Rep: OEB Doc: 12RXF Rev: 0 ONTARIO ENERGY BOARD Volume: 2 27 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 27 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 SUBMISSIONS BY MR CASS: [19] SUBMISSIONS BY MR. DeROSE: [151] SUBMISSIONS BY MR. SHEPHERD: [180] SUBMISSIONS BY MR. MATTSON: [214] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 10:00 a.m. 15 MR. BETTS: Good morning, everybody, and welcome back to this hearing day two of application RP-2003-0048. We have completed the evidentiary portion of the hearing, and today we are beginning to receive oral arguments. 16 And the schedule for today are arguments in-chief from the applicant and supporting arguments from any intervenors. 17 So prior to taking those arguments, are there any preliminary matters for the Board's consideration? 18 There being none, Mr. Cass. 19 SUBMISSIONS BY MR CASS: 20 MR. CASS: Thank you, Mr. Chair. Mr. Chair, in the hope that it will make my submissions more comprehensible to the Board, I have tried to gather them under a number of headings. 21 I will start by indicating to you what those headings are, to give you more or less a road map of where I intend to go with my argument. 22 First, I will address some submissions to the Board's mandate under the governing statute, and in particular, the just and reasonable rates standard. 23 Second, I will address what significance, if any, in the context of that just and reasonable rates standard there is to a numerical analysis of specific costs. 24 Third, I will have some submissions on inflation and the Ontario CPI. 25 Fourth, I will address prospective rate-making. 26 Fifth, I will be making submissions about cost pressures that the company must manage. 27 Sixth, I will address the partial settlement, and in particular, the ratepayer safeguard as it is called in the partial settlement. 28 Moving from there, my seventh area will be linking together the theme of just and reasonable rates with another theme that I will call pragmatism. 29 And then finally, I'll just wrap up with very brief comments about the decision that the applicant submits would be the appropriate decision to be made by the Board. 30 Beginning then, sir, with the statutory mandate, of course, we all know and hear repeatedly that the Board's mandate is fixing or approving of just and reasonable rates, and I will endeavour to structure my argument around that theme of just and reasonable rates. 31 The primary point that I wish to start out with is that there is nothing whatsoever in the governing statute which either says or even implies that fixing or approving just and reasonable rates necessarily means a numerical analysis of specific costs. 32 In fact, the Board will recall, of course, that the previous version of the statute prior to 1998 contained a somewhat different set of rate-making powers, and without going into that in any detail, there was at that time a requirement on the Board to find a rate base, although that could be dispensed with in certain circumstances. 33 My point is that even under that earlier version of the statute, in my submission, the Board was not strictly confined to a numerical analysis of specific costs. I am going entirely by recollection here. I haven't had time to check it, but my distinct recollection is, for example, that the targeted PBR application of the company's that was ultimately successful was, in fact, filed under the previous version of the statute, that is, the pre-1998 version. 34 My point is that under that statute, even where there were some specific requirements about finding a rate base, there was nothing to say that fixing or approving just and reasonable rates meant that the Board had to go through some sort of specific analysis of costs. 35 What flows from that, in my submission, is that the new statute that came into effect, as I recall, at the beginning of 1998, is even more clear on this point. In fact, in my submission, it is hard to conceive that it could be more clear. 36 The new statute, as has been pointed out by the company, states very specifically that in fixing or approving just and reasonable rates, the Board may adopt any method or technique that it considers appropriate. 37 In my submission, it could hardly be more clear than that that this Board is not subject to any artificial restriction that when it goes about fixing or approving just and reasonable rates, it has to have any sort of specific analysis of costs. 38 In my submission, what the determination of just and reasonable rates is all about, and what it has always been all about, is a balancing by the Board of the interests of shareholder and ratepayers in all the circumstances of a particular case. 39 Now, having said that, I would like, albeit with some trepidation, to come back to the questions that Mr. Dominy asked at the end of the day yesterday and that I think we recognize did not result in the sort of answer that Mr. Dominy was expecting. 40 These questions arose from the attachment to the response to CAC interrogatory number 8, that's Exhibit I, tab 2, schedule 8. 41 I don't think we need to turn it up. I think we all remember that there was a presentation attached there that had just a list of risks that the company would face in making this application, and simply pluses or minuses opposite the risks. 42 Ms. Hare was able to remember a forecast number associated with one of those risks, but unfortunately, and regrettably, could not remember the others. But I do want to, if I may, seize on that as an attempt to explain what, in the company's view, this case is really all about, and there is three points that I would like to make. 43 First, the company's analysis, to the extent that the Board feels it would like to consider that in its decision, is really the analysis that's provided in the March 30th e-mail from Ms. Hare that is found as an attachment to the same interrogatory. It doesn't have the sort of numerical analysis of specific costs that I am addressing, but that really is the company's analysis, to the extent that the Board wishes to take that into account. 44 Again, that is the March 30th, 2003, e-mail written by Ms. Hare. 45 Second, and again, without turning up the list of items, I just ask the Board to reflect briefly on the types of items that were on the list. One, as Mr. Dominy pointed out, was the O&M DA. Now, as the Board is aware, the company has argued for a zero balance in the O&M deferral account, but the company has obviously no forecasting methodology that allows it to attach a meaningful number to what the Board's decision in that regard might be. 46 And in fact, I would submit there would even be a certain unfairness to the company to ask it to come forward with that sort of a specific number, because of course the company has to try to do some planning around expected Board decisions, but then to, you know, have the company come forward and say, well, perhaps it has done some planning around the downside to this decision, would then be turned against the company as some kind of acceptance that its position of a zero balance is wrong, which I think is unfair. 47 So the fact that the company has to do planning around a number like that I don't think should then be used against the company's position that the balance really ought to be zero. And that's why I submit that there would be a certain unfairness to the company coming forward with that sort of a number. 48 Now, another example of what was on the list was weather, and again, the company does not have any greater ability to know with certainty what the weather in 2004 will be than anyone else. 49 So all I am saying in this context is, yes, some of the other items in there would be more susceptible to attaching a forecast number to, but one could never take all the pluses and minuses and try to put them together and come to anything meaningful, because we are talking about things like weather and we are talking about things like the outcome of a Board decision that is unknown at this time. Now, the third point, and perhaps the more fundamental one I wish to make in relation to the concept of a numerical analysis of specific costs, is that, in my submission, it inevitably leads this case in directions where, at least, as far as the company's proposal is concerned, the case is not intended to go. 50 The problem with coming forward with specific cost items and dollar figures is that if these were presented, it would be entirely legitimate for other parties to say, Well, we don't know that this is complete; we don't know that the company hasn't cherry-picked; we need to see everything. And similarly, it would be entirely legitimate for other parties to say, Well, if the company is basing its case on specific cost items, we need to fully test them and are not required to accept them at face value. 51 So what I am saying is that once one accepts this proposition, which I say is not a correct proposition under the statute, that you have to have some kind of numerical analysis of specific costs, it inevitably leads down a road which means that, short of a full cost of service review, someone can always say the information was insufficient, we didn't have enough. If what is to be undertaken is a numerical review of sufficient costs, there can always be an argument that, short of full cost of service filing, there is not sufficient information. This is why I was at pains to point out from the start that I don't believe the statute in any way requires the Board to start down that road of a numerical analysis of specific costs. 52 This then brings me to the next subject of my submissions which is, well, what has the company proposed rather than a numerical approach to specific costs? And of course, what the company has proposed is something based on inflation, or more specifically, Ontario CPI. 53 Now, to start my submissions on this branch of the argument, I would just like to point out something that is perhaps obvious, but is, I think, nevertheless important. In my submission, in considering the company's proposal and the partial settlement, it is important to remember that, for the purposes of this application, all parties have accepted, on a forecast basis, that there will be inflation for 2004 and it will be 2.0 percent. There is a full settlement on the forecast inflation for 2004. And in fact, this was confirmed and clarified by Mr. Betts on the day when the settlement proposal was presented. This appears at transcript paragraphs 189 to 190 from that day of presentation of the settlement proposal. 54 I won't read it all, but Mr. Betts asked Mr. Warren at paragraph 190 whether it is correct that there is no dispute that 2 percent is a reasonable number that can be used for an inflation forecast? Is that the position of all parties? But that at least for two parties, they are not necessarily convinced that this is a factor that should be used as an adjustment at all, and the answer was: Yes, that's fair. 55 So on the record for this case, and on the settlement proposal, it's a given, if I can use that word, that forecast -- there will be forecast inflation in 2004 of 2 percent. Well, the existence of that inflation, in my submission, has important implications. There are two perspectives to it that I would ask the Board to think about, two perspectives to the existence of this inflation that will occur in 2004. 56 The first perspective is that of the consumers of gas. The Ontario Consumer Price Index is measuring -- I know I am not going to use accurate statisticians' language, this is my own loose language -- but is measuring the increases that consumers can expect to see with respect to the goods and services they'll purchase in 2004. The evidence is that over ten years, Ontario Consumer Price Index has increased by an average of 1.8 per cent, while the company's gas distribution rates have increased by a higher average of 2.6 percent. That's Exhibit A, tab 5, schedule 1, paragraph 4. 57 So looking at this from the perspective of the consumer of gas, the consumer knows that in the test year, on a forecast basis, of course, rates are going to increase less than Ontario CPI. Rates are going to increase less than what those consumers are generally going to pay for the goods and services they'll be purchasing in that year. And this, even despite the fact that historically the reverse has been true. Historically, rates paid by those consumers have increased at a higher rate than the general purchase of goods and services by consumers in any particular year. So this is the customer benefit referred to by Ms. Hare in her testimony, and which I will refer to as I go through my submissions. 58 So that's the one perspective, being the perspective of consumers. The other perspective on Ontario CPI that I think needs to be separated and differentiated is that even aside from that, the evidence is that this measure tracks extremely well the company's costs. The evidence is that the company's model indicates a very strong relationship between Ontario CPI and the distribution index since 1992. In particular, a 1 percent change in Ontario CPI over this period, based on the company's model, leads to a 1.01 percent increase in the distribution revenue index. That's at Exhibit A, tab 5, schedule 1, paragraphs 5 and 6. I believe there is also a table 1 that follows those paragraphs. 59 So what the Board has the comfort of knowing is that, from the perspective I am now talking about, the company's perspective, the measure that is being proposed as the basis for an adjustment to rates is one that historically tracks very closely with the company's costs of providing distribution service. 60 In cross-examination yesterday, counsel for VECC took the witnesses to an interrogatory asked by an intervenor, Malcolm Haynes, the reference for the interrogatory is Exhibit I, tab 5, schedule 1, page 4. What was seen from that interrogatory response, which was based on a unit rate calculation, I should say, but what was seen there was that although there was a close correlation between unit rates and CPI over an 11-year period, on a one-year basis, there could be variations one way or the other from CPI. This was a point that VECC made during cross-examination. 61 My submission to the Board is that, to the extent that this point has any validity, it is not in any way bringing out a shortcoming of Ontario CPI as an appropriate measure. What it is really bringing out is a feature of prospective rate-making. Prospective rate-making is based on forecasts. That's true even under cost of service regulation. I think if there is anything that anyone can know for sure about a forecast, it is that they are never going to be bang-on. There will always be variances. That is a function of setting rates on a prospective basis which requires the use of forecasts. 62 But what the Board does, of course, in prospective rate-making is it balances the interests of the shareholder and the ratepayer and, looking at those forecasts, determines amounts that are most appropriate considering the risk of variances up or down and balancing the interests that I have described. 63 So year-to-year variances from forecasts don't mean that rates are not just and reasonable. This is a feature of prospective rate-making, and the fact that variances from forecasts will occur. 64 Bringing this back, then, to the case we have before the Board, the Board knows from the evidence that Ontario CPI correlates extremely well with the company's costs of providing distribution service. So on a prospective basis, the Board can be comfortable that using Ontario CPI on its own would represent a very fair balancing of the interests of the shareholder and the ratepayers in trying to determine what the company's costs might be for 2004. And in fact, in order to deliver the customer benefit that I have already referred to, the company has shifted that balancing slightly against the shareholder to request and propose a measure that is only .9 of Ontario CPI. 65 But this is all in the context of trying to get back on track to do prospective rate-making, to have a decision in place prior to the beginning of the test year, which of course requires that one work with forecasts. 66 This then brings me to the heading of "prospective rate-making", and some other submissions I wish to make in that regard given the cross-examination that occurred yesterday. 67 Now, first, one of the points that seemed to come out repeatedly in CAC's cross-examination was that there could still be retroactivity resulting from the Board's determination in some other cases, these being the notional utility account case and the ROE case. 68 The reference for some of the questions in this regard is transcript paragraphs 247 and 248. By the way, if I may just interrupt my flow and go back a step, I don't think I gave the transcript reference for the VECC cross-examination on the Malcolm Haynes interrogatory, that would be at transcript paragraphs 657 to 670. 69 Anyway, if I could come back to prospective rate-making, CAC's point during cross-examination was that there could still be retroactivity resulting from the two proceedings I have described. 70 First, what will happen in those proceedings will be determined by the Board there, and I don't think it is appropriate for us, as parties before the Board, to speculate on how the Board will deal with the implementation of any decisions it may reach in those cases. 71 Second, though, and perhaps more importantly, I suggest, with the greatest of respect to CAC, that this suggestion misses the point of the company's application. I don't believe it has ever been suggested that the point of the company's application is that there would never ever be any instance of retroactivity again. 72 The point of the application, or one of the points, is to get the company's rate applications back on track for prospective rate-making, which is what I have just been talking about. 73 I think it was clear to everybody that unless something was done to get back on track, future cases for 2005, 2006 and so on, were going to continue on this same track of behind being in prospective rate-making. 74 The Board gave a pretty clear -- a very clear direction in the 2002 decision about getting back on track. In my submission, what that meant was to get back on the road of prospective rate-making where there would be the effort to have borders in place before the start of the fiscal year. This case is endeavouring to meet that goal, and of course, subject to the time the Board will need for its own decision, is on track to meet that goal. 75 So these other proceedings, the notional utility account and the ROE proceeding, whatever happens in those is not going to in any way affect the great strides that have been made in this case to get the whole regulatory timetable back on to prospective rate-making. 76 Now, another suggestion that came up in CAC's cross-examination was that perhaps not being on track for prospective rate-making is a good thing because, when you have a rate case during the course of the test year, then actual information begins to become available. And the reference for that is transcript paragraph 383. 77 As Ms. Hare pointed out in responding to this line of questioning, one difficulty is the case becomes confused because there is an issue about updating information and, naturally, parties want to update things that tend to favour their position and to not be so interested in updates that don't favour their position. And I am not referring to any particular parties here; it is just part of the process. 78 So it is a confusing situation to be in during the test year to have actual information coming out and to have this issue about how much should be updated and how far it should go in terms of updating to actual numbers. 79 But the real point here is that if there is seen to be some benefit to having this actual information, as CAC implied, that's an argument to be made at some other time for retroactive rate-making based on actual information. 80 In fact, the company believes that the Board's direction was to get back on track for prospective rate-making, and in that context, actual information doesn't become available in the way that CAC was referring to because the case is heard and determined before the start of the test year and before any test year actual results. 81 The next point that I wanted to turn to was the subject of cost pressures. Both of the parties who disagree with the partial settlement asked questions that were suggestive of what might happen if there were simply what I will call a rate freeze. For example, Mr. Warren took the witnesses to a list of benefits to the ratepayers and to the regulatory process of the company's application. This is found at Exhibit A, tab 3, schedule 1, page 3. 82 So some of these benefits, for example -- and I won't read them all -- but there is the obvious one, to get the regulatory timetable back on track for prospective rate-making, stable and predictable rates, allowing ratepayers to know in advance their rates to facilitate their budgeting, even avoiding the costs of a full cost of service proceeding. 83 So there is a whole list of benefits here that flow directly from the company's proposal. I don't think there was any question that those benefits do flow in the way the company suggests. 84 What was put forward on cross-examination instead was, well, these benefits would flow if there was a rate freeze, would they not? And that was at transcript paragraphs 264 to 265. 85 With the greatest of respect, and I don't mean this to be critical of the party putting forward that proposition, I submit that that's not a helpful approach for the Board. One could just as easily say, well, if gas distribution services were provided for free in 2004, all these benefits will be achieved. Well, of course they would, but there is two sides to the equation. Just and reasonable rates is a balancing of the interests of both ratepayers and shareholders. To say that a rate freeze would deliver these benefits to the regulatory process and customers is to ignore totally the other side of the equation, which is the interests of the company's shareholder. 86 What the company's proposal does is it considers all interests. It provides all of these benefits while at the same time providing the customer benefit that I have already described and taking into account the shareholders' needs when it comes to managing the company. 87 Also in relation to this rate freeze suggestion, Mr. Ladanyi pointed out that where such a thing does exist, it tends to be in cases of utilities that are not in a growth mode. 88 At transcript paragraphs 633 to 637, Mr. Ladanyi gave detailed evidence to the effect that the company, as far as growth is concerned, is at the top of utilities in North America and what that means for the cost pressures on a utility like Enbridge Gas Distribution. 89 So what the Board knows in this case is that it has a company that is in an active growth mode at the rate of around 50,000 customers per year in front of it. It knows that the company's costs closely correlate with Ontario CPI. It knows that all parties have accepted 2004 Ontario CPI on a forecast basis at 2 percent. And on top of that, it knows from this case, and from the 2003 case, about the cost pressures that the company is facing. This is in areas, for example, like insurance and salaries, as referred to by Ms. Hare at transcript paragraph 712. In fact, on this issue, it was interesting that for the purposes of a particular line of questioning, counsel for VECC was at some pains to put on the record evidence that the O&M budget of more than $300 million proposed by the company in the 2003 case is a legitimate budget. And I will actually go to some of the transcript on this. I don't know that you need to turn it up. It is from yesterday's transcript at paragraphs 808 to 812 and 815. Those are the portions I'll refer to, but I think it goes on from there as well. 90 So at paragraph 806, Mr. Janigan is talking about the company preparing an O&M budget at the end of the TPBR period, and at paragraph 808 he puts to the witness these words: 91 "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." 92 Ms. Hare said: "That's correct." 93 And Mr. Ladanyi said: "Yes, we gave our best estimate of the forecast of our costs for 2003." 94 And then Mr. Janigan goes on with reference to a document: 95 "If there had not been reductions in the way of ratepayer benefits, there would have been an O&M expense of $332.2 million? And that was confirmed." 96 And at transcript 815, paragraph 18, he says: 97 "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." 98 Mr. Ladanyi: "Yes, it was, that was our best estimate of what our expenses would be." 99 Well, as the Board knows, that number was reduced and part of the reduction was in the ADR proposal for 2003. 100 Now, the point I am making here is that VECC brought this evidence out for a different purpose, for a point that it wished to make on efficiency that I will address, but having done it, surely VECC has to live with it for all purposes. And what this evidence does is confirm what the company has been saying about the cost pressures it faces in trying to live with the O&M that was agreed to in the ADR for last case. And in my submission, by doing this, VECC has, indeed, confirmed that there are legitimate cost pressures that the company has to manage to in 2003, having only a 1.8 percent increase on what was approved in 2003. 101 My point is that counsel cannot bring out evidence like that for one purpose and then attempt to disavow it for another purpose, and the other purpose I am referring to here is supporting the company's evidence about its cost pressures. 102 Now, what VECC did pursue vigorously during cross-examination was the subject of the productivity that the company was able to achieve -- has been able to achieve in the O&M area, and it is important to remember that this is productivity in the O&M area only. During the period when the company has been achieving that type of O&M productivity, the evidence shows that rates, as determined in case after case by this Board to be just and reasonable, were still increasing by more than Ontario CPI. And again, that's Exhibit A, tab 5, schedule 1, paragraphs 5 and 6, and table 1. 103 So the fact that the company has historically shown an ability to achieve good O&M productivity does not lead to a conclusion that any adjustment less than Ontario CPI is appropriate. In fact, when the company has been achieving that sort of productivity, the Board's determination of just and reasonable rates has been exceeding Ontario CPI. 104 This then brings me to the partial settlement. As I indicated at the outset, I did want to say a few words about what has been called the ratepayer safeguard in the partial settlement. In its written submissions for the purposes of the request for production by CAC, the company pointed out that when it filed its application, it believed that the Board had a very good basis for determining just and reasonable rates for fiscal 2004 by applying an increment that, for all the reasons I have been talking about, is a modest increase to rates for 2003 that have already been determined by the Board to be just and reasonable. 105 The point that I want to make about a partial settlement is that it gives the Board, if I could call it an added level of comfort beyond what I have just said and what the company believed when it went into this application. If the Board accepts the partial settlement, there will be the ratepayer safeguard to ensure that the 2003 base is a good base for the Board to apply the adjustment mechanism to and determine just and reasonable rates for 2004. 106 If the company's actual results for 2003 -- and by "actual", I mean known, actual results at the year-end -- on a normalized basis result in earning more than 25 basis points above the Board-approved ROE, there is the ratepayer safeguard that has already been discussed before the Board to return to ratepayers the amount of that adjustment. This, in my submission, should leave the Board with complete confidence that the proposed adjustment mechanism will be applied to a base that is a just and reasonable base if the partial settlement proposal is accepted. 107 During cross-examination, one counsel discussed various scenarios that might transpire when that ratepayer safeguard comes to be dealt with in accordance with the partial settlement, again, if the partial settlement were to be accepted by the Board. These scenarios included the possible need for interrogatories and ADR and a hearing and so on. These postulated circumstances were described by Mr. Ladanyi more than once as a worst-case scenario. That's at transcript 343 and 364, for example. 108 In my submission to the Board, the very premise of the application that the Board is now dealing with was that these sorts of worst-case scenarios do not have to happen. If, coming into this case, or at the time of deciding upon its application for 2004, the company had proceeded on the basis of that type of worst case scenario, the application that is now before the Board would never have been feasible and would never have been filed. The company had faith that those scenarios do not need to happen and that, in an appropriate case like this one, the process is capable of working in a way that suits the exigencies of the situation. I think that, to date, that belief and that faith of the company has proved to be true, regardless of the outcome of the Board's decision as to whether or not to accept the partial settlement, this case has really taken that one big step to get matters back on track for prospective rate-making. 109 Again, I can't begin to speculate on the availability of a Board decision, but certainly matters are on track to potentially have a decision in advance of the test year. So the company did not proceed on the basis of a worst case scenario when it filed the application. If it had, the application would never have occurred. The worst case scenario did not transpire, and in my submission, there is no reason to approach the ratepayer safeguard on the basis of an assumption that some worst case scenario will transpire when that safeguard comes to be addressed. 110 I come now to the topic that I said at the outset would be a discussion of both just and reasonable rates and also what I have called pragmatism. 111 I return here to the comments that I have been making about whether there is a necessity for the Board, in fixing or approving just and reasonable rates, to embark on a numerical review of specific numbers. 112 I suggest to the Board that a determination that that sort of review is a necessity would not be a healthy precedent. And I hasten at this point to make very clear what I am saying. I am not in any way saying that the partial settlement, if accepted by the Board, were to set a precedent; that is definitely not the case. The wording of the partial settlement is very clear that it does not set a precedent if accepted by the Board. 113 What I am actually talking about is the reverse. I am talking about what if the Board were to accept this notion that some sort of numerical review of specific costs is a necessary part of rate-making. 114 I suggest to the Board that that sort of determination would really be one that greatly ties the Board's hands in handling unforeseen cases that could arise in the future. I don't think anyone knows at this point in time whether at some time in the future there might be a need on the Board's part to move expeditiously. 115 I have already made submissions about how embarking on this numerical review of specific costs inevitably leads down the road to a full cost of service case. I think a determination that starting down that road is a necessity in rate-making would unnecessarily restrict the Board's flexibility. 116 As I submitted, I submit very strongly that that's not required by the statute, and I submit very strongly as well that that's not pragmatic. 117 On the other hand, I asked the Board to consider the pragmatism of the company's proposal. The company's proposal allows the Board, for all the reasons I have already discussed, to balance the interests of ratepayers and shareholders and to establish just and reasonable rates, but to do it in a pragmatic manner that is suited to the particular circumstances now in front of us. And by "those particular circumstances", I am referring, for example, to the Board's direction that the rate-making process should be brought back on track for prospective rate-making. 118 So what we have, I submit, is a solution that not only is pragmatic in those circumstances, but also fully balances the interests of ratepayers and shareholders in the way that I have described throughout this submission. 119 And I did say at the outset that, in my submission, what is involved in the setting of just and reasonable rates is that sort of balancing in all the circumstances of a particular case, so at the risk of repeating things that I have been saying throughout these submissions, I will just try to wrap up some of the circumstances of this case that I think are appropriate for the Board to consider in determining what is just and reasonable. 120 One of the circumstances that I think is a perfectly legitimate one to be considered under the rubric of what is just and reasonable is the need for a pragmatic solution in order to get matters back on track. If there had to be a full cost of service review, if there had to be studies filed on productivity factors and total productivity factors and those sorts of things and what was referred to in the evidence as a battle of the experts, the objective of getting back on track would not have been met. 121 In my submission, the pragmatic feature of this case is something that does go to just and reasonable rates. 122 Other things are: The ratepayer benefit of an increase less than CPI that I have discussed and will not go into in any more detail again. The other benefits listed in the pre-filed evidence that, yes, would be benefits of a rate freeze but are benefits also of a balanced application, such as that put forward by the company. 123 There is the fact that it is agreed on a forecast basis that there is going to be inflation of 2 per cent in the test year, coupled with the fact that the company's costs historically correlate very closely with Ontario CPI. 124 And there is the evidence and the need for management to be able to manage the utility and deal with cost pressures. So in my submission, and again, I know that is repetitive, but I am just trying to make the submission to the Board that one needs to put all of these types of things together to determine what is just and reasonable, and in my submission, when one does that in this case, one is driven to the conclusion that a very just and reasonable solution can be achieved on a pragmatic basis by acceptance of the partial settlement. 125 This, in conclusion then, brings me to what I said would be very brief, which is a description of what the company believes or submits needs to be addressed in a Board decision. 126 First, the company submits that the foremost issue is whether or not the Board would accept the partial settlement described in issues 1.2 and 7 of the settlement proposal. 127 Beyond that, I am not sure if there was any doubt about the issue of attribution of load balancing costs that is described under one of the complete settlement issues in the settlement proposal. 128 Just in case there is any doubt, there is no need for a decision right now on that issue about attribution of load balancing costs or, indeed, on any gas costs, transportation or storage matter. That is to be addressed later, and as Ms. Hare testified, the indication that has been given is that there may perhaps be a day or some time in October to do that. 129 In any event, though, that's not part of what, in my submission, the Board needs to decide now. The real issue now, in my submission, is whether or not the Board sees fit to accept partial settlement on issues 1.2 and 7. 130 That completes my submission, Mr. Chairman. I think I did bring myself in under the time limit I gave yesterday, quite uncharacteristically. 131 MR. BETTS: Thank you, Mr. Cass. 132 [The Board confers] 133 MR. BETTS: Mr. Cass, I just have one question, I believe, for you. It relates to -- and you may or may not be able to address it. Do your best, or it could lead to an undertaking. 134 But it relates to a statement made in yesterday's transcript by Ms. Lakatos-Hayward, and it's specifically in paragraph 180. She stated in her opening remarks: 135 "Certainly, in this application the company is guaranteeing to customers that natural gas distribution rates will increase by less than the rate of inflation." 136 The sentence goes on, and I will continue "and in this we believe that the Ontario consumer price inflation is a key measure that tracks inflation for an average Ontario consumer." 137 Can you address that comment and tell me whether that was somewhat of an overstatement or whether I have misinterpreted things? From what I understand, the formula is based on a forecast; the company is not in any way guaranteeing if, in fact, the forecast does not turn out to be accurate that there will be some adjustment that will make sure rates don't change. Are you in a position to address that or clarify it for me? 138 MR. CASS: I can try to do so, sir. Your understanding of the company's case is correct, that if, on an actual basis, inflation differs from the forecast, there is not any expectation or proposal for an adjustment. Again, I think that flows very much from the submissions that I was making about prospective rate-making, the company's perception of one of the goals of the Board is that matters should be brought back on to a prospective rate-making basis, and what that means is that one does proceed on forecasts. So on a forecast basis, the company is saying that customers' rates will increase less than the forecast rate of Ontario CPI. 139 And I understand completely your concern that that did not come through as clearly as it might have in the answer that is given at paragraph 180. 140 MR. BETTS: Thank you for that clarification. We have no further questions. Thank you, Mr. Cass. 141 Is there any order established? 142 MR. DeROSE: Good morning, Mr. Chairman. 143 MR. BETTS: Mr. DeRose. 144 MR. DeROSE: I believe this morning it will be myself, Mr. Shepherd, and Mr. Mattson are the only three intervenors making submissions, and with the Board's permission, we would propose that I begin, Mr. Shepherd go second, and Mr. Mattson go third. 145 To give you an idea of timing, given my friend, Mr. Cass's submissions, mine have been reduced substantially. I have been trying to put lines through things as the submissions were going this morning. I would anticipate I will be no longer than 15 minutes, and probably less than 10. I can't speak for my friends. I don't know whether it would be helpful to the Board to get an understanding of the timing or whether you want me to just carry on and begin. 146 MR. BETTS: Perhaps we will see if the other parties have a feeling for their time. 147 MR. SHEPHERD: Mr. Chairman, I expect to be 20 minutes. 148 MR. MATTSON: Five to ten minutes, Mr. Chairman. 149 MR. BETTS: That's excellent. So again, we have a deadline of roughly about 12 o'clock, so it sounds as though we are in line to accomplish that. Thank you very much. And these then will be submissions from intervenors in support of the settlement agreement. 150 Mr. DeRose, please continue. 151 SUBMISSIONS BY MR. DeROSE: 152 MR. DeROSE: Thank you, Mr. Chairman. The focus of my submissions this morning will primarily be with respect to the ratepayer safeguards and the partial settlement. But let me begin by reminding the Board that at issues day, IGUA advised that it supported the company's proposal with respect to the 1.8 percent increase and IGUA's support of that increase is because we believe that it will allow the company's regulatory timetable to get back on track and that it will avoid or substantially reduce retroactive rate-making. And both of these are goals that we believe are important and must be obtained. So with that, I'll turn to the ratepayer safeguards within the partial settlement agreement, and in our submission, the ratepayer safeguards are; one, necessary; and, two, reasonable. 153 Now, with respect to the necessity of the ratepayer safeguards, and this will be the only time today that I take you to the transcript from yesterday, but I would take you to my friend, Mr. Shepherd's, extensive cross-examination of two questions, and that can be found at paragraphs 211 through to really 216. And in response to a question that Mr. Shepherd asked with respect to whether there is a reasonable possibility that the company could over-earn in 2003, Mr. Ross provided the following answer, which can be found at lines 213 and 214, and that would be volume 1 of the transcript, and Mr. Ross said: 154 "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. There is a possibility that earnings will be over the limit. Now, whether they will be material or not at this stage, in terms of overall quantity, we cannot tell at this stage." 155 So in our submission, on the evidence of Mr. Ross, there is a possibility that the ratepayer safeguard will be triggered. There is a possibility that the company will materially over-earn in 2003. But that's simply a possibility. We can't say for sure. But the chance that that will happen in and of itself, in our submission, is a justification for the ratepayer safeguard. And it is, in our submission, completely proper and appropriate to insure that the company's indexed fiscal 2004 rates are reduced accordingly if the company substantially over-earns in fiscal 2003. 156 So based on the evidence, such an over-earning is possible, and once that possibility exists, under the partial agreement, if that happens, in our submission, ratepayers will be properly protected, which would take me to our second point, which is that the ratepayer safeguards are reasonable. 157 Now, let me begin by saying that the length and detail of the partial settlement agreement should not be interpreted or in any way taken to mean that the ratepayer safeguards are unnecessarily complex or that the detail of the ratepayer safeguards will lead to future disputes between the parties. In our submission, it is quite the opposite. The partial agreement sets out in significant detail the very methodology by which 2004 rates will be adjusted if the company significantly over-earns in 2003. In our submission, this is important, because it is the very detail itself that substantially reduces the likelihood of a future dispute. In other words, the step-by-step procedure set out in the partial settlement agreement for calculating the adjustment amount, if required, significantly reduces the likelihood of a dispute at a future time. 158 Now, a dispute could arise at a future date. Mr. Warren, in his cross-examination yesterday, took Ms. Hare through what I would call the nightmare scenario; it is the worst-case scenario. And we submit that the chances of that worst case scenario occurring are unlikely. The ratepayer safeguard is, by and large, formulaic. Thus, even if there was a dispute, we submit it would be limited in scope. 159 So in this regard, we would request that the Board not interpret the possibility of a future dispute, even the possibility of the nightmare scenario, which we would submit is unlikely, as undermining the value or the benefit of the ratepayer safeguard. The possibility of a dispute cannot be interpreted as a reason or a rationale to reject the ratepayer safeguard in total. 160 Mr. Chairman, if I can just have one indulgence, I think I can cross out a few things and speed things up. 161 MR. BETTS: You go right ahead. 162 MR. DeROSE: Mr. Chair, may I go ahead? 163 MR. BETTS: Please. 164 MR. DeROSE: With that, I can summarize IGUA's position with respect to the partial agreement and with respect to our support of it. 165 In our submission, the partial agreement accomplishes three things. 166 First, it will bring the company's regulatory timetable back on track. This is, in our submission, required. 167 Secondly, bringing it back on track will avoid or limit substantially retroactive rate-making. Again, this is required. 168 And third, the Board can take comfort that the ratepayer protections or safeguards ensure that the 2003 base to which the index is to be applied is correct, and if, after the 2003 actuals are known, if the company significantly over-earns, then the 2003 rates will be adjusted accordingly. This provides protection and assurance to the Board that the rates will be just and reasonable. 169 And in this regard, we respectfully submit that the 1.8 percent increase, in conjunction with the ratepayer safeguard, will, in fact, produce just and reasonable rates. 170 Subject to any questions from the Board, those are our submissions. 171 MR. BETTS: Thank you, Mr. DeRose. 172 MR. DOMINY: I just have an observation. You might want to check the transcript, because I think you meant the 2004 rates, not the 2003 rates would be adjusted. 173 MR. DeROSE: I'm sorry, Mr. Dominy? 174 MR. DOMINY: I think you said the 2003 rates would be adjusted. I think you meant the 2004 rates would be adjusted. 175 MR. DeROSE: Sorry, yes. It would be an adjustment of the 2004 rates. I am not suggesting that the 2003 rates would be in any way affected by this ratepayer safeguard. 176 MR. DOMINY: I just wanted to make sure the transcript was clear. 177 MR. DeROSE: Thank you, Mr. Dominy. 178 MR. BETTS: Thank you, Mr. DeRose. We have no further questions. 179 Mr. Shepherd. 180 SUBMISSIONS BY MR. SHEPHERD: 181 MR. SHEPHERD: Thank you, Mr. Chairman. 182 Mr. Chairman, in these submissions, I would like to focus on the structure of this application. 183 In essence, the company has proposed a syllogism. They've said, if rates are set on a base that is known to be just and reasonable, and if they are adjusted by a methodology that is known to be just and reasonable, then the resulting rates will be just and reasonable. 184 School boards believe that in all but the most unusual cases that syllogism is correct, so therefore, in order to look at their application, it is appropriate to look at whether those two premises are correct. 185 There are two accepted ways to establish just and reasonable rates. The classic method is cost of service. In theory, what this Board does is build up the reasonable costs to deliver the distribution service, or the company does, and the Board reviews it, including the costs of capital and return on equity, and then rates are set based on that total number. You figure out the costs, and that's what the rates should total. Economists call this a bottom-up approach. 186 In practice, of course, which was the last time we actually did that? To do that correctly, in a bottom-up way, we would have to look at each component of the company's costs from scratch each time there is a rate case; we would look at how many miles of pipe have to be laid each year, and how many people are needed to do that, average wage rates for that category of employee, etc., etc. It would be ridiculous to do that every year. We would be in the hearing room every day of the year, and I am sure we would all enjoy that very much. 187 So we don't actually do that except in special cases. Personally, I think we should do that more often, take areas of the company's budget and do a zero-based analysis, but in fact, that's rarely done. 188 What we do instead is we take the existing cost of service as a base and the company then proposes adjustments to that base. They can be things like, we want to initiate a new project, and this is how much we think it will cost. We want to add these new staff to this particular function area, and this is how much we think that will cost. Or it can be things like, we think this category of costs will go up or down by a certain percentage because we have market information to that effect. 189 These are all normal budget things that the company has to do, and what this Board does is review the adjustments to that base and then establish a new set of rates based on the existing cost of service, plus or minus those adjustments. 190 So how is that different from the current application? Well, it is submitted that it is different in two ways. 191 First, in the current application, we do not have as extensive a filing of information with respect to the existing costs of service, as we normally do. The company says, or they don't say it expressly, but I think it is between the lines what they are saying, and I think with some justification, that we just finished a knock-'em-down, drag-'em-out ADR that took twelve years, it seemed like, on cost of service in March, and only weeks later we filed this application. 192 This is not as if the information available to the Board on costs of service or indeed the last review of cost of service is particularly stale. They are not as current as they might be, that's true, but they are not a year old either. 193 Therefore, the need to go through this again in great detail is not as urgent as it would be in normal circumstances. It might be preferable. I am not saying anything to the contrary, but the need is less. 194 So that's the first difference between what is proposed today and a normal cost of service application. 195 The second difference is that in the current application, the adjustment mechanism is much simpler than we would normally see in a cost of service environment. In a cost of service, we adjust line by line. In this case, the company is saying two things, I believe. 196 They are saying, number one, there is a bigger problem with the regular story schedule that has to be addressed and that some short cuts are justified in order to deal with that problem. 197 They are also saying that in order to ameliorate the reduced rigour that comes with short cuts, and that's what we are all talking about, is this a rigorous enough process, and they are admitting it is less rigorous, and to reduce the danger inherent in that, they are keeping their rate requests to a low number. They are not asking for special adjustments. They are making sure that the rate increase requested is less than historical trends. 198 That's their trade-off. 199 So if we compare the current application to cost of service, we can see that there are some differences and there are some reasons for those differences. 200 Now, in recent years, rate-makers throughout North America have experimented with a different method of rate-making, performance-based rate-making, PBR, and I guess we all assume that that is fundamentally different from cost of service regulation, but it is not really that different. 201 In PBR, like cost of service, we start with a base, which is usually existing cost of service rates, and then we make adjustments to that base and the difference is twofold. First of all, the base is usually older than in a cost of service case, because PBR goes several years, so it is staler; and second, the adjustments are by a formula rather than line by line. 202 So as a result, much of the focus is on making the formula just and reasonable through stretch factors and Z factors and all those neat jargon things that we use. 203 So again, how is that different from the current application? Well, in respect of the base, at least arguably, the base on which PBR is based, operates, is staler than what is being proposed this time around. This time around, we are looking at current year actuals as the base, and we have built in, negotiated by almost all the parties, a ratepayer safeguard to make sure that the base has integrity, that we know that it is a reliable base. 204 With respect to the adjustment factor, though, we are again back to the trade-off, getting back on track versus more rigour in the calculation. 205 So the company has said it will set its sights lower, make it easier for this Board to accept the application, and further more, has agreed that the ratepayer safeguard will be asymmetrical to further limit the risks to the ratepayer. 206 Mr. Chairman, my friends, Mr. Warren and Mr. Janigan, will take the principal position, I believe, without trying to put words in their mouth, they'll take the principal position that the onus and burden of proving that rates should be increased is on the company and always remains on the company. And I am the last person to argue that the company's onus or burden should be undermined or weakened in any way. Indeed, in some respects, I am making this whole final argument holding my nose because we, the school boards, would clearly support more rather than less rigour in the regulatory process. 207 But Mr. Chairman and Mr. Dominy, I would invite you to listen critically to the submissions of Mr. Warren and Mr. Janigan and ask yourself whether there is an unstated major premise buried in their submissions. What I expect will be the case is that there is an unstated major premise which is this: That the only way for the company to meet its onus and burden with respect to rate increase is with a cost of service filing. You know, cost of service, at least periodically, is a very useful discipline, and we are not arguing against it at all. But we do not believe it is the only way to regulate gas rates, and if, in fact, my friends, Mr. Warren and Mr. Janigan, are indirectly arguing that that's really the only way you can do it, then, in our respectful submission, that is incorrect. 208 Mr. Chairman, the current application is a short cut. It is justifiable only because of the special circumstances and the specific direction of the Board to the company to find a creative way to get back on track. In normal circumstances, School Boards would be arguing vociferously against short cuts. In this case, we believe that the company has found the right balance in order to achieve a necessary result, and we urge the Board to approve it. 209 Subject to your questions, those are our submissions. 210 MR. BETTS: Thank you, Mr. Shepherd. 211 [The Board confers] 212 MR. BETTS: The Board has no questions. Thank you very much. 213 Mr. Mattson. 214 SUBMISSIONS BY MR. MATTSON: 215 MR. MATTSON: Thank you, Mr. Chairman, Mr. Dominy. 216 The Board, in its decision with reasons in RP-2001-0032, was very clear in expressing its concerns about the retroactive application of rates in the company's franchise area. Moreover, the Board indicated that it was not convinced that Enbridge Gas Distribution was making sufficient efforts to rectify the matter to "get back on track", as it were. So when the company brought forward an application which was neither a typical cost of service application, nor an incentive regulation plan application for 2004 rates, but one which was innovatively designed to get the regulatory process back on a preferred schedule, Energy Probe felt it should commit itself to give a fair examination to the company's proposals. 217 And I think, Mr. Chairman, at this point, so did many of the others in the room, and I think you see that in the partial settlement and, in fact, although there is a discussion about what the actual settlement should be, I don't think any party at this point has brought a motion or an argument that there should be a full cost of service or incentive plan hearing. 218 This was a considerable stretch for Energy Probe, as we take the position that the strengthening of regulatory oversight leads to a stronger, more effective energy distribution system. And Energy Probe, in fact, believes this fact has been borne out in gas distribution in the Province of Ontario, and we hope it will eventually do the same in electricity distribution. 219 So, if my client was to sign off on the settlement proposal, arising from an ADR proceeding utilizing an index formula to fix rates, we were going to need the explicit safeguards written into the agreement, and my friend from IGUA, counsel for IGUA, has gone into those and we agree with those safeguards. Moreover, we would need to make it clear to both the applicant and the Board that Energy Probe saw the acceptance of the rate adjustment mechanism described in the settlement proposal as a means to meet the company's objective of getting back on track. We did wish -- we did not wish it to be taken as a precedent for any other case and, again, that is set out in the settlement proposal -- partial settlement proposal. 220 It is the position of Energy Probe, then, that this type of rate adjustment mechanism may, if repeated, result in the weakening of regulatory oversight, but in the circumstances of this case, we do accept it. 221 Now, we have heard yesterday through cross-examination by two parties disagreeing with the partial settlement, we have heard them raise objections to it by indicating that the applicant did not provide sufficient evidence of its need for an increase in rates, however modest. In response to that, we just indicate, Mr. Chairman, that the applicant did not file a cost of service application. In the last rate case, RP-2002-0133, the intervenors undertook an exhaustive examination of the extensive information filed by the applicant through numerous interrogatories and an extended ADR and cross-examination at the hearing. Taking the outcome of that rates case as a base, with sufficient customer safeguards in place, appeared to my client, Energy Probe, to be an acceptable method to fix just and reasonable rates in this case, being, of course, an exception. 222 And Energy Probe feel that is this settlement proposal has addressed those concerns. Therefore, we support the settlement proposal for issue 1.2 and we request it be accepted by Board panel. 223 Thank you, Mr. Chairman and Mr. Dominy. Those are my submissions. 224 MR. BETTS: No questions. Those submissions were very clear. Thank you. That completes then the submissions in support of the partial settlement agreement, and everybody has done -- I see Mr. Cass looking at the clock, and yes, you have all done very well. 225 MR. CASS: This is going to give lawyers a bad reputation. Usually, it is accepted that lawyers will exceed their time limits. 226 MR. BETTS: Well, you have shown that not to be the case. You have all done very, very well, and I thank you for that. Our objective here has not been to do things quickly; it has been to do things efficiently, and as quickly as possible, and all of you are supporting our objective in that, and we thank you for that. 227 That concludes then today's portion of the hearing. We will be resuming the hearing tomorrow morning at -- I am not sure we set a time, but let us -- all of you are not involved with tomorrow morning very early, and I am just wondering, perhaps Board counsel can give us a feeling in terms of how early we should start tomorrow morning? 228 MS. LEA: Well, the argument of VECC is going to be delivered in writing, and that can be transcribed into the record, and I think the deadline for that was noon. 229 MR. BETTS: Right. 230 MS. LEA: So we have CAC's argument. Does anybody know of anybody else who is arguing tomorrow? Okay, so I don't -- 231 MS. GIRVAN: We would be prepared to start at 9 o'clock. 232 MR. BETTS: That certainly is fine. I am not sure it is necessary, actually. If you want a little more time or -- 233 MS. LEA: Should we compromise on 9:30 perhaps? 234 MS. GIRVAN: Well, I guess I would like to speak with Mr. Warren, but we are in the Board's hands. 235 MR. BETTS: Well, actually, I would be happy to go on your preference. It is certainly for the Board at 9 o'clock, 9:30 or otherwise. So if you would like to establish your preference, we'll -- 236 MS. GIRVAN: Why don't we say 10 o'clock. 237 MR. BETTS: That works for the Board. 238 MS. LEA: Okay. 239 MR. BETTS: That's fine. We will resume the hearing tomorrow morning at 10 o'clock. We will be hearing arguments in response from CAC and VECC, and at this point there is a hope that the applicant will be able to deliver arguments in-chief later that day, but we will conclude that tomorrow. There may be a complication in the Board's ability to sit tomorrow afternoon, and perhaps, if you check with either Board counsel or Board staff later, we'll have an idea there. At the very worst, it would be Friday morning first thing that we would receive final arguments. But at this point, we are proceeding on the basis of final arguments late in the day on Thursday from the applicant. 240 Are there any questions that have arisen as a result of this proceeding that we can help with? Then with that, we will adjourn now until 10 o'clock tomorrow morning. Thank you. 241 --- Whereupon the hearing adjourned at 11:20 p.m.