Rep: OEB Doc: 12RXD Rev: 0 ONTARIO ENERGY BOARD Volume: 1 26 AUGUST 2003 BEFORE: R. BETTS PRESIDING MEMBER G. DOMINY MEMBER 1 RP-2003-0048 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF an Application by Enbridge Gas Distribution Inc. for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, transmission and storage of gas commencing October 1, 2003. 3 RP-2003-0048 4 26 AUGUST 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel COLIN SCHUCH Board Staff FRED CASS Enbridge Gas Distribution TANIA PERSAD Enbridge Gas Distribution DENNIS O'LEARY Enbridge Gas Distribution VINCENT DeROSE IGUA ROBERT WARREN CAC MICHAEL JANIGAN VECC JAY SHEPHERD OPSBA DAVID POCH GEC & CIELAP MURRAY KLIPPENSTEIN Pollution Probe MARK MATTSON Energy Probe 8 TABLE OF CONTENTS 9 APPEARANCES: [18] PRESENTATION OF SETTLEMENT AGREEMENT BY MR. O'LEARY: [26] PROCEDURAL MATTERS: [66] EGDI - PANEL 2: [142] EXAMINATION BY MR. CASS: [152] CROSS-EXAMINATION BY MR. SHEPHERD: [210] CROSS-EXAMINATION BY MR. WARREN: [222] CROSS-EXAMINATION BY MR. JANIGAN: [623] CROSS-EXAMINATION BY MS. LEA: [970] QUESTIONS FROM THE BOARD: [1042] 10 EXHIBITS 11 EXHIBIT NO. C.1.1.A: VECC BOOK OF MATERIALS [743] EXHIBIT NO. C.1.1.B: VECC BOOK OF MATERIALS [744] 12 UNDERTAKINGS 13 14 --- Upon commencing at 1:00 p.m. 15 MR. BETTS: Welcome, everybody. I think officially this is probably day 1 of the proceeding on application RP-2003-0048, Enbridge Gas Distribution Inc. 16 We were scheduled to begin the evidentiary portion related to three unsettled issues, and I know in the last few hours there has been a great deal of effort underway to try and bring the DSM agreement forward as well. 17 So with that, I think I would probably be wise to ask if there are any preliminary matters before we begin. Oh, and before I do, I do recognize that there are some new faces in the audience, so perhaps I will ask any parties who are appearing today that did not appear yesterday to introduce themselves now for the record. 18 APPEARANCES: 19 MR. O'LEARY: Mr. Chair, Dennis O'Leary, for the company. 20 MR. BETTS: Thank you, Mr. O'Leary. 21 MR. JANIGAN: Michael Janigan for the Vulnerable Energy Consumers Coalition, Mr. Chair. 22 MR. BETTS: Welcome, Mr. Janigan. 23 MR. KLIPPENSTEIN: Murray Klippenstein for Pollution Probe. 24 MR. BETTS: Mr. Klippenstein, welcome. Anyone else? Thank you. 25 Then Mr. O'Leary? 26 PRESENTATION OF SETTLEMENT AGREEMENT BY MR. O'LEARY: 27 MR. O'LEARY: Thank you, Mr. Chair. Let me start by apologizing for the delay in the start of the proceedings today, but you are correct that with hopefully your acceptance of the settlement proposal I am about to briefly describe to you, you'll conclude that the time was well spent. 28 We have provided to Board counsel copies of a complete settlement in respect of DSM for fiscal 2004, and with your approval, I will briefly walk the panel through the provisions of that. 29 The target volume that all parties, again, it is a complete settlement, all parties have agreed to a target volume of 72.5 million cubic metres for fiscal 2004. 30 The DSM budget will be set at a total of $13.1 million, and that figure will not change, notwithstanding any decision in respect of the indexing mechanism. 31 The manner in which that is being dealt with is by providing that if the indexing mechanism is accepted, the DSMVA will be increased by 2.05 million; if the indexing mechanism is not accepted, then the DSMVA will be increased by 2.25. 32 The net impact of that, Mr. Chair, is that the DSM O&M budget for fiscal 2004 is $13.1 million. Sir, you'll recall from last year there was approval of the $500,000 research budget for end-use market data, and the evidence accompanies that much of that has not been spent given timing. 33 The parties have agreed that any unspent portion of that amount be rolled into the 2004 DSMVA account. 34 And thirdly, there is an allocation issue that, in respect of the increase in the O&M budget of either $2.05 million or $2.25 million, that that number be allocated as set out at item 4 in the complete settlement, and that is that either $700,000 or $768,000 respectively, depending upon what is the final amount recorded in the DSMVA, would be allocated to the business markets with the balance being allocated to the residential markets. 35 And, sir, that is the complete settlement, and I am certainly happy to entertain any questions that the Board may have. 36 MR. BETTS: Thank you. Give us a moment. 37 [The Board confers] 38 MR. BETTS: Perhaps while we are just going through this, I would ask if Board Staff have any comments or submissions at this point? 39 MS. LEA: No, thank you, sir. We had an opportunity to give a couple of comments to the parties before you entered the room, and those minor comments are reflected in the new document which you see before you. We have no further questions. Thank you. 40 MR. BETTS: Thank you. 41 [The Board confers] 42 MR. DOMINY: I just have a clarification question, and that is on item 3. It says: 43 "The parties agree with Enbridge's proposal that any unspent amounts from the $500,000 research budget approved for 2003 should be carried forward into 2004 within the 2004 DSMVA account." 44 Perhaps you could explain to me what exactly is the effect of that? 45 MR. O'LEARY: The effect is -- well, let me see if I understand your question, sir. 46 If a portion of the $500,000 which was approved to be spent on end-use market study for fiscal 2003 has been unspent, the intent of paragraph 3 is to roll that into the fiscal 2004 DSMVA, given that the decision was received last Friday, the company had indicated in its prefiled evidence that it had not spent a substantial portion of that $500,000; therefore, the regulatory treatment that we propose is that it be rolled into next year's 2004 DSMVA, which is what we did or what was approved for fiscal 2003, was that it was going to be recorded in the DSMVA. 47 MR. DOMINY: So in other words, if you have only spent say $100,000, there is another $400,000 you could spend in that project, but the transactions are all recorded in the DSMVA? 48 MR. O'LEARY: For 2004, correct. 49 MR. DOMINY: For 2004. You carried $400,000 from 3 to 4? 50 MR. O'LEARY: Correct, it does not change the actual total amount that is approved for expenditure. 51 MR. BETTS: And Mr. O'Leary, also it does not change the designation of where that money was to be spent? 52 MR. O'LEARY: No, sir. 53 MR. BETTS: Thank you, Mr. O'Leary. I believe that the agreement is certainly clear for us now with those questions answered that we can consider it. Regardless of the outcome, I do want to congratulate the company and all of the intervenors for this effort to bring an agreement to the Board, and I think initially it certainly is one that the Board will definitely give serious consideration to. And hopefully we can give you a decision on this, my expectation would be tomorrow, but I do, again, want to congratulate all the parties for this effort. Clearly, I believe everybody is working together on the same objective here, which is to try and establish just and reasonable rates in a very effective and, in fact, in short order. 54 So thank you all for participating, and I am sure you have worked hard yesterday afternoon and today to get to this point. 55 Is there anything that we should know before we leave this particular subject, Mr. O'Leary? 56 MR. O'LEARY: Thanks, sir. On behalf of the company, we appreciate your comments. The only question I would have is that in the event that the Board decides that the complete agreement is not acceptable, is there any view as to when a hearing on the issues might go forward? We have some witnesses that are in some difficulty in terms of their timing and their availability. 57 MR. BETTS: Staff has advised us that there is an issue surrounding availability of witnesses, and certainly I can't say exactly when it would be scheduled, but it will be scheduled with discussion with all parties in advance. We won't just pick a day or timing that isn't suitable. 58 It is possible that Mr. Dominy and I can even give you some advance word on this decision some time today. We'll just see how it goes. We'll certainly try to advise parties as quickly as possible. 59 MR. O'LEARY: Thank you, sir. 60 MR. POCH: Mr. Chairman, with your leave, this is the only issue my client is involved in. With your leave, I'll take my leave, and, of course, will remain in touch with Board Staff and the company should your decision on this require my subsequent presence. 61 MR. BETTS: Thank you, Mr. Poch. Thanks for your participation. 62 Are there any other parties that would like to conclude their attendance here as well? Feel free to do so. 63 Mr. Klippenstein, thank you. And again, thank you all for your participation. It looks as though it has been a rewarding stay for you in the Board offices here for the last two days. 64 Thank you, and I think we'll move on to the next issue. And again, Mr. Dominy and I will try to give you some information on this agreement as soon as possible. 65 MR. O'LEARY: Thank you, sir. 66 PROCEDURAL MATTERS: 67 MR. BETTS: That brings us to the next item, which is the outstanding issues which we referred to as issues 1.2, 1.3 and 7, and if everyone would like to change chairs, as I see they are doing now, we will begin to deal with that. 68 MR. JANIGAN: Mr. Chairman, before this commences, I would like to put on the record my consent to the undertaking regarding confidentiality which was discussed yesterday in the proceeding. 69 MR. BETTS: Thank you, Mr. Janigan. Oh, yes, that's right, you were not present for that, but we were advised that you would be advised of it. Thank you very much for that. 70 MR. DeROSE: Mr. Chair, one other preliminary point. There has been some discussions amongst the parties with respect to scheduling of argument, and that's an issue, with your leave, I think it would be helpful to all of us if we could obtain some sort of direction from the Board on argument in-chief, as well as the intervenors' argument on this issue. But perhaps Mr. Cass can best provide us with the company's position on when they would be in a position to do argument in-chief, assuming that the evidence is completed today, as we are all hoping will be the case. 71 MR. BETTS: Mr. Cass, have you had a chance in the last 30 seconds to think of that? 72 MR. CASS: I have given it some thought prior to coming into the room today, sir. First, I think it's fair to say that for the company I will be prepared to argue orally in-chief and in reply, if that suits the Board's purposes. Assuming that the evidence were to be completed today, I could argue orally in-chief tomorrow morning, perhaps not right at 9:00 a.m., if that was suitable to everyone else, and then subject to when other parties are able to provide their arguments, I would expect to be able to argue orally in reply very shortly after that. 73 MR. BETTS: Perhaps I should make a statement too on behalf of the Board. The Board panel will not be available from 12:30 p.m. tomorrow afternoon through the afternoon, so we basically have the morning to deal with tomorrow. And I am sorry, this has only just popped up and we were unable to give you any advance notice on that. But with that in mind, and assuming, again, that we can finish the cross-examination today, that would put at least the argument in-chief on in the morning, and Mr. Cass, without having heard anything that is going to transpire today, how long do you think that you might need? 74 MR. CASS: I am pondering that, sir. I am thinking an hour, perhaps an hour and a half on the outside for argument in-chief. In light of what you just said, sir, about tomorrow afternoon, and again, I don't want to anticipate what others would be able to accomplish, but certainly from my point of view, something that would be achievable would be for me to argue in-chief orally tomorrow; for others to respond Thursday morning; and then I would be prepared to respond orally Thursday afternoon, if that's workable for others. 75 MR. BETTS: Now, we haven't asked for submissions from parties on the idea of oral arguments, but we are at that stage now. Mr. Cass just proposed a schedule that might be workable, which would be argument in-chief tomorrow morning and then responses on Thursday and reply either that afternoon or the next day. 76 Can I have submissions from intervenors based on that proposed schedule? 77 MR. WARREN: That's fine with me, sir. 78 MR. DeROSE: That's fine with IGUA, sir. 79 MR. JANIGAN: Mr. Chairman, what would be preferable for VECC is the ability to submit written argument within the same time frame as oral argument is due, so perhaps our written argument would be due at noon on Thursday. 80 MR. BETTS: That would be fine, and the Board's preference, or at least this Board member's preference, is to be able to have that written argument read into the record or transcribed into the transcribed record. If no one objects to that, I see that that's satisfactory to all parties. So that would be fine. 81 Are there any parties that would find the proposed schedule not to work for them or to be unworkable? 82 Then certainly everybody here has indicated that that schedule works, so let's work on that basis, and that certainly puts the pressure on Mr. Warren to accomplish what he wants to do today. 83 So everything is kind of hinging on him at this point, but I am sure he can manage that. 84 MR. WARREN: May I be excused, sir? I only had the DSM issue I was concerned about, so I want to leave now, and then Mr. Janigan takes the head seat. 85 MR. BETTS: Excuse me for one moment. 86 [The Board confers] 87 MR. BETTS: Just before we begin, I do all the talking, and unfortunately Mr. Dominy has a chance to do all the reading and he is very effective at that, and a question has come into his mind regarding the proposed settlement agreement for DSM. Fortunately, Mr. O'Leary is still here so I'll ask him to just come forward and answer this one question for Mr. Dominy and myself. 88 Mr. Dominy. 89 MR. DOMINY: Mr. O'Leary, in the settlement agreement, they say that you have adopted -- it's in, "The company wishes to add the following comments," and then it says, "As approved in the Board's RP-2003-0013, the" -- sorry. 90 Well, the issue is 72.5 million cubic metres using a 30 percent pre-rider rate for customer projects, and the question I have, I know it is not addressed in the settlement agreement, but it relates to the Board's decision, and it just made a comment in that decision at paragraph at 2.4.2 where it says: 91 "The Board is prepared to accept the continuation of the methodology for 2003 and 2004 with one modification, the result of the company's study into the custom project pre-rider rate be reviewed in the DSM consultative and be considered for implementation in 2004." 92 And all I was asking, the question was, is there any status on that particular recommendation in relation to the settlement agreement? That's the only question. 93 MR. O'LEARY: My understanding, Mr. Dominy, is that the company will be following up on that, and the consultative will be dealing with that issue, but to this point, the company has not had an opportunity to complete those discussions within the consultative. 94 MR. DOMINY: Thank you. That's all I wanted, and I wanted it on the record. Thank you. 95 MR. BETTS: Thank you, Mr. O'Leary. Mr. Mattson? 96 MR. MATTSON: Sorry, Mr. Chairman, just before we go forward, with respect to argument, just to be clear, we are part of the partial settlement, Energy Probe, my client is, so I take it after Mr. Cass goes forward with submissions tomorrow morning, anyone who is in support of the partial settlement would then be asked to go forward, however briefly, tomorrow prior to the responding parties? Is that correct? 97 MR. BETTS: Thank you for catching that, and that would be the appropriate process. Does that create a problem for anybody? 98 So again, again then, the pressure will be on all parties to accomplish that in a half a day. And I am seeing nods of approval, so we are on that schedule, so we should -- thank you for asking that question, though, Mr. Mattson. That would have undoubtedly caused confusion later. 99 Okay, anything else? 100 MR. SHEPHERD: Mr. Chairman. 101 MR. BETTS: Mr. Shepherd. 102 MR. SHEPHERD: Then that raises the question when do we start tomorrow morning the argument? If my friend Mr. Cass is going to be 60 to 90 minutes and there are probably three other parties that will have short arguments and the deadline is 12:30, it's tight enough to be concerned about the start point. Mr. Cass had suggested we start after 9:00, so I ask about that. 103 MR. BETTS: One option we have is Mr. Dominy is the one that has the conflict tomorrow and he would be prepared, if parties found that acceptable, for me to receive the oral arguments and he would refer to the transcripts. 104 If that isn't acceptable to all parties, then we would have to deal with it differently. 105 Does anyone find that not acceptable, if I were to receive the arguments orally as a single member? 106 MS. LEA: The only difficulty, Mr. Chairman, is that that does not give Mr. Dominy the opportunity to ask questions. I think that we could do that perhaps for argument in-chief, as Mr. Dominy would have another opportunity to ask questions of Mr. Cass when he gives his reply. I would be hesitant to not have Mr. Dominy hear the arguments of other parties and not have the opportunity to ask questions. 107 In that circumstance, we could hear Mr. Cass's argument tomorrow afternoon; he'll be returning in the morning in any event to hear other arguments, I presume, so Mr. Dominy could then have the opportunity to ask questions at that time. 108 So if that were the schedule, and then supporting parties could follow the next morning. 109 MR. BETTS: That's possible too. The problem I could see is that the opposing party may need more time then to digest all of the arguments in support. 110 MR. SHEPHERD: Actually, Mr. Chairman, my question was a lot simpler question than that. 111 MR. BETTS: Okay. Well, do you have a simple answer for it? 112 MR. SHEPHERD: I took Mr. Cass to be suggesting that we start at 10:00 or something like that tomorrow, and I am asking the question, can we start at 9:00 or 9:30 so that we are sure we get everybody in tomorrow morning before 12:30? 113 MR. BETTS: I was trying to avoid having to ask Mr. Cass to get up really early to prepare his argument, but Mr. Cass, would that be acceptable? 114 MR. CASS: The bottom line, Mr. Chairman, is I will start whenever it takes in order to get this done as expeditiously as possible. 115 I was actually thinking in terms of something like 10 o'clock, on the assumption that we are going to be here for some time today, and I would like to have a chance to gather my thoughts before argument in-chief. 116 The other thing I would say is when I gave my time estimate, I really was expecting to be much closer to the one hour than the one and a half hours, and I can do my best to achieve the one hour. 117 So if we were to start at 10:00 and I were to take an hour, I am just wondering whether that would then would be sufficient time for others to do what they would like to accomplish tomorrow morning? 118 MR. BETTS: I am seeing that people do find that acceptable. If we do go on, I will sit and hear the final arguments by myself, and if Mr. Dominy has questions, we may even ask that representative to come back so he can ask some questions on the Friday, if necessary. 119 We'll do whatever we have to do to try and accomplish that process. 120 So let's start at 10 o'clock tomorrow morning with argument in-chief, and supporting arguments as well. 121 And then it would be understood that arguments opposing the position would be provided on the Thursday morning, and we did -- Mr. Cass, you indicated, would you be prepared to deliver your reply that day? 122 MR. CASS: That would be my expectation. The only thing I would have to add, Mr. Chair, is that with receipt of Mr. Janigan's argument in writing at noon, that obviously is a key element of what I would need for reply argument. 123 So as long as there was sufficient time for me to receive Mr. Janigan's argument by noon and prepare my response to it, certainly Thursday afternoon. 124 MR. BETTS: Okay. Mr. Janigan? 125 MR. JANIGAN: We can meet that deadline. 126 MR. BETTS: And I think in the past you have been even prior to the deadline, so if that was possible, that would be beneficial as well. 127 Okay, well, let's go ahead on that basis, and I think at this point we can begin again to deal with the outstanding issues from the settlement agreement. 128 Mr. Cass, was it your intent to provide some argument in-chief -- or some evidence in-chief on this? 129 MR. CASS: Yes, Mr. Chairman, there will be a short examination in-chief. 130 If I may perhaps begin, and I'll introduce the witness panel and ask them to come forward to be sworn. 131 MR. BETTS: Thank you. 132 MR. CASS: Starting with the witness closest to the Board panel is Kerry Lakatos-Hayward who is Manager, Volumetric and Market Analysis for the company. 133 Next is Pascale Duguay. Ms. Duguay is Manager, Rate Research and Design. 134 Then we have Marika Hare, Director of Regulatory Affairs. 135 Tom Ladanyi, Manager, Regulatory Proceedings. 136 And around the corner, Mr. Bill Ross, Director, Finance and Control. 137 And Robert Bourke, Manager, Regulatory Accounting. 138 That's a large panel. 139 MR. BETTS: I believe there's only two panel members that haven't been sworn in. 140 MR. CASS: Three, perhaps. 141 MR. BETTS: Oh, Ms. Hare as well, yes, so we'll have those people sworn in, please. 142 EGDI - PANEL 2: 143 K.LAKATOS-HAYWARD; Sworn. 144 P.DUGUAY; Previously sworn. 145 M.HARE; Sworn. 146 T.LADANYI; Previously sworn. 147 B.ROSS; Sworn. 148 R.BOURKE; Previously sworn. 149 MR. BETTS: And the witnesses have been sworn in. 150 Mr. Cass, please proceed. 151 MR. CASS: Thank you. 152 EXAMINATION BY MR. CASS: 153 MR. CASS: If I could begin, Ms. Hare, by asking you on behalf of the panel, to confirm that the prefiled evidence and responses to interrogatories by the company in this case were prepared by or under the direction or control of the members of the panel? 154 MS. HARE: Yes, they were. 155 MR. CASS: Could you also please confirm on behalf of the panel that the evidence I have described is accurate to the best of the knowledge or belief of the members of your panel? 156 MS. HARE: Yes, it is. 157 MR. CASS: Thank you. Ms. Hare, could you please, at this point, outline for the Board the rationale for the proposal made by the company? 158 MS. HARE: Yes. We had three objectives in developing an alternate approach to setting rates for 2004. These were, first, to avoid retroactive rates; second, to get back on track in terms of the regulatory schedule; and third, to provide a benefit to customers. In the prefiled evidence, we speak to these three objectives, but obviously the company had additional objectives, and these were to provide a sufficient increase in revenue to allow the company to be able to manage its distribution system and to maintain shareholder value. And these last two are inherent in managing any type of business. 159 The application we filed with the Board adjusts 2003 rates based on an index from the rate of inflation for 2004. This approach allows us to achieve all five of the company's objectives. 160 MR. CASS: Can you elaborate, please, on how the approach enables the company to meet the five objectives? 161 MS. HARE: Yes. By the end of February 2003, the company was still in negotiations for our 2003 rates. Without having those 2003 rates finalized, it was not possible to complete an application for 2004. It was apparent that unless we did something different, we would, again, be behind in our regulatory filing schedule, meaning that rates would not be in place for the start of fiscal 2004. 162 A traditional cost of service application would have taken a minimum of three months to prepare. This meant the application would not be filed until mid-June at the earliest. But even that date I didn't believe was possible because many of the key people involved in the application were also involved in the 2003 hearing. 163 So not having rates in place for the start of the year is problematic for several reasons. One is that a retroactive adjustment is required, which causes customer dissatisfaction and which appeared to us to be in conflict with the government's clear signal, as expressed in the results of the 100-day review of the Ontario Energy Board. 164 The second is that prospective rate-making is complicated once we are into the fiscal year and actual results are available. We reviewed the Ontario Energy Board Act and confirmed our understanding that the Board may adopt any method or technique that it considers appropriate to the setting of rates; in other words, a cost of service application is not mandated. 165 The streamlined application we filed was a way to meet the first two objectives, that is, to avoid retroactive rates and to get back on track in terms of the schedule. The objective of providing a benefit to customers is achieved through this application in that the company is guaranteeing to customers that natural gas distribution rates will increase by less than inflation. 166 And lastly, the objective of increasing revenue to enable the company to operate reflects the fact that there are cost pressures on the company as a result of customer growth, inflation, rising insurance costs, the need for capital, etc. 167 An increase of 1.8 percent in rates provides some additional revenue in order for the company to manage these cost pressures. There are additional benefits of this proposal to fixing rates, and these have been outlined in the prefiled evidence in Exhibit A, tab 3, schedule 1, page 3. 168 MR. CASS: Ms. Hare, can you please briefly explain for the Board the partial settlement proposal? 169 MS. HARE: Yes. The parties to the partial settlement proposal have agreed that rates for 2004 will be increased by 90 percent of the Ontario consumer price index, that being an increase of 1.8 percent. 170 But the parties to the partial settlement proposal also wanted to start from an appropriate base. Otherwise, if the company was earning significantly more than the Board-approved rate of return on a normalized basis in 2003, an increase of 1.8 percent may not be justified. 171 The parties to the partial settlement proposal have therefore agreed to ratepayer safeguards, which could mean an adjustment to the base if, when the 2003 financial results are known, the company has earned more than 25 basis points above the benchmark ROE of 9.69 percent. 172 When the decision of the Board in RP-2002-0133 and the actual normalized results of the company for the fiscal 2003 year are both known, the company will reduce rates, if required, within eight weeks of these events. 173 As an alternative, the company may determine that rather than changing rates, any difference owing to customers would be rebated through a one-time adjustment by the amount defined as the 2004 adjustment amount. The calculation of that amount has been described in detail in the settlement proposal, and I will not go into detail at this point. 174 The company agrees to calculate normalized actual earnings for 2003 in the normal manner, consistent with past practice. The results will be filed with the Board and with the intervenors for review. Should there be any dispute with respect to the calculation of any aspect of the normalized actual results, either the company or the intervenors may request a ruling from the Board. 175 In calculating normalized actual earnings for 2003, the amount for unbilled gas for the last two weeks of September may reduce or increase earnings. In the event that the company so determines, it will calculate the amount of the adjustment and file that calculation along with all detailed backup information. 176 In addition, in order to capture the impact of any decision of this Board relating to the 2003 O&M deferral account, if any, the parties have agreed that rates will be further adjusted by an amount defined as the 2004 O&M deferral account amount. The calculation of that amount has also been described in detail in the settlement proposal. 177 Of course, if the Board determines that there should be no amount in the O&M deferral account or that the Board is clear that the amount applies only to 2003, then no adjustment would be required. 178 Two other decisions of the Board could affect 2004 rates; namely, the decisions in RP-2002-0135, which is the notional utility account established in EBO-179-14/15, and RP-2002-0158, the review of the Board's guideline for setting ROE. The effect of those decisions on fiscal 2004 rates, if any, will be determined by the Board in those decisions. 179 MR. CASS: Ms. Lakatos-Hayward, can you summarize for the Board, please, why the company considers Ontario CPI to be an appropriate measure for the purposes of this case? 180 MS. LAKATOS-HAYWARD: Certainly. In this application, the company is guaranteeing to customers that natural gas distribution rates will increase by less than the rate of inflation, and in this, we believe that Ontario consumer price inflation is the key measure that tracks inflation for an average Ontario consumer. 181 As we have shown in our evidence, and in particular, table 1 of Exhibit A, tab 5, schedule 1, since 1992, Ontario CPI has increased on average by 1.84 percent, and in comparison, Enbridge's allowed per-unit distribution revenue has increased by 2.62 percent. 182 In comparison, if Enbridge's application was approved, on average the distribution rates for fiscal 2004 would increase by 1.4 percent, and this would be in comparison to Ontario CPI, the consensus forecast, which shows Ontario CPI would increase by 2 percent. 183 The company also considered a number of other factors in determining what an appropriate inflation index would be, and specifically the benchmarks that we feel should be selected would be an objective, independent measure of inflation that is widely tracked and reported in a timely manner. And the measure should also be stable and predictable. 184 In the company's assessment, Ontario CPI meets these criteria. Statistics Canada tracks and analyzes CPI on a monthly basis, and it's because of this transparency and the economic importance of CPI that, as a result, a wide number of third-party and independent forecasts are available that we can utilize for the purposes of determining a consensus forecast. 185 And we have documented in the evidence that we have eight independent forecasts of Ontario CPI that were developed in the spring and summer of this year. 186 Further, an increasing number of financial and labour contracts use CPI measures to index prices or rates, and this trend is largely due to the stability and predictability of CPI. In this, for example, the bank of Canada uses consumer price index measures as its key benchmark or barometer of inflation across the broader economy when establishing monetary policy. 187 And as we have attempted to demonstrate in our evidence, Exhibit A, tab 5, schedule 1, research from the bank of Canada shows that in the 1990s, CPI was much more stable and predictable than in the previous decades, and this is largely due to the link between inflation targets and monetary policy. 188 And this has led inflation expectations to be closely aligned with the mid-point of inflation, around 2 percent, so it is certainly much more stable and predictable currently. 189 Finally, on a historical basis, there is a strong relationship between Ontario CPI and the inflation experience of Enbridge's distribution rates, which would indicate that selection of Ontario CPI as an external inflation benchmark is both reasonable and appropriate. 190 MR. CASS: Thank you. 191 Ms. Duguay, can you please explain for the Board how the company's proposal would be implemented in distribution rates. 192 MS. DUGUAY: Certainly. The process for establishing the proposed 2004 distribution rate was performed using a three-step process. 193 In the first step, the company took the 2003 distribution revenue by rate class and adjusted it to exclude some gas supply-related elements such as losses on our Tecumseh storage system, as well as gas losses on the company's distribution system, and finally, the company also excluded costs associated with storage and transportation on Union's system. 194 Conversely, the company included as part of its 2003 adjusted distribution revenues, costs that are not recovered through the distribution revenues, but rather are currently being recovered through the gas supply load balancing charge. And these costs, in particular, were in relation to the operating and maintenance costs associated with DSM. 195 So the company felt that these costs were essentially O&M costs, and therefore, should be subject to the rate index; whereas, elements that are gas supply-related, their costs are driven by the forces of the market and, therefore, they should not be subject to the rate index. 196 The total adjustment to the 2003 distribution revenue amounted to a reduction of $97.2 million, and this is seen at Exhibit A, tab 7, schedule 3, page 1. 197 In the second step, the rate index of 90 percent of CPI, or 1.8 percent, was applied to the 2003 adjusted distribution revenues at the rate class level, so the resulting proposed increases by rate class are found at Exhibit A, tab 7, schedule 2. 198 In total, the proposed overall increase in distribution revenue for fiscal 2004 amounts to $13.9 million. By virtue of the fact that the 2003 final distribution revenues were adjusted downward to the tune of $97.3 million, it then follows that the overall proposed increase in comparison to the existing final 2003 distribution revenue is lower than the rate index of 1.8 percent. As a matter of fact, in total, the proposed increase to distribution revenue in relation to the final 2003 distribution revenue is 1.6 percent. 199 In the last step, the proposed increases by rate class derived in the second step were added to the 2003 final distribution revenue. This amount was the target for the proposed 2004 distribution revenue. In terms of effecting that 1.6 percent increase in distribution revenue, the company proposed to adjust strictly the delivery component of its rate, and that would be, if there are any demand charges within the delivery component, that would remain unchanged, as well as the existing level of the monthly customer charges. 200 In terms of the unit rate increase by block, they were derived essentially using the same methodology that the company uses through any rates proceeding. 201 And finally, the detailed proposed rates by rate class, by block, are found at Exhibit I, schedule 35, updated August 14th of 2003. 202 MR. CASS: Thank you, Ms. Duguay. 203 Those are my questions of the panel, Mr. Chairman, thank you. 204 MR. BETTS: Thank you, Mr. Cass. 205 At this point, the Board will ask if there are any questions from parties that support the agreement proposal? 206 Mr. Shepherd, you have some. Are there any others? 207 I trust you will try not to go over ground that has already been covered, I am sure you will anyway, so please proceed. 208 MR. SHEPHERD: I am hoping this will be the shortest cross-examination in history, Mr. Chairman. 209 MR. WARREN: Say thank you now. 210 CROSS-EXAMINATION BY MR. SHEPHERD: 211 MR. SHEPHERD: I want to explore the question of ratepayer safeguard, so I have really only one question which anybody on the panel can answer. 212 Is there any reasonable possibility that the company will have material over-earnings in 2003, based on the information you have today? 213 MR. ROSS: Yes, sir. If I can repeat your question, you asked whether there was any possibility that the company would have material over-earnings this year. 214 There is a possibility that earnings will be over the limit. Now, whether they'll be material or not at this stage, in terms of overall quantity, we cannot tell at this stage. 215 MR. SHEPHERD: It is not possible yet to say what they will be at the end of the year? 216 MR. ROSS: Not at this stage. 217 MR. SHEPHERD: Thank you. Those are my questions, Mr. Chairman. 218 MR. BETTS: Thank you, Mr. Shepherd. 219 Are there any further questions from parties supporting the agreement? 220 Then I think I understand already who will be questioning the witnesses in terms of opposing positions. I know Mr. Warren, you will be leading that, and Mr. Janigan will follow, if necessary. 221 Are there any other parties? I believe that's the only parties that oppose the position, so Mr. Warren, please proceed. 222 CROSS-EXAMINATION BY MR. WARREN: 223 MR. WARREN: Thank you, Mr. Chairman. 224 Ms. Hare, in your examination in-chief you mentioned a couple of other proceedings that are pending before the Board. One of them, and I apologize, I don't have the file, the docket numbers, but one of them is a proceeding in which Enbridge is seeking approval to recover some $50 million in deferred taxes from ratepayers; is that correct? 225 MS. HARE: That's correct. 226 MR. WARREN: And may I understand that you hope that that issue will be resolved within the compass of fiscal 2004? 227 MS. HARE: Yes. 228 MR. WARREN: And if, as I presume you hope, you are successful, that will result in ratepayers paying an additional -- an increment to their rates; is that fair? 229 MS. HARE: Yes. 230 MR. WARREN: The second proceeding that you mentioned, and again, I apologize, I don't have the docket number, is the ROE application. May I again presume that you hope that that will be resolved within the compass of fiscal 2004? 231 MS. HARE: Yes. 232 MR. WARREN: And if you are successful in that application, may I presume, Ms. Hare, that there will be another further increment to the rates paid by consumers? 233 MS. HARE: The implementation date of any change to ROE really hasn't been decided at this point. That would be the subject of that proceeding. The company will also, at that time, depending on when that proceeding is finished, determine whether or not it asks for that change in 2004 or 2005. At this point, we want to leave the option open. 234 MR. WARREN: May I ask this question, Ms. Hare: Is one of the options you are considering asking the Board to apply in the increase in ROE to the fiscal 2004 period? 235 MS. HARE: Yes. 236 MR. WARREN: And if that were to be the case, may I assume, then, that there would be an increase in the rates paid by consumers? 237 MS. HARE: Yes. 238 MR. WARREN: Do you have any way of knowing at this point, Ms. Hare, if I were to ask you, let's assume two things: that you were granted the relief that you are seeking in the ROE application in its entirety, that's the first assumption; and the second assumption is that you were successful in persuading the Board that that should apply to 2004. Do you have any sense, Ms. Hare, of the total amount of the increase in rates that would be paid by consumers? 239 MS. HARE: In terms of the deferred taxes, again, the implementation of any amount that is granted to the company would be the subject of discussions with the Board and intervenors. At one point, we had talked about any increase being over a ten-year period, so the exact amount resulting from that would be determined at a later date. Certainly, we would be concerned about ratepayer impact from that proceeding. 240 In terms of the ROE, I think there is a CME interrogatory number 8 which provides some indication of what the impact would be on rates from that proceeding. Perhaps Mr. Bourke can speak to that further. 241 MR. WARREN: I'm sorry, Ms. Hare, you said interrogatory number 8? 242 MS. HARE: CME number 8. 243 MR. WARREN: CME number 8, yes. Thank you. 244 MR. BOURKE: This interrogatory asked, if we were granted our full relief at an 11.5 percent level, what would the impact be? And in response, the company's 2003 overall rate of return on rate base would increase to 8.96 percent from the 8.32 percent included in the ADR settlement. 245 The company's 2000 revenues would increase on a full-year basis, if it was fully effective, by 31.6 million on a gross basis. 246 MR. WARREN: Thank you, Mr. Bourke. 247 Finally, in this context, Ms. Hare, if the company is successful in the relief it is seeking in the deferred taxes issue, and if some of that is recovered in fiscal 2004, and if the company is successful in its ROE application, and if it is successful in persuading the Board to apply that to 2004, can you and I agree that the increments to rates charged to consumers would be retroactive in their nature? 248 MS. HARE: Yes, they would be. 249 MR. WARREN: Thanks. Panel, in order to expedite matters -- 250 MR. BETTS: You are feeling the pressure. 251 MR. WARREN: My 15 minutes are just about up, so -- 252 MR. BETTS: May I just interrupt for just a second, and not on that subject, but I sense that it is getting a little warm in here, and it will get warm in here. The Board will not object if anybody feels that they would be more comfortable in taking off their jacket or sweaters or that, so feel free to do that as the temperature rises. 253 I apologize for the interruption, and we'll add this to your time allocation. Mr. Warren, all joking aside, please don't feel pressured. You ask as many questions as you feel are necessary. 254 MR. WARREN: Mr. Betts, if I start to cry, you'll notice the pressure is getting to me. 255 Ms. Hare, can I take you, then, to the subject of the rationale or the objectives of the application, and in this context, I would ask you to turn up your prefiled evidence at Exhibit A, tab 3, schedule 1, please. 256 Looking first at page 1 of that exhibit, and you mentioned this in your examination-in-chief, the desire to avoid retroactive charges. First of all, we have just agreed that as a result of the operation of other proceedings, there may be retroactive charges during the course of fiscal 2004; correct? 257 MS. HARE: Correct. 258 MR. WARREN: Now, with respect to the issue of avoiding retroactivity, can you and I agree, Ms. Hare, that you could avoid retroactivity by, for example, having a rate freeze for fiscal 2004? 259 MS. HARE: I'm sorry, we could avoid retroactivity by asking for a rate freeze? 260 MR. WARREN: Right. 261 MS. HARE: That wouldn't address the questions you just pursued with me in terms of the ROE or the deferred taxes. 262 MR. WARREN: But my question, Ms. Hare, on the issue of rate retroactivity for this application, you could avoid retroactivity by, for example, asking for a rate freeze or, indeed, asking the Board to reduce the rates that were charged in fiscal 2003? 263 MS. HARE: That's true. 264 MR. WARREN: Could I ask you to turn up page 3 of that exhibit; for the record, it is Exhibit A, tab 1, page 3. Under that you list seven bullet points of benefits that accrue to the regulatory process in customers, and without reading them into the record, Ms. Hare, can you and I agree that all of those benefits would obtain if you were to apply for either a rate freeze or a rate reduction? 265 MS. HARE: That's true. But, Mr. Warren, I also talked about the company's objectives in terms of maintaining shareholder value and having sufficient revenue to be able to manage its system. 266 MR. WARREN: Thank you for that, Ms. Hare, because that's where I want to go. You have been characteristically prescient. 267 MS. HARE: If I may, Mr. Warren, I may have misspoken in that you are asking me about retroactive rates. It really depends on when the Board's decision is issued in both of those proceedings, and I have no idea when that will be on the notional deferred taxes, but we were led to believe by something that Board Staff told us that it would be in short order. So, in fact, it might not be retroactive, but it may be. 268 MR. WARREN: Could I ask you to turn up the CAC interrogatory number 1, which, for the record, is Exhibit I, tab 2, schedule 1. 269 Now, in that question, the -- I'm sorry, panel, do you have it? 270 MS. HARE: Yes. 271 MR. WARREN: And members of the panel, do you have the answer? 272 MR. BETTS: Yes. 273 MR. WARREN: The CAC asks you the question: "Does EGD agree that these benefits can also be achieved under the implementation of alternative adjustment mechanisms?", and then they specify rate freeze or negative adjustment. 274 And your answer reads as follows: "Although the benefits listed can be achieved under a rate freeze or under a negative rate adjustment mechanism, the company did not file such applications and is opposed to them since" - and I want to underscore the following words - "they would not result in sufficient funds to operate the system as required and would adversely affect its ability to add new customers and make the necessary system integrity investments." 275 And I take it, Ms. Hare, that that answer is consistent with what you have said in chief this morning about the cost pressures that the company has and the need to manage those cost pressures; is that right? 276 MS. HARE: Yes. 277 MR. WARREN: Now, can you tell me, Ms. Hare, where I can find in the evidence record that is before the Board any evidence dealing with the amount of the funds that you need to operate the system as required? 278 MS. HARE: No, that's not included in the evidence. 279 MR. WARREN: Can you tell me where there is anything in the evidence about your ability to -- the influence, sorry, on the ability to add new customers, is there any evidence on that subject in the record? 280 MS. HARE: Not in this application. 281 MR. WARREN: And can you tell me where I can find in the evidence any evidence with respect to what you describe as the necessary system integrity investments? 282 MS. HARE: Again, not in this application, because this isn't a cost-of-service application. However, looking at the 2003 evidence and the testimony during the hearing, there was certainly quite a bit of evidence put on the record in terms of what it costs us in adding 50,000 customers a year. 283 MR. WARREN: And you have made a choice, I take it, Ms. Hare, not to include that evidence in this application; is that right? 284 MS. HARE: That's right. 285 MR. LADANYI: Maybe if I can help you, Mr. Warren, we provided extensive evidence on these costs in the past proceeding we just concluded, and I don't want to introduce evidence from other cases, but for example, there is an interrogatory response in RP-2002-0133 which actually lists our capital expenditures since 1997, it lists customer additions every year. 286 And I am sure that we could go over that, and you will see that in that exhibit that we had approximately 50,000 to 60,000 customers each year, and we have certain capital requirements for that. 287 And as you know, in our franchise area, houses are being built, subdivisions are being built. These people demand to be served. We cannot suddenly turn this off. We can't tell the real estate market, "Don't build houses because Bob Warren has asked us for a rate freeze." 288 We have to continue serving those customers. That's what we have to do, and those pressures are not going away. 289 MS. LAKATOS-HAYWARD: And perhaps if I could add, we had filed in Exhibit A, tab 5, schedule 1, the inflation evidence that part of the reason in selecting the Ontario CPI as an external benchmark was that there was a close correlation between Ontario CPI, hence inflation and historical cost pressures, that the company has faced in the past, and as Mr. Ladanyi had indicated, that the cost pressures associated with adding 50,000 additional customers a year. 290 MR. WARREN: I just want to understand, Ms. Hare, or Mr. Ladanyi, am I right in my understanding that the evidence of these cost pressures and what you have by way of pressures, for example, to maintain the system integrity and the amount of money you need to do that is not in evidence in this case, and therefore, is not available, for example, for Mr. Janigan or me to cross-examine on it; correct? 291 MS. HARE: That's correct. 292 MR. WARREN: Thanks. 293 I would like then to turn to the partial settlement agreement, if I could, Ms. Hare, and I'll ask you these questions, but others may be able to answer them. 294 Mr. Chairman, for the record, this is Exhibit B, tab 1, schedule 1. 295 And Ms. Hare, if you could turn up beginning on page 6 of 23, and what I want to do, Ms. Hare, is just walk you through the process which is envisaged by this agreement, or more particularly, the process which may necessarily arise from this agreement. 296 Now, as I understand it, Ms. Hare, looking at page 7 of 23, item number 5, do you have that? 297 MS. HARE: Yes. 298 MR. WARREN: Now, am I correct in my understanding that there are two trigger dates which are contemplated by this? 299 MS. HARE: Yes. 300 MR. WARREN: The first of which is the production of the final financial results for fiscal 2003; is that correct? 301 MS. HARE: That's correct. 302 MR. WARREN: And can you or Mr. Bourke tell me when in the ordinary course the final financial results for fiscal 2003 would be known? 303 MR. BOURKE: I am looking at Mr. Ross, but I believe they are an element of a late November board of directors -- 304 MR. ROSS: Sir, generally speaking, our board of directors is towards the end of November, and that's generally when we issue our results for 2003. 305 MR. WARREN: Now, the second trigger date -- thank you for that, gentlemen. 306 The second trigger date, Ms. Hare, is the issuance of the Board's final decision in RP-2002-0133; is that correct? 307 MS. HARE: That's correct. 308 MR. WARREN: And it is the later of those two trigger dates which is the one which is the beginning for the eight-week period; is that correct? 309 MS. HARE: That's correct. 310 MR. WARREN: So let's leave aside for the moment the question of the issuance of the Board's decision and let's take, with some allowance, November 30th, the date for the issuance of your final financial statements; is that correct? 311 MS. HARE: Yes. 312 MR. WARREN: Now, the process, as I understand it, is that the final financial results are going to be delivered to whom? 313 MS. HARE: We would take the financial results and normalize them, and those would be presented to the Board and to intervenors. 314 MR. WARREN: Is the normalizing of the results something which will happen after the November 30th date? 315 MS. HARE: Yes. 316 MR. WARREN: And how long will that take? 317 MS. HARE: Well, it probably would be ready the same time because as Mr. Ross mentioned, that would be the date the financials received board approval to be publicly available, so they would be known internally before that, so the calculations would be going on at the same time. 318 MR. WARREN: So -- 319 MS. HARE: So it could be the next day, let's say. 320 MR. WARREN: In fairness to you, let's assume it is the same date, go with November 30th. Now, can you tell me -- let's step back on this. 321 In what form will the financial data be distributed? Is it in the form simply of the audited financial statements of EGD or will it be in some other form? 322 MS. HARE: Maybe Mr. Bourke can answer this. 323 MR. BOURKE: I would anticipate at this time that it would be possibly available in the type of filing that I refer to as the utility results on a historical-year basis? 324 MR. WARREN: Can you tell me, Mr. Bourke, or Ms. Hare, if the form in which this information is to be produced is specifically referred to or contemplated in the partial settlement agreement? 325 MS. HARE: I am not sure I understand your question. 326 MR. WARREN: I'm sorry, Ms. Hare. Does the partial settlement agreement require that this data be produced in any particular form? 327 MS. HARE: No, the form is not specified. To the extent that we have agreed that it would be in the normal course of calculations, I would imagine it means in the normal format. 328 MR. WARREN: Now, is it possible, Ms. Hare, just possible, that there may be some dispute as to the adequacy or sufficiency of the form in which the information is produced? Is that possible? 329 MS. HARE: It's possible. 330 MR. WARREN: Now, I jump back, and I apologize for that, this information is to be distributed by whom? To whom, I'm sorry? 331 MS. HARE: To the Board and to intervenors. 332 MR. WARREN: All of the intervenors in this case? 333 MS. HARE: Yes. 334 MR. WARREN: Now, if there are questions which intervenors have about how the calculations were arrived at or what the numbers mean, will there be a process of written interrogatories by which intervenors can pose those questions? 335 MS. HARE: We hadn't discussed that. 336 MR. WARREN: Is that a possibility? 337 MS. HARE: It is a possibility. I would think it would be more efficient to have a meeting and discuss the results, rather than a formal interrogatory process, but that really hasn't been thought through. 338 MR. WARREN: Now, if there is a disagreement as to the interpretation of the data or the way the data has been either presented or interpreted by EGD, is it possible that there will be the equivalent of or indeed an ADR process to try and resolve those differences? 339 MS. HARE: It could be. The settlement proposal does speak to either of the company or intervenors asking the Board for a ruling, so there certainly could be some kind of ADR process if there is a dispute. I would hope that's not necessary, though. 340 MR. WARREN: And is it possible -- you have referred, Ms. Hare, to asking for a Board interpretation -- that that's specifically contemplated in the agreement at item 4 on page 7 of 23 of that exhibit; is that correct? 341 MS. HARE: That's correct. 342 MR. WARREN: And is it fair for me to assume that if there were a written interrogatory process, whether or not there was one, whether or not there was an ADR, it is possible that the resolution of any disputes over the meaning and interpretation of this data might come back to the Board in the form of an oral hearing? 343 MR. LADANYI: That would be a worst case scenario. I think all parties -- 344 MS. HARE: Mr. Warren, you are asking me is it possible. All of these are possibilities. I think that all of the parties to the partial settlement and the company would work very hard to ensure it doesn't come to that. But you are asking me is it possible, almost anything is possible. 345 MR. WARREN: I guess to be fair to you, Ms. Hare, is there anything in the partial settlement agreement as filed that would preclude any or all of the steps that I have just outlined: Number one, written interrogatories; number two, an ADR process; number three, an oral hearing. 346 Is there anything in the partial settlement group which would preclude that? 347 MS. HARE: No, there is not. 348 MR. WARREN: Now, if we are looking forward then from a November 30th date, if the information is available and distributed on that date, it is possible in what Mr. Ladanyi describes as a worst case scenario, that we may be looking at, for example, another eight weeks before the issue is resolved by the Board; is that fair? 349 MS. HARE: If that were the case we would be in breach of the agreement that is stated here, because we have agreed to have the rates implemented within eight weeks if in fact there is any adjustment. 350 MR. WARREN: So that if in the worst case scenario all those steps were required, they would have to be completed and the matter resolved within the eight weeks; is that right? 351 MS. HARE: Yes. 352 MR. WARREN: So just applying that to it, we are looking at December the 1st -- January the 1st, in effect, the drop-dead date under this scenario for finally putting rates in place. 353 MS. HARE: I would think it would be February 1st, within eight weeks would be February 1st, not January 1st. 354 MR. WARREN: I apologize, February 1st. And in which case, Ms. Hare, certainly this process would result in, or may result in a retroactive adjustment of rates; correct? 355 MS. HARE: Well, Mr. Warren, this is in one direction only. If there is any adjustment, it is a downward adjustment. 356 MR. WARREN: I appreciate that. 357 MS. HARE: So there would be a retroactive adjustment downwards. 358 MR. WARREN: But your prefiled evidence talks about retroactivity and it doesn't talk about retroactivity one way or the another; correct? 359 MS. HARE: That's right, although I also mention the big concern with retroactive rates making customer dissatisfaction. Customers are not dissatisfied when, in fact, they receive a rebate. 360 MR. WARREN: No. All of these questions, Ms. Hare, if you could turn back to your prefiled evidence at Exhibit A, tab 3, schedule 1, page 3 of 5, there are 7 bullet items listed in item 9 as the benefits to the regulatory process to customers. If the steps which I have just outlined in my discussion with you were to follow, would you agree with me that that process would neither be administratively simple nor easy to understand? 361 MS. HARE: I'm sorry, could you repeat the question? 362 MR. WARREN: If, in the scenario which I have just outlined to you, that is, November 30th issuance of the data, misunderstandings or disagreements followed by written interrogatories, ADR and a hearing, if all of that were to obtain, would you not agree with me that that is neither administratively simple nor easy to understand? 363 MS. HARE: It is not administratively simple. Easy to understand? I think we would find a way to communicate it to customers so that they would understand. 364 MR. LADANYI: I would like to add something, Mr. Warren. I think the parties to the settlement agreement all hope to work together in good faith to minimize this administrative burden which you are outlining for us. You are outlining really a worst-case scenario which I think everybody here is going to work very hard to avoid, and we will do our best to communicate with the intervenors and work out any misunderstandings outside the hearing process so we do not have the dead weight of lengthy regulation sitting on top of this thing so that we don't have arguments, we don't have interrogatory processes, we don't have to go through the whole complicated process. 365 I mean, it is this kind of complicated process which has caused us to fall behind schedule, and we are trying very hard to avoid this kind of process, to settle our differences outside the hearing room. That's what we are aiming for. And certainly, yes, there is a possibility that certain intervenors could force us into a lengthy hearing, a lengthy process which, yes, will make this somewhat more difficult, but nevertheless we hope to work together with everybody else and try to achieve these -- what we are aiming outside the hearing room so we do not have to involve the Board in making these decisions. 366 MR. WARREN: Your phrase, Mr. Ladanyi, was that the intervenors could force you into doing something. It is possible that the intervenors could take what they regard as a perfectly reasonable interpretation of the data with which you would disagree and then you would ask the Board for a resolution; is that not fair? 367 MS. HARE: That's true. 368 MR. WARREN: Thanks. 369 Now, just so that I understand this process, Ms. Hare, factored into the calculation of final rates for fiscal 2004 is the possibility that there has to be factored into this the effect of the Board's decision in the ROE case and in the deferred taxes case; is that right? 370 MS. HARE: I'm sorry? 371 MR. WARREN: Sorry, I have described a process by which final rates for fiscal 2004 may have to be determined. But I am correct that in addition to that, the Board may have to factor into this the effect of the ROE application when it is decided and the deferred taxes application when it is decided; is that right? 372 MS. HARE: Yes, it is not part of the process that you outlined, but it would have to be factored in depending on the outcome of those two decisions. 373 MR. WARREN: I then ask, Ms. Hare, I am going to turn to a different topic and that is the topic of the genesis of this proposal that's before the Board, and in that context, would you turn up, please, an interrogatory that was delivered by my client, the CAC, and it is interrogatory 8. 374 For the record, Mr. Chairman, it is Exhibit I, tab 2, schedule 8. 375 Now, Ms. Hare, correct me if I have got this chronology wrong, but if we go to the first of the attachment pages, and there are 12 pages to this attachment, the first of the attachment pages is or appears to be the cover page for a presentation which you made to the executive management team of EGD on March 3rd, 2003; is that correct? 376 MS. HARE: That's correct. 377 MR. WARREN: Okay. Now, a clarification question first, Ms. Hare. Turning to the second page in, under the heading "objective" you have got the first bullet item, and then there is an indented statement under the first bullet item and it reads as follows: 378 "Prospective rate-setting avoids issue of current performance during rate negotiations." 379 Do you see that? 380 MS. HARE: Yes, I do. 381 MR. WARREN: Can you tell me what that means, Ms. Hare? 382 MS. HARE: It means that from our perspective, it is always difficult when we are into the year and talking about setting rates on a prospective basis when intervenors are asking, How are you doing so far in terms of O&M, how are you doing so far in terms of capital spent, and how are you doing in terms of degree days? 383 MR. WARREN: I hesitate to reveal my bone-deep cynicism, Ms. Hare, but at the risk of doing so, isn't it the case that that kind of information is a benefit to the ratepayers, the intervenors and makes life more complicated for EGD? 384 MS. HARE: Well, it is not prospective rate-making and so the problem for us is in the event that there is cherry-picking of the information that is provided. 385 MR. WARREN: It is always open to you to counter that cherry-picking with your own interpretation, your own spin on what the data means; is that fair? 386 MS. HARE: Of course. 387 MR. WARREN: Now, can I then turn over to -- this is one, two, three, four, five, six pages on -- sorry, Ms. Hare, seven pages on. It is a heading "Risks". 388 As a general question first, Ms. Hare, I take it that you felt, and I mean no subtext in this question, and I don't mean it as any criticism, you felt an obligation to point out to your management team what you regarded as the risks involved in this application process? 389 MS. HARE: That's correct. 390 MR. WARREN: And if I could take you to the bottom bullet point, "If the application is considered, the OEB may increase the discount against inflation"; what do you mean by that? 391 MS. HARE: At the time that this presentation was written, and you would have seen that we were talking about 80 percent of inflation, and so the risk that's being spoken to here is that it might be 50 percent of Ontario CPI. 392 MR. WARREN: The second risk you have identified is, under this heading, "Decrease the limit of the ROE cap"; what do you mean by that? 393 MS. HARE: One of the scenarios that we were thinking about at the time was in anticipation that intervenors may be concerned about the earnings above benchmark ROE of this, that is, we would offer to cap the ROE at a certain level. And I think we were thinking about 300 to 350 basis points at the time, but as you know, we didn't go forward with that proposal. 394 MR. WARREN: And then the final bullet item is "Introduce earnings sharing"; what does that refer to? 395 MS. HARE: Again, that one of the options might have been that there would be earnings sharing above a certain dead band above a benchmark ROE. 396 MR. WARREN: Was that something which, at that point, EGD was proposing to include in its application, or is that a matter of either the Board imposing it or intervenors asking for it and the Board opposing it? 397 MS. HARE: It was the latter. 398 MR. WARREN: Now, Ms. Hare, you are the one who prepared this document, this presentation; is that right? 399 MS. HARE: Yes. 400 MR. WARREN: And when I see the risks here, I don't see in the text - and I invite you to find it for me, if you can - where there is any discussion of how these risks are going to be mitigated. 401 MS. HARE: That's correct, it is not in this presentation. 402 MR. WARREN: Did the executive management team not want to know how these risks could be mitigated or managed? 403 MS. HARE: Not at that time. This is a preliminary presentation, and really what I was asking the executive management team for was approval of the concept to go forward with this type of application, as opposed to a cost-of-service application. 404 MR. WARREN: Could I then ask you to turn over to the next page, which is 2004 rate application, March 19, 2003. Can you tell me what this document is, Ms. Hare? 405 MS. HARE: This is the presentation that was made by the president of Enbridge Gas Distribution to the Enbridge Inc. corporate leadership team. 406 MR. WARREN: That was made by whom, I'm sorry? 407 MS. HARE: Jim Schultz, the president of Enbridge Gas Distribution. 408 MR. WARREN: To the executive management team of EI. 409 MS. HARE: No, sorry, to the Enbridge Inc. corporate leadership team, and I was present when Mr. Schultz made the presentation. 410 MR. WARREN: Did Mr. Schultz prepare this or did you prepare it for him? 411 MS. HARE: I prepared it. 412 MR. WARREN: Now, if I go to the third page of this document, I see -- I take it these are slide preparations or overheads or -- 413 MS. HARE: Yes. 414 MR. WARREN: Betraying my age and lack of technical sophistication when I refer to them as "slides," I'm sorry. Is this a PowerPoint presentation? 415 MS. HARE: That's right. 416 MR. WARREN: Under the heading "Risks", are these risks that -- can you tell me what they are? What are the risks being described here? 417 MS. HARE: These were the risks that were identified as a result of going forward with this type of application as opposed to a cost-of-service application. 418 MR. WARREN: Can you tell me, Ms. Hare, between the shorter list of risks that I just referred you to and the presentation earlier in March and this longer list of risks, how was this list generated? 419 MS. HARE: Well, it was generated by members, I suppose, members of my department identifying what we thought some of the risks were. 420 MR. WARREN: And perhaps you could explain for me exactly the nature of each of these risks briefly, Ms. Hare. 421 MS. HARE: Well, the first one refers to the O&M deferral account, and what we were considering as a risk was whether or not, if there was any amount included in a deferral account for O&M stemming from the 2003 decision, whether or not that would then apply to 2004. 422 MR. WARREN: You have got a negative sign on this sum? 423 MS. HARE: Correct. 424 MR. WARREN: What does that mean? What is the significance of that? 425 MS. HARE: It would mean if there is any amount in the 2003 O&M deferral account which then applies to 2004, that it would be a reduction in the revenues that the company would have available to it. 426 MR. WARREN: The second heading, or the second item is cost of debt, what is that? 427 MS. HARE: If the cost of debt were to increase because we weren't asking for any change in the cost of debt, then we would be financially harmed. 428 MR. WARREN: Income tax? 429 MS. HARE: Income tax, in anticipation that there might be a change in federal or provincial income tax, that that would be a benefit to the company. Municipal taxes we saw as a potential risk, and that's discussed actually in the settlement proposal. That risk we don't believe will materialize, but at one point we thought that that could be a risk of $10 million. 430 Declining average uses, again, because we were not adjusting the volumetric forecast, the impact of declining average uses would not be reflected in the 2004 rates, which would be a negative. 431 Weather, because we were not adjusting for degree days, would be a positive impact, and customer and volume growth would be a positive impact. 432 MR. WARREN: Now, in the compass, in the scope of this presentation, Ms. Hare, can you find for me where there is a discussion of how these risks which you have identified are going to be mitigated? 433 MS. HARE: That wasn't identified in this presentation. 434 MR. WARREN: Now, as of March 19, 2003, as of the date of this presentation by Mr. Schultz to the corporate leadership team of Enbridge Inc., am I right, Ms. Hare, that in the material there is no discussion of what the costs of Enbridge Gas Distribution's operations are going to be in 2004? 435 MS. HARE: That's correct. 436 MR. WARREN: And am I right that there is no discussion about whether the proposal would generate sufficient revenue to meet those costs? 437 MS. HARE: That's not in the presentation, no, although that very much was the subject of discussion at the meeting. 438 MR. WARREN: Sorry, it was the subject of discussion at the meeting, but it wasn't included in your presentation? 439 MS. HARE: That's correct. 440 MR. WARREN: I'm sorry, Mr. Schultz's presentation. 441 MS. HARE: That's correct. 442 MR. WARREN: And will you agree with me there is no discussion in the presentation about whether or not the proposal would generate sufficient revenue to meet the expectations with respect to return on equity; correct? 443 MS. HARE: That is not in the presentation, but again, that was discussed at the meeting. 444 MR. WARREN: And can you agree with me, Ms. Hare, that there is no discussion in this about the impact, if any, on this proposal of efficiency gains that might be obtained by the company in its operations in fiscal 2004? 445 MS. HARE: Again, that is not in the presentation. The purpose of this presentation was to explain to the corporate leadership team the new approach we were taking to filing for 2004 rates. The subject of whether or not this proposal would generate sufficient revenue in order to operate the company was very much discussed at the meeting, but that wasn't the purpose of this presentation. 446 MR. WARREN: The next document in the interrogatory response, Ms. Hare, appears to be a hard copy of an e-mail transmission from you on the 30th of March; is that right? 447 MS. HARE: That's correct. 448 MR. WARREN: This is some 11 days after Mr. Schultz's presentation to the corporate leadership team; is that correct? 449 MS. HARE: That's correct. 450 MR. WARREN: And this was sent to a number of people, including folks at Enbridge Inc.; is that right? 451 MS. HARE: Yes. 452 MR. WARREN: Okay. And if I look at the bottom half of the page, I see under the indications of the documents, I see the following: 453 "Questions remain about the risks/benefits of this proposal and a comparison of the financial outcome of this application, if accepted, relative to proceeding with a cost-of-service application for 2004." 454 And you are saying questions remain, Ms. Hare. Whose questions were they? 455 MS. HARE: Questions at the Enbridge Gas Distribution management level and questions from the corporate leadership team. 456 MR. WARREN: Now, at the bottom of the page, about roughly halfway down, the following appears: 457 "Therefore, we should compare the outcome of an increase in O&M of 33 million, increase in rate base (both of which would increase the deficiency) offset by increased volumes and customer additions (which would decrease the deficiency). The application of an inflation-referenced index would generate $14- to $17 million in additional distribution and storage rate revenue. The potential upside of significant volume impacts due to weather and customer adds that would be retained is offset by capital expense not recovered. The major swing items between the best case/worst case are the impact of the O&M deferral account if any amount is recorded in this account if the OEB determines that it should apply the 2004 (we will argue on both issues why this should not be the case)." 458 Am I right, Ms. Hare, in understanding what I have just read into the record as your short form calculation of whether or not this proposal would be a benefit financially to EGD or not? 459 MS. HARE: Well, I wouldn't call it a calculation. I would call it a high-level review of some of the risks and the benefits, and taken into consideration was whether or not we had much a choice in terms of cost of service, because on the next page you'll see that we conclude in this memo that going through a cost-of-service application would be a better outcome. 460 But we didn't have the time to do that. 461 MR. WARREN: Well, let's explore that, if we can, in the context of what's written on this page. 462 You concluded, I take it, that a cost of service application would be better, but the risk you were fearful of was government disallowance of retroactive rates; correct? 463 MS. HARE: Yes. 464 MR. WARREN: What was the basis on which you fear that the government would disallow retroactive rates? 465 MS. HARE: Excuse me, Mr. Warren, maybe I agreed too readily. It wasn't just the government's direction, but also the Board's wording I believe it was in the 2002 decision where we are basically chastised for being off track in terms of the regulatory schedule and we are asked to think of some creative solution to try and get back on track. 466 Now, I think you are asking me about what was the basis of our concern about retroactive rates? 467 MR. WARREN: And you have just expressed what it was. 468 MS. HARE: No, I haven't. The basis for that was the government's direction in terms of what we were hearing from the 100-review of the Ontario Energy Board. 469 MR. WARREN: So is it fair for me then to conclude, Ms. Hare, that the driver for the entire application that's before the Board today is this fear that existed at the time that upwards of 50 percent of the deficiency would be disallowed as a retroactive charge? 470 MS. HARE: No, I don't think that's what I said at all. There are a number of factors. 471 MR. WARREN: And those factors are the benefits which you have listed in your prefiled evidence; is that correct? 472 MS. HARE: That's correct. 473 MR. WARREN: But certainly at the time when you and your corporate leadership folks were making the decision, am I not right, in reading this document, that the driver for the application was a fear about what the government or the Board might do with retroactive rates? 474 MS. HARE: No, that was not the driver. It was one consideration. We were concerned about getting back on track in terms of what the Board had said in approving its decision. We were concerned about retroactive rates. We always are, in any event, in terms of the reaction from customers. 475 MR. WARREN: Now, can I ask you, Ms. Hare, to turn back to the first page of the interrogatory response, which is Exhibit I, tab 2, schedule 8, page 1. 476 MS. HARE: Yes, sir. 477 MR. WARREN: Now, as I understand the third paragraph of your response, the plan was taken -- I am reading this: The plan was taken to the Enbridge Inc. corporate leadership team on March 21st. Based on the attached presentation and discussion, approval was given to proceed subject to some changes in rate indexing; is that right? 478 MS. HARE: That's correct. 479 MR. WARREN: Can you tell me what the changes in the rate indexing were? 480 MS. HARE: We were suggesting 80 percent of the Ontario consumer price index. The corporate leadership team didn't understand why we wouldn't be going with the historic 2.4 percent; in other words, an increase over the rate of inflation. It was pointed out to the corporate leadership team that we wanted to be able to say to customers that rates are going up less than the rate of inflation, and the balance that arose then between wanting to provide a benefit to customers and having sufficient funds to be able to operate, and that was really the CLT's question, How do you think you are going to be able to operate on 80 percent of CPI when historically you have operated at a level greater than CPI? And the balance between those two competing objectives was 90 percent of CPI, which is what we filed for. 481 MR. WARREN: My final point on this interrogatory response, Ms. Hare, is if you can look down to the bottom paragraph, the last sentence -- sorry, the second last sentence: The rule-of-thumb type of analysis of the rate of indexing proposal was relied on in writing the memo of March 30. What is the memo of March 30? 482 MS. HARE: That is the one you just took me through, Mr. Warren. 483 MR. WARREN: That is your e-mail; is that right? 484 MS. HARE: That is my e-mail. 485 MR. WARREN: Okay, thanks. Now, I would like to turn then, panel, to the financial data which you presented yesterday, which, for the record, is -- 486 MR. BETTS: Mr. Warren, could I also just get you to find an appropriate time for a break. 487 MR. WARREN: Now is fine, sir. I am moving to an entirely different topic. 488 MR. BETTS: Okay, I didn't want to interrupt your line of examination, but it is probably appropriate, after two hours, to take a short break. So if this is satisfactory, we will take a 20-minute break. We will reconvene at -- let's target five minutes past 3:00. Thank you. 489 --- Recess taken at 2:45 p.m. 490 --- On resuming at 3:10 p.m. 491 MR. BETTS: Welcome back from that short break. Before we ask Mr. Warren to continue, the Board is prepared to advise all the parties that we find the complete settlement agreement on the issue number 5 DSM volume target and O&M budget for 2004 to be acceptable, and therefore there will be no requirement to consider it further in this hearing. Congratulations to all the parties. It was an outstanding effort and a job well done. Thank you. 492 Are there any other preliminary matters before we return to Mr. Warren's cross-examination? 493 Mr. Warren, please continue. 494 MR. WARREN: Mr. Chairman, my next set of questions are on the exhibit which was filed yesterday, which is Exhibit A, tab 10, schedule 6, which are the nine and three financials for 2003. I have advised Ms. Lea, and I'll repeat it on the record for Mr. Cass, I am going to do my best not to refer to any numbers, specific numbers within this. There is a possibility I may transgress, and I'll apologize in advance, but I am going to do my best not to refer, so I don't think it is necessary that you go into confidential -- into in-camera at this stage. 495 MR. BETTS: Thank you. That would be a very good effort if you can do it. If there is a mistake made, we'll just try and capture it on the written transcript and correct it there. Thank you, Mr. Warren. 496 MR. WARREN: Mr. Bourke, I guess the first question on this is to you, or perhaps not, I don't know. If I could get you to turn, actually, in this context, Mr. Bourke, to Exhibit A, tab 10, schedule 5, which are the nine months into June 30th. 497 This document I don't believe, Mr. Cass, is confidential; is that right? 498 MR. CASS: That's correct. 499 MR. WARREN: Mr. Bourke, if you could -- do you have that, Mr. Bourke? 500 MR. BOURKE: Yes. 501 MR. WARREN: Mr. Chairman, for the record, it is Exhibit A, tab 10, schedule 5. These are the nine-month figures which are on the public record. And if I could ask you to turn to the second page of the document under the heading "results of operations", and at the bottom of the page I quote: 502 "Year-to-date, 34.4 million of the revenue deficiency recovery has been included in the gas distribution margin of the company, partially offset by a charge against gas commodity and distribution costs of 11 million dollars during the first quarter. This was the result of the OEB's 2002 rate decision directing the company to increase a regulatory liability account by that amount to provide for certain long-term transportation contracts." 503 Am I right in understanding that this is a reference to the Alliance Pipeline matter? 504 MR. BOURKE: Yes, it is, Mr. Warren, and as we discuss this group, this exhibit further, I'll enjoin Mr. Ross to the discussions, these are prepared under his ... 505 MR. WARREN: Well, either Mr. Ross or Mr. Bourke, could you just explain to me, to a person who so disparately is not an accountant that it is pathetic, how the Alliance -- $11 million for the Alliance matter was treated in these financial statements? 506 MR. ROSS: Mr. Warren, these costs were treated as a charge to revenue under the distribution margin. 507 MR. WARREN: And that was in fiscal 2003; is that right? 508 MR. ROSS: That's correct. 509 MR. WARREN: Now, if I could then turn you, panel, to Exhibit A, tab 10, schedule 6, which is the confidential exhibit which was delivered yesterday. In going through that data, I don't see any reference to the Alliance matter, to the $11 million. Has it been factored into this data, and if so, can you tell me where and how? 510 MR. BOURKE: Perhaps I could begin by pointing to an update to this exhibit that was handed out probably only 10 or 15 minutes ago, so I am looking at a copy that's August 26th. I mention that just as a point of interest. 511 You are correct, there is no reference to the $11 million Alliance-Vector -- 512 MR. BETTS: Mr. Bourke, just before you do, let's make sure everyone has copies of that update. 513 Does everyone in the room have that version? It would appear so. So please, sorry for the interruption, please continue. 514 Is there anyone that doesn't have that version? Yes, there are a couple. 515 MR. WARREN: It was my understanding, Mr. Bourke, that what Ms. Persad handed around was the same as the document that was filed yesterday, except that, in accordance with the Board's direction, there is an unredacted version and a redacted version; am I right in that? 516 MR. BOURKE: Correct. 517 MR. WARREN: So that when I look at what you just referred to, there is no change from what was delivered yesterday; is that right? 518 MR. BOURKE: Correct. 519 MR. WARREN: Then I had interrupted you. I was asking where in this document I would find a reference to or see where Alliance was factored into it, and where would I find that? 520 MR. BOURKE: You wouldn't. It was not mentioned in this narrative. However, in keeping with the settlement proposal in which -- in Exhibit B, on Exhibit B, tab 1, schedule 1, page 6, a bullet-point indicated as A, under number 1, that the company had committed to removing the $11 million charge from the Alliance disallowance. 521 I can tell you that the nine-month actual numbers that were brought forward under schedule 8, that my staff removed that $11 million charge. 522 MR. WARREN: So it doesn't appear in the exhibit; is that correct? 523 MR. BOURKE: Correct. By "that exhibit", I mean it is not referenced in schedule 6, which I will call the narrative exhibit; neither is it numerically included in schedule 8. 524 MR. WARREN: Okay, thanks. Now, one other question on a number-related question, Mr. Bourke, and it is in this confidential exhibit. 525 And if I could get you to turn to Exhibit A, tab 10, schedule 8, page 3 of 6, and I see at the bottom of column H on that page a negative number in relation to total rate base; do you see that number? 526 MR. BOURKE: Yes, I do, on line 29? 527 MR. WARREN: Yes, that's right. 528 MR. BOURKE: I believe it is column I where the negative number appears. 529 MR. WARREN: Yes, you are right, I'm sorry, column I. Am I to understand that the significance of that is that the company spent less by way of capital expenditures in fiscal 2003 than they did in 2002? 530 MR. BOURKE: The variance there is compared to a Board-approved number. 531 MR. WARREN: Less than the Board-approved number; is that right? 532 MR. BOURKE: I think we have probably all gone through the way this information has been prepared. To make a statement that capital expenditures are less than Board-approved, I don't know where we stand at nine months. 533 MR. ROSS: Mr. Warren, I can confirm that the company spent less on capital expenditure in 2003 to date compared to 2002. 534 MR. WARREN: And Mr. Ross, am I right that one implication of that is that the Board is earning -- sorry, that EGD is earning a return on money that it hasn't spent? 535 MR. ROSS: Sir, there are many things which are different from the Board-approved rates. This would just be one of them and would not impact your inference there. 536 MR. WARREN: I'm sorry, Mr. Ross, I didn't hear your response. 537 MR. ROSS: This is just one of many things which are different between the Board rates. 538 MR. WARREN: No, I appreciate that, but with respect to the underspending, the difference, the variance between the Board-approved and what you have actually spent on capital expenditures, you are earning money on -- you are earning a return on capital expenditures you haven't made; is that not fair, Mr. Ross? There may be offsets in other areas, but you are earning money on -- is that fair? 539 MR. BOURKE: I can confirm we have a budget variance in rate base, yes. 540 MR. WARREN: Okay. And just as a collateral point on that, is it fair for me to conclude that capital expenditures are always in the discretion of the company; they can spend as much or as little on capital expenditures as they choose in any given fiscal year; correct? 541 MR. BOURKE: There is a certain group of capital expenditures over which the company would have a certain degree of discretion. However, as it comes to serving customers, the demand for customers is -- has been very strong this year. It is something that the company has no discretion over. 542 Now, I am not completely familiar with the capital expenditure budget, but I think a significant portion is related to customer growth, and certainly that would not be considered discretionary. 543 MR. WARREN: Now, Mr. Bourke, let me deal with an issue which was raised specifically by the presiding chair, Mr. Betts, yesterday when he asked you what the reliability of the figures which are in Exhibit A, tab 10, schedule 8; do you remember that exchange with Mr. Betts yesterday? 544 MR. BOURKE: Yes, I do. 545 MR. WARREN: Now, in this area, I want to begin, if I can, with some questions about the potential impact of a partial settlement agreement, which is Exhibit B, tab 1, schedule 1. And please correct me if I am wrong in my understanding of it, Mr. Bourke, or members of the panel. 546 Under the so-called consumer protection measures, under what have been described as the consumer protection measures, am I correct in understanding that if Enbridge over-earns by an amount, a sufficient amount, the result may be a drop in the rates; is that right? 547 MR. BOURKE: Yeah, I believe they are called a ratepayer safeguard, and I believe the calculation provides for a settlement ROE which would calculate an ROE based upon the exclusion of the $11 million related to Alliance-Vector, the exclusion of any amount that would be recorded in the company's books of record related to the 2003 O&M DA, as well as a calculation to exclude a variance from the forecast level of unaccounted for gas. 548 Under those three criteria, the company would calculate its normalized return and compare it to a band number based upon a Board-approved of 9.69 plus 25 basis points. 549 And the amount of earnings in excess of that amount would be subject to adjustment to 2004 rates under the terms of the ratepayer safeguard. 550 MR. WARREN: Now, my question to you -- thank you for that explanation. 551 My question to you was that if, under this formula, if EGD over-earns to any significant degree, the operation of this ratepayer safeguard, the formula, would have the effect of dropping the rates; is that right? 552 MR. BOURKE: Correct. 553 MS. DUGUAY: Well, it would be either dealt with through an adjustment to the 2004 distribution rates or through a deferral account. 554 MR. WARREN: It wouldn't be -- 555 MS. DUGUAY: Either way it would translate into monies being returned to the customers, but whether it would be dealt with through rates or through a one-time adjustment on the customer's bill will need to be assessed at some -- 556 MR. WARREN: Fair enough, Ms. Duguay. 557 Am I right enough in understanding that one way or another, however it is dealt with, it means less revenue for Enbridge Gas Distribution; is that correct? 558 MS. DUGUAY: Yes, that is correct. 559 MR. WARREN: And can you and I agree, panel, that if there is less revenue going to EGD than this proposal contemplates, that that represents a risk for the company; is that fair? 560 MR. BOURKE: May I mention in terms of risk -- 561 MR. WARREN: Could you just, Mr. Bourke, if I could just get an answer to my question, you can offer whatever gloss you want on it. 562 I want to know whether or not the possibility under this settlement agreement that the amount of revenue going to Enbridge Gas Distribution represents a risk to Enbridge Gas Distribution; yes or no? 563 MR. BOURKE: An over-earning under this calculation would see a reduction in 2004 revenues, correct. 564 MR. WARREN: And does that represent a risk to the company? 565 MR. BOURKE: Yes, it does. 566 MR. WARREN: Now, can I presume, panel, that the nature and extent of that risk was something that was taken to senior management of EGD, and indeed, to EI? 567 MS. HARE: It was taken to the senior management of Enbridge Gas Distribution. 568 MR. WARREN: And can I presume, panel, that EGD was prepared to take that risk because it was confident that what I describe as the claw-back provisions of the formula would never kick in? 569 MS. HARE: I don't think it's a confidence that was considered and we didn't think that we would earn in excess of -- significantly in excess of the 25 basis points dead band, but there is no confidence of that. 570 MR. WARREN: Well, is it not fair, Ms. Hare, that as a responsible manager of Enbridge Gas Distribution, when you take it to your senior managers and ask them to assess a risk, they are going to want to know how confident you are in your earning below -- too many negatives in this -- in your not earning in excess of the band? You are not materially over-earning; correct? 571 MS. HARE: The financial people were involved and did do some high-level numbers as to what the result might be, but there is no guarantee that the numbers that were done at a high level are going to be the numbers that we see by the end of the year. 572 MR. WARREN: But surely, we can agree, can we not, Ms. Hare, that management would not take a risk unless it was reasonably satisfied on the numbers given to them that this risk would not materialize? 573 MS. HARE: No, Mr. Warren. Actually, the company has taken a number of risks. The O&M deferral account was a very significant risk, and yet it was agreed to by the company. 574 MR. WARREN: But the O&M deferral account is one category of risk which is contemplated. I am talking about the over-earnings risk. 575 MS. HARE: Mr. Warren, I just gave that as an example that management does take risks in certain situations. 576 MR. WARREN: Can you tell me, Mr. Bourke, if the numbers that were presented to the Board yesterday in this exhibit, were they the numbers that were given to Enbridge management as part of its assessment of whether or not this was a risk they were willing to take? 577 MR. BOURKE: I can assure you they were not. 578 MR. WARREN: Were there -- 579 MS. HARE: Mr. Warren, these numbers were only produced over the weekend. They weren't available when management was making the decision during ADR. 580 MR. WARREN: Can you tell me, Mr. Bourke, what numbers were presented to management when they were making the assessment whether or not you were likely to over-earn? 581 MR. BOURKE: It certainly wasn't any information I worked on. 582 MR. WARREN: Can you tell me, Ms. Hare, what numbers were presented to them? 583 MS. HARE: Numbers that is Mr. Mees produced. 584 MR. WARREN: I beg your pardon? 585 MS. HARE: Mr. Mees, our director of -- I believe his title is director of finance, produced them, some high-level calculations. 586 MR. WARREN: Well, let me get to the nub of it, panel. Yesterday, in response to a question which was asked by Mr. Betts, the evidence from you, Mr. Bourke, if I can put my gloss on it, was that these numbers were unreliable; is that a fair gloss on your answer? 587 MR. BOURKE: I would hesitate to use the word "unreliable." 588 MR. WARREN: Then what I don't understand, Mr. Bourke, is why it is you would present numbers to Enbridge Gas Distribution management, not you, personally, but somebody would, Mr. Mees would, that would allow them to take a risk. Surely, they must have been sufficiently accurate that the company was prepared to take the risk. 589 MS. HARE: Mr. Warren, I believe we said that we did not have confidence that the those numbers were going to be the same numbers as at the end of the year. To that extent, the numbers were not accurate. 590 MR. WARREN: Am I to understand, Ms. Hare, that you presented in discussion of a risk presented to Enbridge Gas Distribution management, you presented numbers that were not reliable? Is that what I am supposed to understand? 591 MS. HARE: I don't think I would use the word "reliable." I think they are as reliable as could be produced in short order. Those are the numbers that were reviewed. What I am saying is there is no confidence that those are going to be the accurate numbers by the end of the year. 592 MR. LADANYI: You have to remember those discussions took place in March, which is many months ago, when a lot less was known about what is going to happen in the year. 593 MR. WARREN: Sorry, Mr. Ladanyi, with the greatest of respect, those discussions took place at the time when you had received the partial settlement agreement; right? 594 MR. LADANYI: Right. 595 MR. WARREN: They took place within the last fortnight, is that not fair? 596 MR. LADANYI: I misunderstood what you were talking about. 597 MR. WARREN: And Mr. Mees was using -- do you know, Ms. Hare, what numbers Mr. Mees was using? Was there a written analysis presented? 598 MS. HARE: No, there was not. There was no written analysis. He was using the nine-month actual numbers, to the best of my knowledge. 599 MR. WARREN: Would you disagree with me, Mr. Bourke or Ms. Hare, that the numbers in Exhibit A, tab 10, schedule 8, indicate that at present rate levels, Enbridge Gas Distribution is earning about what it is allowed by the Board's approved return on equity? 600 MR. BOURKE: Without going into a full analysis of how this information was developed, I can tell you that the methodology that I followed in producing the quarterly financial monitoring report is was used previously for filing with the ERO, produced is the result you see before you. It is not a twelve-month cohesive fully reviewed number. It is two groups of numbers, a nine-month group and a three-month group, that are appended and it produces this result. 601 MR. WARREN: My final area of questions is for you, Ms. Duguay, and it just is a follow-up to an exchange that you had with Mr. Betts yesterday, and perhaps -- do you have the transcripts from yesterday? 602 MS. DUGUAY: I don't. 603 MR. WARREN: Well, let me read the exchange to you. 604 MS. HARE: Mr. Warren, if we could just have a moment, we'll find the transcript. 605 MR. WARREN: Do members of the panel have the transcript from yesterday? 606 MR. BETTS: Yes, we do. 607 MR. WARREN: I am not sure how much turns on it -- I'm sorry, do you have it? 608 MS. HARE: We don't have it. 609 MS. DUGUAY: I suggest you try and read it to me, and if I need to consult -- 610 MR. WARREN: It doesn't require a close textual analysis, Ms. Duguay. 611 The question from Mr. Betts was this, it appears at paragraph 135. Mr. Betts: 612 "One question, and the question is a simple one. Will this affect the other rate classes or is the change within class 6?" 613 And your answer -- sorry, the answer was from Mr. Cass. I'm sorry. All of this exercise for you, Ms. Duguay, and it is Mr. Cass I should be taxing about this. 614 Mr. Cass said: "For the purposes of the current case, my understanding is that it will not affect the other rate classes. It is only within rate 6. In respect of other rate classes, it is simply the commitment to do the examination to see whether there is any similar issue after the seasonal rate differential." 615 My question arising from that is: Are there differential impacts within rate 6? Are there some winners and losers within rate 6? This is between rate 6 and others. 616 MS. DUGUAY: Yes, there would be, because to the extent that the change to rate 6 was confined to that existing rate class, to the extent that there is a change in the seasonal differential, that means that there is going to be a tilt within the rate class and a tilt towards the summer and winter rates, yes. 617 MR. WARREN: Some people pay more, some people pay less, is that it? 618 MS. DUGUAY: That's correct. 619 MR. WARREN: Those are my questions for the panel, sir. 620 MR. BETTS: Thank you very much, Mr. Warren. 621 Mr. Janigan? 622 MR. JANIGAN: Thank you, Mr. Chairman. 623 CROSS-EXAMINATION BY MR. JANIGAN: 624 MR. JANIGAN: Panel, has it ever occurred that Enbridge, or its predecessor, Consumers Gas, has not had an annual rates case? 625 MR. LADANYI: Perhaps I could answer that, Mr. Janigan. I believe that was a period, I think, preceding EBRO-464, which I believe the year was 1989 when Enbridge or, at that time, it was Consumers Gas Company, wanted to stay out, and it was called in by the Energy Returns Officer to file financial information and it was asked by the Board to file an annual rates case, and since that time we have had an annual rates case every year. 626 MR. JANIGAN: Now, prior to that time, was there ever an occurrence when you didn't have an annual rates case? 627 MR. LADANYI: We have had annual hearings every year, as far as I understand, since 1971, and prior to 1971, there were no hearings. At that time, there were annual rate filings with the Board without a hearing from 1960 to 1971, so there were no public hearings in that period. The Ontario Energy Board started in 1960. 628 MR. JANIGAN: Has it ever been the case that Union or Centra has not had an annual rates case? 629 MR. LADANYI: There I am not as knowledgeable. I understand that Union filed a two-year rate case at some times in the past, but beyond that, I can't tell you more details. 630 MR. JANIGAN: In the event that no rates case is filed, the rates that were in effect for the previous year stay throughout that year? 631 MR. LADANYI: That certainly would be the practice under cost of service, and that happens in the United States and a number of jurisdictions. 632 MR. JANIGAN: And presumably during that period of time, increases in prices that are paid by the company for its inputs are absorbed by the company either through efficiencies or reduced earnings? 633 MR. LADANYI: Apart from commodity, and I think the practice, again, speaking mainly of the United States now where this is more common, there would be a gas adjustment clause whereby commodity costs would be passed through to ratepayers in some way, through regular adjustments, but there would be -- the rates would stay in place. 634 But what I should qualify here is that jurisdictions where this is more common are jurisdictions with no growth. This would be jurisdictions such as, let's say, Kentucky where there would be no event like occurs here in southern Ontario. They do not have a hundred thousand people who move into their franchise area every year. 635 I think you have to understand that we have unique problems here that we face as a utility. If you look at North America in general, you will see that there are essentially three high-growth areas. One is Los Angeles, the other one is Toronto, and the third one is Atlanta, and New York City is not far behind. 636 And in terms of the kind of growth we see in the franchise area, if you think of, let's say, 200,000 immigrants coming into Canada every year, a hundred thousand of those immigrants settle into our franchise area. 637 These people eventually buy homes and that is why there is a real estate market out there. Homes are built for these people, and that's why we have this growth. And one way to look at it, and I was telling Mr. Cass this before, earlier today, is you have to see our franchise areas. If we add the City of Sudbury every year, that's what we look like. We essentially have to serve a brand new city every year. That is how many people we have to add every year to our franchise area. 638 MR. JANIGAN: Now, I presume the electric distribution companies in Ontario are subject to some of the similar pressures in terms of expansion of customer base? 639 MR. LADANYI: Certainly some would be, and I think you would look at certainly Brampton Hydro would have pressures and Markham Hydro would have certain pressures, not all of them, so they would vary by where they are located. 640 MR. JANIGAN: And in those provinces, those electric distribution companies are subject to a rate freeze, as I understand it? 641 MR. LADANYI: Well, that is actually a good question, and I think that some of them are really suffering under rate freeze, as you will know. Some are doing well under a rate freeze. Some are having a very hard time meeting the demands on their services. 642 MR. JANIGAN: In that case, any increase in the prices they pay for their inputs has to be covered either by efficiencies or reduced earnings? 643 MR. LADANYI: And/or possibly by reductions in service, and I think that has to be kept in mind as well. I think that should be a concern amongst ratepayers and I suppose everybody in this room, that the quality of service provided by those utilities, and they are under these severe cost pressures, are not reflected in reductions of service. 644 MR. JANIGAN: Are quality of service indicators, as far as you know, in place for those electric distribution -- 645 MR. LADANYI: I cannot tell you that. 646 MR. JANIGAN: And you don't have any -- 647 MR. LADANYI: No, I don't. 648 MR. JANIGAN: You don't have any knowledge the quality of service is diminished during the period of the rate freeze? 649 MR. LADANYI: No, I don't. 650 MR. JANIGAN: Okay. 651 Now, your case for an increase is based in part on the correlation between the CPI and historical levels of distribution revenue? 652 MS. HARE: That's correct. 653 MR. JANIGAN: That is correct? 654 MS. HARE: That's correct. 655 MR. JANIGAN: And I wonder if you could turn to Exhibit I, tab 5, schedule 1, page 4. 656 MS. HARE: I'm sorry, could you repeat the reference, please, Mr. Janigan? 657 MR. JANIGAN: Yes, Exhibit I, tab 5, schedule 1, page 4. Under Malcolm Hayes' interrogatory, and that sets out the annual increase in distribution revenues, as well as the percentage increase year over year, as I understand it; is that correct? 658 MS. LAKATOS-HAYWARD: Sorry, could you repeat that last statement? 659 MR. JANIGAN: For an 11-year period, this particular table shows the annual increase or decrease in distribution revenues and the percentage increase or decrease year over year? 660 MS. LAKATOS-HAYWARD: That's correct. 661 MR. JANIGAN: And I note, first of all, that, in looking at just the percentage increase, that this particular figure, and that's the final column on page 4, seems to be highly variable. Would you agree with that? 662 MS. LAKATOS-HAYWARD: Some years tend to be higher than others, certainly. 663 MR. JANIGAN: And in any given year, this particular percentage might not match up with the particular figure for CPI? 664 MS. LAKATOS-HAYWARD: No, the analysis that was conducted in the inflation evidence shown in tab 5 looks at over an average 11-year period, so we are looking at a longer time period, what would be the correlation between Ontario CPI and the average allowed distribution per unit revenue. We are looking at longer term. 665 MR. JANIGAN: So in any given year, it might be out of whack with the CPI? 666 MS. LAKATOS-HAYWARD: That is the nature in developing statistical models, that in any given year, yes, that is possible. 667 MR. JANIGAN: But for example, if in EBRO-479 we used the CPI to calculate distribution revenues, obviously we would have been out a fair amount? 668 MS. LAKATOS-HAYWARD: Over an 11-year period, what the model that we had developed had indicated, that on average, over that 11-year period, there would only be a 1.6 percent average percentage error in using that model. 669 MR. JANIGAN: Well, we are setting rates here, aren't we, one year at a time? 670 MR. LADANYI: Certainly. 671 MR. JANIGAN: And in fairness to Enbridge, of course, in any given year the amount that you set for the CPI might be considerably lower than the actual increase in distribution revenues, that was experienced? 672 MS. LAKATOS-HAYWARD: It is possible, but it is hard to know year to year what that may be. 673 MR. JANIGAN: Okay. 674 MR. LADANYI: Maybe I can help a little bit, Mr. Janigan. Sometimes capital expenditures are lumpy in terms of they are not distributed evenly from year to year. As you are well aware, we might sometimes have a program to upgrade our computer system, we might have several years of high capital expenditures, and this would reflect an upward pressure in rates and this would be followed by several years of low capital expenditures. 675 And therefore, this kind of fluctuations will occur from time to time, and that is perfectly normal, cyclical investment in a utility plant, and that is reflected in the fluctuation in the rate increases. 676 But what we are saying is that over a long period of time, the correlation with consumer price index for Ontario is a very good correlation. 677 MR. JANIGAN: Would that lumpy capital problem you refer to be reflected in the distribution revenues? 678 MR. LADANYI: Certainly, it would be reflected in the distribution rates which would then be reflected in the distribution revenues, correct. 679 MR. JANIGAN: Now, if you could turn up Exhibit I, tab 6, schedule 2, I believe it's indicated here, if I understand the response, that indexing rates and not the distribution revenues, that 90 percent of the Ontario CPI, would result in rates that are lower than your proposal? As I understand it, am I correct in that? 680 MS. HARE: Yes. 681 MR. JANIGAN: Okay. And do you have any idea of what the correlation is between increases in rates and the CPI over an 11-year period? 682 MS. LAKATOS-HAYWARD: I'm sorry, I don't understand what your question is yet. 683 MR. JANIGAN: Well, if you looked at the various rate increases that have been passed on throughout the 11-year period which you have tracked distribution revenues, would the same correlation apply to the CPI as applies to distribution revenues? 684 MS. DUGUAY: I guess we don't understand in relation to your previous line of questioning, when we were looking at the year over year impact or increases or decreases in distribution revenues over 11 years, we don't understand the difference between your previous line of questioning and what you are currently asking. If you could please clarify? 685 MR. JANIGAN: Okay, you started off with the initial premise that if you applied your rate of increase to rates rather than distribution revenues, it would result in a lower revenue requirement for the company; am I correct in that? It would give the company less money if your increase of 1.8 percent was applied to rates rather than distribution revenues? I think that's what it says. 686 You go further and say that it would be lower than if you filed a cost of service application, but I am assuming that it is also lower than you would get if you used distribution revenues instead; right? 687 MS. LAKATOS-HAYWARD: Mr. Ladanyi has just reminded me that if you refer to Exhibit A, tab 5, schedule 1, I am not sure if this is going to be helpful to you, but what we had attempted to do was look at the per-unit Board-allowed distribution revenue and create an index around that. So really, in effect, because it is on a -- calculated on a per-unit revenue, in effect it operates somewhat similar to a rate. 688 MR. JANIGAN: I guess I am still troubled by the fact if we use rates rather than distribution revenues, we get a lower number. 689 MR. LADANYI: That is not actually what it says. I think what we are dealing with here, Mr. Janigan, is I think we are not understanding each other as you are asking a question. 690 MR. JANIGAN: Okay. 691 MR. LADANYI: What we are trying to tell you is that -- and maybe I can help a little bit -- is that rate structure, as you all know, is a very complicated thing, so it is very difficult when you talk about a rate, what exactly are you talking about? Are you talking about the first block or second block? Which rate you are talking about? 692 So what is shown in Exhibit A, tab 5, schedule 1, page 2, in table 2, is essentially you would call it per unit revenue, is really a blended rate, so it is reflective of all of the rates that we are charging, because otherwise the problem would be very complicated if you were to do a correlation with every single component of a very complex rate structure. So this simplifies the analysis and makes it more descriptive and it is an indicator of the correlation between rates and consumers price index. 693 You can understand how complicated the analysis would be if you had to do this correlation for each block, for each rate class, you know, through a very complex rate structure. 694 MR. JANIGAN: I guess the concern is, for my clients, for example, that are paying a particular rate for the services they receive, that whether or not the percentage increase that you were suggesting, in effect, produces the same kind of increase in rates or produces some other kind of increase in rates based on whether distribution revenues or rates are used as the comparator. 695 MS. DUGUAY: I think I would like to go back a little bit to the interrogatory response that you are looking at, and I think I finally understand the question. 696 Just to clarify, the first sentence here, really the gist of the sentence is to say that the company's simplified rate case proposal would have resulted in rates that would be lower were the company to have filed for a cost of service application for 2004. This is what this is saying. And I think -- or I believe I understand the question that you are asking is that the proposed increase at the rate class level may or may not match the proposed increase at the rate class by block. 697 Is that really the question? 698 MR. JANIGAN: Yes. And overall, what the difference might be between indexing rates, as it is suggested here, and indexing distribution revenues. 699 MS. DUGUAY: Okay. Well, as I mentioned in direct examination, in terms of effecting the proposal at the rate class level and additionally at the rate block level, and at the seasonal level, if you will, as well, given that our rates are seasonally differentiated, the company has used the methodology it typically uses in any other rate application. So there is a methodology that is used for our large volume customer rate classes and there is also another methodology that is used for our general service rates, being rate 1, rate 6 and rate 9. 700 Were the company to have effected a uniform increase by block which would match the proposed increase at the rate class level, the outcome of doing that, which the company could do, would be to increase the winter rates by virtue of the fact that we have seasonal rates and our winter rates are higher than our summer rates. 701 So, for example, if we were to effect by block a rate increase of, say, the overall average, as I indicated earlier, is 1.6 percent, so if I were to apply 1.6 percent to a higher unit rate, which is typically the case for our winter rates, that means that the increase would be higher. 702 So I did look at that, and I was questioning whether that would be a desirable outcome. So we simply decided to use the methodology that we currently use, and the resulting outcome is found at the response to Board Staff interrogatory number 35. 703 MR. JANIGAN: Okay. I'll move on. As I understand EGD's position, that you require approximately, and I believe it is $13.9 million is the amount of the increase, as I recall? 704 MS. DUGUAY: That's correct. 705 MR. JANIGAN: You require the $13.9 million to meet your allowed return for 2004; am I correct in that? 706 MS. HARE: That is not what we are saying at all. 707 MR. JANIGAN: Okay. 708 MS. HARE: Sorry. Because what we are saying is we need an increase in revenues to be able to operate. 709 MR. JANIGAN: Okay. And that increase -- 710 MS. HARE: That may not get us to the benchmark ROE. 711 MR. JANIGAN: But presumably the reason that you need the increase is toward the revenue requirement to meet your allowed return. 712 MS. HARE: Really, the way we are looking at it were the cost pressures that we were aware of for 2004, so we spoke about customer growth. We know that that, at 50,000 customers, would be $7 million alone for customer growth. Then there is inflation. I mean, employees are expecting a salary increase; increase in insurance costs. There are a number of cost pressures, and it was believed that at $14 million, with looking at other areas where we could make reductions, that the company could manage on that amount of an increase. 713 MR. JANIGAN: Okay. And as I think you indicated, one of the company objectives is to maintain shareholder value? 714 MS. HARE: Correct. 715 MR. JANIGAN: And a principal way that is done is to meet your allowed return? 716 MS. HARE: Correct. 717 MR. JANIGAN: So at least, in part, one of your objectives is to obtain that $13.9 million as a help towards meeting that -- 718 MS. HARE: Yeah, the only reason I am quarreling with the words, Mr. Janigan, is that it implies that we did a calculation, and we did not. 719 MR. JANIGAN: I see, okay. Now, your particular adjustment formula does not have any offset or productivity offset in any way against that index of 1.8 percent? 720 MS. HARE: No, it does not. 721 MR. JANIGAN: And just dealing with your productivity in general terms, you have filed at Exhibit I, tab 6, schedule 18, page 3 -- that is tab 6, schedule 18, page 3 -- the calculations that were done by your experts, Navigant. 722 MS. LAKATOS-HAYWARD: No, if I could correct, that was an internal company study, and the study, however, was reviewed by Navigant. 723 MR. JANIGAN: Oh, okay. Thank you very much for that. That this study set out the calculations for the historical total factor productivity, and as a result of this, over the historical period that you have chosen, I believe -- that is the eleven-year period that is -- 724 MS. LAKATOS-HAYWARD: No, sorry, that starts from 1988, I believe. 725 MR. JANIGAN: Over that period of time, up until -- and the last entry for that that's reflected here is -- 726 MS. LAKATOS-HAYWARD: Sorry, year 2000. 727 MR. JANIGAN: Year 2000, and which entry is that? 728 MS. LAKATOS-HAYWARD: That would show the TFP in the first column of 95.8. 729 MR. JANIGAN: Yes. And the TFP growth of negative 1.46, and that is in the year 2000, you said? 730 MS. LAKATOS-HAYWARD: That's correct. 731 MR. JANIGAN: Okay. And we, accordingly, have a negative historical total factor of productivity of negative .33 percent. 732 Now, have you measured any of your historical total factor productivity over the last three years? 733 MS. LAKATOS-HAYWARD: No, this study, as I had indicated, was undertaken from 1988 to 2000, so that was the last year that was included in the study. 734 MR. JANIGAN: I wonder if I could -- and I have some materials that I would like to use in my examination, and they also have a -- the last two pages were not photocopied as well as I had hoped, and the company has graciously allowed me to obtain photocopies of those two pages so that they can be a little more legible. 735 So I would suggest that possibly they be marked as an exhibit, and then adding the two -- 736 MS. LEA: Yes, I was just waiting to see what it was, so we could identify. Can we call it VECC book of materials? Would that be acceptable, Mr. Janigan? 737 MR. JANIGAN: That would be fine. 738 MS. LEA: Exhibit C.1.1, VECC, that's V-E-C-C, all in caps, book of materials. 739 MR. JANIGAN: And the last two pages have been reproduced separately to make them a little more legible. 740 MS. LEA: Since this is a separate piece of paper, maybe we'll mark it as C.1.2, or would you rather tear out the whole pages? 741 MR. JANIGAN: Or either mark that as Exhibit A and B, if possible. 742 MS. LEA: Okay, so the first is C.1.1.A and the second is C.1.1.B, same title. 743 EXHIBIT NO. C.1.1.A: VECC BOOK OF MATERIALS 744 EXHIBIT NO. C.1.1.B: VECC BOOK OF MATERIALS 745 MR. JANIGAN: Thanks very much. 746 MR. BETTS: I am not sure, I want to make certain that we have what we should have. What are the last two pages that we received? 747 MS. LEA: We seem to have a single page. 748 MR. JANIGAN: There should be two separate pages. 749 MS. LEA: Okay. 750 MR. JANIGAN: What do you have? 751 MS. LEA: It seems to be coming down the -- 752 MR. JANIGAN: Oh, it's coming down, okay. 753 And they are the exact replica of pages 19 and 20 of my book of materials, but more legible. 754 MR. BETTS: Thank you very much. 755 MR. JANIGAN: Now, the first page of the materials I would like to refer to is set out on page 3 of the book, and this is an excerpt from the decision with reasons of EBRO-497-01. 756 And I note that in the context of this decision that the company had derived a value of .63 percent as the historic productivity growth of the company over the period 1987 to 1997; am I correct on that? 757 MR. LADANYI: Yes, that was the O&M productivity. 758 MR. JANIGAN: Yes. 759 MR. LADANYI: It is different from the total factor productivity we just discussed. 760 MR. JANIGAN: Are you certain that that .63 percent was just the O&M productivity or the total factor productivity? 761 MS. LAKATOS-HAYWARD: No, the .63 percent refers to the O&M productivity, and in fact, just in reference, because you had raised it in relation to the total factor productivity over the study had referred to the negative .33 percent average, in fact, the O&M productivity that was calculated in that study indicated an average O&M productivity of 2.6 percent. So while we were showing a positive O&M productivity, but a total factor productivity, in the context of that study, total factor productivity averaged negative .33 percent. 762 MR. JANIGAN: Okay. Now, in terms of the 497-01 case, the company's position was, at that time, that the .63 percent would be a significant challenge during the term of the PBR plan, am I correct? 763 MR. LADANYI: Yes, that's my understanding. 764 MR. JANIGAN: And experts were produced that showed that principally the company was achieving very good levels of O&M per customer, and as a consequence of the achievements to date, that it would be very difficult to get any more efficiency gains, as I recall. 765 MR. LADANYI: And again, this was all in the context of discussing operation and maintenance costs only, rather than all the costs of the company. 766 And also, I think we should keep in mind that if you look at the total decision, the Board allowed, for example, for a growth factor, which recognized that there is going to be a cost impact of adding those customers, so that was added in the formula. 767 So the formula had a growth factor in it, it had inflation, and it was minus productivity. 768 So all of these factors were considered and accepted by the Board, so I think we should not look at O&M productivity in isolation, but we should recognize what the total decision was in that case. 769 MR. JANIGAN: Now, the Board also imparted a stretch factor to the historical growth? 770 MR. LADANYI: Yes, it did, but I think the stretch factor was applied in the context -- not in isolation, but in the context with a growth factor, so I think we should not look at these things in isolation and only pick some of them. It was the total decision of the Board that was significant. 771 MR. JANIGAN: Well, Mr. Ladanyi, do you understand that in the context of the making of most price caps or price cap frameworks by regulatory boards and commissions, that a stretch factor is a usual feature of a price cap? 772 MR. LADANYI: Yes, and I think I allude to that or explain it in our response to Board Staff interrogatory number 3, and if you care to turn to that, so that would be Exhibit I, tab 1, schedule 3, page 1. 773 So if you all have it, the usual form of a price gap formula is shown there, and it looks like essentially what is in the multiplier is 1 plus the inflation index minus productivity. 774 Then there is also Z factors, and Z factors are things that are typically outside the company's control, and as you know, we have had stakeholder consultations over the past, I guess, year and a half when we were discussing potential multi-year incentive regulation plan, and we did discuss the cost pressures on us, and we did discuss that the pure application of the price cap formula would cause us difficulty, that we would need certain Z factors to provide for investments, for example, for system integrity, to provide for investments for pipe replacement, for service relays and for upgrading our system in the state of good repair. And that a pure application of a price gap formula whereby within the price gap formula we would have to face the cost pressures of adding those 50,000 customers a year and also make non-revenue investments in system integrity would cause great difficulties for us. 775 So we would require evidence on Z factors. We would probably -- if we were to apply a formula like this, we would require evidence from expert witnesses on productivities. So this would create a very complex proceeding, and we did not want to go this way. We provided what we thought was, to the intervenors and to the Board, a very reasonable alternative to arrive at just and reasonable rates by our proposal. We really did not want to go through this, perhaps, theoretically more pure of doing things but a far more complex one. 776 MR. JANIGAN: No, I understand your reason for suggesting the formula that you have, but it is fair to say that other utilities, including Union, have been subject to price gaps with productivity offsets that are associated with the application of an inflation rate. 777 MR. LADANYI: I completely agree with you, and what I am saying is that when you look at price gaps, and this is a typical formula, then you are also going to have to look at Z-factors, and we did not want to go to that level of complexity. 778 What we were looking for is a simple solution that would lead us as quickly as possible, with least amount of complications, to just and reasonable rates, and that was our proposal. 779 MR. JANIGAN: I guess what I am looking at here, and I guess what my question cuts to, is whether or not the application of your simple adjustment formula puts the company in a better position than it might have been had a full price cap or PBR regime been put in place. 780 MR. LADANYI: It is very difficult to say. We are also concerned it might put us in the worst position. And we are really prepared to take that risk, that we might have greater difficulty with going ahead this way, but we believe that both for us, as a utility, and also for our ratepayers, and also for the Board, it is in everyone's interest that the process, the regulatory process, be brought back to schedule, that essentially we are not facing retroactive rate-making. And that issue is so important that we are prepared to take a certain chance, and we are hoping that intervenors would cooperate with us. 781 MS. LAKATOS-HAYWARD: Sorry, I just wanted to make one other point in regards to the stretch factor that you had alluded to, that in the Union and in other cases, the PBR plans are multi-year plans, and this is, you know, a one-year plan that we are asking for. So you know, it wouldn't be particularly appropriate to have a stretch factor in that kind of context. 782 MR. JANIGAN: I understand that. But in the context of this application, you are requesting an additional 13.9 million through your increase, and I guess what I am exploring is whether or not that request for that increase is fair given the kinds of efficiencies and productivity gains that are expected of other utilities. 783 I want to take you to page 15 of my book of materials, and this is an excerpt from the evidence that was offered in the 2003 rates proceeding, the evidence of Dr. Mark Lowry, and it's based on multifactor productivity studies. 784 First of all, can you clarify for me, Dr. Lowry seems to indicate that he used some capital inputs in order to obtain or arrive at this MFP index. Is this an index solely of O&M or of the entire company? 785 MS. LAKATOS-HAYWARD: I am not overly familiar with Dr. Lowry's study, but I believe in the context of the case that it was filed, he was referring to O&M productivity only. 786 MR. JANIGAN: Okay. Now, how does that true-up with the number that you gave me before for O&M productivity that you had done internally? I believe you said it was 2.62. 787 MS. LAKATOS-HAYWARD: The study that was undertaken by the company was an independent study that included -- and the methodology did vary somewhat, and that included capital. And also on the O&M side it treated operation and maintenance expense as one input; whereas, I believe, Dr. Lowry's study had treated operating and maintenance -- sorry, labour and materials as two separate inputs. Sorry, in the company's study, labour and materials were treated as one input so that the studies were fairly independent and different assumptions were made. 788 MR. JANIGAN: I guess I am trying to derive some meaning from the figure that was used of the negative .33 historical productivity growth, and looking at some of the other factors that are associated with measuring the company's performance. Can you help me there? 789 MS. LAKATOS-HAYWARD: Well, I am not exactly sure how -- what kind of assistance that you are asking in sort of understanding the numbers. Perhaps if you can elaborate a little bit on what you are looking for. 790 MR. JANIGAN: As I read your evidence, I wonder if you would say it was fair to say that the historical TFP growth that you measured of negative .33 percent, you did not attach a great deal of weight with respect to that figure in looking at the productivity performance of the company, principally because of the lumpiness of the capital inputs? 791 MS. LAKATOS-HAYWARD: I wouldn't say that we didn't attach weight to the study because of the lumpiness of the capital, the lumpiness of the capital inputs. What we were hesitant to undertake, as Mr. Ladanyi had indicated, was that the purpose of this rate application was to get back on track, and that we were introducing evidence on a productivity study that really, you know, were not being fully explored. We were not looking at other factors of TPBR or an incentive regulation. We were not looking at what would be appropriate customer growth numbers or appropriate Z-factors. So we didn't want to get too much into a discussion of productivity in and of itself. 792 MR. JANIGAN: Well, let's put it this way. If this was in the context of a PBR application, would you be using that negative .33 percent number as the expected productivity of the company? 793 MS. LAKATOS-HAYWARD: Well, we might, of course, attempt to update the numbers for more recent, we had no reason to believe that while we had Navigant review the study and we introduced this to the stakeholders, we believed that this was a fair estimate of the historical productivity of the company. 794 MR. JANIGAN: And -- 795 MS. LAKATOS-HAYWARD: And in fact, if you look at, I believe it's Board Staff Exhibit I, tab 1 -- sorry, just please bear with me a second. Sorry, the reference is Exhibit I, tab 1, schedule 6, that on the attachment from the Navigant study, on page 18 of that reference, although certainly any study that's undertaken, there are things that can be improved upon, the Navigant did confirm that the results of the company's study are reasonable estimate of TFP for Enbridge given the date of limitations. 796 MR. JANIGAN: And they did give some qualifications with respect to the data and why it may not be reflective of possible productivity targets of the company. 797 MS. LAKATOS-HAYWARD: I think they did make some suggestions, but overall, that they did feel it was a reasonable estimate of TFP growth. 798 MR. JANIGAN: Let me skip ahead to what actually transpired after the EBRO-497-01 decision, and for that purpose I have put on page 18 an excerpt from a company exhibit. These documents were in a confidential binder, but I don't believe the material set out there is confidential. And once again, to put this in context, this refers to years 1999 through to 2003, and in particular, the 2000, 2001, and 2002 years are reflective of the TPBR period; am I correct on that? 799 MR. LADANYI: Yes, you are. 800 MR. JANIGAN: Okay. And these productivity numbers are exclusive of any productivity and efficiency gains that may have been obtained in the out-sourced affiliates who carried on different O&M operations for the company? 801 MR. LADANYI: We are not actually that familiar with this exhibit. This was prepared by other witnesses and for a different purpose, but subject to check, I believe you are correct. 802 MR. JANIGAN: Okay. Now, we have already heard in the context of the 497-01 decision, the difficulty that the company expressed with respect to meeting their anticipated productivity target of .63, let alone the productivity target of 1.1 percent that was chosen by the Board; am I correct? 803 MR. LADANYI: That was the evidence in that case. 804 MR. JANIGAN: And it's fair to say that the company certainly surpassed those expectations by a fair amount in the context of the TPBR period? 805 MR. LADANYI: It appears that is the case, and I think one has to look at the intended consequences of a performance-based regulation methodology. The consequence is to incent their company to find performance, to improve its performance, which the company did. So that would be an intended consequence, which is what happened. 806 MR. JANIGAN: And following the expiry of the TPBR period, the company prepared an O&M budget for 2003 rates and filed? 807 MR. LADANYI: Yes, we went through that in a past rate case. 808 MR. JANIGAN: And I take it that when you did so, you did so with a view to attempting to produce those numbers that had the closest relationship with the actual costs expected of the company? 809 MS. HARE: That's correct. 810 MR. LADANYI: Yes, we gave our best estimate of the forecast of our costs for 2003. 811 MR. JANIGAN: Okay. And in effect, if we look on page 19, if there had not been -- and this is reflected, I believe, in the A handout that was given a little clearer reading -- if there had not been the reductions that are set out on this table of 2003 O&M ratepayer benefits, there would have been an O&M expense of 332.2 million? 812 MR. LADANYI: Correct, but I think you have to keep in mind, again, that we are dealing not with a static utility, which has the same number of customers each year, which doesn't add any customers; we are dealing with a utility that is growing. 813 So the numbers have to really always be looked at on a per-customer basis, on some way that are normalized per customer, and evidence in that case, which I don't want to go through again, indicated that had on a per-customer basis, we were becoming more efficient rather than less efficient, as you are alluding. 814 So we certainly were trying very hard to control our costs, and even with a higher absolute total budget, our per-customer costs were still reasonable. And I think that's the important part. 815 MR. JANIGAN: But you would agree with me, Mr. Ladanyi, that 332.2 million was a legitimate estimate of what your expenses were going to be for the 2003 year? 816 MR. LADANYI: Yes, it was. That was our best estimate of what our expenses would be. 817 MR. JANIGAN: And in the process of finding efficiencies, the ADR settlement and the out-sourcing benefits, there was a reduction that benefitted ratepayers in the amount of 64.1 million? 818 MR. LADANYI: I'm sorry -- 819 MR. JANIGAN: You see that on page 20? 820 MR. LADANYI: Page 20? 821 MR. JANIGAN: Or you can see it on page 18 in a columnar manner. 822 MR. LADANYI: Yes, and that was -- I think that ratepayer benefit discusses the total out-sourcing impacts, sustainable reductions and the settlement, so that is the entire pie chart on page 20. 823 MR. JANIGAN: My question is, Mr. Ladanyi, if the company can find the will and the way to reduce a legitimate budget of 332.2 million by 64 million, why can't it find a way to dispense with the necessity of a $13.9 million increase? 824 MR. LADANYI: I think what you are looking at are the result of programs over a number of years. It is not something that can happen in one year. And I think also what you saw since 2000 was substantially restructuring the company. You saw out-sourcing of certain functions which allowed us to gain greater efficiencies. It is not something that can happen instantly or all over one year. 825 MR. JANIGAN: But, for example, just takings the savings from the ADR settlement of $32.9 million dollars, the company found a way to produce for ratepayers savings of $32.9 million in the context of the ADR. 826 MS. HARE: But Mr. Janigan, that implies that the 2003 base already reflects that reduction, so to suggest that we could reduce further is not possible. 827 $14 million increase is very modest in comparison to the cost pressures related to customer growth. 828 MR. JANIGAN: But I assume you used the same care and diligence in looking at what may be a legitimate figure for this year as you did with looking at what may be a legitimate figure for 2003? 829 MS. HARE: Well, I go back to looking at the rate of inflation relative to the increase in rates. We have looked at the last ten years, and the rates have had to be increased by more than inflation, so there is nothing to suggest that 2004 is going to be any different type of year in terms of the cost pressures on the company. 830 So actually, we believe that by asking for 90 percent of inflation, that we are already giving back a benefit. 831 MR. JANIGAN: But in every case in the past, when you have tried as best as possible to predict what you could do in terms of achievement of efficiencies in O&M, you have exceeded that and been able to bring greater efficiencies to the fore when you have been challenged. Why can't you be challenged this year and have the $13.9 million increase absorbed in the context of your rates? 832 MS. HARE: We believe that we are challenged and that's why we put in an application for 90 percent of inflation as opposed to an increase over inflation, so our application already reflects that. 833 MR. JANIGAN: But you would agree with me that that produces a much smaller efficiency gain than you have been able to produce over the last four or five years? 834 MS. HARE: I would not agree with you on that. 835 MS. LAKATOS-HAYWARD: No, sorry, could you repeat that last statement. 836 MR. JANIGAN: Well, by the looks of the results that are set out at page 18, I would suggest that over the past five years or past four years of operation, 2000, 2001, 2002 and 2003, the company has been able to produce a ratepayer benefit which they calculate -- the MPV of which they calculate to be $459 million. 837 MS. LAKATOS-HAYWARD: Yes, I believe that's over the next ten years. 838 MR. JANIGAN: And as well, just in the past year it produced ratepayer benefits of 64.1 million. 839 MS. LAKATOS-HAYWARD: But I believe, as Ms. Hare had pointed out, that even over the time frame that included the TPBR, historical rates were still increasing higher than the rate of inflation. 840 So we almost have that kind of built-in productivity stretch factor that we have included, and on top of that have asked only for 90 percent of Ontario CPI. 841 MR. JANIGAN: But in that case, during the TPBR period, you were able to achieve many more times the productivity that you predicted beforehand? 842 MS. HARE: But again, as Mr. Ladanyi pointed out, the formula adjusted for customer growth and inflation minus the productivity factor. The increases were on average, over those three years, over 4 percent. 843 MR. JANIGAN: I am just looking at your ability to generate productivity gains, and we are talking in the context of a $13.9 million increase, whether or not that $13.9 million can be overcome in the context of -- 844 MS. HARE: I think what we are saying is looking at productivity only is not fair. 845 MR. LADANYI: But also I think, Mr. Janigan, you misunderstand our application. Our application attempts to arrive immediately at a solution. We could have had a lengthy cost of service hearing, wherein, if we had filed evidence supporting all of our cost pressure, it would have been a much higher cost increase they would have been asking for. They would have had a lengthy hearing going over many months, possibly 15 months later we might come up with a decision that would end up roughly in same place. 846 And then you would say, oh, well, we have been successful in reducing, the company has increased by, let's say, a large number of dollars. We have attempted to go straight to the decision by this application, by looking at where past Board decisions have led to, what have they resulted in, and they have resulted in an increase that was higher than the rate of inflation. 847 We felt that our attempt to arrive immediately where the decision would lead us would result in just and reasonable rates, by being at 90 percent of the rate of inflation. 848 So we did not want to go through this lengthy process which, in the end, probably will take us to the same place. 849 MR. JANIGAN: In fairness, Mr. Ladanyi, you could have also avoided the lengthy process by adopting the same regime as electrical distribution companies are subject to in Ontario. 850 MS. HARE: No, Mr. Janigan, we couldn't. I mentioned the other two objectives of the company, to maintain shareholder value, to have sufficient funds to be able to operate -- 851 THE COURT REPORTER: You are going to have to slow down. Could you repeat your answer, please. 852 MR. JANIGAN: In fairness, Ms. Hare, we were talking about the objective of ensuring -- 853 MR. BETTS: Mr. Janigan -- sorry, could you just repeat that? 854 MS. HARE: My hesitation is I am not sure I can repeat it exactly the way I said it before. I said the company had two additional objectives, one was to maintain shareholder value, and the other was to have sufficient funds to be able to manage its business. And a rate freeze such as the electric utilities have would not meet those objectives. 855 MR. JANIGAN: But in fairness, Ms. Hare, what I was discussing with Mr. Ladanyi was the timing problem. The timing problem could have equally have been met by the adoption of a rate freeze or, in fact, the non-submission of a 2004 rate case? 856 MS. HARE: That would have addressed the timing issue, yes, but that would not have addressed all of our issues. 857 MR. JANIGAN: Okay. Now, I wonder if you could tell me how the settlement agreement addresses the issue whether 2004 turns out to be a colder than normal year? 858 MS. HARE: It does not. 859 MR. JANIGAN: Okay. So in the event that it is a colder than normal year, presumably the company keeps those -- 860 MS. HARE: Yes, it does. 861 MR. JANIGAN: Okay. 862 MR. LADANYI: And conversely, if it is a warmer than normal year, the company would be short of funds. 863 MR. JANIGAN: I understand. 864 MS. HARE: In fact, there is nothing in the settlement proposal about how the company earns or how much the company earns in 2004. 865 MR. JANIGAN: Can you tell me what the 2003 and 2004 degree day budgets are? 866 MS. LAKATOS-HAYWARD: I can tell you what the 2003 ADR settlement degree days for the central zone is 3565 heating degree days. 867 MR. JANIGAN: And do you have the current forecast for 2003? 868 MS. LAKATOS-HAYWARD: That is the forecast for 2003. 869 MR. JANIGAN: I'm sorry, for 2004? 870 MS. LAKATOS-HAYWARD: No, I do not. 871 MR. JANIGAN: Okay. I wonder if I could just go back to CAC interrogatory response number 8, and that's tab 2, schedule 8 attachment presentation. And I would like to move forward two pages in this presentation to the slide, is the only word I can think of for it, entitled "rate application". 872 MS. HARE: I'm sorry, are we on the first or second presentation? 873 MR. BOURKE: The first. 874 MS. HARE: The first? 875 MR. JANIGAN: And it has rate application, 40 pages. 876 MS. HARE: Yes. 877 MR. JANIGAN: Plus 6, plus 6 regulatory schedules. 878 Now, did you file the 6 plus 6 regulatory schedules for 2003? 879 MR. BETTS: Mr. Janigan, sorry, I am not sure I am looking at the right exhibit either. 880 MR. JANIGAN: We are at Exhibit I, tab 2, schedule 8, attachment. And the pages aren't numbered. It is the page entitled, "Rate application, 40 pages plus 6 plus 6 schedules". 881 MS. HARE: I'm sorry, is the question whether we filed the 6 plus 6 schedules? 882 MR. JANIGAN: That's correct. 883 MS. HARE: No, we did not. 884 MR. JANIGAN: Now, before I leave this page, I wonder if I could ask: Did you file information on the 2003 SQIs? 885 MS. HARE: No, we did not, because 2003 wasn't a PBR year; it was cost of service, and so the agreement by all parties was that SQIs weren't required. 886 MR. JANIGAN: Okay. 887 MS. HARE: That was the subject of the settlement proposal for 2003. 888 MR. JANIGAN: Thank you. I wonder if I could have you turn up the material that was filed yesterday, Exhibit A, tab 10, schedule 7. And I don't believe the -- I want to look first at the 2002 results that I don't believe are confidential. Am I correct on that? 889 MR. BOURKE: That's correct. 890 MR. JANIGAN: Okay. And my first question relates to schedule 7 of the 2002 results, page 1, and at lines 18 and 20, the columns D and E, you show no fourth-quarter operating profit but rather a small operating loss in the quarter? 891 MR. BOURKE: That's correct. 892 MR. JANIGAN: Is that typical, and what are the factors at play? 893 MR. BOURKE: Basically it has to do with the loss of heating load in the summer final quarter of the fiscal year; July, August, September. 894 MR. JANIGAN: So this is a typical occurrence? 895 MR. BOURKE: In fact, I would have anticipated, if you are going to use the word "typical", that the loss might have been more significant. 896 MR. JANIGAN: Okay. Now, at lines 31 and 32, you show actual and normalized return on rate base and return on equity. 897 MR. BOURKE: In different columns, but yes, on those lines. 898 MR. JANIGAN: And 8.97 percent and 11.8 percent normalized. 899 MR. BOURKE: Correct. 900 MR. JANIGAN: What was the 2002 degree-day budget? 901 MS. LAKATOS-HAYWARD: I am just trying to stretch my memory here, but it was 3700, I believe. 902 MR. BOURKE: For the central delivery area. 903 MS. LAKATOS-HAYWARD: Sorry, central, yes. 904 MR. JANIGAN: Now, if you could turn up page 3 of this same schedule, and I am looking at line 29, could you explain how at line 29 the actual rate base compares with the Board-approved level? 905 MR. BOURKE: The actual rate base is in column G; the Board-approved is column H; the variances, actual minus Board-approved, are shown in column I. 906 MR. JANIGAN: And how does that variance, in this case, it is 42.5 million, how does that affect the actual return on rate base and return on equity? 907 MR. BOURKE: In the calculation of the company's actual ROE, the company's capital structure would be based upon the actual rate base figure of 2,976.8 million. 908 MR. LADANYI: Mr. Janigan, if you look on that page, you'll notice the largest part of this variance is, in fact, natural gas inventory in storage, so it is due to gas in storage rather than anything else. 909 MR. JANIGAN: Now, I wonder if I could go to 2003, and this is the confidential part of the document, and I want to look at Exhibit A, tab 10, schedule 8, page 1. 910 Now, once again, at lines 18 and 20, columns D and E, you are showing a significant fourth quarter operating loss? 911 MR. BOURKE: That's correct. 912 MR. JANIGAN: What is causing this? 913 MR. BOURKE: Again, it would be based on the summer quarter having no heat load, principally. 914 MR. JANIGAN: And at lines 30, 31 and 32 of column E, you project the actual year-end returns on rate base and equity and the normalized numbers in column G? 915 MR. BOURKE: Correct. 916 MR. JANIGAN: Now, I believe we have already established what the 2003 degree day budget was? 917 MR. BOURKE: Correct. 918 MR. JANIGAN: Can you tell me about the effect of unbilled volumes on the returns shown in column G? 919 MR. BOURKE: In that that column has included the normalization entry to the end of June, I believe there would be no impact. 920 MR. JANIGAN: Does this accord with what was said yesterday concerning this matter on unbilled volumes and the potential impact? 921 MR. BOURKE: Are we referring perhaps to the clause in the settlement proposal related to the calculation of ROE? 922 MR. JANIGAN: Yes. 923 MR. BOURKE: In fact, then, there is no variance inherent in this information in that we have used the budgeted unbilled volume number. The clause in the settlement proposal seeks to remove any impact that may occur by the time we get to calculating the settlement ROE based on actual results, such that any swing in unbilled volumes has the effect removed in calculating the ratepayer safeguard value. 924 MR. JANIGAN: Now, I believe that it was mentioned yesterday, an effect of a certain number of basis points that these unbilled volumes may have on rate of return? 925 MR. BOURKE: If I might explore this a bit, Mr. Janigan, I believe you might be giving consideration to a number that was spoken to as the difference between an unbilled accrual/deferral, which is a different point than I am making about unbilled volumes here. 926 The process for developing the ERO report took a nine-month set of data and attached to it a three-month set of data, and in those two packages of data, there was a disjoint of one item and that one item was unbilled volume accrual/deferral. 927 And in that regard, normally this number would come to zero at the end of the year, but because the two packages had a disjoint, they would not have done so. But we chose not to update for that one single element because, as we mentioned, the disjointed process, it would be cherry-picking one item to adjust; there would be many disjoints between the nine-month package of data and the three-month package of data. 928 But I believe Mr. Cass gave that number and spoke to it as being one item, and I think what he was trying to highlight was the fact that there are several inherent differences, I would call them problems in the methodology and how I develop this information, such that the nine-month numbers might not flow perfectly with the three-month number to give us a perfect twelve-month result. The number that he spoke to was unbilled accrual/deferral. 929 Have I gotten there? 930 MR. JANIGAN: I wonder if I could just draw your attention to line 9 and the columns G and H, what is the impact of the $6.3 million overbudget on O&M? 931 MR. BOURKE: Again, I'll refer back to the numbers that I believe Mr. Cass provided when he gave an explanation when these schedules were originally handed out. I think he said that in regard to O&M we would provide two scenario bits of information. 932 One -- I am flipping through my pages trying to find it. I can't find it. I am going to go from memory. 933 I believe Mr. Cass said that 287 represented roughly 6 to 6 and a half million over the Board-approved number, and that a scenario at the Board-approved O&M level, leaving all else at the same number, would have been 38 basis points. 934 And I think he gave a second scenario stating that if O&M was under by the same variance that schedule 8 shows it as being over, i.e., in and around the amount of 275 million, that it would be an additional 37 basis points. 935 MR. JANIGAN: Now, on page 3, line 29, you explored this figure with Mr. Warren, and once again, what are the factors affecting that and what is the impact on return on rate base and common equity? 936 MR. BOURKE: I'm sorry, Mr. Janigan, page 3? 937 MR. JANIGAN: Page 3 of the same schedule, tab 10, schedule 8. 938 MR. BOURKE: Yes, page 3. 939 MR. JANIGAN: And you have a number at line 29, column entitled "Variance." 940 MR. BOURKE: Correct. 941 MR. JANIGAN: Which is column I. And I am looking at -- I am asking you what are the factors that affect that and what is the impact of this number on the return on rate base and on common equity? 942 MR. BOURKE: The factors that would affect it relate to capital expenditures, and as Mr. Ross mentioned earlier, our capital expenditures to the nine-month actual are lower. 943 As to the impact that the variance would have in terms of the information on line 32 of schedule 1A, the return on common equity, I haven't calculated that number. 944 MR. JANIGAN: Directionally, which way would it be? 945 MR. BOURKE: If the actual rate base were in fact equivalent to the Board-approved number, you would have a higher level of deemed common equity, and given the same income levels shown on schedule 1A, directionally, the return would be lower. 946 MR. LADANYI: You should keep in mind, Mr. Janigan, that these numbers are not year-end numbers and they are very dependent on the closings and completions of capital projects. 947 And that was our concern with this particular format, that we felt that particularly a rate base is something that is best analyzed on an annual basis at year-end when all of the accounts are closed, rather than at a quarter level, which is what this form demands. So more accurate information will be available in a few weeks, and at that time I think it would be appropriate to look at the numbers again, and they will be reflected in the ratepayer safeguard calculation as we have provided for in the settlement proposal. 948 MR. JANIGAN: I wonder if I could skip ahead to schedule 5 of this document, Exhibit A, tab 8. It says -- it is actually schedule 8. It says at the top schedule 5. It is page 6. 949 MR. BOURKE: We are talking of A, 10, schedule 8, page 5 of 6? 950 MR. JANIGAN: Page 6 I am on. 951 MR. BOURKE: Oh, you are on page 6, thank you. 952 MR. JANIGAN: Yeah. 953 MR. BOURKE: The schedule numbers, in this case that would be the ERO schedule that we used to file. 954 MR. JANIGAN: Okay. So schedule 8 is the right way to refer to it. And if you look, you'll see a number in line 5 under the "variance" column K; is that a confidential number? 955 MR. BOURKE: Yes, it would be. 956 MR. JANIGAN: Okay. 957 MR. BOURKE: That calculation is based on a projection. 958 MR. JANIGAN: Now, does this calculation represent the amount of normalized revenue for 2003 above the Board-approved level? 959 MR. BOURKE: I am going to invite Ms. Duguay to join our conversation. This schedule is prepared by her group. 960 MS. DUGUAY: So this schedule compares, on a normalized basis, the difference between the Board-approved revenues and the actual-to-date normalized through the 2003 regulatory budget and a projection for the last three months based on the 2003 regulatory budget. So it is subject to the same discontinuities that Mr. Bourke has been talking to all along. 961 MR. BOURKE: And if it helps, the line you are referring to and the variance you are referring to is brought forward on to page 1 of 6 in row number 1 of this exhibit. This would be a supporting schedule giving volumes. 962 MR. JANIGAN: So the answer to my question, I guess, is yes, is it not? 963 MS. DUGUAY: Well, it is the difference between the Board-approved and the nine plus three that is constructed in a fashion that Mr. Bourke has talked about. That's what this is, yes. 964 MR. JANIGAN: Okay, thank you. Thank you, panel. 965 Mr. Chair, those are all my questions. 966 MR. BETTS: Thank you, Mr. Janigan. 967 Does Board Staff have any questions? 968 MS. LEA: Yes, about 15 minutes' worth, sir. 969 MR. BETTS: Okay, let's continue. 970 CROSS-EXAMINATION BY MS. LEA: 971 MS. LEA: Thank you. I would like to turn to a few things which may seem somewhat simplistic, but we need to understand a little bit about, please. One thing that we noticed in an earlier cross-examination, I wonder if you could have a look at Exhibit I, tab 6, and those are the Malcolm Hayes notes, VECC interrogatories, schedule 2. There was only the one page. And I think I also heard Mr. Ladanyi give the same evidence a few moments ago as well. 972 I am looking at the Exhibit I, tab 6, schedule 2, the response A, the first sentence, you said: 973 Indexing rates at 90 percent of Ontario CPI results in rates that are lower than had the company filed a cost of service application for 2004. 974 Now how did you know that? 975 MS. HARE: We didn't know it for a fact. That was our assumption that we made going into -- it is referenced actually in that same e-mail that was sent March 30th where we believed that if we had made a cost of service application, we would be asking for a deficiency that would be greater than this. Now, whether or not that would be approved so that that's actual fact, I don't know, but that's what we would have filed for. 976 MS. LEA: And what information was it that led you to believe that you would be seeking an increase that would exceed what you are presently seeking under the proposal? 977 MS. HARE: The cost pressures that we were looking at for 2004. 978 MS. LEA: And you had enough information about them at the time you wrote this interrogatory to have confidence in the statement that you have put in the first sentence? 979 MS. HARE: It goes back to the statement in the e-mail that had we filed a cost of service application, we would be filing -- again, this is an assumption that was made -- we would be filing for an O&M level similar to what we asked for in 2003, but in 2003 we agreed to a lower number through ADR. But it's still our feeling that the appropriate level, in order to undertake all of the growth programs that the company wants to undertake, that the appropriate level would be the 305 filed for in 2003 plus the service charges that were removed. 980 So again, that was an assumption that was made. 981 MS. LEA: All right, thank you. I would like to turn to a different topic then, and that has to do with the implementation of the proposal in the settlement agreement. I am going to be looking at the settlement agreement itself, issue 1.2. You might want to have a look at it yourself. Now I have lost my copies with the notes on it. Oh, no, I have found it. 982 I wonder if you could go through with me and assist my understanding in three areas with respect to this. The first is the series of events and orders that you will be requiring. I understand, and please correct me if I am wrong, that at the end of this phase of this hearing, the end of today and when we have heard argument, that what you will be seeking from the Board is an interim rate order? 983 MS. HARE: Yes. 984 MS. LEA: And that subject to the interim rate order, you will, as soon as they are available, file the financial results finalized for fiscal 2003; is that correct? 985 MS. HARE: On a normalized basis, yes. 986 MS. LEA: On a normalized basis, yes. Then Mr. Warren discussed with you the possible disputes that might arise with respect to that, and is that the dispute that you are referencing at page 7 of the settlement agreement in paragraph 4 in the last sentence? 987 MS. HARE: Yes, it is. 988 MS. LEA: Thank you. So subsequent to any resolution of any dispute that may arise, I gather the next thing that would happen is that you would be filing an application to the Board for any rate adjustment or single payment that is necessary, or advising the Board that no adjustment is necessary; am I right? 989 MS. HARE: Correct. 990 MR. LADANYI: Well, we would need to have the Board decision by that point as well, so two events would have to take place. We have to go past our year-end to have year-end results and we also need Board decision in a previous rate case. 991 MS. LEA: The Board decision in 0133, is it? 992 MR. LADANYI: Yes. 993 MS. HARE: 33, that's right. 994 MS. LEA: And once you have received the Board decision, and you have the financial results and any dispute has been resolved, then you would be filing an application to the Board for any final rates, an adjustment if necessary, a one-time payment, or no adjustment as is contemplated; is that right? 995 MS. HARE: Yes, but depending on the other two proceedings and whether decisions have been rendered, it might still be interim rates. 996 MS. LEA: Okay. And those ones are the return on equity proceeding? 997 MS. HARE: That's right. 998 MS. LEA: And the deferred taxes proceeding? 999 MS. HARE: Yes. 1000 MS. LEA: Now, once you have -- and I'll leave those aside and come back to them. Once you have filed, then, an application for rates to recognize the adjustment arising from this proposal, presuming it is accepted, there would then be an opportunity for intervenor comment on that filing? 1001 MS. HARE: Yes. 1002 MS. LEA: And then the Board would review it and determine whether your application was appropriate? 1003 MS. HARE: Yes. 1004 MS. LEA: And then issue a rate order, final, if possible; if not, interim, am I correct? 1005 MS. HARE: That's what we envision. 1006 MS. LEA: And then after that, leaving aside for the moment the return on equity proceeding and the deferred taxes proceeding, do you have any understanding of what the implementation date of any adjustment might be? 1007 MS. HARE: Well, the commitment is within eight weeks of these two events occurring. 1008 MS. LEA: Of these two events. All right, thank you. 1009 Now, I would like for you to assist me in factoring in two other things. We have talked about on October the 1st is the beginning of your fiscal year, so if possible, the interim rates that the Board may order at the end of this proceeding would be -- would they be implemented as of October 1st if it was an interim rate order and your proposal was accepted? 1010 MS. HARE: That's our expectation, yes. 1011 MS. LEA: Okay, uhm-hmm. 1012 Then you have a QRAM adjustment. What is the timing on that? 1013 MS. HARE: That is going to be filed next week, on September 3rd, for implementation October 1st. 1014 MS. LEA: So you are planning an October 1st implementation for that? 1015 MS. HARE: Yes. 1016 MS. LEA: And disposition of the deferral accounts as per section 2 of the settlement, is that also intended to be implemented as at October 1st? 1017 MS. HARE: Yes. 1018 MS. DUGUAY: Yes. 1019 MS. LEA: Then the last area I wanted to ask you about is how does that all fit in with the rates that appear in the Board Staff interrogatory, Exhibit I, schedule 1 -- or tab 1, schedule 35, which is -- now, you gave us an August 14th update to that, I believe? 1020 MS. DUGUAY: Yes. 1021 MS. LEA: How much of everything that we have talked about did these rates in IR-35 contain? Did they include, for example, the QRAM adjustment? I am presuming not. 1022 MS. DUGUAY: No, they don't. 1023 MS. LEA: No. 1024 MS. DUGUAY: That's right. So what we would do, and that's exactly -- I am glad you asked the question -- what we are proposing to do within our October 2003 QRAM application. What we would do in terms of our starting point, given that we don't have the Board's decision in this particular application, this exhibit that you are referencing, Exhibit I, tab 1, schedule 35, would be the starting point, provided we receive regulatory approval. Otherwise, we would have to change the starting point if there are any modifications to our proposal. 1025 And essentially, what we would do is we would adjust essentially the delivery charge, the gas supply load balancing and the level of the gas supply charge to come up with essentially the rates or the proposed rates to be implemented starting in cycle day 1 of October. 1026 So to make a long story short, I guess what you are asking me is, will the rates in schedule 35 actually hit the billing system? And the answer is no, because they will be superseded concurrently, if you will, to reflect the October QRAM, and we know we have hit the threshold and we are forging ahead to amend our rates to reflect a decline in commodity prices. 1027 MS. LEA: One moment, please. 1028 So another -- I am just checking with Mr. Schuch here who understands these things far better than I do. The other layer then that we have talked about is the factor of the disposition of the deferral account? 1029 MS. DUGUAY: That would be made as a separate adjustment on the bill, so -- 1030 MS. LEA: A separate adjustment on the bill? 1031 MS. DUGUAY: Yes, it will be. Whenever we dispose of our deferral or our variance accounts for any given year, that never forms part of the rates, per se. It is a separate adjustment. 1032 MS. LEA: Okay, but it would be still an implementation date -- planned implementation date of October 1st? 1033 MS. DUGUAY: Correct, yes. 1034 MS. LEA: Are there any other rate adjustments or one-time adjustments that would result from the settlement document that I haven't dealt with that the Board should be aware of? Have I left anything out? 1035 MS. HARE: I don't believe so. 1036 MS. DUGUAY: No. 1037 MS. LEA: One moment, please. 1038 I overestimated my cross-examination time. Those are my questions, thank you. 1039 MR. BETTS: Thank you very much. 1040 Mr. Cass, how much time do you need in re-examination? 1041 MR. CASS: I am not sure that I need any time, Mr. Chairman. At this point, I don't believe I have any re-examination. 1042 QUESTIONS FROM THE BOARD: 1043 MR. BETTS: Okay. 1044 Okay, we don't have many questions, so let us try and get them in, and then we can call it a day at that point. 1045 So Mr. Dominy, if you would please proceed. 1046 MR. DOMINY: A little bit of understanding this timetable that people talked about, and maybe I am not quite up to speed on the process that is being discussed, but I know that in part of your evidence, you had tab 11 and tab 12 which dealt with gas costs, transportation and storage. And I wondered how that fit into this timetable? 1047 Are those items not items for which decisions are required? 1048 MS. HARE: Well, decisions are required. It was our understanding that that would be dealt with some time in October at a hearing. 1049 MR. DOMINY: That's why I said I was not sure I was completely up to speed on what these processes were doing. 1050 MS. HARE: Our understanding is that there would be an interrogatory process and then a review at a hearing in October. 1051 MR. DOMINY: Fine, that helps. The QRAM is a normal QRAM? 1052 MS. HARE: Yes, it is. 1053 MR. DOMINY: There is no extra things added to it? 1054 MS. HARE: No. 1055 MR. DOMINY: I asked a question with regard to the clearance of the deferral accounts and with regard to the load balancing costs and the concern raised in the settlement agreement that people would have an opportunity to question if they wanted to. When would that take place? 1056 MS. HARE: My understanding is that would happen in October. 1057 MR. DOMINY: In October, okay, sorry, I am just trying to make sure I understand. 1058 Then there were a couple of comments in the settlement agreement, and I wasn't quite sure what is expected of the Board, and that's on -- it is in 1.2, and it is paragraphs 10 and 11. 1059 Are you expecting some comment from the Board on these statements? I am not sure what exactly we are expected to do with paragraphs 10 and paragraph 11. 1060 MS. HARE: Can I turn this over to Mr. Cass? 1061 MR. BETTS: Are you going to give evidence here, or just comment? 1062 MR. DOMINY: Just explain what the meaning of these are. 1063 MR. CASS: Might I just take a moment? I think I know what the words are about. If I could just have a moment. 1064 Yes, certainly my understanding of the company's point of view, the company would not be requiring or expecting any ruling from the Board on these paragraphs. These paragraphs were more just to insure in future, in a future case, that somebody's agreement to things that are in the partial settlement would not be used against that party. 1065 That's a very broad way of trying to capture both 10 and 11, but that is my understanding, that at least from the company's point of view, it is not something that would require a Board decision in this case. It is more just the parties' concerns about what might or might not be used against them coming out of this settlement proposal in a future case, and it is just to make sure that that will not happen. 1066 MR. DOMINY: Okay, and a simple question related to I-1.35, which is the Board Staff interrogatory, and if I go to schedule 33, I-33, it makes the statement -- 1067 MS. LEA: Sorry? 1068 MR. DOMINY: Tab I, schedule 33 -- 1069 MR. BETTS: I-1-33 -- 1070 MR. DOMINY: Schedule I, tab 1, 33. The question to the Board Staff, and in the response it says: "The company proposed to increase the delivery charges by a common unit rate per block such that overall distribution revenues reflected the rate index." 1071 And then I turned to schedule I -- Exhibit I, tab 1, schedule 35, and I looked to see what that meant, and I noticed that for rates 100 onwards, it was a fixed unit change in each block, i.e., if I look at rate 100, it is .0526 cents for the first, the second and the third block, and so I said, ah-ha, that's what it means. 1072 MS. DUGUAY: That's right. 1073 MR. DOMINY: Then I turned to rate one and I don't see that type of presentation, so I wondered if you could reconcile those two statements for me. 1074 MS. DUGUAY: I'll try. Essentially the way that we effect changes in rate for general service, customer rate classes and large volume are different, and I think -- I didn't go into the detail but I alluded to that earlier. 1075 So typically, for all large volume, you will see a common unit rate change per block in the winter months as well as in the summer months, and we are seeing that here. And if you were to go back in previous rate case and so on, you would see the exact same trend. 1076 For our general service rates, we start off -- that's a starting point. We take the overall change in the revenue requirement, divide that by the volumes, and that will give you a unit rate, but there is an additional transformation that takes place such that the relative relationship of the blocks in the summer and in the winter are being maintained, and if I can further clarify that. If you were to propose, in the general service rate class, an increase of, say, 1.6 percent, you would see that by block, by season. 1077 In this particular proceeding, because of the manner in which the information was produced in a very compressed time frame, the additional transformation for rate 1, rate 6 and rate 9 did not take place. So you are kind of having a little bit of a mismatch, but I think in trying to reconcile the statement in schedule 33, it is true by virtue of the fact that the additional transformation that I was talking about did occur in our 2003 final rates. 1078 So you have got, on the one hand, an additional transformation that was done at the starting point, which was not done at the ending point; and that's why you see a difference, because otherwise -- 1079 MR. DOMINY: All I was wondering is if I was to divide, say, rate 1, each of those blocks, the rate change by the current rate, would I get the same percentage? 1080 MS. DUGUAY: No, you would not. 1081 MR. DOMINY: No? 1082 MS. DUGUAY: No. 1083 MR. DOMINY: I don't think I can pursue this anymore. I would only be able to pursue it if I saw numbers. 1084 MS. DUGUAY: I'm really sorry. It is just getting so technical into the process. 1085 MR. DOMINY: Fair enough. 1086 MS. DUGUAY: I tried. 1087 MR. DOMINY: And the only other question I had is if I turned to the exhibit that has been the subject of much discussion, CAC interrogatory number 8, and it is on -- it is the last page of the presentation by Mr. Schultz, and it is the risks issue. And I believe in response to a question, I think it was to Ms. Hare, she referred to a number of about $10 million to reflect the risk -- quantification of the size of the risk for municipal taxes. 1088 I just wondered whether there is any possible indication of what this quantification of the risk for the other items are? Obviously the difficulty you would have with the first one depends on a Board decision, but on the other ones, whether there is any indication in terms of $10 million or a number of that sort? I know that there is also the copy of the e-mail in which you discuss the risks, and there is a sort of offsetting there between capital and growth, but I just wondered whether you could elaborate a bit more on the quantification of those risks. 1089 MS. HARE: Those risks were quantified at a high level using rules of thumb. I don't have the numbers with me. The municipal taxes I remembered well because, in fact, we had applied for a variance account at one point, and so again, we knew that amount because we considered it significant. The other categories, they were quantified at a high level, but I don't have them with me. 1090 MR. DOMINY: Okay. I think I would have liked to have seen them, but I haven't got them here at the moment. Is it possible that you can just quickly get an indication of those numbers? 1091 MS. HARE: Well, the problem with those is that they are also based on assumptions. 1092 MR. DOMINY: Well, I'll take that for what it is. Thank you. 1093 MR. BETTS: And I have no questions. 1094 Mr. Cass, is there anything you feel you should follow up on? 1095 MR. CASS: No, Mr. Chair. Thank you. 1096 MR. BETTS: Thank you. Then I want to thank the witness panel for their contribution and the time you have spent with us today in helping us in dealing with this matter. I believe that concludes the evidentiary portion of the hearing dealing with those issues. 1097 We will tomorrow, as planned, begin oral arguments. We will receive oral arguments in-chief from Mr. Cass. I believe we all agreed that would be at 10:00 a.m. Okay. 1098 Mr. Warren. 1099 MR. WARREN: Mr. Chairman, because of the change in scheduling due entirely and exclusively to somebody in Ohio and the power shortage, a matter that I had scheduled for Wednesday, tomorrow, I cannot move, and so I mean no disrespect to the Board or to my friends if I am not here to listen to their argument. I will read it on the transcript and will respond. 1100 Certainly, it is important -- I wanted the Board to understand that I mean no -- it doesn't diminish the seriousness with which my client takes the issues in this case, it's just that I can't physically be here tomorrow to listen to their arguments. 1101 MR. BETTS: Thank you, and the Board will take it in the proper light. 1102 MR. JANIGAN: Mr. Chair, I intend to be listening to the arguments in my office in Ottawa, and once again, I mean no disrespect to the company and the intervenors presenting their argument. 1103 MR. BETTS: It sounds like it will keep the costs down anyway, so I am quite happy with that. 1104 Any other points before we close for today? Then we will adjourn at this point, and reconvene tomorrow morning at 10:00 a.m. Thank you. 1105 -- Whereupon the hearing adjourned at 5:15 p.m.