Rep: OEB Doc: 12WW5 Rev: 0 ONTARIO ENERGY BOARD Volume: 10 20 OCTOBER 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER A. BIRCHENOUGH MEMBER 1 RP-2003-0063 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 Union Gas Limited for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, storage, and transmission of gas for the period commencing January 1, 2004. 3 RP-2003-0063 4 20 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel CHRIS MACKIE Board Staff JAMES WIGHTMAN Board Staff MICHAEL PENNY Union Gas Limited CRAWFORD SMITH Union Gas Limited MARCEL REGHELINI Union Gas Limited MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group ROBERT ROWE Enbridge Gas Distribution Inc. VINCE DeROSE Industrial Gas Users Association BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association ALICK RYDER City of Kitchener JAY SHEPHERD Ontario Public School Boards Association MICHAEL JANIGAN VECC 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [17] UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT [29] CROSS-EXAMINATION BY MR. RYDER: [34] CROSS-EXAMINATION BY MR. JANIGAN: [381] PRELIMINARY MATTERS: [458] UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT [476] CROSS-EXAMINATION MR. JANIGAN: [481] CROSS-EXAMINATION BY MS. SINGH: [599] CROSS-EXAMINATION BY MR. AIKEN: [647] CROSS-EXAMINATION BY MR. DeROSE: [673] CROSS-EXAMINATION BY MR. DINGWALL: [730] CROSS-EXAMINATION BY MR. MORAN: [914] RE-EXAMINATION BY MR. PENNY: [998] PROCEDURAL MATTERS: [1032] PRELIMINARY MATTERS: [1044] UNION GAS LIMITED - PANEL 2; ANDREWS [1052] EXAMINATION BY MR. SMITH: [1057] CROSS-EXAMINATION BY MR. WARREN: [1089] CROSS-EXAMINATION BY MR. JANIGAN: [1215] CROSS-EXAMINATION BY MR. DINGWALL: [1289] CROSS-EXAMINATION BY MR. DeROSE: [1342] CROSS-EXAMINATION BY MR. AIKEN: [1350] CROSS-EXAMINATION BY MS. SINGH: [1382] PROCEDURAL MATTERS: [1444] 10 EXHIBITS 11 12 UNDERTAKINGS 13 UNDERTAKING NO. N.10.1: TO ADVISE MR. RYDER WHICH SECTION OF THE ACT PERMITS A PARTY TO A NEGOTIATION TO APPLY TO THE BOARD [179] UNDERTAKING NO. N.10.2: TO UPDATE EXHIBIT D.1, TAB 1 AND TAB 4, APPENDIX B TO REFLECT THE OCTOBER QRAM [656] UNDERTAKING NO. N.10.3: TO EITHER CONFIRM THERE'S AN UPDATE FOR EXHIBIT J.7.56 OR PROVIDE AN UPDATE [1363] 14 --- On commencing at 9:37 a.m. 15 MR. SOMMERVILLE: Good morning. It's Monday, October 20th. This is the continuation of the Union Gas Limited application for rates for 2004. 16 Are there any preliminary matters? 17 PRELIMINARY MATTERS: 18 MR. PENNY: Mr. Chairman, just a note that I had made reference a few times earlier in the last couple of weeks to the fact that there was going to be a Phase 2 update, which takes about six weeks to turn around after the Phase 1 update, and that has now been made available. There are a few copies in the room, but parties probably don't want to take it because it's been couriered to everyone and it's rather thick, so people will find it in their offices. If they don't have it already, they should find it in their offices later today. 19 MR. SOMMERVILLE: Thank you, Mr. Penny. 20 Any other preliminary matters? 21 MR. DeROSE: Good morning, Mr. Chair. My name is Vince DeRose; I just wanted to introduce myself. I'm here on behalf of the Industrial Gas Users' Association, I will be pinch-hitting for Peter Thompson over the next couple of days. 22 MR. SOMMERVILLE: Thank you, Mr. DeRose. 23 We have made inquiries with respect to Wednesday and the Board meeting and the potential for using some of that day for this proceeding. And it would appear as though we can use from about 1:00 onwards on Wednesday in this proceeding. So if you guys want to discuss that and get back to us, that would be helpful. 24 As I understand it, our plan today, Mr. Penny, is to conclude the gas supply panel, and then deal with the GDAR material, Mr. Andrews, and the ABC material. 25 MR. PENNY: That's correct. 26 MR. SOMMERVILLE: Thank you. 27 Without further ado, Mr. Ryder, I think it's your time. 28 MR. RYDER: Thank you. 29 UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT 30 M.ISHERWOOD; Previously sworn. 31 D.NEWBURY; Previously sworn. 32 D.SIMPSON; Previously sworn. 33 D.DENT; Previously sworn. 34 CROSS-EXAMINATION BY MR. RYDER: 35 MR. RYDER: Panel, I'd like to turn to a situation where an M9 customer switches and becomes a T3 customer, and I think the situation is illustrated by M.4.1, so I'd ask you to turn that up, if you would. 36 MR. NEWBURY: Yes, I have it. 37 MR. RYDER: Now, on the switch, the situation is covered by the last paragraph of page 1 of that exhibit which states that: 38 "The attached schedule shows the detailed calculation of storage space allocated to each rate M9 customer. This is the storage entitlement available to customers switching to unbundled rate T3. 39 MR. NEWBURY: Yes, I see that. 40 MR. RYDER: So on the switch to the T3, I think you told us yesterday, they get the space allocated under the excess-over- average method, but they don't get any allowance for contingency. 41 MR. NEWBURY: Correct, Union continues to provide that service using the contingency. 42 MR. RYDER: All right. But with respect to the task of varying -- balancing your customers for deviations in the weather, for colder-than-normal winter, I take it that that is a task that would be fixed with the T3 customer, not with Union. 43 MR. NEWBURY: As far as it's unforecasted events, it remains Union's job to serve and balance of all of the customers including those who are on T3. 44 MR. RYDER: You don't weather balance for Kitchener. 45 MR. NEWBURY: We provide Kitchener their contract re-delivery requirements regardless of what their own supply arrangements have been that day and regardless of what demands they are drawing at our station that day. 46 MR. RYDER: Yes, but it's Kitchener's responsibility -- 47 MR. ISHERWOOD: Perhaps I could add to that. To the extent that Kitchener needs to plan for warmer or colder-than-normal weather, then they would have to do that within their T3 contract. So in a colder than normal year like we just went through, you would expect the City of Kitchener to have to bring in incremental supplies, as did Union Gas, Enbridge, GMI and most of the northeastern market. 48 MR. RYDER: Precisely. But it doesn't have any of the allocation of contingency space to do that. 49 MR. ISHERWOOD: Typically, that winter was cold -- 50 MR. RYDER: Just yes or no. 51 MR. ISHERWOOD: I think I need a little more explanation. 52 MR. RYDER: Well, it's a precise question. On a colder than normal, winter Kitchener does not get an allocation of contingency space to weather balance. 53 MR. ISHERWOOD: They wouldn't need it. 54 MR. RYDER: Pardon? 55 MR. ISHERWOOD: They would not need to. 56 MR. RYDER: Well, whether they need it or not, they don't get it. 57 MR. ISHERWOOD: That's true. 58 MR. RYDER: Thank you. Now, isn't that position of Union's on the switch to a T3, in which the customer doesn't get the contingency space that used to underpin their service, isn't that a breach of the principle going back, I think originating in EBRO 412, that on the switch, a customer should retain their existing storage entitlement? 59 MR. NEWBURY: No. What they are getting, again, is their excess-over-average entitlement. Union, as the provider of all other services has always had the contingency space to provide these other services to weather-balanced customers and since the agreement even at RP-99, that contingency space has been recognized by all that system operator needs to retain that and that space cannot be assigned away to any type of customer bundled, T3, or unbundled. 60 MR. RYDER: So that when Union managed Kitchener's storage as an M9 customer, you had a component of contingency space for weather balancing, and yet you don't give that to the T3 customer when it has to manage its weather balancing. 61 MR. NEWBURY: Again, they are managing their demand inside their T3 contract. Union, as the system operator, has other obligations to continue to serve the City of Kitchener and one of the tools it uses to serve the City of Kitchener is the contingency space that it retains as the system operator. It could not perform its function that it has to provide to all customers of Union if it began assigning away these tools and I think that point was made quite clear through the unbundling hearing about the function of this space, whether it be a bundled customer, as is Kitchener right now, or in the ultimate end state where all customers are unbundled. 62 MR. RYDER: Well, one last question: When Kitchener was an M9 customer, did some portion of contingency space for weather balancing underpin that service to Kitchener? 63 MR. ISHERWOOD: Contingency space is used for all customers so we don't look at proportioning it to M9 or to M2, it's used for all bundled customers collectively. 64 MR. RYDER: And so some of it underpins the service of Kitchener? 65 MR. NEWBURY: The utility needs this space -- 66 MR. RYDER: I know that. You've told us that. That's not my question. Does some of it underpin the service to Kitchener? 67 MR. ISHERWOOD: And some of that underpins the service to T3 as well. 68 MR. NEWBURY: The point I wanted to make was, the utility needs this space to manage the system and it isn't accessed by any particular customer. The costs in the services are spread to all customers. So my point is it is not a particular customer who receives this space when you see the costs being allocated to them. All customers are using this space through Union's service. The volumes and costs for the M9 rate class in this exhibit simply show how those services are being paid for by the M9 customers. 69 MR. RYDER: Tell me, does Kitchener, when it moved to a T3, is it allocated weather variation -- the cost of space for weather balancing? 70 MR. NEWBURY: It's my understanding that as a T3, there is no longer a weather portion of costs being allocated to Kitchener, but you'd really need to take that up with Mr. Kitchen who does our allocations. 71 MR. RYDER: And it's not allocated to Kitchener because they don't get it. It underpinned them when they were M9, but they don't get it when they're T3. 72 MR. NEWBURY: Kitchener continues to receive a bundled service that Union provides all of the deliveries that Kitchener draws at our city gate on a no-notice basis, and in providing that service it is quite possible that if Kitchener has not maintained sufficient inventory or Kitchener has not maintained sufficient deliveries that Union will provide this back-stopping services and rely on this contingency assets to do that. 73 MR. RYDER: Well, it's unbundled in terms of storage. I mean, look at Exhibit M.4.1, the last line, and it speaks of switching to unbundled rate T3. 74 MR. NEWBURY: I think we'll go back to the date when this was prepared in '98. The terms "bundled" and "unbundled" got very well defined in RP-99. T3 customers are bundled and they are not managing their own storage as an unbundled customer would. You have no nominations that you do on a daily basis. By that, I mean Kitchener provides no direction to Union on how to manage their storage. Union takes their deliveries, typically at Parkway, returns the gases as Kitchener is drawing it off at the city gate, and performs all of these bundled services on Kitchener's behalf. That is why Kitchener is not an unbundled storage customer. Union is doing that for them. 75 MR. RYDER: Thank you. So the definition of "unbundled" changed? 76 MR. NEWBURY: I think if you actually -- 77 MR. RYDER: Did the definition change? 78 MR. PENNY: Sorry, Mr. Ryder, with great respect, you asked Mr. Newbury a question, he was about to answer it and you interrupted him. With great respect, these witnesses are entitled to give full and proper answers. And I'd ask, Mr. Chairman, that you direct Mr. Ryder to calm down, not display such aggressive and untoward behaviour towards the witnesses and permit them to answer the question. 79 MR. RYDER: Well, really, my intervention was just simply because the answer wasn't responsive to the question. 80 MR. NEWBURY: I think you'll find the definition -- 81 MR. RYDER: Has the definition changed, is my question. 82 MR. NEWBURY: The definition that is in place now can be found in the glossary that was discussed on Friday. In fact, at Exhibit A, tab 29, page 11, you'll find the definition. Tab 21, I'm sorry. 83 MR. RYDER: What is the answer to my question, Mr. Newbury? 84 MR. NEWBURY: As described on M.4.1, the service that Kitchener has moved to is a bundled service. 85 MR. RYDER: Has the definition changed? 86 MR. NEWBURY: Since what time? 87 MR. RYDER: Since Exhibit M.4.1? 88 MR. NEWBURY: Given that unbundling didn't exist in its now understood form, I can't -- 89 MR. RYDER: It's not a tough question. Has it changed? 90 MR. NEWBURY: The services haven't. There's greater definition around what unbundling is. 91 MR. RYDER: Let's go to another topic. 92 I'm talking now about the allocation of storage-peaking service. Now, the storage-peaking service, I take it, relates to deliverability. 93 MR. NEWBURY: Storage-peaking service is provided to general service customers who are unbundled. 94 MR. RYDER: Let me step back a bit. Storage consists of space and deliverability, those two components? 95 MR. NEWBURY: Correct. 96 MR. RYDER: Right? And those -- and the storage-peaking service relates to deliverability? 97 MR. NEWBURY: Storage-peaking service is approximately 10 percent of all of our storage -- or, I'm sorry, 16 percent of all of our storage and it provides a 10 percent level of deliverability where the standard storage, the balance of our pools operates at a much lower level of deliverability. 98 MR. RYDER: Okay. And deliverability refers to the rate of withdrawal from storage. 99 MR. NEWBURY: Yes. 100 MR. RYDER: Okay. And in the case of 0017, storage was broken out into two categories, SSS and SPS. 101 MR. NEWBURY: That's correct. 102 MR. RYDER: And the deliverability is measured as, I think you said this, as a percentage of the total space? 103 MR. NEWBURY: I was just trying to give you an idea of how much of Union's total storage was peaking storage and the portion that was base storage. 104 MR. RYDER: All right. But the deliverability level of storage is described as a percentage? 105 MR. NEWBURY: Yes, and that would be the 10 percent number, giving you an idea that this storage can provide a greater degree of withdrawals than our other base storage can provide. 106 MR. RYDER: Well, maybe this will be clearer if you look at Exhibit J.5.87. 107 MR. NEWBURY: One moment, please. 108 MR. PENNY: That number again? 109 MR. RYDER: J.5.87. 110 MR. NEWBURY: Yes, I have it. 111 MR. RYDER: All right. And you see that there are two tables, and let's look at the bottom table. It describes the level of deliverability in terms of a percentage. 112 MR. NEWBURY: Yes. 113 MR. RYDER: All right. And that's a percentage of what? 114 MR. NEWBURY: Percentage of total space. 115 MR. RYDER: Okay. And for the SSS, in 0017, the deliverability that you proposed was 1.2 percent? 116 MR. NEWBURY: That's correct. You can -- your reference, then, is page 2 of that, the first sentence. 117 MR. RYDER: All right. And then we can compare the -- sorry, if I could take you to attachment 1 of this interrogatory response, there's an excerpt from the evidence in 0017. 118 MR. NEWBURY: Yes. 119 MR. RYDER: And at page 58 of that attachment, at the bottom of the page, line 22, the text reads: 120 "The SPS service provides storage space with a high deliverability entitlement in order to serve heat-sensitive customers in the southern operations area." 121 Right? 122 MR. NEWBURY: Yes. 123 MR. RYDER: Now, then we go back, please, to page 1 of that interrogatory response and we can compare the deliverability for the various customers, and so the M2 deliverability proposed in this case is 2.18 percent? 124 MR. NEWBURY: Yes. 125 MR. RYDER: And for the M4, 2.5 percent? 126 MR. NEWBURY: Yes, I see it. 127 MR. RYDER: And for the M9, 1.71 percent; for the M7, 2.52 percent; and the T3, 1.5 percent. 128 MR. NEWBURY: Yes, I see it. 129 MR. RYDER: Now, if high deliverability is needed to serve heat-sensitive customers, my first question is, why reserve it exclusively for U2, for the unbundled customers in U2? 130 MR. NEWBURY: My first answer to that would be this was all dealt with in the 99-0017 proceeding, how those assets would be allocated. 131 MR. RYDER: We didn't participate in that so this is our first crack. 132 MR. NEWBURY: Your point? 133 MR. RYDER: My point is that that's why I'm asking the question. 134 MR. PENNY: Well, sorry, is Mr. Ryder wanting to relitigate a matter that was decided by the Energy Board? 135 MR. RYDER: I'm not relitigating. I'm litigating the numbers in the right-hand column, which is the deliverability you're proposing in this case to the various customer classes, all right? 136 MR. NEWBURY: Yes. 137 MR. RYDER: And I take it none of the high deliverability goes to any of these customer classes shown on page 1. 138 MR. NEWBURY: I think you're getting to the point where it's really Mark Kitchen who does these allocations that you want to get to this level of detail on. 139 MR. RYDER: Can you explain -- well, these numbers, can you tell us who actually deals with that besides Mr. Kitchen? 140 MR. NEWBURY: He is the one who prepared this evidence. I can take you to the point that this evidence is the application of the approved process. 141 MR. RYDER: Okay. Are you aware that no high -- sorry, that only the U2 received the high deliverability? 142 MR. ISHERWOOD: I think U2 received the storage-peaking service. That storage-peaking service, or SPS service, was designed for the general-service market. 143 MR. RYDER: And so -- and there are no customers in U2? 144 MR. ISHERWOOD: That's correct. 145 MR. RYDER: And so what happens to that space? Who's using it? 146 MR. ISHERWOOD: It's been used today still by the general service market as bundled customers. 147 MR. RYDER: Now, is the level of deliverability an item in the carriage-service contract? 148 MR. ISHERWOOD: You're referring to the T1 contract? 149 MR. RYDER: T1 and T3. 150 MR. ISHERWOOD: Certainly in both forms of service, withdrawals and injections are parameters that you have to have in the contract. 151 MR. RYDER: All right so these are negotiated between the customer and Union? 152 MR. ISHERWOOD: That's correct. 153 MR. RYDER: And what happens if there's a failure to agree? 154 MR. ISHERWOOD: I think, generally speaking, it's somewhat formulaic in terms of how you get there. I think Mr. Newbury explained on Friday that you really start with annual demands and you divide that by 365 until you get the daily deliveries into the system, we call that the DCQ, or Daily Contract Quantity, and then from there you do the excess over average, so it's quite mechanical in terms of how you get there. 155 MR. RYDER: Well, is the deliverability for all of T3 -- sorry, T1 customers the same as -- the same? 156 MR. ISHERWOOD: I guess I'm not really an expert witness to know that. 157 MR. RYDER: That's another one for Mr. Kitchen? 158 MR. ISHERWOOD: I'm not sure Mr. Kitchen would know that. We have 72 T1 contracts, so it would be difficult to... 159 MR. RYDER: And is the deliverability the same for all of them? 160 MR. ISHERWOOD: I don't know. I suspect not. I suspect that, as I mentioned, it's somewhat mechanical, so each contract would be unique. 161 MR. RYDER: Well, in each case it's percentage of the total space? 162 MR. ISHERWOOD: I think the other thing that differentiates -- 163 MR. RYDER: Can you answer that? Is it a percentage in each case of the total space? 164 MR. ISHERWOOD: It's not in T3 either, and it's not in T1 necessarily a percentage, although I think the 1.2 percent is something you look at as being what the storage can actually deliver, so you try to get to that number if you can. 165 MR. RYDER: Insofar as it's not mechanical, what happens if you cannot agree? 166 MR. ISHERWOOD: The point I made on Friday, I think, two reasonable parties negotiating, my experience has been that we have been able to agree. 167 MR. RYDER: And in the event of an impasse, what does a customer do? 168 MR. PENNY: That's really a legal question, Mr. Chairman, and the Act provides for a party to make application to the Board in matters relating to service. 169 MR. RYDER: What provision of the Act? 170 MR. PENNY: I don't have it with here with me but I'll look it up if you like. 171 MR. RYDER: Thank you. 172 Can we have that as an undertaking because I'm not aware of it, where an individual customer can bring an application to the Board. 173 MR. PENNY: Why don't I just tell Mr. Ryder at the break rather than assign an interrogatory number to it. 174 MR. SOMMERVILLE: Is that satisfactory, Mr. Ryder? 175 MR. RYDER: No, I'd like it on the record whether there is or is not a provision, because I'm -- 176 MR. PENNY: There is a provision it simply provides that applications can be made to the Board, but I'll look it up and provide it. I don't have a problem with that. 177 MR. SOMMERVILLE: Well, we will assign that. Let me indicate that generally speaking, I think that undertakings ought to represent work of unique creation of some kind, but in this case, I think we'll make an exception, and Mr. Moran, if you could give us a number that would be appreciated. 178 MR. MORAN: Yes, Mr. Chair, that would become Undertaking N.10.1, an undertaking to advise Mr. Ryder which section of the Act permits a party to a negotiation to apply to the Board. 179 UNDERTAKING NO. N.10.1: TO ADVISE MR. RYDER WHICH SECTION OF THE ACT PERMITS A PARTY TO A NEGOTIATION TO APPLY TO THE BOARD 180 MR. RYDER: Thank you, sir. 181 The source of the high deliverability are certain pools in Union's system? 182 MR. NEWBURY: That's my understanding, correct. 183 MR. RYDER: And before 0017 when the SPS was created as a service, I take it high deliverability was used to serve a variety of customer classes? 184 MR. NEWBURY: It's my understanding, again, that high deliverability continued even prior to 0017. Its function was to serve the heat-sensitive rate 2 general service class of Union's. The terminology was struck at 0017, but not the function. It had always been used for that function. 185 MR. RYDER: Okay. So did it serve anybody else besides M2? 186 MR. NEWBURY: That's outside of my area of expertise. 187 MR. RYDER: Who would I ask that of? 188 MR. NEWBURY: The storage facilities people could give you the most direct -- Bill Fay. 189 MR. RYDER: So as of today, it's continuing to serve the M2. 190 MR. NEWBURY: That's correct. 191 MR. RYDER: And anybody else? 192 MR. NEWBURY: It's my understanding no. 193 MR. RYDER: Now, I'd like to change topics, if I may, moving right along to the impact of the 20-year trend for operational purposes and how that's affected the gas supply plan. 194 Now, when did Union start using the 20-year plan for operational purposes? 195 MR. NEWBURY: I understand that in the summer of 2001, so the impact of that would have been most closely felt beginning November of that year for the 2002 gas year forward. 196 MR. RYDER: And can I ask you to turn to J.5.45. 197 MR. NEWBURY: Yes, I have it. 198 MR. RYDER: And you've quoted some paragraphs from 0029 which, I take it, sets out the basis upon which the operational decision was made. 199 MR. NEWBURY: Planning and operationally, this is how we view what we do, yes. 200 MR. RYDER: Yes. Now, if you look at the top of page 2 of this interrogatory response, you quote from the decision of the Board in 0029, paragraph 5.61, and the last two lines of that paragraph state: 201 "And to use it in planning and operations to the extent that it does not affect rates or service rates." 202 MR. NEWBURY: Correct. 203 MR. RYDER: And I take it rates would include service allocation. 204 MR. NEWBURY: In the context of this paragraph, the discussion was around unbundled service rates. 205 MR. RYDER: So you say that it doesn't affect existing service rates? 206 MR. NEWBURY: Correct. 207 MR. RYDER: So that means that Union was free to introduce the 20-year trend for planning purposes even though it affected existing storage allocations? 208 MR. NEWBURY: Numerically it would affect allocations but not the rights and levels of service that those allocations are providing to our customer base. 209 MR. RYDER: I see. So it wouldn't have changed the excess-over-average method of allocation? 210 MR. NEWBURY: Correct. 211 MR. RYDER: But it would change the forecast of volumes upon which the excess-over-average allocation depends? 212 MR. NEWBURY: That's right. It's a better method to use relative to the 30-year method and using that method numerically changes the results of the storage allocations. 213 MR. RYDER: Now, there is no Board order specifically authorizing you to introduce the 20-year trend for operational purposes. 214 MR. NEWBURY: Correct. I think that's why we speak to, in every circumstance where the Board is going to review our gas supply decisions, that they look to the fact that we need to address operational requirements prior to the Board having the opportunity to first understand, approve every step and so they've laid out for us what they want us to take into account before we make changes moving from the circumstances at the time when we're making decisions like this, the foreseeability of any changing circumstances, and realizing that, with a multiyear outlook that Union has to maintain, that in any particular year, in isolation, you can identify something that has a poor outcome, but that's not a balanced way to look at how Union has to establish its planning, which is a base line of normalcy around which, for instance, warmer or colder winters might happen. 215 MR. RYDER: Well, Mr. Newbury, to be clear, I'm not challenging the prudency today of moving to the 20-year trend, I'm just moving to the understanding upon which you did that. 216 MR. NEWBURY: Yes. 217 MR. RYDER: All right. And one of the things that you weren't supposed to do, or the introduction for operational purposes was not supposed to do, it wasn't supposed to affect rates. 218 MR. NEWBURY: And it didn't. 219 MR. RYDER: Well, let's look at that and see if it's true. Can I ask you to take a look at Exhibit J 5.41. And we'll deal with the supplemental, corrected version. 220 MR. NEWBURY: Yes, I have it. 221 MR. RYDER: And basically doesn't this show the amount of additional gas which would have been injected into storage in 2002 for bundled customers if the 30-year average was used for operational purposes? 222 MR. ISHERWOOD: I think if you are trying to tie J.5.5 and J.5.41, the distinction here is -- 223 MR. RYDER: I'm not trying to tie them. 224 MR. ISHERWOOD: Well, let me finish, if I could. 225 MR. PENNY: Why don't we find out and stop interrupting the witness. 226 MR. RYDER: I would like the witness to be directed to respond to the question. 227 MR. SOMMERVILLE: Mr. Ryder, that's exactly -- if you think that the witness is not being responsive, you should ask some assistance from the Board to ask the witness to answer the question. I don't think that interrupting the witness in that fashion is helpful. 228 MR. RYDER: I will be calling upon you, then, I'm afraid. 229 MR. SOMMERVILLE: Thank you. 230 MR. RYDER: Now, just forget about J.5.45 for the moment and concentrate on J.5.41. And my question is: Does this show the amount of additional gas which would have been injected into storage in 2002 if you had used the 30-year average for your operational purposes? 231 MR. ISHERWOOD: J.5.41 is really trying to identify the fact that you cannot look at one year cold weather in isolation, and that by the very term "20-year trend," you need to look at a long-term period. 232 And just to help the Board look at more than a colder-than-normal year, we've chosen also to go back to the 2001 winter where we had that warmer-than-normal year, '01/'02 winter, where it was warmer than normal. And, in fact, if you go back to the winter before that, that also had a mild period in the January through March time period. So you can't look at one year in isolation; that's opportunistic and, in our opinion, is inappropriate. 233 MR. RYDER: So what's the answer to my question? 234 MR. ISHERWOOD: I think, as the interrogatory answers, the incremental gas that you referred to has been identified as probably -- if we were on the 30-year methodology, we would have injected that gas in the summer of '01. 235 MR. RYDER: And that would have been the 2.7 pJs? 236 MR. ISHERWOOD: Yes. 237 MR. RYDER: That's the question I asked. 238 Now, in order to load balance for the winter of 2002/2003, it was necessary to purchase 2.7 more pJs of gas than would have been necessary had you used the 30-year average. 239 MR. ISHERWOOD: I believe we've established that the difference between a 30-year and a 20-year is 2.7. 240 MR. RYDER: And so just to get the arithmetic down, 2.7 pJs at load-balancing cost bought during the wintertime was $25.8 million? 241 MR. ISHERWOOD: That was assuming the average load-balancing cost for the winter, that's correct. 242 MR. RYDER: Yes. And 2.7 pJs at injection-season cost was 15.7 million? 243 MR. ISHERWOOD: No. That -- you have to go back to the summer of 2001. In the summer of 2001, the injection cost -- 244 MR. RYDER: Why wouldn't you have gone back to the summer of 2002? 245 MR. ISHERWOOD: Because the winter of '01/'02 was warmer than normal, so we actually would have injected the gas that you're referring to, we would have injected it in the summer of 2001. And the cost of injecting it in the summer of 2001 was 22.8 million. 246 MR. RYDER: Well, look, sir, at the interrogatory response. 247 MR. ISHERWOOD: I am. 248 MR. RYDER: All right. And you'll see in the second or third line down: 249 "As such, the cost to fill 2.7 pJs of storage during the 2002 injection season would, on average, be approximately 15.7 million." 250 MR. ISHERWOOD: That's correct. But if I could refer you to paragraph 1 on page 2 of 3, where we go on to state that that assumption -- 251 MR. RYDER: Slow down, slow down. You're still confirming the 15.7 million as an -- 252 MR. PENNY: Mr. Chairman -- 253 MR. SOMMERVILLE: Mr. Ryder, I think the witness is entitled, I understand the difficulty you're having, but I think the witness is entitled to refer to the interrogatory that you led him to to qualify his answer. 254 MR. RYDER: I just wanted to take this a step at a time. That's my problem. But certainly, go ahead. 255 MR. ISHERWOOD: So on -- under paragraph 1, on page 2 of 3, we go on to say that, in terms of looking at a multiple-year trend and what the actual flow of gas would have been, we would have actually injected the gas in the summer of 2001 at a cost of 22.8 million, carried it through the winter of '01/'02, through the summer of 2002, and not actually consumed that, then, until the cold winter of 2002/2003. 256 MR. RYDER: Didn't you tell us when you -- in 0029, in effect, that we're going to go ahead with the 20-year trend for operational purposes but it won't cost you anything. That decision -- we'll save you harmless for any weather impacts, for any -- for any costs. 257 MR. ISHERWOOD: That was my earlier reference in terms of 5.45 and 5.41. What we've undertaken to do is not to impact delivery rates by changing the methodology in 2001, and we're really adopting an operational process that would balance the costs of being warmer than colder as equally and as best as we could. 258 MR. RYDER: But wasn't there a QRAM process in which you attempted to recover load-balancing costs for the winter of 2002/2003? 259 MR. ISHERWOOD: That's correct. 260 MR. RYDER: All right. And those load-balancing costs would have been avoided had you been using the 30-year trend. 261 MR. ISHERWOOD: That's incorrect. 262 MR. RYDER: And you say that because of page 2 of your corrected -- 263 MR. ISHERWOOD: What this answer is trying to address on 5.41 is that there will always be a cost, if it's colder than normal or warmer than normal, there will always be a cost of deviating from plan. And so by picking the methodology that gives you the best equilibrium or the best balance, you will do your very best to minimize the cost in that case where you're warmer or colder. And what 5.41 shows is the cost to be warmer by $13 million in the winter of '01/'02, and to be colder than normal a year later was 3 million. So, again, we're trying to find the balance between warm and cold. 264 MR. RYDER: Yes, but you promised us that, no matter what, we wouldn't have to pay for the cost impacts of the 20-year trend. 265 MR. PENNY: Well, Mr. Chairman, the witness has already answered that question, with great respect. 266 MR. RYDER: Well, do you recall the directive in 0029 -- let me see if I can turn it up. Perhaps you have it. It's at paragraph 5.63 of that decision. 267 MR. ISHERWOOD: I don't have it. 268 MR. SOMMERVILLE: Which decision, Mr. Ryder? 269 MR. RYDER: 0029. 270 MR. SOMMERVILLE: Thank you. And the paragraph reference was? 271 MR. RYDER: 5.63. 272 MR. SOMMERVILLE: Thank you. 273 MR. RYDER: Is this the next case that's being referred to in that paragraph? 274 MR. ISHERWOOD: Probably. 275 MR. PENNY: 0130. 276 MR. SOMMERVILLE: Mr. Ryder, we don't have that in front of us at the moment. We'll refer to it later, but I don't have it at the moment. 277 MR. RYDER: Well, perhaps I should just -- 278 MR. SOMMERVILLE: I think I do remember -- if you wouldn't mind slowly reading it into the record, that may be helpful. 279 MR. RYDER: It states: 280 "Accordingly the Board directs the applicant to defer application of the proposed new weather-normalization methodology as it may affect the allocation of storage rates to customers until such time as it brings an application forward seeking Board approval of its use and there is an opportunity to review concerns such as those of Kitchener." 281 So this is the application you're referring to in that paragraph? 282 MR. ISHERWOOD: Probably, yes. 283 MR. RYDER: Okay. Now, just to go back to the cost, in the cost of load balancing for 2002/2003, how do you propose to recover that? 284 MR. DENT: We propose to recover that as we've outlined in the updated evidence according to rate classes that drafted the system at the March 31 storage or end of winter date, and those actual percentages are in the evidence, but it's primarily heat-sensitive customers with M4s and M5s picking up a small portion of those costs. 285 MR. RYDER: So Mr. Dent, this would be a charge on customers' bills eventually? 286 MR. DENT: Through the QRAM process, not all but a majority of those load-balancing costs had been or are being recovered primarily through the delivery rates. 287 MR. RYDER: So it will have a rate impact? 288 MR. DENT: It has an impact insofar as the winter was colder than normal and we needed to buy additional gas in order to balance customers, and this has happened a number of years in the past when it's been colder. In other years where it's been warmer that hasn't been necessary, and so we haven't incurred those load balancing costs. 289 MR. NEWBURY: If I could, the context of the paragraph 5.63, the discussion that brought that finding forward was first the Board acknowledging that Union hadn't sought approval for a change in the methodology for the purpose of setting our rates, our delivery rates, and so we said, No, we are not changing our delivery rates by using this methodology. 290 The reference to the impact on storage allocations had to do with two specific intervenors, one being Kitchener who wanted this methodology reviewed prior to their contract coming up for renewal, and their contract does not come up for renewal in 2005. The other intervenor was CEED, and their concern had to do with how Union would operate under the 20-year methodology in the event customers were unbundling. No customers have unbundled, so again, we have not done anything to affect rates nor storage-right allocations. 291 MR. RYDER: Well, whether you've affected rates is a matter we can argue. 292 MR. NEWBURY: Well, I just think if you read specifically the sections 5.44, 5.48 and 5.61, it becomes quite clear the context of rates and storage allocations that we were then following the Board direction under. 293 MR. RYDER: All right. So you're saying that the statement that it shouldn't affect rates -- or to be precise the quote is: "To the extent that it does not affect rates," doesn't mean that -- 294 MR. NEWBURY: We are speaking delivery rates. 295 MR. RYDER: I see. And that qualification you say is implicit? 296 MR. NEWBURY: Yes. 297 MR. RYDER: Can I turn to March Park? 298 MR. ISHERWOOD: March Park? 299 MR. RYDER: Yes. 300 MR. ISHERWOOD: That's actually the subject of another panel: Sarah Van Der Paelt and myself and Mark Kitchen later. 301 MR. RYDER: Okay. And winter-peaking service. 302 MR. NEWBURY: Yes, we can deal with that. 303 MR. RYDER: In your evidence you say that Union has a winter-peaking service requirement, and I take it that by the term "requirement," you mean that it needs a winter-peaking service to meet demand forecasted for the winter period which can't be met with existing service. 304 MR. ISHERWOOD: That's correct. 305 MR. RYDER: And this non-facility capacity will be required for both the winters of 2004, 2005, and 2003/2004, am I right? 306 MR. ISHERWOOD: That's correct. 307 MR. RYDER: And so you're forecasting a winter-peaking service for both winters. 308 MR. ISHERWOOD: That's correct. 309 MR. RYDER: And will Union have a winter-peaking service requirement for subsequent years that may be covered by this case? 310 MR. ISHERWOOD: Maybe I can just explain how we get to winter-peaking service. Typically on winter-peaking service, the closest thing to winter-peaking service is really a build, a build option on our Dawn-Parkway system, and typically what happens when go to build a Dawn-Parkway loop or piece of pipe, it comes in very lumpy pieces. So typically you get 200- to 300,000 gJs per day of capacity being added in every incremental loop. There are very high capital costs of 20-, 30-, $40 million type of thing, and because the market doesn't grow in exactly the same fashion that you can add pipe, what we normally do between years where we build, we would actually use winter-peaking service to accumulate the market growth. So typically you would see it ramp up over time and then we would do a build to eliminate it and we've done that cycle for many, many years. 311 So I believe for this November we have a requirement of approximately 33,000 gJs and that grows the following November and we will accumulate any market growth on our system and supply it or serve it as winter-peaking service until such time that we do a build to essentially clear it out. So it's way of allowing the market to grow discreetly and then when it gets big enough and the economics makes sense, you would actually go ahead and do a build. 312 MR. RYDER: Thank you. So do you anticipate a winter-peaking requirement for further years after 2004, 2005? 313 MR. ISHERWOOD: Larry Hyatt is actually the fellow that does the converting the whole system into a winter-peaking service forecast. Directionally I would see the requirement continuing until we do a build directionally. 314 MR. RYDER: So it's part of the regular plan? 315 MR. ISHERWOOD: We've been doing that for a great number of years. 316 MR. RYDER: So where are we in the cycle now? 317 MR. ISHERWOOD: 33,000 would be the beginning. 318 MR. RYDER: We're at the beginning of the cycle? 319 MR. ISHERWOOD: That's right. 320 MR. RYDER: So we can expect the winter-peaking service for the next few years? 321 MR. ISHERWOOD: I think in terms of this actual case, we've brought forward two numbers, November 1 of '03 and November 1 of '04 and it -- I'm trying to think of the number of '04, I believe it's 94,000 GJS or thereabouts. 322 MR. RYDER: Are the cycles predictable? How long do they last? 323 MR. ISHERWOOD: It's not predictable. It really depends on the market and economy. 324 MR. NEWBURY: If I could just add, it's because of the peaking nature of the transmission system that for a limited volume or for a limited number of days, a peaking service might be an alternative. If you had a customer of more of a base-load limited requirement, we wouldn't be serving that necessarily with a peaking service, we would go to what Mr. Isherwood describes as a facilities build. What we have before us is a design day limited number of days or limited volume requirement and that's why it's a peaking service as opposed to a facilities build. 325 MR. RYDER: Well, did Union purchase a peaking service last winter? 326 MR. SIMPSON: On an actual basis, '02/'03 we did not. 327 MR. RYDER: What do you mean "on an actual basis"? 328 MR. SIMPSON: I mean we actually did not purchase any. 329 MR. RYDER: And are your peaking services structured in the same way? 330 MR. ISHERWOOD: The same way as which? 331 MR. RYDER: Well, each year, are they structured in the same way? 332 MR. NEWBURY: Do you mean the arrangement that we might strike to get this peaking service? 333 MR. RYDER: Yes. 334 MR. SIMPSON: I'm sorry, could you restate the question? 335 MR. RYDER: Well, are they a call on molecules or transportation service, how are they structured? 336 MR. SIMPSON: There are various ways that products can be put together to ensure the need that Mr. Isherwood defined and Mr. Newbury defined as met. The most common would be a transport or an exchange service so that a provider is giving us the opportunity to get molecules from one point, for example, Dawn, to Parkway, so they would provide transport from Dawn to Parkway, and throughout the winter period and the peak periods, we would provide the molecules from Dawn. 337 MR. RYDER: And so when you purchase the service, do you so through an RFP process? 338 MR. SIMPSON: Yes, there's a process in place when we acquire transport of any structure, that we get a market-sensitive price that reflects the costs for that particular product at that time. 339 MR. RYDER: Would you have bidders? Do you allow bidders for the service? 340 MR. SIMPSON: Yes, typically for something like this product, we would ensure, if the market had multiple participants, it could provide the product, that we would get two or three quotes to make sure that the price that we were paying for the product was representative of a fair market value price. 341 MR. RYDER: Does price always govern? 342 MR. SIMPSON: Could you be more specific? 343 MR. RYDER: Well, what criteria do you use to evaluate winter-peaking services? 344 MR. SIMPSON: Okay. Specific to winter-peaking service, we would define the volume and the conditions upon which we would want that service, and of course then the three -- in my example, three parties would bid on that and, yes, price would determine that. 345 MR. RYDER: And as a regular feature of the gas supply plan, it occurs -- we can expect, I take it, that a winter-peaking service of some sort will be in place year in, year out. 346 MR. ISHERWOOD: That's incorrect, I think. To the extent that we do a build, the build will take away any winter-peaking service requirement for that year and possibly for several years to follow, if the builders offer some excess capacity to the system. 347 MR. RYDER: We're in the early stage of the cycle now, so we can expect it for some years from now. 348 MR. ISHERWOOD: Some years being one, two or three type thing, that's right, until we build again. 349 MR. RYDER: And so in the cycle prior to now, say since 1998, have you been purchase peaking services from affiliates? 350 MR. SIMPSON: I'm sorry, the context of your question I was going to respond to was, in prior cases, specifically, I think, the last CRP, we got into some great detail in interrogatories from City of Kitchener about actual acquisitions of winter-peaking service. I believe it was -- I'm sorry, I'd have to look up the reference. You may recall that discussion from the CRP. So there was a good amount of information on the record with respect to historical actuals. 351 For this case, I believe it was 5.54 interrogatory that no, we've already spoke to the issue of affiliate for winter-peaking service at this point. 352 MR. RYDER: So you're referring me to one of our own interrogatories? 353 MR. SIMPSON: Yes, I am, 5.54. 354 Does the Chair have that exhibit? If I could direct you to part D of City of Kitchener's -- the answer to City of Kitchener's interrogatory, and then the last sentence that no affiliates were involved. 355 MR. RYDER: That's for the WPS for this summer, this winter, and next winter? 356 MR. SIMPSON: That's correct. 357 MR. RYDER: Right. What about recent -- for past years? 358 MR. SIMPSON: No. 359 MR. PENNY: Sorry, Mr. Chairman -- 360 MR. RYDER: I withdraw the question. 361 I think I may be done. Can I just have a minute? 362 MR. SOMMERVILLE: Yes, Mr. Ryder. 363 MR. RYDER: When you purchase peaking services during the course of the period following a major rate case, assuming we go into a new PPR process, are these transactions, as they occur, reported to the Board? 364 MR. NEWBURY: The gas supply plan throughout the PBR process would always speak to if Union was buying a winter-peaking service and, it's explicitly listed on the gas supply plan for each gas year. Whether Union has plans to -- as it is this year, whether it's PBR or cost of service, the gas plan will speak to Union's plans, yes. 365 MR. RYDER: So it would be addressed in the customer-review process. 366 MR. NEWBURY: That's correct. 367 MR. RYDER: My question is: Is it reported to the Board separately, to the ERO or to any other board official? 368 MR. NEWBURY: Outside of -- I'm sorry. 369 MR. RYDER: Outside of the customer-review process. 370 MR. NEWBURY: I'm sorry, I don't know. 371 MR. ISHERWOOD: It is not part of the ERO reporting typically. 372 MR. RYDER: Okay. So the only area, the only time to investigate these would be during the customer-review process? 373 MR. ISHERWOOD: Even the filings to the ERO are done within -- with confidence, so the public time to look at it would be during the CRP process. 374 MR. RYDER: Thank you. Those are my questions. 375 MR. SOMMERVILLE: Thank you, Mr. Ryder. 376 A question arises, Mr. Simpson, just with respect to your reference to paragraphs B of J.5.54, and as I understand that answer, it's simply that you haven't entered into contracting contracts for that winter-peaking service as yet, but you have sought indicative pricing; is that right? But that no affiliates were included in the list of persons or companies that you sought indicative pricing from; is that right? 377 MR. SIMPSON: That's correct. And I could just further add that our purchases to date have not included affiliates as either. 378 MR. SOMMERVILLE: Thank you. Thank you, Mr. Ryder. 379 Mr. Janigan. 380 MR. JANIGAN: Thank you, Mr. Chair. 381 CROSS-EXAMINATION BY MR. JANIGAN: 382 MR. JANIGAN: Thank you, Mr. Chair. 383 First of all, panel, am I to understand that if I have any questions on the March park deferral treatment set out on page 5 of your updated evidence, I should ask them of the other panel? 384 MR. ISHERWOOD: That's correct. 385 MR. JANIGAN: I wonder if you could turn up Exhibit D.1, tab 1, page 6, of the updated -- blue-page update. Do you have that there? 386 Union notes that it arranged two new firm transportation contracts since the original evidence was filed, and I understand that this is a firm contract for supply to Ojibwe via the Panhandle -- that eastern pipeline, one of these contracts; is that correct? 387 MR. ISHERWOOD: That's correct. 388 MR. JANIGAN: And who is selling this transportation to Union? 389 MR. SIMPSON: I might just -- for the Board's clarification, it's actually a Trunkline contract, and the parties that operate the Trunkline and Panhandle system, it's perhaps just worth understanding that the Trunkline is a pipeline that comes from the Gulf of Mexico, the Panhandle originates in the mid-continent, and they join at a point that ultimately leads up to Ojibwe. So the contract is ultimately on the Trunkline system that is feeding the supply basin from the Gulf of Mexico. 390 And to your question as to who was that acquired from, it was acquired through negotiations with the Trunkline entity as it has been in many years, and has been in the portfolio as such. 391 MR. JANIGAN: And is the Trunkline entity in any way related to Union, through its parent? 392 MR. ISHERWOOD: It is not. 393 MR. JANIGAN: There is no connection between Duke Energy and Trunkline? 394 MR. ISHERWOOD: No. 395 MR. JANIGAN: Okay. Now the other firm -- just revisiting that again, did Union produce any analysis that ensured that this transportation path was the lowest price option for supply at Parkway versus supply, for example, from the Alberta basin? 396 MR. SIMPSON: The evidence that's been submitted is speaking to landed cost of gas which takes into account transportation so within the acquisitions that Union has acquired for November '03, starting November '03, they are very competitive relative to other market options. 397 MR. JANIGAN: And the prices of other market options are set out somewhere else in the evidence, are they? 398 MR. ISHERWOOD: Exhibit J.18.227 goes part of the way to answering your question. 399 MR. JANIGAN: I might not have that. 400 I'm sorry, Mr. Chairman. I'm travelling light from Ottawa. Thanks very much. 401 Which part of this deals with the other options, price of the other options? 402 MR. SIMPSON: I'm just waiting to see if the Board had the exhibit. 403 MR. JANIGAN: I'm sorry. 404 MR. SOMMERVILLE: Thank you. 405 MR. SIMPSON: The question that was posed in this particular interrogatory spoke most specifically to the Vector capacity and on section D of that response, there's a comparison of the toll and the landed cost and as I alluded to, the landed cost, in this case, of Vector is extremely competitive in response to your directional question about Trunkline. It is also in the same neighbourhood as the landed cost of Vector. It wasn't part of that interrogatory, but it is at approximately $5.33. So is -- I'm sorry in terms of units that was U.S. dollars per MMBtu, the same as that interrogatory. 406 MR. JANIGAN: So if we plugged it into this interrogatory, the landed cost would come out about 5.33 U.S.? 407 MR. SIMPSON: Correct. 408 MR. JANIGAN: Now, with respect to the Vector pipeline, we've dealt with that a little bit in the last interrogatory. This transportation capacity was purchased from a Duke company as I understand? 409 MR. ISHERWOOD: That's correct. 410 MR. JANIGAN: And this analysis that's provided in that interrogatory was used to, in effect, justify the purchase on the basis it was the lowest cost option? 411 MR. ISHERWOOD: It supports the purchase, that's correct. 412 MR. JANIGAN: Now, I wonder if you could turn up D.1, tab 1, page 4 in the original evidence. It's set out here that there are a number of principles that the gas supply plan is designed to meet, and I want to look at the principle on line 8 that it's optimized the transportation assets in both the northern and eastern operations area, north and southern operations area, to minimize potential stranded costs by diverting TCPL capacity that is required to serve the north peak-day requirements to the south when such capacity is not required to serve firm loads in the north. 413 Now, the vertical slice that we've proposed for the south is set out in the blue-page update D.1, tab 1, schedule 1, I believe. That's the schedule that follows page 7 of the blue-page update. 414 MR. NEWBURY: Yes, we have it. 415 MR. JANIGAN: Now, it shows that the total system transportation portfolio is Alliance-Vector at 29 percent, Vector at 41.4 percent, and Trunkline at 29.6 percent, and there is clearly no allocation of northern TCPL capacity to the south. I was wondering how Union is going to optimize the northern TCPL capacity required for peak-day requirements if you're not indicating any diversions to the south? 416 MR. NEWBURY: Sure. The original evidence, the white-page evidence where we started on page 4 of 27, where we talk about our principle of optimizing our transportation assets by taking north capacity to the south when it's not needed is the same concept that we had last year when we were diverting about 14 Bcf a year to the south and included it in that year's vertical slice. 417 When you move forward to the schedule we are now talking about, Exhibit D.1, tab 1, schedule 1, that's Union's updated gas supply plan, the blue-page plan. Between the white-page plan, which was developed in 2002 and the two-page plan, which was developed in 2003, Union has undertaken negotiations with TCPL to remove the excess capacity that it had in its portfolio. That capacity came to its end of its primary term and Union has other arrangements in place now to meet the peak day and therefore, doesn't have that length in the north. 418 So the redesigned portfolio that's discussed at schedule 1, Exhibit D.1, tab 1, is the resulting southern portfolio after we've redesigned our northern portfolio and there's a bit of a description of that in our blue-page evidence. If you go to page 7 of 7, the updated version, which discusses Union concluded that negotiation with TCPL so we are still maintaining our peak day protection of the north, but we don't have as much length excess capacity in the north that we have to divert to the south. 419 MR. JANIGAN: Just to complete that thought, what are you doing to ensure that there is peak-day capacity in the north given the cancellation of the excess? 420 MR. SIMPSON: Just to help the Board understand in terms of peak day in the north, we're referring to what was at one time the old Centra franchise, and with weather-sensitive loads, of course, there's going to be peak conditions in the winter period, and leading up until this gas plan, those had been traditionally met with long-haul transportation and now that we've had the opportunity with those contracts coming up for renewal, we've been able to reduce the amount of long-haul and work out an arrangement where TransCanada have incremental STS service, which is the product that takes gas from Parkway back up into the northern areas. 421 MR. JANIGAN: I wonder if you could turn up Exhibit J.7.20 which is an interrogatory from the Consumers' Association of Canada. 422 MR. NEWBURY: Yes. 423 MR. JANIGAN: And I understand that Union's recent updated gas supply plan results in a decreased forecast of unabsorbed demand charge from 8.3 pJs to 4.0 pJs. 424 MR. NEWBURY: That's correct. 425 MR. JANIGAN: And the estimated UDC is predominantly allocated to rate 1. 426 MR. NEWBURY: That's correct. 427 MR. JANIGAN: What was Union's actual UDC for 2003. I suppose the year is not quite over yet, but what's the best estimate of what that's going to be? 428 MR. NEWBURY: We don't have an updated estimate of what the UDC will be. At 17.26, we're still holding the projected amount -- I'm sorry, IR 17.26. 429 MR. JANIGAN: And that amount is currently? 430 MR. NEWBURY: The estimate is 4.9 based on what is in the EBRO 499 rates. 431 MR. JANIGAN: At Exhibit D.1, tab 1, page 6, line 13 of the original evidence, I understand that you're not forecasting any UDC in the south. 432 MR. NEWBURY: That's correct. 433 MR. JANIGAN: Now, with Union's new contracted firm transportation commitments to the south, that's reported in the updates, is Union still forecasting no UDC for the south? 434 MR. NEWBURY: That's correct. 435 MR. JANIGAN: Now, in Exhibit D.1, tab 1, page 25, Union is proposing that a joint deferral account for UDC be established, joint being one deferral account for both the north and the south, as I understand; is that correct? 436 MR. DENT: That's correct. 437 MR. JANIGAN: And in the evidence, Union notes that the UDC will be a flow-through cost of customers. I assume that's a flow-through cost to customers. 438 MR. DENT: That is also correct. 439 MR. JANIGAN: Now, historically when Union has forecasted UDC, was there always a deferral account mechanism surrounding the over and under forecast to the actuals in both north and south? 440 MR. DENT: No. In the north UDC, there was always an element of UDC that was in rates, and then depending on whether that UDC target was hit or not, there could be a shareholder benefit or a shareholder cost. 441 MR. JANIGAN: And that's different from the treatment in the south which was -- 442 MR. DENT: Yes, that's correct. In the south there was no UDC in the plan served by the firm demand. It had some capability with the spot to manage some of the warmer-than-normal weather, and so the UDC was -- although it was relatively small volume, was always used as a pass-through. 443 MR. JANIGAN: Now, was UDC part of the other-purchased-gas account, or a subaccount of that other-purchased-gas account? 444 MR. DENT: There could be two aspects where the UDC could come in, and there was an exhibit that was distributed last Friday that perhaps we can take a look at again. 445 Mr. Warren, do you have that -- or Mr. Janigan, I beg your pardon. I bet Mr. Warren doesn't have that. 446 MR. JANIGAN: I don't have that exhibit, unfortunately. 447 MR. DENT: I have a board as well. There really are two elements where UDC could occur, and as has been -- as has been indicated in the other-purchased-gas account, there has been tracked a UDC in the past. Certainly in the warmer-than normal winter of 2001/2002, we certainly tracked the UDC in the other-purchased-gas account. And also, because what we described earlier with respect to the north, there always was some north, or almost always was some north UDC both in the rates itself as well as certain unplanned UDC as warmer-than-normal circumstances occurred. So we could have UDC in both of those charts, either the north toll and fuel account, or the other-purchased-gas account. 448 What we're proposing is that we will have one joint account, called an unabsorbed demand account, and if there is any UDC costs, those costs would be tracked in that account. 449 And of course we would be tracking not just the total unabsorbed demand account, but tracking where the source of the UDC was and then making a judgment in coming back to the Board to propose how that UDC would be disposed. 450 Conversely, though, if you had the planned UDC in the north, which is 4.9 pJs, and if indeed it's less than that, then that benefit goes back to the ratepayer, it doesn't stay with the shareholder. 451 MR. JANIGAN: Can you explain, though, Mr. Dent, how you're going to track that, and where -- how -- whether it's arisen in the north or the south. 452 MR. DENT: We're going to track that -- essentially how we track the UDC in the 2002/2003 situation, where if you have a warmer-than-normal winter, you come out of that winter and you're managing that length, that we have a -- that we will be taking a look at what is the cheapest cost option, tracking those costs; and then similar to what we do with the load-balancing costs, we will be essentially making a determination as to which rate classes generated those -- that UDC, and then making a recommendation to the Board. 453 In more of a normal type of year average, say average weather where we still might have UDC in the north but perhaps not in the south, we'd do a similar type of tracking, again to ensure that the cost causality is assigned to the appropriate rate classes. 454 MR. JANIGAN: Mr. Chairman, I have another -- I'm moving on to another topic here. This might be an opportune time for a break. 455 MR. SOMMERVILLE: We'll adjourn until quarter after 11. Thank you. 456 --- Recess taken at 10:55 a.m. 457 --- On resuming at 11:26 a.m. 458 PRELIMINARY MATTERS: 459 MR. SOMMERVILLE: Thank you. Please be seated. 460 Mr. Janigan. 461 MR. JANIGAN: Thank you -- 462 MR. PENNY: Mr. Chairman, before we begin, there were two preliminary matters I wanted to speak to, with apologies to Mr. Janigan. 463 The first, I don't get undertakings very often so I was pleased to be able to answer this promptly. The specific provisions of the Act that I was thinking of when I had raised that issue with Mr. Ryder this morning were three. There's section 36(4) of the Act which provides that an order -- that's, of course, the section that provides the Board with the jurisdiction to set just and reasonable rates, and it provides that: 464 "An order under this section may include conditions, classifications, or practices applicable to the sale, transmission, distribution, or storage of gas." 465 And then there is section 39(2) which provides to the Board the authority to approve the requirement that the Board approve all agreements to enter into or renew storage, and that is, in fact, a provision that the City of Kitchener has actually relied upon to bring its matters before the Board in the past. 466 And then most specifically, there is section 42(3) of the Act which provides that: 467 "Upon application, the Board may order a gas transmitter, gas distributer, or storage company to provide any gas sale, transmission, distribution, or storage service, or cease to provide any gas sale service." 468 So those provisions were what I was thinking of this morning when I said that a party was able to bring forward an issue as the kind -- of the kind mentioned. 469 The second issue, preliminary issue, Mr. Chairman, had to do with scheduling. I wanted to advise the Board that certainly the company is prepared to proceed on Wednesday afternoon. I gather that others may have submissions on that. But let me say before hearing from them that it would be our current -- based on what we know, we think that it's likely that we would finish this panel and perhaps Mr. Andrews on the GDAR and ABC issues today. It seems clear that there is only about, roughly, two or two and a bit hours of DSM material to deal with, so we would be making our affiliate panel available, in all likelihood, tomorrow afternoon and we're prepared to proceed on Wednesday afternoon as well. 470 And then I think with respect to the other off day which is scheduled towards the end of the month, perhaps we should at least think in terms of whether that date might be included, but we perhaps don't need to decide whether to leave that as an off day or not just yet, we can see where we are when we get closer. 471 MR. SOMMERVILLE: Thank you, Mr. Penny. 472 Mr. Shepherd. 473 MR. SHEPHERD: Mr. Chairman, the Board has convened an all-day meeting of the DSM advisory group on Wednesday which I have to attend and that would prevent me from cross-examining on affiliate transactions. 474 MR. SOMMERVILLE: I was made aware, I had forgotten actually about the DSM process so I've asked Mr. Moran to make such inquiries as he needs to and we'll come back to the question as to what we schedule, if anything, tomorrow. Thank you. 475 Mr. Janigan. 476 UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT 477 M.ISHERWOOD; Previously sworn. 478 D.NEWBURY; Previously sworn. 479 D.SIMPSON; Previously sworn. 480 D.DENT; Previously sworn. 481 CROSS-EXAMINATION MR. JANIGAN: 482 MR. JANIGAN: Thank you, Mr. Chair. 483 Mr. Dent, I believe you had a qualification to one of your answers that you wanted to put on the record? 484 MR. DENT: Yes, thank you, Mr. Janigan. 485 I think I may have done some overlapping of time periods and just wanted to clarify that since 499, there was about 1.8 pJs of UDC in south rates totalling about half a million dollars, again with the update of the gas plan for 2004, south UDC is now zero and the north UDC has been decreased as Mr. Newbury mentioned just before the break. 486 MR. JANIGAN: Thank you. 487 Panel, I take it that the gas supply plan is designed to ensure supply for both service-sales customers and bundled direct-purchase delivers; am I correct? 488 MR. NEWBURY: That's correct. 489 MR. JANIGAN: And if we look on page 7 of your original evidence, tab 1, page 7, Exhibit D.1, it sets out the requirements or the reasons that spot gas is required and as I understand it, spot gas is required for three reasons, if colder weather, the spot is required by Union to manage its seasonal and daily balancing requirements, that's one requirement? 490 MR. NEWBURY: That's correct. 491 MR. JANIGAN: Secondly, that spot is also used to balance sales-service demand variability, unforecast direct-purchase drafting and direct-purchase daily contract quantity reductions that result in upstream transportation capacity being returned to Union? 492 MR. NEWBURY: That is correct. 493 MR. JANIGAN: And lastly, winter spot gas may be required to ensure that Union's March 1st and March 31st storage inventory levels are sufficient to meet all firm storage deliverability requirements. 494 MR. NEWBURY: Yes. 495 MR. JANIGAN: Now, assuming that all your supply was in balance to meet Union's March 1st and March 31st storage inventory levels, it would appear from this evidence that spot gas may still be required if a direct-purchase customer drafted the system. 496 MR. ISHERWOOD: That's true under the existing load- balancing methodology. Once we have a chance to transform into the new load-balancing methodology, we will no longer be buying spot gas for south DP customers, direct-purchase customers. 497 MR. JANIGAN: Now, spot was could be required if a direct-purchase customer reduced his DCQ and returned upstream transportation capacity to Union; is that correct? 498 MR. NEWBURY: That's correct as well. 499 MR. JANIGAN: And spot gas may be required even under your new system if customers are out of daily balancing. 500 MR. ISHERWOOD: Can you explain, please? 501 MR. JANIGAN: Well, if customers are, in effect, they're not being asked to balance on a daily basis, direct-purchase customers, are they, under your new system? 502 MR. ISHERWOOD: No, they are not. 503 MR. JANIGAN: And spot gas might be required if customers are out of daily balancing regardless if their sales-service customers or direct-purchase customers. 504 MR. ISHERWOOD: I would typically say no to that only because we don't use spot gas to balance daily requirements, it's more seasonal requirements. 505 MR. JANIGAN: Now, when a direct-purchase customer renews its contract each year, Union determines if the DCQ should decline based on the previous year's consumption; is that correct? 506 MR. NEWBURY: That's correct, yes. 507 MR. JANIGAN: And at that stage there is a possibility of some upstream transportation being returned to Union? 508 MR. NEWBURY: That's correct as well. Once we've looked at their historic consumption and it's been normalized, if they've been allocated a greater degree of pipe, i.e., the 30-year methodology, we would be going to the 20-year methodology and that could cause a reduction. 509 MR. JANIGAN: And in that circumstance, rather than incur UDC, I assume that you would purchase some spot gas to make up that contract capacity because that has been returned? 510 MR. ISHERWOOD: Actually, based on the 20-year trend, that capacity would no longer be returned, so you'd return that capacity back to the pipeline company. 511 MR. JANIGAN: So in the circumstance where a direct-purchase customer DCQ has been reduced, it returns that capacity to Union, Union simply returns turns that now to the pipeline company? 512 MR. ISHERWOOD: I'd let Mr. Newbury answer this, but typically there is a lot happening, obviously, in any gas supply plan; there is new customer additions, there is people going to direct purchase, people coming back to system gas. There are a lot of variables happening. So at the end of all the planning, taking all those impacts into effect, if we were long on pipe then we would turn it back to the pipeline company, but there is generally growth in the system so we would absorb some of it that way as well. 513 MR. JANIGAN: So you don't foresee any circumstances where, where there has been a capacity returned to Union because of a reduction in DCQ, that you would have to purchase spot gas? 514 MR. ISHERWOOD: As long as our customer is on direct purchase, to the extent that they've returned capacity to us, and I can't think of an example during a normal weather, to the extent that we get into colder-than-normal weather, then we may be buying spot gas for the whole system. 515 MR. NEWBURY: The only thing I'd add to that is if that customer decided actually to return to sales-service system supply from Union and as served as a direct purchase customer they only had half of their capacity in hand when they came back, Union might be buying the balance of their annual demand as spot. That's the only thing I can think of. 516 MR. JANIGAN: And if you did that, where would the cost consequences be visited? Who would pick up the cost consequences, would it be the direct-purchase customer or would it be all system-sales customers? 517 MR. ISHERWOOD: In the example Mr. Newbury used it would be the rate class. 518 MR. JANIGAN: The rate class that the customer returned to? 519 MR. ISHERWOOD: That's correct. 520 MR. NEWBURY: Just a point of clarification, they're always a general-service rate class. If this is a case of residential, it's simply their supply source has moved from being direct purchase to Union supplying it, so the rate class didn't change, the rate class would take those costs. 521 MR. JANIGAN: Okay. Now, could an alternative to overpurchasing transportation capacity to avoid winter spot-price volatility be to use more storage capacity? 522 MR. NEWBURY: The problem with that approach is the storage capacity is based on the annual demand forecast which is driven by this method we keep discussing, the excess over average. To describe that a little more fully, the excess is talking about how winter average demand is higher than average annual demand and when you think of those two numbers and multiply it by the 151 days of winter, you come up with how much storage the customer requires in order to serve his excess winter demand relative to his average annual demand. 523 So setting aside more storage is outside of the storage allocation methodology. In order to do that, customers would no longer be tying their pipe requirements, their DCQ, to their average demand, they would be basically moving towards a system where they were just buying a bunch of spot at some point in the year hoping to put it in storage and perhaps burning it not knowing if they have their demand balanced with their DCQ balanced with their storage allocation. So I think it's an uneconomic -- 524 MR. JANIGAN: Well, let's go to your evidence that deals with your decision to hold more upstream transportation capacity unless there's spot gas to reduce your spot gas volatility. That's found in your original evidence at page 9, pages 8 and 9. 525 MR. NEWBURY: Yes, I have it. 526 MR. JANIGAN: Now, one problem that might occur by, in essence, increasing or overpurchasing the firm transportation capacity, this could cause UDC if there is a warmer-than-normal position, I assume. 527 MR. NEWBURY: That's an outcome, correct. 528 MR. JANIGAN: Now, is this the first time that you've increased transportation capacity to avoid winter spot price volatility? 529 MR. DENT: In my five or six years with Union, that certainly is the case, that this would be the first year that we have purchased incremental assets as a replacement for some measure of the spot gas. 530 I would, however, though, make a slight clarification. The same outcome, as far as avoiding some of these spot gas volatility, could be achieved by buying, for example, Dawn gas firm even dailies through the entire winter, November 1 through to March 31. You still would have some winter volatility, but you'd achieve the same thing by buying the spot gas, firm even daily, over the entire winter as you would with the pipe being purchased over the entire winter. 531 And, in fact, you'll recall from Mr. Simpson discussing the Vector purchase, that indeed Dawn -- buying at Dawn or buying Vector-delivered is essentially a similar price. 532 So you need to go beyond the price volatility of Dawn gas itself and think about the change in the environment at Dawn where there are a number of players that are substantially reduced. So by going to a Trunkline and a Vector supply basin, Chicago and into the Gulf of Mexico, rather than having five or six purchasers or sellers at Dawn, we now have suppliers of 15 to 20 at the Vector or at the Gulf of Mexico inlet, and so you get some supply diversity and some supplier diversity at those hubs which are greater than at the Dawn hub. 533 And then, secondly, what also occurred is that by buying that first 5 Bcf outside the Dawn hub, that at least in theory, it leaves another 5 Bcf to be purchased at Dawn by ourselves, and maybe others, in the event that it is continually colder than normal as it was last winter. 534 So it does moderate the price volatility a bit, but it helps us as well by broadening out the supplier group, broadening out the credit-worthy suppliers that we have to deal with as well. So there's a couple of other nuances where expanding that assists us. 535 MR. JANIGAN: Let's look at the other -- the alternative mechanism that I alluded to earlier, which is the use of storage. 536 I take it that Union currently has more storage capacity than it requires for infranchise customers. 537 MR. NEWBURY: That's correct. 538 MR. JANIGAN: And have you compared the cost difference of storage capacity at cost versus the cost of contracting for this additional transportation capacity as an alternative to purchasing spot gas in the winter? 539 MR. DENT: If you're looking at more than just a one- or two-year period but you look at, say, over a five- or six-year time frame, the value of winter gas versus summer gas is in the same ballpark. We did a bit of work, again for J.5.41. We showed the graph of the winter NYMEX versus the summer NYMEX prices, and the difference over the five-year average was about 10 cents. So it wasn't necessarily intuitive or obvious from that study that actually buying additional storage affiliated with summer-priced gas is any more economical than price purchasing that spot was in the wintertime, over the longer period. 540 MR. JANIGAN: Okay. So let's compare it to the alternative that you did take, which was essentially contracting for increased capacity. Have you done any comparison of costs between what it would cost to use that storage to basically deal with the same volatility problem that you have attempted to remedy by contracting for increased capacity? 541 MR. DENT: Well, again, the volatility that you see in the winter, you also see a similar type of volatility in the summer. Maybe not going back to 1998 or 1999, but certainly in 2000, 2001, 2, and 3, we see volatility in the winter and the summer of vary -- of a similar type of degree. 542 Again, I go back to my earlier point that, to my mind, what we're trying to do by buying the extra pipe is, to some extent, avoiding the March high-price day gas, but also it's really important that we get a more diversified supplier base. 543 When I think back to the winter of 2001/2002, we purchased 11 pJs of winter spot that year and we had 11 counterparties, and we purchased 97 percent of that supply from the top nine. Last year we purchased about 24 pJs of winter supply from six suppliers, 97 percent of which came from three suppliers. 544 So we really thought it was prudent to go -- to try to get back to a more -- to a supply basin which had 15 and 20 counterparties rather than three or four counterparties. 545 MR. JANIGAN: But I want to deal, particularly, not so much with the comparison of spot but the comparison of the alternative that you actually used and the costs that are associated with the increased transportation capacity versus the option of simply increasing the amount of storage that's available, and use that as the mechanism to deal with volatility problems. 546 Is there any analysis that's either in the evidence or that you've done that looks at those two alternatives? 547 MR. DENT: Well, there certainly isn't any in the evidence. I guess at a high level, if you compare the UDC impact of approximately 15 cents, if it's a warmer-than-normal year and we need to shed our Trunkline at 15 cents U.S., and I compare that against the cost of purchasing incremental storage on the market of anywhere from 50 to 60 or 70 cents U.S., then notionally you need to have about four winters where it's warmer than normal and you're incurring UDC to match the opportunity of buying the storage at, say, 60 cents and filling it with the summer gas. That 60-cent value would be roughly equivalent to what the difference between buying summer gas and buying winter gas at the time you acquired the storage, so kind of a four to one type of ratio. 548 MR. JANIGAN: Mr. Dent, I wasn't suggesting that you would acquire incremental storage, I was suggesting that you would use existing storage in a different way. And I assume that what that means is that there will be foregone revenues associated with the storage that you, I think, have accounted for in the interrogatory, the Kitchener interrogatory you referred to earlier. 549 But in that kind of analysis, can you speak to that, or give me the same kind of breakdown that you did in the supplemental interrogatory I referred to earlier. 550 MR. ISHERWOOD: I think the impact on storage, whether you're buying it or whether it's just less storage you have to sell, it's basically the same cost. It's the last incremental piece of storage you sold, whatever that market value is. 551 MR. JANIGAN: Can you recapitulate the results in the Kitchener interrogatory with the scenario that I've given you? 552 MR. ISHERWOOD: So comparing the option of actually having market-based storage off the market, filling it full of -- I think basically it is covered in that interrogatory in that we did assign the 2.7 pJs, did assign that the market value during the 2001 to 2002 years. 553 MR. JANIGAN: So I should be able to work through that calculation, given that interrogatory? 554 MR. ISHERWOOD: I believe so. 555 MR. JANIGAN: Okay. Now, I take it that Union gets a portion of the revenue generated from a sale of storage capacity through S&T sharing; am I correct on that? 556 MR. ISHERWOOD: That's correct. 557 MR. JANIGAN: Now, let me turn to the integrated joint accounts, and we discussed earlier the joint account that you proposed for UDC. I believe there's three joint deferral accounts for the integrated processes; that's UDC, the spot, and the inventory revaluation? 558 MR. DENT: That's correct. 559 MR. JANIGAN: And given the integrated nature of these operations between the north and south, can the operation in the one area cause cost impacts to the other area? 560 MR. DENT: No. 561 MR. JANIGAN: And when Union purchases spot gas molecules, does it know that the cost of that gas molecule purchase is due to a specific operational need in the north or south? 562 MR. DENT: No, at the time that we purchase those molecules, we know that we're below the March 31 inventory line, but we don't have a clear understanding of who may have driven it until after we get the actual meter-reading data. This is why in the May QRAM we had a forecast of those to recover the load-balancing costs, but it wasn't until six or eight weeks following the end of March that we were able to put together the full story, and therefore, we updated the load-balancing impacts based on having the actual information available. 563 MR. JANIGAN: And that actual information available I think you referred to as metering information available? 564 MR. DENT: Yes, for the general-service customers, they're not necessarily getting daily reads as you might with some of the larger industrial customers, so again, there is some lag in when the gas is consumed and when the meter read occurs, so there is a need to make sure that we have the best actual information based on the full meter read. 565 MR. JANIGAN: And Union is proposing to allocate the spot gas purchases for each operational area on a different basis; is that correct? 566 MR. DENT: No, the basis is the same, it's the consumption in excess of forecast. 567 MR. JANIGAN: Well, as I understand it from your evidence on page 24, that in the north, Union will continue to provide upstream transportation and load balancing for both sales-service customers and bundle-direct-purchase customers and as a result, Union is going to allocate the spot purchases to both sales-service and bundle-direct-purchase? 568 MR. ISHERWOOD: I believe that paragraph is in the context of the new load-balancing proposal, so in 2005, when we're fully into the new load-balancing methodology, this paragraph would be true. Historically and for 2003, our proposal is to allocate costs based on consumption excess of forecast and that would be consistent with both the north and the south. 569 MR. JANIGAN: Okay. So in the future, this is what is going to occur, that in north you will allocate spot purchases to both sales-service and bundle-direct-purchase customers and in the south you will be allocating the all the spot purchases to sales- service customers? 570 MR. ISHERWOOD: That's correct based on the fact that the direct-purchase customer in the south will be supplying their own spot gas to balance the two points. 571 MR. JANIGAN: But I think as we have established, direct-purchase customers will not be responsible for daily load balancing. 572 MR. ISHERWOOD: That's correct. 573 MR. JANIGAN: And the load-balancing proposal doesn't mean the direct-purchase customers can't lower their DCQ and return the capacity back to Union. 574 MR. ISHERWOOD: The return capacity back to us based on their weather-normalized forecast going into the current contract year. 575 MR. JANIGAN: And direct-purchase customers in the south will still be able to draft the system. 576 MR. ISHERWOOD: That's correct. 577 MR. JANIGAN: Now, some of the direct-purchase customers on Union have weather-sensitive loads such as a marketer who sells to residential customers. 578 MR. ISHERWOOD: That's correct. 579 MR. JANIGAN: And under your proposal, these direct-purchase customers who purchase their gas from a direct-purchase marketer won't be responsible for their spot-gas cost from the south. 580 MR. ISHERWOOD: In the new proposal, once it's fully implemented, any spot gas required to balance the sales or the direct-purchase general-service customer would be the responsibility of the marketer if it was colder than normal. 581 MR. JANIGAN: But in circumstances that we've gone through where direct-purchase customers may incur a requirement for spot gas, that's not going to be passed on to the customers of the direct-purchase market. 582 MR. ISHERWOOD: With the new proposal, that's correct. 583 MR. JANIGAN: Okay. Now, we have visited the UDC account and as I understand it, under Union's proposal, Union is proposing for the north to recover the UDC and the difference from the cost in rates to all bundled customers, that's both direct and sales? Am I correct on that? 584 MR. DENT: That's correct in the north the transport is occurring to both sales service and direct-purchase customers. 585 MR. JANIGAN: And in the south, there is no UDC forecasted and to the extent there is any UDC it will be recovered from south sales-service customers only? 586 MR. DENT: That's correct. Again, for the same reason on the load balancing where south direct-purchase customers would be purchasing incremental supply, they'd also have an obligation to shed pipe or have their own UDC in the summer in the case of a warmer-than-normal situation. 587 MR. JANIGAN: And in the circumstance, Ix think we've visited the circumstance, where there is a return of capacity by a direct-purchase customer, Union believes that no UDC would be incurred in that circumstance? 588 MR. NEWBURY: We don't have customers migrating between direct purchase and sale service in our gas plan, and that's the basis for our statement that in the south there is no UDC that would be incurred. Since the majority of the customers are now operating towards the 20-year methodology, they've worked the capacity length that they have in their portfolio out. And any capacity that got returned to Union, we in turn have the flexibility again in our portfolio to return that to the upstream provider. And then I would just add to that, Mr. Isherwood's statement that at the same time, we do have infranchise growth that we would not necessarily even have to return capacity to the upstream provider which may deploy it against the infranchise growth that we are serving. 589 MR. JANIGAN: And as I understand it, there is no cost associated with returning the capacity to the upstream provider? 590 MR. SIMPSON: Maybe I could just answer that question. Of course, as Mr. Newbury outlined, we have some flexibility within our portfolio for these very reasons; however, if a contract is up for renewal, when we say we're turning back capacity, what we're really doing is renegotiating it at a lower level for that next period. 591 To the extent that there was a significant plant closure or extreme circumstance that did return pipe to us and we did not have a contract up for renewal, then we may get into a circumstance. So I did not want to suggest that we would never incur UDC, I wanted to elaborate a bit further in terms of causes and flexibilities to adapt. 592 MR. JANIGAN: Thank you panel, those are all my questions. 593 MR. SOMMERVILLE: Thank you, Mr. Janigan. 594 Mr. Warren. 595 MR. WARREN: I have no questions for this panel, Mr. Chairman. 596 MR. SOMMERVILLE: Mr. Shepherd. 597 MR. SHEPHERD: I have no questions either, Mr. Chairman. 598 MR. SOMMERVILLE: Ms. Singh. 599 CROSS-EXAMINATION BY MS. SINGH: 600 MS. SINGH: Good morning, panel. 601 If as a result of using the 20-year methodology the actual volumes turn out to be higher than the forecasted volumes, what happens to the additional revenue that is collected by Union does it get returned to the ratepayer or does Union retain the excess? 602 MR. ISHERWOOD: I believe in the event that we have colder-than-normal weather then through-put would be higher than forecast and the shareholder would benefit in that situation, and likewise on the other side, if it was warmer-than-normal and through-put was less than forecast, a shareholder would earn less than expected that year. The whole focus of the 20-year trend is to find the balance point where those two events are equally probable. 603 MS. SINGH: Am I correct in my understanding that Union's evidence suggests that a 20-year trend methodology would reduce the capital requirements for storage and pipeline expansion as compared with the 30-year methodology? 604 MR. ISHERWOOD: It shouldn't affect capital. I'm not sure of the reference point, but in terms of upstream transportation, we have identified that there would be about 19,500 gJs of capacity that we no longer need under the 20-year trend, and that would be capacity that would be on upstream pipelines outside of our capital requirements. 605 In terms of the actual storage, it implied the 20-year trend requires 2.7 petajoules less than the 30-year average, and that's just capacity that, in effect, will not be renewed by third party storage providers next year. So it doesn't really affect our capital; it may affect other parties. 606 MS. SINGH: Could I refer you to Exhibit M.2.3, that was some cross-examination material that was presented by Mr. Shepherd on October the 7th. It has a colourful drawing in it. If you could just turn up page 5 of that exhibit. 607 On October the 7th, when panel 3 was testifying, Mr. Shepherd asked Mr. Fogwill the following question. This was at paragraph 943, and I'll just read it to you, for ease of the Board: 608 "I wonder if, Mr. Fogwill, you can turn to page 5 of our cross-examination materials. This is Exhibit M.2.3. All this does, and this is just math, it just extends your current trend line that's predicting 2004 out another 20 years. The trend that you've identified in the last 20 years implies that 20 years from now, we will be at around 3,200 heating degree days. Is that what you think is going to be the case?" 609 And Mr. Fogwill responded: 610 "No, no, this is inaccurate in terms of representing our method. Our method is recalculated each year. So the slope of this line is only good for one year, our test year, and then next year we'll recalculate it again and we'll get a new slope and it will be good for the following year, so on and so forth." 611 And Mr. Shepherd asked: 612 "Didn't you just tell us it had no predictive value for next year?" 613 And Mr. Fogwill responded: 614 "We're not identifying it as being used for predictive value, we're identifying it as used for a benchmark for planning purposes. And what that benchmark will say is that when you recalculate the 20-year trend, you're going to get a new slope of the line, a new estimate." 615 Given this exchange, I was wondering if you could please explain how Union would go about making its capital asset planning decisions, storage, pipelines, and so on, on the basis of identifying the slope of the line for one year, on a 20-year trend, and not extrapolating out beyond that point. 616 MR. PENNY: Mr. Chairman, this may be a question of terminology, but this panel is not dealing with capital assets, there's another panel that will be dealing with capital assets. This panel is dealing with the gas supply plan and the purchase of upstream transportation and the operational impacts, not the capital impacts, of the 20-year trend. 617 MR. SOMMERVILLE: Thank you, Mr. Penny. 618 Ms. Singh, you can continue. 619 MS. SINGH: Can you answer that question? 620 MR. NEWBURY: As I take the sense of what you're asking the gas supply panel, is every year, our demand forecasting people issue their new demand forecast. Once that has been completed, the gas supply planning group takes that forecast and constructs next year's gas plan. And from that philosophy that it brings together, the acquisition group makes its acquisition decisions. 621 That exercise is repeated every year, and with the flexibility that we now have, we don't have any 20-year decisions that are made in any particular gas supply planning year. We have the flexibility to revisit those decisions every year based on the most up to date demand forecast information. 622 MS. SINGH: So would that have changed, then, from the 20-year to the 30-year? It sounds as though that's not a change. 623 MR. NEWBURY: The gas supply planning scheduling that I've just described, the philosophy is such that it didn't matter whether it was a 30-year planning or a 20-year planning methodology that we used for our base line. Every year, beginning roughly in the early summer through to the mid-summer, we conduct our gas-supply planning around that base line demand forecast. Does that answer your question? 624 MS. SINGH: I think it does. 625 And I'll ask the capital asset portion of the question to -- which panel would it be, panel number 10? 626 MR. NEWBURY: I believe if you're wondering about Union's transmission line, the Dawn-Trafalgar line, you would be speaking to Larry Hyatt. 627 MS. SINGH: Thank you. 628 Am I correct in assuming that there is no mechanism in place which, after the fact, would reconcile over and under actual volumes relative to forecasts and Board-approved levels? 629 MR. ISHERWOOD: The process is really through the cost recovery for the year. So, for example, the past winter was extremely cold so we had very high levels of spot gas, and that's a topic in this hearing. In past hearings where we had warmer-than-normal weather, the topic was UDC, primarily. 630 MS. SINGH: So is there a mechanism in -- 631 MR. ISHERWOOD: That is the mechanism. It's through the annual hearing or the review process. 632 MS. SINGH: And is that -- does that occur every year? Sorry, I'm not familiar with it. Maybe you could just explain. 633 MR. ISHERWOOD: We've had customer review processes every year during the PBR time frame, and we're currently in a major rate case, obviously, for the 2003 cost of gas. 634 MS. SINGH: So that will occur then? 635 MR. ISHERWOOD: It has historically. 636 MS. SINGH: And that CPR process is, in your evidence, the mechanism that adjusts the difference between the 30-year trend -- the 30-year average and the 20-year methodology if there is, in fact, a discrepancy between the -- 637 MR. ISHERWOOD: No. The CRP process, or the rate cases process, would really bring before the Board and intervenors all the gas costs for full discussion and review. So it's not really necessarily a discussion between 30-year and 20-year; the discussion is were the gas costs incurred prudently. 638 MS. SINGH: Okay. So that's probably a different answer, then, than the question that I was asking, which was, you know, basically, is there any mechanisms, such as an account, you know, a deferral account or whatever, that would reconcile the over or under actual volumes relative to forecasts and Board-approved levels? 639 MR. ISHERWOOD: Yes, I believe Mr. Dent has testified that there's really two accounts that we're proposing, going forward; there would be a joint UDC account, which would really apply in warmer years, and we would have a joint spot gas account, which would really apply in colder-than-normal years. 640 MS. SINGH: So would those two accounts, would it be your evidence that they would basically make the discussion about the 30-year average and the 20-year trend somewhat academic? 641 MR. ISHERWOOD: Those accounts will attract credits or debits based on the 20-year trend. Given operations, we've already adopted that trend line. So the base line would be the 20-year trend. 642 MS. SINGH: Okay. 643 Those are my questions. Thank you. 644 MR. SOMMERVILLE: Ms. Singh. 645 Mr. Aiken. 646 MR. AIKEN: Thank you. 647 CROSS-EXAMINATION BY MR. AIKEN: 648 MR. AIKEN: Good afternoon, panel. I just have a couple of brief questions. 649 First of all, on Exhibit D.1, tab 1, page 3 updated, is Union proposing to provide the Board with an update to the numbers in table 1 to reflect the October QRAM change? 650 MR. DENT: We can provide that to the Board, to update for the most recent QRAM. 651 MR. AIKEN: Could you also provide an update to the prospective balance recovery? That's the 105 million shown on the top of page 4. 652 MR. DENT: Yes, we can do that as well. 653 MR. AIKEN: Would you undertake to update both of those for me, please? 654 MR. DENT: Yes, we would be glad to do that. 655 MR. MORAN: Mr. Chair, that would become Undertaking N.10.2, an undertaking to update Exhibit D.1, tab 1 to reflect the October QRAM. 656 UNDERTAKING NO. N.10.2: TO UPDATE EXHIBIT D.1, TAB 1 AND TAB 4, APPENDIX B TO REFLECT THE OCTOBER QRAM 657 MR. SOMMERVILLE: Thank you, Mr. Moran. 658 MR. AIKEN: On page 5 of the updated evidence, there's a section titled The March Park Deferral Treatment. My question here is request is the March Park deferral being included in the joint spot account rather than having a separate account for itself. 659 MR. ISHERWOOD: If we could refer those March Park questions, there will be a whole load-balancing panel with Ms. Van Der Paelt and myself and others. 660 MR. AIKEN: Then my final question was covered somewhat this morning by Mr. Ryder on the winter-peaking service, and I believe it was you, Mr. Simpson, who gave a response that there was no winter-peaking service on an actual basis for this past winter, the winter of '02/'03; is that correct? 661 MR. SIMPSON: That is correct. 662 MR. AIKEN: Was there a winter-peaking service on a planned or on a forecast basis for that winter? 663 MR. SIMPSON: I'm not entirely clear because I believe the last time that was reviewed would have been in the 499 case and I'm sorry, I'm not completely familiar with that. 664 MR. AIKEN: Well, how would the 499 case deal with the winter of '02/'03? 665 MR. PENNY: The confusion perhaps is about what winter-peaking service and whether it's in rates or not perhaps, but I gather that's not your question. 666 MR. AIKEN: No, I guess on a gas-supply planning basis did you plan on having a winter-peaking service for the winter of '02/'03? 667 MR. NEWBURY: It would show up in the gas plan that was used in the last CRP, in the same spot both in Mr. Hyatt's evidence and in mine, we just don't have it in front of us to recall if there was a value or what that value was but it would show up in the gas purchase expense schedule that was filed with that on the second page. 668 MR. AIKEN: Okay. And then given that you said there was nothing object an actual basis, can I assume from that that there was actually no contract entered into for a winter-peaking service, even if it was there on a planned or forecast basis, but on an actual basis no contract was entered into? 669 MR. SIMPSON: That's correct. 670 MR. AIKEN: Okay. Thank you. 671 Thank you those are my questions. 672 MR. SOMMERVILLE: Thank you, Mr. Aiken. 673 CROSS-EXAMINATION BY MR. DeROSE: 674 MR. DeROSE: Good morning, panel, my name is Vince DeRose. I'm here on behalf of IGUA. Mr. Dent and Mr. Isherwood I've met before, Mr. Newbury and Mr. Simpson, I don't believe we've met. I'm Vince DeRose, I work with Peter Thompson, whom I believe you do know. 675 My questions today will relate almost entirely with respect to the UDC in the north and as Mr. Janigan has already gone over this, I don't believe I will be very long. But first of all, as a preliminary issue, you've just given an undertaking to Mr. Aiken to update table 1 and the following paragraphs on Exhibit D.1, tab 1, page 3 of 7 and 4 of 7. 676 When you update those gas cost deferral balances, is it a problem to also provide the allocation of those deferral accounts by rate class? 677 MR. DENT: No, we wouldn't have that by rate class, at least the gas supply group would not. The allocations would need to come through Mr. Kitchen's group; however, I would point out that the imbalances on the load balancing as noted on page 4 of 7 updated, those are based on actuals so they will not change. 678 MR. DeROSE: Okay. So table 2 would not be impacted by the update that you would be providing Mr. Aiken? 679 MR. DENT: That's correct. And, in fact, the load-balancing costs themselves as outlined on table 1, page 3, line number 2 in the table of 44.837 million, that number will not change with the update as well. 680 MR. DeROSE: Okay. Thank you very much. That's helpful. 681 If I could have you turn to Exhibit J.17.26 this is an interrogatory by IGUA. And if it's of assistance to the panel, that's the only exhibit that I intend to refer to and the only other item that may be of use to have in front of you is the colour chart that you have behind you. I suspect you may refer to it, Mr. Dent, in response to some of my questions. 682 MR. NEWBURY: Yes, we have the interrogatory. 683 MR. DeROSE: Now first of all, panel, if I understood your exchange with Mr. Janigan, the 3.4 million which is the projected cost for 2004, that amount would be the UDC charge embedded in rates for 2004; is that correct? 684 MR. NEWBURY: That's correct. 685 MR. DeROSE: And the proposed joint UDC account would not change the fact that that will still be embedded in rates for 2004; is that right? 686 MR. DENT: That's correct. 687 MR. DeROSE: Now, there's no embedded UDC in the south, is there? 688 MR. DENT: Not proposed, that's correct. 689 MR. DeROSE: And why is there no embedded UDC in the south but there is in the north? 690 MR. NEWBURY: The cause of the northern UDC has to do with the peaking nature of the north and Union needs to pre-arrange upstream capacity in order to serve the north on its peak day and by peak day, what I'm speaking about is the general-service rate class, we look at how much demand they would call off of the TransCanada Pipeline, the only pipe serving them in the north, how much demand they would have, and to that we add the firm commitments that Union has with its contract-rate customers and you arrive at a number that's just slightly under half a Bcf a day on a peak day. So Union needs to prearrange to have that capacity available to serve the north on a peak day. 691 On a seasonal basis, though, you don't need that much capacity so you come to a point where the capacity should not be filled because the molecules will have nowhere to go and that's where the estimate of 4.0 pJs is coming from. It's the capacity in place on TransCanada to serve the firm loads in the north on their peak day. 692 The same situation does not exist in the south, the transmission capacity serving the south is our Dawn/Trafalgar line. 693 MR. DeROSE: Thank you. And as I understand it, currently there's no true-up mechanism for UDC in the north; is that right? 694 MR. DENT: That's correct. 695 MR. DeROSE: So if I can take you to Exhibit J.17.26, for instance, in 1999, the actual volumes were less than the projected volumes. That would not have been trued up, that would have been a shareholder benefit for that year; is that right? 696 MR. DENT: Just looking at the numbers that would be correct, but again, there are some other factors that impact that, for example, rate-class switching, et cetera, which may not make the numbers a true representation of the shareholder win or loss, but directionally, just looking at the numbers, your interpretation would be correct. 697 MR. DeROSE: And conversely, I mean, to be fair in 2001 and 2002, your numbers on the volumes show that there would have been a shareholder loss; is that right? 698 MR. ISHERWOOD: I think you have to go beyond just -- those numbers are actually volume numbers. If you look at the actual cost, what the UDC cost was each year, there's a market value for pipes. So to the extent that you show higher volumes or lower volumes, you have to also take into account what the actual market value of the pipe was while you're doing that. As well, because Union has integrated systems, it's sometimes possible to get some of the north UDC covered and filled as spot gas going into the south. 699 MR. DeROSE: Okay. Now, on Exhibit J.17.26, you did not provide the actual costs, was there a reason why that wasn't provided? 700 MR. NEWBURY: I just wanted to understand, is that the line marked "Projected and Incremental" that we're speaking to? 701 MR. DeROSE: Well, Mr. Isherwood just indicated to me that you need to look at the actual costs. And for volumes, you've provided the actual and the projected, but for the costs at line 5, it appears you've only provided the projected, not the actual. 702 MR. ISHERWOOD: I think line 6 gets to the actual. It shows an incremental cost for 2002 and I'm assuming that would be the incremental cost that you're ... 703 MR. DeROSE: So do I understand you right, that for 1999 to 2001, the actual costs were 2.2 million, and for 2002, the actual costs were 3 million? 704 MR. ISHERWOOD: I think for '99 and 2000, what that's saying is there was no incremental costs. There may have been a cost savings but there was no incremental cost. But there was an incremental cost for 2002. 705 MR. DeROSE: Can you tell me what caused the incremental cost in 2002? 706 MR. ISHERWOOD: It would be the actual volume of 11.6 relative to 4.9. What's interesting, and to my earlier point, 11.6 versus 4.9, you would expect the cost potentially to be twice as high, and what I'm saying is the market value obviously allowed us not to have that full hit. 707 MR. DeROSE: Okay. And I take it that's why, in 2001, even though you had 6.4 instead of 4.9, it was still 2.2. 708 MR. NEWBURY: Yes. 709 MR. DeROSE: Now, if the Board approves the joint UDC account, will there be a true-up mechanism into the future in the north? 710 MR. DENT: Yes, that's correct. If, indeed -- using the example of J.17.26, 3.4 million is in rates. If, indeed, there is a lower UDC, or if the brokering revenues are higher than forecast and maybe the cost is only, say, 3 million, for example, then $400,000 will be returned to the ratepayer. 711 MR. DeROSE: And conversely, I assume that if the actuals are substantially higher than the projected, the company would be free to come back to the Board to seek further recovery. 712 MR. DENT: Yes, that's correct. We envision a symmetrical relationship here. 713 MR. DeROSE: And am I right to assume that, in terms of the true-up of the joint UDC account, in terms of the allocation of the UDC and the tracking of a future true-up, if it happens in the future -- sorry, this is very confusing. Let me will he phrase it, Mr. Isherwood. 714 Assuming that a true-up occurs at a future date of the joint UDC account, I assume intervenors will have an opportunity, at a future rate case, to review both the allocation and the true-up. 715 MR. ISHERWOOD: Absolutely. 716 MR. DeROSE: Okay. Thank you. 717 Those are all my questions. 718 MR. SOMMERVILLE: Mr. DeRose. 719 Mr. Rowe? 720 MR. ROWE: No, thank you, sir. 721 MR. SOMMERVILLE: Mr. Dingwall. 722 MR. DINGWALL: I'll be a little bit of time, and I see we're heading past the noon hour to around 12:20. I'm wondering if it might be appropriate to break at this point. 723 MR. SOMMERVILLE: We'll reconvene at 2:00. 724 MR. DINGWALL: Thank you, sir. 725 --- Luncheon recess taken at 12:18 p.m. 726 --- On resuming at 2:06 p.m. 727 MR. SOMMERVILLE: Please be seated. 728 Are there any preliminary matters before we continue? 729 Mr. Dingwall. 730 CROSS-EXAMINATION BY MR. DINGWALL: 731 MR. DINGWALL: Thank you, sir. 732 Good afternoon, panel, my name is Brian Dingwall. I'm counsel for Energy Probe in this matter, and I hope I won't take up too much of your time this afternoon. 733 In looking through the volumes of binders that we've seen over the past few years, it looks like since I last had the opportunity to question the Union Gas supply panel there have been significant strides in the information technology that enables you to gather information with respect to the system operations. Would you say that's correct? 734 MR. NEWBURY: Certainly as a general statement, yes. 735 MR. DINGWALL: So is Union Gas, then, able to have a snapshot of what's going on with its system operations on a more frequent basis than in the past five years? 736 MR. ISHERWOOD: It's certainly true in terms of a total system operation in terms of how much inventory we have in storage, that type of thing. Obviously, with the general service rate they're still billed in cycle billing which goes in between months and such, so that part of the market is difficult. The contract market is certainly the day-after type information and the system operation in terms of the total system operation is day-after-type information as well. So it is better than perhaps it was a few years ago. 737 MR. DINGWALL: And with the Union line system now, other participants are starting to gain a little bit more of a view on system operations as well? 738 MR. ISHERWOOD: Yes, that's true. 739 MR. DINGWALL: What or how frequently does your group gather system-operational information such as understanding what's being used on a per-class basis, understanding where that's coming from, how much of that might be coming from storage, whatever? 740 MR. ISHERWOOD: Actually, we have a group directed by Mr. Poredos, the capacity management group, that does that exclusively for us, and they feed that information to the acquisition team if we need to act on acquiring more spot gas, for example, or any other issues that may developed. 741 MR. DINGWALL: How often do you receive that information? 742 MR. ISHERWOOD: Constantly. We're on the same floor so we're constantly receiving that information. 743 MR. DINGWALL: Does that mean quarterly? 744 MR. ISHERWOOD: Daily, hourly. 745 MR. DINGWALL: Hourly. 746 MR. ISHERWOOD: It's constant. 747 MR. DINGWALL: And this travels from Mr. Poredos' capacity management group to gas supply? 748 MR. ISHERWOOD: Yes. 749 MR. DINGWALL: Does that travel to any of the other business units? 750 MR. ISHERWOOD: I'm not sure, Mr. Poredos would have to address that. But certainly we get the information from the gas acquisitions point of view. 751 MR. DINGWALL: And Mr. Dent, you're on the risk management committee, does this type of information get to them on the same frequency? 752 MR. DENT: The risk management is really dealing with the commodity portfolio itself so in terms of how we're managing the commodity risk in the portfolio, we're really looking at the assets we're filling with commodity, the firm transportation, and making recommendations to that committee so the capacity management information has relatively little to do with that aspect of it unless there may be an event such as a warmer-than-normal winter and then there may be some assets which are removed from the portfolio and consequently we have fewer assets to hedge. 753 MR. DINGWALL: Now, when you say assets being removed from the portfolio, is that based on a decision of gas supply or capacity management or risk management? 754 MR. DENT: No, that would be capacity management who looks at what the inventory levels are, for example, coming out of a warmer-than-normal winter. And in order to manage that, as we did in the summer or following the winter of 2001/2002, we may have intended in the gas plan to fill those assets but as it turns out during that summer, we actually left about 30 pJs empty in order to rebalance the system. 755 MR. DINGWALL: Now, gas supply would have as you say, and correct me if I am wrong, a view on an hourly basis of what Union's storage usage would be; is that correct? 756 MR. ISHERWOOD: No, I may have mischaracterized that. We are talking to the capacity management group on a constant basis. In terms of the actual use of the storage, capacity management group is looking at those type of numbers and converting that into an action, if you want, for the acquisition group to take part in. 757 So from my perspective, I'm not really storage-use type of numbers, that's really being done through the capacity management group. And what I'm really seeing is some action coming out of that if there needs to be more action or whether as Mr. Dent has alluded to, incurring more UDC or that type of thing. 758 MR. DINGWALL: So how often do you see storage reports? 759 MR. ISHERWOOD: I typically don't see storage reports. 760 MR. DINGWALL: Do you do you know how often they are prepared? 761 MR. ISHERWOOD: I think the capacity management group throughout the winter is looking at an inventory curve, and I'm not how often they prepare that, but I would see results in terms of we're off the curve by 2 or 3 Bcf, for example, and need to go buy some spot gas as occurred last winter. So I would be seeing that type of discussion with the capacity management group rather than actual storage numbers. 762 MR. DINGWALL: So you receive kind of a variance report associated with the curve that you are dealing with? 763 MR. ISHERWOOD: When we have the discussion with the capacity management group, it's really around an action or activity that's required and we are not really seeing the variance per se as the action is required and how much volume, which I guess is really driven by the variance, but we are not discussing it in terms of variance, we are discussing it in terms of an action required. 764 MR. DINGWALL: So who directs the action? 765 MR. ISHERWOOD: Capacity management group is a group that is looking at the inventory curve and determining if any action is required. 766 MR. DINGWALL: Now, is that with respect to buying spot gas or is that with respect to use of storage; what's that with respect to? 767 MR. ISHERWOOD: The example I used was buying spot gas. 768 MR. DINGWALL: In addition to that example, what other actions are directed to you? 769 MR. ISHERWOOD: Another action would be around unabsorbed demand charge or if we are coming out of a winter long on gas supply, then the capacity management group would identify that and direct us to start to leave some pipe empty so that we can bring our balance back in line for the following fall. 770 MR. DINGWALL: Now, with respect to your gas acquisition decisions, I take it they're made primarily around the annual forecast; is that correct? 771 MR. ISHERWOOD: They're made relative to Mr. Newbury's gas supply plan, that would be the basis. 772 MR. DINGWALL: And that supply plan is a plan made at the beginning of the year; is that correct? 773 MR. NEWBURY: That's correct, yes. 774 MR. DINGWALL: And on the basis of that supply plan, decisions are made as to how much storage is needed for system integrity; is that correct? 775 MR. NEWBURY: No. Storage for system integrity is an established and set number, it's 9.1 Bcf, the supply plan doesn't impact that, that's an asset that Union has as the system operator. It's not part of the gas supply planning process. 776 MR. DINGWALL: And the transportation needed to get the forecasted gas to system would be based, again, at the beginning of the year on the forecast numbers; is that correct? 777 MR. NEWBURY: That's correct, yes. 778 MR. DINGWALL: For planning purposes, does gas supply update that forecast within the year or live with that forecast as it is? 779 MR. ISHERWOOD: Once Mr. Newbury's completed his gas supply plan for the year, that plan is then released to the capacity management group and they would then begin to have a more active plan throughout the year to respond to changes in the economy, weather, et cetera. 780 MR. DINGWALL: With respect to the use of assets, and with respect to determining whether the storage that you have is sufficient or not on an ongoing basis, where would that decision be taken? 781 MR. ISHERWOOD: Within the context of the actual year, it would be within the capacity management group. 782 MR. DINGWALL: And how often or how frequent would that be reviewed? 783 MR. ISHERWOOD: I believe it's an ongoing process. 784 MR. NEWBURY: If I just might add one thing, the gas supply planning process, storage begins to be filled at the beginning of spring through the fall. You don't, in the middle of winter, then, decide to allocate more storage and fill it to meet, for instance, demand being above expectations. So it's really storage, once it's set against the annual demand forecast, is, I'll call it, a base line assumption that isn't then, in the midst of winter, recalibrated or reset. That's basically the asset that you have in place now that you are in a post-November period. 785 MR. DINGWALL: Could you go through, for the record, the three components of the system integrity storage. 786 MR. NEWBURY: Sure. The function of it, as we agreed to in RP-99, was for weather and that specifically is for the non-daily metered general-service customers, the ones Union doesn't have day-to-day information about. The function of that is, in an unbundled world, these customers would be providing to Union a nomination of their expected consumption for the next day. That is based on an equation, an algorithm that can have an errant in it relative to actual weather that we see. 787 This space allows Union to continue to serve that group of customers when actual weather -- if actual weather departs from the next-day demand forecast. 788 The next piece is for supply backstopping. If customers' upstream arrangements fail yet they will still continue to take supply at their plant gate, Union, as the system operator, has to have the deliverability from storage in order to get them their supply even though their upstream arrangements have failed. 789 And the last if for Union operating our storage and transmission lines, things like line pack, for instance, and day-to-day variations in the line that go on. We have this inventory on hand for the integrity of our storage and pipeline operation. 790 And that's the three pieces that add up to the 9.1 Bcf of integrity space when we fully unbundle. 791 MR. DINGWALL: Now, out of the physical volume of storage, there is a portion of that left empty in the fall to account for gas that would be delivered by marketers for future use from their customers; is that correct? 792 MR. NEWBURY: That's correct. 793 MR. DINGWALL: What approximate amount or percentage would that be? 794 MR. NEWBURY: My previous description was around system integrity space. In the fully bundled environment that we're operating in right now, the same numerical amount of space, 9.1 Bcf, the way we're using that - and that's internally what I refer to contingency space in our current year's plan - the 3.5 Bcf is held on a planned basis to be empty in my gas plan on November 1 to account for the late-season injections that can happen in the DP community as they stand somewhere around 0 percent balancing. They're allowed to be as much as 4 percent out. As well, if we have an unplanned mild late season, October, again gas supply arrangements are on their way to Ontario; they need a place to go and that's where they would go on an unplanned, i.e., contingency basis. 795 MR. DINGWALL: So this portion of your 9.1 is really for the floating range of storage commitments that come about through operating your system. 796 MR. NEWBURY: Right. In the current fully-bundled world that we're operating in, correct, yes. 797 MR. DINGWALL: I don't understand that there's any proposal to go to any other world in the test year, is there? 798 MR. NEWBURY: No. Ultimately customers can select unbundling. I'm just drawing the reference. Right now they have selected to be fully bundled and that's how we're using the contingency space. If they made a decision in 2004 to become unbundled, we'd facilitate that and the operation of the space would move over to the integrity space duty. 799 MR. DINGWALL: I understand that that's not available for the general-service rates; is that correct? A marketer serving residential customers would not have the ability to take on their storage. 800 MR. NEWBURY: Not the integrity space, no. 801 MR. DINGWALL: Correct. So when are decisions taken throughout the winter to release to the S&T group any excess amount of other gas in storage or storage capacity? 802 MR. ISHERWOOD: Again, the capacity management group is looking at the overall system operation relative to the inventory plan; and to the extent that there's excess assets available, it would be the capacity management group that would release those to the S&T group to try and find some value somehow. 803 MR. DINGWALL: Do you know how often that takes place, how often that's reviewed? 804 MR. ISHERWOOD: Again, it's constantly, it really is constantly. And because the winter changes so quickly with the weather and economy and such, it needs to be a constant review. 805 MR. DINGWALL: When you're making your mid-year gas supply planning decisions, what are the factors you take into account when making those decisions? 806 MR. NEWBURY: In constructing the gas supply plan? 807 MR. DINGWALL: No, in managing the gas supply plan. 808 MR. ISHERWOOD: I'm not sure I understand the question. 809 MR. DINGWALL: Well, what you've mentioned is that, in operating the system, you have feed-ins from a number of different places about how much gas is being used which you are now aware of on a more frequent basis than in the past; how much gas you have in storage versus how much gas you were forecasted to have in storage; how much of your storage you're using. How do you determine, for example, whether to use gas in storage or gas from the spot market? 810 MR. ISHERWOOD: We would only buy spot gas to the extent that our inventory curve falls below the planned curve. That would be the signal test to actually go and purchase spot gas. Overwise, if we're above the curve or on the inventory curve, what we're really saying is we don't need to buy spot gas and the gas that we have in inventory is sufficient to meet the winter supply. 811 MR. DINGWALL: Does price factor into the decision to purchase gas from the spot market or to use gas from storage? 812 MR. ISHERWOOD: Again, if we fill storage for the purpose of serving winter markets, our first action would be to empty the storage. We would not buy spot gas and leave gas trapped in storage, because in addition to the cost of gas in storage, you have carrying costs and such as well. 813 MR. DINGWALL: How do you cost the gas in storage, at acquisition cost? 814 MR. ISHERWOOD: The gas in storage is valued at the current WACOG. 815 MR. DINGWALL: When you say "current WACOG," are you referring to today's price? 816 MR. ISHERWOOD: No. As the WACOG changes at each QRAM, the valuation of the inventory changes at the same time. 817 MR. DINGWALL: Does that create a situation where, if you've managed to buy gas for one price prior to injecting it into storage, and the market for that gas is somewhat higher, that you might be making a decision solely on the basis of your curve when price might actually have an influence? 818 MR. DENT: What occurs when the -- when our actual gas that we project is available below the March 31 inventory curve is that that's suggesting to us that, all other things being equal, we'll have no gas in the ground come March 31. So when we're buying spot gas, we're buying it to get back to that curve in order to make -- in order to preserve system integrity. 819 Now, we try to do that by following our normal acquisition practices of layering in those buys, of doing some financial hedges, et cetera. But without the acquisition of incremental supply, regardless of what the price might be, if the weather curve continues as it is, then we simply run out of molecules; and, from a system integrity point of view, we just can't allow that to happen. 820 MR. ISHERWOOD: If I could just add to that, to the extent that -- the case we just explained was if we were below the curve. If we're actually above the curve, if we were to buy additional spot gas in that circumstance, it would actually trap the gas as in-storage and it incurs UDC the following summer, because the whole plan is to take the empty storage come April 1st and fill it during the course of the summer with the firm deliveries that are coming at us. So to the extent that we are above the curve during the winter and still buying the spot gas, we would actually be incurring the UDC cost the following summer. 821 MR. DINGWALL: What you've just said, sir, presumes that gas is habitually and completely empty on April 1st, gas in storage. 822 MR. ISHERWOOD: That's our plan. 823 MR. DINGWALL: That's your plan. Is that actually the case each year? 824 MR. ISHERWOOD: To the extent that it is a warmer-than-normal winter, typically we will cross April 1st with more gas in storage than planned, and that then forces us during the summer to have a UDC to get back on to plan. And to the extent it's an average winter or a colder-than-average winter, we typically do exit the winter with a near zero balance April 1st. 825 MR. DINGWALL: If there's gas in storage April 1st would that be something that becomes another toy to play with for your S&T group. 826 MR. ISHERWOOD: Typically, if there's gas in storage it implies that we are going to have incremental costs in terms of UDC and there is not a lot of value in having gas in storage April 1, there really isn't. 827 MR. DINGWALL: I believe Mr. Quinn asked an undertaking on Friday with respect to the historical trend of gas in storage. Would you agree with me that for rate-making purposes, all that's really contemplated here is that there's a forecasted storage season of November to the end of March? 828 MR. ISHERWOOD: The plan is based on that assumption, that's right. 829 MR. DINGWALL: And if the actual storage season were somewhat longer, then that wouldn't encompass the value for rate-making purposes. 830 MR. ISHERWOOD: I'm sorry, I don't understand the question. 831 MR. DINGWALL: If you're able to use storage as a viable asset and if people want gas from storage past March 31st, and if that's not being managed on behalf of system customers, if that moves to the S&T group, then the full value of that storage asset isn't really being reflected in rates, is it? 832 MR. ISHERWOOD: I never said it would go to the S&T group on April 1st. I think my answer was that on April 1st if we are long on gas, it forces us during the summer to get rid of that gas and typically has very little value. 833 MR. DINGWALL: April's not always summer, is it? 834 MR. ISHERWOOD: The transition from winter to spring obviously occurs over several weeks, several months. 835 MR. DINGWALL: Right. 836 MR. ISHERWOOD: There's days in March where you're be injecting and days in April where you may be withdrawing, and as we discussed on Friday there's also other situations where direct-purchase customers may be taking gas on or off the system as well which could influence a whole cycle of injection withdrawal. 837 MR. DINGWALL: Well, if there's gas in storage that people are withdrawing in April and it's not for direct-purchase customers, who would it belong to then? 838 MR. ISHERWOOD: To the extent there are withdrawals in April it could be for system-sales customers as well. If it's a cold day in April, it's quite possible. 839 MR. DINGWALL: I'm not asking for one example, I'm asking for every possible benefit that you can think of: Who would be buying this gas? Who would take the benefit of it and who owns it? 840 MR. ISHERWOOD: I think the two examples that come to mind are the sales-service customer on a colder-than-normal day in April and the other example would be if it has been a warmer-than-normal year it's quite possible the DP customers may be taking gas off the system asking for special permission to do that in April. 841 MR. DINGWALL: Or if we've got a cold April and there are third-party customers seeking to use whatever gas is left in storage, is it conceivable that that balance, because it's not encompassed in our rates, might be used by one of your business units for profit? 842 MR. NEWBURY: The gas we're speaking of is the gas in the gas supply plan. Where there are only two customers, there are direct-purchase customers, bundled direct-purchase infranchise customers, and there are sales-service customers. If there's any inventory left on April 1st of that amount, and someone's withdrawing from it, I think what we've said is the only people who are withdrawing it are direct-purchase customers either to meet demand or they are taking the gas off the system in order to meet their balancing requirements or it's system customers who are burning this gas because April demands are there. There isn't any third-party customer inside this space that we're talking about. 843 So I don't understand who this customer is and how they would get their hands on this gas. 844 MR. DINGWALL: I take it that during the year, you or your capacity management group or some bunch of you will take a look at whether or not you have too much or too little gas in storage and if there's too much, you will dispose of it; is that correct? 845 MR. NEWBURY: The method to bring the inventory down is most typically to stop supplies arriving at the province, therefore the withdrawals again are serving the sales-service customers and they're withdrawals because we've reduced our upstream pipeline arrangement that were in place to serve those customers. So we're not taking the inventory to a third party typically to draw that inventory down. If that's the decision we've made, we would look at our upstream arrangements and stop flowing gas to the province. 846 MR. DINGWALL: Well, you say "typically," typically is not an all-inclusive word, there are other circumstances where that might not happen; is that not correct? 847 MR. NEWBURY: There are none I can think of. 848 MR. DINGWALL: Does each of your affiliates operate on the same weather forecasts that Union Gas does? 849 MR. ISHERWOOD: I have no idea. 850 MR. DINGWALL: Yet by them having presence on the risk management committee they have complete visibility into your forecast, do they not? 851 MR. ISHERWOOD: I don't think they do. I don't think the risk management committee sees the forecast. 852 MR. DINGWALL: Mr. Dent? 853 MR. ISHERWOOD: I'm actually on the committee, I can speak to that. 854 MR. DINGWALL: Would you agree with that, Mr. Dent? 855 MR. DENT: Yes, I would. 856 MR. DINGWALL: Moving on to the March park, I believe it was this panel's answer earlier on in the day that the regulatory justification for the March park would lie with another panel; is that correct? 857 MR. ISHERWOOD: That's correct. 858 MR. DINGWALL: What operational interaction would gas supply have with the use or implementation of the March park, should it be approved? 859 MR. ISHERWOOD: The only involvement the gas supply group would have on the March park would be to actually purchase it and then it would be up to the capacity management group to manage it. 860 MR. DINGWALL: Would that change in any way the way in which storage for system integrity is used or managed? 861 MR. NEWBURY: No, it doesn't. The integrity space, again, in the unbundled world has its duty and in our current bundled gas plan has its duty, and the March park, when you get into the description of it, is to meet demands in the month of March that are unforecast. 862 MR. DINGWALL: So the decisions that would be made with respect to storage for system integrity will not change if there's a use of March park? 863 MR. ISHERWOOD: That's correct. 864 MR. DINGWALL: Is this panel the appropriate panel for discussion of the discretionary gas supply service? 865 MR. ISHERWOOD: No, it's not, that would be Mark Kitchen and Sarah Van Der Paelt. 866 MR. DINGWALL: Moving on to the winter peaking service, I believe Mr. Aiken asked you a couple of questions with respect to that as did Mr. Ryder this morning, and from what I heard, it sounded like, if anything, this panel might have, if anything, a peripheral knowledge of that. Is this analogous to another one of the weather devices that would be spoken to by another panel? 867 MR. ISHERWOOD: I'm not sure of the comparison to weather devices, but this panel can address winter-peaking service from the point of view of planning, which is Mr. Newbury's plan, and from a point of view of purchasing for it as well. In terms of the long-term planning for it, I think Larry Hyatt, you referred to, would be better to talk to that. 868 MR. DINGWALL: I think it was either Mr. Aiken or Mr. Ryder this morning who was asking you about the genesis of it and the history of it, and that's where I believe I heard the hesitance. 869 MR. ISHERWOOD: I think the hesitance was around long-term -- the long-term planning for winter-peaking service, we'd defer to Larry Hyatt. 870 MR. DINGWALL: I beg your pardon, I'm sorry, I couldn't hear the last part. 871 MR. ISHERWOOD: I'm sorry. We deferred the long-term planning or the long-term vision of winter-peaking service to Larry Hyatt, because that's his planning model. 872 MR. DINGWALL: So has such a service been in place in the last five years? Have you used it before? 873 MR. SIMPSON: I believe we addressed -- partially addressed that earlier this morning. On an actual basis, we did not last year. And there are previous undertakings in the most recent CRP submitted by Kitchener, interrogatories, that is, C.4.5 to 4.13, as well as C.8.8, I believe. But without specific reference to those, at least in the last four years, there has not been a purchase of winter-peaking service. 874 MR. ISHERWOOD: But to add to that, there's been some Dawn-Parkway or Dawn-Trafalgar building which has -- as I mentioned this morning, winter-peaking service is in lieu of a build. And you build up the market demand until you have enough to do a build, and since 499, there has been three builds completed between then and now. 875 MR. DINGWALL: Let's be very clear what we're talking about. Can you define the terms of the winter-peaking service for me so that I understand specifically what you're referring to. 876 MR. SIMPSON: Certainly. I'll just reiterate from this morning's conversation. The winter-peaking service that is to be acquired is a product that enables gas to get to our easterly most point on the system in Parkway. And in terms of what that provides is, during peak winter conditions, there is a designed amount that has to show up at Parkway such that all firm demands are met. So when we acquire a winter-peaking service, the typical product would be an exchange product from Dawn to Parkway that would enable us to flow molecules from Dawn to Parkway to make sure that the entire firm consumption through-put is met. 877 MR. DINGWALL: And the company has not made use of such a service in the past five years? 878 MR. SIMPSON: I believe I said the last four. My notes reflect that one of those interrogatories would have shown the last purchase was the '98-'99 winter. 879 MR. DINGWALL: So just to clarify, in the past five years, the company has not used a winter-peaking service? 880 MR. ISHERWOOD: And that's because of the supply/demand balance in the Dawn-Parkway system. The supply has been met by three builds of the Dawn-Parkway system, whereas now we have just a slight imbalance of 33,000 gJs. It's much more prudent to do that as a winter-peaking service rather than adding 200 or 300,000 gJs per day of a build. 881 MR. DINGWALL: What kind of companies would be on your list of counterparties for providing a winter-peaking service? 882 MR. SIMPSON: Perhaps I can address that. Just in terms of a reference, I know that I was listing several interrogatories. There is one, C.4.12, which was within the bandwidth of those that I mentioned from the EB-2002-0363, so just for future reference, and that confirmed that the last winter-peaking service was purchased in '98-'99. 883 And in terms of the entities that those types of products would be purchased from, there would be a -- there would be several entities both with physical transportation capacity from various points to Parkway, or that are able to provide exchanges to Parkway. 884 MR. DINGWALL: Is this a service to which there is an extremely liquid market with many providers, or is it a rather new service that not many providers provide? 885 MR. SIMPSON: This is definitely not a new service. 886 MR. DINGWALL: Approximately, how many transactions of this type take place in a year in this region? 887 MR. SIMPSON: I couldn't answer that. As I alluded to, we haven't purchased the product on a historical basis since '98-'99. But there are parties that are able to provide such product, that have assets that are capable of doing just that. 888 MR. ISHERWOOD: Other utilities and industrial customers would have purchased a similar product in the last year, few years as well, so it is a relatively common thing. 889 MR. DINGWALL: Now, is this the panel that would be able to speak to the availability of diversions and other balancing mechanisms? 890 MR. ISHERWOOD: No. 891 MR. DINGWALL: That would be capacity management? 892 MR. ISHERWOOD: Yes. 893 MR. DINGWALL: And there's been a presentation with regard to deferral account restructuring. Is this the panel that would be able to speak to the quantum of the deferral account recovery sought for gas supply charges? 894 MR. ISHERWOOD: Yes. 895 MR. DINGWALL: Now, as I understand it, in the March QRAM there was a significant amount of cost associated with the recovery of spot gas; would you agree with that? 896 MR. DENT: Yes, that's correct. 897 MR. DINGWALL: And the approximate amount, Mr. Dent, was? 898 MR. DENT: The approximate amount to be recovered through the deferral mechanism relates to the deferral accounts themselves; it was about $63 million. 899 MR. DINGWALL: And the volume of gas associated with that was, Mr. Dent? 900 MR. DENT: We purchased 24.2 pJs of supply for our load balancing this past winter. 901 MR. DINGWALL: And had the company used the previous 30-year weather forecasting methodology, how much of that spot-gas purchase would have been necessary? 902 MR. ISHERWOOD: I believe I identified earlier that the difference for the last winter in terms of a 30-year and a 20-year model was 2.7 petaJoules -- gigaJoules, sorry, petaJoules of gas between the two. 903 MR. DINGWALL: So if you applied the pricing that Mr. Dent references with respect to the purchases over the winter, and then multiplied that by the volume that would have otherwise existed had you used the 30-year weather forecasting methodology, how much would have been saved had you used the previous methodology? 904 MR. ISHERWOOD: I would draw your attention to Exhibit J.5.41, which is a City of Kitchener interrogatory which asks exactly the same question. 905 MR. DINGWALL: And the number on that is? 906 MR. PENNY: Well, sorry, Mr. Chairman, this is directly duplicative of extensive cross-examination that took place this morning. I don't recall whether Mr. Dingwall was in the room, but all of these facts were covered specifically and exactly these questions were asked. And this 5.41 was covered. There's nothing new being added here, with great respect. And so, in my submission, it's entirely duplicative and it's not a useful use of hearing time. 907 MR. DINGWALL: I guess a lot of things happen when you're 15 minutes late in the morning. My apologies to the panel and Mr. Penny. 908 MR. SOMMERVILLE: I think it's fair enough to ask your question, Mr. Dingwall. I think Mr. Penny is right, that the answer lies within 5.41. But why don't you ask your question and ... 909 MR. DINGWALL: Well, now that we've got the reference and the number on the record, Mr. Chair, that's fine with respect to that. I'll just spend a quick moment conferring with my client and then determine whether there's anything left. 910 Thank you, gentlemen, those are my questions. 911 MR. SOMMERVILLE: Mr. Dingwall. 912 Mr. Moran. 913 MR. MORAN: Thank you, Mr. Chair. 914 CROSS-EXAMINATION BY MR. MORAN: 915 MR. MORAN: Just a few questions. I'd like to begin with the blue-page update Exhibit D.1, tab 4, appendix B. 916 MR. DENT: Is that appendix D? 917 MR. MORAN: B as in Betty, the deferral account balances. Do you have it? 918 MR. DENT: Yes. 919 MR. MORAN: And we see for inventory reevaluations a credit in the amount of 15.8 million; is that correct? 920 MR. DENT: That's correct at that time. 921 MR. MORAN: At that time. All right. I think earlier you gave an undertaking to update the main exhibit to which this is an appendix. Could you also add to that undertaking an update of this appendix? 922 MR. DENT: Yes, certainly. 923 MR. MORAN: All right. To reflect the October QRAM results. 924 MR. DENT: Yes, that's correct. We'll provide it in the format that it's provided here. 925 MR. MORAN: Okay. So included in Undertaking N.10.2 then is your undertaking to update Exhibit D.1, tab 4, appendix B. 926 MR. DENT: Yes, we'll do that. 927 MR. MORAN: Thank you. 928 While we're on the inventory revaluations, are you in a position to indicate what the split is for that amount between the north and the south? As of that balance, obviously. 929 MR. DENT: As of that balance, my recollection, subject to check, was 74 percent to the south and 24 percent to the north and that's roughly equivalent to the volume of south versus north customers. Pardon me I may have misspoken, 74/26. My math is not very good, I'm not an engineer. 930 MR. MORAN: That saved that follow-up question. 931 All right. And now I'd like to turn to the rejigging, I guess, of the deferral accounts themselves as you proposed it and if you could turn up D.1, tab 1, page 24, the original evidence. 932 MR. DENT: Yes, I have that. 933 MR. MORAN: I'm just trying to get an understanding of the mechanics of how this would work. Now, at lines 11 through 14 on page 24 you indicate that: 934 "Union operates its inventory for north and south customers on an integrated basis and decisions to buy incremental spot gas to supplement inventory levels are also made on an integrated basis, therefore, Union would create a joint spot account." 935 Earlier you indicated that despite it being in a joint account, there would be a tracking of these costs and an allocation between the north and the south. Could you please describe the mechanical process that you will put into place in order to decide which part of this integrated joint account would be allocated to the north versus the south? 936 MR. DENT: Sure. Just let me begin by saying that this evidence was written on the assumption that the load-balancing flexibility directive would be fully implemented for this coming winter and, of course, that will be delayed one winter, but assuming the load balancing had been fully integrated, then we'll know at that point that the south direct-purchase customers will be supplying their own spot gas, and it's only if they fail that we would allocate any of that to them. 937 And then secondly, with the load balancing implemented, we essentially would go through a similar type of exercise that we do today looking at the rate class in balances looking primarily at the north rate classes because we still could be acquiring spot for them in relationship with the sales service imbalance and then making a judgment as to which particular class the sales-service customer north and south or on other rate classes, north, was actually driving the need for the spot gas. 938 MR. MORAN: So in this joint account, would you have sub-accounts that would keep track of these things? 939 MR. DENT: No, it would be our view that we would keep the total balance as a whole and then it's clear for everyone to see what the total deferral amount in that balance is but similar to today, we would do an allocation presentation of a table saying, for example, rate 1 might be deriving 20 percent, sales service deriving 80 percent, but clearly outlining separately how that total account would be allocated or would be disposed of based on who was driving those particular costs. 940 MR. MORAN: And that's something that the Board would have an opportunity to examine when you bring that proposal forward for clearing those balances. 941 MR. DENT: Yes, in all of our proposals we still suggest that there needs to be a year-end disposition of the total cost even though there may be some perspective disposition of costs, there still needs to be a year-end determination that those costs were all incurred currently, and so we still want to keep the whole account in one spot but have a separate table, if you like, that would indicate how we would allocate those specific costs. 942 MR. MORAN: All right. Now, you indicate you're also going to have a single unabsorbed demand-charge account and if you turn the page over to page 25 of Exhibit D.1, tab 1, you've indicated that: "Union manages its north and south transport portfolios on an integrated basis and will determine the pipeline on UDC is incurred, if necessary, based on the least cost option. Consequently, UDC is managed on an integrated basis which supports the creation of the joint unabsorbed demand charge account." 943 Again the same question, how are you going to allocate those costs between the north and the south? 944 MR. DENT: It would be a similar process only almost a mirror image of what's driving the spot would be driving some of the UDC. Again, to step back one step, it will be different with the new load balancing proposals fully implemented, then there will be a slightly different process but again, in general, whether we've fully implemented that or post a full implementation of it, we again look at the imbalances by rate class and determine what rate class is actually driving the UDC then allocating those costs accordingly. 945 MR. MORAN: All right. Then you also indicate that you're going to have a joint account for inventory revaluations. Again, on page 25, at lines 10 to 15, once again you indicate that: "Union operates a system on an integrated basis and cannot differentiate between inventory used to serve north sales-service customers compared to the south sales-service customers. As a result, Union is not able to value inventory based on separate pricing that reflects the portfolios used to serve each operating area. Accordingly, the joint inventory revaluation account is proposed with all of the gas in inventory priced at one unit value." 946 I take it this is a change in the way you do inventory revaluations, right? 947 MR. DENT: No, actually this is consistent with how we're operating today. There is one inventory pool and it is a pool account and the credit or debit is allocated to either north or south on that proportionate to the volumes in each area. Where there is a challenge is that we do have gas coming at Parkway, some of it could be consumed by south customers, others -- back to the north for their consumption. So it really is very difficult to determine in inventory which molecule may ultimately belong to a north or south customer. So to keep the integrated aspect of inventory revaluation, we propose no change to the current method and approach. 948 MR. MORAN: Okay. So in this approach, there's some risk; sometimes it's to the detriment of the north, sometimes it's to the detriment of the south, right, in terms of price? 949 MR. DENT: Well, the reference price will be the same for both areas, so there is common -- there is a common reference price itself. I think that as long as we are allocating those debits or credits in the same proportion as is volume in the south or north, then we're getting a fair approximation of what the -- of what each area should be absorbing as far as inventory revaluation debits or credits. 950 MR. MORAN: And in terms of implementation of this new process, what's your proposed target date to implement the new deferral accounts? 951 MR. DENT: Our proposed target date is January 1, 2004. We would propose that the current deferral account structure remain in place until the end of this year, December 31, 2003, at which time we will make final disposition of all of those accounts, close the appropriate ones, and then start with a fresh slate on January 1, 2004. 952 And by the way, this is also consistent with the settlement that we have on the QRAM itself. This actually -- the deferral account structure is actually an integral part of the overall QRAM process, and so in order to do the QRAM, we really need to have this deferral account settled as well. And one of the things that we're asking for would be -- potentially an expedited decision on the deferral account structure so that we can integrate those into the QRAM process for January 1. 953 The work to do that, by the way, will start around the middle of November, so in less than a month's time. 954 MR. MORAN: Okay. So for that expedited decision, you'd like, if possible, to get a ruling from the Board prior to mid-November? 955 MR. DENT: Yes that would be very much appreciated by our group and our staff from the work-planning and workload point of view. 956 MR. MORAN: Thank you, Mr. Dent. 957 Turning now to you, Mr. Simpson, just a couple of follow-up questions on the winter-peaking service. 958 If you could just turn up Exhibit J.5.54, and while you're there, if you could also turn up J.5.55. This is just a follow-up to some questions that you've already been asked. 959 Mr. Simpson, you indicated that there are different ways of meeting the winter-peaking service requirements and that one of them is through an exchange or transport service. And when I look at J.5.55, in answer A, it looks like your forecast is actually based on a choice having been made and that is to use exchange transport services; is that correct? 960 MR. SIMPSON: What I was trying to convey in J.55.A was really that there was no molecules attached with this service. A product -- again, trying to achieve the goal of ensuring that molecules are at Parkway on those cold winter days is, in fact, to purchase a product that would have the molecules provided as well. 961 More traditional products that I've referred to throughout the day are exchanges or transport from Dawn to Parkway, where we would use molecules already at the Dawn location. 962 MR. MORAN: All right. So for 2004, have you decided what product you are going to use at this point? 963 MR. SIMPSON: No. We're in the midst of, for winter '04-'05, assessing the product mix that is both available and preferred, and as well, of course, taking into account all options. But I think it would be fair to say that at this point, we do prefer exchange over transport products so that we can utilize our molecules at Dawn rather than be subject to a less-liquid market at Parkway in peak winter conditions. 964 MR. MORAN: Okay. So it's still in flux, but your preference is towards exchange transport service. Okay. 965 Based on your answer, then, does that mean that you're currently looking in the marketplace to see what the prices are for the various options? 966 MR. SIMPSON: We've for both -- I guess maybe to help clarify. Because the plan is on a calendar basis, it will literally cross over two winters; the winter that is just about around the corner effective January/February/March of '03, and then the winter of '04 which will be the tail end of the calendar year. So there's different volumes for each of those winters that we are -- have built into the forecast. We have made some purchases. We have not completed our entire portfolio for that requirement, so there is a fair amount that remains outstanding. 967 MR. MORAN: All right. So then if we turn to J.5.54, answer D, I think your answer there confirms, in part, what you just said; you haven't actually contracted for the winter-peaking service yet; right? 968 MR. SIMPSON: Not completely, that's correct. 969 MR. MORAN: Okay. And in the last sentence there, you indicate that no affiliates were included in the request for indicative pricing. 970 I'm just trying to get a better understanding of what you mean by "indicative pricing." Have you gone out just to -- sort of in an informal way, to ask people how much would it cost for this kind of a service? Is that what you mean by "indicative pricing"? 971 MR. SIMPSON: At the time of responding to this interrogatory, J.5.54, that is precisely what we did, was tried to get some market intelligence on costs. As I alluded to earlier, that did not involve any affiliates, and our actual purchases to date have not either. 972 MR. MORAN: Right, because you haven't actually made any purchases yet; right? 973 MR. SIMPSON: For the winter of '04, we have not. For the winter -- this winter, '03, yes, we have. 974 MR. MORAN: Oh, okay. And in order to make those purchases, were those the subject of an RFP beyond the indicative pricing process that you've just described? 975 MR. SIMPSON: Yes, they were. 976 MR. MORAN: Okay. And when you indicate that no affiliates were included in the request for indicative pricing, are any affiliates included in the purchases that you have already made? 977 MR. SIMPSON: No, they were not. 978 MR. MORAN: When it comes to dealing with affiliates for this kind of purchase, do they have to compete in the marketplace along with everybody else in response to your RFPs? 979 MR. SIMPSON: Well, in the case of the winter-peaking service, we went out to, I believe it was, three or four parties specifically and defined the product that we were looking for, as I mentioned earlier, and requested a price that would be binding, and we did not include our affiliate in that RFP process. 980 MR. MORAN: And if they wanted to be involved, how would they -- what would be the rules of the game? 981 MR. SIMPSON: I believe Mr. Dent could speak to the molecule RFP process, but I'll just elaborate in terms of a transport product. 982 In this case, we will take it upon ourselves, knowing the marketplace as we do, and determine who are the best three or four candidates for a product that we may be looking for, in this case, winter-peaking service. And we didn't feel our parent was capable of providing such a product so we just excluded it from that process. 983 MR. MORAN: I guess all parents come across that sooner or later. Some earlier, perhaps. Thank you. 984 Did you want to add anything to that, Mr. Dent? 985 MR. DENT: For the molecule, we have a request for -- an RFP process as well, and we'll send, normally, a fax request to a number of counterparties. We do have an affiliate on our RFP list. They have not won any business in 2003 so far. They have only bid, in fact, on a very few RFPs, and, quite frankly, they'll need to sharpen their pencils to get any business. They'll need to become the lowest bidder in order to win the molecule business. 986 MR. MORAN: Thank you, Mr. Dent. 987 One last question, and I'm not sure to who to direct this to, is a question of clarification. If you could turn up Exhibit D.1, tab 1, page 4 of the updated material. 988 MR. NEWBURY: Yes, we have it. 989 MR. MORAN: This is in the section that's dealing with the load-balancing cost allocation, and it's a reference that starts at page 16 and says: 990 "These imbalances include the impact of approximately 71,000 south customers that returned to sales-service due to bill 58." 991 I wonder if you could just explain what that means? 992 MR. ISHERWOOD: I believe it was back in July of 2002 where the Ontario government changed, through bill 58, how customers coming up for renewal with a marketer how they actually renewed. And as I understand the legislation, it actually required the customer to have a positive signature on a piece of paper to have that renewal, and I think what happened is the bill came about fairly quickly and I'm not sure the marketers were ready for that transaction. 993 So initially, there were quite a few customers that the marketers were not set up for that process to get the signature, so as I understand it, especially in the early days through to probably the middle of last winter, there were a lot of customers that did not make that signature or did not make that signature, did not make that transition, and in essence, were turned back to system sales and that total is 71,000 for the south. 994 MR. MORAN: Thank you. Mr. Chair, those are all my questions. 995 MR. SOMMERVILLE: The Board has no questions. 996 Mr. Penny. 997 MR. PENNY: Thank you, Mr. Chairman. I did want to, at some stage before leaving this topic, point out to the Board that there are -- we didn't do any examination on this specifically, but in terms of how Union's system operates, there are some maps in binder A at tab 6 that show where Dawn is and where Parkway is and kind of how the system works, so I just wanted to point that out in case the Board wants to look at a schematic when reviewing the evidence. 998 RE-EXAMINATION BY MR. PENNY: 999 MR. PENNY: Mr. Isherwood, you were asked by Mr. Ryder this morning some questions about the contingency storage space and you were asked whether the City of Kitchener got any contingency space and part of your answer was they wouldn't need it. Can you explain why Kitchener doesn't need contingency space? 1000 MR. ISHERWOOD: In terms of bundled customers which would include the City of Kitchener T3 service as well as T1, the carriage service, and the other direct-purchase N2 service, Union Gas provides the contingency planning around those customers as well as sales-service customers. So that's why it's actually a major topic during the unbundling hearing as contingency space would remain within the utility for planning purposes. 1001 MR. PENNY: Thank you. And both the City of Kitchener, and I think it was perhaps the CME, one or the other of the intervenors anyway, raised the issue of the 20-year trend versus the 30-year average in relation to the gas supply plan and the implementation of the gas supply plan. 1002 Can you, panel, first of all tell us what the impact would be on system-sales customers from an operational point of view of a return to a 30-year average as the basis for the demand forecast? 1003 MR. ISHERWOOD: If we had to return to a 30-year average methodology for system sales customers, we would have to essentially go and purchase additional storage and upstream pipeline assets that would increase the cost of serving that group of customers. 1004 MR. PENNY: And can you tell us the same question with respect to direct-purchase customers, what would the impact be from an operational point of view on direct-purchase customers of a return to the 30-year average? 1005 MR. ISHERWOOD: It would have the same effect on the general-service direct-purchase market as well, in that we would have to go out and buy incremental storage and incremental upstream assets, and in fact, Mr. Newbury's plan has identified that we would have to purchase an additional 19,500 gJs of upstream transportation and allocate approximately half - we use round numbers - half would go to the direct-purchase general-service market and half would go to the sales-service general-service market. So the 19,500, approximately half of that would go to the direct-purchase market, half to the sales-service market, and in terms of the storage space, we would need an additional 2.7 petaJoules of storage space and again, that would be divided approximately half amongst those two classes of customers. So it would increase the costs to both groups of customers. 1006 MR. PENNY: And in Union's view, is that level of capacity necessary to serve those customers? 1007 MR. ISHERWOOD: That level of capacity is not required to serve those customers. As the evidence clearly states, the 20-year model is a model that is the most appropriate model and it's the only model in evidence that is supported and for that purpose we do not believe we need either the 19,500 gJs of pipe or the 2.7 petaJoules of space. 1008 MR. PENNY: And then the City of Kitchener -- and I think Mr. Dingwall a few moments ago was asking questions about the spot gas costs and whether they were higher under the 20-year trend than they would have been - this is from last winter - than they would have been from the 30-year average. Are any of those "costs" from the colder-than-normal winter paid by T3, by the T3 rate class? 1009 MR. ISHERWOOD: No, they are not. 1010 MR. PENNY: Thank you. You were also -- I think Mr. Janigan asked you about UDC and spot gas and the relationship between those things. Under the new load-balancing proposal, will Union incur spot or UDC costs with respect to direct-purchase customers? 1011 MR. ISHERWOOD: For Union south customers, once we are fully implemented in the load-balancing model, we will not incur UDC costs for direct-purchase customers and in most circumstances, would not be incurring a spot cost for direct-purchase customers either. 1012 The one exception I will mention now and perhaps discuss in more detail when I am back before the Board with the load-balancing panel is the March park is designed to capture the March weather variance under most circumstances. If you got into a really extreme March, then there may be a situation where we have to buy a little bit of spot gas towards the end of the month and that spot gas could potentially go towards direct-purchase customers and that would given a fairly rather event given the protection. 1013 MR. PENNY: We'll await the second panel to deal with that. You also had said in the context of those questions that direct-purchase customers will draft the system under the plan on a short-term or daily basis as opposed to seasonal basis. Does this so-called drafting require Union to purchase spot for direct-purchase customers? 1014 MR. ISHERWOOD: No, not at all. Our system -- 1015 MR. PENNY: Why not? 1016 MR. ISHERWOOD: Our system operations plans to have direct-purchase customers draft the system. We actually carry a load-balancing inventory for that specific purpose. So as long as we are having a normal winter and everybody is on plan, then we would not be buying any spot gas for direct-purchase customers. If we left the plan, then the direct-purchase customer would be buying the spot, not the utility. 1017 MR. PENNY: And who pays for those embedded costs that are currently planned? 1018 MR. ISHERWOOD: The general-service market pays for the inventory carrying costs. 1019 MR. PENNY: And as between system sales and direct purchase, how is that determined? 1020 MR. ISHERWOOD: The inventory is really divided between load balancing for direct purchase and general service inventory for the general-service market, and those costs would collectively go to the general-service market. 1021 MR. PENNY: And then there were some questions about April 1 and what would happen if you were long on gas and so on. I just wanted to ask you why do you plan to have and why do you need your storage empty in April? 1022 MR. ISHERWOOD: The plan that Mr. Newbury prepares assumes a storage empty on April 1 and is refilled using the firm pipe during the summer and to reach the maximum inventory for October 31 you need to start with empty storage April 1. 1023 MR. PENNY: All right. And then finally you were asked about an affiliate representative on the risk management committee. Which affiliate is represented on the risk management committee. 1024 MR. ISHERWOOD: Duke Energy Gas Transmission. 1025 MR. PENNY: And what is the business of Duke Energy Gas Transmission? 1026 MR. ISHERWOOD: They operate a transmission system from the Gulf of Mexico up to the northeast market. 1027 MR. PENNY: And is it a regulated entity? 1028 MR. ISHERWOOD: Yes, it is. 1029 MR. PENNY: By which regulator? 1030 MR. ISHERWOOD: By FERC. 1031 MR. PENNY: Thank you. Those are all my questions. 1032 PROCEDURAL MATTERS: 1033 MR. SOMMERVILLE: Mr. Penny, your client is seeking an early ruling with respect to the deferral account structuring, and as you indicated yesterday, just let me make sure I understand what process you're going to follow, it is essentially to canvass intervenors. It's not completely clear to me that there are no issues surrounding that subject. It appears as though there are not any necessary consequential aspects to a determination on this subject that would necessarily have implications for any other elements of the case, but I invite you to do that canvassing, and if there is a measure of consensus that arose around that subject, that would obviously be of some assistance to the Board. 1034 Failing that, we would have to think about some departure from our normal process where we would argue that specific subject matter independently, and I'd be interested in any comments -- if that eventuality seems to be looming, submissions on that side of things. 1035 MR. PENNY: Well, we did consider that, Mr. Chairman, at the break, and it seems to me that perhaps the fair -- the fairest and most complete thing to do, rather than just rely upon those here in the room, that maybe what -- perhaps the fairest thing to do would be for Union to write a letter to the Board, make that request, outline the reasons for it, and invite parties who took a contrary view to so indicate in writing, and then we would at least have a preliminary sense of where we were. And if it looked like it was uncontroversial, we could then return to the subject, and if -- well, I guess in either case we could then return to the subject, whether it appeared to be controversial or not. But that way at least everyone will have notice of the request and have the opportunity to comment on it. 1036 MR. SOMMERVILLE: That would certainly seem to accomplish things. That's fine. 1037 We'll adjourn for ten minutes. Thank you to the panel. Mr. Isherwood, you will be making a return appearance, I think, but the others, I don't think you are. Thank you for your assistance. 1038 MR. PENNY: And Mr. Chairman, the next panel, Mr. Andrews on GDAR and the ABC, will be led by Mr. Smith, my colleague. 1039 MR. SOMMERVILLE: Thank you, Mr. Penny. 1040 --- Recess taken at 3:18 p.m. 1041 --- On resuming at 3:33 p.m. 1042 MR. SOMMERVILLE: Thank you very much. Please be seated. 1043 MR. SMITH: Mr. Chairman, just a couple of preliminary matters. 1044 PRELIMINARY MATTERS: 1045 MR. SMITH: The first of which is during the evidence of the O&M panel, the O&M panel identified a number of interrogatory responses which would be corrected. Union has sent out, I understand, now by fax to all of the intervenors copies of those corrected interrogatory responses; additional copies will be available at the back of the room later this afternoon. A copy has been filed with the Board. 1046 As a second preliminary matter, I was wondering if I can raise with you, Mr. Chairman, whether the Board had further thoughts with respect to Wednesday, and I should indicate that it's Union's preference to proceed on Wednesday afternoon and Union is prepared, on the expectation that Mr. Andrews will take until tomorrow morning and the DSM panel some of tomorrow morning and maybe possibly even the beginning of the afternoon, to call its affiliate panel as well. 1047 MR. SOMMERVILLE: Thank you, Mr. Smith. 1048 I've had some discussion with Board Staff on this subject. The real conflict we have on Wednesday is not only with respect to the board meeting, which is one thing, but the minister's directive with respect to DSM. It occurs -- it is our determination that we will not sit on Wednesday. I know that that's a disappointment for the applicant, but I think that, in light of all the circumstances, that's the most appropriate thing for us to do and that's what we will do. 1049 We have another dark day established later on in the process and we'll consider that as we get closer to it. But we will regard the 22nd as a non-hearing day in this proceeding. Thank you, Mr. Smith. 1050 MR. SMITH: Thank you, Mr. Chairman. 1051 Without further ado, Mr. Wayne Andrews, if he could be sworn. 1052 UNION GAS LIMITED - PANEL 2; ANDREWS 1053 W.ANDREWS; Sworn. 1054 MR. SOMMERVILLE: Mr. Smith. 1055 MR. SMITH: Thank you, Mr. Chairman. Just before I begin with Mr. Andrews, I should say that Union's intention, notwithstanding we're not sitting on Wednesday, remains to begin with its affiliate panel tomorrow afternoon. 1056 MR. SOMMERVILLE: Thank you. 1057 EXAMINATION BY MR. SMITH: 1058 MR. SMITH: Mr. Andrews, I understand that you are the manager of customer support at Union Gas. 1059 MR. ANDREWS: That is correct. 1060 MR. SMITH: And you've held that position since 1999? 1061 MR. ANDREWS: That is correct. 1062 MR. SMITH: And as the manager for customer support, you are responsible for the systems development and implementation of Union's response to the gas distribution access rule? 1063 MR. ANDREWS: That is correct. 1064 MR. SMITH: And further, I understand that you are responsible for the agency billing and collection service that Union provides to gas marketers? 1065 MR. ANDREWS: Yes, that is correct. I do administer that service. 1066 MR. SMITH: And I understand you've been with Union since 1983? 1067 MR. ANDREWS: That is correct. 1068 MR. SMITH: And prior to that, you obtained a Bachelor of Commerce degree from the University of Windsor, in 1982? 1069 MR. ANDREWS: That is correct. 1070 MR. SMITH: And I understand that you've testified before this Board on at least four separate occasions? 1071 MR. ANDREWS: That is correct. 1072 MR. SMITH: Most recently in the enabling and unbundling case, RP-2000-0078? 1073 MR. ANDREWS: That is correct. 1074 MR. SMITH: And I understand that you've filed evidence in this proceeding with respect to ABC and the gas distribution access rule? 1075 MR. ANDREWS: That is correct. 1076 MR. SMITH: And the ABC evidence is contained at Exhibit C.1, tab 5? 1077 MR. ANDREWS: That is correct. 1078 MR. SMITH: And the GDAR evidence, at Exhibit G.1, tab 12? 1079 MR. ANDREWS: That is correct. 1080 MR. SMITH: And with respect to the ABC evidence at C.1, tab 5, there's both an addendum which bears your name as well as the evidence of Mr. Shervill and Rogers which discuss ABC? 1081 MR. ANDREWS: Correct. 1082 MR. SMITH: And do you adopt that evidence at C.1, tab 5? 1083 MR. ANDREWS: I do. 1084 MR. SMITH: And similarly, do you adopt the evidence at D.1, tab 2? 1085 MR. ANDREWS: I do. 1086 MR. SMITH: Mr. Chairman, there being no matters for examination-in-chief, I would tender Mr. Andrews for cross-examination. 1087 MR. SOMMERVILLE: Mr. Warren. 1088 MR. WARREN: Thank you, sir. 1089 CROSS-EXAMINATION BY MR. WARREN: 1090 MR. WARREN: Mr. Andrews, could I ask you to turn up Exhibit D.1, tab 12, page 1 of 2 updated, the blue-page update. 1091 MR. ANDREWS: I have it. 1092 MR. WARREN: I should say by way of overview, Mr. Andrews, in fairness to you, I'm going to begin with a cluster of questions on the GDAR issue and then turn to the ABC after that. 1093 Looking at the bottom of the first page of Exhibit D.1, tab 12, page 1 updated, am I right, Mr. Andrews, that Union is seeking to recover in rates the sum of approximately $6.08 million in respect of GDAR costs? 1094 MR. ANDREWS: If that's the result of the sum of the capital cost of 4.78 million and the operating cost of 1.3; is that what you've done? 1095 MR. WARREN: That's what I've done, sir. 1096 MR. ANDREWS: Yes, sir. 1097 MR. WARREN: It's always dangerous to take my math, but it's fairly straightforward, isn't it? 1098 Now, can I just turn for a moment, then, Mr. Andrews, by way of background, am I right in understanding that the Board's original decision on GDAR was appealed, at least in part, to the Divisional Court; is that correct? 1099 MR. ANDREWS: That is correct. 1100 MR. WARREN: And am I correct that the decision of the Divisional Court on that the matter is the subject of an application for leave to appeal to the Court of Appeal? 1101 MR. ANDREWS: That is correct. 1102 MR. WARREN: And would I be -- perhaps you could tell me. In your application for leave to appeal, are you seeking, among other forms of relief, a stay of the Board's GDAR decision pending the outcome of the appeal? Perhaps your counsel can answer that question more easily than you can. 1103 MR. SMITH: Well, the answer to that is no, the notice of motion for leave to appeal seeks only leave to appeal to the Court of Appeal from the Divisional Court's decision, which, from Union's perspective, related only to chapter 6. 1104 MR. WARREN: Does the appeal, sir, have anything to do with - and, again, perhaps your counsel can answer this - the chapter 4 requirements that are the subject of the cost estimates in your prefiled evidence? 1105 MR. SMITH: Well, the answer to that is no, at least the appeal is limited to the jurisdiction of the Board with respect to vendor-consolidated billing and distributor-consolidated billing. There is an impact on chapter 6 from chapter 4 in that marketers are the parties who direct the service transaction requests, but they're not -- that section itself is not under appeal. 1106 MR. WARREN: Perhaps, Mr. Chairman, then, for purposes of this cross-examination, if I could get Mr. Smith to put on the record this: Will the effect -- if leave is granted, is one of the possible effects that the jurisdiction of the Board to require Union to comply with chapter 4, will that be one of the possible effects of an appeal, if leave is granted? 1107 MR. SMITH: I'm -- I'm sorry, Mr. Warren, I was both listening with my left ear and my right ear and now have nothing to say out of my mouth. 1108 MR. SOMMERVILLE: Would you repeat your request, Mr. Warren. 1109 MR. WARREN: I'm hesitant to ask which ear was my ear, but let me telescope the issue in this way, if I can, members of the panel and Mr. Smith. 1110 What I want to know is whether or not the necessity to implement the requirements derived from chapter 4 of GDAR sometime in fiscal 2004 will be or might be affected by the outcome of the appeal? That's really what I'm trying to get, Mr. Smith. 1111 MR. SMITH: The answer to the question is no. 1112 MR. WARREN: Is no? Okay. Thanks very much. 1113 My next series of questions, Mr. Andrews, is this: Your original request for relief in this case, if I can ask you to turn up your original prefiled evidence which is Exhibit D.1, tab 12, page 1 of 11 -- sorry, page 4 of 11. 1114 You were originally seeking, and correct me if I am wrong, to recover in rates approximately $9 million comprised of $8.12 million in capital expenses and about $850,000 in operating and maintenance expenses; is that correct? 1115 MR. ANDREWS: That is correct. 1116 MR. WARREN: And can you tell me, sir, why the reduction from approximately $9 million to about the $6 million which you're seeking to recover now? 1117 MR. ANDREWS: Yes. At the time when we had put the prefiled evidence together, we had not yet had an opportunity to work with our principle consultant to basically sit down and do a thorough review of the requirements of chapter 4, so our earliest estimate was a very conservative estimate. We had made some assumptions regarding what we thought we had to change in the way of processes and the systems, but it wasn't until we had an opportunity to work with our principal consultant that we were able to more narrowly define requirements. 1118 MR. WARREN: Could you turn up, please, in that same original prefiled evidence, Exhibit D.1, tab 12, page 9. And also at the same time, it would assist you if you could turn up Board Staff Interrogatory No. J.1.94. 1119 MR. ANDREWS: I have those. 1120 MR. WARREN: Exhibit J.1.94, Mr. Andrews, breaks out the components of the revised capital cost estimate of $4.78 million and then the page over, you've got the revised estimate of the O&M costs of $1.3 million. 1121 Can you tell me where I might find, in the prefiled evidence including the interrogatory responses, the evidence which would justify the prudence or reasonableness of these costs? 1122 MR. ANDREWS: Well, I think that's what I'm here today for, Mr. Warren, is to have that discussion. Given that the gas distribution access rule was required by the Board for the utilities to implement, that's why we're here today, to basically present these costs to you, to be able to explain to you the nature of the costs and why it is we feel we have to make these changes. 1123 MR. WARREN: Let me then go to the nub of the issue, and in this connection if you could return to your original prefiled evidence at Exhibit D.1, tab 12, page 2 of 11. In the first full paragraph on that page, beginning at line 9: 1124 "The implementation of GDAR is driven exclusively by the need for regulatory compliance. Recovery of the costs of implementing GDAR are not contingent upon Union demonstrating that the costs of implementing the rule are outweighed by any benefits that might result from the enactment of the rule since Union is obligated by the rule to comply." 1125 Now, would I be fair in reading that prefiled evidence, my gloss on is this and please correct me if I am wrong, that Union feels it does not need to justify these expenditures as prudent because it is obligated to make these expenditures; is that a fair reading on my part? 1126 MR. ANDREWS: No, it's not a fair reading on your part, Mr. Warren. All we're simply indicating there was that Union was not under any obligation to determine whether or not the benefits of incurring the costs would, in fact, be either outweighed by the costs or not. However, that doesn't relieve us of the obligation to determine the prudency. 1127 MR. WARREN: Now, in addition to seeking recovery of the some $6.08 million, you are seeking approval of the establishment of a deferral account; is that correct? 1128 MR. ANDREWS: That is correct. 1129 MR. WARREN: And the deferral account will have recorded in it, what? 1130 MR. ANDREWS: It will record the variance, the variances from the costs incurred to implement the systems changes. 1131 MR. WARREN: What would your objection be -- sorry. 1132 Do you have any estimate now of the quantum that may be reported in that deferral account? 1133 MR. ANDREWS: At this point, I don't think there's anything that's recorded in the deferral account. I think what's going to be recorded will be the variance from our estimate of the capital costs. 1134 MR. WARREN: And will the deferral account record only those costs related to chapter 4 compliance? 1135 MR. ANDREWS: Yes, that's correct. 1136 MR. WARREN: Finally, on the issue of GDAR, sir, the allocation of the costs of the GDAR, can you tell the Board how they will be allocated in terms of customer classes? Or is that for another panel? 1137 MR. ANDREWS: I think that question would be best answered by the cost allocation panel, sir. 1138 MR. WARREN: And my final question, sir, is can you tell me, has anyone signed up for the GDAR service, the chapter 4 service? 1139 MR. ANDREWS: They don't have to sign up for it, sir. 1140 MR. WARREN: Has anybody indicated any interest in using the chapter 4 service? 1141 MR. ANDREWS: Yes, we had a recent checkpoint meeting with our gas-vendor customers the week of October 8th and 9th and they were all represented at these meetings. I think we all feel that this is a matter of Board compliance, so we recognize we will all be operating under those rules, whether we're interested or not. 1142 MR. WARREN: Can I turn briefly, sir, to the ABC service. 1143 MR. ANDREWS: Yes. 1144 MR. WARREN: Your prefiled evidence on this is found at C.1, tab 5; is that correct? 1145 MR. ANDREWS: That is correct. 1146 MR. WARREN: And looking at page 2, the service, can you describe briefly what it is? What does the ABC service consist of? 1147 MR. ANDREWS: What is ABC service? 1148 MR. WARREN: Yes, what does it consist of? 1149 MR. ANDREWS: Basically, it consists of Union billing on behalf of the gas vendors, and essentially what we do is we either put a combination of commodity, transportation, or storage prices on our bill and we bill to the residential customers and we will remit back amounts to the gas vendors, and the service also includes bad-debt protection so that Union Gas will take the risk on non-collection of those accounts. 1150 MR. WARREN: Okay. The sales contract between the vendor and the customer, Union, I take it, is not privy to that contract? 1151 MR. ANDREWS: That is correct. 1152 MR. WARREN: And whether Union would regard the terms of such a sales contract as fair and reasonable is not something that is Union's business; is that fair? 1153 MR. ANDREWS: Well, I think it's probably fair that the gas vendors would see it that way, but I think that, you know, given that these contracts are aimed at common customers, I would say that we care about what could be in these contracts that could put us in the middle of a sticky situation. 1154 MR. WARREN: Let's, if we can, then plunge into the middle of that sticky situation. Can you describe for the Board what the circumstances are under the existing ABC service if the customer fails to pay the amount to the gas vendor? 1155 MR. ANDREWS: Under the current service, if the customer fails to pay and depending on how long the outstanding receivable may be, it could trigger the process whereby we can invoke the shut-off of the gas service, but as I indicated before, the gas vendors are protected from that in that we will remit based on what's on the bill and we take the risk on the collection side. 1156 MR. WARREN: Yu take the risk on the collection side. Could do I understand that you would, in effect, enforce the contract up to and including the shut on off of service for the failure to pay the vendor for the price? 1157 MR. ANDREWS: I don't know that I would say that we're enforcing the contract per se. Again, I don't know what's in the contract. The contract that we have with the vendor, which is reflected in ABC service, is such that we will take the risk on non-collection of the commodity transportation and storage amounts that we will put on the bill. 1158 MR. WARREN: I just want to understand what's meant by the concept of you taking the risk. Is the right to enforce the contract assigned to you by the vendor pursuant to the ABC arrangement? 1159 MR. ANDREWS: It's based on our collection service agreement that we have with the gas vendor that we agree to take on that risk; that we will basically attempt to collect those amounts. But we will remit what's put on the bill, and if we can't collect, then it's up to us to manage that receivable. 1160 MR. WARREN: Okay. What does it mean to manage the receivable, sir? Do you sue the residential consumer? Let's take the example of the residential consumer. Do you sue the residential consumer to enforce -- to obtain payment of the default amount? 1161 MR. ANDREWS: No, we don't sue anybody. I mean, it could lead to the potential of shutting off the gas services. That would be the extreme. 1162 MR. WARREN: But you are, would you not agree with me, you are enforcing that portion of the contract; is that not fair? 1163 MR. ANDREWS: I'm sorry? 1164 MR. WARREN: You are enforcing that portion of the contract; is that not fair? 1165 MR. ANDREWS: The only reason I think I just differ with that interpretation is, again, based on the terms and conditions of the collection service agreement. We have an agreement whereby we're saying we will provide and remit to the vendor whatever it is they put on the bill, and that's as far as they have to go. The rest is up to us, this part of the service that we offer. 1166 MR. WARREN: Now, your evidence on the ABC service was in two tranches; the first is Exhibit C.1, tab 5, and it's dated May 2003; correct? 1167 MR. ANDREWS: Correct. 1168 MR. WARREN: And the second tranche is described as an evidence addendum and it's dated August 14, 2003; is that correct? 1169 MR. ANDREWS: That is correct. 1170 MR. WARREN: And the -- if you could turn up the addendum evidence, please. 1171 MR. ANDREWS: I have it. 1172 MR. WARREN: And would I be correct, sir, in understanding that what is new in the addendum evidence -- does the Board have that? 1173 MR. SOMMERVILLE: I do not. 1174 Thank you, Mr. Wightman. 1175 MR. WARREN: Now, would I be correct in understanding, sir, that what is proposed by the addendum evidence is an addition to the ABC service whereby gas vendors have asked Union, and I'm quoting from the top of page 2: 1176 "Gas vendors have requested that Union bill, as part of the ABC service, consumers for early exit fees in the event that a consumer chooses, under 4.3.2.1(b) of the GDAR, to submit a request for a change in gas supply from a gas vendor to sales service." 1177 Correct? 1178 MR. ANDREWS: Yes, they have made that request to Union. 1179 MR. WARREN: Can you tell me, sir, between the original prefiled evidence in May of 2003 and August of 2003, what circumstances changed to add -- to ask you to -- ask the Board to include an ABC service for that particular feature? 1180 MR. ANDREWS: Well, our rationale for making this addendum was simply to give the Board a head's up, that given that we were seeking approval to continue to offer the ABC service, we didn't want the Board to be surprised if, let's say, after that approval was granted, that we had, in fact, perhaps made some enhancements or added some features to the service. So that was the reason for the addendum, was to simply give the Board the head's up. 1181 However, I should clarify, though, that circumstances have changed. What this evidence indicates is that we are interested in pursuing this feature because the vendors have asked us to do this by virtue of GDAR. Given the fact that consumers, as a result of GDAR, can elect to take themselves out of a direct-purchase contract with a gas vendor, the gas vendors were saying, Well, you have the bill. We'd like you to put these exit fees on the bill. 1182 At this point in time, this is still very much an early work in progress. If we examine the situation and we examine the basic business model that currently underpins the ABC service, as I described earlier, the way the service works is that we will bill the consumer and we will remit to the gas vendor, and that we take the risk on collection. 1183 But after examining the situation with exit fees, we came to the conclusion that we cannot shut off gas service for non-payment of the exit fees, nor do we want to; nor do we want to allocate payments. If a consumer should provide a reduced payment to the utility without any further direction from the consumer, we don't want to allocate that to the exit fees. 1184 So what we've concluded is that the existing or the current business model for ABC isn't going to work under these circumstances. So where we are at now, and as I just mentioned, this is very much still an early work in progress, is that we are now looking at offering a billing service only. In other words, we will put the exit fees on the bill and we will attempt to collect. And at this point, I think the business model that we are going to put forward to our executive for review and approval to pursue is that we won't remit until we've actually collected an amount from the consumer, and we'll even put a time limit on it; in other words, we'll give it three months. And if we don't collect anything after three months, then that's it. 1185 The point of that is, A, we will not take the risk on the bad debt so therefore our bad-debt costs will not increase as a result of that. Two, we want to make sure we provide some incentive to the marketers to keep these fees reasonable. We've communicated this to vendors and they are fine with this; however, as I said, we haven't pursued this any further at this point. This is still very much an early work in progress. 1186 MR. WARREN: What I want to understand is -- you've included this exit fee in the prefiled evidence, and what I need to know from you, Mr. Andrews, is what exactly the Board's being asked to approve. 1187 Let me give you some context for that, Mr. Andrews. During the course of some of the proceedings today, Mr. Janigan was kind enough to let me have access to his computer and so I turned up the Direct Energy web page and I went to one of the contracts which is on their web page which provides for the option of a five-year contract. It provides that if the contract is cancelled, courtesy enough by Direct itself, that the exit fee payment is 7 cents a cubic metre for the amount that would be consumed under the balance of the contract. 1188 Now, if we can assume -- can I assume, for the sake of this discussion, that a typical residential consumer would consume somewhere between two and a half and 3,000 cubic metres a year? 1189 MR. ANDREWS: Yes, that's correct. 1190 MR. WARREN: Now, if I am right about that and the contract is cancelled early enough in the five-year term, a residential consumer might be looking at an exit fee somewhere in the neighbourhood of 750 to $1,000; will you take that, subject to check? 1191 MR. ANDREWS: Yes. 1192 MR. WARREN: Okay. Would you agree with me that if that were suddenly to appear on a Union bill, that that might come as a surprise, it would be a shock to residential consumers; correct? 1193 MR. ANDREWS: We're convinced it would be a surprise and a shock. 1194 MR. WARREN: Okay. And in addition to being a surprise and a shock, it would presumably elicit a stiff response -- might elicit a stiff response from the consumer directed to Union Gas; correct? 1195 MR. ANDREWS: Yes, and that is a concern that we do have. 1196 MR. WARREN: Now, can you describe for me, under the present circumstances, how are the exit fees collected? First of all, they don't appear on the bill pursuant to the existing ABC service; is that correct? 1197 MR. ANDREWS: That's correct. 1198 MR. WARREN: And how would they be collected? 1199 MR. ANDREWS: I have no idea, sir. I can only assume that the gas vendors may attempt to collect them themselves, but I really don't know that. 1200 MR. WARREN: Now, you indicated a moment ago in response to my question that Union may have a concern, indeed, has had a concern, that the exit fees not be unreasonable or unfair. I can't remember what your word was, but it was something to that effect; is that fair? 1201 MR. ANDREWS: That's fair. 1202 MR. WARREN: Okay. Now, are you asking the Board, in this decision, to approve an ABC service that contains that exit-fee provision; or, in the alternative, will you defer the request for approval of that service until you finalize what the details of it are? 1203 MR. SMITH: Well, sorry, just if I might, Union's position on the application, I think, would be more appropriately the subject of argument. But Union's position on the application is simply that Union is seeking the order of the Board to provide ABC service. It's Union's position, and I suppose, again, it would be argument, that the nature of that service is not something that's regulated by the Board and is indeed a subject of contract between the vendors and Union. 1204 So in terms of what Union is asking for, it's asking for permission to continue to provide an ABC service; and then the specific form of that, of course, is the subject of discussions between what the marketers might want and what Union feels it can do. 1205 MR. WARREN: Mr. Andrews -- sorry, Mr. Smith. 1206 MR. SMITH: And I was just saying and that is -- and the evidence is something to provide intervenors and the Board with an indication of what that service might look like. 1207 MR. WARREN: Mr. Andrews, in light of what Mr. Smith has told us, as I understood your evidence earlier today, you felt it important that the Board know exactly what the ABC service consisted of when you were seeking approval to continue it; correct? 1208 MR. ANDREWS: Yes, we wanted to remind the Board of what the basic service is, that's correct. 1209 MR. WARREN: But as we stand here today, as I understand your evidence, there may or may not be an exit fee component of it and what the exit fee component of it is is uncertain at this point; is that correct? 1210 MR. ANDREWS: That is correct. 1211 MR. WARREN: Those are my questions of this panel. Thank you very much, sir. 1212 MR. SOMMERVILLE: Mr. Warren. 1213 Mr. Janigan. 1214 MR. JANIGAN: Yes, thank you, Mr. Chairman. 1215 CROSS-EXAMINATION BY MR. JANIGAN: 1216 MR. JANIGAN: Mr. Andrews, I understand that the new forecast of GDAR is a result of Union's completion of its scope and analysis phase, am I correct? 1217 MR. ANDREWS: That's correct. 1218 MR. JANIGAN: And has Union filed in this proceeding the results of the scope and analysis phase that supports the lower capital cost of the increased O&M cost? 1219 MR. ANDREWS: We have filed an update letter that basically flowed from or came from or was a result of our completion of the scope and analysis phase. 1220 MR. JANIGAN: Well, I note I think in J.1.94 that this scope and analysis phase cost $140,000, did that produce a report? 1221 MR. ANDREWS: What came out of it, there was a lot of information that came out of the scope and analysis phase as a result of our work with our principal consultant, Sapient, and Sapient is not -- we didn't hire them to do the budgeting, so all that would flow from that would be the scope of the system changes that we were proposing to take to the design phase and their price for the define phase. 1222 MR. JANIGAN: You didn't get any report as a result of that? 1223 MR. ANDREWS: What kind of a report would you be referring to? 1224 MR. JANIGAN: Well, that set out the reasons for the differences in costs and why the program would be changed. 1225 MR. ANDREWS: Well as I had indicated earlier, Sapient was not involved in our early estimate of those costs so they really wouldn't be able to be in a position to explain the difference. Those were based on our own early estimates without having the benefit of having worked with Sapient during the scope phase. 1226 MR. JANIGAN: And when you developed your scope and analysis was there a report prepared? I guess what I'm trying to do is see if there is a report and if there is a report can you undertake to produce it? 1227 MR. SMITH: I think Mr. Andrews indicated there is no such report. 1228 MR. JANIGAN: Is that your he had evidence, Mr. Andrews. 1229 MR. ANDREWS: That's correct there is no -- I'm not sure what report you're looking for, but I think it's fair to say there probably isn't one that you're referring to or what you have in mind. 1230 MR. JANIGAN: Okay. If you could turn up interrogatory J.34.76. 1231 MR. ANDREWS: I have it. 1232 MR. JANIGAN: And if I'm reading this interrogatory correctly, I believe that having a fixed-price concept is one of the reasons that Union cites for selecting Sapient as the contractor in this case, rather than going out to tender? 1233 MR. ANDREWS: That's one of the reasons, Mr. Janigan. 1234 MR. JANIGAN: And of the new forecasted costs for GDAR chapter 4 compliance, how much of that cost is the projected payment to Sapient? 1235 MR. ANDREWS: The consulting costs that are included in that revised estimate of 4.78 million would be about 2.99. 1236 MR. JANIGAN: And is there a contract to provide the work for a fixed price? 1237 MR. ANDREWS: Yes. So far we've had three separate contracts. The way it works with Sapient is that you basically contract with them one phase or one step at a time, so it would have been what we referred to as a statement of work for this scope and analysis phase, there would have been and is a statement of work for the design phase, and we had a little bit of work with respect to having to make some changes in order to facilitate Internet Explorer 6.0. We contracted for that separately with them, so there would be a statement of work for all three of those statements of work. We are in the process of putting a statement of work in place for the build phase. 1238 MR. JANIGAN: Is there anything in that contract that may cause this portion of the GDAR cost to escalate further? 1239 MR. ANDREWS: Absolutely not. 1240 MR. JANIGAN: Now, in the original evidence, at D.1, tab 12, pages 6 to 9, you review how the Union systems and process will need to be altered due to the GDAR chapter 4 requirements and it sets out the different changes that must be made. 1241 I wonder, given the extensive changes to the existing system, why Union elected not to use a competitive bid process to procure the external consultant? 1242 MR. ANDREWS: For a number of reasons, Mr. Janigan. Sapient is the original architect of the Union Line application and we've had this application in service now for over a year. It was implemented back into July of 2002 as a result of the enabling unbundling hearing. So they know this application better than anybody else since they are the original architect. 1243 Two, we made a very quick decision and probably what I'd refer to as a no-brainer, that we are in the position of not having to start from scratch. So we knew that we were going to simply make modifications to the Union Line application as well as two of our back-office applications contracts and Banner. 1244 Thirdly, Sapient had undertaken to learn all about GDAR on their own. They were aware that this thing was coming down, so they had spent some time basically looking at the document, looking at the various drafts, and when the final order came down they had undertaken to do a GAP analysis and came to us and said, Look, we've read this document, we've been working with Enbridge, which by the way we had persuaded Enbridge to work with them, and they indicated that they were in a good position to help us understand what those change requirements would have to be, and of course, they also bring the fixed price, fixed term approach to the table as well. 1245 MR. JANIGAN: Now, in your answer in Interrogatory J.34.76, you indicated that: 1246 "Union is always in the position to tender for service should Union not be assured or convinced that Sapient's prices represent fair value." 1247 My question is that if Sapient starts off on this GDAR project, isn't it going to be hard for Union to elect another consultant to take over the project after the project has begun if they are convinced that Sapient's price doesn't represent a fair value? 1248 MR. ANDREWS: Well, I guess it depends where you're at in the process. Again, the first step of the project is to work with them on the scope and analysis phase, again we contract separately for that, and if we're not satisfied with the deliverable after that point, we could move on to someone else if we chose to. 1249 Then we moved on to the design faces and again, after the design phase we are not committed to continue to work with Sapient beyond that, but they continued to deliver on time and on budget. And now that we're about to enter the build phase, again, there's nothing that says that depending on where things go that we couldn't stop this thing. But again, we've been working with these guys since 1999 and they've always delivered on time and on budget. So something fairly catastrophic would have to happen for us to upset that relationship at this point. 1250 MR. JANIGAN: So under development of the Union Line, for example, the actual cost of this project, did it come above or below forecast? 1251 MR. ANDREWS: Below. 1252 MR. JANIGAN: And is this GDAR forecasted costs for compliance to chapter 4 been projected based on the assumption that Union obtains an approval for the validation exemption? 1253 MR. ANDREWS: What we did with the validation exemption, Mr. Janigan, is that we've designed around it. So in other words, our cost estimates basically allow us to facilitate that particular article verbatim. 1254 MR. JANIGAN: If I can understand, so that your cost estimates include that without the exemption? 1255 MR. ANDREWS: They include that without the exemption. 1256 MR. JANIGAN: Now, does Union know the cost that Enbridge is expected to incur in order to be compliant with the GDAR chapter 4 requirements? 1257 MR. ANDREWS: No, I do not. 1258 MR. JANIGAN: If you could turn up J.1.94, which was referred to earlier, it's the breakdown of GDAR costs. 1259 MR. ANDREWS: I have that. 1260 MR. JANIGAN: What is the materials and postage costs of $140,000 for? 1261 MR. ANDREWS: If you actually go through all of the 60-some articles under chapter 4, what the GDAR requires is, in many circumstances, that we have to provide notification as to the status of a particular service transaction request, which we call an STR. And we will make those status updates, or will make those communications in one of a couple of ways. 1262 When we communicate back to the gas vendors, we will do so electronically through Union Line, as we have been doing since Union Line was implemented last year. But with respect to the consumers, we will make those notifications in writing; we will send them a letter as to the status of a particular STR. 1263 So we went through each of the articles and we determined where an out-bound communication to consumers is necessary, and then we simply made some assumptions as to how often we'd have to do that. 1264 MR. JANIGAN: And now do these then go to all customers or just to customers that have elected a gas vendor? 1265 MR. ANDREWS: Well, the communication or the notification would only go to those customers who are involved -- who are attached to that particular service transaction request. 1266 MR. JANIGAN: And O&M costs went from 850,000 to 1.3 million. What O&M cost drove this increase? 1267 MR. ANDREWS: Well, essentially the fact that the changes to our Banner application are made by Alliance Data Systems, ADS, and we don't own the Banner application, so our finance people told me that we can't capitalize those costs; therefore, they are a one-time cost of $540,000 that are going to be treated as one-time O&M. 1268 MR. JANIGAN: Why are they treated as O&M when it sounds as if they are -- I mean they -- 1269 MR. ANDREWS: Well, because we don't own the Banner application, sir; therefore, under accounting rules, we can't capitalize that. 1270 MR. JANIGAN: And that principally accounts for the difference in the O&M. What about the reduction in the capital costs? 1271 MR. ANDREWS: Well, again, I think I'd indicated earlier that by the time we had put the prefiled evidence in place, we had not had an opportunity to work with Sapient to basically go through a thorough review of the scoping exercise. So we made some very conservative estimates and assumptions around the extent of the changes that we thought we'd have to make. 1272 MR. JANIGAN: I take it that $540,000 that we referred to earlier is a one-time O&M, and that the O&M budget will be reduced subsequent to that in subsequent years. 1273 MR. ANDREWS: That is correct. That is not a repeatable amount. 1274 MR. JANIGAN: And in the event that GDAR costs are greater than your forecast, is it Union's view that it will only have to justify the cost increase in excess of the forecasted costs? 1275 MR. ANDREWS: I think the answer is no to that. I mean, we're here today to basically justify and explain the entire cost estimate, so we certainly want to demonstrate the prudency of that. But to the extent of that, if we come in over budget, I guess we would certainly seek to recover those costs and we would have to explain the reason for that, that overspend. 1276 MR. JANIGAN: Finally, with respect to ABC, apart from commodity costs, is there anything that Union currently recovers on behalf of the marketers as part of the ABC service for customers? 1277 MR. ANDREWS: There are some -- in some cases, there are some administration charges that would -- could appear on a bill. 1278 MR. JANIGAN: What would they be? 1279 MR. ANDREWS: These would be miscellaneous charges between the gas vendor and the consumer, but they are very modest in scope. 1280 MR. JANIGAN: And is it Union's position that the Board may exercise its jurisdiction to approve the ABC service without approving the charging of exit fees? 1281 MR. ANDREWS: No. 1282 MR. JANIGAN: So that it's -- it is simply a decision that they're requesting either approval of the ABC service with the ability to charge exit fees or turn it down completely? 1283 MR. ANDREWS: That's correct. 1284 MR. JANIGAN: Thank you. Those are all my questions. 1285 MR. SOMMERVILLE: Mr. Janigan. 1286 MR. DINGWALL: I'm wondering if I might beg the indulgence of the others intervenors to go slightly out of turn. I anticipate I could go as long as to 4:30 and be, hopefully, as concise as possible. 1287 MR. SOMMERVILLE: Unless someone speaks up, Mr. Dingwall, you can assume that you have their indulgence. 1288 MR. DINGWALL: Thank you, sir. 1289 CROSS-EXAMINATION BY MR. DINGWALL: 1290 MR. DINGWALL: Mr. Andrews, firstly, with respect to the ABC service, I take it that the current costing of the ABC service includes the bad debt associated with that service in the service fees. 1291 MR. ANDREWS: That is correct. 1292 MR. DINGWALL: Have you had occasion to look at forecast or estimate what might happen with the bad debt associated with the service if that service includes exit fees? 1293 MR. ANDREWS: Nothing's going to happen to the bad-debt expense associated with ABC if we put exit fees on the bill, because, as I indicated earlier, we are not prepared to take the collection risk and therefore we are not going to force our customers to pay if they choose not to pay. The risk will rest entirely on the shoulders of the gas vendors. 1294 MR. DINGWALL: And I know your evidence earlier was that you had not thought out the service completely at this point, but could I give you one example and ask for your response: If a customer were to switch from marketer A to marketer B, I presume the time that you would place the exit fee on the customer's bill would be the last bill with marketer A; would that be correct? 1295 MR. ANDREWS: Well, that's essentially correct, yes. 1296 MR. DINGWALL: Would that fee continue to appear on that customer's bill once they had migrated to marketer B? 1297 MR. ANDREWS: Unfortunately, Mr. Dingwall, as I indicated earlier, this is very much in the early stages of putting together the business principles for this service, so I really can't say for sure exactly what the service will look like by the time -- if and when we roll this out. 1298 MR. DINGWALL: Now, I understand the approval you're seeking is sort of an all-or-nothing one; is that correct? 1299 MR. ANDREWS: That's correct. 1300 MR. DINGWALL: Does Union Gas have the interpretational position that disconnection of utility services is a matter subject to the regulation of the Ontario Energy Board? 1301 MR. ANDREWS: I suppose I'm at a bit of a loss. I don't have the Act in front of me, but I understand that the Act does provide for -- for disconnection. 1302 MR. DINGWALL: And if the Board placed restrictions around the disconnection of customer accounts that limited the use of that methodology for the collection of exit fees, would Union then not wish to go forward with the ABC service? 1303 MR. ANDREWS: If there is restriction placed on discontinuing gas service for non-payment of exit fees; is that the question? 1304 MR. DINGWALL: Yes. 1305 MR. ANDREWS: Well, as I indicated earlier, we're already prepared -- I think we're past that already. I think we've already determined that we recognize that we can't and we won't shut off gas service for non-payment of exit fees, number one; and number 2, we'll only be willing to try to collect them for a short period of time. I mean, that's as far as we're at as far as the design of that service at this point. 1306 MR. DINGWALL: Now, with your saying earlier that Union Gas did not want to take risk for the non-collection or non-payment of exit fees, does that mean that each marketer would bear its own risk, from a financial perspective, for the exit fees? 1307 MR. ANDREWS: Yes, they would. 1308 MR. DINGWALL: So for the calculation, then, of ABC fees, going forward, would they be based solely around the commodity-related non-exit fee bad debt. 1309 MR. ANDREWS: Yes. Now, there may be -- if we do, in fact, put the exit fees on the bill, I would expect that there would still be some sort of administration fee associated with that, but there would be no fees associated with any bad debt that would flow from non-payment of those exit fees. 1310 MR. DINGWALL: And because the utility's, therefore, not taking collection risk with the exit fees, is that why you've not forecasted that the bad-debt rate for the utility itself would increase or have any affect from the billing of the exit fees? 1311 MR. ANDREWS: That's correct, sir. 1312 MR. DINGWALL: With respect to the other portions of GDAR, the chapter 4 portions and the open switching that that would result with, has that created any new market interest from marketers who are currently not operating in this market? 1313 MR. ANDREWS: I can't say that I'm aware that it has or it hasn't, sir. 1314 MR. DINGWALL: Okay. With respect to the 540,000 that you were speaking with Mr. Janigan with respect that relates to ADS services, has this amount been contracted? 1315 MR. ANDREWS: Yes it has, sir. 1316 MR. DINGWALL: Do you know when that was completed? 1317 MR. ANDREWS: The contracting or the work? 1318 MR. DINGWALL: The contracting? 1319 MR. ANDREWS: Contracting? I believe that was completed in June. 1320 MR. DINGWALL: Of 2002? 1321 MR. ANDREWS: 2003, yes, that would have been a separate statement of work that we would have entered into with ADS. 1322 MR. DINGWALL: And given the many machinations and perambulations of GDAR over the last five years, was this part of an ongoing discussion with ADS and its predecessor, Enlogix? 1323 MR. ANDREWS: No, absolutely not. 1324 MR. DINGWALL: Well, it was in December of 2002 that the decision enshrining GDAR partly in conflict, partly in fact came about. Did Union not foresee prior to that time that they might have some need to make some changes to the billing system to accommodate open switching? 1325 MR. ANDREWS: Well, we certainly anticipated that once the rule landed and knowing that the systems that we currently use today are, in facts, are our contract system, Banner and Union Line, then in all likelihood we would have to make changes to those systems, that much we did foresee, yes. 1326 MR. DINGWALL: So when did the discussions with ADS or its predecessor begin? 1327 MR. ANDREWS: It was earlier this year. 1328 MR. DINGWALL: So post-December 2002. 1329 MR. ANDREWS: Post-December 2002, that's correct. 1330 MR. DINGWALL: Okay. I'd like Mr. Moran to note what my estimate was for this panel and to also note what the actual was. 1331 Thank you, sir, those are my questions. 1332 MR. SOMMERVILLE: There's some in the bank, Mr. Dingwall. 1333 MR. MORAN: So noted, Mr. Chair. 1334 MR. SOMMERVILLE: Not much, but some. 1335 MR. MORAN: Five minutes. 1336 MR. SMITH: I'd like to know what the deferral account balance is. 1337 MR. SOMMERVILLE: Mr. Aiken. 1338 MR. AIKEN: Yes, I'm probably going to be about 15 minutes. 1339 MR. SOMMERVILLE: Mr. DeRose, I think you're -- 1340 MR. DeROSE: Assuming that Mr. Andrews answers my one question as I think he's going to answer it, I'm going to be one question. Two minutes. Would you like me to go first and then I can -- 1341 MR. SOMMERVILLE: I think that might work out better. 1342 CROSS-EXAMINATION BY MR. DeROSE: 1343 MR. DeROSE: Mr. Andrews, I just wanted to confirm that if there's any questions as to cost allocation or cost causality as it relates to GDAR, this is an issue to be dealt with in the cost allocation rate design panel. 1344 MR. ANDREWS: That's correct, sir. 1345 MR. SOMMERVILLE: You came under budget too, Mr. DeRose. 1346 MR. DeROSE: I'll bank it. 1347 MR. SOMMERVILLE: Mr. Aiken. 1348 MR. AIKEN: Well, I might come under budget now too because I will be deferring to the cost allocation panel. 1349 MR. SOMMERVILLE: There's some healthy competition underway. 1350 CROSS-EXAMINATION BY MR. AIKEN: 1351 MR. AIKEN: I was going to have you turn up the response to J.7.56, which is the allocation of the costs of the various rate classes. 1352 MR. ANDREWS: Yes, I have it. 1353 MR. AIKEN: Now, this is based on the original forecast. I'm looking specifically in the last column, $850,000 O&M, and I guess I also need you to look at J.1.169. 1354 MR. SMITH: J.1? 1355 MR. AIKEN: 1.169. 1356 MR. ANDREWS: I have that. 1357 MR. AIKEN: In part A of that answer in the original forecast column, you see at line 3 the $850,000. Of that 345,000 was to be recovered via DPAC and the other remaining 505,000 through delivery rates. So my question is, based on the original evidence, why in J.7.56 do we have an allocation to delivery rates of 850,000 rather than $505,000? 1358 MR. ANDREWS: Well, I'd have to have somebody from the cost allocation panel confirm this, but I think J.7.56 would be in error then. 1359 MR. AIKEN: Okay. Back to the J.7.56, the second paragraph just above the table, it says: "These allocations will be updated with a blue-page update of phase 2 evidence as filed." 1360 Now, I may have misplaced it, but I did not see an update to this response and if there wasn't, could you undertake to provide an update based on the revised capital and O&M costs? 1361 MR. ANDREWS: Yes, I can do that. I'll have to consult with the cost allocation group, but yes, I can do that. 1362 MR. MORAN: Mr. Chair, that will be Undertaking N.10.3, to either confirm there's an update for Exhibit J.7.56 or provide an update. 1363 UNDERTAKING NO. N.10.3: TO EITHER CONFIRM THERE'S AN UPDATE FOR EXHIBIT J.7.56 OR PROVIDE AN UPDATE 1364 MR. SOMMERVILLE: Thank you, Mr. Moran. 1365 MR. AIKEN: Now, the 540,000 you just mentioned to Mr. Janigan, you said you can't capitalize that. Can you amortize it? 1366 MR. ANDREWS: I presume you can, Mr. Aiken, but I'm not the finance expert here today, so you'd have to take that up with somebody in our finance group, and I believe you've already had that discussion with Pat Elliott the other day. I would have to defer to her judgment. 1367 MR. AIKEN: We had her discussion about amortizing the rate-rider cost. So you would take her opinion to be applied to the GDAR O&M for the 540,000 in a similar manner? 1368 MR. ANDREWS: Yes, I would. 1369 MR. AIKEN: Okay. On the ABC, I think my only question there is: Is there somewhere in the evidence where we can compare the revenue forecast for ABC to the fully-loaded cost of providing the ABC service; in other words, to make sure that it's not being subsidized by delivery rates, or is that something for the cost allocation panel? 1370 MR. ANDREWS: I don't think it would be something that the cost-allocation panel would be providing but my understanding is that the only thing that would have been provided in our evidence would have been the revenues associated with the ABC service for the 2004 test year. 1371 MR. AIKEN: And in that provision of the revenues, is there a determination somewhere that shows that the revenues cover the costs of the program? 1372 MR. ANDREWS: Well, I haven't put any evidence together to that effect, sir, so I don't know if there's anything in the evidence elsewhere that would be put forward by a cost allocation panel or not with respect to costs and revenues. 1373 MR. AIKEN: Let me ask the direct question then. Do the revenues cover the cost of providing the ABC service? 1374 MR. ANDREWS: Yes, they do. 1375 MR. AIKEN: Thank you. Those are my questions. 1376 MR. SOMMERVILLE: Mr. Moran. 1377 MR. MORAN: Mr. Chair -- oh, I beg your pardon, Ms. Singh, you were hiding behind Mr. Janigan there and I didn't see you. My apologies. 1378 MR. JANIGAN: Easy to do. 1379 MR. SOMMERVILLE: Or Mr. Janigan was concealing you. 1380 MS. SINGH: That's probably better. 1381 Thank you, Mr. Chair. 1382 CROSS-EXAMINATION BY MS. SINGH: 1383 MS. SINGH: Am I correct in my understanding, Mr. Andrews, I think I understood this from your discussion with Mr. Janigan, that the current estimate of 4.78 million for capital and 1.3 million for O&M is an upset limit, or does Union anticipate there will be overruns? 1384 MR. ANDREWS: Well, at this point and after -- and we've just completed our design phase - but I haven't seen anything at this point to indicate that we will exceed those estimates. But I do remind everyone, and I do remind the Board, that we still have that letter that we had submitted on May 23rd seeking the exemption and seeking some clarification. So until we get a response to that letter - and hopefully there aren't going to be any cost consequences from that - I can't say categorically that there isn't anything else that's going to come along to take us above the current estimates. 1385 But at this point, based on what we've seen so far, we're in good shape. 1386 MS. SINGH: Is there any contractual protection that Union intends to negotiate or plans to negotiate with contractors to ensure that the cost estimates will not be exceeded? 1387 MR. ANDREWS: Well, we have been doing that all along with Sapient. And, again, the way it works is that we basically lock down our price and the terms. So, for example, when we undertook the design phase, it was a nine-week engagement and so they guaranteed us a price. The only time that we can exceed that is if we request to spend more time, discuss more scopes. So in other words, Sapient will say, Okay, we understand what's in scope, we understand what it is we have to do, so we will guarantee a price. But if we come along and say, Well you know, those five things we wanted you to do, we now want you to do ten things, in which case it's not fair to expect them -- that they can continue to guarantee that price. So unless we direct them to do things that they hadn't anticipated, we are guaranteed a price. 1388 MS. SINGH: And you will reflect that in your contract? 1389 MR. ANDREWS: Yes, that is in the contract, that's correct. 1390 MS. SINGH: I think it was in Exhibit J.18.18, there's a suggestion that the costs, the capital and/or the O&M costs associated with implementing compliance with chapter 4, will be shared between sales-service and direct-purchase customers; is that correct? 1391 MR. ANDREWS: What was that reference, I'm sorry? 1392 MS. SINGH: J.18.18. But regardless, just -- is that your understanding? Could you confirm for me that the costs will be shared or ... 1393 MR. ANDREWS: I don't think that's correct. 1394 MR. SMITH: I'm not -- I don't think that 18.18 is exactly the correct reference. 1395 MR. MORAN: 18.118, I think, might be the correct reference. 1396 MR. SMITH: 18.118. 1397 MS. SINGH: Thank you, Mr. Moran. 1398 MR. ANDREWS: I have J.18.118, and I believe your question was: Will the capital operating costs be recovered from both system-gas and direct-purchase customers? That is correct. 1399 MS. SINGH: Okay. Thank you. 1400 And now if I could just ask you to turn up J.18.108 where the components of the 1.3 O&M costs are set out together with the one-time charge of 540,000 for system development. 1401 MR. ANDREWS: I have that. 1402 MS. SINGH: Could you explain the difference between system development and the design function listed on page 1 of -- sorry, Exhibit J.1.94, which also sets out the components of the 1.3 million, you'll see on page 2. 1403 MR. ANDREWS: I have both of these exhibits, so could you just perhaps repeat the question again. I'm not sure what two terms I'm comparing here. 1404 MS. SINGH: The difference between the system development and the design function listed on the first page of Exhibit J.1.94. I believe you explained to Mr. Janigan why the system development is an O&M cost and not a capital cost; but I was wondering if you could also explain the difference between the system development and design function. 1405 MR. ANDREWS: What I was explaining to Mr. Janigan was that the costs associated with having ADS make changes to Banner; and whether they're design, scope, build, regardless, because we don't own the system, the application itself, we cannot capitalize so they're going to be treated as one-time O&M. So there really is no difference in terms of, you know, whether it's design or -- it doesn't really matter. I don't know if I'm answering your question, but I'm ... 1406 MS. SINGH: Well, I'm just wondering, in terms of the allocation between the O&M and the one-time 540,000 cost, if there's -- if there was a reason of segregating them in that way as a capital cost and an O&M cost, beyond what you've said? 1407 MR. ANDREWS: No. Again, it's just driven by the accounting treatment for the ADS costs. 1408 MS. SINGH: Okay. May I ask you to turn up Exhibit 7.56. 1409 MR. MORAN: Is that J.7.56? 1410 MS. SINGH: J.7.56. 1411 MR. ANDREWS: I have that. 1412 MS. SINGH: Has this answer been updated to reflect the new capital and O&M cost estimates that you've got in your blue-page update? 1413 MR. SMITH: If I might, Mr. Chair, I believe that was the subject of an undertaking that was given a moment ago in response to Mr. Aiken's question. 1414 MS. SINGH: Thank you. 1415 Can I ask what criteria Union used to make the allocations by rate class shown in that exhibit? 1416 MR. ANDREWS: I'm going to have to defer that to the cost allocation panel. 1417 MS. SINGH: Can you describe the incremental O&M activities involved and why these activities cannot be performed within the O&M resources. 1418 MR. ANDREWS: Are you referring to an explanation of the $1.3 million? 1419 MS. SINGH: Yes. 1420 MR. ANDREWS: Okay. Well, I guess first off, $540,000 represents, again, the one-time O&M associated with ADS making the system changes to our Banner system, so that leaves $760,000 as incremental ongoing O&M. Of that, $230,000 represents approximately three staff-adds in our information systems group. 1421 By virtue of adding additional functionality to our applications, Banner contracts, and Union Line, it requires ongoing sustainment by the IS group, and they are at a point now where they can barely keep up with the sustainment requirements so we need additional resources there. 1422 There's another $120,000 associated with our retail group, and essentially what we're looking at there is 1.65 staff-adds with respect to our retail call centres, because we anticipate an additional influx of phone calls on an annual basis by virtue of GDAR; in other words, consumers are going to be calling in and asking for the status of STRs. 1423 Then that leaves us with $410,000 in the direct purchase area, which is my area of responsibility. Of the $410,000, I think I had already indicated that 140,000 of that is related to the notification requirements sprinkled throughout chapter 4; the postage and mailing costs and materials costs. And that leaves about $270,000 for staff-adds. 1424 We have undertaken to try and automate as much as we can with respect to the requirements for chapter 4; however, consumers, when they submit their service transaction requests - the GDAR allows them to do so under two occasions; one is for them to take themselves off of a direct-purchase deal; the other one is an occasion where they can actually resend a previous transaction either submitted by themselves or a gas vendor - those requests are likely going to be phoned in, or possibly mailed in or e-mailed. They are not going to use Union Line and therefore there is going to be some data entry as a result of that. 1425 In addition to that, we are doing some automation around service address changes, when consumers change service address; however, it's not perfect and there's going to be some occasions where we are going to have to connect those pieces manually. 1426 We are also going to be subjected to further investigations initiated by the consumers or vendors, so that's what's driving the O&M requirements in order for us to sustain chapter 4, going forward. 1427 MS. SINGH: And would any capital expenditure be needed, new software, equipment or anything in addition to that, in addition to what you've listed? 1428 MR. ANDREWS: Any software or hardware required in addition to the 1.3 million? 1429 MS. SINGH: Or is that included in the 1.3 million? 1430 MR. ANDREWS: That's included in the 4.78, the capital. 1431 MS. SINGH: Okay. Thank you. 1432 Could you describe what that 4.78 would consist of? 1433 MR. ANDREWS: Sure. Approximately 2.9 million would represent consulting costs, we have about $100,000 that's represented by travel expenses for our internal IS group because our consultant, Sapient, is located in Toronto so the team has to travel back and forth and stay in Toronto about three days a week for each of these phases. 1434 We have about $700,000 in what I would refer to as IS labour costs. Because people can't be in two locations or two jobs at the same time, in order for our IS group to manage their current portfolio of activities, principally their sustainment responsibilities, they have to basically backfill certain of their roles so that certain people can work on the project full time. 1435 We have about $430,000 in hardware and software costs that we're looking at picking up another two servers, some storage upgrades and some software upgrades, and that represents about $4.2 million right there. Then the balance of the costs are with respect to the business group so you have the contract admin group, my group, and you have retail group. And again, you're going to have travel expenses associated with that, you're going to have process change costs associated, again all one-time costs in order for us to implement chapter 4. 1436 MS. SINGH: Now, just turning briefly to the ABC issue. Am I correct in my understanding that Union is requesting approval to continue to offer the ABC service and gas supply service without a limitation on the term for which this would be offered? 1437 MR. SMITH: That's correct, yes. 1438 MS. SINGH: What, in Union's views, would be the factors or conditions that would trigger a review if the Board were to approve this service given that there would be no limitation on the term? 1439 MR. SMITH: Sorry, Ms. Singh, your earlier question referred to gas molecule sales and I just got hung up because my recollection is that that was actually agreed to in the ADR process, and then your other question was what will trigger a Board review, and just for the record, section C.9 of the settlement agreement provides that there's a complete settlement with respect to the gas molecule sale including your client, in fact. 1440 And then with respect to ABC service, I suppose this is a cost-of-service application for 2004 while we're seeking approval, a non-time limited approval. I suppose there hasn't been any consideration beyond that point. 1441 MS. SINGH: So Union has not turned their mind to what the conditions might be for a review? 1442 MR. SMITH: Well, I suppose the answer to that is anybody could bring that matter if they wanted to bring an application to the Board in the future. 1443 MS. SINGH: Thank you. Those are my questions. 1444 PROCEDURAL MATTERS: 1445 MR. SOMMERVILLE: Ms. Singh. 1446 Do you have questions, Mr. Moran. 1447 MR. MORAN: Yes, Mr. Chair, unlike many of the others ahead of me, my time has not collapsed and we may be better served by breaking and starting tomorrow morning. 1448 MR. SOMMERVILLE: We will adjourn until tomorrow morning, 9:30. 1449 I guess the batting order, Mr. Smith, is Mr. Andrews, we'll conclude with him, and then the DSM panel. 1450 MR. SMITH: That's right, Mr. Chairman. My current understanding is that the DSM panel, I understand, from Mr. Gibbons, that he expects to be -- or Mr. Klippenstein expects to be in the order of two hours. 1451 MR. SOMMERVILLE: And then the affiliate -- 1452 MR. SMITH: And then the affiliate panel. 1453 MR. WARREN: Mr. Chairman, I wonder if I could just ask this question. Is it reasonable to expect that the affiliate transaction panel will be on at a fixed time in the afternoon? The reason I ask that question is that it's a waste of everybody's money to have counsel waiting around for this to happen and that would be the case if I came in the morning and waited for it. So would that be a reasonable request, that we would know a fixed time when they are going to come on? 1454 MR. SOMMERVILLE: Let me just say, I think this may be the way to do it, the affiliate panel will not go on prior to the noon break. 1455 MR. WARREN: Thank you, sir. 1456 MR. SMITH: Thank you. 1457 MR. DeROSE: Mr. Chair, one more question from the back, as I understand it, everyone has either been keeping to their estimated time or slightly over. 1458 MR. SOMMERVILLE: Or not. 1459 MR. DeROSE: Today's been the exception and the reason I ask this, I would just like to be able to get a feel for the timing for cross-examination on affiliate transactions tomorrow only because I'm here tomorrow, Mr. Thompson is here on Thursday and I'd rather not split the cross-examination. We had originally planned for Mr. Thompson to do the cross-examination on Thursday. If you anticipate it coming to the back of the room by the end of day tomorrow, I will prepare tonight, but our preference is to wait to Thursday if, with relative assurance, we know that we aren't going to get to us. 1460 MR. SOMMERVILLE: That may be a question that's better directed to your colleagues in the intervenor community. 1461 MR. DeROSE: Fair enough. 1462 MR. SOMMERVILLE: If I can call it that. 1463 I'm not sure that I can provide you with any security on that subject. 1464 MR. DeROSE: I'm quite happy to talk to the other intervenors. 1465 MR. SOMMERVILLE: We'll use our allotted time tomorrow and we sort of have to follow that where it goes. 1466 MR. DeROSE: Fair enough. 1467 MR. SOMMERVILLE: Anything else? 1468 We'll adjourn until tomorrow morning at 9:30, thank you. 1469 MR. SMITH: Thank you. 1470 --- Whereupon the hearing was adjourned at 4:50 p.m.