Rep: OEB Doc: 12RXG Rev: 0 ONTARIO ENERGY BOARD Volume: 3 28 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 28 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 WARREN: [19] WRITTEN SUBMISSIONS BY VECC INSERTED BY COURT REPORTER AS FOLLOWS: [127] REPLY SUBMISSIONS BY MR. CASS: [220] PROCEDURAL MATTERS: [316] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 10:00 a.m. 15 MR. BETTS: Good morning, everybody, and welcome back to day three of this hearing respecting application RP-2003-0048. We have dealt with arguments in-chief from the applicant, and arguments in support of the settlement proposal by parties who, in fact, support it, and today we are receiving arguments from parties who oppose the settlement agreement. 16 It is the Board's understanding that at least one submission will be made in writing, and it will be made prior to noon today, and the Board will endeavor to make that available as quickly as possible to Mr. Cass and others. And today, if I understand correctly, it will be Mr. Warren we will be hearing from orally, and I do not believe any others. 17 First of all, if there is any errors in what I have said, please advise me; otherwise, are there any preliminary matters? There appear to be none. 18 Mr. Warren, welcome. 19 SUBMISSIONS BY MR WARREN: 20 MR. WARREN: Thank you, sir. I am in the unusual position of being among that wonderful equation of loneliness and being just. I want to begin my submissions, Mr. Chairman and Mr. Dominy, with some comments by way of introduction to the CAC's position, and the reason I want to do that is that, notwithstanding the facetiousness of my opening observation, we find ourselves in this case, along with Mr. Janigan's client, being, in effect, the enemies of promise, being those who are against an efficient disposition, against doing something which is supposed to be, according to my friends opposite in position, a new and modern and better way to set rates. 21 CAC opposes the partial settlement because Enbridge Gas Distribution has not, in our view, proven that the proposed rates are just and reasonable. It is not, in our submission, proven that the rate increase is either necessary or appropriate. 22 CAC also opposes the partial settlement because EGD is proposing what we believe is an unacceptable departure from important principles of rate-making. In our submission, EGD has not demonstrated why this departure is either necessary or appropriate. The ostensible benefits which EGD says will accrue from the granting of the application do not require the approval of EGD's proposed formula; that is, in our respectful submission, one of the central myths of Enbridge's application and its presentation of this case. All of the objectives can and will be achieved by freezing rates at the fiscal 2003 levels. In addition, doing so will accomplish other, and in our respectful submission, equally important benefits. 23 First, it will demonstrate to ratepayers that is they do not have to pay a rate increase for which there has been no demonstrated need. 24 Secondly, it will allow the Board to fulfill its statutory obligation of protecting the interests of consumers with respect to prices. This objective is not achieved merely by keeping -- the objective of protecting ratepayers and consumers with respect to prices is not achieved merely by keeping prices below the forecast rate of inflation. That is, in our respectful submission, an artificial test and an inappropriate one. The objective is achieved, that is, the objective of protecting consumers with respect to prices, sorry, at a minimum, when consumers pay rate increases only when there is a proven need for those rate increases. 25 Thirdly, a rate freeze insures that the basic principles of rate-making are adhered to by requiring evidence of the need for a rate increase. 26 Fourth, a rate freeze protects the integrity of the Board's processes by insuring that rate increases are only approved on the basis of evidence which can be tested in the hearing process. 27 At the outset, CAC wants to respond to one of the myths which Enbridge and those which support its position seek to impose on it. That is the myth that CAC believes that rates can only be established on the basis of a cost-of-service proceeding and its corollary, the CAC opposes any short form formulaic approach to rate-setting. Neither of those propositions are true. They simply reflect a tactic on the part of my friends to assign to those with whom we disagree unacceptable positions in principle. It's simply, if you wish, a tactic to denigrate the opposing position by saying that he or she is, as I have described it, an enemy of promise. 28 As a matter of historical record, the CAC supported the PBR regimes which are based on a formula to determine rates. In both of the PBR regimes that have come forward, the CAC sponsored evidence from Dr. Johannes Bauer, a experienced and responsible expert on PBR regimes, who testified on how such regimes may be based on formulae which are carefully calibrated to protect the interests of consumers. 29 The difference, of course, is that the PBR regimes used formulae that were based on substantial evidence, tested in hearings, reflecting costs and revenues and reflecting the need of utilities for rate increases in some circumstances. None of those factors are present in this case. 30 What CAC objects to is the approval of this formula on the evidence in this case. It is also important to bear in mind that while a partial settlement is supported by a few intervenors, it is also opposed by intervenors which represent the largest, and in our respectful submission, by any standard, the most important group of customers; namely, residential consumers. 31 From that introduction, I propose to proceed with three points in my argument. First, I want to deal with the regulatory test that the Board should apply. Secondly, I want to apply that test to the application which has been filed. And finally, I want to address the alternate adjustment mechanism which the CAC submits the Board should approve. 32 Let me deal first with the regulatory test. EGD's application is predicated on the express desire to have the Board use a new way to determine just and reasonable rates. To use the language of Ms. Hare's presentation of March 3rd, 2003, to her senior managers, to her executive, I'm sorry, EGD wants to "challenge" the Board to redefine its method of fixing just and reasonable rates. 33 Let us then examine the test which EGD proposes. It is articulated by my friend, Mr. Cass, in his argument in-chief, and it appears at various points, the first of which that I can find is at page 38 -- sorry, paragraph 38 of yesterday's transcript of the argument in-chief, and the test is: "Balance the interests of shareholders and ratepayers in all of the circumstances of a particular case". 34 We will examine the balance proposed in this case in a moment, but we want to begin by trying to determine how the Board should apply such an imprecise amorphous test. What standard should the Board apply? How does the Board define the interests of ratepayers, and more importantly, how does the Board measure the interests of ratepayers? 35 Beyond the obvious interests, for example, the safe and reliable delivery of an essential commodity, the fundamental interest, in our respectful submission, is the protection from being overcharged by a monopoly. That is why regulation exists. It is also why section 2 of the Board's Act provides that one of the Board's objectives is the protection of the interests of consumers with respect to prices. 36 The Board has applied, for many years, basic tests for protecting consumers with respect to prices, namely by insuring that the monopoly utility only recovers its necessary costs and an allowed rate of return. The tests which my friend, Mr. Cass, proposes dispenses with that basic protection. Enbridge provides no evidence of its costs and no evidence that it needs an increase in revenue, let alone the amount of the increase that is necessary to meet any costs. 37 Enbridge's challenge to the Board is to see if the Board is prepared to say the following to residential customers, in effect: You are going to be charged more next year, even though there is no evidence that Enbridge needs your money, but you may get some offsetting benefits. That's the challenge which Mr. Cass and his client ask the Board to take up. 38 In our respectful submission, the test which is proposed fails, because it does not have, at its core, a definition of what the ratepayer interests are and how they are to be protected. Instead, it posits a number of what it describes as benefits; we will turn to an examination of those benefits, both on their own and in relation to what ratepayers are giving up. 39 Two principle benefits are posited. The first is that the amount of the increase is lower than inflation and lower than the level of increase which EGD has historically had approved by the Board. Neither of these benefits are of any value unless the increase is needed by Enbridge. 40 The first argument which appears at -- this first proposition which appears first, as far as I can find it, at paragraphs 56 and 57 of the argument in-chief yesterday, is that consumers know that they are going to have to pay more for services next year because of inflation, so they should, as I understand the argument, consider it a benefit if they have to pay a little less than inflation by way of an increase in EGD's rates. 41 But it is of no benefit to consumers to pay less than some level if there is no demonstrated need for the increase at all. The same is true of the second argument -- sorry, if the argument was based on Enbridge's historic rate increase. The argument to a consumer that you are going to pay less of an increase than you have had to pay historically is, again, of no value if that need, if a need for an increase is not justified in the first place. 42 Residential consumers could legitimately look to the experience of Union Gas and ask why their rates are not going down. And frankly, if the Board were asked that question, I am not sure what answer it could give. 43 The second benefit posited by my friend, Mr. Cass, is that the application of the formula means there will be no retroactive rate increase, but that benefit would be obtained if there were no rate increase at all or if there were a decrease in rates. 44 Indeed, all of the objectives of the application, all of the benefits listed at Exhibit A, tab 3, schedule 1, page 3 would be achieved under a rate freeze. Enbridge Gas Distribution conceded that point in response to the CAC's IR number 1, which for the record, Mr. Chairman, is Exhibit I, tab 2, schedule 1, and again in response to a question which I posed to Ms. Hare, the transcript of her cross-examination which appears at paragraph 258 and following. 45 In its argument in-chief at paragraph 74 of yesterday's transcript, Enbridge pointed to the fact that the Board had directed Enbridge to get back on track with respect to the regulatory schedule. We want to underscore the point that there is no need to approve this particular formula in order to accomplish that goal. 46 We also want to make the point in passing that the CAC has cooperated in expediting this application. 47 The balance for the shareholders, the other side of my friend, Mr. Cass's test, is that the revenue is necessary to meet what it described as "cost pressures" and a reasonable return. 48 But there is no evidence of the relationship between the amount of the cost pressures, whatever they are, and we don't have that amount, and no opportunity to test the amount of those cost pressures and no evidence of the relationship between the quantum of the cost pressures and the quantum of the rate increase being sought; is there a one-to-one match of these cost pressures and the revenue being sought? 49 Is one, in other words -- sorry -- in my respectful submission, Mr. Cass, by necessary implication concedes what I say is the central flaw in his case when he argues at paragraphs 89 of the argument in-chief that the Board can know about cost pressures on EGD from, first, the evidence in the last case, and secondly, evidence -- sorry, and secondly, from the fact that historically EGD's costs correlate, roughly, with CPI. 50 The obvious weakness of this argument is that it compels the Board to rely on secondary information, not evidence, secondary information which is not evidence in this case and is not tested. The Board has no evidence on what costs are legitimate, how they are being managed and what revenue levels there are to offset the costs. 51 What EGD is forced back on is a subtle form, and although the term is harsh, I mean it with no disrespect, it is in effect a subtle form of blackmail because it is implying it would not be able to respond to customer demand without this rate increase, but there is simply no evidence of a relationship between whatever cost pressures there are and the rate increase being sought and the ability to manage those cost pressures. 52 In my respectful submission, Mr. Cass's formulation of the test you should use is one that lacks basic principles, and in my respectful submission, Mr. Cass has, by implication, conceded that he must justify his proposal by reference to costs. 53 The trajectory of the application on this point is interesting. In its pre-filed evidence at Exhibit A, tab 1 -- sorry, Exhibit A, tab 3, schedule 1, Enbridge has described the rationale for the application entirely in terms of the benefits to ratepayers. There is no reference in that pre-filed evidence to the cost pressures or to shareholder benefit. 54 But when Ms. Hare testified on Tuesday of this week, those latter points had suddenly become two of the main five objectives of the application and I refer the Board, without needing to turn it up, to the transcript at paragraphs 158, Ms. Hare's examination in-chief on Tuesday. 55 The problem, in our respectful submission, is that when "cost pressures" and "shareholder benefits" become part of the central rationale, the case becomes a fundamentally different one, and there must be evidence to support them. 56 Again, Mr. Cass, in our respectful submission, conceded this point when he said in his argument in-chief, and the reference here is transcript of yesterday's argument at paragraph 50, and I quote: 57 "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." 58 Now, I pause here to note that the irony of that proposition is that Enbridge is, in fact, basing its case on specific cost pressures, citing, for example, insurance and labour costs in support of that proposition. That is exactly what, according to the quote I have just read to you, Mr. Cass said they could not do. 59 I frankly cannot understand the magic in the words "specific cost items" in that quote. Mr. Cass used that phrase and obviously attaches significance to it, because by my count in the first two pages of the transcript of the argument yesterday he used the phrase five different times. 60 However, if you were to take the words "specific cost items" out of the quote and substitute for them the more general cost pressures, the meaning doesn't change. Let me do that for you. If I take Mr. Cass's quote and change it to read as to say, well, if the company is basing its case on "cost pressures", we need to fully test them and are not required to accept them at face value. 61 Mr. Cass has a more supple analytical mind than I do, but for the life of me, I cannot understand the distinction between specific cost items and costs generally. And if my re-working of his quote is a fair one, then I say by necessary implication Mr. Cass has conceded that he can not rely on cost pressures without allowing the intervenors, and by necessary implication, the Board to test them. 62 Enbridge is seeking to justify its rate increase on cost of service criteria, but won't give any evidence to support it. This is a reflection of the classic information asymmetry problem which plagues regulatory processes and which is centrally a problem for both the Board and the intervenors. 63 Enbridge knows exactly what it costs are. It knows what its revenues are likely to be, and it knows what measures it is going to take or is likely to take to reduce its costs, but it won't tell the Board about that and asks the Board to make a decision based on partial information. 64 If, as I submit, Enbridge is seeking to justify its rate increase on cost of service criteria but won't give any evidence to support it, this is not a new way to arrive at just and reasonable rates, just the old way absent the burden of having to prove your case. 65 At bottom, in my respectful submission, Enbridge's new test is an empty one. Enbridge must try to persuade the Board, and its own customers, that the Board should act on no evidence on the assurance that, first, the benefits -- certain benefits will be conferred, chief among them the level of the increase is less than what consumers might have had to face in other areas; and secondly, that it seems to be reasonable proposition based on a general understanding of what circumstances were in the last case. 66 This is not, in our respectful submission, protecting the interests of consumers with respect to prices. 67 In my cross-examination of Ms. Hare the other day, I took Ms. Hare to concurrent processes in which Enbridge Gas Distribution asked the Board to approve the recovery of some $50 million in deferred taxes and a substantial amount of money in many millions of dollars by way of a higher ROE. Those proceedings are not, strictly speaking, relevant to the resolution of this application, and they should be properly kept separate. The reason I raised it with Ms. Hare is that those sums will be recovered from ratepayers. Each amount to be recovered from ratepayers requires scrupulous review and clear, unambiguous justification. 68 This case is no different from those other cases. The Board would not approve those substantial increases on the amount that ratepayers are paying in those other two cases without clear and unambiguous justification for it. This case is no different, it is just one of the many pressures, cost pressures, which ratepayers will face. 69 Enbridge also tries to persuade the Board that any risks to ratepayers can be mitigated by the so-called consumer protection measures in the partial settlement proposal. CAC does not believe that these measures protect consumers if they allow them to pay a rate increase that has not been justified. The measures which are proposed may protect consumers from certain excesses on the margin, but they still leave an unjustified rate increase in place. That is the CAC's fundamental concern with the adequacy of these consumer protection measures. But CAC also believes that they are not simple, not straightforward and not easy to understand, and that they will, if triggered, almost certainly result in a second phase of this proceeding. 70 EGD and those who support its position argue, as they argued yesterday, that what I have proposed to Ms. Hare in cross-examination is a dooms-day scenario that will never occur. But in our respectful submission, that there will be another phase to this hearing, and I underscore the word "hearing", is inevitable. Let me use this example. If the rates, according to this formula, must be adjusted, how are the adjustments going to be allocated? 71 Now, Mr. Dominy asked Ms. Duguay the other day a question about rate allocation within the context of the existing formula, and Ms. Duguay is, and I mean no disrespect to the other folks who testified for Enbridge, a very, very competent witness who gives straightforward, clear, unambiguous answers when she is asked, and for the first time, in my experience, Ms. Duguay had a difficult time in explaining an allocation issue; the first time I have ever seen it. 72 My point of that context is that if it is difficult to determine now how rates are going to be dealt with, how is that going to be determined after the formula kicks in? It is inevitably the case that there will be questions about that, among other issues, that will have to be resolved by some form of interrogatory process and be resolved by the Board, so the formulae, in our respectful submission, leads inexorably to a second phase of this hearing. 73 Now, the CAC asks rhetorically on this point: Has there ever been a formula which has been used by the Board which did not result in a regulatory process? For example, the QRAM process; for example, Union's customer review process; for example, Enbridge's own PBR-related processes. With respect to each of those processes, the bright promise at the outset was that the use of a formula would reduce regulatory costs, would eliminate the need for hearings. 74 Now, it's ironic, I find, that Mr. Shepherd would say, we are articulating a dooms-day scenario that will never occur, because for each of those processes, QRAM, customer review, and EGD's own PBR processes, Mr. Shepherd has been in the thick of the fight. He is entitled, entirely entitled to stoutly defend his client's position, but the fact is that formulas, however clear and simple they may appear, inevitably result in regulatory processes. I say necessarily result in regulatory processes. I guess people are entirely entitled to seek information that clarifies the information that comes forward. So the benefits which ostensibly accrue to consumers from these consumer protection measures don't exist, first, because there is going to be another complicated process, but more importantly, that however those measures apply, there is going to be, in our respectful submission, an unjustified rate increase. 75 Now, as a collateral point with respect to this, I want to make the observation that the formula focuses attention on, among other things, the OMDA. What is or is not in the OMD is not, nor should it be, an issue in this case. It is the subject of a separate proceeding and a separate analysis. What may be in the OMDA is, at the end of the day, a matter for the shareholder EI. The consideration of the OMDA should not, in our respectful submission, confuse the consideration of the central issues in this case, whether or not Enbridge has proven the need for a rate increase. 76 Let me turn then to my final point, Mr. Chairman, and Mr. Dominy, which is the alternate adjustment mechanism. The CAC submits that the appropriate adjustment mechanism is a rate freeze. In our respectful submission, there is no evidence that Enbridge needs a rate increase. A rate freeze achieves all of the benefits sought by the application. There is no evidence that Enbridge could not manage under its existing rates. 77 Now, the CAC pressed with the production of fiscal 2003 data, both actual and forecast, in order to try and see if the existing rates allowed EGD to earn its allowed rate of return. In our respectful submission, Exhibit A, tab 10, schedule 6, which is the confidential financial information, demonstrates that Enbridge can earn its allowed rate of return at existing rates. As Enbridge witnesses conceded, there may be some variables that will affect the exact number, but the variations are quite small and, if anything, as Mr. Ross testified on behalf of Enbridge, said on Tuesday, they may slightly over-earn. 78 Now, Mr. Bourke, particularly in response to a question asked by you, Mr. Betts, made a great show of saying that the forecast numbers are unreliable. In our respectful submission, and with great respect, Enbridge's own behaviour shows the opposite. If the Board reviews the answer to CAC interrogatory number 8 which, for the record is Exhibit I, tab 2, schedule 8, it shows that throughout the development and articulation of this formula to its senior managers, Enbridge was aware of the risks which applying this formula might have. A partial settlement agreement in the claw-back mechanism, the consumer protection measures, represents a risk that Enbridge may, depending on how it does in fiscal 2003, not get any rate increase under its formula. Indeed, there is an argument that if the claw-back provisions apply, there would, in fact, be a small rate decrease. 79 Now, if we are to believe Mr. Ladanyi's evidence about cost pressures, we must also believe that Enbridge would never take the risk that, through the claw-back provisions, they wouldn't get the rate increase they want or they might face a rate decrease. The Board must conclude that Enbridge wouldn't take that risk on the basis of the financial data for fiscal 2003 being reasonably accurate. 80 In our respectful submission, having asked for the production of the information, the information demonstrates that at the existing rates, Enbridge is doing just fine and can do so in the future. 81 Enbridge has led no evidence capable of being tested by the Board or by intervenors that requires more revenue. Consumers should not have to face an increase in rates for which there is no proper justification. 82 We also wanted the fiscal 2003 data to see how actual and approved levels compare. What we discovered in reviewing that data was that normalized actual volumes are likely to exceed approved volumes. All of which demonstrates, Mr. Chairman, that on the existing data, we want to emphasize the point that we sought vigorously to obtain this data in order that the Board would try to have the best available information on which it could make a decision. While we all may accept the proposition that it's important, we do accept the proposition that it is important to get back on track on the regulatory schedule, to avoid retroactive rates, we want the best available information to support what is, in our respectful submission, a tissue-thin application, and what that data points to is, first, that they can make their allowed rate of return at existing rates, and secondly, that there is an enormous amount of flexibility in how they, for example, deal with capital investment that allows them to protect the interests of their shareholders. 83 In our respectful submission, a rate freeze is the appropriate remedy. If, however, the Board accepts the formula, then, in our respectful submission, the best available consumer protection measure is to have an earnings sharing mechanism. 84 In order to protect the interests of ratepayers and in the absence of forecast data for 2004, we believe that an earnings sharing mechanism, only as an alternative and if the Board accepts the formula, could be utilized. 85 If this is truly a one-time application made in an effort to get the schedule back on -- if this is truly a one-time application -- I should pause and say I have never been in circumstances where people actually want to hear what I want to say, Mr. Chairman, it is a new and dizzying experience. 86 If this is truly a one-time application made in an effort to get the schedule back on track, Enbridge in our view, should and would not object to a proposal that this earnings sharing mechanism be applied to protect the interests of ratepayers. 87 The earnings sharing mechanism should, in our view, be asymmetrical and return to ratepayers any earnings above the return. Enbridge should be allowed to earn its allowed return and ratepayers would be protected. Enbridge has not provided any information that would convince us that a dead band would be appropriate. 88 We would oppose a symmetrical earnings sharing approach in this context because it would create an incentive for Enbridge to overspend knowing that they would be ensured the recovery of those amounts through the mechanism. 89 We support this approach as it avoids a mid-year process as envisaged under the settlement proposal and it protects ratepayers against the unknown in 2004, specifically because we have no idea as to costs and revenues for 2004. 90 I want to conclude, Mr. Chairman, with some submissions on the implications of the application that is before you. Like many applications that claim the benefit of a new, modern and better way, it comes to you on little cat feet, but it has, in our respectful submission, significant implications. 91 Enbridge would have you believe that this is a simple application designed simply to get it back on track. But there are significant implications if the Board accepts the formulation of the test for determining just and reasonable rates. 92 The Board should not, in our respectful submission, approve a rate increase unless there is some demonstrated proof of need. PBR is a different matter, and it is important to distinguish this formula from PBR. PBR schemes use formulae which are based on evidence which involves a careful calculation of need, incentives and consumer protection. 93 The Board is, in our respectful submission, in this case being asked to jettison the way it has protected interests of consumers with respect to prices, and do so to achieve objectives which can safely be achieved by a rate freeze and to do so without a credible test to use to protect consumers. 94 Mr. Cass's test, does not, in our respectful submission, provide a reasonable protection for the interests of consumers because the Board can't know whether a rate increase is needed. 95 Those are my submissions, subject only to our request that we be granted our reasonable costs incurred for participation in this and, Mr. Chairman, we have endeavoured not to delay the process. We have tried to act expeditiously. We have shared some burdens with Mr. Janigan, for example, in our cross-examination, and in our respectful submission, the position which we have taken in this case is a responsible one on behalf of the residential consumers and the views which we have expressed in argument are ones which the Board needs to consider in facing what is, in reality, a brave new world and embarking on a new test for what are just and reasonable rates. 96 Those are my submissions, sir, thank you. 97 MR. BETTS: Thank you, Mr. Warren. 98 [The Board confers] 99 MR. DOMINY: Mr. Warren, just a couple of questions. The first one is very straightforward. When you talk about earnings sharing, I see you are talking about normalized earnings? 100 MR. WARREN: Yes. 101 MR. DOMINY: The second one is more philosophical, that you talked about how any of the formulaic processes have led to succeeding processes being required, and I just wondered whether there was any comments you could make to the possibility that part of the reason for the follow-on processes is because the basic underlying arrangements to which the formula applied was being proposed to be changed? For instance in the last QRAM of Enbridge, there was a discussion about changing the timing of the collecting of load balancing costs and that led to a hearing. 102 And in the case of my understanding of some of the Union case, there were many changes proposed to the underlying arrangements when they came forward at the next step of the process. 103 I just wondered whether you would comment on that? 104 MR. WARREN: Mr. Dominy, I agree with that, but it doesn't change the thrust of my argument on the point for this reason. In each of the cases, in each of the examples I have given, the bright shining promise was that because there was a formula, there would be essentially no dispute over what came out of the formula. Nobody anticipated that there would be new circumstances which would have to be fit into it. 105 My point is that we are in exactly the same position. If we were to say today that there were no variables and no circumstances which might arise which might have to be plugged into this formula later down the road, we would be guilty, I say with respect, of naivete and ignoring the examples of what has gone on before. 106 It is almost inevitable -- I'm sorry, it is inevitable that there will be interpretive issues which we have not thought of, there will be new wrinkles and new variations that will quite legitimately arise. We can't say with any confidence that the kinds of circumstances you described in those cases won't apply here, and that's the danger in simply assuming that this formula, unlike all the others, will apply simply and clearly without any dispute. 107 MR. DOMINY: Thank you, Mr. Warren. 108 MR. BETTS: I think I understand your position on this particular item, Mr. Warren, but I did want to clarify it to make certain. Your position with respect to a proposed earnings-sharing mechanism would be that 100 percent of the earnings above the approved ROI would go to the benefit of the consumer? 109 MR. WARREN: Yes. 110 MR. BETTS: Thank you. 111 Thank you, that's all the questions that the Board panel has of you. Thank you very much. 112 There are no other presentations in terms of arguments opposing except for the one that is yet to arrive, and that will be in writing from Mr. Janigan representing VECC. 113 At this point, we will adjourn and we will reconvene this afternoon to hear oral reply arguments from the applicant. 114 In terms of scheduling, I believe the Board may be ready as early as 2 o'clock, but we aren't certain. If Mr. Cass felt that he could be ready at 2:00, he and interested parties could be here at 2 o'clock, and then we would begin as soon as the Board was able to. We can assure everybody it would be no later than 3 o'clock. If that's in any way awkward, we could establish a fixed time of 3 o'clock. 115 MR. CASS: Thank you, Mr. Chairman. 116 The difficulty is there is a remaining uncertainty. Not having seen Mr. Janigan's argument, I have no way of knowing the length of the argument, the points that will be made in there, and accordingly, the amount of time I might need to prepare to respond to it. 117 So in light of that uncertainty, if it is acceptable to the Board and if convenient for everyone else, perhaps the suggestion of 3 o'clock would be appropriate. Again, just because of the uncertainty in not knowing what will be received at noon and what amount of time might be needed to deal with it. 118 MR. BETTS: That is quite satisfactory. Thank you very much, and we will therefore firm up our time to be 3 o'clock this afternoon to reconvene. 119 Are there any final points? Yes. 120 MS. LEA: No, sorry, I have nothing further. Thank you. 121 MR. BETTS: Okay. 122 MS. LEA: I am thinking in my head, and sort of, you know -- pardon me. 123 MR. BETTS: That's all right. I thought I spotted a signal there, but there was none. 124 Thank you all. Thank you, Mr. Warren. That was a very effective presentation. We appreciate receiving the view from the opposing parties, and it certainly will be considered in our decision. 125 Thank you all once again, and we will see many of you later this afternoon at 3 o'clock. We will now adjourn. 126 [VECC's submissions presented in writing, not delivered orally; inserted into the transcript as written, as directed by the Board] 127 WRITTEN SUBMISSIONS BY VECC INSERTED BY COURT REPORTER AS FOLLOWS: 128 Introduction. 129 The Vulnerable Energy Consumers Coalition, VECC, requests that the Board reject the Alternative Adjustment Factors set out in the Settlement Proposal (Exhibit B, Tab 1 Schedule 1) for the reasons set out in this Argument. If the Board agrees with our submissions, we will address such further relief, if any, that may be necessary later in this argument. 130 Task of the Board. 131 The Company's application is for the fixing of just and reasonable rates for the 2004 Test Year pursuant to the Board's responsibilities set out in Sec 36(2) of the OEB Act. The Company's application proposes to dispense with the ordinary examination of forecast costs and apply an adjustment factor increasing rates over and above the 2003 Board-approved level. 132 In relation to the Board's responsibilities, Counsel for EGD in AIC has stated that: 133 "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." 134 EGD Counsel further noted the presence of provisions in the Act (sec. 36(3)) that permits the Board to adoption of any method or technique that it considers appropriate. 135 VECC agrees that there is no prescriptive methodology that must always be followed to arrive at just and reasonable rates. As the historic Hope decision affirmed, the setting of just and reasonable rates consists of the making of pragmatic adjustments to achieve a fair result for the Company and its ratepayers. What is in dispute in this proceeding is whether the Company has met the onus of showing that its proposed adjustment to rates, modified by the ratepayer protections contained in the Partial Settlement, produce a just and reasonable result. The result in this case urged by the Company is the application of an adjustment factor that augments its distribution revenues by some $13.9 million. 136 This burden of proof upon the Company has been statutorily recognized in sec 36(6) of the OEB Act. VECC submits that the application of this burden is particularly acute in relation to circumstances wherein the Company seeks to increase rates. In the Northern and Central Gas case, Mr. Justice R. E. Holland noted the following: 137 "The Board has a duty to be fair not only to the ratepayers but also to the shareholders but at the same time the Act specifically places the duty on the applicant who is seeking to increase its overhead and, as such, increase the amount that may be charged to the consumer. The applicant has the duty of adducing evidence which is then subject to testing by counsel for the Board and the intervenors. The Board is not required to go out and seek evidence and intervenors are not required to adduce evidence on their own behalf. 138 Courts in US jurisdictions have also been vigilant to ensure that a sufficient evidentiary basis has been provided for the regulators rates disposition. The Supreme Court of New Jersey noted, in a case which involved an appeal of a Board of Public Utilities Decision denying a utility rate increase: 139 Further although the respondent (Board) is not bound by technical rules of evidence (see R.S. 48:2-32) there must be sufficient or substantial competent and relevant evidence in the record to support the reasonableness of these items since a court is of necessity restricted upon a review of the rates fixed by the respondent to a consideration of the record before it, Public Service Coordinated Transport v. State, supra (5 N.J. at p. 223); Central R. Co. of N.J. v. Dept. of Public Utilities, supra (7 N.J. at p. 260). 140 The way in which the regulatory boards and commissions should approach the determination of whether the regulated utility that is seeking a rate increase meets the onus of proof has also been considered. In affirming a decision of the Minnesota Public Utilities Commission (MPUC) challenged by the electric utility affected by the decision, the Supreme Court of Minnesota noted the following: 141 "The 'weighing' by court in a civil case applying the 'fair preponderance' standard involves a determination by the court whether the proponent of the conclusion has produced sufficient credible evidence to sustain that conclusion. In contrast, the task of the MPUC is not so much concerned with the sufficiency and credibility of the evidence, as it is concerned with whether the evidence submitted, even if true, justifies the conclusion sought by the petitioning utility when considered together with the Commission's statutory responsibility to enforce the state's public policy that retail consumers of utility services shall be furnished such services at reasonable rates. See, e.g., Minn. Stat. 216B.01 (1986). The burden of proof rests with public utility seeking the change to demonstrate that the rate change is just and reasonable." 142 This public interest safeguard is a matter of common sense that addresses the fundamental information asymmetry that exists in a regulatory proceeding between the Company and the other stakeholders. Frequently in rate cases, as in this proceeding, the entire record consists of the evidence of the Company. It is not simply a matter of weighing some evidence offered by the Company and no testimony by the other parties. The Company bears the burden of both adducing evidence concerning the necessity of a rate increase for the purpose of its own revenue requirement, and to additionally show that such rate increase is just and reasonable. 143 In Ontario, there is now superimposed upon the Board's responsibility in relation to the adjudication of evidentiary issues associated with the meeting of this burden, some added or highlighted responsibilities. Bill 23 has brought greater clarity to the tasks to be accomplished by the Board in its deliberations by adding the following as a Board objective: 144 2. To protect the interests of consumers with respect to prices and the reliability and quality of gas service. 145 VECC will submit that the position urged by the Company falls well short of meeting this objective. 146 Finally, as we have acknowledged above, it is permissible for a rate formula or adjustment mechanism to be adopted by the Board, provided that such formula or adjustment mechanism demonstrably produces just and reasonable rates. There is no guidance in the OEB Act apart from the goal and objectives previously discussed as to the required content of any adjustment mechanism. The Board has accepted in previous proceedings the adoption of different forms of Performance Based Ratemaking (PBR) for the purpose of setting just and reasonable rates. EGD was governed by a targeted PBR for the years 2000-2002 that provided a cap on Company O&M expenditures. Union Gas and the Ontario electricity LDCs have been or are subject to more comprehensive plans, involving the implementation of a price cap. In all circumstances, there were attempts to build into the PBR plans appropriate mechanisms to capture realistic costs and to incent reasonable efficiencies. We will say more on the subject of EGD's performance under its targeted plan later in this argument, but it is reasonable to note that the Board has not, up to this juncture, attempted to set utility rates by reference to one external variable as is suggested here . The challenging balancing process associated with the examination of costs and incentives inherent in the implementation of alternatives to cost of service regulation, is presumably a causality of getting back on track in terms of prospective ratemaking. VECC, however, questions whether the principle of attempting to proxy reasonable and expected efficiencies as well as costs should be dispensed with by way of the one way slam-bang adjustment the Company has proposed. 147 On the subject of adjustment mechanisms, it is instructive to note the requirements set out in the legislation governing the review by the U.S. Federal Energy Regulatory Commission (FERC) of rate adjustment clauses for utilities engaged in interstate commerce. The governing provisions at 16 USC824 provide as follows: 148 "f) Review of automatic adjustment clauses and public utility practices; action by Commission; 'automatic adjustment clause' defined: 149 "(1) Not later than 2 years after November 9, 1978, and not less often than every 4 years thereafter, the Commission shall make a thorough review of automatic adjustment clauses in public utility rate schedules to examine-- (A) whether or not each such clause effectively provides incentives for efficient use of resources (including economical purchase and use of fuel and electric energy), and (B) whether any such clause reflects any costs other than costs which are-- (i) subject to periodic fluctuations and (ii) not susceptible to precise determinations in rate cases prior to the time such costs are incurred. Such review may take place in individual rate proceedings or in generic or other separate proceedings applicable to one or more utilities. 150 "(2) Not less frequently than every 2 years, in rate proceedings or in generic or other separate proceedings, the Commission shall review, with respect to each public utility, practices under any automatic adjustment clauses of such utility to insure efficient use of resources (including economical purchase and use of fuel and electric energy) under such clauses. 151 "(3) The Commission may, on its own motion or upon complaint, after an opportunity for an evidentiary hearing, order a public utility to-- (A) modify the terms and provisions of any automatic adjustment clause, or (B) cease any practice in connection with the clause, if such clause or practice does not result in the economical purchase and use of fuel, electric energy, or other items, the cost of which is included in any rate schedule under an automatic adjustment clause. 152 "(4) As used in this subsection, the term 'automatic adjustment clause' means a provision of a rate schedule which provides for increases or decreases (or both), without prior hearing, in rates reflecting increases or decreases (or both) in costs incurred by an electric utility. Such term does not include any rate which takes effect subject to refund and subject to a later determination of the appropriate amount of such rate." 153 The FERC review, enabled by statute, contemplates adjustment clauses that provide for both increases and decreases in costs7, and the exclusion of ascertainable forecast costs. It also specifically inquires as to the Company's efficient use of resources under the operation of any adjustment clause. 154 While the EGD proposal in this case is characterized as a one-off adjustment, there is no basis in law and practice to allow the adjustment mechanism to be skewed. The proposal provides recognition of potential inflationary costs but excludes other requisite components of the Board's task in making the pragmatic adjustments to fashion just and reasonable rates. Even a hasty proxy must accomplish all the goals and objectives set out above. 155 VECC will now discuss how the evidentiary record in this proceeding fails to establish the requisite elements to enable a rate increase. 156 The Application. 157 As we have noted, EGDI's Application, as filed, proposed that the Board fix 2004 Rates by indexing of the 2003 Board-approved distribution revenues that produced final rates for 2003. The index is 90% of forecast 2004 Ontario CPI, estimated at 2%. The use of this index (1.8%) provides an additional 13.9 million dollars (Tr. Vol. 2 603,604) in revenue for the Company in 2004. 158 The only potential additional prospective adjustments would be those arising from ongoing Board proceedings: 159 Generic ROE Proceeding; 160 Deferred Taxes; 161 RP-2002-0133-O&MDA. 162 Supporting Evidence: 163 Evidence in Chief of the Company Exhibit A, Tabs 1-10; 164 Interrogatory Responses Exhibit I Tabs 1-9; 165 Settlement Proposal Exhibit B, Tab 1, Schedule 1; 166 Evidence of EGD witness Panel August 26, 2003. 167 The controlling premise of this application is that the objective of getting back on track with prospective rates disables the participants from embarking upon a review of prospective 2004 test year costs (see Ex I, T2, S10). As a consequence, the record is remarkably scant. The reasonableness of the Company's proposal for a rate increase in accordance with its adjustment mechanism is based on two simple points: 168 1. Evidence that EGD distribution revenues have historically increased on average at 2.46%, a rate that is slightly above the 2004 forecast rate of inflation. 169 2. Over the last eleven years, there is a statistical correlation between increases in Ontario CPI and increases in distribution revenues. 170 It is important to note what the Company has not done. EGD has not: 171 a) filed any forecast of any key utility parameters driving the 2004 revenue requirement and has not indicated whether it will have any revenue deficiency in 2004 with current (2003) rates. 172 b) filed any information regarding 2003 utility performance that would normally validate the base cost of service for the prospective test year. (This is the norm in both cost of service and Performance Based regulatory schemes). The Company only filed utility segment financial information (regulatory financial schedules) on August 25, 2003 in response to a further Board Order following a motion in writing by CAC and VECC for production. It has not filed year-to-date data on actual and normalized volumes, customer additions CAPEX etc. (requested by VECC and CAC in IRs). 173 c) offered any evidentiary support, apart from assertions of lack of time, for the absence of features in the proposed adjustment that would take the place of elements normally found in an alternative regulation plan, such as a price cap, to recognize the necessity of the Company to control costs and introduce efficiencies. 174 EGDI's Indexing Proposal for 2004 Rates. 175 VECC submits that the absence of appropriate considerations of cost control in the Company's adjustment proposal is fatal to the ability of the proposal to pass the requisite scrutiny. It departs substantially from alternate regulation such as PBR. As the Board is well aware, some PBR plans are based on a formula such as CPI-X +Z, where X includes a productivity offset as well as stretch factor and perhaps a growth factor, if the utility is in rapid growth mode. In addition, the Z factors must be justified as being events that are out of the ordinary and beyond the control of the Company. Many PBR schemes also include a form of earnings sharing or other ratepayer protection. These features have evolved as regulatory attempts to both mirror the ideal of paying only for what is needed and to reward Company reductions in costs while maintaining service levels. The one-year duration of this alternate plan does not negate the validity of incorporating similar features. However, the Company categorically rejected VECC's suggestions for earnings sharing for 2004 [I/Tab 6/S 19] and has scoped out no alternative proposal (Ex I, T2,S6). Curiously, EGD seems to have seriously considered the risk in that the Board may order earnings sharing [I/Tab2/S8 -last page of the March 3 EGDI Presentation]. In this case the Board is being asked to buy into a "pig in a poke" alternative adjustment plan, a low rent fragment of a genuine PBR plan under the guise of a simple indexing proposal. The 2003 base for this plan has not been tested, and there is evidence that the Company may in fact over-earn its allowed return on a normalized basis in 2003 (Tr.V.2, 213,214). While the historical record of eleven years of observations supports a correlation between distribution revenues and the Ontario CPI, this is a one year plan. In any given year, there can be a mismatch between changes in distribution revenues and Ontario CPI. (ExAT5S1 Table 1. Tr. 662-666). The results themselves are highly variable. If this was an eleven-year plan, we might have confidence that the CPI adequately predicted the cost environment the Company may be facing. A one-year adjustment is simply a crapshoot. 176 The Company is offering ratepayers a 10% discount from inflation. (CPI-0.2%). The Company touts this as a significant ratepayer benefit on the ground that in the past rates have gone up on average faster than inflation. [Tr vol 2 56 and 57]. This ratepayer benefit is presumably meant to take the place of any consideration of the ways the Company could deal with any increase in input prices or adjustments for efficiencies that might be introduced. 177 Fortunately, unlike much of this application, the ability of the Company to reduce costs despite its protestations to the contrary, is well documented. As Ex C1.1,pp3-4 shows, in EBRO 497-01, the Company, supported by its expert consultants, sought to demonstrate that its exemplary O&M performance to that date would make it hard to improve upon its historical .63% productivity. Later, after being given a 1.1% productivity target by the Board, the Company racked up productivity savings of some $15.8 million over the TPBR period (Ex C1.1 p.18), an annual average that was almost 500% greater than its Board approved target and over 800% greater than its professed capability. These figures do not even comprehend the significantly greater efficiencies achieved in the affiliates or entities which were contracted to provide O&M services. 178 The reduction of the 2003 O&M budget touted by the Company to be a legitimate estimate of forecast costs (Tr. V.2, 808-816) from $332 million to $270 million (Ex) is a rather stunning example of the Company's ability to manage an anticipated cost environment. While counsel for the Company in AIC (Tr V.3, 100) seems to believe that this proves the bona fides of the current cost pressures now alleged by EGD, it does not. It is like stating the conclusion to a play after watching only the first act. The final result was that, in accordance with the ADR settlement proposal, the Board found that just and reasonable rates entailed a reduction of 62 million. It cannot be inferred that the Company abandoned its professed objectives of managing its distribution system and maintaining shareholder value in the context of its agreement to the 2003 Rates settlement proposal. 179 There is thus ample evidence, based on very real and recent historical record, that the Company could manage potential cost pressures supposedly proxied by the Company's adjustment mechanism that comprehends a 13.9 million dollar increase in distribution revenues, without the necessity for such increase. At a minimum, the record strongly supports the submission that the Company's adjustment mechanism is deficient without a factor that adequately deals with achievable cost reduction and efficiency goals. 180 The Board has other pertinent evidence and precedent to support these conclusions. Ontario electrical distribution companies, operating in the same kind of growth environment as EGD, are expected to manage costs and maintain value within the confines of a rate freeze. Union Gas has successfully managed its operations within a price cap that provides a 2.5% productivity target. The Company's offering to ratepayers in this case is rather thin gruel. Can a half-baked formula be excused because it is timely and only for a year? VECC submits that if any formula proposed for 2004 or any other rate year should be based on analysis that is tested and has no less rigour than a three year proposal. It is not appropriate for the Company to shortcut the requisite inquiry and prevent the imputation of all reasonable adjustments that both increase and decrease expected costs. 181 Notwithstanding the assertion of no precedent value in the settlement proposal, the approach suggested by the Company could be potentially problematic in future test years. VECC notes that the Company has not ruled out filing for indexing in 2005 [I/T2/S8/Attachment Page 7 of 12]. It has only promised to file cost of service information [B/T1/S1 page 8 paragraph 9], but could still apply for a continuation of indexing for 2005. 182 VECC submits that the evidence of the Company falls well short of the standard of proof, articulated earlier this argument, to show that the proposed adjustment will yield just and reasonable rates. On the other hand, there is considerable evidence in support of the proposition that EGD's formula for adjustment of 2003 rates is seriously flawed, particularly in its failure to adequately proxy Company cost managing capacity. VECC accordingly submits that the Company's request for a Distribution revenue request should accordingly be denied. 183 Settlement Proposal. 184 A Settlement Proposal was filed with the Board on August 13, 2003 covering all issues except Issue 5-DSM which was deferred pending the Board's Partial Decision in RP-2002-0-133. A supplementary Settlement Proposal addressing Issue 5 was filed with the Board on August 26, 2003. All issues are the subjects of Complete Settlement except: Issue 1 Enbridge Gas Distribution Inc.'s Proposed Adjustment to 2003 Rates; 185 1.2 Alternative Adjustment Mechanisms (Partial Settlement); 186 Issue 7 Rate Implementation and Rate Design. 187 VECC is not a consenting party to the Partial Settlement of Issues 1.2, and Issue 7. Apart from the concerns previously elaborated in this Argument, VECC considers that the Partial Settlement of Issue 1.2 is excessively complicated and may require Board intervention when 2003 results are known. In addition, it may not result in just and reasonable rates for 2004 absent any over-earnings protection. Issue 7 is directly linked to the proposed resolution of Issue 1.2. 188 With regard to Issue 1.1. Counsel for EGDI in AIC (Tr. V. 3, 53) makes much of the fact that all parties including CAC and VECC agreed to an inflation forecast of 2% for 2004. (VECC and CAC actually took no position on the matter.) However, when the forecast is part of a proposal that should not be accepted, its significance is akin to an agreement on the future price of soybeans. 189 Challenging the Regulatory Framework and Informational Concerns. 190 EGDI acknowledges it is "challenging the OEB to redefine its method of fixing just and reasonable rates." (Ex I T2, S8). The challenge presumably consists of fixing all forecast costs on a single estimated external variable. 191 VECC does not submit that a cost of service filing is required for 2004 (as the Company and Counsel for School Boards have and will in reply, no doubt characterize VECC's position). However, any alternative to Cost of Service or previously accepted PBR plans must be well justified, transparent and result in just and reasonable rates. The one-year duration of the Company's proposal does not derogate from the need for EGDI to prove that its indexing proposal is soundly based and will meet the Board's statutory responsibilities. The preferred option is for the Company to live with the existing rates. It is by no means certain that these may not allow the Company to over-earn its allowed return in 2003 and may allow the Company to do so in 2004, especially because the 2003 Degree day Budget is maintained for 2004. 192 VECC submits that there are disquieting statements that accompany the Company's proposal. In particular, the Company argues that an examination of past costs is not a prerequisite for prospective ratemaking. [Tr vol. 2 -34 and 38] Regardless of whether the regulatory regime is cost of service or PBR, the provision of current and prospective test year costs is an essential feature of regulatory oversight that involves the utility, ratepayers and the Regulator. To suggest that scrutiny of test year costs is no longer necessary, if that is what Counsel for the applicant is suggesting, is considerably off the regulatory mark. Such a policy would fly in the face of regulatory practice which provides for customer review processes built into performance based regulatory schemes. Such processes require filing of historic year and test year regulatory financial and other performance data as part of the PBR. The retreat from scrutiny was manifest in this case in that the Company declined to provide any utility segment regulatory schedules or any actual 2003 operating data as ordered by this Board and requested by Intervenors until August 25, when the hearing was underway and still did not provide information requested by intervenors. [I/T6/S20]. The Company position is that provision of year to date financial performance on a regular basis is not an issue raised by this case. [B/Tab2/S1 Page 10]. VECC disagrees. 193 The Company has agreed as part of the Partial Settlement to file Cost of Service Information in support of any 2005 Rate Application. However it has not indicated what form its 2005 Application will take and may still file for an indexing of 2004 Rates. Since the 2003 9 months actual and 3 month forecast financial information was only filed on August 26, 2003, there has not been adequate review and testing of the information. Parties to the Partial Settlement of Issue 1.2 say it is not important, since the Ratepayer Safeguard will deal with any 2003 over-earning. With respect, VECC believes that this misses the point. The need for year to date 2003 information was necessary to compensate for the fact that test year 2004 financial projections are not part of this application. 194 The information provided shows that there are several areas of variance from Board-approved revenues and expenses that could result in the Company exceeding its 2003 allowed return on equity. In addition changes in capital structure and rate base could result in normalized earnings above the allowed return. 195 The Board will have to consider, in the context of the Partial Settlement, whether the 2003 Ratepayer Safeguard will work to mitigate against the potential for 2004 over-earnings resulting from the indexing allowed in the Partial Settlement. VECC obviously does not think such safeguard to be adequate. 196 Risks. 197 The Company is clearly concerned that in addition to a 2003 O&MDA affecting 2003 earnings, a 2004 O&MDA might impact its 2004 earnings. VECC submits that this risk factor is a powerful motivation for the Company's insistence that it needs to increase rates. 198 It is clear from the memorandum from Ms. Hare filed at I/T2 S8 Attachment that the Company views this as a significant risk. Counsel to EGDI again highlighted this in his argument in Chief. [Tr Vol 2 45-47]. If history is to be a guide, then any regulatory disallowance such as the Vector/Alliance disallowance in RP-2001-0032 will be sought to be mitigated by the Company in a subsequent rates case in order to maintain the before tax earnings and shareholder return. 199 Cost Pressures. 200 In an application based on the supposition that no evidence need or will be produced to adequately forecast EGD costs in the 2004 test year, it is remarkable that the Company now seeks to justify its proposal on the grounds of cost pressures. EGD cannot have it both ways. It cannot seek to set rates without the examination of past, present and future costs. The term Cost Pressures bandied about by the Company counsel and witnesses at the hearing and in AIC, may or may not tell something about Company motivation to pursue an increase. It tells nothing about the necessity for such increase as it reflects a line of inquiry foresworn by the Company when it embarked upon its challenge to the OEB. 201 Conclusions. 202 1. The Company's formula has provided inputs for the resolution of only the cost increase element of any alternate rate setting mechanism. It is bereft of other requisite elements recognizing expected cost management and reduction. 203 2. The index factor chosen is not shown to be sufficiently reliable to predict possible cost increases on a one-year basis. 204 3. There is no other evidence of the need for a rate increase. In fact, there is significantly more evidence of the lack of such necessity. 205 4. The benefits set out in Ex A T3S1p3 to the Regulatory Process and Customers would still be met by the rejection of the Company proposal and maintaining current rates. 206 5. It is not possible to quarantine the effects of an ill designed alternate proposal to the test year. 207 6. The implementation of the Company proposal runs counter to the objectives and responsibilities of the Board pursuant to the OEB Act. 208 Requested relief. 209 VECC submits that the Company's proposal should be rejected. The effect of such rejection is to effectively freeze 2004 rates at 2003 levels. VECC supports a rate freeze for 2004 as it meets the shared objectives of stakeholders. It is simple, transparent and understandable by Ontario energy consumers. The Partial Settlement is not simple or transparent, will require further regulatory process and still results in a rate increase for Ontario natural gas consumers. Such a rate increase would be occurring at the same time that the rates of electricity distributors are frozen, and when EGDI's parent, Enbridge Inc. will be likely publicly posting increased earnings in 2003. 210 Costs. 211 VECC awaits the Board's direction with respect to claims for costs in this proceeding. 212 All of which is respectfully submitted this 28th day of August. 213 Michael Janigan, Counsel for VECC. 214 --- Recess taken at 10:45 a.m. 215 --- On resuming at 3:04 p.m. 216 MR. BETTS: Welcome back, and we are reconvening this day to hear reply arguments in the application of RP-2003-0048. Before we begin, are there any preliminary matters? 217 Mr. Cass, are you ready to reply? 218 MR. CASS: Yes, I am sir, thank you. 219 MR. BETTS: Please proceed. 220 REPLY SUBMISSIONS BY MR. CASS: 221 MR. CASS: To begin with, Mr. Chair, I would like to address what I perceive to be a fundamental difficulty in the arguments brought forward, both by CAC and VECC. Both of those arguments appeared to advance the proposition that now that it appears that with the company's application proceeding as it has, that matters are back on track, that CAC and VECC embrace the benefits of being back on track but then suggest, Well, this could all be achieved with a different sort of application, such as a rate freeze or even a reduction. I think there is a fundamental problem with that approach. To begin with, the approach forgets that what got things back on track was the application by the company and the proposal made by the company. 222 As I stated in argument in-chief, the notion of a rate freeze or a reduction does not do any of the balancing of interests that is inherent in the fixing or approving of just and reasonable rates. It does not give any consideration to the needs or interests of the company and its shareholder. It, in the submissions of CAC and VECC, achieves the ratepayer process benefits that were described in the argument in-chief. But in order for the interests of the company and its shareholder to be brought into the equation, it becomes clear from the arguments of CAC and VECC that they would require very specific evidence in order for this to happen, and that being evidence of specific costs. 223 I made a note during Mr. Warren's argument, and I understood him to say that in order for the company to justify any increase in costs, it would require evidence -- sorry, any increase in rates, it would require evidence of costs that would go through scrupulous review and require unambiguous justification, but a process with scrupulous review and unambiguous justification would not have met these objectives that all come back to getting the process back on track. So what this really brings us to is that in the eyes of CAC and VECC, in order to get back on track, the company's only hope would have been to seek a rate freeze; otherwise, any increase in costs -- in rates requested by the company would require evidence of costs, and that evidence would require scrupulous review and unambiguous justification. 224 And even then, I suggest to the Board, if the company had been able to balance all interests in such a way as to request a rate freeze, there is no reason to think that even that would have been enough for CAC and VECC. Mr. Warren, for example, repeatedly referred to the possibility of a rate freeze or a rate reduction, so even in the event of company evidence supporting a rate freeze, if there was some way that the company could manage to that, which there is not, it follows from Mr. Warren's arguments that there would still need to be a scrupulous review and unambiguous justification just to be sure that a rate reduction might not be a possibility. 225 VECC takes a similar approach in its argument at page 16. It again is happy to seize upon the benefits that have arisen from the company's proposal, and it makes the point that these benefits would still be met by the rejection of the proposal and maintaining current rates; that's numbered paragraph 4 on page 16. 226 So in a similar fashion to CAC, VECC is only too happy to accept the benefits brought by the application as framed by the company, but then to suggest that the proposals should have proceeded on a very different basis. And in particular, looking at VECC's argument at pages 9 and 10, VECC laments the lack of consideration of a catalog of different items, and I'm under the heading, "EGDI's indexing proposal for 2004 rates," on page 9, VECC talks about here issues regarding a productivity offset, that's about six or seven lines down in that paragraph on page 9, a stretch factor, a growth factor, Z-factors, and then over to page 10, talks about the 2003 base being tested. 227 So again, in a similar fashion to CAC, VECC is happy to say, Well, yes, now the process has got us on track and we have achieved all these benefits, but you should reject the company's proposal because it doesn't have all of these things that we think it should have or it did not have consideration, I should say, of all these things: Productivity offsets, stretch factor, growth factor and so on. 228 The fundamental contradiction, though, is if it had had all of these things, we wouldn't be back on track, or we wouldn't have had a hope of being back on track, and the objectives wouldn't be achieved. So this is the fundamental difficulty I alluded to that I think is presented by both of the arguments of these intervenors. 229 Now, instead of a specific examination of specific costs, what the company proposed in order to get the process back on track was to look to a broader measure of reflecting costs in rates. Rather than having to go through a specific cost analysis of specific numbers, it turned to a broader measure that could accomplish the task of reflecting costs in rates. What the company proposed, of course, is that Ontario Consumer Price Index be applied for this purpose. 230 The settlement proposal, as I said in argument in-chief, as accepted by the Board, makes it a given for this case that forecast inflation for 2004 is 2.0 percent. The company's evidence, and uncontradicted evidence, in my submission, is that there is a very strong relationship between the Ontario Consumer Price Index and the distribution index; that's Exhibit A, tab 5, schedule 1, page 3. 231 Mr. Warren, as I recall, said in his submissions that Ontario CPI correlates roughly with costs of distribution but, in fact, I think that the evidence was more clear than that. The evidence at the page that I have cited is that there is a very strong relationship between Ontario CPI and the distribution index. 232 In addition, the evidence in this proceeding, as I alluded to in argument in-chief, is that Enbridge Gas Distribution is one of the fastest-growing gas utilities in North America, that there are significant cost pressures associated with that growth, and that there are other cost pressures. Historically, rates approved by the Board, as just and reasonable, have increased faster than Ontario CPI, and this is understandable in the context of such a rapidly growing utility. So there is strong evidence to support the company's proposal. It's evidence based on a broad measure of costs rather than a numerical analysis of specific costs. 233 In the VECC argument, there is a considerable amount of discussion of the burden of proof that is upon the company in this application. There is reference to a number of legal authorities. I won't spend a lot of time on them. One, though, is an Ontario case. It is at page 3 of the VECC argument and it is quoted from on that page. The company doesn't have any difficulty with the proposition set out in this case at all. 234 Turning to the quote on page 3 of the VECC argument, it says, halfway through the quote: 235 "The applicant has the duty of adducing evidence which is then subject to testing by counsel for the Board and the intervenors. The Board is not required to go out and seek evidence and intervenors are not required to adduce evidence on their own behalf." 236 Well, that is precisely what the company has done; it has adduced evidence. And just to be absolutely clear, in my submission, this is not a case where there is any issue about the company having provided an evidentiary base, having adduced evidence or having met the burden of proof. 237 Really, at its heart, the issue being raised by CAC and VECC is that they don't like the way the company has met the burden of proof because they, in their minds or in their submissions, for any increase in rates, even a modest one like in this case, there should be what Mr. Warren called a scrupulous review. 238 In my submission, the fact that CAC and VECC might have liked the company to present different evidence and might have liked a scrupulous review of costs, does not in any way detract from the fact that the company did meet the burden of proof by providing the evidence that I have described and discussed in argument in-chief to establish that just and reasonable rates can be fixed or approved by application of a broad measure of costs rather than a specific analysis of costs. 239 Much of the core of the VECC argument from pages 10 to 12 is really summed up at page 12 where VECC says that: 240 "The formula proposed by the company is flawed in its failure to adequately proxy company cost-managing capacity." 241 And the preceding pages have submissions about efficiencies and the company's ability to achieve productivity in its O&M costs. 242 The Board will recall, this was addressed in argument in-chief. Notwithstanding the company's cost-managing abilities in the O&M area, rates approved by the Board as just and reasonable have been increasing faster than Ontario CPI. 243 It has not been disputed in this case, that I know of, that I can think of, that the company is a rapidly-growing utility, as has been indicated; it has not been disputed that I can think of that significant annual customer additions do put cost pressures on the utility. And the result, as seen by the historical evidence provided by the company, is that notwithstanding its ability to achieve O&M productivity, on an overall basis, rates have been increasing faster than Ontario CPI. 244 So as stated in argument in-chief, the submissions by VECC about productivity do not in any way detract from the company's evidence supporting Ontario CPI as an appropriate index. 245 Now, coming back to the statement I made just a few moments ago that the inflation forecast of 2 per cent for 2004 is what I loosely call a given for the purposes of this case, at pages 12 to 13 of its argument, VECC seems to take some exception to the way I described the position of CAC and VECC in relation to Enbridge, in argument in-chief, made much of the fact that all parties agreed to an inflation forecast of 2 per cent. And it is pointed out that in the settlement proposal, VECC and CAC actually took no position. 246 It is absolutely true that in the settlement proposal they took no position, and I made that clear on the day when the settlement proposal was presented. What I was actually referring to in argument in-chief, as the Board may recall, was a response by Mr. Warren to a question later on from Mr. Betts about what the position was in relation to Ontario CPI. That was at transcript paragraphs 189 to 190. 247 I understood Mr. Warren to be answering on behalf of both CAC and VECC, but if I in any way did misstate what Mr. Warren was saying, I do apologize. 248 In any event, the important point comes up as one reads a little further in the VECC submission, and that's, again, at the top of page 13 where VECC states: 249 "When the forecast is part of a proposal that should not be accepted, its significance is akin to an agreement on a future price of soy beans." 250 Well, when I made the submission in argument in-chief that the inflation forecast of 2 per cent was a given for the purposes of this case, it was not because I was endeavoring to link that to any acceptance of an adjustment mechanism. In the transcript reference that I just referred to, paragraphs 189 to 190, that was made clear by Mr. Warren that there was no dispute that 2 per cent was a reasonable number that could be used, but the issue was whether this was a factor that should be used as an adjustment. 251 So this, in fact, is understood and was what was intended to be addressed in argument in-chief. It was not intended to link the inflation factor -- the inflation forecast as being accepted under the complete settlement with the adjustment mechanism. The link that was made in argument evidence, and again, I believe this to be uncontradicted, is that the company's costs correlate closely to Ontario CPI. That was the link that was sought to be made. Once you have the uncontradicted evidence that the company's costs correlate closely to CPI, you add to that the accepted complete settlement that there will be Ontario CPI forecast of 2 per cent increase in the test year, you then have what I submitted were very important elements of the case for the Board to consider. 252 So that's where the company would take exception to this submission by VECC that the inflation forecast is akin to an agreement on the future price of soy beans. The inflation forecast for 2004 is important because it is something that has a close correlation with the company's costs, quite unlike the future price of soy beans. 253 Another point that came up at several places in the VECC submissions -- I don't have a specific reference, but I think it is mentioned a number of times -- is that the company's proposal is based on one external factor. 254 The company, in fact, perceived this as a positive element of the proposal. The Board may recall that Ms. Lakatos-Hayward gave evidence about this. It can be found at paragraph 183 of the transcript and succeeding paragraphs. She indicated there that the company had considered a number of factors. The company selected Ontario CPI for quite a number of reasons, including the fact that it is objective, it is independent, it is widely tracked, it is reported in a timely manner, it is stable and predictable, it is transparent. 255 On top of that, one can add the other obvious point that it's readily understood by customers. CPI is something that customers are well used to hearing about. So the company thought and submits that using that one external factor as a reference point for establishing just and reasonable rates is a positive for all the reasons I have stated and given, its close correlation with the company's costs. 256 Now, while both CAC and VECC seem to take issue with the evidentiary basis for the company's proposal, one could well turn that around and question, where is the evidentiary base to support the position they are advancing to the Board? Where is the evidentiary base that would support a Board decision that the company can manage on a rate freeze in 2004? 257 VECC says at page 16 of its argument that there is significantly more evidence of the lack of a necessity for a rate increase, but it does not give a reference to what this evidence might be. I am hard-pressed to think, really, of a scintilla of evidence that would form the evidentiary basis for a decision that the company can manage on a rate freeze in 2004, particularly, again, given the acceptance of CPI at 2 percent in 2004. 258 CAC did seem to refer to some evidence in support of this notion that a rate freeze might be a possible alternative, and in doing so, the evidentiary reference I took down was Exhibit A, tab 10, schedule 6. If I took down the reference correctly, this was simply the narrative preceding the financial schedules that were filed with the Board earlier this week. I don't believe there is anything in that narrative that provides an evidentiary basis for a rate freeze. One, of course, can look behind to the financial schedules and ask the question: Is there an evidentiary basis there for the possibility of a rate freeze? 259 I am going to try to avoid reading any numbers into the record, I don't think it is necessary, but if, for example, one were to look at Exhibit A, tab 10, schedule 8, page 1, which is the nine months plus three months projected utility results for the fiscal 2003 year, it is my submission that looking at line 32 and the normalized results shown there, the numbers simply do not support the conclusion that Mr. Warren drew from them about how the company is doing. 260 Even beyond that, the numbers obviously are for 2003. These are not 2004 numbers. Even if one could reach Mr. Warren's conclusion from these numbers that the company is doing just fine, I think were his words, this would be for 2003. What that would tell one, if one could reach that conclusion, which I don't see how he can derive it from line 32, what it really means then is that the Board has a good 2003 base, if his interpretation of the numbers is correct. But again, we have the evidence in relation to 2004, using a broad measure of costs, that being Ontario CPI, supporting a modest increase to make 2004 rates just and reasonable. 261 So CAC relies on the 2003 nine months plus three months projected results apparently as the evidence for the rate freeze proposal, but the record completely lacks any evidence upon one could conclude that a utility growing at the rate of 50,000, approximately, customers per year and facing Ontario CPI increase of 2 percent can operate in 2004 on 2003 rates. The evidence just isn't there. 262 VECC refers to the rate freeze that's been imposed upon electric utilities. Again, though, there is an absence of any evidence as to how this would be relevant to the situation of Enbridge. Mr. Ladanyi's evidence, when he was asked about the rate freeze for electric utilities, was that some are really suffering and some are not. That's at transcript 641. But regardless of how the electric utilities are doing under this rate freeze, there is simply no evidence as to how such a rate freeze for electric utilities can be translated into a rate freeze for Enbridge. 263 I wanted to digress a little bit to talk some more about the financial schedules that were presented earlier this week, only because of my understanding of a statement that was made in argument by CAC, and if I understood the statement correctly, I don't think it is properly reading the numbers in the schedule. 264 I understood CAC to be saying that, based on the projection, the nine months plus three months projected, normalized volumes will exceed Board-approved volumes in 2003. In fact, if one looks at the last page of the exhibit, which is Exhibit A, tab 10, schedule 8, page 6, on line 9, looking across to the variance under column G, it is clear that normalized volumes actually will fall under Board-approved, based on this set of numbers. 265 Now, looking further across line 9, one can see that on a revenue basis there is a variance above Board-approved, but most of that comes from the sales revenue at line 5. I won't read the number, but the Board can see the number in column K at line 5, and that number, of course, doesn't take into account gas costs. 266 So if one wanted to put the number into context and take into account gas costs, one would go back to page 1 of the same schedule -- I'm sorry, I am just taking a moment to find my way through the pages -- but one would go back to page 1 of the same schedule, look in column I under "variance" and one can see the same gas sales figure that I just alluded to but did not read into the record and then see the impact in line 3 of cost of gas and then see a negative variance on gas distribution margin. 267 So I know that's a lengthy digression, but the point, first, is that it is not correct to say on a volume basis that the nine months plus three months projected shows an increase over Board-approved. It is the opposite. And even if what was meant to be referred to is on a revenue basis, when one takes into account the impact of gas costs, as shown on page 1 of the schedule, in fact, then one sees the negative impact overall on gas distribution margin. 268 Now, also VECC made some submissions about the timing of production of the information I have just been referring to and about the extent of any review and testing of this information. Now, the Board said in its ruling last Friday, on August 25th, that in making its order, and this is right at the end of the -- I'm sorry, August 22nd, right at the end of the August 22nd ruling: 269 "The Board reminds all parties of its ruling on Issues Day. This information is to be used only to the extent that it is needed to allow intervenors to put forward alternative adjustment mechanisms." 270 Well, as I read the VECC argument, and perhaps I am just not reading it correctly, but VECC does not make any attempt in its argument to use this information for an alternative adjustment mechanism. It does not offer any explanation that it might have used it in some way for an alternative adjustment mechanism if there had been some other review or some other timing of the release of the information. In fact, what VECC does in its argument, at page 14 with this information is it draws from the information the conclusion that it is possible -- I am just trying to find the precise words. 271 "There are several areas of variance from Board-approved revenues and expenses that could result in the company exceeding its 2003 allowed return on equity." 272 Well, this is precisely the issue that the ratepayer safeguard is intended to address. VECC goes on at page 14 of its argument to talk about the ratepayer safeguard and to say that: The Board will have to consider whether the safeguard mitigates as intended. 273 VECC then says it does not think such safeguard to be adequate, but as far as I can see gives no reasons for that conclusion. 274 So first, there is nothing in this use of the evidence filed in response to the Board's order by VECC that seems to relate to an alternative adjustment mechanism. Second, it seems to be linked by VECC to issues that are addressed by the ratepayer safeguard anyway. And third, although VECC disagrees with the ratepayer safeguard, there is, in my submission, a lack of any reasoned basis from VECC as to why the safeguard is not adequate. 275 Now, CAC, in its submissions, referred to the argument in-chief about whether there was any significance to a numerical review of specific costs and expressed a lack of understanding as to the distinction between a review of specific costs and the company's evidence about cost pressures. Given CAC's submissions in that regard, I am going to see if I can be more clear than I was in argument in-chief. 276 The Board will recall that in argument in-chief I was very specific in saying that what I was addressing was the significance, if any, of a numerical review of specific costs. So just to put that into a context of something concrete, there has been evidence, for example, about insurance cost pressures, so by a numerical review, I was talking about somebody saying, okay, well, these insurance cost pressures amount to X million dollars, or salary cost pressures amount to Y million dollars. 277 The submission that I was making in argument in-chief was that if the company were to start down that road and start taking this numerical approach to specific costs, then intervenors surely would say, well, you can't cherry-pick, give us all the numbers. And similarly, they would say, we don't need to accept these numbers at face value; we need to fully test them. 278 And in fact, I think that's what CAC has now confirmed in its argument when it made this reference to scrupulous review, that to the extent that there are specific dollar amounts, it would expect that there'd be full disclosure of dollar amounts and full review. 279 But as I have already said in these submissions, that numerical review of specific dollar amounts was very much what this application was not about. Instead, the company proposed a broad measure of costs and provided evidence that historically its rates have increased faster than this broad measure. 280 And what are the possible reasons as to why the company's rates increased faster than this broad measure? Well, this is where evidence about cost pressures like growth, customer growth and insurance come into it. 281 So the cost-pressure evidence goes to the application of the broad measure. It goes to why Ontario CPI, if anything, is a modest reflection of the cost increases that the company experiences. The evidence has shown historically that, in fact, Ontario CPI lags the company's increases in rates, and the evidence about cost pressures is an attempt to explain that. But it was never intended to be a numerical analysis of specific costs, and this is why the company did not embark on the exercise of attaching specific numbers to specific costs. Surely, at that point, if the company had done that, the very next question would have been, give us all the numbers and let us review it all. 282 Now, VECC in its submissions at pages 13 and 14 takes issue with a statement in argument in-chief. Now, I am just lacking the most important page, which is page 13. 283 VECC is concerned about its interpretation of a statement in argument in-chief being taken to mean that -- I am just trying to find it -- cost scrutiny is no longer necessary. 284 Well, I am not sure what VECC means by that. If VECC is interpreting the company's position to be that there will never again be any need for cost scrutiny, that is certainly not what I intended to say. What was intended to be put forward in argument in-chief was that what is necessary and appropriate in any particular case can be determined by the Board in the circumstances of that case. And in a particular case like this one, the full cost scrutiny that I have referred to is not necessary; it is not required by the statute; in fact, the statute says the Board may adopt any method or technique. 285 But I hasten to say it was not intended to be a suggestion that cost scrutiny will never again be necessary. In fact, the Board would see, as part of the partial settlement, that regardless of what the company applies for in 2005, the company has committed -- again, as part of the partial settlement -- to a full cost of service filing as part of its 2005 application. That is at page 8, and it is numbered paragraph 9 on page 8 of the settlement proposal. And the commitment includes 2003 historical year, 2004 bridge year and 2005 test year information on a cost of service basis, regardless of the type of application. 286 So I do just want to be sure that there is no misunderstanding about what the company's submission was in argument in-chief. 287 Now, CAC said more than once in their submissions that the proposal before the Board is being presented as the, I think it was, new and modern way of doing things, and there is really just one point that needs to be made here, and again, it comes back to the partial settlement. The partial settlement specifically says, and this has already been referred to, that all parties to the partial settlement agree that acceptance of the rate adjustment mechanism is not to be a precedent. 288 So that is at numbered paragraph 10 of the partial settlement, also on page 8. 289 And again, I could refer also to the other paragraph that I just did, paragraph 9 on page 8 where the company has committed to make the cost of service filing in the fiscal 2005 case. 290 So I think the submission that what the Board is being presented with is a new and modern way of doing things is not reflective of the partial settlement, which the company is requesting that the Board accept. 291 Both CAC and VECC had some submissions about the ratepayer safeguard. I think I can primarily deal with these submissions by addressing what was said by CAC. CAC's statement, as I understood it, was that there has never been a formula approach that has not resulted in a hearing. 292 Perhaps it is just in one's definition of what it means by "resulted in a hearing", but taking that statement literally, I think the company simply has to part company with CAC on such a view of formula-based approaches to rate-making. One example that immediately sprang to mind during CAC's submissions is the Board's guidelines for establishing ROE. They have been in place, I understand, since 1997. It is true that there is a review at this time, after quite a number of years of operation of those guidelines, but I think it is also true that in case after case since 1997, the application of those guidelines has dispensed with all the evidence that the Board was used to receiving from ROE experts in relation to the establishment of the appropriate ROE. 293 So again, maybe it is just what one means when one talks about whether something has resulted in a hearing, but my submission would be that the ROE guidelines have worked very well procedurally in establishing a process, a pre-established methodology that cuts down on a lot of what would otherwise have to occur in a hearing. The same can be said of the QRAM methodology. It is my understanding that there have been a number of recent QRAM applications that have been processed, if I can use that word, with few or no issues. Examples are April 2002, October 2002, January 2003, and April 2003. 294 So this is why I say maybe it is a difference of semantics, but the company does have real difficulty in accepting this notion that a pre-established formula or pre-established methodology has proven not to be workable in the past. The company would, in fact -- does, in fact, submit the opposite, that with the examples I have given, and I think there are many other examples, that, in fact, those types of approaches have proved to be effective from a procedural point of view and a process point of view. 295 And for the Board to approach the partial settlement on the basis that a formula is always going to lead to a hearing, in my submission, would mean applying an approach that is really quite a bleak and unrealistic view of how regulation has worked and can work in Ontario. The CAC argument assumes, first, that issues are going to arise from the ratepayer safeguard; and second, that if issues do arise, that they must be contested through a regulatory process. 296 I understood Mr. Warren to say issues will have to be determined by an IR process and by the Board. I ask rhetorically: Why would one assume this? Why would one assume that even if issues do arise, parties will be unable to resolve them without going to the Board? In my submission, experience is showing more and more the ability of parties to resolve matters without going to the Board, and this is why I submit that the Board is being invited to view the safeguard, the ratepayer safeguard from a very bleak perspective of Ontario regulation. 297 CAC also relied on Ms. Duguay's inability to, while on the witness stand, to fully explain the answer to a particular question. Now, if I understand CAC's reference in this regard, it was actually a question put by Mr. Dominy, and it was at transcript 1070. I did not understand the question that Ms. Duguay was attempting to answer to be one about the ratepayer safeguard. If CAC is relying on Ms. Duguay's attempt to answer this question to say that there could be a problem explaining the application of the safeguard adjustment, there are several points that I think would be appropriate to make. 298 First, it's obviously a little different attempting to explain a matter on the witness stand than it is attempting to explain something in another context, and again, assuming I am using the example that counsel for CAC had in mind, Mr. Dominy did say at the end of this discussion that he would obviously need to have the numbers to understand the explanation. So if an issue did arise in the adjustment called for by the ratepayer safeguard, obviously Ms. Duguay would be able to walk people through the numbers and not have to do that in the context of trying to testify in the witness stand. 299 So this, if anything, is an illustration of how it can often be better working through issues outside the hearing room, because it is possible to walk people through the numbers and to explain things in a little better fashion than can be done sitting on the witness stand in the context of a hearing. 300 Now, another point that came up in CAC's argument and is touched upon in VECC's argument is the concept of there perhaps being earnings sharing in relation to the company's utility results for fiscal 2004. Mr. Warren, I believe, referred to this as an earnings sharing mechanism. 301 Now, first and foremost, the basic problem that I have in responding to this is that it was not put to the witnesses. Because it was not put to the witnesses, there is not an evidentiary base for me to deal with it in argument. It has come up rather belatedly, if I can put it that way, insofar as the existence of any evidentiary base for the Board to use is concerned. And just as it is difficult for me to address it without an evidentiary base, I would submit it is similarly difficult for the Board to give serious consideration to it as part of its ultimate decision in the absence of that evidentiary base. 302 But having said all that, let me at least take a stab at a few submissions in this regard. First, CAC distinctly referred to this as a sharing mechanism, but then proposed that a hundred percent of earnings over the Board-allowed return would go to ratepayers. It is difficult to see, at least in my submission, any sharing concept there at all. That does not seem to be sharing. 303 Second, I observed that CAC has tried to persuade the Board that a possible forthcoming adjustment based on the ratepayer safeguard, this would be an adjustment from 2003 utility results, is somehow problematic, but then at the same time is arguing to the Board that perhaps there should be a mechanism that effectively would adjust based on 2004 results. 304 Third, I submit it is difficult to see how this concept of earnings sharing can be introduced at this stage of the proceeding in a manner that is going to be fair to the parties. CAC argued that the sharing, or so-called sharing should be asymmetrical. That, though, in my submission is unfair to the company. It puts the company completely at risk for all downside, but then requires it to give up some or all of the upside and all of the upside in CAC's request. So asymmetrical sharing, in my submission, although, again, it wasn't put to the witnesses and there wasn't an opportunity to build an evidentiary base on it, is simply unfair to the company. But then on the other side of the coin, any form of symmetrical sharing would be unfair to all of the other parties to this proceeding who have not had an opportunity to comment on whether their clients would be prepared to have symmetrical sharing and take some downside risk. 305 So for all those reasons, I submit that this concept of an earnings sharing mechanism has been belatedly introduced and that the record for this case simply doesn't support moving in this direction at that time. 306 I think, Mr. Chair, that has taken me through the CAC and VECC arguments and brings me to my conclusion. I am somewhat at a loss as to what to say in conclusion because I believe I did endeavor in argument in-chief to pull together all the reasons why the company has presented a fair and balanced proposal, why the proposal leads to just and reasonable rates and why, at the same time as achieving those objectives, it is also a pragmatic proposal. 307 I suppose I can add the obvious, which is that the proposal as now reflected in the partial settlement is one that's been agreed to not only by the company but by quite a large group of intervenors, and a group that cuts across a number of different interests. It has been agreed to by the direct representatives of industrial or large-volume customers, those being IGUA and CME. It has been agreed to by the direct representatives, and there are two of them, of school groups. It has also been agreed to by a broadly-based intervenor, that being Energy Probe, which intervenes as an environmental and consumer organization. 308 So not only is it a just and reasonable and balanced and pragmatic proposal for all of the reasons I have stated in argument in-chief and in reply argument, the just and reasonable and fair nature of this proposal is also reflected in the wide acceptance that has been given to the partial settlement. 309 So that concludes my submissions on the substance of the case. Mr. Warren did, in his oral argument, make reference to CAC's cost request, so I feel that I should at least respond to that orally. 310 While I think it is very clear to the Board that the company does have little common ground with CAC on the issues before the Board now, that being specifically whether the partial settlement ought to be accepted, the company does fully recognize CAC as a responsible and conscientious participant in this process and has no objection to the request made by Mr. Warren for recognition of reasonably incurred costs. 311 I observe also that other intervenors did not make a request for costs. I understand in some cases and assume in others that those costs will probably be coming in writing to the Board. 312 And then having said all that, I think it remains only for me to, on behalf of the company, thank the Board and indeed all parties for finding time in schedules that we know to be very busy ones to deal with this application. 313 Thank you, sir. 314 MR. BETTS: Thank you, Mr. Cass. 315 [The Board confers] 316 PROCEDURAL MATTERS: 317 MR. BETTS: Thank you, Mr. Cass. The Board panel has no questions. 318 MR. CASS: Thank you, sir. 319 MR. BETTS: First of all, I'll ask Board counsel, are there any comments by way of clarification that you would like to make at this stage, submission to the Board panel? 320 MS. LEA: No, thank you. We have no questions of Mr. Cass with respect to his submissions. If there is any understanding or ability of the panel to indicate where we go from here, that might be of assistance to parties, but that may not be possible yet. I don't know. 321 MR. BETTS: I actually intend to give a bit of guidance in that respect, so thank you. 322 The Board hopes to be able to deliver an oral decision before the end of next week on this matter, but we will advise all the parties of a firm time and place when we have concluded our deliberations. 323 But it is our objective to attempt to deliver an oral decision by the end of next week. 324 And that would imply that there will be at least one more day of hearings, but with that, I would still like to take this opportunity to thank all of the participants, the applicant, and the intervenors for the very professional and co-operative approach that we have seen throughout this hearing. It has been obvious. I think it has supported the objective of all to deal with the matter as effectively and efficiently as possible. 325 Certainly, I would like to thank once again, and I am doing this constantly, the court reporters for their very consistent high quality results and very supportive and co-operative attitude they bring to this hearing room. And we could not have accomplished this the way we have without the benefit of our staff, the three people that are here today, both in the way they have managed this application and also in their support to the panel. 326 So thank you all very much for that. Again, if we are successful in our plans, we will be convening once more. We are not sure of the time and date at this point, but it is our objective to conclude the matter some time next week. 327 Any questions before we arise? 328 With that, we will adjourn until our next get together. Thank you. 329 --- Whereupon the hearing adjourned at 4:05 p.m.