the winter load. You wouldn't wait until the summer to connect those customers. 304 And in that case, again, the forecast is a straight-line, 50 percent over the year, where in fact those pipelines would have been in rate base in the fall of the year, which is the beginning of their fiscal year, so it is the opposite situation in that case. 305 MR. VLAHOS: But Mr. Blake, would you agree with me that given the substantial increment for 2003 and 4, given the actuals of the last while, and I think the figure was put at 585,000, that this would be the time where your discretion has to come in in terms of what can be postponed? Would you agree that this may be a time where discretionary expenditure has to be under the microscope? 306 MR. BLAKE: I think, you know, the capital expenditures should be under the microscope all the time, and I think that we have actually done that this year in that, as I said, we went through the capital budget very carefully and we have eliminated or delayed a substantial number of items. All of the things that we think are discretionary we have pushed out. 307 And you know, it becomes a matter that if we are to eliminate -- you know, let's say that we are to eliminate $10,000 out of meters and regulators, then it could be very difficult to have all our meters and regulators comply with Measurement Canada standards. And it would be the same thing with regulators. You know, we are constantly replacing regulators or buying new regulators for new customers, and if we take X number of thousand dollars out of that program, it could be very difficult to operate the system and add those customers which we have budgeted for. 308 If there is something in the capital budget that is discretionary, I would say that it is that Norfolk East project, and I think that would be the -- you know, if for some reason the Board determined that capital expenditures were too high in the two years, that, in my mind, is the only project or the only capital expenditure that could be moved forward into another year and reviewed in 2005, let's say. 309 But the rest of the capital expenditures, we have been through them and through them and through them and adjusted and tried to eliminate largely because we recognize that with the building in 2003 and that project in 2004, that the capital expenditures were still higher than what we would like. We would like the capital expenditures to be in around that $500, 550,000 range going forward, and we would like that to be true for this year and for next year as well, but given that we also see the need for the building, the building was a project that had to be completed at some point in time. 310 MR. VLAHOS: Finally, in this area then, if the Board were inclined to make an adjustment, as was suggested, then perhaps, gentlemen, you can help me. How does the Board go about -- and please don't read anything into this. I am just one vote out of the three here. 311 How would the Board go about making that adjustment, recognizing that the different classes of assets and of course we can't afford to be that scientific, but if for example the Board were inclined, Norfolk, this project is not considered to be an in-service date by 2004 fiscal year, then how do we calculate depreciation, how do we calculate CCA? What exhibit do I have to go to get some kind of an estimate so that I will not be too far off? Mr. Aiken? 312 MR. AIKEN: I would suggest that you would ask for an undertaking, for example, to see the impact on the revenue requirement of the removal of the Norfolk East project, because in addition to the depreciation, CCA, income tax changes, there would also be a change in the revenue forecast, the gas costs because of the removal of 15 residential customers and 10 seasonal customers, which tend to be larger customers. 313 So there would be a revenue impact in addition to the rate base impact and the income tax related impacts. 314 MR. VLAHOS: I appreciate that, and in fact, why don't we do that then. Why don't we get an undertaking from the company to provide the revenue requirement impact on the assumption that the Norfolk East project does not materialize in fiscal year 2004, okay. 315 UNDERTAKING J.1.1: TO PROVIDE THE REVENUE REQUIREMENT IMPACT ON THE ASSUMPTION THAT THE NORFOLK EAST PROJECT DOES NOT MATERIALIZE IN FISCAL YEAR 2004 316 MR. VLAHOS: The second undertaking would be that: What would be the impact if the Board were to disallow X percentage of the proposed budget without specifying a specific project, and let's call it on the discretionary side, call it per 10 percent or $100,000, whatever is easier for you. Do you follow that, Mr. Aiken, that second part? 317 MR. AIKEN: On the second part, are you looking at both test years or just the 2004 test year? 318 UNDERTAKING J.1.2: TO PROVIDE THE IMPACT IF THE Board WERE TO DISALLOW X PERCENTAGE OF THE PROPOSED BUDGET WITHOUT SPECIFYING A SPECIFIC PROJECT, ON THE DISCRETIONARY SIDE; PER 10 PERCENT OR $100,000 319 MR. VLAHOS: Both I guess, I am not sure that it matters much, but we're not looking for science here. If the Board were inclined to say for each of the 2003 and 2004 the capital expenditure proposal should be reduced by, call it, you know, 10 percent, or for each increment of $100,000 or $10,000, it doesn't matter what the increment is, we are just looking at the marginal rate of change for CCA and depreciation. That's on the discretionary side where there is no revenue requirement associated with it. 320 Are you clear on that? 321 MR. AIKEN: Yes, I am. 322 MR. LYLE: Mr. Chair, we'll mark those as undertakings. 323 MR. VLAHOS: Yes. 324 MR. LYLE: Do you want those as separate undertakings or one undertaking? 325 MR. VLAHOS: Separate would be fine. 326 MR. LYLE: So the first undertaking with respect to the Norfolk East project we'll mark as Undertaking J.1.1. And the undertaking with respect to the marginal rate of change on the capital cost allowance and depreciation, we'll mark as Undertaking J.1.2. 327 Mr. Chair, was there a time by which you were hoping to receive a response? 328 MR. VLAHOS: I'll be guided by the company on this. 329 MR. AIKEN: The second one I can probably have done for tomorrow. I am not sure about the first one. It is a little bit more complicated. But within two days I think I could have that to you. 330 MR. VLAHOS: Let's hope we get this before the end of the hearing so that if we have any follow-up questions, we would hate to bring you back, gentlemen. I have driven that 401, it is not that pleasant. 331 Okay, moving on to the use of the building, and again, it may be useful just one more time to help me understand, is the total building associated with the utility business or not? 332 MR. BLAKE: It is the utility's building. There are periodically some non-utility activities that relate to the gas wells that occurs at the building. 333 MR. VLAHOS: Right, and those have been charged out, you say, to that activity? 334 MR. BLAKE: Right. I think it is 30 -- 335 MR. AIKEN: Twenty. 336 MR. VLAHOS: Mr. McCallum, just don't hesitate to jump in and assist us here. 337 MR. McCALLUM: On average, it is probably about $26,000. It goes up and down depending on the account. 338 MR. VLAHOS: What is $26,000? Put it in perspective. 339 MR. McCALLUM: That is the charge that NRG, Natural Resource Gas Limited, charges to its affiliate, NRG Corp., for doing that well service. 340 MR. VLAHOS: I'm sorry, this is for the service provided? 341 MR. McCALLUM: Yes. 342 MR. VLAHOS: And that would reflect some kind of expenses associated with the building? 343 MR. McCALLUM: Not so much with the building. That is mainly labour costs, because most of the work that is done by Natural Resource Gas Limited employees is out in the field at the well sites. 344 MR. VLAHOS: Okay. So the answer to my question is that the total expenses, you know, capital expenditures and expenses, ongoing expenses associated with the building, it is a total responsibility of the utility and there is some service provision to the other affiliates which is not necessarily associated with the provision of the new building; is that fair? 345 MR. AIKEN: I think what they are saying is that the service is provided out of the new building. It is a well maintenance service provided by NRG Limited to NRG Corp. 346 MR. VLAHOS: But is that a new service, Mr. Aiken? That charge would have been applied before? 347 MR. BLAKE: It has been going on for years and years, and it is similar to going to someone's house and servicing their furnace or doing any sort of chargeable service work. There is obviously, you know, some things that occur in the building, the service person gets his orders at the building and, you know, picks up his truck at the building and, you know, so forth. 348 But it is the same sort of use of the building as other chargeable services that we do for any individual would have that use in the building. Like, there is nothing special about that. We could be doing service work for another company or we do service work or installations of a furnace or an air conditioner or something for a company, well, really there is not too much in the building because the furnace comes in in the morning and goes out in the afternoon, really there is not a lot in the building. 349 And the same thing with the products they use, periodically there is some desiccant, or something like that, that comes in that the technician takes out with them, but it is not -- you know, to say, "No, there is no part of the building that is not used," would be incorrect, but it is the same sort of use that our service people use the building for that they would use the building to do service work or other charge-outs for other customers. 350 MR. VLAHOS: Okay, thank you. The last area I want to cover is the capital gains which was discussed with Mr. Lyle. 351 Now, Mr. Blake, I have got it down in here you are saying that, really, this is the only asset that in your memory or in the history of the company has been really -- has been sold -- major asset that has been sold and the issue of capital gains, it is an issue. But those things may happen on an ongoing basis when it comes to other smaller things like vehicles, I noted. 352 MR. BLAKE: Yes, I guess it would only have an implication if there was a gain on the sale, and I guess with a vehicle, it typically would not be a gain on a sale. So in all likelihood, it would probably have to be land or something like that. You know, we obviously wouldn't be selling a piece of our pipeline or those sorts of things, but -- 353 MR. VLAHOS: Right. So the vehicle example is probably not a good one. 354 MR. BLAKE: No, obviously, we do sell those, but after saying it, I thought, well, I guess there probably was not a gain on the sale of those. There is probably more often a loss on the sale of those. 355 MR. VLAHOS: Yes, I always wonder when they advertise that, "this new car, the best investment you can make." 356 So basically, this is probably the first time that -- there is a good reason why this issue is the first time it appears before the Board, because there was no reason for it to come before the Board. 357 MR. BLAKE: That's correct. 358 MR. VLAHOS: And from the accounting perspective, if it has happened before on smaller assets, then you simply follow the accounting treatment and there was no real issue before the Board, but you can appreciate why it is an issue this time. 359 MR. BLAKE: Yes, I understand. 360 MR. VLAHOS: And are you familiar with what the Board's practice has been in this regard over the years, Mr. Blake? You and I go back some time. I remember you with a lot of hair. 361 MR. BLAKE: Well, it is going quickly. 362 I understand that the treatment in the past with some of the other utilities has been a sharing with the company and the customers, but aside from that, that's sort of the only thing that I am aware of. And I didn't really become aware of that until just recently. 363 MR. VLAHOS: And you can appreciate the reasons for the sharing? 364 MR. BLAKE: Yes, I understand. 365 MR. VLAHOS: Okay, thank you. Those are the panel's questions on rate base, Mr. Lyle. 366 Now, just a note that we do have the prerogative of coming back to those issues before the end of the hearing on any of the individual issues we have covered or cover in the next couple of days. 367 Mr. Lyle? 368 MR. LYLE: Thank you, Mr. Chair. 369 FURTHER CROSS-EXAMINATION BY MR. LYLE: 370 MR. LYLE: Gentlemen, I am going to proceed on then to the matter of operating revenue, which is Exhibit C in your prefiled evidence. And I am going to focus on the reasons for the decline in forecast normalized through-puts for 2004. 371 I want to turn you first, gentlemen, to Exhibit C.5, tab 2, schedule 3. 372 MR. AIKEN: And is it the revised green schedule? 373 MR. LYLE: This is the revised, the green sheets, that's correct. I'll specifically mention it if I am talking about something other than the revised -- 374 MR. VLAHOS: Mr. Lyle, would you repeat that for Dr. Zerker? 375 MR. LYLE: Yes, Dr. Zerker, it is Exhibit C.5, tab 2, schedule 3, and it is the green revised evidence. 376 And I was saying to Mr. Aiken that if I am referring to something other than the revised evidence, I will make mention of that. 377 And you'll see, gentlemen, that the normalized actual for 2002 volumes was approximately 24,632,000 m3, and the normalized forecast is for an increase in 2003 up to 25,389,000. And if we move then into the 2004 fiscal year, at Exhibit C.6, tab 2, schedule 3, you'll see that the normalized forecast for the fiscal year 2004 is 25,043,000 m3, approximately, and that is an approximate decline from 2003 of 346,000 m3. 378 And am I correct in saying that the forecast -- the volumes for 2003 are based partly on actuals and partly on forecast? 379 MR. AIKEN: Yes, 2003 has four months of actuals. 380 MR. LYLE: Now, one of the major drivers, gentlemen, for the decrease in 2004 seems to be the reduced demand from seasonal customers in 2004; is that fair? 381 MR. AIKEN: Yes, it is 382 MR. LYLE: And going back to Exhibit C5, tab 2, schedule 3 again, you'll see that for the rate 2 seasonal customers, the normalized actual in 2002 was approximately 3,677,000, and that's forecasted to increase in 2003 to 4,139,000. And then referring you back again to Exhibit C6, tab 2, schedule 3, a decline for seasonal customers is forecast of 451,000 to bring the seasonal volumes down to 3,688,000, approximately. 383 Can you give us a little bit of background, gentlemen, on who are the seasonal customers? 384 MR. AIKEN: The seasonal customers are tobacco curing accounts. 385 MR. LYLE: So those are entirely tobacco curing accounts; is that correct? If there is no other type of industry, who are rate 2 seasonal customers? 386 MR. AIKEN: No, I don't think there are any other customers in that category. 387 MR. LYLE: And for someone who is a city boy, can you give me a little background on what is involved in tobacco curing? What is the process, and how does gas play a role in this process? 388 MR. BLAKE: The tobacco farmers have -- typically have a number of tobacco curing kilns, they are called, in tobacco jargon they are called "kills", for whatever reason they don't pronounce the "n", and they may have as many as 25 or possibly 30 of them on a large farm and possibly six or eight on a small farm. 389 And I don't know if you have driven through that tobacco area, but the tobacco kills used to be some small little Insulbrick or tar paper, almost, buildings and then they had a little furnace on the side of them sort of thing. 390 And a number of years ago they modernized them and they are now almost like a little house trailer and they are maybe 30 feet long and eight feet wide or ten feet wide and 10 or 12 feet high, so they are more modular units. 391 And so the farmers used to go out and they used to pick the tobacco manually and they used to come to the tobacco kill and it was tied on a stick, believe it or not, and hung in the kill and then it was cured with whatever, natural gas or oil or propane or whatever it was that they used. 392 And during the process of modernizing these new buildings they went to a system where the tobacco was first brought up and put on metal rack and put in the kilns, and now they have automatic harvesters which drive through the field and pick up the tobacco, it goes in the bin and they bring the bins into the kilns and pick them up with a fork lift and they drive them in. 393 And that is called automatic harvester with bins in a bulk kiln sort of thing, and that's the most modern way. 394 There are, still, a few of the people that are doing it the old, old way with the sticks and the -- almost hand-priming, it but most people have gone to the modern way, and as the tobacco industry rationalizes, those are the farms that are typically falling off, are the older farmers with the older methods and so forth, and they are just not spending the money to modernize. 395 So as the tobacco comes into the curing units or into the kills, it is dried and, depending on the time of year, it takes anywhere from a few days to possibly as much as two weeks to cure or to kill the tobacco, and when it comes out, the leaf is usually almost a bright colour, a bright yellow-brown colour. 396 And then it goes to the barn and it's sorted in the barn and from there it goes to the tobacco warehouse where it is sold at auction and the manufacturers then purchase it there. Some tobacco goes to Imperial Tobacco in Aylmer where it is processed into the tobacco that is smoked. 397 And so Imperial Tobacco is also a customer of ours. They don't dry the tobacco, they process it, and they are also a big gas user, in fact, one of our largest customers. 398 So the tobacco that you are talking about -- or the sales volume that you are talking about here under the seasonal is used strictly for that curing process that the farmers do with the tobacco on their farm in typically August and September of each year. 399 MR. LYLE: Thank you, that is very helpful. 400 Now, I understand that one of the issues for predicting usage by seasonal customers is the tobacco quota. 401 MR. BLAKE: Yes. 402 MR. LYLE: And in your revised summary of application, and that is found at Exhibit A, tab 2, schedule 1, and specifically, at the bottom of page 4, you talk about a change in the crop agreement between the Ontario Flue-Cured Tobacco Growers Marketing Board. 403 And I take it in order to grow and sell tobacco in the province, you would have to be a member of that organization and have a quota from that organization? 404 MR. BLAKE: To grow flue-cured tobacco, which is cigarette tobacco, that is true, and they are a registered marketing Board in the province. 405 All of the tobacco produced goes through that marketing Board. There is -- each farmer has a quota of tobacco that he can grow, and the quota, he would have -- you know, he could have acquired it when the quota was originally assigned or he could have bought quota over the years or he may in fact even rent quota. 406 So the quota used to be set a number of years ago by the number of acres, so the farmer could grow -- he may have a quota of X number of acres of tobacco that he could grow, and because some years they would grow the same number of acres and they would have a bumper crop or other years they would grow the same number of acres and there would be a crop failure because of frost or disease or whatever, the amount of tobacco grown became sort of lumpy. 407 And so they changed a number of years ago to a poundage quota basis, so each farmer, based on the number of acres they had of quota, was converted to a poundage quota, so each farmer can market X number of pounds of tobacco. 408 So at sort of the height of the tobacco industry a number of years ago, there was about 250 million pounds of tobacco quota, and it gradually came down, you know, over the last -- I am guessing about maybe eight years or so -- to last year when I think it was around 113 million pounds and this year, on May 15th, they released their agreement for, I think 94 and a half million pounds and I think they are forecasting approximately the same amount for 2004. 409 MR. LYLE: To be precise, the 2004 quota is 93.3 million pounds, and that's referenced at page 5 of your evidence. 410 MR. BLAKE: So the quota number that -- the amount of tobacco quota forms an important part of our forecast for our tobacco sales, and the number we were using was the previously allotted number of 108 million pounds. 411 And when we were advised that the quota had actually been reduced to 94 million pounds, we made the adjustment. 412 There was a rumour that it could have been even reduced to -- some of the rumours were that it could go as low as 73 million pounds, so we actually -- we are quite happy that it was 94 million instead of 73 million pounds. 413 MR. LYLE: Now, when I look at these quota numbers, that's for the entire province, I take it? 414 MR. BLAKE: That's for the entire province? 415 MR. BLAKE: That's for the entire province. 416 MR. LYLE: And what percentage, approximately, would the farmers in your franchise area receive of the quota? 417 MR. AIKEN: We are not privy to that information because you would have to know the quota for each individual farmer and that is not public information. We do know that, you know, NRG has roughly 120 -- 418 MR. VLAHOS: Mr. Aiken, you have to come closer to the mike, please. 419 MR. AIKEN: We do know that NRG has approximately 120 seasonal customers and Union Gas has approximately 1,000 seasonal customers. 420 MR. LYLE: And I believe your seasonal customers are forecast to grow into 2004; is that correct? 421 MR. AIKEN: That's correct, that ties into that Norfolk East project. 422 MR. LYLE: So these are not new tobacco farmers receiving a new quota, but rather tobacco farmers who are currently not your customers but still tobacco farmers, is that correct? 423 MR. AIKEN: That's correct. I don't think there would be many new tobacco growers in the province. These are existing tobacco growers who currently are using other fuel. 424 MR. LYLE: So if you were to delay the Norfolk East project so that you missed the 2004 fiscal year, what impact is that then going to have on the number of customers that you are going to have, the number of seasonal customers? 425 MR. AIKEN: It would drop the number of customers. I think the number is by 10, which I think would actually result in a reduction in the total number of seasonal customers from 2003, because we are forecasting something in the neighbourhood of 10 additions and three losses for a net addition of seven tobacco customers in 2004. If that Norfolk East project is delayed, then the 10 customers that are associated with it would not be using natural gas in 2004 and that goes back to the undertaking for the rate base impact, because it is part of the revenue impact that would be associated with that. 426 MR. LYLE: I just want to clarify with respect to the quota numbers that are in your evidence, those are calendar year numbers, are they? 427 MR. AIKEN: Yes. 428 MR. LYLE: And in the crop agreement that was released on May 15, 2003, were there any reasons given as to why the quota was reduced? 429 MR. BLAKE: The tobacco companies, of which Imperial Tobacco is the largest, they negotiated very hard with the marketing Board and the farmers, and actually, their statements were that they didn't require as much tobacco, they had large volumes in their warehouse, and as well, with the decline in tobacco consumption, led them to simply need less tobacco. 430 And for them to have waited until May to release the quota for the upcoming year is quite unusual. Typically, they have it out earlier in the spring so that the farmers know how much to plant in their greenhouses, how much greenhouse to plant and how much farmland to prepare so that -- and this year it was very late. And we called the tobacco Board almost daily to find out when the quota was going to be released, and we were told that, you know, "they are negotiating again today, they are negotiating again tomorrow," and it just sort of went on and on and on. 431 So it is, I guess, a supply situation -- an inventory situation by the manufacturers and the decline in tobacco consumption. I am also informed that there may be an effect of higher imports of tobacco into Canada because of pricing of offshore tobacco, South African and South American tobacco. 432 MR. LYLE: Is generally the tobacco grown in the southern Ontario area for domestic purposes or -- 433 MR. BLAKE: I think at one time principally all of the tobacco consumed in Canada, in Canadian cigarettes, was domestically grown. I think now some of that tobacco is imported. 434 At one time, we had a fairly substantial export market as well, and that export market has declined and that is because of increased tobacco quantities being grown in South America and in South Africa and some other African countries. 435 MR. VLAHOS: Mr. Lyle, would this be a good time to break? 436 MR. LYLE: Certainly. 437 MR. VLAHOS: All right, according to my watch, it is 5 after 11:00, so we'll resume at 11:30. Thank you. 438 --- Recess at 11:05 a.m. 439 --- On resuming at 11:30 a.m. 440 MR. VLAHOS: Mr. Lyle. 441 MR. LYLE: Thank you, Mr. Chair. 442 Gentlemen, when we left off we were discussing the decline in the tobacco quota, evidence for which you have provided us in your revised evidence, and I understand then that that decline in the tobacco quota has led to a significant adjustment downwards of your 2003 and 2004 forecast. 443 Looking at Exhibit C.6, tab 2, schedule 3, and I am going to look to both the blue page and the green page of this particular schedule. Looking at the blue page, your original forecast for 2003 for seasonal customers was approximately 4,412,000 M3, and looking then at the green page, that forecasted number has declined to 4,139,000, approximately. So that's, what, about 175,000 difference? 444 My math is really off, that's 275,000 difference. 445 And then looking at the forecast for 2004, it's originally 4,011,000, and that's now been reduced down to 3,688,000, and that's about a $325,000 difference. 446 And I take it, then, that all of these declines in forecast are related to the decline in the tobacco quota; is that correct? 447 MR. AIKEN: Yes, the difference between the updated and revised evidence is due to the change in the quota. 448 MR. LYLE: Now, I understand that for seasonal customers, all of their consumption is -- almost all of their consumption is concentrated in the months of August, September and sometimes into October, and in some years the consumption in October seems to be significantly higher than it is in other years. 449 And when I look at your evidence, Exhibit C.5, tab 2, schedule 4, the October consumption in the 2003 fiscal year for seasonal customers is approximately 794,000 m3, and that's October 1, 2002, so I take it that's an actual number. And then moving to 2004, the seasonal consumption in October, and that would be obviously October 1, 2003, this is found at Exhibit C.6, tab 2, schedule 4, that number declines down to 187,000 m3, approximately. 450 Can you explain why there is such a significant variation in some years for October consumption? 451 MR. AIKEN: First of all, I'll start with the forecast. The forecast is based on the historical pattern of consumption over the months over the last, I think it is ten-year period. So that's what the 187- or 188,000 is based on; it is based on a historical ten-year trend. 452 Within that ten-year trend, there are years where the October consumption is substantially higher. That has to do with the crop for that year either being late or, you know, various reasons why the curing wasn't finished in late September, and it gets carried through to October. And when you get into October, you also get into the possibility of more colder weather that has an influence on the amount of gas used if there is still curing going on in October, you know, rather than having it finished in September for that growing year. 453 MR. LYLE: So just focussing then on that October 2002 number, was it the mild fall last year that would have delayed the harvest? What would the reason be behind the significant consumption in October 2002? 454 MR. AIKEN: I think the reason I heard for the delay was that the summer of 2002 was quite dry, so the tobacco didn't mature as early as it normally does. So it wasn't actually harvested until later in the year, later in August, September, and therefore there was some carry-over until October. 455 MR. BLAKE: I think there may have been some frost in the early -- in the spring, and some had to replant some fields as well, which those fields would have been delayed because of the later planting. 456 MR. LYLE: So does that mean that the August and September volumes for 2002 were then lower than you would have expected? 457 MR. AIKEN: Yes, it means that some of that gas consumption that usually would happen in August and September of 2002 was delayed until October of 2002. 458 MR. LYLE: Why I am confused about that is when I go to C.4, tab 2, schedule 6, and following it down for the volumes for m3 across to August and September, those volumes seem to be within the range of normal. 459 MR. AIKEN: Sorry, what do you define as "normal"? 460 MR. LYLE: Good question. They don't seem to be that much different than the volumes for August and September in other years. 461 MR. AIKEN: The problem is, you can't compare them directly because the quotas have changed and the number of customers using gas will have changed between the two years. 462 MR. LYLE: While we are on that line, I note also that, going back towards the beginning of the line, October 1 -- sorry, the October 2001 consumption, it also looks like it was a high October for consumption. 463 In that ten-year period, how many of the -- approximately how many of those October months have been these type of high consumption months? Do you have any idea of that? How common is this October outlier? 464 MR. McCALLUM: Well, certainly if you look at October 2000, which is on C.3, tab 2, schedule 6, you'll see that there is almost -- or there is very low volume in October. 465 MR. AIKEN: In that month the consumption is roughly 66,000 cubic metres, so it is less than 10 percent of the other Octobers. 466 MR. BLAKE: There are some years where you actually -- where we have had very little September consumption, we have had quite an early frost, and as soon as there is a frost, then you are done. The tobacco is -- everything that is in the field is done. All you have is some consumption for the remaining tobacco kilns that are in the curing process. 467 So it is not always the same, and depending on how the growing season is in the summer, how dry it is and how much sunlight there is and so forth, that to some extent regulates on how quickly the tobacco matures and is then -- begins to harvest. 468 I know some years that some farmers begin harvesting in July, so you start seeing some real consumption in August; in other years, they don't start until well into August and push it back later. 469 This year was sort of a mixed year. We had some farmers that started quite early, and we had some farmers that were still drying in October. So this year was sort of -- we had both ends of the spectrum, and I think that was partly because of the early frost, partly because of the growing season we had this year, and it sort of was an extended season. We like that, that's good for our business because you get a sort of greater diversity or you get fewer peaks and that sort of thing; the longer you extend it, the better. But that is not always the case. 470 We have had years when we have had -- I can't remember which year it was, I think 1994, anyway, we had a severe frost right at the beginning of September and there was, you know, no October and actually very little September consumption. 471 MR. LYLE: Why do you choose to start your fiscal year October 1, given that there is variance between Octobers from year to year? 472 MR. BLAKE: A June year might be better, but when we established the company in 1979 and determined which fiscal year to use, we actually chose Consumers' fiscal year, largely because it worked with the heating season. And I think, to a great extent, we thought the tobacco curing season would be over by the end of September, and in fact, we have had a number of years that have run into October as well. 473 And when we used to do our forecasting, you know, several years ago, we didn't used to forecast any October volumes and we are actually now getting some October volumes. We used to think we only had September -- August and September sales. 474 MR. LYLE: Thank you. Now, you state in your evidence that the decrease in 2004 is somewhat offset by an increase in seasonal customers, and you have mentioned already that those increase in customers would be related to the Norfolk East project. 475 Can you quantify for me how much of an offset would be related to that increase in seasonal customers? 476 MR. AIKEN: I believe there are ten additional customers, seasonal customers associated with that Norfolk East project, and if you look at Exhibit C.6, tab 5, or sorry, C.6, tab 2, schedule 5, the average use for a seasonal customer in 2004 is 28,800 cubic metres. 477 So if those ten customers wouldn't be there, we would reduce the volumes by 288,000 cubic metres in total, the average use is 28,000. 478 MR. LYLE: Those ten customers aren't coming on all at the beginning of the year, though, are they? 479 MR. AIKEN: But remember, all their consumption -- in excess of -- 92 or 93 percent of their consumption takes place in July, August and September, and the Norfolk East project, as Mr. Blake had indicated, would be in service by that time, because that's when their consumption takes place. 480 MR. LYLE: Now, moving away then from the seasonal customers just briefly, the other significant impact related to the decline in volumes in 2004 that you have mentioned in your prefiled evidence is a decline in through-put with respect to a specific rate 3 customer. 481 MR. AIKEN: That's correct. 482 MR. LYLE: That's stated to have a reduced volume of 575,000 m3. Can you explain what is going on there? 483 MR. AIKEN: That is the tobacco processing account that NRG serves in Aylmer. Their forecast for the last five years has been 4.3 million cubic metres of gas and that is based on a contract they signed five years ago when NRG added a distribution line that helps serve their increased consumption. They expanded their plant five years ago, and they estimated that their annual use would be 4.3 million and they entered into a five-year contract to consume that much gas each year. 484 What we have found is that over this five-year period, and this five-year period ends at the end of fiscal 2003, their actual consumption has been less than the 4.3 million on a consistent basis. 485 So we have estimated what their use will be beginning in 2004 when they are no longer under contract to use the 4.3 million, and that has resulted in a reduction in the forecast use at that plant by 575,000 cubic metres. 486 MR. VLAHOS: Mr. Lyle, if I could interject for a second just to follow up on this point. 487 So what would happen in the event that this plant was taking less than the contracted amount? They wouldn't use the gas, but they would have to pay for it? 488 MR. AIKEN: That's right, they were subject to a minimum annual volume penalty on the shortfall, up to the 4.3 million. 489 MR. VLAHOS: And there has been a shortfall in the main, you said, there has been a shortfall during the duration of the contract so far? 490 MR. AIKEN: That's right. 491 MR. VLAHOS: So who would benefit from this? You don't have to send the gas, but you charge for them. 492 MR. AIKEN: There is no benefit, because the rates are based on that customer using 4.3 million. So the rates are based on that forecast use. When the customer doesn't use that much, the MAV covers the costs that are built into rates. They obviously don't pay for the gas, but they pay -- 493 MR. VLAHOS: Okay, I'm sorry. Yes, thanks for that clarification. They don't pay for the commodity gas. You are talking about the margin? 494 MR. AIKEN: That's correct. 495 MR. VLAHOS: All right, thank you. 496 MR. LYLE: Just one last clarification. I note that you didn't revise that 575,000 m3 figure when it came to your revised evidence, so your expectation then is that the particular contract with this processing plant is not going to be affected by the reduction in the tobacco quota? 497 MR. AIKEN: That's correct. They have warehouse facilities where they store the tobacco before it is processed, so they are more insulated from changes in the amount grown on a year-to-year basis 498 MR. LYLE: Thank you. Mr. Chair, those are all my questions on operating revenue. 499 MR. VLAHOS: Thank you, Mr. Lyle. 500 The Board has some questions. 501 Mr. Birchenough. 502 FURTHER QUESTIONS FROM THE BOARD: 503 MR. BIRCHENOUGH: I would just like to get back to the Norfolk East project. It seems to be serving mainly tobacco customers. I am hearing that, in fact, quotas are declining from the order of 250 million pounds down to 93 and I even heard a number of 73 as a possibility. 504 In your business case that you have established for this Norfolk East project, what assumptions have you made as to the useful life of this project? 505 MR. McCALLUM: We have used our standard useful life of 30 years for evaluating all capital projects. That criteria was applied to this project as well. 506 MR. BIRCHENOUGH: Do you have any commitments, firm commitments from customers? 507 MR. BLAKE: No, we have no signed commitments. We have contacted a number of the farmers who have verbally indicated a sincere interest in getting gas supply, but we have no signed commitments as of this date. 508 DR. ZERKER: I have -- I am going to follow up on Mr. Birchenough's question, but I first would like to know about seasonal customers. I notice you service Lake Erie. Do you not have seasonal customers who use gas, who are cottagers? 509 MR. BLAKE: We do, and they would be classified as a residential customer. For whatever reason, the seasonal customers have been -- the term "seasonal customers" has been used only for tobacco-curing customers. There are -- all the customers in that category are tobacco curing. 510 Residential customers using it as a seasonal use, you know, for example, a cottager or something like that, would be grouped in with our residential customers. 511 DR. ZERKER: And do you have any special conditions or fixed rates for that particular group of residential customers? 512 MR. BLAKE: No, they fall under our rate M1 -- our rate 1 customers, rather, and they receive the same rates and conditions of service as any other residential customer. 513 DR. ZERKER: Thank you. Could I refer you to Exhibit C.6, tab 2, schedule 4; this is about the 2004 projections and your August and September numbers. 514 The August number is rounded out at 1.5 m3 consumption number, and the September 1.8 m3 - I am just rounding out those numbers - 1,491,000 for August, and 1,837,000. I am not going to pay any attention to the last three. 515 Now, I am not clear on whether or not that includes the projection of the possible Norfolk customers. Does that include them? 516 MR. BLAKE: Yes, it does. Those ten Norfolk customers that we forecast would be included in that, in those numbers. 517 DR. ZERKER: And we have some sense of the average. Supposing -- well, I guess something -- I am following up on Mr. Birchenough's point, and I recognize that you are the businessmen and you know your own business. I am not a businessperson, but I would be somewhat concerned, from my perspective, about spending over $360,000 for a project in a declining industry. 518 I mean, what you are telling me is that the tobacco industry, in general, is in decline and it has been in decline year by year. So you are projecting for 30 years, and certainly for the year 2004, that once you have that project complete, that that expenditure does not take -- does not have an enormous risk, or you are taking account of that risk; am I correct in that? 519 Are you accounting for the risk of a declining industry now in that project? 520 MR. BLAKE: To some extent, we are, in that there are more potential customers there than we have forecast that we would acquire. I don't have the exact numbers here, but we may have it in part of our forecast, but in that section, on our forecast we have here, there are 33 potential customers, tobacco curing customers there, and we are forecasting ten, which would mean we could, you know -- theoretically, a third of those customers -- two-thirds of those customers could go away or not convert to natural gas. You know, some would stay on their current fuel, not everybody converts, and others would not convert and possibly go out of business. 521 So we have only forecast for a third of those customers. Probably five or ten years ago, we would have forecast that we would acquire maybe 80 percent of those customers, so I think that's how we have accounted for the risk involved in acquiring the customers. 522 MS. ZERKER: You are projecting that only a third of the potential customers will be using gas in 2004, but what about the -- we are talking about a 30-year projection. How do you see what happens in the future? I mean, we are talking -- the 360,000 plus investment is not for one year. 523 MR. BLAKE: Correct. We only forecast customer additions for five years as part of our forecasting model, in our forecasting model, and we are forecasting a total of 25 customers to be added over a period of five years. 524 MS. ZERKER: I see. And the average would be approximately 29,000, so at 29,000, it looks like you are going to have -- if that were to be the case, it looks like the $360,000 investment would be profitable? It is 28,807, according to what I read here. 525 MR. BLAKE: Using the EBO-0188 model, which we have done, which is the standard in the industry, and our model is very similar to those used by the other utilities, we show that that project has a profitability index of 1.120. 526 MS. ZERKER: Annually? 527 MR. BLAKE: Well, that would be over the life of the project, that would be the profitability index for it. 528 MS. ZERKER: Yes, I should've figured it isn't annual, that would be a pretty good investment if it was annually. 529 MR. BLAKE: So it is not what we would classify as, you know, a really great project. 530 MS. ZERKER: No. 531 MR. BLAKE: But it would qualify as a project that would not require aid to construction from the customers. Anything less than 1, we would seek an aid to construction from the customers; anything over 1 is an economic project that, in theory, has an economic benefit for all the customers of the system. 532 So we have used the model that, you know, has been approved by the Board in determining that that's a viable project that the company should be proceeding with. 533 MS. ZERKER: Well, thank you very much. 534 MR. VLAHOS: Thank you, Dr. Zerker. 535 Just to follow up on this point, so you do eventually forecast a capture rate of 80 percent or so. I guess it is 25 customers out of the 33 potential? 536 MR. BLAKE: It was actually a little higher than what I had thought. I thought we had only been forecasting about a third, and it is 80 percent instead of 66, or whatever the number would be. 537 MR. VLAHOS: Those customers are on oil now? 538 MR. BLAKE: Some are on oil -- 539 MR. VLAHOS: Sorry, not customers, those tobacco driers. 540 MR. BLAKE: Some may be on oil, and some would be on propane. I would say most of them would be on propane right now. 541 MR. VLAHOS: Does the Norfolk east project, does it contain any other customers other than tobacco drying? 542 MR. BLAKE: I believe only some residential customers. We show 59 -- the schedule we are referring to is -- maybe we should give you the reference. 543 MR. McCALLUM: The schedule is at B.5, tab 2, and is the detail on the financial tests. 544 MR. AIKEN: Yes, B.5, tab 2, schedule 5, and it is about five pages in. 545 MR. BLAKE: I think at the top of it, it shows -- the title at the top where it says description is called, "South on Regional Road 23, plus east/west lines." 546 MR. VLAHOS: Sorry, I am on Exhibit B.5, tab 2, schedule 5 -- schedule 5 you said? 547 MR. McCALLUM: Yes. 548 MR. VLAHOS: Schedule 5. 549 MR. McCALLUM: About five pages in. 550 MR. VLAHOS: Okay. And it starts with "South on Regional Road 23...", is that the one? 551 MR. BLAKE: That's correct, yes. 552 MR. AIKEN: Right at the bottom of that page, it shows the customer addition forecast. 553 MR. VLAHOS: And these customers are now on oil or propane -- sorry, I should say residential customers, I apologize. You answered the question before about the seasonal. 554 MR. BLAKE: I would think that the residential customers are probably relatively evenly split between oil, propane and electrical heating. 555 MR. VLAHOS: And did you have a survey about the residential customers' potential interest? 556 MR. BLAKE: I don't think we, in that case, went house to house with a survey and a response sheet, which we do on some occasions. 557 I believe what we did was we did a house count and used our best judgment based on our penetration rate in other areas. For example, in the Cloden project, we actually did an actual house-to-house survey with a reply letter and so forth. 558 But I don't believe in this one we went that far to do that in this area. 559 MR. VLAHOS: And could you remind me again, what is the in-service date contemplated for this project? 560 MR. BLAKE: We contemplated we would have it complete and in service by the middle of July 2004. That would allow the tobacco farmers to have access to the use for their 2004 season; heating customers would have time to convert their systems over for the fall of 2004. 561 MR. VLAHOS: So there would be not much by way of revenue, if you like, in 2004; you have to have the system in place so customers can start converting. Is that something that has been contemplated in the financial analysis for 2004? 562 MR. BLAKE: You are correct that the customers would be very little revenue from those residential customers during fiscal 2004, maybe a couple of months of fixed charges would be the best we could hope for. 563 MR. VLAHOS: So -- I'm sorry to interrupt. So when Mr. Aiken will do his response to the undertaking, I guess that will come out as the revenue associated with this project, I guess, would reflect the fact of the lateness of this project coming into the fiscal year? 564 MR. AIKEN: Yes, it would. 565 MR. VLAHOS: All right. Now, just lastly, seasonal customers has been an ever-visited topic, I guess, with NRG before the Board, and I suspect that over time there is a pretty good sort of correlation that you have worked out mathematically in terms of the tobacco quota and consumption, I would think. 566 But in terms of total -- there is also the other things that you mentioned, Mr. Blake, today about -- and others mentioned -- about weather patterns, you know, how dry or how wet, how cold or not cold. 567 So a regression analysis or a question, what would it show in terms of the significant variables into the overall consumption forecast? 568 MR. AIKEN: The regression equation that is used to forecast the volume in this category relates the annual volume used to four things. The first one is the NRG quota per customer; the second one is the growing degree days, which affects the size of the crop; the third item is the mean September temperature, the temperature in September has an impact on use in that month; and the fourth item is a catch-all that reflects items like early frosts, poor growing conditions or excellent growing conditions, the grab-bag of factors that are lumped together. 569 MR. VLAHOS: So in your regression -- I don't want to get technical, I'll probably get lost, but is this a sort of dummy variable that you put in? 570 MR. AIKEN: That's correct, yes. 571 MR. VLAHOS: Okay. And the overall explanation, explanatory power of that model is what? 572 MR. AIKEN: The R2 is just under 99 percent. 573 MR. VLAHOS: And you would have also the sort of the significance that these statistics have on each of those four things? 574 MR. AIKEN: I do. 575 The first one, the NRG quota per customer, and these are all logs of these numbers, so it is elasticity, the coefficient is a 0.52 with a T-stat of 8.96. The growing degree days has an elasticity of 1.64 with a T-stat of 39.8. The mean September temperature has a coefficient or an elasticity of minus .21, with a T-stat of 1.8, and the dummy variable has a coefficient of minus .13 with a T-stat of 10.1. 576 And I should add, that equation is based on actual data for ten years, 1992 through 2001. 577 MR. VLAHOS: Okay, thank you. 578 And so you worked out the coefficients, and they all seem to be statistically significant. I guess the mean September temperature is a bit iffy. 579 MR. AIKEN: That's correct, it is close to the borderline. 580 MR. VLAHOS: Yes. So now what you have to do is a new forecast for each of those things, the quota, for example. 581 MR. AIKEN: That's correct. 582 MR. VLAHOS: And you spoke in the exchange with Mr. Lyle today that what you have received in May, it is what it is and it is not going to change? 583 MR. AIKEN: That's correct. 584 MR. VLAHOS: It is just a question of whether you increase the customer count, and therefore, the quota now becomes bigger for your customers? 585 MR. AIKEN: Well, the variable used in the model is what I have called an NRG quota. It takes the provincial quota and estimates what amount of that is grown by NRG customers. So if the number of NRG customers grows, that NRG quota grows as well, because they are now using natural gas and before they weren't. 586 So the quota used in the equation reflects both the changes in the provincial quota and the changes in the number of customers using natural gas within NRG's territory. 587 MR. VLAHOS: Thank you. And how do you forecast the growing degree days? 588 MR. AIKEN: If I recall correctly, the growing degree days is a -- it is either a five-year weighted average of growing degree days or it is the environment Canada growing degree day number. I could undertake to tell you which one of those, but it is one of those methodologies. It is very similar to the way that heating degree days are forecast. 589 MR. VLAHOS: But I just wonder how much of that is company judgment or input as opposed to a statistic that comes from external sources? 590 MR. AIKEN: Well, it is all based on actual growing degree days, historical actual growing degree days. 591 MR. VLAHOS: Right, which you receive from someone? 592 MR. AIKEN: Yes, the same source as heating degree days, Environment Canada. 593 MR. BLAKE: We subscribe to Environment Canada daily reports. 594 MR. VLAHOS: And the mean September temperature, how is that worked out, forecast? 595 MR. AIKEN: That is also from the Environment Canada data. 596 MR. VLAHOS: Okay. Lastly, again, and you'll hear this question quite often, should the Board be inclined to do an adjustment, I suspect somewhere here in the evidence we would have the margin associated with those sales, the seasonal sales? 597 MR. AIKEN: Yes. 598 MR. VLAHOS: Okay. And does an exhibit number come to mind, Mr. Aiken? 599 MR. AIKEN: For 2004, it is found at Exhibit C.6, tab 1, schedule 3, and this is a margin excluding any gas commodity costs, the margin on those customers is 10.67 cents per cubic metre. 600 MR. VLAHOS: And then for 2003, it is the C.5 and then the same? 601 MR. AIKEN: That's correct. 602 MR. VLAHOS: Thank you, those are the Board's questions. Sorry, there are some more questions from my colleagues. 603 MS. ZERKER: I need a clarification, because I asked the question of whether or not the average of customer consumption of 28,807 was included in the Norfolk ten projected customers, and I thought you said yes. But then I hear from your answer to Mr. Vlahos that that period would perhaps realize revenues only reflecting the fixed cost because it would be so close to the actual service period from the Norfolk development. Do you understand what I am saying? 604 MR. BLAKE: I think when I was answering your question, my understanding was that we were talking about the seasonal customers. 605 MS. ZERKER: I am talking about the seasonal. 606 MR. BLAKE: And when answering Mr. Vlahos' question, my answer was with respect to residential customers. Now have I really confused everyone? 607 DR. ZERKER: Okay, well then let's sort that out. Would the seasonal customers be in a position to consume the volume of gas that is calculated on an average? Those that are to come on with the Norfolk development? 608 MR. AIKEN: Yes, the seasonal customers, their annual average use is 28,807. 609 DR. ZERKER: Right. 610 MR. AIKEN: If the line is built and in service in July, and they only consume July, August and September, they will consume 26,647 cubic metres, because that's when the majority of their consumption takes place. That's in reference to the roughly 92 percent I had mentioned earlier. 611 DR. ZERKER: Okay, so you're projecting that they will be in a position technologically to take on and consume approximately the average? 612 MR. AIKEN: That's correct, yes. 613 DR. ZERKER: All right, thank you. 614 MR. BIRCHENOUGH: Just a question getting back to the business case for the Norfolk east project. What assumptions have you made relative to the trend of the quota for Ontario over the 30-year life of this project? 615 MR. AIKEN: I guess the first comment I would want to make is not so much the trend in the quota; it is a trend in the average use of NRG's customers. And that number hasn't changed that much. It has been in the 28 to 32,000 range for as long as I have got history on it. 616 So the average use by existing customers has not changed that much. I think part of that is driven by the fact that NRG, over the last number of years, has picked up, on average, larger customers that is compensating for declining use at existing customers. 617 So the average use of NRG's customers has not changed that much. 618 MR. BLAKE: What typically happens is a farm has a certain capacity, if you would like, so they would have so many kills, barns, greenhouses, machinery and so forth. And in order that that unit can remain economic, those farmers either have to buy quota or somehow acquire quota. 619 And so although the overall industry is in decline, particular farmers, although, you know, from year to year they may grow slightly more or slightly less, but in general, they have to maintain their productive unit at a certain size in order to make it economic. 620 And so we have been quite fortunate over the past. Because we were, in the last 20 years or so we have been adding tobacco farms, the ones we have added are the more modern farms on average, and those are the ones that are committed to the industry. 621 And the ones that are falling off are the ones with the older, less efficient -- the old wooden building-style tobacco kills, and they are falling off. 622 So the ones that we have managed to keep and are adding are the more modern units, and their average consumption - I am not saying it is the same every year - but they are trying, those units are trying to maintain it. And in fact, there are some of them that are actually in this -- there are a few of them that are actually growing a little bit, because some of them have taken two or three farms of their own and collected them on to one operation. Others have bought quota and yet others have fallen off. 623 And we find that the ones that are falling off trend to be the ones that are using less economic heating sources, oil and propane and that sort of thing, and they are the ones that sort of have been -- we have been losing out of the industry sort of thing. 624 So that tends to keep the average use up. 625 MR. BIRCHENOUGH: Am I right in assuming that these reducing quotas at some point in time would lead to less use of available land for growing tobacco and conversion to other uses in that your project has a 30-year life; does your business case contemplate that possibility? 626 MR. BLAKE: I think you are correct in that to some extent we may be -- when we did the forecast for that project, we came up with the 1.29 profitability index. At that time, we were still expecting the tobacco quota to be somewhere probably around the 110 million pounds of quota. 627 So between that time and today, we are somewhat less optimistic about the overall tobacco business, which is I think what you are referring to. You are saying, well, some of those farms are not going to be there in the longer haul, and have we taken that into account? 628 And I would say to some extent we have because we have said we are not going to add them on. Had we been as conservative as we might be today? Probably not. We would probably be more conservative if we looked at it today given the rumour mill which had 73 million pounds of quota and the actual number which is 94, compared with last year, which was 110 and three or four years ago -- three years ago, which was 135 million. 629 So we might have been a little more conservative today than we were, you know, whenever it was we did this project, did the paper -- did the analysis. I don't know when it was, six months ago at least, probably. 630 MR. VLAHOS: Just finally, I want to follow up on that. Mr. Blake, what is the company's understanding, culture or practice about projects that -- whether they have come before the Board or have not come before the Board, if you feel something has not been approved as such, but if you feel that the economics are correct. Would that stop you from going forward and the only thing you are going to be missing out, I guess, is to what extent they have been in rate base for a little while without any revenue -- or any cost being recognized, I shouldn't say revenue, any cost over revenue being recognized for a short while. 631 But do you feel that Board approval is something beyond that, that you can not really undertake those expenditures unless you have the approval of the Board? 632 MR. BLAKE: I guess there have been cases where we have obviously proceeded with projects that have not necessarily been fully reviewed by the Board, and then there are other cases where the Board has -- you know, the project hasn't been included, you know, or through the ADR process hasn't been included. I remember many years ago we applied to the Board that we wanted to build a new building quite a few years ago. And the amount was not included in rate base, so we didn't build the building. That was probably in, you know, the early 1980s when we first bought the company. 633 And we took that as an indication that there were other and more important things that we should be considering, and that was largely why we shelved the building until we got all our pipelines constructed and then we ran the building. 634 So I guess in general, you know, we would like to have the projects reviewed by the Board, but there are -- I am sure there are and have been cases that -- and we see them as very economic and, you know, obviously in the public interest and we have had a high demand and, you know, for whatever reason they have gone ahead. And they could be small projects, with a small extension or -- you know, it doesn't necessarily have to be a $300,000 project. 635 MR. VLAHOS: So this specific example, if the Board were to say, well, we are not really sure about this project at this time, should you continue to be sort of hopeful about the economics, then it would not stop you from going ahead and doing it and then coming to the Board and saying, we have done it and the economics are correct and here they are -- sorry, the economics are reasonable, here they are, and you would ask for recognition of that in a rate base at the next opportunity? 636 MR. BLAKE: I think that would be an option that would be available. 637 MR. VLAHOS: Right, so you don't look at sort of that it is axiomatic, that everything has to come before the Board for a previous blessing before you actually embark on economic projects in your view? 638 MR. BLAKE: I think we would use our best judgment, and if everything was correct, we would go, and if we would have confidence that we had undertaken a project that was economic and have confidence that the Board would see it, that it was economic, they would include it in rate base at a subsequent period. 639 MR. VLAHOS: Mr. King, I have been remiss, I should be asking you if you have any redirect -- re-examination. I should have done that before on the previous issue. So here is your opportunity. 640 MR. KING: I have none. 641 MR. VLAHOS: On both issues. You have none? Okay, I don't feel as bad then. 642 Mr. Lyle, anything on this, or are we going to move on to another topic? 643 MR. LYLE: I am ready to move on to the next topic, Mr. Chair. 644 MR. VLAHOS: Okay, let's do that. 645 FURTHER CROSS-EXAMINATION BY MR. LYLE: 646 MR. LYLE: And that's cost of service. I want to turn you gentlemen to Exhibit D.4, tab 1, schedule 3. And I am looking at the second line of this chart, "Operation and Maintenance", and I note that there is a significant difference between the actual O&M in 2002 and the Board-approved. 647 Can you explain what accounts for this difference in 2002? 648 MR. BLAKE: I am just looking to another schedule to refer you to. 649 MR. AIKEN: D.4, tab 3, schedule 3. That table provides a brief explanation for any variances I believe it is over $10,000. 650 MR. LYLE: I note in particular -- is there anything you wish to highlight in here as to why there was a particularly large variance? I mean, I can see there is a number of cumulative items, but it is quite a significant difference between actual and Board-approved. 651 MR. AIKEN: I think that the table highlights the regulatory difference, which is 133,000, which is essentially the total -- the net expense difference, and there is more of an explanation on the regulatory costs on D.4, tab 3, schedule 4. 652 MR. LYLE: Sorry, D.4? 653 MR. AIKEN: Yes, D.4, tab 3, schedule 4, which is the regulatory expenses for the 2002 year. At the bottom there, there is a brief explanation of the reduction in regulatory costs, and essentially, it was related to the fact that -- 654 MR. VLAHOS: Mr. Aiken, we are having a bit of difficulty hearing you up here. 655 MR. AIKEN: Okay. In essence, the difference, the reduction in the regulatory costs is a result of the fact that there was no hearing in the last case. All the issues were settled through the ADR process, so that eliminated a lot of legal, consulting, transcript and Board costs. 656 MR. LYLE: I am curious: Why would that not have been raised with the Board in the previous proceeding to say, as it appears, we are going to be settling this matter and it may be appropriate to reduce down those regulatory expenses? 657 MR. AIKEN: Not being on the other side of the negotiation table, I can't answer that. 658 MR. LYLE: So the Board approved a level which had been calculated on the assumption of an actual hearing, then? 659 MR. AIKEN: That was what was agreed to in the ADR settlement. 660 MR. LYLE: Now, moving on, I want to refer you to interrogatory number 39, and this relates to your arrangements with Cornerstone. 661 And I understand that Cornerstone is an affiliate of NRG; is that correct? 662 MR. BLAKE: That's correct. 663 MR. LYLE: And that in 2002 NRG paid management fees to Cornerstone of approximately $81,000, and that's the breakdown -- 664 MR. McCALLUM: That's correct. 665 MR. LYLE: -- in this interrogatory answer? 666 Now, Mr. McCallum, did I understand from earlier testimony that you are also an employee of Cornerstone? 667 MR. McCALLUM: That's correct. 668 MR. LYLE: And an employee of NRG? 669 MR. McCALLUM: I am just an employee of Cornerstone. 670 MR. LYLE: Just of Cornerstone, okay. 671 So when I see figures related to management support and accounting, is that work that was undertaken by yourself? 672 MR. McCALLUM: The accounting figure would represent my costs; the management support represents the cost of other individuals employed by Cornerstone that provide services to Natural Resource Gas. 673 MR. LYLE: And those individuals would be actual employees then of Cornerstone, as opposed to contractors who are retained by Cornerstone? 674 MR. McCALLUM: Yes, they are employees of Cornerstone. 675 MR. LYLE: And how many employees are there of Cornerstone who provide services to NRG? 676 MR. BLAKE: I guess on a somewhat regular basis, two individuals. 677 MR. LYLE: And are those individuals located in the London office, then? 678 MR. BLAKE: Most often they are in the London office, yes. That is their typical place of work, yes. 679 MR. LYLE: Do they also spend some time in the Aylmer office? 680 MR. BLAKE: I don't think -- not on a regular basis. 681 MR. LYLE: Now, how was the figure of $63,200 arrived at in terms of what would be charged out to NRG for Mr. McCallum's services? 682 MR. McCALLUM: That would represent my salary and benefits that were allocated based on what I had done in previous periods was track my time to determine how much applied to Natural Resource Gas Limited versus other companies that I look after. And those other companies get charged a management fee as well, representing the balance of my salary and benefits. 683 MR. LYLE: And my recollection was from your earlier testimony was that was approximately a 75/25 split; is that it? 684 MR. McCALLUM: That's approximately correct, yes. 685 MR. VLAHOS: Mr. McCallum, how many other companies are associated with Cornerstone that you would provide services to? 686 MR. McCALLUM: There are two other companies that I look after. 687 MR. VLAHOS: Being? 688 MR. McCALLUM: One of them is NRG Corp., which is the oil and gas exploration and development company; another one is a company called Johnson Limited, which is another oil and gas company in the United States. 689 And I do occasionally provide some other services for Cornerstone directly. 690 MR. VLAHOS: And those services are accounting and finance-oriented? 691 MR. McCALLUM: That's correct. 692 MR. VLAHOS: Not corporate development or -- 693 MR. McCALLUM: Generally, no. Those would be covered more under the management support figure. 694 MR. VLAHOS: And you would also figure in into the management support as well? 695 MR. McCALLUM: No, none of my salary or benefits are included in the management support. That service is provided by other individuals who are employees of Cornerstone. 696 MR. VLAHOS: Sorry, Mr. Lyle. 697 MR. LYLE: No, that's okay. 698 I just wanted to also mention the $9,600 in rent that is paid to Cornerstone properties, what is that for? 699 MR. BLAKE: For the use of space in the Cornerstone office. We use their boardroom and some office space, mostly for meetings and periodically when someone is doing work in London. 700 MR. LYLE: And is that going to carry on despite the fact that you now have much better premises in Aylmer? 701 MR. BLAKE: It is much easier now to have meetings in Aylmer. It used to be it was almost impossible. 702 And I think that we are going to be revisiting that for the next rate case as far as how much use we'll make of the London facility and so forth, but we are expecting, you know, for this year and next year to carry on with approximately the same process. 703 Typically, we have our regular management meetings there. We meet contractors and suppliers and that sort of thing in the London office. And all our cheques continue to be signed in London. A lot of things go back and forth between the two offices. We have some shared telephone facilities and so forth. So we still have a strong connection with that office. 704 MR. VLAHOS: Sorry, Mr. Blake, I did not put the number down, rent to Cornerstone, how much did you say it was? 705 MR. BLAKE: I think it is $9,600. 706 MR. VLAHOS: Hundred dollars? 707 MR. BLAKE: 9,600, yes. It has been at that figure for many years. 708 MR. LYLE: Moving back into the area of regulatory expenses and looking at your forecast for 2003, and that's found at Exhibit D.5, tab 3, schedule 3, and as I understand it, the total regulatory costs for 2003 and 2004 are estimated to be $180,000, and that's to be expensed equally over those two years so that it is $90,000 in each year? 709 MR. AIKEN: That's correct. 710 MR. LYLE: And that's a significant increase over your actuals for the prior time period, and I understand the difference there is because of the fact that we are here today actually having a hearing; is that the major reason? 711 MR. McCALLUM: That would be the major component of the difference, yes. 712 MR. LYLE: And when you calculated these figures, were there any assumptions about the length of this particular proceeding? 713 MR. AIKEN: I don't think there were any specific assumptions, you know, on the number of days of ADR or number of days of hearing, other than say, you know, the typical length of time, assuming there was a hearing. 714 MR. LYLE: And what was that typical length of time? 715 MR. AIKEN: Anywhere from two to five days. 716 MR. LYLE: Well, but obviously they get to $62,000 in legal fees or $50,000 in consulting fees, there is some assumption about whether it is two days of fees or five days of fees, so which one was it? 717 MR. AIKEN: Actually, it is not, because a lot of is front-end loaded preparation, consulting or legal fees. Preparation -- 718 MR. LYLE: No, I understand there is a lot of preparation time and there is also your time involved in preparing the evidence, but there is also your time and Mr. King's time in being here this week, and obviously, presumably, you will be billing less if we wind up tomorrow than you will if we were to wind up on Friday? 719 MR. AIKEN: That's correct. 720 MR. LYLE: So can you give me some sense of this number, how much of this number I would extract if it turns out we have two days or three days of a half-day hearing? 721 MR. AIKEN: Well, for my own fees, it would be less than $200 a day, based on three and a half hours of hearing time. I can't speak to the legal fees. 722 MR. LYLE: You wouldn't have any sense of that, would you, Mr. King? 723 MR. KING: By pulling two days? 724 MR. LYLE: The legal fees of $62,000, what the basis of that projection is and what the difference is if we have a shorter hearing? 725 MR. KING: A shorter hearing would be approximately -- 726 MR. VLAHOS: Mr. King, you have to pull the microphone down. 727 MR. KING: Sorry, a shorter hearing would mean approximately 6,000 less. 728 MR. LYLE: Okay. Now, I take it then, given the $50,000 figure for your consulting fees, Mr. Aiken, that you have been involved pretty heavily in the preparation of all of the prefiled evidence; is that correct? 729 MR. AIKEN: And prior to that, in doing things like the revenue and volume throughput forecast, gas cost applications that have taken place. 730 MR. VLAHOS: Mr. Aiken, I'm sorry, again, I cannot hear you. 731 MR. AIKEN: I'm sorry. 732 MR. VLAHOS: Could you pull that microphone towards you. 733 MR. AIKEN: It won't go any further. 734 Yes, my costs that are included in the $50,000 consulting include preparation of the prefiled evidence and even preparing information prior to that. I do the revenue and throughput forecasting for NRG. There is also costs in there for the gas cost applications, two of which have been done in 2003, more of which are forecasted to be done in 2003 and 2004. And the evidence preparation and all of that is included in that fee. 735 MR. LYLE: So would you work together with Mr. McCallum in actually preparing the prefiled evidence? 736 MR. AIKEN: Yes. 737 MR. LYLE: Now, I think your O&M figure for 2003 is approximately $1,668,000. Given that, $90,000 in regulatory costs is not an inconsiderable expense for a small company. 738 Have you given any thought to whether there are other regulatory approaches which could lessen that regulatory burden on NRG ratepayers? 739 MR. BLAKE: We would welcome an opportunity to reduce the costs. It is a very time-consuming process for the company. It is expensive and time-consuming. 740 MR. LYLE: Have you considered putting forward a performance-based regulatory system which would attempt to reduce the number of times that you would have to appear before the Board? 741 MR. BLAKE: We were working toward that at the last -- in the last ADR session, in fact. That was largely the basis on which some of the settlement was made, is that we, in fact, grouped the O&M costs together and looked at them in aggregate, rather than individual costs. 742 And that seemed to be a process that would work quite well. 743 MR. LYLE: Do you -- 744 MR. VLAHOS: So you still had to do the same prefiled evidence, though, Mr. Blake, wouldn't you? What you are suggesting is how staff would address the O&M issue, but it would be the same effort by Mr. Aiken, for example, in terms of putting the evidence together before it got to the stage of ADR? 745 MR. BLAKE: That's correct. 746 MR. AIKEN: It would be somewhat simplified in that we would not be doing an O&M budget or an O&M forecast on a line-by-line basis. In fact, what we had proposed in the last case was a targeted O&M PBR identical to what Enbridge was under at that point in time, but that was withdrawn at the request of the Board. 747 MR. LYLE: And have you given any further consideration since then to changing the regulatory mechanism by which your rates are set? 748 MR. AIKEN: We have discussed it at various points in time. Rather than coming in for two test years, which is already a significant savings, coming in for a period of three test years. So that essentially the same costs would be split over three years, rather than two. That does have some inherent problems, especially when it comes to things like capital expenditures when you are forecasting out that extra third year, but that has been and continues to be considered. 749 MR. BLAKE: I think another has been sort of how to deal with the rate of return issue as well. And given that the rate of return matter is up for review right now, I think we were somewhat reluctant to go too far ahead with our current forecast. But once that rate of return issue I assume will be settled, you know, within the next period, then that may make it easier to come forward with a longer test period. 750 And I think the other thing is back again to the maturity of the company and the greater ease in forecasting and so forth might make it easier for us to come in for a longer period or maybe even go to a PBR system. 751 But we are open, we are very open to any suggestions that the Board or Board Staff may have with respect to making changes that makes it easier for the company and easier for the Ontario Energy Board. I know that everyone is busy and it's costs for us and costs for the Board. 752 MR. LYLE: Finally, I just want to touch on an issue with respect to the calculation of income tax, and I want to turn you to D.5, tab 6, schedule 1, and looking down at your calculation of both federal and provincial income tax, obviously you pay different rates on different portions of your income. 753 And if one was going to calculate the marginal income tax rate, I guess for purposes of provincial income tax, it would be for the next dollar over $309,918, the provincial rate of tax would be 12.5; the federal rate of tax on that same dollar, I take it, would be 23.5, plus the surtax of 1.12, which would get you to a figure of 37.12; is that correct? 754 MR. AIKEN: I believe that's correct, yes. 755 MR. LYLE: Is there a way to calculate the appropriate percentage to use to gross up the ROE percentage when you are calculating your revenue requirement? Is there a way of doing that? 756 MR. AIKEN: I am not sure I follow the question. 757 MR. LYLE: Well, what I am saying is, say your ROE is nine and a half percent and sometimes it is expressed as well, grossed up for taxes, it is 14 percent, for instance; is there a way of calculating a number to do that gross-up for NRG or because of the different tax rates on different income levels, is that not something that can be done? 758 MR. VLAHOS: I can also put it in different words. Mr. Aiken, how do you gross up for a revenue deficiency or sufficiency found by the Board? What income tax rate would one use to gross it up? 759 MR. AIKEN: We gross it up based on that marginal tax. The assumption is made, and I think it holds true in almost all circumstances, that at the appropriate revenue requirement level, the marginal tax rate is in effect. 760 So all those previous levels of tax rates do not apply at the revenue requirement level for any marginal change in the net revenue requirement. So it is essentially that the net deficiency or sufficiency changed by that margin of 37.12 percent to get the gross deficiency or sufficiency. 761 MR. VLAHOS: Okay, and I'm sorry, how do I get the 37 point something again? 762 MR. LYLE: Mr. Chair, that was merely by adding the numbers 23.5. 763 MR. VLAHOS: Right. 764 MR. LYLE: 1.12, and that's the federal component of the tax. 765 MR. VLAHOS: Right. 766 MR. LYLE: To 12.5, which is the provincial component. 767 MR. VLAHOS: Okay, got you. And that's 37 point -- 768 MR. LYLE: Twelve. Just to follow up on that, Mr. Aiken, you have the left-hand column of this table is forecasts, and then the right-hand column is adjusted forecast. What is that adjusted for, that particular column? 769 MR. AIKEN: That adjusted forecast, if you look at the various lines, first on the normalized operating revenue -- 770 MR. LYLE: Um-hmm. 771 MR. AIKEN: -- the adjusted reflects the normalized volumes and revenues for those first four months of actuals. 772 The gas costs also reflects the normalized volumes for those four months of actuals, and I believe that's the only change. So it is the difference between actual volumes and normalized volumes for those four months. If you look at the same schedule for 2004, these columns are identical because there is no actuals to be dealt with in that test year. 773 MR. LYLE: I guess the source of my confusion was that if you had -- if life had proceeded in accordance with the adjusted forecast, you wouldn't actually be paying any tax at the top marginal rate? 774 MR. AIKEN: That's correct. 775 MR. LYLE: So then a different rate would have applied for purposes of the gross-up calculation, no? 776 MR. AIKEN: Not necessarily, because under the gas costs line, the gas costs have changed twice already in 2003, and each time they have been increased. But that is not necessarily reflected in the amount that NRG will actually pay for their gas. 777 They draft the Union Gas system and then make up for that gas near the end of their fiscal year in September. So a lot of it will depend on what the price of gas is that they actually have to buy to replace the gas they have already used from Union. 778 So basically what I am saying is there is a disconnect between the revenues and the gas costs at this point in time because the gas costs have changed throughout the year. 779 MR. LYLE: Okay. Those are all my questions. 780 MR. VLAHOS: Thank you, Mr. Lyle. 781 Okay, very few questions, panel. 782 FURTHER QUESTIONS FROM THE BOARD: 783 MR. VLAHOS: Just to follow up on the last point, what is then the purpose of the adjusted forecast? This is adjusted for the actual four months, that is what I heard, but in terms of the original question as to what is the applicable income tax rate, the marginal income tax rate, that still remains 37.12 percent; that's what I took from this discussion, Mr. Aiken? 784 MR. AIKEN: That's correct, yes. 785 MR. VLAHOS: All right. Now, Mr. Aiken, you did -- and I believe I quoted you correctly here -- you said the targeted PBR withdrawn at the request of the Board. Was it the Board or Board Staff, or did you make a distinction in your mind? 786 MR. AIKEN: My understanding is it was at the request of the Board. At that point in time, the Board did not feel it had time to deal with this as an issue, and they thought it would be more expedient to do the normal cost of service filing and, in fact, NRG did file the targeted PBR as part of its application and part of its evidence, and we were asked by the Board if we would consider to withdraw that so the Board could proceed with that case more quickly. 787 MR. VLAHOS: I'm sorry, how was that communicated to you or the company, Mr. Blake? Was it through the Board in a letter, or was it through Staff? Can you help me with this? 788 MR. BLAKE: I can't recall. We are not a hundred percent certain. We think it may be through Mark Garner or his office. 789 MR. VLAHOS: I would take it it is verbal communication through Staff, and if it is different, would you let us know? 790 MR. BLAKE: I don't think we had anything writing, so -- but we had actually -- the evidence had been filed as part of our package, and then we went back and actually reformulated it into -- 791 MR. AIKEN: Into a standard cost of service. 792 MR. BLAKE: -- into a standard cost-of-service package and proceeded on with that through the ADR process and so forth. 793 MR. VLAHOS: Okay, and when was that? What year? 794 MR. BLAKE: I believe the ADR took place in September of 2002 -- 2001, September of 2001. I would have to look to see what the actual application date was and the filing dates. 795 So it would have been our previous case, which was for the F-201, F-202. 796 MR. VLAHOS: That is when we tried to get the market ready, was it, in electricity? 797 MR. BLAKE: Pardon me? 798 MR. VLAHOS: That is when we tried to get the market ready for electricity, was it? 799 MR. BLAKE: I think there was a lot of action going on. In fact, I recall that Board Staff hired Roger Higgin to assist them because they didn't have enough staff. And I think the ERO's office actually sent Staff to assist in our hearing as well, if my memory is correct. 800 MR. VLAHOS: The ADR, Mr. Blake, I will turn to you, do you find this an efficient process? 801 MR. BLAKE: The ADR? 802 MR. VLAHOS: Yes -- I'm sorry, I should say that from your company's perspective; not generally. 803 MR. BLAKE: I guess, you know, I have two viewpoints. 804 One is that the beauty of coming to the hearing, having a hearing, is that you are there, it is over and everyone goes back and goes on with business. So the filing part of it is essentially the same. But the ADR and the hearing, the hearing could be a shorter process, I think. 805 The ADR that we had last time took I think about a week of full days, and then we spent another I think about two weeks after that of finalizing the agreement, which we thought we had pretty much finalized when we left, and there were a lot of minor changes, you know, not to be critical of Board Staff, but we thought they were coming sort of from the Board Staff side. 806 So it was quite a prolonged, you know, process, and even at that we weren't sure, you are never sure that it might -- the whole thing might go to hearing anyway. You are not -- you know, although we said, here, we went through the ADR process and we saved a lot of money because we didn't go to hearing, we made a lot of efforts to make concessions and make the thing work and so did Board Staff. But you never know even when you are there that the whole thing might go to hearing and you might be going through this process anyway. So it is kind of difficult to start slashing money out of the budget when you don't know if you are going to hearing. 807 But I think that the ADR process is informative, but I don't know in total whether -- you know, if you are talking about efficiency and time and money, I am not certain that the ADR process is any less costly for the company, and maybe not for the Board either. 808 MR. VLAHOS: Did you involve Mr. Aiken and Mr. King during the ADR? 809 MR. BLAKE: We didn't have Mr. King. I think we may have had him for sort of the opening; I am not a hundred percent certain whether we did or not. 810 MR. KING: I think I was involved maybe in discussions around the ADR, but I didn't attend the ADR, and I don't think I was even there for the first day. 811 MR. BLAKE: I think we had some preliminary work with Mr. King and Board and Board Staff -- I guess I should say Board Staff, but Mr. Aiken was involved with us throughout the process. 812 MR. VLAHOS: Okay. I am just going to go to very specific now regulatory costs and then I'll have another general question. 813 There is an OEB fixed cost -- sorry, let me go to Exhibit D.6, tab 3, schedule 3, and that is the updated, the blue page. Now, intervenor costs, has it been the case recently that there have been intervenor costs? 814 MR. BLAKE: We have had no intervenor costs in the last -- either in our cost-of-gas applications or in this case. 815 Now, we had had intervenors all the way along. This time we had no intervenors, so I don't expect we are going to have any intervenors, we haven't seen anything of anyone, so that cost could probably be eliminated from the forecast. 816 MR. VLAHOS: Okay, and to the extent you had any intervenors in the past, that would have been sort of the Union or Enbridge type as opposed to -- 817 MR. BLAKE: HVAC Coalition actually intervened and that's where we received the intervenor costs in the past. 818 MR. VLAHOS: Just once? 819 MR. BLAKE: For several cases. I think three at least -- two or three. However, this time we received no intervention. 820 MR. VLAHOS: Okay, then you have OEB $15,000. Is this what you have been assessed on an annual basis? 821 MR. AIKEN: The annual assessment shows up on the second-last line as OEB fixed cost. 822 MR. VLAHOS: Okay, so that is the assessment, is 12.5, and what is the OEB $15,000 then? 823 MR. BLAKE: Our estimate as to the Board's costs for this proceeding. 824 MR. VLAHOS: And that would be for what, for transcription? 825 MR. BLAKE: Transcripts are a separate item. 826 MR. VLAHOS: Are they a separate item? Okay. Then what would it be, Mr. Blake? 827 MR. BLAKE: I assume it would be for panel costs, you know, any costs the Board may have. 828 MR. VLAHOS: That is the reason I am asking, because I believe that this may be based on some policy of the past which I believe it has been changed and I'll probably look at Staff for this, but there used to be a time where we would probably bill you for the part-time members. 829 MR. BLAKE: Right. 830 MR. VLAHOS: Is that your recollection? 831 MR. BLAKE: I know we have typically received a bill from the Board, but on the other hand, we have not had an actual hearing for the last, you know, I think two processes. 832 MR. AIKEN: Just to point out, in the last rate case in which there was no hearing, NRG was assessed OEB costs of $13,771 in addition to their fixed costs, their annual assessment. 833 Now, part of that would have been for Dr. Higgins who was hired specifically to help Board Staff, but I am assuming there were more costs than just him in there. 834 MR. VLAHOS: That's fair, and I am suggesting to you that -- and I guess this falls back on Staff and the panel whether this policy of billing the incremental costs to NRG being a consultant for Staff or being a part-time Board member or a paid per diem, this may have changed and I cannot be more definitive than that. But I believe it has changed and it will be something to check. 835 MR. BLAKE: Well, we would be quite pleased to have whatever adjustments made that are required and if the Board or Board Staff can make the adjustments, that's fine. 836 MR. VLAHOS: Transcripts are 7 and a half thousand, and this is sort of typical of this hearing, would it? Say a two or three days' hearing, half day? 837 MR. AIKEN: Yes, it is my understanding, that is close to the costs from the last hearing where there was transcripts. 838 MR. BLAKE: If you would like, we could ask the transcription company, we could call them and request sort of a budget number, if you would like. 839 MR. VLAHOS: If you can assist us with that, there would be something on the record. 840 I just want to know on what basis the 7,500 is there, what does it assume, how many days, how many of transcription time would we buy? 841 MR. BLAKE: Well, we can call them this afternoon and advise you in the morning. 842 MR. VLAHOS: That's fine, Mr. Lyle, undertaking 3? 843 MR. LYLE: Yes, that will be J.1.3. 844 UNDERTAKING J.1.3 TO OBTAIN COSTING INFORMATION FROM COURT REPORTING COMPANY 845 MR. VLAHOS: Yes, just lastly, and I will turn again, Mr. Blake, to you, you talked about the company being very open, those were your words, about streamlining things and finding more efficient ways of dealing with the company's rate-making. 846 And I would just like to invite you as to what do you think should happen? How? 847 MR. BLAKE: Well, I think to some extent that the quarterly filing of the financial information should be a good monitoring mechanism for the Board to monitor our progress, and I think then with that, in my view, I think we should look at doing a three-year forecast and coming forward for 2005 and beyond with a three-year forecast. 848 And if there is any material changes during that period, I would like to have the opportunity to come back to the Board and sort of re-open those issues, if they are material issues, and I think that way you have the possibility of saving 50 percent of your regulatory costs if you are spreading it over three years instead of two. 849 I think we made a big step when we started coming for a two-year rate case, but I think now that a three-year rate case would work for the company as well. I am not reluctant, or I am not closing the door on doing some sort of PBR either. I think we would be open to doing that sort of thing as well. 850 MR. VLAHOS: I guess we all appreciate that the more the test period, the longer the test period, in this case, three years, the greater the risk. And I guess, coming back to being prepared to accept the risk, there is also the risk from the regulator's perspective that if we are way off on this, then somebody will tell us that, somebody will remind us of that. 851 I don't want to put you on the spot, but would something like in the event there are excess earnings experienced, would you be amenable to something like a sharing mechanism? 852 MR. BLAKE: I would have to discuss it with our management team, but I think we are quite open to discussing or reviewing any proposals the Board may have. 853 MR. VLAHOS: And you realize I am not intending here to be symmetrical. I am talking about excess earnings. One moment, please. 854 [The Board confers] 855 MR. VLAHOS: Gentlemen, just a reminder that just to follow up on one specific issue, and based on our information, the 2002 O&M costs, and I guess if we were to look at the 2002 proposed and actual O&M costs for 2002, I am repeating myself, there was substantial deviation from it, the O&M costs did come in substantially less than what was proposed and what the Board approved. Can you help us with that? 856 MR. AIKEN: I think that was Mr. Lyle's question that I answered about the $133,000 related to the regulatory costs which would -- 857 MR. VLAHOS: Okay, you may want to give it more time, Mr. Aiken -- you may want to do it one more time. We can read the transcript, but maybe you can help us again. 858 MR. AIKEN: Yes, on D.4, tab 3, schedule 3, it shows a line-by-line variance between the actual cost and the actual approved cost. The bottom line reduction is $130,000 of which $133,000 was related to regulatory. 859 The regulatory explanation is found on Exhibit D.4, tab 3, schedule 4 and primarily relates to the reduction in legal, consulting, transcript and Board costs due to the fact that there was no hearing for the last case. 860 MR. VLAHOS: Okay, that's fine, Mr. Aiken. Now I do recall this, yes. 861 MR. BLAKE: Mr. Vlahos, I think I was contemplating your question about how to save money and make the whole process smoother, and another option may be that if the Board would consider another option would be to come on a year-by-year basis and just do one year on a year-by-year basis but with a reduced volume of information required. 862 We are producing three volumes of information, and I can't tell you how many hours that takes to coordinate the whole process. And if we could come with a scaled-down filing and have a one-and-a-half day or a one-day hearing for one year, rather than a two- or three-day hearing for two years, that may be another way of resolving the issues of having it dealt with expediently and efficiently. So that would be another option I would just like to put forward. 863 MR. VLAHOS: Thank you, Mr. Blake. We may have more discussion on this tomorrow or the next day, if we go into the next day, related to other things that may lend themselves to a simplification of the process, at least on a selective basis. 864 MR. BLAKE: Okay, thank you. 865 MR. VLAHOS: Thank you for that. 866 Being 1:15, according to my watch, we are coming to the end of the day. Any matters, Mr. Lyle, before we -- 867 MR. LYLE: No, Mr. Chair. 868 MR. VLAHOS: 869 No? Mr. King? 870 MR. KING: No, I have none. 871 MR. VLAHOS: Any redirect? 872 MR. KING: None. 873 MR. VLAHOS: Thank you. Then we are adjourned until 9:30 in the morning. 874 --- Whereupon the hearing was adjourned at 1:15 p.m.