Rep: OEB Doc: 12WW7 Rev: 0 ONTARIO ENERGY BOARD Volume: 12 23 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 23 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff MICHAEL PENNY Union Gas Limited CRAWFORD SMITH Union Gas Limited MARCEL REGHELINI Union Gas Limited MIMI SINGH CME SUE LOTT Vulnerable Energy Consumers Coalition RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group JAY SHEPHERD Ontario Public School Boards Association PETER SCULLY City of Timmins, City of Sudbury, FNOM VINCE DeROSE Industrial Gas Users Association BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET [51] CROSS-EXAMINATION BY MR. DeROSE: [54] CROSS-EXAMINATION BY MS. LOTT: [223] CROSS-EXAMINATION BY MR. BRETT: [540] PROCEDURAL MATTERS: [893] UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET [907] CROSS-EXAMINATION BY MR. SHEPHERD: [910] 10 EXHIBITS 11 EXHIBIT NO. M.12.1: DOCUMENT ENTITLED, "UNION GAS INBOUND SHARED SERVICES 2003 VECC TEMPLATE" [231] EXHIBIT NO. M.12.2: SCHOOL BOARDS' BOOK OF CROSS-EXAMINATION MATERIALS SUBMITTED BY MR. SHEPHERD [897] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.12.1: TO TAKE THE 2000 BUDGET AND WITHIN THAT IDENTIFY THE ELEMENTS THAT RELATE TO THE FUNCTIONAL GROUPS AND A TOTAL OF 82.5 MILLION, AND THEN TO BREAK THAT 82.5 MILLION OUT INTO WHAT IS REPRESENTED BY THE MANAGEMENT FEE AND WHAT IS REPRESENTED BY COSTS STILL WITHIN UNION IN ACCORDANCE WITH THE FORMAT USED IN J.7.22 AND TO PROVIDE AND TO DETERMINE THE EXTENT TO WHICH THE REDUCTION IN FTES IS REFLECTED IN N.6.11 AND TO TAKE THAT 2004 TEST BLUE-PAGE UPDATE, BRING THAT INTO THE SPREADSHEET, AND THEN SHOW THE DIFFERENTIAL BETWEEN WHAT WE COME UP WITH FOR THE 2000 AND WHAT WE HAVE IN THE 2004 ON A LINE-BY-LINE BASIS, AND TO DO IT UNDERNEATH THE TABLE JUST TO INDICATE THAT THE COLLECTIVE CATEGORY INCLUDES THOSE PARTICULAR ONES [126] UNDERTAKING NO. N.12.2: TO TAKE THE YEAR 2000 ACTUAL O&M AMOUNTS AS SET OUT AT J.7.22, LINE 41, AND APPLY THE SAME CPI AND INSURANCE COST ADJUSTMENT METHODOLOGY AS SET OUT ON PAGE 48 OF EXHIBIT D.1, TAB 14; AND SECONDLY, TO DO THE SAME THING WITH THE RESULTS THAT ARE GENERATED BY THE RESPONSE TO UNDERTAKING N.12.1 [188] UNDERTAKING NO. N.12.3: TO CONVERT THE U.S. DOLLAR FIGURE SET OUT IN EXHIBIT J.17.40 AT PAGE 2, PARAGRAPH B TO CANADIAN CURRENCY AT CURRENT RATES [217] UNDERTAKING NO. N.12.4: TO PROVIDE THE NUMBER OF EMPLOYEES BEING ADMINISTERED UNDER THE DCAN BUDGET SET OUT ON LINE 32 OF EXHIBIT D.1, TAB 14 [388] UNDERTAKING NO. N.12.5: TO PROVIDE A COMPARISON FOR LEGAL RATES OF IN-HOUSE COUNSEL, EXTERNAL COUNSEL AND U.S. AFFILIATE COUNSEL BASED ON EQUIVALENT YEAR OF CALL AND OVERHEADS, I.E. THE FULLY-LOADED RATE [446] UNDERTAKING NO. N.12.6: TO RECAST THE TRANSACTION FOR DUKE ENERGY, ENGAGE CANADA AND WESTCOAST ENERGY TO BE FOUND IN RESPONSE TO EXHIBIT J.1.22 AND PUT IT IN THE FORMAT AND LEVEL OF DETAIL THAT EXISTS ON PAGE 2 OF EXHIBIT J.1.23 [513] UNDERTAKING NO. N.12.7: TO PROVIDE THE PRICE RANGES OF STORAGE, LOANS, TRANSPORTATION EXCHANGES, AND HUB SERVICES SALES TO NON-AFFILIATES DURING 2002 [532] UNDERTAKING NO. N.12.8: TO PROVIDE THE BREAKDOWN TO CARRY FROM THE 643 NUMBER THAT WAS THE 2001 HEAD COUNT AND THEN PROVIDE HOW THAT TRANSITIONS TO THE 2004 HEAD COUNT RESULTING IN THE EARLIER REFERENCED 142 NUMBER [574] UNDERTAKING NO. N.12.9: TO PROVIDE THE COMPLETE 2002 BUDGET SET PRIOR TO SEPTEMBER 2001 AND TO INDICATE WHETHER THERE WAS BOARD OF DIRECTORS' APPROVAL AND WHEN THAT MIGHT HAVE BEEN [972] UNDERTAKING NO. N.12.10: TO ADVISE MR. SHEPHERD OF THE EXISTENCE OF DOCUMENTS RELATING TO THE OBTAINING OF DUKE APPROVAL FOR THE ENLOGIX SALE [1257] UNDERTAKING NO. N.12.11: TO ADVISE OF THE EXISTENCE OF DOCUMENTS RELATING TO THE CONNECTION BETWEEN THE ENLOGIX SALE AND THE SEPTEMBER AMENDING AGREEMENT BETWEEN UNION AND ENLOGIX [1287] UNDERTAKING NO. N.12.12: TO ADVISE AS TO THE EXISTENCE OF ANY INFORMATION PROVIDED TO DUKE OR ADS WITH RESPECT TOT HE SALE OF ENLOGIX TO ADS [1306] 14 --- Upon commencing at 9:40 a.m. 15 MR. SOMMERVILLE: Good morning, please be seated. 16 This is the continuation of the Union Gas Limited application for rates for 2004. 17 Are there any preliminary matters that need to be spoken to? 18 PRELIMINARY MATTERS: 19 MR. PENNY: Yes, Mr. Chairman, I have two. The first is to put on the record that there are now answers to an additional eighteen interrogatories available. They've been distributed in the room, there are additional copies, and they'll be sent out in the ordinary course. 20 Those are, just to list them quickly for the record, 6.2, 6.6, 6.8, 6.14, 7.1, 7.3, 7.6, 7.7, 7.8, 7.9, 7.10, 8.6, 9.1, 9.4, 9.5, 9.6, 9.8 and 10.3. I also point out that in relation to two of them, 6.8, I believe, and 7.9, the information is quite substantial and so it's been provided in the form of a CD which is in the brown envelope. 21 That is the first issue. The second has to do with the -- I should advised Board, give the Board an update, and the parties, on the issue that Mr. Dingwall raised the other day about the Enlogix contract. Just by way of background, this arose initially because Mr. Shepherd, I believe, made a request in the interrogatory process for the renewed Enlogix contract which took place in 2002. The Enlogix contract is the contract that relates to the general service rate class billing system that used to be called the CIS or customer information system contract. That was the subject of a hearing in 177-17 in 1997, I believe. That was a five-year contract with an affiliate and in those days, affiliate transactions over $100,000 required the prior approval of the Board, and so that hearing was in respect of obtaining the prior approval. Ultimately, without getting into the details, that contract was approved with some adjustments that were indicated by the Board. 22 So when that contract was getting near its end, Union entered into a process, the result of which was the negotiation of a new contract with Enlogix, and that was effective January 1, 2002. At that time, Enlogix was still an affiliate although there was no longer obviously a requirement for prior approval. Since then, Enlogix has been sold to an arm's-length supplier of these kinds of services, that's a company called Alliance Data Systems, and so the contract is now with and the services are now being provided by an arms-length non-affiliate. 23 So Alliance, or ADS, they carry on business in Canada, they have at least one other major customer in Canada, that's the City of Calgary, and they hope to have more. So the contract terms, specifications, and pricing are all, to them, commercially sensitive. I would add that the ADS contract imposes a confidentiality obligation on Union with respect to matters such as the terms and conditions and pricing. 24 So in these circumstances, we originally filed this redacted version of the contract that was redacted by ADS, that was interrogatory J.26.59, and as you know, Mr. Dingwall indicated he would be requesting a copy of the full contract. 25 So rather than engage in protracted litigation over this process, we've tried to come up with a practical solution, and I think we have come up with a practical solution which will meet everyone's requirements subject, of course, to the approval of the Board. It is similar to the process that we adopted in the OPG Bruce decontrol case and I guess in some respects it's not unlike, ultimately, the process that was ultimately adopted in the Enbridge case. 26 The practical solution involves two steps. First, we agreed to provide Mr. Dingwall and Mr. Shepherd with a copy of the complete agreement in exchange for their agreement to keep it confidential. And the purpose of that first step is to enable them to decide whether they even need to refer to the details of the contract in the course of the hearing. If they don't then that would be the end of the matter. 27 If, however, they believe they do need to explore specific details of the content of the agreement, and I should say, we don't quarrel with the right to make that choice, we might not agree with it, but we don't quarrel with the right to make that choice. So if they want to go down that path, we would ask the Board to do so in camera. It's essentially one small group of documents and it involves essentially one issue, it's this one contract, so in my submission, the scope of the in- camera proceedings would be quite limited and therefore, would not create problems for the public interest, I don't believe. 28 So as a practical matter, and we've discussed this with the parties, I'd suggest that we save Mr. Shepherd and Mr. Dingwall's cross-examination to the end, and indeed, even within that, save their questions if they have some on the specific details of the contract to the very end, and that way we could minimize the necessity for in-camera proceedings and then be done and on with the case. 29 I should say with respect to argument that we can probably work out the details of that later, but it could be along the same basis, that if those parties feel the need to refer in argument to specific details, they could file some kind of addendum that would only go to the Board and to Union that would contain those submissions, but we can work that out later. 30 I understand from our discussions with Mr. Shepherd and Mr. Dingwall that they're agreeable to this approach and we have raised it with most of the other parties who have been here and it's my understanding that most of the parties are content to have Mr. Dingwall and Mr. Shepherd pursue this issue, and I know Mr. Brett has indicated to me he would like to see it but doesn't propose to cross-examine on it. So he's prepared to sign a confidentiality agreement in order to see it. And if other parties, of course, want to, they're entitled to as well. 31 That, subject to some limitations, but I don't think that will be a problem so if something arises we can deal with that. 32 I should say, finally, that I, of course, do not act forever ADS whose interest is really affected here. They do, I believe, however, have a legitimate commercial interest which is worthy of the Board's consideration, but I'm really no more than a spokesman on this pragmatic solution which we're proposing. What I do know is the pragmatic solution we're proposing is acceptable to them, so if the Board is agreeable to this approach, then ADS is content that we proceed on that basis. But I should say that if this pragmatic approach is opposed by anybody or if it's not acceptable to the Board, then I think in fairness to ADS, that would require that the disposition of how to deal with this contract and ADS's claim to confidentiality in the hearing be deferred to enable them to retain counsel and address the issue. 33 But I see no reason why it should come to that because it seems that the pragmatic approach that we've taken is at least, as far as I can tell from talking to people, acceptable to parties and protects their commercial interest in a reasonable way and as I say, they're content with that if that's acceptable. 34 So that's how we propose to deal with that request and I just thought I should advise the Board and put on the record are how we are proposing to deal with that. 35 MR. SOMMERVILLE: Thank you, Mr. Penny. 36 Mr. Shepherd. 37 MR. SHEPHERD: I'd just like to clarify one thing, Mr. Chairman, while indeed we are in agreement with that resolution of the situation, it is with one caveat and that is we haven't had a chance to look at the actual confidential material, and to the extent that we don't believe it's confidential, we might take a position that it shouldn't be treated as such, but we've advised Mr. Penny of that and the things that he's described that are in it seem to us to be confidential so we don't have a problem. 38 MR. SOMMERVILLE: Mr. Dingwall, you're -- 39 MR. DINGWALL: I have no further clarification, that's correct. 40 MR. SOMMERVILLE: Thank you. That certainly seems to be a useful way of managing this situation and if we need to change course somewhere along the line, we'll consider that accordingly. 41 This seems like a very appropriate framework and thank you for advising us and it's something that I think we can endorse. 42 Are there any other preliminary matters? 43 Without further ado, we'll continue account with the cross-examination of the affiliates panel. Ms. Lott, you have pride of place. 44 MS. LOTT: I actually think Mr. DeRose would like to go prior to me. I will go after him. 45 MR. SOMMERVILLE: Mr. DeRose. 46 MR. DeROSE: Thank you, Mr. Chairman. 47 First of all, Mr. Chair, I had indicated on Monday that I anticipated that Mr. Thompson would be here this morning. I apologize if in any way the board believes I misled them. Obviously I'm here, Mr. Thompson isn't. Circumstances have changed and I trust there's no problem with that. 48 Secondly, I'd just like to thank my fellow intervenors, they've led me go ahead today. I'm required to be in Ottawa this afternoon, and with the Board's permission upon completion of my cross-examination I would propose to just quietly leave the room and catch the first flight if that's okay. 49 MR. SOMMERVILLE: It doesn't seem completely fair, Mr. DeRose, but we'll -- of course. 50 MR. DeROSE: Thank you. 51 UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET 52 R.BIRMINGHAM; Previously sworn. 53 J.LAFORET; Previously sworn. 54 CROSS-EXAMINATION BY MR. DeROSE: 55 MR. DeROSE: Good morning, panel, if I can have you begin by turning to J.17.5. This is an interrogatory by IGUA. 56 Sorry about that, we're there. 57 MR. DeROSE: No problem. 58 Mr. Chair, I just wanted to make sure that you have it. 59 MR. SOMMERVILLE: Thank you, Mr. DeRose. 60 MR. DeROSE: Now, attached to this interrogatory is a presentation as I understand it to the Union board of directors on the status of the Duke transition plan; is that correct? 61 MR. BIRMINGHAM: That's correct, and the presentation was given on November 8th of 2001. 62 MR. DeROSE: Thank you, and Mr. Birmingham, are you familiar with this presentation? 63 MR. BIRMINGHAM: I am. 64 MR. DeROSE: Were you involved with the presentation? 65 MR. BIRMINGHAM: No, I wasn't. 66 MR. DeROSE: Can you tell us what the purpose of the presentation, generally speaking, to begin with was? 67 MR. BIRMINGHAM: Well normally at the board of directors' meetings there is a general update given by the president of a number of things that are occurring within the company, and this was clearly one of the key issues for Union Gas, certainly one of the key events. It was on September 20th of 2001 that Duke announced the purchase of Westcoast which would include Union Gas, and so this is an update of what had happened really since the time that the purchase was announced and some of the work that was commencing around the transition to move under Duke Energy ownership. 68 MR. DeROSE: Okay. Thank you. 69 Now, if I could have you turn to page 8 of the presentation, it's a sheet that at the top says, "Union Employee Reaction." 70 Do you have that, Mr. Birmingham? 71 MR. BIRMINGHAM: Yes, I do, thank you. 72 MR. DeROSE: And if I can take you to the first bullet and it reads as follows: "Concern over employment implications starting to appear, but not affecting work. 60 million target savings raising questions." 73 Can you first of all tell me what was the 60 million target savings related to? 74 MR. BIRMINGHAM: The $60 million was a target that Duke Energy had set for revenue increases and cost reductions associated with the purchase of the Westcoast group of companies over a multiyear period that would justify the premium that they paid for the Westcoast stock. 75 MR. DeROSE: Okay. And would that 60 million target, I take it if it applies to Westcoast, it wouldn't be 60 million just in Union, but it would be 60 million over the entire Westcoast operation? 76 MR. BIRMINGHAM: That's correct, Mr. DeRose. That would include the B.C. pipeline, it would include B.C. field services, Engage Energy, Pacific Northern Gas, Centra B.C., Union Gas, Maritimes Pipelines, the Alliance and Vector ownership and Foothills Pipelines. So it would be that group of companies within Westcoast that Duke was expecting some revenue increases or cost reduction that would amount over a couple of years to approximately $60 million Canadian. 77 MR. DeROSE: And are you aware, was there ever a breakout of what portion of that 60 million target Union was expected to achieve? 78 MR. BIRMINGHAM: There was not a breakout for any of the operating companies. What this was was a high-level target that was then used to set people on the work of doing the transition to move Union Gas and the Westcoast group of companies under Duke Energy ownership. Those plans then were moved along with the idea that at the end of the process, at the end of the transition process, they would look to see whether those plans would add up to $60 million or not. 79 MR. DeROSE: And do you know, was that ever done? Was there ever a tracking and a comparison? 80 MR. BIRMINGHAM: The result of the transition is reflected in the budgets and in the actual results for 2002, for 2003, and for 2004. 81 What I can tell you, Mr. DeRose, is that we did not come anywhere near the $60 million worth of savings for the Westcoast group of companies. Part of the reason is that when that target was set it was quite explicit that we were to take a look at what revenue increases or cost reductions could be achieved without considering a number of things. And one of the key things there was that we weren't considering the regulatory frameworks of the different companies. So for Union Gas for 2004 you'll know that we achieved savings of approximately $10.1 million as a result of using the inbound shared services from Duke Energy and as well providing outbound services to a number of other affiliates, so we achieved $10 million but we -- and but we didn't actually track all of the savings up to the 60 million. What I can tell you is that we didn't come close and in fact that was one of the reasons why I think, or certainly was a contributing reason to the fall in the share price. 82 MR. DeROSE: Okay. Thank you. 83 If I can now take you to J.17.39. This is another interrogatory from IGUA. 84 MR. LAFORET: Yes, we have that. 85 MR. DeROSE: Thank you. 86 Now, just to provide context to the answer, in sub A, IGUA asks that you list all of the functions that were currently be performed or are to be performed by Union's affiliates or related parties during the test year which were previously performed by the utility resources. And the question that I'm particularly interested in is sub D, and the question is: What were the utility costs actually been incurred on an annual basis with respect to these functions -- so those are the functions that I've just described -- when the performance of the functions was transferred from the utility to affiliates? 87 And your answer is that Union's 2001 actual cost for these functions was 82.6 million; is that correct? 88 MR. LAFORET: Yes, that's correct. 89 MR. DeROSE: And as I understand that answer, am I right in my understanding that that answer means that the functions that are now being performed by affiliates in 2001, with the exception of audit which you've taken the 2000 numbers, were worth 82.6 million? 90 MR. LAFORET: I just want to make sure I phrase this right or that I understood this correctly. What the table indicates is for 2002 as best possible going back into the financial system and looking for the financial numbers that match the structure that was then put in place after the Duke transition, the number that we come up with is the 82.6 million which reflects the actual costs incurred in 2001 for those functions. 91 MR. DeROSE: And are those the functions which, as I understand it, are now being outsourced for a total of 27.8 million? 92 MR. LAFORET: What these services represent or these functional groups as we refer to them that are listed there, corporate services and so on, they represent those activities that now operate under the shared services structure. So what that means is that some of the activity is performed by our affiliates for Union and that represents the $29 million management fee that we are being charged by our affiliates, but activities are also still continuing on within Union that also carry a cost that Union is directly incurring. 93 MR. DeROSE: Okay. If I can take you to page 2 of 2 of that interrogatory then. 94 MR. LAFORET: Yes. 95 MR. DeROSE: Do you have that? And I believe what you've done here is you've broken this out on a line-by-line basis and you show the transition date -- first of all, does the transition start date mean this is the date upon which these activities were being done under your shared-service model, as opposed to internally within the utility? 96 MR. LAFORET: Column A, the transition start date and the table, what that represents is the point in time at which we began to move to the shared-services structure. What occurred through 2002 and some of 2003 was the actual change to the new shared-services structure. So it's not a -- I guess I would say it's not an instantaneous event that on March 2002, corporate services moved from its Union Gas structure to the new shared-services structure there was a number of months while these groups transitioned through, did the role reductions, and cost reductions within Union and that the affiliates began to provide the services that replaced those activities that were being done in Union prior to the transition. 97 MR. DeROSE: Perhaps to make this a little bit easier, I hope, and this would help me, if I could have you keep that interrogatory open, would you be able to turn up J.7.22 as well? This is an interrogatory from CAC which I believe has been brought before the Board a number of times in this hearing already. 98 Do you have that, Mr. Laforet? 99 MR. LAFORET: J.7.22, yes. 100 MR. DeROSE: And if I could have you turn to the attachment which at the top says, "Union Gas Limited operating and maintenance expense by cost type 1999 Board-approved through 2004." 101 Do you have that? 102 MR. LAFORET: Yes, I do. 103 MR. DeROSE: First of all, which would have been the last year in which all of the $82.592 million of costs would have been inside the utility on this sheet? 104 MR. LAFORET: On this sheet, based on the services that are listed on page 2 of 2 of J.17.39, the last year that those services would have been within Union would be the 2000 actual which is column D of J.7.22. The reason I put that forward is because internal audit, aside from or unrelated to the Duke transition, was a function that transitioned from Union to being provided by Westcoast in that year. 105 MR. DeROSE: Mr. Laforet, by way of undertaking, would I be able to have you identify, and I think the best way to do it would be in a spreadsheet and the first column would have 2000 actual, the same way you have it in J.7.22, with a column next to it that allows us to see on a line-by-line analysis where that 82.592 reductions were made using the same line-by-line type of expense that you've used in J.7.22. 106 MR. PENNY: Just so we're clear, Mr. Chairman, as Mr. Laforet said, it's not a reduction, some of it is a reduction, some of it is still done within Union. 107 MR. DeROSE: And if you can indicate what portion of the 82 million is actually a reduction related to outsourcing and provide your qualification and provide your explanation as to what is not. 108 MR. LAFORET: Just so that I make sure I have this correct, what you're looking for, if I refer back to the J.17.39, and the total amount of the 82.5 million, what I believe you're looking for would be a breakdown by the type of expense. 109 MR. DeROSE: Yes, I'd like a breakdown of the type of expense but in the same categories or type of expenses and the same format as J.7.22. So intuitively, Mr. Laforet, if you tell me that 82 million of costs were incurred in the utility prior to outsourcing that are now done as part of the shared services, intuitively, for instance, if we take 2000 actual at the bottom, it's 243 million that's total net utility operating and maintenance excluding compressor fuel, intuitively, I would think that it's 243 subtracting 82 million and adding the costs of the shared services, and if I'm wrong, if you can show on a line-by-line analysis what portion of the 82 resulted in reductions and what part did not result in a reduction of your costs. 110 MR. LAFORET: If I may have a moment, I just want to refer to another spreadsheet, to see if we may have -- 111 MR. DeROSE: Okay. 112 MR. LAFORET: I believe I can do what you're requesting, to do that breakout, but once again, I want to bring forward that what it would be is it would represent those numbers represented under column D, the 2000 actual. We would then be able to segregate that 83 million in cost, but at the end of that exercise, I just want to be clear that that line 41, the total net utility operating maintenance expense would not go down by the 83 million and then only back up by the 29 million in management fees. 113 So what I'm just trying to work on in my mind here is I'd also have to bring back in the costs that Union is continuing to incur for its portion of the shared-services activities that it's doing within the utility. 114 MR. DeROSE: And I would be fine if you would show all of those three things then. As I understand it, you would show a breakout of the 82 million showing the reductions. You would also show the shared-service fees or the management fees that would go up, and as I understand it, you're telling me that some of that 82 million is still being done inside of Union; is that right? 115 MR. LAFORET: Yes, that's correct. 116 MR. DeROSE: Will you also show us that? 117 MR. LAFORET: Yes. 118 MR. DeROSE: And if you can do it in one column, that's fine, if you need to do it in two columns, I leave it up to you. Is that fine, Mr. Laforet? 119 MR. LAFORET: Yes, that's fine, we can pull that together for you. 120 MR. MORAN: Mr. Chair, just to assist the court reporter, I wonder if Mr. Laforet can just give a snappy description of what it is he's going to do. 121 MR. SOMMERVILLE: Or would you rather Mr. DeRose do that? 122 MR. LAFORET: I believe my understanding of it would be to take the 2000 budget and then within that, identify the elements that relate to the functional groups and a total of 82.5 million and then to break that 82.5 million out into what is represented by the management fee and what's represented by costs still within Union. 123 MR. DeROSE: Thank you. That's fine, and with the only caveat that if you can use the same format that we see in J.7.22 in terms of the lines. 124 MR. LAFORET: Yes, in the terms of that same layout. 125 MR. MORAN: That would become Undertaking N.12.1, Mr. Chair. 126 UNDERTAKING NO. N.12.1: TO TAKE THE 2000 BUDGET AND WITHIN THAT IDENTIFY THE ELEMENTS THAT RELATE TO THE FUNCTIONAL GROUPS AND A TOTAL OF 82.5 MILLION, AND THEN TO BREAK THAT 82.5 MILLION OUT INTO WHAT IS REPRESENTED BY THE MANAGEMENT FEE AND WHAT IS REPRESENTED BY COSTS STILL WITHIN UNION IN ACCORDANCE WITH THE FORMAT USED IN J.7.22 AND TO PROVIDE AND TO DETERMINE THE EXTENT TO WHICH THE REDUCTION IN FTES IS REFLECTED IN N.6.11 AND TO TAKE THAT 2004 TEST BLUE-PAGE UPDATE, BRING THAT INTO THE SPREADSHEET, AND THEN SHOW THE DIFFERENTIAL BETWEEN WHAT WE COME UP WITH FOR THE 2000 AND WHAT WE HAVE IN THE 2004 ON A LINE-BY-LINE BASIS, AND TO DO IT UNDERNEATH THE TABLE JUST TO INDICATE THAT THE COLLECTIVE CATEGORY INCLUDES THOSE PARTICULAR ONES 127 MR. DeROSE: Was that 12.1? 128 MR. SOMMERVILLE: Thank you. 129 MR. DeROSE: Now, panel, if I can take you to Exhibit N.6.11, this was an undertaking of Mr. Bodnar to Mr. Thompson. 130 MR. LAFORET: Yes, we have that. 131 MR. SOMMERVILLE: Sorry, Mr. DeRose, could I have that reference again, please? 132 MR. DeROSE: It was N.6.11, N as in Nancy. 133 MR. SOMMERVILLE: Thank you. 134 You can carry on, Mr. DeRose, we have that. 135 MR. DeROSE: Okay. Thank you. 136 Just as a description, this undertaking indicates the reduction of FTEs, and as I understand it, Mr. Laforet, if you look at page 1 of 3, line item number 5 shows a reduction of 23 million; is that right? 137 MR. LAFORET: Yes, that's correct. 138 MR. DeROSE: Do you know whether that reduction of 23 million would be included or excluded within the 82 million that we've just been talking about? 139 MR. LAFORET: That would be -- so prior to the role reduction, a portion of that 23 million would be included in the 82.5 million. 140 MR. DeROSE: Okay. To the extent that either some or all of that 23 million is not included in the 82 million that we've just discussed, would you be able to provide an additional column on our previous undertaking that just shows if there's other reductions related to those FTEs that are not covered in the 82 million? I suspect that they are covered, but if you can just confirm that to us. 141 MR. LAFORET: I would say that they are covered in those reductions and we can undertake to include that detail in the original undertaking. 142 MR. DeROSE: And Mr. Laforet, if they are completely covered by the 82 million, we don't require a further breakout. We are only interested in that if it is in addition to the 82 million. 143 MR. LAFORET: Okay. And I'll take that under the advisement because I did not create the $23 million figure that's here, I want to go back and determine the details behind that and then also bring that in line with information that I have put together with regards to the functional group reductions. 144 MR. DeROSE: Fair enough. 145 MR. SOMMERVILLE: That's, in effect, an amendment of the previous undertaking to reflect the reduction in FTEs. 146 MR. DeROSE: Yes. 147 MR. SOMMERVILLE: To determine the extent to which the reduction in FTEs is reflected in that -- 148 MR. DeROSE: In N.6.11. 149 MR. SOMMERVILLE: Thank you. 150 MR. DeROSE: Thank you. 151 And Mr. Laforet, if I can just make one more amendment to the undertaking and that will complete the loop on this. On J.7.22, the last line will show your 2004 test year blue-page update. 152 MR. LAFORET: Yes, column -- 153 MR. DeROSE: That's your current -- that's the budget which you are seeking. 154 MR. LAFORET: Yes. 155 MR. DeROSE: If you could just in one other column show us the difference per line between your breakout and the 2004 test year. So, for instance, if the benefits in your breakout from 2000 are reduced to 20 million and it shows 52, it would just show a 22 million [sic] increase. So we can understand what the increase is from 2000 up to 2004 on a line-by-line basis. Would that be difficult for you? 156 MR. LAFORET: Once again, just so I have clarity on it, what you're looking for is to take that 2004 test blue-page update, bring that into the spreadsheet, and then show the differential between what we come up with for the 2000 and what we have in the 2004 on a line-by-line basis? 157 MR. DeROSE: Yes. 158 MR. LAFORET: Yes, we can do that. 159 MR. DeROSE: Thank you. Is that fine, Mr. Moran, in terms of that description? 160 MR. MORAN: I think the court reporter is smiling so it must be okay. 161 MR. DeROSE: Thank you. 162 Now, in terms of -- I'll move to another topic. 163 Mr. Birmingham, you will recall on Tuesday, you had an exchange with Mr. Warren with respect to efficiency gains and your analysis of the stand-alone costs, and I think just to help you in this conversation if we can turn up D.1, tab 14, page 48 of 61. 164 MR. BIRMINGHAM: We have that, Mr. DeRose. 165 MR. DeROSE: Okay. And Mr. Birmingham, just -- I'm not going to try and go over what Mr. Warren did, I just want to -- as long as we're on the same place, if you recall, you indicated to Mr. Warren that CPI is a rough proxy and as I understand it, it's a rough proxy but you would agree that it's a fair proxy; is that right? 166 MR. BIRMINGHAM: Yes, that's right. What I indicated to Mr. Warren was that we didn't prepare a 2004 budget on a stand-alone basis, what we had done is we prepared a 2002 budget on a stand-alone basis and then we escalated that by CPI for both 2003 and 2004 as a proxy for how those expenses might actually occur if we had prepared a stand-alone 2004 budget. And that was on the basis if that we know that a number of our expenses, in particular salaries, wages and benefits, were escalating at a rate much higher than inflation, but we also recognized that there may be some expenses that are escalating at a rate that's lower than inflation, so used CPI as a rough proxy to determine what the ratepayer benefit might be in 2004. 167 MR. DeROSE: Okay and with the exception of insurance, those items that are a little bit higher, those items that are a little bit lower, in your opinion, would even out; is that right? 168 MR. BIRMINGHAM: That's the premise underlying the use of the CPI calculation, that's right. 169 MR. DeROSE: And Mr. Birmingham, I can indicate that we aren't taking issue with it being a fair proxy, we agree with you. What we would like to ask you to do by way of undertaking are two things: One, to take your 2000 actual O&M budget and again, this is set out in J.7.22, and your 2000 actual budget total -- 170 MR. BIRMINGHAM: Sorry, Mr. DeRose, can I just stop you there for a second? We have 2000 budget and we have 2000 actuals. I'm just wondering which one -- 171 MR. DeROSE: Sorry, 2000 actual. If I said budget, I misspoke. 172 MR. BIRMINGHAM: Thank you. 173 MR. DeROSE: If you could take your 2000 actual net O&M expense, excluding compressor fuel, and apply CPI to it in the same method so it's year over year from 2000 through to 2004, and I think it would be appropriate to include insurance the same way that you have. So you are applying the same methodology that you have in table L on Exhibit D.1, tab 14, page 48 of 61, and the only difference is that the historical costs that you have put as 2002, if you can just put your O&M at 2000 actual? Would that be acceptable, Mr. Birmingham? 174 MR. BIRMINGHAM: Just two points of clarification, Mr. DeRose. 175 To the extent that we take 2000 actual O&M, you appreciate that that level of O&M expenses was incurred at a time where our revenues and weather were different than what would normally be included in rates, but you'd want us to start with the 2000 actual; is that right? 176 MR. DeROSE: That's what I would like to you start with. There are two things I'll ask for. One is if I can have you start with that number, and the second is the number that is produced by Mr. Laforet's undertaking in Undertaking 12.1, if you can also run that number out, so it would be the 2000 actual minus the 82 million that is included outside of the utility adding in the management fees. 177 MR. LAFORET: In terms of format, am I correct that you're looking for, I guess, a recreation of how table L is laid out, which is at page 48 of 61, that at line 15, rather than being the historical 2002 cost you are asking for one version of the table L which would start at the 2000 actual O&M? 178 MR. DeROSE: Correct. 179 MR. LAFORET: And then would carry the inflation through the years of the CPI up to 2004. 180 MR. DeROSE: Correct. 181 MR. LAFORET: And the adjustment for the insurance costs come with come up with the 2004 stand-alone costs. And then the second version of that, in place of that historical 2002 cost which is currently in the table, would be to use that number that calculates out of Undertaking 12.1 with regard to the adjustments to the 2000 actual reducing for the cost reductions and bringing it back up for the management fees and the costs being still incurred within Union. 182 MR. DeROSE: Thank you, Mr. Laforet. 183 MR. BIRMINGHAM: One other question, Mr. DeRose, my second question of clarification and that is, we're going to start with the 2000 actual and we're going to apply CPI, and in this case, are you asking us to apply CPI on what would have been forecast for 2001 and 2002 or did you want us to apply actual CPI for 2001 and 2002? To be consistent with 2003/2004 we may want to use a forecast number at the time. 184 MR. DeROSE: Sorry, I was just quickly trying to look at your D.1, tab 14, page 48 of 61 to determine when you applied 2003 and 2004 CPI, whether you were using forecast or actuals. I'd like you to be consistent. 185 MR. BIRMINGHAM: We will do that. We'll use the forecasts as they may have existed at the time the budgets were prepared. 186 MR. DeROSE: Thank you. 187 MR. MORAN: Mr. Chair, Undertaking N.12.2, firstly, to take the year 2000 actual O&M amounts as set out at J.7.22, line 41, and apply the same CPI and insurance cost adjustment methodology as set out on page 48 of Exhibit D.1, tab 14. Secondly, to do the same thing with the results that are generated by the response to Undertaking N.12.1. 188 UNDERTAKING NO. N.12.2: TO TAKE THE YEAR 2000 ACTUAL O&M AMOUNTS AS SET OUT AT J.7.22, LINE 41, AND APPLY THE SAME CPI AND INSURANCE COST ADJUSTMENT METHODOLOGY AS SET OUT ON PAGE 48 OF EXHIBIT D.1, TAB 14; AND SECONDLY, TO DO THE SAME THING WITH THE RESULTS THAT ARE GENERATED BY THE RESPONSE TO UNDERTAKING N.12.1 189 MR. DeROSE: Thank you, Mr. Moran. 190 And panel, if I can take you to the last issue I'll discuss with you today. If I can have you turn to J.17.37. Do you have that, panel? 191 MR. LAFORET: Yes, we have that. 192 MR. DeROSE: If I could have you turn to page 2 of 2 and it shows, as understand it, in line 15, that the average compensation for FTE by budget for Union is $88,196; is that right? 193 MR. LAFORET: Under the blue-page 2004? 194 MR. DeROSE: Correct. 195 MR. LAFORET: Yes. 196 MR. DeROSE: And that average salary is inclusive of salary, wages, benefits, incentives; is that right? 197 MR. LAFORET: Yes, that's my understanding of the calculation. 198 MR. DeROSE: And if I can then have you turn to J.17.40, it's three interrogatories after. 199 MR. LAFORET: We're there. 200 MR. DeROSE: And if I can take you to page 2 of 3. 201 MR. LAFORET: Yes. 202 MR. DeROSE: Sub B, this is a paragraph in which you're showing the average compensation for Duke Energy Business Services, Duke Energy Gas Transmission and Westcoast Energy Inc. 203 MR. LAFORET: Yes, that's correct. 204 MR. DeROSE: Are you able to confirm whether those amounts also include salary, wages, benefits, incentives so that we're comparing an apples-to-apples average salary? 205 MR. LAFORET: Yes, they do contain those same components of the salaries, benefits, wages. One of the points around that though is the average compensation which is listed at J.17.40 relates to the group of employees that are providing shared services or the group of employees within the affiliate, that are providing shared services to Union. Whereas, at J.17.37, the 88,196 is an average for all of the employees within Union Gas. So what we have is that number gets pulled down by the hourly and clerical dollars that are also in that mix. So what we have is a different mix of employees included in the 88,000 versus the mix of employees which are included in the numbers presented at J.17.40. 206 MR. DeROSE: Well, we're a little bit at your mercy here in that we were given the numbers by you. 207 MR. LAFORET: And to provide some clarification around that or to provide a bit more information around that, what we have done is taken a look at the average salary for the management, technical and analyst employees within Union Gas which would be a comparator group to the management technical and analyst employees within Duke Energy Business Services, Duke Energy Gas Transmission, and Westcoast Energy, which are represented by their average compensation. 208 When we calculate that number out, based on that specific employee group, we do come up with an average salary which is $97,700. 209 MR. DeROSE: Sorry, and that salary is the average salary within Union? 210 MR. LAFORET: That is the average salary within Union of the management, technical, and analyst group. 211 MR. DeROSE: And is it your evidence that that group is the same group as those that you're indicating in J.17.40, page 2 of 3? 212 MR. LAFORET: Yes, that is correct, that would be the comparator group of employees within Union as compared to the group of employees within the affiliates. 213 MR. DeROSE: Okay. To assist us in our comparison, and just so that we're on the same page in terms of an exchange rate, would it be possible for you, by way of undertaking, just to convert the U.S. dollars Duke Energy Business, and Duke Energy Gas Transmission in an undertaking, if you could just pick the Bank of Canada exchange rate on which ever date you want to do it and provide that by way of undertaking so that we have a comparison in the same dollars in the evidence? 214 MR. LAFORET: Yes, what we can do is undertake to look at the two salaries which are quoted there in U.S. dollars and convert them over at current Bank of Canada rate to come up with a Canadian equivalent. 215 MR. DeROSE: Thank you. Will I be able to have an undertaking for that. 216 MR. MORAN: Mr. Chair this would be Undertaking N.12.3, to convert the U.S. dollar figure set out in Exhibit J.17.40 at page 2, paragraph B to Canadian currency at current rates. 217 UNDERTAKING NO. N.12.3: TO CONVERT THE U.S. DOLLAR FIGURE SET OUT IN EXHIBIT J.17.40 AT PAGE 2, PARAGRAPH B TO CANADIAN CURRENCY AT CURRENT RATES 218 MR. DeROSE: Thank you, panel, thank you Board, those are all my questions. I believe I'm 15 minutes under, so thank you. 219 MR. SOMMERVILLE: Thank you, Mr. DeRose. That will be noted. 220 MR. PENNY: His prize is he gets to leave. 221 MR. SOMMERVILLE: Ms. Lott. 222 MS. LOTT: Thank you, Mr. Chairman. 223 CROSS-EXAMINATION BY MS. LOTT: 224 MS. LOTT: I'll just introduce myself to the panel. My name is Sue Lott, I'm counsel for the Vulnerable Energy Consumers' Coalition. 225 MR. LAFORET: Good morning. 226 MS. LOTT: Food morning. I'll start by saying that I had provided to Union's counsel yesterday an exhibit, our cross-examination material that we would like to have filed as an exhibit, and I will provide that now. It was also cc'd to the Board, but I will provide you another copy which I'll be making reference to in this first portion of my questioning. 227 And I'll just note that the title should reflect 2003 to 2004, but it just states 2003 at this point, so you might want to correct that. 228 MR. MORAN: Mr. Chair, this would been Exhibit 12.1, document entitled: Union Gas inbound shared services 2003 VECC template. 229 MR. PENNY: The number again was? 230 MR. MORAN: Sorry M.12.1. 231 EXHIBIT NO. M.12.1: DOCUMENT ENTITLED, "UNION GAS INBOUND SHARED SERVICES 2003 VECC TEMPLATE" 232 MS. LOTT: Thanks very much. 233 I wonder at this point if you could also at this point pull up Exhibit J.1.112, and I'm looking there at the attachment 3 updated, that's a Board Staff interrogatory. 234 MR. LAFORET: Attachment 3? 235 MS. LOTT: It's attachment 3 updated. 236 MR. LAFORET: Yes, we have it. 237 MS. LOTT: I'll just make sure the Board has it as well. 238 I'm going to ask you the following questions around the range and scale of services provided under the shared services for 2003 under the Duke shared-services model. So I wonder if we could start with looking at Exhibit J.1.112, attachment 3. Am I correct that it is your evidence that this is a table that essentially incorporates appendices F and H in Exhibit D.1, tab 14, that that's the Westcoast Energy Corporation centre charges from 1999 to 2002, and then H being the type and amount of services forecast to be provided by affiliates in 2004? 239 MR. LAFORET: Yes, it's a presentation of that same thing. 240 MS. LOTT: It's an amalgam of that. 241 MR. BIRMINGHAM: I'd also add, Ms. Lott, that it probably incorporates appendix K as well to the extent that the cost reduction in column G is found under that appendix. 242 MS. LOTT: Thank you for that. 243 Now, I wonder if we could just look at under the year 2001, column C, showing the range and scale of Westcoast Corporate Services which were provided to Union, and am I correct about that that the total is 2.78 million, that's what that reflects? 244 MR. LAFORET: Yes, that's what the total reflects for the service. 245 MS. LOTT: Okay. Now, if we could look at that list under 2001, just for my clarification, could you explain to me what, in terms of the range or scope of services, what was not included in 2001? What was not provided by Westcoast? 246 MR. LAFORET: What was not provided by Westcoast in comparison to -- 247 MS. LOTT: 2000, the previous year. 248 MR. LAFORET: Oh, the change from the previous year. 249 What I'd provide on that is that there was no change in the service level between 2000 and 2001 that I'm aware of. There was a slight differential in some of the pricing, and actually -- I just want to double-check a number here. The service activities stayed the same, it was just a difference in what came through in the charge. I don't have a specific explanation for that differential. 250 MS. LOTT: If I could just then take you where it says under corporate services for example, zero, engineering and procurement, zero. If you could just explain what that is to me? 251 MR. LAFORET: For 2001? 252 MS. LOTT: For 2001, yes. 253 MR. LAFORET: In 2001, Union was operating in its pre-Duke structure. Under that structure, we were receiving a group of services from the Westcoast Corporate Centre and those covered the items which do have dollar amounts associated with them, such as the environmental health and safety, the finance, human resources, and so on. The corporate services and engineering and procurement which have zero balances in 1999, 2000 and 2001, Union was not receiving any services from Westcoast or another affiliate related to those, but following the Duke transition, Union began to receive shared services from affiliates. So what that really represents is no receipt of services up to that point of the Duke transition and then we started receiving services from the affiliates. 254 MS. LOTT: So wherever there's a zero balance there in 2001 that's what that reflects -- 255 MR. LAFORET: That's what that reflects, yes. 256 MS. LOTT: Okay. So therefore, by the fact that there are amounts as you've listed under the other categories, those were being provided. 257 MR. LAFORET: Yes. 258 MS. LOTT: Okay. And you would agree with me that the most costly items, and if we look at them in descending order, they are finance, we have legal next, then we have information technology, environment, health and safety and human resources. You'd agree with me that that's a descending order of cost? 259 MR. LAFORET: Yes. 260 MS. LOTT: If we could just look at the -- again in 2001 what was purchased. I'm interested in what was purchased from Westcoast Corporate Centre in the area of information technology services. We see there under column C the amount is $297,000; is that correct? 261 MR. LAFORET: Yes, that's correct. With regard to the information technology services, one of the functions that the Westcoast Corporate Centre was undertaking was to provide a direction and a strategic plan for information technology across all of the Westcoast companies. So where there is the ability for common platforms or common purchasing of services, that was managed or orchestrated by people within the Westcoast Corporate Centre and then allocated out to the business units. 262 MS. LOTT: Now, we move on to the column at 2002. When did the Duke shared-services model kick in, first of all, in that year? 263 MR. LAFORET: The shared shared-services structure kicked in starting in March of 2002 upon the purchase transaction. And then throughout that year and into 2003, the actual transition kept moving so once again, it was not an instantaneous point in time that Union was no longer doing the work completely and the affiliate was providing 100 percent. There was a transition period that carried out through each of the departments as they reduced their level of activity within Union and reduced the associated costs within Union and the affiliate began to take up and provide the services through that period as needed to replace that reduction in Union. 264 MS. LOTT: So where then would the master services agreement and the service schedules be for 2002. 265 I note in the evidence that we only have them for the 2003/2004 period? 266 MR. LAFORET: That's correct. For 2002, we did not have master services agreements or service schedules in place during the transition period. It was difficult to draw up just what the services would be and what the associated pricing would be because we knew we were going through the transition period. 267 One of the things that we realized through that process as we did the transition is that the paperwork would be lagging the actual receipt and provision of services under the shared services model. So what we endeavored to do was to still follow the principles set out in the affiliate code of conduct in terms of how the services were identified and how the pricing was identified for those services based on the provider's costs and then was charged to Union, and likewise, Union also began providing more services to some of its affiliates and once again followed those same procedures to set the pricing for those. 268 So while we weren't operating with a piece of paper in place, we were operating within the guidelines of the code in terms of the service provision and the pricing. 269 MS. LOTT: So my understanding of the Affiliate Relationships Code which was in place at that time was that those are requirements; wouldn't you agree? 270 MR. LAFORET: In terms of the wording of the code, the code certainly sets out what is to be put in place in terms of dealing with the relationship between affiliates in terms of provision or receipt of services, but once again, Union faced the conundrum of how you put those in place while the transition continues. And then the effort that would go into continually updating the service schedules while the transitions occurred and services moved from Union to another party. 271 MS. LOTT: If you could, again, look at the column back in the Exhibit J.1.112, the 2002 column. So if you could just confirm for me again in that range of services what are the new services that Union procured from the Duke affiliates that started in 2002? 272 MR. LAFORET: Maybe it would be easiest if I walked through them in order. Corporate services, Union was not receiving services prior to 2002. Under the shared-services structure, Union began to receive services from the Duke corporate centre which manages the corporate services for all of the Duke entities. 273 So they began providing services to us in terms of management of our corporate services and that represented the cost of their time and expenses for doing that. 274 MS. LOTT: Could you just give me some sense of what the nature of those services were that started to be provided by Westcoast Energy Corporate Centre? 275 MR. LAFORET: Maybe to walk through those and provide a bit more detail, I'd refer you to Exhibit D.1, tab 14, appendix I. What appendix I does is provides a breakdown by the general categories, such as corporate services, of the individual services that comprise that. The one thing that I will note, in column H the total charge to Union, the figure represented there is higher than the 233 that's represented under the 2002. Column D is the J.1.112, attachment 3, that's an example of how the services were ramping up through 2002 but did not hit full-service provision, so this provides some of that detail. 276 What I'd also refer to is within appendix M where we had filed the draft service schedules that then talk through what services are going to be provided in 2003, 2004. So what the 2002 column in the J.1.112 represents is the starting of the ramping up of those services until we hit the complete transition with regard to the shared-services structure. 277 MS. LOTT: Thanks for that. 278 You've mentioned this so I'll sort of follow up on your point on this. The M.1, the schedules show in fact, and would you confirm this, that there are actually two different sets of corporate services being provided by affiliates starting in 2003 to 2004. And for ease of reference we can go back to our exhibit that we provided for you where we've set that out and you can see that there are two different sets of corporate services there, one provided by DCAN and the other by Duke Energy Business Service, so would you confirm that there are two sets of new corporate services being provided? 279 MR. LAFORET: Yes, that's correct. The per M.12.1, as it's laid out, we are receiving some corporate services from Westcoast Energy and also receiving some corporate services from Duke Energy Business Services or as we referred to, Duke Corporate Centre. 280 MS. LOTT: If we could go to one of those schedules. I'm interested looking at M.2, schedule 2, and I wanted to look at the -- it's the corporate service schedule between Union Gas and DCAN. 281 MR. LAFORET: M.2, schedule 2, page 15 of 28? 282 MS. LOTT: That's right, yes. I wanted to focus in on one of those corporate services that are being provided as described in that schedule, and in the very bottom it talks about corporate accounts payable, do you see that? 283 MR. LAFORET: Yes, I do. 284 MS. LOTT: And am I correct in just stating here that it indicates that a U.S. service organization, and I quote here: 285 "...will provide oversight and direction to ensure processes and procedures are executed appropriately for all accounts payable functions in Canada." 286 Do you agree that's what's being done there? And then just after that it states that: "The day-to-day processing of accounts payable will reside in corporate services Canada." 287 I'm correct about that? 288 MR. LAFORET: Yes, that's correct. 289 MS. LOTT: Why does a Duke U.S. affiliate need to provide oversight function for a kind of process that's already residing within the corporate services entity in Canada? 290 MR. LAFORET: What occurs with the shared-services structure and one of the efficiencies that's gained out of it is that you consolidate some of the management of functions such as accounts payable. So within Union, there were cost reductions related to the accounts payable function and some of that oversight was then provided by Duke Centre Corporate, and this is where we get into the concept of the dotted line reporting relationships where the accounts payable lead within Union now has the dotted line reporting relationship to the person in Charlotte and what this represents is the costs related to that oversight, that direction, that strategic planning that is now provided by Charlotte and that activity which is no longer performed within Union. 291 MS. LOTT: Okay. I wanted to look further down at the -- go back to the IT infrastructure. Now, if we look at VECC's exhibit there, it shows I think it's $14.354 million in services being purchased from Westcoast Energy doing business as Duke Energy Gas Transmission and that's for 2003/2004. 292 MR. LAFORET: Yes. 293 MS. LOTT: Would you confirm that that's the amount and is that over a two-year period, is that 2003 and 2004? 294 MR. LAFORET: The -- 295 MS. LOTT: It's not per annum, that figure. 296 MR. LAFORET: That is a per annum figure. 297 MS. LOTT: So looking at that, I wonder if we could go look at that specific service schedule which is under appendix D, tab -- sorry appendix M.1, schedule 8 is what I'm interested in looking at. If you can pull that out. 298 MR. LAFORET: Yes, M.1., schedule 8. 299 MS. LOTT: And would you agree that it does show an agreement between Union and DCAN for Union to purchase the amount that I have just indicated, the $14.3 million in IT services from DCAN, and that's a per annum figure; that's correct? 300 MR. LAFORET: Yes, that's correct. 301 MS. LOTT: And would it be fair to say as we're -- as we look at this schedule that what it does here is essentially describe type of services in essentially a point form. Would you agree with me on that? 302 MR. LAFORET: Yes, it provides a general category of services. 303 MS. LOTT: Now, I would suggest that that's a pretty sketchy outline of $14.4 million in annual services, wouldn't you agree? 304 MR. LAFORET: I don't know that I would describe it as sketchy certainly in that it is concise. One of the aspects of that is this is a function that was performed within Union and resided within Union and then was moved to Westcoast to be provided on a Canada-wide basis. So the party providing the service continued the same but became Westcoast employees, and the receiver of the service continued to be the utility. So both parties understood what the requirements were and what services would be provided and what was covered by that. 305 MS. LOTT: But I guess my concern is that given what might be known among parties between themselves, that doesn't provide us with much transparency, or the Board, in terms of understanding how this complies again with Affiliates Relations Code. And if we go and look at that code and we see the section where it describes what a services agreement shall contain, I don't see the details that meet those requirements. 306 MR. LAFORET: What schedule 8 does provide are the specific activities without getting into the detail of how that activity is performed or how that activity is provided, but what it does do in those is provide specifically what will be done, such as under the end-user services that they will provide the help desk, the service desk. We don't get into the details of what all of that means, but that they are our help desk provider. Or that under the IMAC coordination, which is the insulation movement additions of computers, that that function is performed by them without getting into the detail of all of the aspects of doing that service. 307 MS. LOTT: But I guess I would just put it to you that as I look at that section of the Affiliates Relationships Code, it doesn't provide a specificity and level of detail that is listed under what service agreements and it states that they shall include. And that includes type, quantity and quality of service, pricing mechanisms, cost allocation, apportionment of risk, and that's just a partial list. 308 MR. LAFORET: What I would offer in response to that is that the service schedule provides by an activity type what will be provided. The master services agreement in and of itself covers some of the other aspects that are laid out in the Affiliate Code with regard to confidentiality, who bears the risk with regards to the transaction, how services will be provided. 309 The other aspect, while the service schedule itself does not provide a specific detail on how the cost is calculated, that is provided in the supporting appendices to D.1, tab 14. So while it's not laid out specifically within that schedule 8, we do have detail that's available or that has been put forward which shows how we went through the process to identify the service pricings, how they were allocated, the cost was identified and how the cost was allocated to Union and then how that service pricing was determined. 310 So it's not laid out specifically or in its entirety in that schedule 8, but those components have been put forward. 311 MS. LOTT: I understand. But you would agree with me that that kind of level of detail was only filed in relation to this rate case. 312 MR. LAFORET: In terms of filing, yes, filed with the cost-of-service case. 313 MS. LOTT: I just have to ask that given the size of the IT services being purchased, did Union fire all of its IT department in 2002 and 2003 in exchange for purchasing of new services from the affiliates? 314 MR. LAFORET: Specifically, with regard to the information technology infrastructure, that was an activity that was being performed within Union, with Union Gas employees and also through contracts with third-party vendors. That entire function was removed from Union, so Union realized the reduction in costs related to no longer performing the ITI activities and Westcoast took on that responsibility on a Canada-wide basis and then set up the service agreements with the companies receiving those services. 315 So Union had a reduction in its costs related to no longer doing this in-house, and that was, in part, offset by the service charge coming in. And that's where, going back to what's detailed out in appendix K, the calculations that we do there is to show where Union expected it would have ended up if it had not gone to the shared services, the costs that Union continues to incur in-house for those services, the costs of the third-party provider -- the costs that the affiliate is charging us and then any ratepayer benefit related to that. 316 MS. LOTT: So are you saying that there were actually staff reductions then in the IT departments? 317 MR. LAFORET: Yes, there were. 318 MS. LOTT: And who paid for the severance and the other cost that would have been involved in that? 319 MR. LAFORET: The severance costs related to the role reductions were taken by Union. With the ITI group, one of the key things is that those roles were transitioned in that they became Westcoast Energy employees. So while there may have been some role reductions with that mix, some of the employees or a bulk of the employees related to that transitioned from Union Gas employees to Westcoast Energy employees. 320 MS. LOTT: Okay. If I could just take you back again to the exhibit that I've been referring to all throughout, the J.1.112. I wanted to go back and look at from looking at 2001 to 2002 period to sort of focus on the scale of some of the changes. And if we pull that out again and look at where the big increases are from the period of 2001 to 2002, if you've got that in front of you. 321 MR. LAFORET: Sorry, thank you. 322 MS. LOTT: I would suggest that -- would you agree with me that the big increases, other than corporate services and IT infrastructure which we've already talked about, are -- we have internal audit services in line 9 going from 76 to 1.3 million; we have environment health and safety going from 244,000 to 642, and then we have public affairs which goes from 100,000 to 381. 323 I guess I wanted to focus in on the -- the issue of internal audit services. And I note that that's an increase of almost 20 times in the level of service from 2001 to 2002. Could you give me a -- some explanation of why that would be? 324 MR. LAFORET: Yes. With regard to the internal audit function, the cost which is represented by the $76,000 that was charged in 1999, 2000, and 2001 related to the management function that resided with the director of internal audit at Westcoast that provided audit direction to all of the business entities within Westcoast. So that was Union's share of that audit director. 325 During that period, the internal audit function was still within Union Gas. So that cost was still being incurred internally by Union. What did occur in 2001, was that the internal audit function transitioned and became a Westcoast function so the employees that were within Union and the budget that was within Union went to zero. They became Westcoast Energy employees and continued to provide the same services but provided those as a corporate centre to Union. 326 So while the cost appears to have gone up in 2003 as compared to 2001, the level of service being provided by the corporate centre also increased during that period because Union was no longer doing internal audit internally, it was being provided by Westcoast. So what Union did achieve out of that was a reduction in its costs, which then created a ratepayer benefit of $161,000 because it was more economical to have it provided on a Canada-wide basis than for Union to continue doing the internal audit function on a stand-alone basis. 327 MS. LOTT: Okay. Well, with respect to public affairs, what is the reason for the increase of about four times from 2001 to 2002? 328 MR. LAFORET: With regard to public affairs, what occurred was there was a reduction in staff levels within Union and a reduction of costs within Union and those activities that were being performed by those roles are now provided by Westcoast. So they took over some responsibility for our public affairs activities and once again, that increased level of activity brought with it an increased cost. But that was then, again, offset by the reduction that Union experienced through the role reductions and through the reduction of its costs. 329 MS. LOTT: Just so I can understand a bit what that increase, again, involves in real terms, could you provide the number of press releases that were issued by Union in 2001, 2002, 2003? 330 MR. BIRMINGHAM: Ms. Lott, I'm not sure that's going to be helpful. We could get that for you if you think it's meaningful, but just listening to the dialogue so far, the thing that seems to be missing is the piece in appendix K, which is why I referred to it before. Public affairs is a good example where there are certain services that Union Gas needs and we are providing that primarily as an internal function and you can see that on appendix K in column B on line 11 where we had costs of 432,000 as internal costs to provide those services. We're now getting those same services, but we're achieving them through the provision of a service from Westcoast at a cost 410,000 so we're saving $122,000 on that function as a result of reorganizing and getting the economies of scale associated with a centralized group. 331 MS. LOTT: I'm just trying to understand what the driver of this kind of an increase would be. If you're telling me that press releases is not a good way of gauging that, then I'll accept that. 332 MR. BIRMINGHAM: What I was going to suggest to you is that the activity level is roughly the same in those cases so they would be preparing press releases, other media releases, reviewing bill inserts, that type of activity, but for that activity level, it used to cost Union Gas $432,000, now it costs us $410,000 as a result of the economies of scale that come from centralizing the function. 333 MS. LOTT: So just to summarize this part of my questioning, my understanding of what Union is telling the Board and intervenors is that as a result of going to the shared-services model in 2002, you have an increase in inbound corporate shared services of $26 million a year, and I take that from your evidence at D.1, tab 14, page 6 of 61, and that's from that table A; am I correct about that? 334 MR. LAFORET: Yes, table A on page 6 of 61 under the inbound shared services, yes, shows the increase of the $26.4 million in inbound shared-service charges. 335 MS. LOTT: These are not, you stated, new services, but are all required for gas-delivery service for Union Gas's customers; am I correct? 336 MR. LAFORET: These relate to services that Union, if not receiving it from the affiliate, would either have to do themselves or find another party to do it. 337 MS. LOTT: I'd like to move on now with a few questions around the issue of cost allocation for the inbound shared services. 338 MR. SOMMERVILLE: Ms. Lott, would this be a convenient time to take a short break? 339 MS. LOTT: That's fine. I have probably about 15 to 20 minutes left. 340 MR. SOMMERVILLE: We'll adjourn until 25 minutes after. 341 --- Recess taken at 11:07 a.m. 342 --- On resuming at 11:27 a.m. 343 MR. SOMMERVILLE: Thank you, please be seated. 344 I note that it is cold in this room. 345 MR. PENNY: The building management is getting back at us for complaining about the heat a few weeks ago. 346 MR. SOMMERVILLE: From a statistical point of view we should be perfectly comfortable. We can take some comfort in that, having been inordinately warm last week. 347 Ms. Lott. 348 MS. LOTT: Thank you very much. I want to ask a few questions, as I said before the break, around cost allocation or inbound shared services and in doing that, I was going to ask you to pull up appendix D.1, tab 14, appendix I, which you had previously referenced for me. 349 MR. LAFORET: Yes, I have that. 350 MS. LOTT: I'll make sure the Board has that as well. 351 MR. SOMMERVILLE: Yes, thank you. 352 MS. LOTT: Now, am I correct in inferring that the charges to Union for services are based on cost drivers and the allocation methodology that's set out in this appendix I? 353 MR. LAFORET: Yes, that's correct. 354 MS. LOTT: And am I correct in understanding that the cost drivers are either a percentage of time or in the case of, for example, IT infrastructure, and I think insurance as well, it's multiple or composite drivers; is that correct? 355 MR. LAFORET: Yes. 356 MS. LOTT: Now, on the surface, the percentage of time as the allocation methodology would appear to be direct and transparent, but I wanted to just look a bit into how that is done. My question in this area first of all is, how are the allocations forecast and then how are they tracked during the year? 357 MR. LAFORET: The allocation was an activity that was undertaken by each of the affiliate groups providing services to Union in conjunction with their controller's groups. So they worked together to identify the level of service, which in most cases represented a percentage of their time that was dedicated to Union, and when they looked at what that would be, they then used that to determine what the cost would be. So that's how the forecast was developed. 358 In terms of the tracking, I do not know of any mechanism within the affiliates where they track that forecast specifically against our actual in terms of time sheets or such other. 359 MS. LOTT: So is the forecast based on historic actuals? 360 MR. LAFORET: The forecast is based on the information that was shared by the service provider and the service receiver in terms of the types and level of activity that would be provided. The service provider then looked at it to determine the level of effort they would be required to expend to perform that work and then use that information to determine what portion of their budget would be allocated to Union to represent the cost of those services being provided. 361 MS. LOTT: And so does Union sign off on that, does it go over it and check it off? 362 MR. LAFORET: How this information was put together was in terms of the work between Union's affiliate relationships group, Union's controller's group and the controller's groups within the other entities. So the controller's group for the Duke Corporate Centre are the ones that put together the information with regard to their total budget, the budget being allocated, the allocation method, the percentage that is allocated to Union, and the related overheads to determine what that charge to Union would be. And Union has relied on the work done by the controller's group within the affiliates to identify service price. 363 Once we receive that information, that's when we then went through what's referred to as the reasonableness check just to see how that compared to what Union would incur internally, which is contained in appendix K, or also with regard to the overheads that are added to the cost through appendix J that we did a reasonableness check on the basis of: Are the overheads that we're being charged related to the services similar to what Union would charge if it were providing the services to an affiliate? So they were treating us as we would treat them. 364 MS. LOTT: So the reasonableness check is what you're referring to as the formal sign-off. 365 MR. LAFORET: Yes, it was our -- yes. 366 MS. LOTT: And during the year, are there time logs that are kept by the affiliate service providers? 367 MR. LAFORET: Not that I'm aware of. 368 MS. LOTT: And is there any true-up between the forecast and the actual? 369 MR. LAFORET: No. Under structure of the service-level agreements with our affiliates, the pricing that we have in place is pricing that would carry through 2003 and 2004. So there would not be any specific true-up or change to those costs during that period. 370 MS. LOTT: Okay. If I could just look at specifically at a couple of the allocations. If we could go and look at human resources, for example, which is lines 31 to 35, and it falls into -- it's page 2 of 5 of the spreadsheet. 371 MR. LAFORET: Yes. 372 MS. LOTT: Looking at that, out of all of the Duke company employees, what percentage would Union's approximately 2,500 employees represent, or do you know that? 373 MR. LAFORET: I'm just trying to do some quick math, but in relation to the total number of Duke Energy employees, it would be, I would say, about 8 percent. It would be less than 10 percent of the total Duke head count. 374 MS. LOTT: Okay. And with respect to Westcoast or DCAN I'm referring to, what is the total head count? 375 MR. LAFORET: The total head count within -- 376 MS. LOTT: How many employees are being administered under that budget? 377 MR. LAFORET: I don't believe I have that number with me. 378 MS. LOTT: Could you under take to provide that? 379 MR. LAFORET: Yes, I can do that. 380 MR. PENNY: Can we just for clarification on the record identify which budget and which employees that you're interested in knowing about? 381 MS. LOTT: Yes, I'd be happy to. The total budget figure under line 31 for DCAN is 2,860, and that's the 2.86 million. That's the budget I'm referring to. 382 MR. LAFORET: In regards to that budget, I just want to make sure that I bring back the correct number for you. Are you looking for the total number of Canadian employees and then Union's percentage of that number? 383 MS. LOTT: That's correct, yes. 384 MR. LAFORET: Okay. Thank you. 385 MR. MORAN: Mr. Chair, Undertaking N.12.4, an undertaking to provide the number of employees being administered under the DCAN budget set out on line 31 of Exhibit D.1, tab 14 -- 386 MS. LOTT: It's actually line 32. 387 MR. MORAN: -- 32, my mistake, yes, in Exhibit D.1, tab 14, appendix I. 388 UNDERTAKING NO. N.12.4: TO PROVIDE THE NUMBER OF EMPLOYEES BEING ADMINISTERED UNDER THE DCAN BUDGET SET OUT ON LINE 32 OF EXHIBIT D.1, TAB 14 389 MS. LOTT: Thank you for that. I just wanted to now look at some of the cost reductions that Union is claiming as a result of the inbound shared-services model. And I wondering if you could there pull up the VECC interrogatory which is J.34.98. 390 MR. LAFORET: Yes, I have that. 391 MS. LOTT: Just make the Board does too. 392 If we just look there, if we look first in column A, I just wanted to clarify the note that is attached in your answer, your response number A and then I'm looking at column A within that table. 393 If you could just clarify what that note means, does that mean that the 2002 number for the functional groups was, in fact, in error of 54 persons too many? Am I correct about that? 394 MR. LAFORET: What that represents is that the 54 employees which fell under four -- were categorized under the one column but should have been under the other. So the total -- Union total employees did not change, but whether they fell under a Union operational group or a Union functional group. 395 MS. LOTT: So you're saying they should have been categorized as operational rather than functional? 396 MR. LAFORET: Yes, that's correct. 397 MS. LOTT: Okay. Another question is why is the 2002 -- if we look at the 2002 operational group which is column A, and then line 4, I notice that -- I note that that shows an increase from 2001, I think it's by 168, and then it goes -- as I said, it goes from 2,132 to 2,300. I'm just wondering why that is given that that seems to be counter to the trend for lower numbers in all the other categories and years as we look at the table. 398 MR. PENNY: Sorry, there's a corrected version of this which you should be referring to -- 399 MS. LOTT: Oh, yes. 400 MR. PENNY: -- which is called Exhibit J.34.98, page 1 of 2 corrected. 401 MS. LOTT: So that gives an explanation of my question? 402 MR. LAFORET: Well, yes. 403 MR. PENNY: I only noticed it because the numbers you were citing were incorrect. 404 MS. LOTT: I apologize, I'm not looking at that updated one. 405 MR. LAFORET: If we look at the -- and I believe -- 406 MR. PENNY: Just for -- by way of background, this was the issue that was raised by Ms. Brodie Lumley where they had found a -- this arose out of the issue that there had been a double-counting in a particular year in the people software system that had been used which they discovered when they were trying to break some of these things down. So J.34.98 was corrected along with two or three other answers to undertakings to reflect the discovery of that error. 407 MS. LOTT: Okay. Thank you for that. 408 So am I correct in saying that relative to 2001, that the Union head count for 2004 has reduced by 64 in the operational and 218 in the functional group? Does that -- I think that's still correct given the updated table I'm looking at. 409 MR. LAFORET: Yes. Yes that's what the numbers provide. 410 MS. LOTT: Okay. I'm interested in knowing what that reduction translates to in dollars and cents. You'd mentioned 97,000 as an average salary at Union and I think that was under Mr. DeRose's question to you this morning. Is that correct for me to suggest that that gives a bare-bones figure? But I'm also looking for the fully-loaded cost. 411 MR. LAFORET: In terms of the 97,000, that would be the fully loaded cost. That would include the salaries, the benefits, and the incentive plan in the 97. 412 The issue that we have going from the 2001 number for the functional groups, the 643, and subtracting the 2004 functional group number of 325, that gives a number of 318, but there are a few points I should clarify around that. There were some roles within that 318 that were transferred over to operational groups and there are also some roles, and this goes back to some of the issues that were discussed earlier with the HR panel and the O&M panel with regards to trying to get an accurate head count, FTE count out of the PeopleSoft system. One of the issues that we have is that PeopleSoft is a current-time system that you can run queries against to figure out where you stood a number of years ago, but it's very difficult to work with some of that data without knowing what was going on at that point in time. 413 So what we did have on the system, specifically in 2001, is roles that still existed on the PeopleSoft system that did not have any incumbents and represented reductions that had already been taken within Union through other reorganization or cost-savings initiatives. So what we end up with is a 2001 number by using the total head count, rather than the total number of spaces filled, but the total number of roles that exist, we end up with a number that's a bit higher than what we think really was at Union in 2001 in terms of the numbers I used here. 414 So when we also take some of that out, what we calculate out is that between the end of 2001 and 2004, there were 142 role reductions within the functional group area. 415 MS. LOTT: Okay. With respect to the issue of pricing of the inbound shared services, if we could go back to appendix I. I'm interested in knowing, if you could tell me this, how much inbound charges are charged on a U.S. basis? Do you have that or can you provide a ballpark figure for that? 416 MR. LAFORET: What I can provide, maybe -- well, the reference I would give would be the D.1, tab 14, appendix G, and what appendix G provides is a breakdown by the service provider of the service-level fee. So the amounts represented there are in Canadian dollars, but the Duke Energy Corporation, Duke Corporate Centre and the Duke Energy Gas Transmission Corporation are actually invoiced in U.S. dollars, converted, and then represented here in Canadian. 417 MS. LOTT: Okay, that's Canadian. 418 MR. LAFORET: Just referring to -- 419 MS. LOTT: I'm just wondering, are those the only ones? 420 MR. LAFORET: Those two service providers, yes. 421 MS. LOTT: That are charged in U.S. dollars. That are invoiced in U.S. dollars. 422 MR. LAFORET: That invoice, yes. 423 MS. LOTT: Okay. 424 MR. LAFORET: And we also provided a response to J.7.37 from the Consumers' Association of Canada, where we identified that the total price in U.S. dollars is 5.9 million in U.S., and then what's represented at appendix G is the Canadian conversion of those. 425 MS. LOTT: Okay. Just as an example following from that, do you check against Canadian-sourced equivalent services. For example, if we look at appendix I under legal services, for example, which falls under line 51, and that's page 3 of 5. 426 MR. LAFORET: I'm sorry, I got a bit of ahead of myself looking for that. 427 MS. LOTT: I just want to make reference to whether you check Canadian-source equivalents against certain other kinds of services like legal services, for example, which fall under line 51 here. For example, would you check corporate legal service rates versus the Canadian legal costs that you're paying, for example, for this proceeding? 428 MR. LAFORET: No. And maybe I'll put that in two points. 429 One is that we didn't do any type of market comparator for the services being provided by the affiliates so we don't have anything that we put together to say how that compares to a market. The other aspect is that we also didn't compare between what the cost was for legal services out of DCAN versus the cost for the services out of Duke Corporate to see if there was any comparator between those two to say that we would choose one over the other. 430 One of the things that we have brought forward is that the shared-services structure is driven as much by how Duke was structured when they did the purchase of Westcoast. So when we transition to that shared-services structure, we dove-tailed into the structure that they already had, and that's what brings us forward where we are receiving some legal services from DCAN and we are receiving some legal services or oversight from Duke Corporate Centre. 431 MS. LOTT: I'm just wondering if you could provide us with that comparison in an undertaking, of the legal rates for in-house counsel, external counsel and U.S. affiliate counsel based on the year of call and the fully-loaded rates. 432 MR. LAFORET: I guess I'm trying to figure out in my mind how I would put those comparators together. The costs that are coming through from legal out of DCAN and the costs that are coming through general counsel out of Duke Corporate Centre may not or would not be the exact same type of services, so I may have a different service with a different cost related to that service. 433 The other problem with this would then be trying to determine, based on salary costs or fully-loaded costs for these services, and market comparators which may be an hourly basis, and I'm not sure if I'd be able to, one, obtain those that would be a comparator; and two, be assured that I was matching up apples and apples on all of this. 434 MS. LOTT: I guess my concern is that how do we know that we're getting fair-market value here unless we're able to look at a specific service and establish a way of comparing? 435 MR. PENNY: Well, Mr. Chairman, the basis for the justification isn't fair-market value, it's that it's less than Union's total cost, so the comparator to fair-market value, we're not relying on that so we're not trying to justify it on that basis. The bottom line is that the total legal services cost is lower than it was before. And that's the basis on which it's being justified. 436 I think Mr. Laforet has a good point on the comparator because even if we knew what general counsel got paid in Charlotte, what would we compare that to? I mean there's general counsel all across Canada that make, I'm sure, from a million dollars to of $65,000. I mean it -- there's no -- there's no way that you could just pick something and compare it because it wouldn't have any meaning, in my submission. 437 MS. LOTT: Well, I guess my response would be that I -- I'm only interested in knowing what Union is being charged and having some way to assess differences between U.S.-based services and Canadian-based services. 438 MR. SOMMERVILLE: I'm going to -- I'm going to permit the question but there is a -- there is some difficulty, it seems to me, in trying to draw a straight line on that comparison. So I'm going to ask witness to do the analysis. I'm not sure of just how deep the evidentiary point will go. I just want you to -- we have some reservations about that, and having some experience in that area, I know that there is a significant complexity in trying to draw some of those comparisons but I -- I'm going to ask the witness to prepare the comparison. 439 MS. LOTT: I appreciate that if that would just stand as an undertaking with that proviso that you've just given. 440 Are you able to do that? 441 MR. LAFORET: Yes, we can undertake to do that. 442 MR. MORAN: Sorry, I wonder if the undertaking could be restated for the purposes of the record? 443 MS. LOTT: I'm just working it out here. 444 MS. LOTT: I would put it as comparison for legal rates of in-house counsel, external counsel and U.S. affiliate counsel based on equivalent year of call and overheads, meaning that I'm looking for the fully-loaded rate. 445 MR. MORAN: That would become Undertaking N.12.5. 446 UNDERTAKING NO. N.12.5: TO PROVIDE A COMPARISON FOR LEGAL RATES OF IN-HOUSE COUNSEL, EXTERNAL COUNSEL AND U.S. AFFILIATE COUNSEL BASED ON EQUIVALENT YEAR OF CALL AND OVERHEADS, I.E. THE FULLY-LOADED RATE 447 MR. PENNY: I think this is going to have to be on a best-efforts basis because as I think about it, Mr. Chairman. Because as I think about it, I'm not sure where we'll find any of this information, but we'll see what we can do. 448 MS. LOTT: Thank you for that. 449 MR. SOMMERVILLE: Ms. Lott may have some of her own resources to bring to bear as well. 450 MS. LOTT: Limited. 451 Just a few more questions in this area. I just wanted to reiterate again that my understanding of the affiliates relations code is that it also specifies for the transfer pricing between a utility and an affiliate is a fair-market value, and that a cost-based price is the proxy if no fair-market value is available, and I'm quoting there section 2.3 of the affiliates relations code. You would agree that that's what it expresses? 452 MR. LAFORET: Yes, that's what it puts forward in terms of the pricing, yes. 453 MS. LOTT: My question in relation to that is what steps has Union taken to ensure that the price for inbound shared services represents fair market value? 454 MR. BIRMINGHAM: Ms. Lott, it may be helpful just to turn to page 36 of Exhibit D.1, tab 14. And it's in that section where we describe why we didn't go forward and try to determine a fair market value for any of these services. I think the first reason was that we were adopting the Duke shared-services model which achieves cost reductions through economies of scale. Duke Energy has had good experience with this model and knows that they can achieve lower costs for the group of companies under this shared-services model. 455 Second is that we weren't going to try to go out and determine a fair-market value when we knew that, in fact, we weren't tendering for the services and that's simply problematic where you're not going to get reasonable bids for the services when parties know that, in fact, they aren't going to be obtaining those services. 456 The third reason that we have listed there is that in many cases, and legal is one of them, is that we were are only receiving a service from the affiliate for part of the overall service. So we still have legal costs inside Union Gas and then part of that function is being provided by an affiliate. So in that case, trying to outsource or trying to get a fair-market value from a third-party service provider for only part of a function would be very difficult because the market doesn't necessarily define the service that way. 457 And then finally, some of those services are management oversight type services that from a prudent standpoint we would not be looking to outsource in any event. So it's really those reasons why we didn't feel that trying to obtain a fair market value for these things was a meaningful exercise. 458 The last thing I would add is that when we went through the separation of Union Gas merchandise programs, we in fact went through quite a comprehensive exercise to try to reconfigure our internal cost to somehow match what the market would try to provide. That was a very time-consuming, extremely expensive, process and in our view didn't justify the value against the costs that we had incurred to try to attempt that. 459 MS. LOTT: But I guess just -- you know in -- a final response and final question to this would be that then how can the Board be sure that the -- for inbound services that are coming from Duke affiliates, that the proposed price in U.S. dollars is not going to be above the Canadian fair-market value? 460 MR. BIRMINGHAM: It isn't a test against whether it's the fair-market value. We haven't -- in our view it isn't reasonable to try to attempt to come up with the fair-market value. One of the things that we did do is we tried to look at the cost for Union Gas to provide that service compared to the cost that we're now being -- will now be incurred under Duke Energy ownership, and that is summarized in appendix K. If we stay with the legal costs, we'll see that the inbound service charge is $585,000, but that is displacing $688,000 of costs for Union Gas for a savings of $103,000. 461 And the test that we have to meet, at least initially under the Affiliate Relationships Code, and you can see that in the purpose section under appendix N, if I could just have you look at page 1. In the very first paragraph, 1.1 purpose of this code, says that "Our actions have to save ratepayers harmless." 462 And then further to that, the Board had come out with a decision in RP-2001-0032 that said that in fact it wasn't a matter of saving ratepayers harmless, that the reorganization of these service arrangements had to, in fact, result in a benefit to the utility. That benefit, is, in total, $7.8 million, and that's what's in appendix K. 463 MS. LOTT: Okay. Thanks for that. 464 I'm just going to move to my -- not that many questions, but I wanted to ask some questions about related-party transactions. These were based on two interrogatories that my colleague, Mr. Janigan, had -- wanted to deal with in his examination of the storage and transportation panel last week but they were deferred to this panel. So I wonder if you could turn up the interrogatories I'm referring to are J.1.22 and J.1.23, those are Board Staff interrogatories. J.1.22 and J.1.23. And I also am going to make just a brief reference to Union's 2002 annual report which is at Exhibit A, tab 12 and I'm looking at page 31 of that report. If everybody can pull those out. 465 MR. BIRMINGHAM: I think we have all that, Ms. Lott. 466 MS. LOTT: That's a lot to pull out, I know. Thank you. 467 I wanted to just start by noting on the very top of page 31 of the annual report it talks about related-party transactions. And in section A there, and I'll just read this off, it indicates that: 468 "The company purchases transportation services at prevailing market prices and under normal trade terms for commonly-controlled companies. During the year ended December 31st, 2002, these purchases totalled 74 million, and in 2001, they were 53 million. The company also provides storage and transportation services to commonly-controlled companies under normal trade terms. During the year, this revenue totalled 11 million, and in 2001, it was 4 million." 469 So based on that, am I correct in saying that Union purchases from affiliates and sells to affiliates transportation and storage services? 470 MR. BIRMINGHAM: During 2002, that was the case, yes. 471 MS. LOTT: Okay. And I also note in that quote I've just read that the amounts purchased and sold with the affiliates are expected to increase in 2002 from 2001. Would you agree with that statement? 472 MR. BIRMINGHAM: Because this is historical external reporting, in fact, they had increased on an actual basis. 473 MS. LOTT: They didn't actually increase but they were -- is that what you're stating to me? 474 MR. BIRMINGHAM: These are the 2002 financial statements. 475 MS. LOTT: Right. 476 MR. BIRMINGHAM: They are done on an actual basis so the 2002 level of transactions, both on the purchase side and on the sales side, were higher than the respective amounts for 2001. 477 MS. LOTT: Okay. So if we can go to Interrogatory J.1.22, and if we look at the response from Union to the question about transportation services purchased. Now, I note from that that it indicates that Union is purchasing from Duke Energy, and I'm looking at item 3 there, 10.1 million in molecules, it's purchasing storage and transportation exchange for 10.1 million. It's purchasing 33.9 million from Engage Canada for molecule storage transportation exchange and ABCT remittance, and then it also notes that it's purchasing from Westcoast Energy $28.9 million in transportation exchange. 478 You read that as I do, that's correct? 479 MR. BIRMINGHAM: Yes, that's the response that's in Exhibit J.1.22. 480 MS. LOTT: Just for my clarification, what is ABCT remittance? 481 MR. BIRMINGHAM: This is the agency billing and collections service that Union offers to direct-purchase marketers and this is the service where marketers would supply commodity to end-users. They would place the cost of their commodity on our bill. We would bill that to the end-user and then remit to the marketer. 482 MS. LOTT: Okay. Thank you. Thank you for that. 483 So when Union purchases from a related third party storage and transportation services, is there any requirement that has to be an open-bidding process? 484 MR. BIRMINGHAM: Generally speaking, that's the case, yes. 485 MS. LOTT: Okay. And does this bidding process have to include bidders other than Union affiliates? 486 MR. BIRMINGHAM: Yes. 487 MS. LOTT: And is there a requirement that Union has to purchase the least-cost storage option? 488 MR. BIRMINGHAM: I wouldn't limit that, necessarily, to storage, Ms. Lott, but I think more importantly, Union takes a look at all of the terms and conditions with respect to the bids, so it may be that it isn't necessarily the lowest, but to the extent that there are other conditions, that is, flexibility within those transportation arrangements, storage arrangements or the term of the arrangement may make the entire package a better value. So there's an assessment that goes into it. 489 Generally speaking though, we try to take the lowest cost. 490 MS. LOTT: And would that apply to the purchasing of transportation exchange as well as loan options? 491 MR. BIRMINGHAM: I'm not sure what you mean by "loan options". Let me deal with the transportation exchange first. 492 The transportation exchange really displaces the need for certain upstream pipe obligations and that transportation exchange means that we make an arrangement with a party where we will deliver gas to a certain point, typically upstream of our franchise area, and that might be at the Alberta border, as an example, and the party agrees to redeliver the gas at a point in our system, typically either Dawn or Parkway. 493 So that's what that arrangement is. I'm not sure what your reference was to loans. 494 MS. LOTT: Concerning the issue of the purchases from the affiliates, can you tell me if any of these services that Union purchased were actually calls or options to call on services which Union never subsequently exercised? 495 MR. BIRMINGHAM: All of the services that you see listed here aren't calls or options, they are all services that we do. 496 MS. LOTT: Okay. I'm interested in knowing, can you tell me how much Union paid on option-type services from its affiliates from the -- 497 MR. BIRMINGHAM: We don't have any option-type services from the affiliates. The only financial derivative type instruments that we use directly at Union Gas is with respect to our commodity purchases, and we do not have any affiliate suppliers of those services. 498 MR. PENNY: Mr. Dent already testified about that. 499 MS. LOTT: Okay. Thank you for that. 500 Now I just wanted to take you to -- if we look at J.1.23. This, as I understand it, relates to Union's selling storage loans, transportation exchanges, and hub services to affiliates. And am I correct that that is what is shown on the attached summary? 501 MR. BIRMINGHAM: That's correct. This is the amount that adds up to the $11 million that was in the annual report for 2002. 502 MS. LOTT: Okay. So looking at J.1.22 and then this, the response to J.1.23, am I correct in saying that Union is selling to affiliates similar services as to what it's purchasing from affiliates, i.e., it's showing the purchasing of storage and transportation exchange in J.1.22, it's showing us the selling of storage and transportation services in J.1.23? 503 MR. BIRMINGHAM: I wouldn't say necessarily that they're the same types of services, Ms. Lott. As an example, an exchange would be the transaction that I just described where gas is dropped off at one delivery point and redelivered at another delivery point. 504 The services we're providing here are things like storage, as an example, which is exactly what it is, it's storage space and deliverability. There are also transactions such as loans where if Union Gas is in a year where the weather is very warm and we have gas on our system that is excess to our needs, we may arrange to loan that gas out to remove it from our system and increase some storage space. So those are different types of services than are the services that we tender for to arrange to get gas to our system. 505 MS. LOTT: So you're saying that -- well, maybe let me just ask you this: Do you know if there's any match by way of transportation path or type of exchanges service by what Union sold to affiliates and what Union subsequently repurchased from affiliates? 506 MR. BIRMINGHAM: Is there a tie between the purchase transactions and the sale transactions, no, there isn't. 507 MS. LOTT: What might be helpful for us and the Board to be assured about this is whether you could undertake to provide me with the breakdown of the purchases with Duke Energy, Engage Canada, and Westcoast Energy that are found at Exhibit J.1.22 in the same level of detail as what you've provided on sales to affiliates in J.1.23 in that table that we've just been -- I have just been referring to. 508 MR. BIRMINGHAM: I think we can undertake to do that, Ms. Lott. So as I understand the undertaking, you want us to recast the transactions for Duke Energy, Engage Canada, and Westcoast Energy that are found in response to Exhibit J.1.22, and put it in the format and level of detail that exists on page 2 of Exhibit J.1.23. 509 MS. LOTT: That's correct, that's what I'm asking. 510 MR. BIRMINGHAM: We can do that. 511 MR. MORAN: That was a nice snappy description, Mr. Chair. Undertaking N.12.6. 512 MR. BIRMINGHAM: I didn't want you to use up your bag too early. 513 UNDERTAKING NO. N.12.6: TO RECAST THE TRANSACTION FOR DUKE ENERGY, ENGAGE CANADA AND WESTCOAST ENERGY TO BE FOUND IN RESPONSE TO EXHIBIT J.1.22 AND PUT IT IN THE FORMAT AND LEVEL OF DETAIL THAT EXISTS ON PAGE 2 OF EXHIBIT J.1.23 514 MS. LOTT: Thank you for that. 515 Now, on page 2 of this table if we could look at J.1.23, if we could just take you to that. And if we look at -- if you've got that in front of you, look at column C which says price range. I'm -- am I correct in saying that these are price ranges reflecting the range of prices in which you sold these services to the affiliates; is that correct? 516 MR. BIRMINGHAM: That's correct. 517 MS. LOTT: Okay. So this -- what this indicates is a market range? 518 MR. BIRMINGHAM: That's right. 519 MS. LOTT: Now, I would also think that Union -- and you can tell me if this is correct or not, that you don't just sell storage loans, transportation exchanges and hub services to affiliates, that you also sell to customers that have no relationship to Union; is that correct? 520 MR. BIRMINGHAM: There are certainly other customers beyond our affiliates that want these services and bid on them and contract for them. 521 MS. LOTT: And contract for them? 522 MR. BIRMINGHAM: And those services are also provided at market-based prices. 523 MS. LOTT: Okay. I'm also wondering if you could just do one more undertaking which would be to provide me with a table similar to that of this table at J.1.23 indicating what Union sold in terms of storage, loans, transportation exchanges and hub services to non-affiliates. And I'm also looking at, you know, looking at the contract term, the volume and the price range and revenues as shown on this table as well. Is that possible to do? 524 MR. PENNY: Well, Mr. Chairman, that's part of -- that's the S&T business. There would be dozens if not hundreds, probably more like hundreds of transactions if the issue -- if the issue is the price range, I mean that -- the column C that might be reasonably reproducible, but to list all of the contracts would be a huge undertaking and be pages and pages of material. 525 MS. LOTT: I understand. 526 MR. PENNY: If we wanted to take comparable time periods and what the price range is, that might be possible. 527 MS. LOTT: That might be helpful, and price ranges in a summary format will be helpful. 528 MR. BIRMINGHAM: What we'll do, Ms. Lott, just so I've got it here, is in this undertaking we will have the same types of services; storage, loans, transportation, exchanges, and hub services, and the price range that those services were sold to non-affiliates during 2002. We can do that. 529 MS. LOTT: That's it. Thank you. 530 And those are my questions, Mr. Chairman. Thank you. 531 MR. MORAN: That's Undertaking N.12.7, Mr. Chairman. 532 UNDERTAKING NO. N.12.7: TO PROVIDE THE PRICE RANGES OF STORAGE, LOANS, TRANSPORTATION EXCHANGES, AND HUB SERVICES SALES TO NON-AFFILIATES DURING 2002 533 MR. SOMMERVILLE: We'll take our break around 12:30 or so, but who is next? 534 MR. BRETT: I'm next, Mr. Chairman. 535 I'm going beyond that that but that's fine, unless there's anybody that's got less than 15 minutes that wants to precede me. 536 MR. SOMMERVILLE: I don't see any volunteers from the back, Mr. Brett. 537 MR. BRETT: Thank you, sir. Good morning, Mr. Chair, Mr. Birchenough. 538 Good morning, panel. 539 MR. BIRMINGHAM: Good morning, Mr. Brett. 540 CROSS-EXAMINATION BY MR. BRETT: 541 MR. BRETT: Just four brief informational questions before I get into my prepared script, just flowing from these conversations we've just had. 542 Mr. Birmingham, with respect to your purchases of these S&T-type services from affiliates that you were just discussing with Ms. Lott, in what circumstances would you not enter into a competitive bidding process for them? 543 MR. BIRMINGHAM: There may be exceptions, Mr. Brett, where the demands in our system are such -- are so dramatic and the need for those services are within a time frame that it doesn't readily allow us to go for a fuller competitive bid. In that case, we would typically call a couple of our key suppliers and try to understand what the range of the price is for those services and contract for them on that basis, but that happens on an exception basis only. 544 MR. BRETT: Could you give us a for instance? What might be an example of that without naming names or places or anything? 545 MR. BIRMINGHAM: An example might be if we were in the first week of February and all of a sudden the weather turned 30 percent colder and we were in a situation where we needed a lot more gas in a very short period of time. That may not allow us to go for what I would call the normal period under competitive bidding, and so we may just call up some of our suppliers and say how much gas can you get to us in this period of time. 546 MR. BRETT: Thank you. And you might call up an affiliate, or you might call up a non-affiliate, or you might call up one of each? 547 MR. BIRMINGHAM: Both. 548 MR. BRETT: And you mentioned -- you were talking about -- with Ms. Lott about transportation but what I thought was I heard a transportation exchange and in the value of 28.9 million. Now, was that -- then you went on to explain what the exchange was. Is that a -- well first of all, I think I heard you say the counterparty was Westcoast Energy Inc. Am I right on that, first of all? 549 MR. BIRMINGHAM: That is on line 6 of the response to Exhibit J.1.22, Mr. Brett, and it was Westcoast Energy. 550 MR. BRETT: Yes, yeah. Westcoast Energy? 551 MR. BIRMINGHAM: That's right. 552 MR. BRETT: Now, was that a commodity exchange or was that -- was that what I understand -- I think I understand to be a commodity exchange as you explained, or is there a transportation component to that as well? Could you explain that a bit? 553 MR. BIRMINGHAM: It's a transportation exchange that replaces upstream transportation. Let me just explain it in a little bit of detail. 554 Typically, what would happen is we would have firm upstream pipeline capacity that would underlie these obligations, and in this case, it would be TransCanada PipeLines. There are periods where the contracts with those upstream pipeline suppliers expire and we have to make a decision about whether to renew that upstream pipeline capacity or enter into some other arrangement that would still allow us to get the gas to our system but at a reduced cost. So it becomes an economic choice, whether we recontract for upstream pipe or enter into another type of service. 555 In this case, it was more economic for us to allow the TransCanada contract to expire and enter into an arrangement whereby we would deliver gas at the Alberta border and Westcoast would agree to redeliver it to our franchise area. And that fee was less than the TransCanada toll that we would have otherwise paid if we had contracted for the upstream pipe. 556 MR. BRETT: I understand. So Westcoast obligation really, in that case, really was to use their transportation capacity on some pipeline to effectively drop off gas to you at Dawn or at Parkway. 557 MR. BIRMINGHAM: Or whatever other assets they had that underlay that service, but they had an obligation to deliver the gas at a delivery point on our system. 558 MR. BRETT: What was throwing me a bit is they are not in the gas commodity purchase and sale business as such. 559 MR. BIRMINGHAM: No, they are not. 560 MR. BRETT: It was a transportation commitment. 561 MR. BIRMINGHAM: That's correct. This is our gas that is being delivered into the system and that's why we call it a transportation exchange rather than a commodity change. 562 MR. BRETT: I see, as opposed to just a pure exchange. 563 My third informational point is you were -- Mr. Laforet, you were talking to, I think it was Ms. Lott, about the -- this is J. -- going back to J.34.98, this is the head count exhibit that you were discussing at some length that you made some revisions to the -- to 34.98. 564 MR. LAFORET: Yes, for the J.34.98 there is a corrected version. 565 MR. BRETT: Yes, that's right. And page 2 of 2 and I think you actually gave us some numbers, you gave Ms. Lott some numbers in answering her, if I'm not mistaken. And you effectively amended the 318 in the third column there, the 318 net reduced roles to 148, I believe. 566 MR. LAFORET: To the -- I believe the number was 142. 567 MR. BRETT: Okay, to 142, thank you. 568 And then you explained to us how -- what the basis of that revision was and I don't want to have you go through that again, but I would -- I wonder if you would agree to give us an undertaking where you lay that out because there were two elements to it, as I recall. One was that some of these roles weren't reduced, they actually shifted to other areas and I'd like to know how many shifted to other areas and to which areas. That's of the 325 -- sorry, of the 643, I guess. And then the second thing you said was there was an adjustment made to the 643 itself based on some changes that took place. 569 I wonder, rather than just go through it again here, could you give us an undertaking to just outline what those factors were and how you arrive at the 142? 570 MR. LAFORET: Yes, I can provide that breakdown that would carry us from that 643 that was the 2001 head count and then how that transitions to the 2004 head count and gives that number of the 142 that I referenced earlier. 571 Mr. Chair, that would be very helpful to me because I was finding it hard to follow that. 572 MR. SOMMERVILLE: Thank you. 573 MR. MORAN: That would be Undertaking N.12.9, Mr. Chair. 574 UNDERTAKING NO. N.12.8: TO PROVIDE THE BREAKDOWN TO CARRY FROM THE 643 NUMBER THAT WAS THE 2001 HEAD COUNT AND THEN PROVIDE HOW THAT TRANSITIONS TO THE 2004 HEAD COUNT RESULTING IN THE EARLIER REFERENCED 142 NUMBER 575 MR. BRETT: And the final point was -- 576 MR. MORAN: 12.8, Mr. Chair, my mistake. 577 MR. BRETT: In your discussion with Mr. DeRose, you had talked about giving him a reconciliation with respect to, I believe it was the impact on J.7.22 of the $82 million in -- I can't remember the reference for the $82 million, do you recall the conversation you were having? Your very first undertaking with him you agreed to give him a -- perhaps I can just do it this way. 578 Do you understand the situation I'm describing? 579 MR. LAFORET: Yes. 580 MR. BRETT: What I would like for you to do, if you wouldn't mind, is when you match up the 82 million -- well, as you know, the J.7.22 and the exhibit you were discussing with the $82 million number have different configurations, one is based on generic types of costs, one is based on the administrative centres, right? 581 MR. LAFORET: Yes, that's correct. 582 MR. BRETT: So when you do the transposition over to J.7.22, could you indicate, opposite each of the adjustments you're making, which of the items in the first table are the ones that caused the reduction? In other words, I want to be able to see into which generic categories the 17 items of the first table fit. In other words, I want to be able to correlate the reductions or an administrator budget of 82 million that's set there with the right -- to understand which ones are being matched with which items in J.7.22. That's a big hackneyed, but that's what I'm -- is that maybe what you're doing already? Is that what you understand you're doing? 583 MR. LAFORET: What I undertook for Mr. DeRose was to do the breakout by the cost types such as salaries, employee expenses, communication costs. If I understand correctly what you're then talking, and the reference would be the J.17.39, page 2 of 2, that in doing that, I would also then show for the activity type of corporate services how it breaks out by the cost types? 584 MR. BRETT: Yes, that's basically it, yeah. So that if -- if you were going to, for example, I have this now, J.17.39, page 2 of 2, if you were dealing with engineering procurement which you show at 6698, as I understand what you were doing with Mr. DeRose is you were showing what that impact of that 6698 would be on the 2000 actual numbers. 585 MR. LAFORET: It would be doing that impact of the 82.5. 586 MR. BRETT: Right. 587 MR. LAFORET: But if I understand -- 588 MR. SOMMERVILLE: Maybe I can assist. If I understand, Mr. Brett, what you're looking for is really a legend that allows you to discern which of the more particular categories that are reflected were captured previously in a broader categorization. 589 MR. BRETT: That's correct, sir, in which ones they were resident, which ones they were captured in. 590 MR. SOMMERVILLE: It's really just a tracking or legend-type exercise. You may want to do it underneath the table just to indicate that the collective category includes those particular ones. I think that's what Mr. Brett is looking for. 591 MR. BRETT: Yes, sir, thank you. 592 MR. LAFORET: No, I understand that. That can be undertaken. That may be -- well, that will be somewhat extensive to try and trace all those back and I'll attempt to do it in a manner that doesn't overcomplicate what Mr. DeRose was requesting, but doesn't complicate what you're looking for. 593 MR. BRETT: Thank you very much. As I say, I don't want to complicate Mr. DeRose's exercise, but if you could show that as an extra to the extent possible, I'd appreciate. 594 MR. MORAN: As I understand it, Mr. Chair, that would just be an addition to N.12.1. 595 MR. SOMMERVILLE: Mr. DeRose's undertaking is being continuously revised. 596 MR. BRETT: Yes, sir. 597 MR. MORAN: In his absence. 598 MR. SOMMERVILLE: I think, Mr. Brett, that's your last informational question? 599 MR. BRETT: Yes, sir. 600 MR. SOMMERVILLE: Why don't we break now for an hour and then you can start the rest of your cross-examination as a whole. 601 MR. BRETT: Thank you, Mr. Chairman, that will be fine. 602 MR. SOMMERVILLE: We'll break until 1:30. 603 --- Luncheon recess taken at 12:28 p.m. 604 --- On resuming at 1:35 p.m. 605 MR. SOMMERVILLE: Please be seated, thank you. 606 Mr. Brett. 607 MR. BRETT: Thank you very much, Mr. Chairman, Mr. Birchenough. 608 Mr. Birmingham, as I understand it, Union Gas is the only gas LDC in the Duke Energy organization; correct? 609 MR. BIRMINGHAM: That's right. 610 MR. BRETT: Can I start back at 493, EBRO 493-494, and would you agree with me, Mr. Birmingham, that the Board examined the Westcoast Centre charges very carefully and thoroughly in that case? 611 MR. BIRMINGHAM: They looked at the Westcoast Corporate Centre charges in the context of our cost-of-service application for that year, yes. 612 MR. BRETT: Right. And they -- at page 155 of the decision, I don't think you need to turn this up, Mr. Birmingham, but you're welcome to -- you may want to have it in front of you. It's page 155. 613 You probably don't need this in the sense of -- I can ask you what I'm -- I'll note what's in the decision and just by way of background, if you think you need to look at it, then I can get -- give you mine, I guess. 614 MR. BIRMINGHAM: Why don't you ask me the question, Mr. Brett. 615 MR. BRETT: I was just going to say that in that case, -- in the -- 155 there's a list there, the Board presents a list which compares what was asked, what Westcoast -- what Union had sought by way of a recovery and what was granted. And in the case, they requested and I was just going to take this, subject to check, they requested $5,202,000 and the Board allowed them $2,265,000. 616 MR. BIRMINGHAM: That's roughly my recollection as well, Mr. Brett. 617 MR. BRETT: Okay. And do you also recollect that in that case, the Board set out for the first time, I think, a set of principles, sort of basic principles against which they would judge requests for corporate centre charges and I think, in fact, you reproduced those in your evidence. 618 MR. BIRMINGHAM: I think it's in the response to Exhibit J.23.7, Mr. Brett, that's the one you're thinking of. 619 MR. BRETT: Okay. And there also -- that's right, 23.7 is one of my client's interrogatories, that's 23.7, but I was just going to cite the principles very briefly from the decision itself. They're at page 143 of the decision, and just to summarize them, would you agree with me that there were the three principles, cost incurrence, and the way the Board put that was: 620 "Are the proposed corporate centre charges prudently incurred by or on behalf of the companies for the provision of the service required," their emphasis, "by Ontario ratepayers." That was the first; right? 621 MR. BIRMINGHAM: That's correct. 622 MR. BRETT: The second one was cost allocation which was essentially, if properly incurred, were they allocated appropriately to the company -- to the utility in question based on principles of cost causation and drivers. Right? 623 MR. BIRMINGHAM: That's right. 624 MR. BRETT: And the third was are the benefits to the company's ratepayers equal to or exceed the costs. Are they at least equal to or do they exceed the costs of rates services purchased. 625 MR. BIRMINGHAM: Is there a net ratepayer benefit, that's right. 626 MR. BRETT: Right. And then the Board, at the same time, this particular passage is not in your evidence, but just for reference, it's at page 144 of the decision, it's paragraph 5.519; do you have that now? 627 MR. BIRMINGHAM: I do, sir. 628 MR. BRETT: And in there, just to summarize this -- well I best just read it. 629 "In general, the Board finds that the primary purpose of the Corporate Centre charges is for Westcoast to recover from its subsidiary business units a significant portion of the corporate centre costs that it has decided are necessary for the operation and growth of a diversified energy company. The Board is not convinced by Westcoast's assertion that most components of the charges result from 'bottom-up' requests for services from the company's managers and budget administrators. The Board's assessment of the evidence is that many of the proposed charges are a top-down allocation of corporate centre costs by the sole shareholder and the Westcoast board of directors and that the company's managers are expected to absorb in their budgets." 630 Is that a correct reading of it. 631 MR. BIRMINGHAM: That's an accurate reading of that segment, that's right. 632 MR. BRETT: Okay. Would you agree with me, Mr. Birmingham, that in the 499 case, that's EBRO 499, this is a pretty broad question, but I mean it's just that the -- that in the 499 case, the parties settled on an O&M budget. First of all, they settled the O&M budget in the settlement agreement, it wasn't litigated, and as a corollary to that, they -- it was a global settlement, in other words, it was a global settlement that included all of the O&M items. One of those items was a corporate charge that Union had applied for in the amount of $2.7 million. But in effect, the overall budget was settled including the corporate charge. 633 MR. BIRMINGHAM: It was. 634 MR. BRETT: And I think you -- in the -- in that settlement agreement, that's the 499 Union Gas settlement agreement, I'll see if I can -- let me give you a reference for this. I apologize for the -- operations and maintenance expense item, page 31 of the settlement agreement. There are about three pages there in the agreement that deal with the operations and maintenance expense and set out the settlement, the global settlement. 635 The parties state in there, in -- at that -- in that section that effectively they can manage, that Union can manage the corporate charge in its discretion within the overall O&M envelope; is that fair? Is that a fair paraphrase of what was said in here and I'm trying to -- 636 MR. BIRMINGHAM: I don't see any reference in this section with respect to the corporate charges, Mr. Brett. There is a section on page 47 -- or that begins on page 47 of the settlement agreement in EBRO 499, it's section G.7.1. 637 MR. BRETT: Yes, I'm sorry. 638 MR. BIRMINGHAM: Relates to corporate centre charges, and then I think it's on page 48 at the -- near the very end of that section it says, "The parties agree that this item," and they're referring to the corporate centre charges, "is one which Union, in its discretion can manage within the agreed-upon total O&M envelope." 639 MR. BRETT: Right. Right. 640 And do you agree with me that in that -- in that particular -- in that context, that there was no acceptance by the parties to that settlement agreement of a particular number for the corporate charge, that that issue was simply not addressed. What was addressed was the overall envelope. 641 MR. BIRMINGHAM: There was no specific agreement on the components of the corporate centre charges or, I guess, for that matter, even the total of the corporate centre charges, other than to recognize that that was included in Union's prefiled evidence, it was the subject of interrogatories, and it was included in the overall O&M envelope that was agreed to back on the beginning of page 31 of the agreement. 642 MR. BRETT: And would you agree with me that this all took place prior to the implementation of the Affiliate Relationships Code, this decision, this settlement agreement was made November 16th, 1998, and the Affiliate Relationships Code was implemented July 31st of '99, right? 643 MR. BIRMINGHAM: Yes, in fact, the Affiliate Relationships Code, as it currently stands, was issued after the Board's decision with reasons in EBRO 499. 644 MR. BRETT: Right. Now, section 2.3.2 of the Code, Affiliate Relationships Code, in dealing with utility purchasing services, a utility purchasing a service from an affiliate says, this is 2.3.2, it says under transfer pricing: 645 "In purchasing a service, resource or product from an affiliate, the utility shall pay no more than the fair-market value. For the purpose of purchasing a service, resource or product, a valid tendering process shall be evidence of fair-market value." 646 Right? That's what the code says? 647 MR. BIRMINGHAM: It does. 648 MR. BRETT: I'd like you, with that background, I'd like to -- I'm going to ask you to look at certain specific agreements, certain specific schedules to the service agreements. And before I do that, I'd just like you to confirm for us that these various services that are being provided by either Duke Energy, DEGT, or Duke Canada are found in a number of places in the evidence, and I won't take the time to go to any of them specifically at the moment other than to confirm with you that if I were to take the three agreements, M.1, M.2, M.3, the three master agreements that are appendices to tab 14 and I were to take a look at the schedules behind each of those three agreements and add up the numbers that are noted in those schedules, I should get an amount equivalent to the amount of the inbound service charge that's shown on appendix K; is that correct? 649 MR. BIRMINGHAM: Under column E is the $28.649 million. 650 MR. BRETT: Right. 651 MR. LAFORET: The one clarification on that is the appendix M, the draft services schedules that were filed contain the service pricing that was in place at the time that we did the prefiled evidence so since that time, we did do an update to appendix K which had a slight reduction in the total management fee. 652 MR. BRETT: That's the blue-page update? 653 MR. LAFORET: Yeah, the blue-page update. So if you take M1, M2, and M3, those prices would total and match up to the $29,170,000 that is shown in column E of the prefiled evidence, prefiled appendix K. 654 MR. BRETT: So you've reduced that by about 600,000 in the blue-wage update? 655 MR. LAFORET: That's correct. 656 MR. BRETT: I'd like to start on this if you take a look at schedule M1, just by way of framework, M1 is the family of contracts, or is the contract between DCN or Duke Canada, otherwise Westcoast Energy Inc., and Union; is that correct? 657 MR. LAFORET: Yes, that's correct. 658 MR. BRETT: It has several schedules attached to it. And I'd like you to look at, to begin with, schedule 1 of that contract. 659 Just perhaps before jumping to schedule 1, schedule 1 is at page -- sorry, schedule 2 is what I want you to look at, which is at page 15 of 33 of appendix 1; right? 660 MR. LAFORET: Yes. 661 MR. BRETT: Just before that, if you go to page 13, backing up a page, you can see the list of schedules, service assignment schedules to this contract and they cover most but not all of the areas that are talked about in schedule K; correct? 662 MR. LAFORET: Yes, that's correct, we get a number of services from Westcoast. 663 MR. BRETT: Now, looking at this schedule 2 a little more closely here, this is corporate services, and this is a contract under which you are purchasing -- Union is purchasing corporate services from Westcoast Energy and they're carrying on business at Duke Energy Gas Transmission, but it's Westcoast Energy; right? 664 MR. LAFORET: Yes. 665 MR. BRETT: And the total amount of fees under this is shown in the last paragraph, fees $292,521; right? 666 MR. LAFORET: Yes, that's correct. 667 MR. BRETT: And just parenthetically, on that amount of fees, this would be charged at a rate of $24,000 per month plus related overhead loadings. Now, I was a little confused with that. If you take 25 or 24, multiply it by 12, you're going to get 292, I think, or something very close to it; right? 668 MR. LAFORET: Yes, that's correct. 669 MR. BRETT: Does that mean that the total amount charged including overhead loadings is higher than the 292 or does that mean that the 292 -- and if it is, then what does that do to what we were just talking about? 670 MR. LAFORET: Okay. In terms of -- I'm going to try to step through this to provide some clarity. In terms of how the service agreement for Westcoast Energy was first struck, we had identified the price of the services, but the specific overhead costs was not identified at that time, so the pricing of the 292,521 related to the direct cost of the service provider, that number divided by 12 gives the 24,377 per month plus the related overheads. The element that is not included there is then captured in appendix I, where we take the 292,000 and then add the applicable overheads to give a total charge to Union of 321,000. 671 MR. BRETT: Okay. 672 MR. LAFORET: To clarify and I guess because I had earlier stated that you would be able to take the numbers from the M1 and the M2 and M3 and add them up, I misspoke because I had -- because that overhead amount was not included in this service agreements. 673 MR. BRETT: I understand. So if you added those numbers up from the back pages of each of these contracts you would get a number equivalent to the number in that column in I that does not include overhead. 674 MR. LAFORET: That does not include overheads, that's correct. 675 MR. BRETT: Now, sort of to the meat of this, this particular agreement covers off a number of corporate services including communications services, and I'm looking at page -- pages 15 and 16 of M1, communications services, records management, facilities management services, real estate services. 676 Now, would you agree with me, either one of you, that these services are available in the marketplace, that is to say, Union could purchase these services in the marketplace? 677 MR. LAFORET: I wouldn't disagree with that statement. Like these types of services, there's a potential that they could be found in the marketplace, I'm not sure that the type or level of the service could be matched specifically. 678 The one thing -- I'm sorry, yes, there's that potential. 679 MR. BRETT: All right. If I could ask -- could I ask you to look at schedule 3 of the same contract. This is to be found at page 17 of 33. That is entitled: "Environmental health and safety services," do you see that there? 680 MR. LAFORET: Yes. 681 MR. BRETT: And under the specific services they talk about compliance and risk management, development of compliance strategies and programs, I'm looking at the bullet for the first paragraph, and under the title of the heading "systems", they talk about developing EHS management systems to comply with regulations, best practices. Over the page under services, they talk about support of -- of supporting Union on issues that may arise with respect to accidents and hazards and safety problems and the like. And then they talk about finally workman's compensation, and so there is the four categories there. 682 My question there would be -- would you agree with me that Union could find that kind of service in the marketplace, that that kind of service is offered by independent consultants in the marketplace whether they be perhaps management consultants or specialized consultants in that area? 683 MR. LAFORET: That is possible. I wouldn't know for sure, but I'd say that is possible. 684 MR. BRETT: All right. But you didn't -- well, let's leave it at that. 685 I'd like you to look at schedule 4, controller's department, the heavy lifting starts here. This is -- you have a controller's department, a number of services that are been provided to Union from Westcoast and there appear to be three or four categories of them, but they are, broadly speaking, services with respect to accounting practices and policies, assistance with respect to financial forecasting, budgeting, treasury services, and year-end reporting. 686 Now, would you agree that at least some of these services, the first category, and probably the second category, could be secured from -- from professional firms in the marketplace, be it accounting firms, actuarial firms, management consulting firms, that you could get these kinds of services, that is to say, those that you don't have internally. I understand when I go through this list, I take it with the understanding that in every case except I think three which you pointed out, I think, yesterday, you are carrying on some of this activity yourselves. 687 MR. LAFORET: Yes. 688 MR. BRETT: With that caveat or with that word of qualification, is it fair to say that you could acquire some of these services in the marketplace? 689 MR. BIRMINGHAM: No, I would disagree with that, Mr. Brett. Some of these services, in fact, use external services providers, perhaps the most obvious example is over on page 20, under year-end reporting, where we coordinate the external and internal audit of Union. So clearly, we have the external auditors coming in. But these are functions that are done within operating companies. I don't know of any operating company that outsources these types of activities and in my view, it wouldn't even be prudent to do that. 690 MR. BRETT: So you're saying that the audit itself is done by a third-party auditor but that you wouldn't -- a company wouldn't hire someone to advise it on what is an appropriate fee to pay an auditor, for example, they would just make up their mind themselves on that? 691 MR. BIRMINGHAM: Oh, no, you can determine by looking at the marketplace what an appropriate fee might be to pay an external auditor. What I was referring to, and maybe an example, is on page 19, the second bullet point under the first category, Mr. Brett, says: 692 "Business services will ensure that Union's financial records conform to the appropriate accounting policy and that proper controls are maintained over the company's financial records." 693 One of the implications of that service and of that task is that that ultimately allows the chief financial officer of the company to be able to certify the financial statements including the reliance on internal controls. It isn't something that we would outsource to anyone. 694 MR. BRETT: I take your point about the ultimate certification, but couldn't you conceive of the company or a company outsourcing to an accounting firm, for example, the job of giving it the assurance that its records are being kept in accordance with good accounting policy? 695 MR. BIRMINGHAM: The external auditors provide an opinion on that when they do their year-end engagement, but this one, this is a service that requires a management representation to be signed, and I would suggest that that wouldn't be a an appropriate thing to outsource. 696 MR. BRETT: Let's move on, if I can. And I want to assure you, just in case -- Mr. Chairman, I don't intend to go through all 25 of these, I'm just taking a sort of at random the first several and the first -- in the first agreement. And I could go on through to the end but there's no -- I don't need to do that, I don't think, to -- 697 MR. BIRMINGHAM: Mr. Brett, I don't know if this will help you or not, but certainly in the cross-examination by Mr. Warren on Tuesday, and then earlier today with Ms. Lott, I had indicated that it wasn't a question of whether there are other service providers that are able to provide these services. In the very first instance, we adopted the Duke Energy shared services business model. And we adopted that because they are our shareholder, they have had a lot of experience in obtaining economies of scale by sharing services and reducing the costs to our operating entities. And it was under that model in the first instance that we adopted to see if we could reduce our costs, and in fact we've reduced them by some $7.8 million compared to the way we were organized before Duke Energy owned us. 698 In addition, we didn't tender any of the services and we list a number of the problems with tendering in our evidence, beginning at page 36, and those are the four reasons that I walked through with Ms. Lott earlier this morning. 699 One of the biggest problems you have with tendering, in particular if you are not going to award the service but even if you are, is you can tender a service and parties will provide a price for that particular service. Then what you have to do is make a comparison between the cost of the external service provider providing you that cost and what it cost to do that service internally. And the problem is that external firms, of course, organize their businesses in a way to provide a certain basket of services. Our costs aren't organized on that same basis so to try to come up with a proper comparison between the two is a very, very difficult exercise. That's the very same exercise that we went through when we were doing the separation with Union Energy and it's not a simple thing at all. 700 MR. BRETT: No, I'm sure -- I think, Mr. Birmingham, I -- we've got a problem here and it's partly semantics and partly a question of principle, I think. 701 I did examine Mr. Warren's cross-examination carefully and I also was here to hear Ms. Lott, but the burden of the case, as I understand it, that you're making with respect to why you should not -- why you did not or felt you could not purchase these services in the marketplace, over and above the fact that you had the -- you had no choice, really, you had the Duke shared-service model put to you and you were very clear on this with Mr. Warren, and I don't intend to open up that area. 702 The other reason you gave, and I think you gave it in different ways and different places in the evidence, but it seemed to me that the second reason you were giving is that it wasn't appropriate and it wasn't practical to simply purchase a part of a service. Now, the reason I'm taking you through these schedules is these are cases where Union is doing some elements of activity which cover some of the ground of the same nature that they're also receiving services from Westcoast on; right? I mean, whether you talk about external relations or finance or human resources, and my point in going through these with you is that, in fact, in many of these cases, it seems to me you can get services in the marketplace. 703 Now, whether or not you can get them cheaper or more expensively is another matter, but clearly, in many of these cases potentially they're out there. You chose not to ask for them but that's another matter. So I think that's sort of the issue of principle here, it's really -- and that's why I'm spending some time on these individual cases. 704 I don't really want to argue at the level of -- not argue, but I don't want to question you at the level of an abstract principle, I think it's more realistic to look at what's actually happening on the ground. So I'm just going to go through a few more of these and I'd like to deal with these external relations which is schedule 5, page 21. 705 In that schedule, it talks about services that are being provided, external communications is one group of services, and these are services you're purchasing from Westcoast at a cost of 207,000 in direct costs. Government relations is another part of this and Aboriginal affairs. 706 Now, would you agree with me that in each of those areas, you could hire that service in the marketplace? Is it possible to hire government-relations experts, external information, public-affairs experts and Aboriginal-affairs experts in the marketplace? 707 MR. LAFORET: And once again, I can't state that I know that that's the case, but there's the probability that those could be. One of the things that it ties to though is -- well, we also receive as part of these services is some of the savings related to doing this on a Canada-wide approach and also some of the continuity that we then gain from it that we're using the same or similar processes across Canada. Whereas, if Union went to an external third party to get these services to provide support on external communications or support on government relations or support on Aboriginal affairs, we would be doing that, I guess, in essence, on our own. Whereas, one of the things that we gain through this is a corporate-wide message that we would be able to deliver. 708 MR. BRETT: All right. I think the only other one I would mention here and then I'll move off of this, is the insurance risk management services, that's at page 29 of M1 and again, it talks here about the various professional insurance advisory services that you are seeking to get, that you're going to get from Westcoast. 709 Now, as I understand it, these are not insurance premiums, these are insurance services that they were going to provide to assist you in putting together an optimal kind of insurance program; correct? 710 MR. LAFORET: That is correct. 711 MR. BRETT: And again, would you agree with me that that kind of professional service can be acquired in the marketplace? 712 MR. LAFORET: I think, once again, I wouldn't disagree that there's the potential for that type of service to be out there, but once again it ties into also the ability through this being provided on a Canada-wide basis, for Union to also benefit from some of the things that are going on in other entities. So while we could either internally create a role or go external to seek assistance on these, part of what this ties into is a relationship that we are able to use on the Westcoast level, on the Duke level to provide benefit to Union. 713 MR. BRETT: Would you agree with me that you could get from a good professional organization a -- you ought to be able to get a fairly broad appreciation of what different approaches are available in the purchasing of insurance? 714 MR. LAFORET: Somebody who knows and has expertise in insurance industry, yes, I would say that exists. 715 MR. BRETT: All right. I'd like to just switch over now a little bit to the decision of the Board in 0032, that was the Union case, the current -- sorry, the Enbridge -- most recent Enbridge case. This is, I believe, actually, quoted in your evidence, tab 14, but it's reproduced in paragraph 511-95 to 511-98 in the decision of the Board in that case. 716 If I could just read it or summarize it, summarize what I've written here. 717 MR. PENNY: Which paragraph numbers? 718 MR. BRETT: I have it as 511-95 to 511-98, and what I've done here in my notes is summarized what I think is the essence of this and I think it's the same piece that you reproduced in tab 14: 719 "The Board expects Enbridge Gas Distribution in the next rates case to file clear and quantifiable evidence that its outsourcing arrangements have resulted in benefits to the utility in terms of..." 720 They have a little list: 721 "...economies of scale and scope and improvements of system reliability, security of supply, cost efficiencies and service quality." 722 I take it that without -- first of all, you're aware of that provision in the decision? 723 MR. BIRMINGHAM: Yes, sir, I think you're referring to page 7 of Exhibit D.1, tab 14, where we've reproduced that in our prefiled evidence. 724 MR. BRETT: That's right you reproduced that. And you agree that what you're doing qualifies as outsourcing arrangements for the purposes of this paragraph? 725 MR. LAFORET: Yes, I would say that the shared-services structure that we're under right now falls in with the definition of outsourcing as we have another party providing the service to us. 726 MR. BRETT: There's one other paragraph that I wanted to bring to your attention, it's paragraph 511-49 of that decision and I just want to read this sentence out here and have you note this. It reads as follows: 727 "While the utility's avoided cost may be relevant to the utility's decision whether to outsource the procurement of services or to provide the services directly, they are not relevant in determining the price at which the services should be provided by another party." 728 Do you see that? Is that a fair rendition? 729 MR. BIRMINGHAM: Yes, sir. 730 MR. BRETT: With respect to the question of -- just briefly now, I want to try and pick up steam here a little bit, on the question of the transfer of S&T marketing service from Union Gas to Duke Energy Gas Transmission, and you discussed this with Mr. Vegh in some detail on Tuesday, I believe it was. 731 MR. BIRMINGHAM: That's right. 732 MR. BRETT: And as I understand the gist of what you said to Mr. Vegh was that the asset management group in Houston that is part of DEGT as you described it which is sort of absorbed within it, the S&T function from Chatham if I can characterize it that way, that asset management group in Houston manages the storage and transportation assets in the secondary market, if you like, of all of the Duke Energy Gas Transmission assets, all of their pipeline assets and all of their storage assets; is that a fair summary? 733 MR. BIRMINGHAM: I think that's a reasonable characterization, Mr. Brett. The asset optimization and marketer services group in Houston provides services to customers where the assets that underlie those services are released by the pipelines as being excess to their needs at a point in time. 734 MR. BRETT: Right. That was my understanding. 735 And it is the case that Duke, particularly -- well, Duke in the person of Duke Energy Gas Transmission, the gas transmission business owns a number of U.S. long line pipelines including Texas Eastern, Algonquin, two major pipelines, Maritime and Northeast, the third major pipeline, storage assets in Pennsylvania and Maryland with significant capacity, as I understand it, capacity in the order of about half the Union storage capacity and through a market hub company owned storage in the production areas in Louisiana and Texas; is that a fair -- it also -- Duke Energy Gas Transmission also has ownership positions, or at least did until recently, I think still does, in both of Alliance and Vector. Is that a summary of the summary of the assets they have in that area? 736 MR. BIRMINGHAM: They don't have the ownership in Alliance and Vector any longer, but they do have some ownership in some other pipeline companies and some gas storage facilities. I think the lists that we have of the assets and the companies that are within Duke Energy Gas Transmission, Mr. Brett, are found on page 2 of Exhibit J.17.40. 737 MR. BRETT: That's one of Mr. Thompson's exhibits? 738 MR. BIRMINGHAM: It is. 739 MR. BRETT: Thank you. And I don't need to have an exhaustive list for purposes of my question but I wanted to hit at least the major -- and I believe that Duke is also -- is it also in the process of developing storage in Upstate New York? Honeye storage facility, h-o-n-e-y-e. 740 MR. BIRMINGHAM: No, they aren't and that was a project that Empire Pipeline had looked like because the Honeye -- or the potential Honeye storage facility would, in fact, attach to Empire when Duke purchased the Westcoast group of companies, they took on the ownership of Empire but then sold Empire. 741 MR. BRETT: Right, I recall that. 742 But when the asset optimization group is looking at how to optimize the use of these various assets and I -- many of which I think you agree provide service into the northeast, upper midwest, and mid-Atlantic states of the United States, they are going to do this. Would you agree with me that they're going to do this in the interest of Duke Energy Gas Transmission as a whole? In other words, they are going to look at all of those assets that they've got to deal with, Union Gas assets that they're dealing with represent one package of assets, but they have assets from all sorts of pipeline and storage facilities. And the way they're going to look at that is from a corporate point of view how can they get the best bang for their buck, the highest returns in dealing with all of these released assets; is that fair? 743 MR. BIRMINGHAM: They are going to try to maximize the economic assets that are released to them. I would agree with that. 744 MR. BRETT: And would you agree in general terms that some of these assets, because of the location of the storage and because of the location of the delivery areas for the pipelines, are assets that under certain circumstances could be competitive to Union's assets in the secondary market? 745 MR. BIRMINGHAM: There may be some, Mr. Brett. I wouldn't be able to identify them specifically. For instance, it may be that Louisiana storage along with some take-away capacity on long-haul pipe would be an alternative to Dawn storage and some long-haul pipe, but I don't really know. It would depend on the customers's needs, where they were at and what the pricing looked like. 746 Union Gas doesn't have any assets that are contiguous to the other assets owned by Duke Energy Gas Transmission, so I don't know whether they would compete directly or not. 747 MR. BRETT: But you would agree that some of these market areas that are served by other elements of Duke are market areas that are, while not exactly contiguous in the sense of Ontario, they are market areas that are close to Ontario, be they Michigan, Pennsylvania, New York, et cetera. 748 MR. BIRMINGHAM: They do serve those areas that would surround some of Union's area, yes. 749 MR. BRETT: Okay. Now, if I could just have you look briefly at the engineering schedule to M3, that would be -- M3 is the Duke Energy Gas Transmission services that are offered to Union and the engineering -- let's see if I can pull this up here quickly, the engineering is schedule 2 of that. So that would be at page 14 of 24 of M3. 750 I'd like you to look at the -- just two points here. The contacts are listed on the Duke side as vice-president engineering, general manager engineering service; right? 751 MR. LAFORET: Yes, that's correct. 752 MR. BRETT: And the specific services, and I just want to highlight the first sentence or two sentences: 753 "DEGT Engineering provides managerial and process support." And then down below under project development, and in pretty much each of the paragraphs following you'll see the sentence, "DEGT Houston provides process oversight and management guidance." You see that again and again throughout in pretty well every piece of this. In addition to that, there are other mentions of DEGT. Let's just stick with those. 754 It seems to me, reading this -- let me put it another way. Would you agree with me that looking at this, does this accurately reflect what I take to be -- what I take this to be saying is that Duke Energy Gas Transmission engineering department specifically is basically responsible for the Union engineering department. In other words, the Union engineering department is one of those functional areas that we spoke of earlier, that you've spoken with everyone over the last couple of days. The way this is written up, the way this description of services is put, is it a fair conclusion that the Duke Energy VP of engineering is really the guy that runs the engineering in the last analysis for DEGT and for Union Energy as for Union Gas. 755 MR. LAFORET: In terms of that context, the engineering groups within Union Gas such as those positions which are reported there, project engineering and engineering services, environmental planning, and materials management, those functional areas have a direct-line reporting relationship to the vice-president engineering of Duke Energy Gas Transmission Corporation so they report direct line up to his group. 756 Then they have a dotted-line reporting relationship to Union's vice-president of gas supply. So this is one of those where there's the direct line and then the dotted line. 757 In terms of the service provisions, what Duke Energy Gas Transmission Corporation provides in conjunction with activities performed within Union would be those engineering services in terms of project, asset design and construction projects, so they would be doing those together. 758 The key element of this is that relationship that then exists between Union's vice-president of gas supply and the provider contact, namely, the vice-president of engineering and the general manager of engineering services for DEGT where they have that relationship in terms of identifying the service needs of Union, the projects that will be undertaken and the services that are required with that regard. 759 MR. BRETT: Can I just ask you there, you mentioned a vice- president engineer of Union Gas, is there such a position, or are you referring to the director of engineering services? 760 MR. LAFORET: Sorry, when I mentioned vice-president engineering, vice-president engineering would be with Duke Energy Gas Transmission. 761 MR. BRETT: Okay. I understand. 762 If you look just briefly at Exhibit J.23.6, that was one of my client's interrogatories and this, I think, just summarizes what we're -- in different words, I think, what we're saying here. 763 I asked to get a -- I asked really here most relevantly I guess, in each case, where do the various managers of each unit reside and work and the response, this covers the functional groups, right, that we spoke about? And it talks about the group leader and your answer says: "All of Union's functional group employees are located in Union's facilities." Fair enough. "Please refer to Exhibit G.40 for details." 764 And then you go on to say: 765 "The following table shows the location of the primary leader of each group that Union's functional group management and staff have a direct reporting relationship with." 766 So it shows where the primary loaders are and they can either be in Houston, at Duke Energy Corporation, or at Westcoast; correct? 767 MR. LAFORET: Yes, that's correct. 768 MR. BRETT: And as far as the -- I wanted to look at just one more schedule under M3. If you look at the next schedule under M3, this is the accounting controller's function, this is at page 17 of 24, schedule 3 of M3, this again, are the services provided by Duke Energy Gas Transmission in Houston, and this is not a large amount of money, I guess, in the overall scheme of things, but I wanted you to look at under specific services, the first sentence: 769 "Finance controllers will provide for Union Gas department management direction and oversight of controller's department issues including..." 770 And they give a long list of things. And the boss here or the prime contact on the Houston side is the controller of Duke Energy Gas Transmission, and I take it that that's, again, another example of what we were speaking about a moment ago with respect to engineering, that in a direct sense, with the direct-line reporting from for the financial group here, controller's group, and the accounting group, they have the president here but leaving that aside, the direct-line reporting group is to the controller in Houston; is that right? 771 MR. LAFORET: Yes, that's correct. The controller of Union Gas has a direct-line reporting relationship with the controller at DEGT. Just as a tag on that, the president of Union Gas is listed because the controller of Union Gas has a dotted line responsibility to the president. 772 MR. BRETT: I see. All right. 773 Finally in this area, if I could ask you to look at -- briefly at J.1.07, that's a Board Staff interrogatory that -- sorry, J.1.107, thank you. 774 MR. LAFORET: We have that. 775 MR. BRETT: And now, you were asked to state: 776 "Please proceed any objectives communicated by Duke to Union as one of its business units to contribute overall results." 777 And this was touched on earlier, but I have another angle on it just for a moment. One of the objectives was to meet or exceed -- the first one actually, to meet or exceed 2003 EBIT, EP, and cash flow for Union to support Duke Energy's targets for EPS. And then you say "see note below." Immediately below that you have a number of explanatory notes and the last one is: Integrating Union Gas into Duke Energy. 778 Do you see that? 779 MR. BIRMINGHAM: Yes, Mr. Brett, although when it says see note below, what that refers to are the notes that are on the second page which explain the acronyms that we have in there. But these are the six objectives that we have as part of the Duke Energy group of companies. 780 MR. BRETT: Okay. Thank you. So the section starting position Union to contribute, that's an objective in itself, that would be objective number 2? 781 MR. BIRMINGHAM: That's correct. 782 MR. BRETT: Okay. Sorry about that, I misread that. 783 Now, then, looking as that as an objective, integrating Union Gas into Duke Energy, now, the way I read that, and I'd like you to comment on whether or not you think I'm reading it fairly, is that integration, to my mind, is quite a strong word, it implies a blending, really, to me, of Duke Energy's operation -- sorry, of Union Gas's operations into those of Duke Energy in a sort of an amalgam, not exactly a merger, but certainly a very close symbiotic linking of the two companies together. Is that a fair -- in other words, you become another holder of assets under the umbrella of the Duke Gas Energy Transmission organization, is that what that is getting at, or am I putting too much into that? 784 MR. BIRMINGHAM: I think it probably has a couple of different dimensions, Mr. Brett. Another example of it would be an operational type of integration where Duke Energy has very specific business continuity planning measures that they undertake and this would be in the event of a physical disaster and how operations would continue under that. 785 Duke wants to ensure that all of its operating companies have that type of business continuity planning done and ready to go in the event of a disaster. So because the Westcoast group of companies is relatively new to the group, that was one other aspect of becoming part of the Duke group of companies that we had to undertake, is to ensure that we had a full business- continuity plan that was undertaken. So it's those type of policy consistencies I think, as much as anything. 786 MR. BRETT: But is it fair to me to say that the integrating that they talk about here includes what you just told me, but will you agree that there would be other things in addition to what you've told me, you were using that as an example? 787 MR. BIRMINGHAM: Yes, I was using that as an example. A second type of example is clearly the shared-services model and we will continue to look for areas where we can share services and reduce costs. 788 MR. BRETT: As we discussed a moment ago, I think with reference to J.23.6 and also with respect to the engineering and the financial appendices to M3, there is an element here of what is being purchased. One of the services, if I can summarize it this way, that's being provided by Duke Energy Gas Transmission or by Westcoast Energy Inc. or by Duke Energy Corporation is what I'll call management and oversight; is that correct? 789 MR. BIRMINGHAM: That is clearly one of the services. 790 MR. BRETT: It's one, it's not by any means the only one, but it's one of the services, it's a distinct service that's being offered. 791 MR. BIRMINGHAM: It is one of the services that is being provided, Mr. Brett. An example of that would be, for instance, we had a discussion with Ms. Lott this morning around legal services. One of the services that's provided there is some management oversight and that replaces the management oversight that used to take place directly within Union Gas. So Union Gas had its own general counsel, who would provide that management oversight and direction to the legal department. We eliminated that role and the individual who now provides that oversight is -- that oversight is provided from DCAN and we share that service with other operating entities and reduce our costs. 792 MR. BRETT: Mr. Birmingham, does that purchasing of management services though not in some sense run afoul of the Board's principle that they laid down in 493/494 very clearly that Union should not be recovering from its ratepayers expenditures in relation to what I will call executive functions, that these are part and parcel of the -- that these executive management functions that are being imposed from a company other than Union on Union employees are really something separate. They're something that the parent company, or companies in this case, because there's a chain of companies, should be absorbing themselves because they're effectively part of the -- they come with the territory, as it were. When you buy Union, you have certain management responsibilities that go with that. You've chosen to organize them in this particular way, why should you -- why, the argument would go, should you burden Union's ratepayers with that? 793 MR. BIRMINGHAM: Mr. Brett, these are management services that are necessary to running the utility and providing services by the utility. The reason that -- and that's consistent with the types of costs that Union had incurred and had included in our cost of service and in our rates prior to the ownership by Duke Energy. 794 What isn't included in those costs, and the reason it's not included is because it is consistent with the Board's decision in EBRO 493/494, are any costs that are associated with the shareholder protecting and managing its investment. So under paragraph 5.5.20, that's where the Board indicated that they had considerable difficulty with the notion that any costs that appear to be part of the costs associated with a major shareholder in protecting and managing its investment should be allocated to its subsidiaries as a legitimate regulatory expense. 795 And it was in EBRO 499 when we submitted our corporate charges of 2.776 million that we had eliminated any cost of the shareholder managing its investment and in fact, we've reiterated that in the response to Exhibit J.23.3 where we quoted the evidence under the EBRO 499 and then further confirmed that there are no costs included in the inbound shared services charges of minding the investment or managing the shareholders' investment. 796 MR. BRETT: But you do agree with me that there are costs being charged for management services being offered by -- to Union being provided to Union by some, what I would describe as senior officers of these various companies. There are several places where a vice-president is cited as the principal contact point, for example, for the provision of the service and I think vice-president in engineering in the case of the M3 engineering annex we discussed, also I think in M1, the Westcoast Energy, the human resources annex also talks about a VP of human resources being the contact point. 797 So you'd agree with me that there are some senior executives involved in providing management services. 798 MR. BIRMINGHAM: There is senior management -- there is a senior management service that is provided that is necessary to run the utility and provide the utility services, and those services displace costs that were previously inside Union Gas. 799 MR. BRETT: Could I just, as a matter of clarification, ask you to turn up J.23.3. This may be for you, Mr. Laforet, J.23.3, that's one of my client's interrogatories, attachment 1, page 1 of 2. It's a table. Do you have it? 800 MR. LAFORET: J.23.3? 801 MR. BRETT: That's right. Attachment 1, page 1 of 2. And my question just goes to column F, as in Fred, and the first part of that, the services being offered by DCAN, there's 11 different services that Duke Energy Canada, which is Westcoast Energy, are offering to Union which total 20.5 million. 802 My question is column F the overhead charges, those seem to range from all the way from 9 percent through 21 percent to a high of 48 percent. Can you tell me what accounts for the variation, the substantial variation there? They vary by a factor of about five if you go from the lowest to the highest. 803 MR. LAFORET: Yes, that is correct. In terms of the overhead, percentage that's allocated to the cost does vary by service. The one aspect of that is that in terms of how DCAN reflects its costs in the overhead costs it looks at each specific items to look at what those direct costs were and also what overhead costs tie into that. 804 One of the unique aspects of the DCAN structure, and I'll take corporate services for example, is that is the cost of corporate services related to the functional groups that are providing service to Union. So the environmental health and safety group is located in the Vancouver office and is supported by the corporate services group which is also located in the Vancouver office. 805 When we looked at how to structure this, there were two methodologies that we could follow: One would be that corporate services wouldn't charge Union directly but they would pass their costs on to the environmental health and safety group and the finance group and the government and public affairs group. And in doing so, that line for the total charge to Union is 321,000 would disappear but would then be picked up in increased overhead charges to the other groups. 806 One of the -- 807 MR. BRETT: You didn't do that, though; right? 808 MR. LAFORET: We didn't follow that methodology. One of the things that they looked at when they were structuring the DCAN group was that they didn't want functional groups cross charging to other functional groups. So for instance, human resources provides support to all employees. So environmental health and safety uses some of that service and should pay for part of that cost for the support they get. 809 Then if they did it that way, they would then pass that cost on through their charge. 810 MR. BRETT: You're saying if they did it that way, the 34 percent would be higher than it is; is that correct? 811 MR. LAFORET: The 34 percent would be higher than it is and some of the lines such as the corporate services and some of the human resources costs and some of the information technology costs would go down or decrease to zero. What would still happen at the end of the day is that the total charge to Union would still come out to the 20.5 million but it would be represented differently, in that, environment, health, and safety would have a budget allocated to Union Gas of 296,000 as depicted at column E. But their overhead percentage would be higher and the overhead charge to Union related to that service would then be higher. 812 MR. BRETT: Do you have these numbers available, Mr. Laforet, that you could provide an undertaking on that? 813 MR. PENNY: Sorry, what? 814 MR. BRETT: Well, the explanation of how he has assigned these overheads to the various functions. I thought what I heard him say was he was tiering these overhead charges one on top of the other. 815 MR. LAFORET: Yes, I believe I understand what you're requesting, but that is not information that I would have. The one aspect is that that's not DCAN or Westcoast's approach to how they did their allocations. 816 MR. BRETT: That's how they approached them? 817 MR. LAFORET: How it's presented here is how they approached it, and then that's the information that was provided to Union. So I, myself, don't have the information to say how that corporate services cost would get allocated to the other business units. 818 MR. BRETT: In other words -- 819 MR. PENNY: I think we might be at cross-purposes here, but we're talking about the way that it has been done, which is here, and the way that it might have been done. 820 MR. BRETT: Yes. 821 MR. PENNY: Can we just be clear what you're asking? 822 MR. BRETT: I'm asking about the way it has been done and I think what you're saying to me is you don't have that information, it's with Westcoast. They would know why and how -- or how they've done it and be able to say that, but they're not here. We'd have to get it from them; is that fair? 823 MR. LAFORET: And what we have from them is what's provided here. 824 MR. BRETT: I see that. 825 MR. LAFORET: Going back to how this was structured once again through the controller's groups of each affiliate or service provider are the ones that then determine their methodology and determined how the budget would be allocated. 826 MR. BRETT: I agree with that and maybe we should -- obviously, they've taken different approaches because you can see DCC, which is the next one, has used the same factor for everything and on the other hand, the third one is DGET has used yet another system which varies considerably more akin to the first one. 827 Why don't we leave it at that for now. There's enough information floating around here. I guess what you're saying is we're going to need to take that on faith to some extent. 828 Let me just finish up -- 829 MR. BIRMINGHAM: Hang on a sec, Mr. Brett, just to give you maybe a little more comfort. You don't just have to take it on faith, there's two other things you can rely on. There is a description of the different overhead methodologies in the prefiled evidence at Exhibit D.1, tab 14, page 54. 830 MR. BRETT: D.1, tab 14 -- that's your main evidence. 831 MR. BIRMINGHAM: Page 54, that's right. And the reason you see different percentages there is it all depends on what's in the direct cost, and depending on which costs are in the direct cost, the overhead percentage gets adjusted. 832 MR. BRETT: In other words, if it were a straight pass-through of an expense from a third party, there might be very little or no overhead attached to it. 833 MR. BIRMINGHAM: Right. 834 MR. LAFORET: That is correct. 835 MR. BIRMINGHAM: Another example is if one entity included general expenses in the direct charge, but another one might have it in their overhead charge. 836 MR. BRETT: Yeah. 837 MR. BIRMINGHAM: So you have to use different percentages depending on where the example is, but the other thing that you can take some comfort in is in appendix J, what we did is we said, well, we also charge our affiliates for some of the services that we provide for them, so in order to be comforted that the overhead charges that are coming through on our inbound services are reasonable -- 838 MR. BRETT: You compared them. 839 MR. BIRMINGHAM: We prepared this table to say, how would that compare if Union Gas was providing all those services to affiliates and what would we come up with as an overhead charge? And in fact, what we found is our methodology would be about half a million dollars higher than what we're getting from our affiliates. 840 MR. BRETT: I recall that now, thank you. 841 The last area I wanted to chat with you about or talk but about is I'd like to start with J.23.3 again, if I may, and I'll ask you to have a look at page 2. This is J.23.3. We were on attachment 1, page 1. If you could go over to attachment 1, page 2, look at the engineering and procurement. This is Duke Energy Gas Transmission so I'm back on the engineering again. 842 You'll see just by way of introduction, column A, the total budget for engineering for DEGT of 18,580,000; right? 843 MR. LAFORET: Yes. 844 MR. BRETT: Then the amount of that that's being allocated to other entities is the next column, that's B at 6,252,000; right? 845 MR. LAFORET: Yes, the budget being allocated, right. 846 MR. BRETT: Then the amount allocated of that 6.2 million the Union allocation percentage is set out in column D and that's 22 percent. 847 MR. LAFORET: Yes. 848 MR. BRETT: And then the amount of direct cost allocated to Union is 1,375,000, and then the overhead on top of that at the same ratio for a total of 1,688,000; right? 849 MR. LAFORET: Yes, that's correct. 850 MR. BRETT: That's one of the significant charges in the overall charge once you get beyond the information technology amount. 851 MR. LAFORET: Yes. 852 MR. BRETT: Right? 853 MR. LAFORET: Yes, that's one of the other -- 854 MR. BRETT: Could you go back and look at that -- I'd like to take you back to that contract which is M3, I think it's M3, schedule 2, so it's at page 14 and 15, and I have a couple of questions on the arrangement there. 855 If you start off with the title paragraph at the top, engineering -- well, first of all, I touched on this earlier, but over on page 16 is where the cost is outlined or the fee, and it's $1,037,000 U.S.; is that right? 856 MR. LAFORET: Yes, that's correct. 857 MR. BRETT: And that fee, as I understand it, that's a fixed fee that's set in advance. That's not -- that fee -- and I'm right in that, am I not, that's a fixed amount? 858 MR. LAFORET: Yes, that's a fixed annual fee for 2003 and 2004. 859 MR. BRETT: And 2004. And you say, in fact, at the first paragraph on page 14, the first paragraph of the schedule, you say, "Union employees..." 860 I'm sorry, I don't see the sentence I'm looking for here, but I understand that this fixed fee is in effect so long as Union doesn't ask for any additional advice beyond the areas that are spelled out in here; is that right? Have I got that right? 861 MR. LAFORET: The fixed fee is in effect for the level of service that was determined by Union Gas and agreed to by the service provider, so they looked at the level of service support that Union would require, given that Union's engineering group had a significant reduction in the number of roles within its group. 862 MR. BRETT: Yes, and what you say here, and I'm looking at each of the paragraphs, project development, pipeline projects and so on: 863 "DEGT Houston provides process oversight and management guidance and then as requested by Union, technical support, and technical support being engineering support. 864 MR. LAFORET: Yes, that's correct. 865 MR. BRETT: And -- but there is no -- but as I understand it, there's nothing in this contract, there's no particular group of people in DEGT that have been tasked with providing this particular service. In other words, there isn't a specific group of people dedicated to providing Union with engineering service; correct? 866 MR. LAFORET: There is a group of people in that the entire engineering group that falls under the vice-president of engineering Duke Energy Gas Transmission provides those services, but individually there are not engineers or technical support sitting in Houston that dedicates 100 percent of their time to Union. 867 One of the aspects relating to the engineering contract and why you see the phrase, "technical and labour support is provided as requested," is because it is a shared service in that we have engineers still within Union Gas that work on the asset design and construction projects that we're involved in and draw on that group of resources in Houston to support them, supplement them or potentially take on the entire project. So that's where it's not a specific level of service for each item but it's driven by the project that's undertaken, the amount of work to that project that will be done within Union, and then the amount of work within that project that would be done by Houston. 868 MR. BRETT: I gather from your conversations yesterday or earlier with Mr. Warren though in the -- am I right in thinking that it's DEGT Houston that basically established the methodology, that established this number? I mean, it's their number? 869 MR. LAFORET: Yes, it's their number based on the determination of Union's requirements. 870 MR. BRETT: And it's -- the question I guess I'm -- the question I'm having and I think this may apply and I've used this as an example, I guess. I obviously can't take the time to go through each of the -- and I count them 13 to 50 separate services. But what I'm getting at here is how does one determine really whether you've got value for your money at the end of the day? I mean you've got this fixed amount that you're paying; right? You have a description of the areas in which DEGT will help out, provide support, in some cases, perhaps, go beyond that, provide process oversight and management guidance, all of that -- you've got that, but how do you know -- how do you know at the end of the day whether or not you've really got value for that? Or how does the Board know? How do you know? I mean do you have a -- do you have any kind of -- well, how do you know, I guess, is my question? 871 MR. BIRMINGHAM: I think the measure of the value is the same as, in this case, the value of the ratepayer benefit. Union Gas is getting the services that we need, so that's the first important point, in order to be able to run the utility. 872 With respect to the engineering services, Mr. Brett, if you look at appendix K updated and line 2 deals with the engineering and procurement function. And you can see that while we are being charged about $1.6 million from the shared-services groups, we've reduced our own costs by some $2.7 million. So the value of moving to the shared-services model with respect to the engineering function is about $1.1 million lower than our costs would have otherwise been under the other previous organization's structure when we were owned simply by Westcoast Energy. 873 MR. BRETT: But what if you're not getting $1.6 million of services or the same quality of service that you were able to give yourselves? I had asked you, I think, in an interrogatory -- or no I had asked you earlier today to confirm that Union is the only gas LDC, for example, in the Duke family which you properly did. Duke has a family of transmission pipelines. You're the only distribution pipeline that they have. How do you know you're going to -- if they're going to -- how do you know they're going to give you the quality of service that you had to become a accustomed to? They're a big company, but they're not in your business, the only way they're in your business is by buying you. 874 MR. BIRMINGHAM: Well I guess there is a couple of things in there, Mr. Brett. One is, they are in our business in the extent that we're building pipelines or compressors, that's what we do, they are experts at that and that's something that we do as well, so they do have that expertise. 875 A couple of the other questions that you raised though are the very same questions that we were attempting to deal with when we're putting together the service-level agreements. So how do we ensure that we get the service level that we need to run the company? And in that respect that's why EF we've come up with these service-level agreements, and it is also why you will see that the receiver contact tends to be a senior person inside Union Gas. To the extent that we aren't getting the service quality or the scope of services that we would otherwise need, we would go back to the service provider and redo this agreement. 876 So let me take your example of engineering. We have a bundle of services that we are receiving on a shared-services basis that we have agreed to pay $1.6 million for. If, for whatever reason, those service providers say we aren't going to provide some of those services, that means that we would have to provide them ourselves, so we would reduce the payment to them and incur the cost ourselves. 877 MR. BRETT: Your agreement doesn't say you can do that, though. 878 MR. BIRMINGHAM: There is provision for that in the -- we'll find you the reference. It's in the master services agreement not in the service schedules. 879 MR. BRETT: All right. Well I'll double-check that. I didn't see anything quite that explicit. 880 MR. BIRMINGHAM: It's paragraph 2.3 of the master services agreement, Mr. Brett. But that is clearly the intention. 881 MR. BRETT: It's a provision that allows you amend -- to request changes. "Receiver can, by giving written notice to provider, be entitled to request changes." Do you agree with me that to get the changes both parties have to agree? It goes on to say that. 882 The last sentence says, "The agreement may the be amended in any manner unless both receiver and provider execute an amendment." 883 MR. BIRMINGHAM: True. 884 MR. BRETT: Do you not feel that -- do you think it's -- I want to put this fairly to you, Mr. Birmingham, but I don't want to water it down too much either. Do you really think it's realistic to think that -- how realistic is it to think that you can push Duke in the circumstance that we've just been talking about. You have some leverage to push them but they are the senior company. 885 MR. BIRMINGHAM: Well the shareholder has agreed to this arrangement, Mr. Brett. These are service-level agreements. They have agreed to this structure and they have agreed no too these service-levels agreements, so they are going to live to that commitment. And to the extent that they don't, then we are going to renegotiate, and all the parties who are tied to this are senior people in the organization who have agreed to that commitment. 886 MR. BRETT: Thank you, those are my questions panel. 887 Thank you, Mr. Chairman, and Mr. Birchenough. I'm sorry I was a little over. 888 MR. SOMMERVILLE: Thank you, Mr. Brett. We'll adjourn for ten minutes, and come back at 3:15. 889 --- Recess taken at 3:05 p.m. 890 --- On resuming at 3:16 p.m. 891 MR. SOMMERVILLE: Please be seated, thank you. 892 Mr. Shepherd. 893 PROCEDURAL MATTERS: 894 MR. SHEPHERD: Thank you, Mr. Chairman. 895 Mr. Chairman, School Boards' has a book of cross-examination materials copies of which have been provided to the Board and the applicant, and additional copies of which were put at the back of the room on Tuesday, I wonder if we could give that an exhibit number. 896 MR. WIGHTMAN: I believe that would be M.12.2. 897 EXHIBIT NO. M.12.2: SCHOOL BOARDS' BOOK OF CROSS-EXAMINATION MATERIALS SUBMITTED BY MR. SHEPHERD 898 MR. PENNY: Mr. Chairman, just on a scheduling matter before Mr. Shepherd proceeds, we had a discussion at the break about the time remaining and it appears that there's probably going to be at least about four hours left tomorrow even with Mr. Shepherd continuing today and we have a group of people who are about to leave to come down from Chatham and it seemed to us that given what we ran into a week or so ago, that perhaps it would not be an efficient use of their time to engage in all the travel time to come back perhaps not to testify at all or only to testify for a half an hour or an hour. So with your leave, even though it may result, if people are expeditious with this panel tomorrow, in losing a bit of time, but I think the risk seems to be high that we either wouldn't get to them or they would only be available for a short period of time, if we could stand them down and proceed with them on Monday. 899 MR. SOMMERVILLE: I think that's the prudent thing to do and thank you for raising that, Mr. Penny. Please don't hesitate to do that. The convenience of witnesses and parties is an important element. 900 MR. PENNY: Thank you, Mr. Chairman. We're of course reluctant to lose any hearing time, but in this case it does seem appropriate. Thank you. 901 MR. SOMMERVILLE: In that regard, it looks as though we are tracking, as we speak, about one full day behind. We are going to slip further behind tomorrow. That means that our proposed day next Thursday, which was to be a dark day, looks like it's going to be a light day. It looks likes it's going to be a day where we're going to be hearing evidence. 902 MR. PENNY: Yes. 903 MR. SOMMERVILLE: We do have some pressure on the outside edge of this proceeding from a timing point of view, so we won't make that determination right now but parties may want to start to think that next Thursday being the 30th will be a full hearing day in this proceeding. 904 As I said, we're not making that determination right now, but that seems like a reasonable outcome of where we are. 905 Mr. Shepherd. 906 MR. SHEPHERD: Thank you, Mr. Chairman. 907 UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET 908 R.BIRMINGHAM; Previously sworn. 909 J.LAFORET; Previously sworn. 910 CROSS-EXAMINATION BY MR. SHEPHERD: 911 MR. SHEPHERD: Continuing the theme that Mr. DeRose developed this morning, I want to explore the ratepayer benefit of some of your affiliate transactions. You'll understand, I think, Mr. Laforet, that the reason School Boards' are so upset with your management fees is they pay a half million to a million dollars of it themselves, were you aware of that? 912 MR. LAFORET: In terms of the cost allocation? 913 MR. SHEPHERD: Yes. 914 MR. LAFORET: Not specifically in terms of the impact to customer base, no. 915 MR. SHEPHERD: No. Well, I wonder if you could turn up, let's start with Exhibit J.1.104, which is at tab 1 of our cross-examination materials. 916 Mr. Chairman, we've tried to include all of the interrogatories in our cross-examination materials. I hope I won't have to refer to any others besides the ones we've included. 917 MR. SOMMERVILLE: That's a significant convenience for the Board and others, I'm sure. 918 MR. SHEPHERD: Thank you. 919 MR. SOMMERVILLE: Thank you. 920 MR. SHEPHERD: Mr. Laforet, you've had to spend a lot of time talking about the details of the ratepayer savings that are generated by these non-arm's length transactions with Duke, but as I understand this answer, you can't actually get to the details of what the savings are. Isn't that what the answer says? I'll help you here, if you turn to the second page, it says, in the second paragraph: 921 "Due to the changes that have occurred including the divestiture of some affiliate entities, subsequent changes in levels and types of services to other affiliates, and the time that has passed, it is not possible to specifically determine the ratepayer benefits or cost decreases associated with the changes to services provided to affiliates." 922 That's still true; right? 923 MR. LAFORET: In terms of that paragraph of that statement, what that refers to is the changes in the charges to affiliates from 1999 up to 2002 and the decrease in those levels. So as discussed with Mr. Warren yesterday, one of the things that we did not undertake was to go back and say, Okay our service to this affiliate has decreased, what did the service provider do to their budget? The assumption or expectation is that the budget administrator would manage their budget accordingly and that if they did have cost savings, because they are no longer providing that service, that they would achieve that reduction or it may help offset some other cost increases that they're experiencing within their budget. 924 One thing I tie to that is that would be in those instances where there was a reduction in costs within Union for no longer providing those services. In some cases, the services is provided to affiliates are done at little or no additional cost to Union using current resources. So all of that, I guess, being said, what I circled back to is the fact that we did not go back, provider by provider and their change in their services provided by Union and look at the administrator budget to see if they decreased their budget related to that loss of affiliate revenue. 925 MR. SHEPHERD: Okay. And I understand that on Tuesday and this morning, you've given some undertakings to try to nail down some of these benefits more tightly to Mr. DeRose and Mr. Warren; that's right, isn't it? 926 MR. LAFORET: With regard to the benefits or the ratepayer benefit related to the inbound shared services and the management fee, yes, that's correct. 927 MR. SHEPHERD: Wonderful. But I guess what I'd like to focus on for a second is how you set this up in the first place. So perhaps you could start by turning to Exhibit J.26.68, which is in tab 8 of our materials, Exhibit 12.2. Do you have that? 928 MR. BIRMINGHAM: We do, Mr. Shepherd. 929 MR. SHEPHERD: So tell me if I'm reading this right, it sounds to me here like the first paragraph is saying, Duke decided what services you would buy from other Duke entities; isn't that right? 930 MR. BIRMINGHAM: Duke already had a shared-services business model that they were organized under when they purchased the Westcoast group of companies so the first step was that we would adopt that shared-services business model. 931 MR. SHEPHERD: They didn't give you a menu and say, Which ones would you like? They said, Here is the list of services that you are buying from other entities; isn't that right, under our model? 932 MR. BIRMINGHAM: Not quite. What they said was, This is how we have been able to achieve economies of scale providing these types of services on a centralized basis and you should adopt that, and they indicated to us that to the extent that that didn't make sense to us, that we would bring that forward as an exception, but generally speaking, given the success that they've had in reducing the costs through the economies of scale inside that shared-services business model, it was the expectation in the first step we would adopt that. 933 MR. SHEPHERD: So it sounds like you had a choice on a sort of service-by-service basis whether you took the service or not; is that right? 934 MR. BIRMINGHAM: No. As I tried to explain to Mr. Warren, this was a package that we adopted in the first instance and it's only where we could identify an exception that we would have the ability to bring that forward. I don't want to give you the wrong impression, it may not have even been the case if we brought back that exception that it would be allowed. 935 The way I explained that to Mr. Warren was this is a package, we've been able to put together the shared-services business model in a way that reduces our costs from what they would otherwise be by about $7.8 million, and to the extent that there was some compromise on that by taking a different approach, we wouldn't want to do that. 936 So there was the option of bringing forward something on an exception basis, but overall, we were adopting the model as they were delivering services, which is more on a centralized basis. 937 MR. SHEPHERD: And you didn't bring any exceptions forward? 938 MR. BIRMINGHAM: No, we didn't. 939 MR. SHEPHERD: So, then, if I look at the second paragraph of that answer, again tell me if I'm wrong here, but I think what you're saying here is that the price you pay for those services is also stipulated by Duke and that value for ratepayers is not part of that analysis; is that right? 940 MR. BIRMINGHAM: Well, the price that we pay is based on the service provider's cost and that's in compliance with the Affiliate Relationships Code. What we then did was a financial assessment that said, Based on the affiliate provider's costs for those services, what is the cost relative to Union's existing cost and is there a ratepayer benefit? And in our case, there was a ratepayer benefit of at least $7.8 million from the inbound services. 941 MR. SHEPHERD: So you did a cost-benefit analysis at the time? 942 MR. BIRMINGHAM: No, it happened in steps. We assumed the Duke Energy shared-services business model and then we took a look at the costs that were then going to be allocated to Union as a result of that business model and then we compared it to the costs as they had existed. That showed the $7.8 million benefit in total. 943 If, as we went through those steps, we were in a position where, in fact, our costs weren't going to decrease, or in the extreme our costs would increase, then we would have found a different way to deliver those services because it wouldn't be in the ratepayers' interest, it wouldn't be in Union Gas's interest, and it wouldn't be in Duke Energy's interests to increase our costs for these services. 944 MR. SHEPHERD: Forgive me if I just try to nail this down. 945 March 2002, Duke buys Westcoast, you have to use their model. Their model says: You buy these things from other Duke entities and here's the price. At that point, you had a choice of saying or of proposing to them that certain things shouldn't be included in the package because they weren't appropriate; right? 946 MR. BIRMINGHAM: We didn't know enough at that point to determine whether it would be appropriate or not. So your characterization of saying in March 2002, they purchased Union Gas, and we were to adopt the shared-services model, that's absolutely right. It was only subsequent to that as we moved through the transition that we started to evaluate what the costs were going to be, how the services were going to work, where the employees were going to be located. So it didn't happen on an instantaneous basis we adopted the model and then we evaluated as we went through. 947 MR. SHEPHERD: So the end result was that Duke said to you, You have to pay X dollars for package of services, here's the list, and you accepted that with no analysis, and then subsequently did an analysis to determine whether it was, in fact, cost-effective for the ratepayers; is that right? 948 MR. LAFORET: Just to break down the process into a couple of the key elements. The first aspect of that, following the Duke transition is where the service provider, which would be the affiliate, the leadership within the affiliate and the service receiver, which would be that group within Union, started to look at what services were going to be shared, and what that would mean for Union, what activities would be taken out of Union, what cost reductions would occur in Union and what activities the service provider, the affiliate, would then begin to provide and determining that. 949 The next step of that was where the controller's group comes into the mix to start to look at that and say, okay for the affiliate service provider, their controller's group then looks at it and says what level of services are you providing and what is the cost associated with those services. It is the controller's group that then within the affiliate and within Union and the affiliate relationships group within Union that then come to the understanding of what the costs of those services being provided is. 950 But it's not specifically the service provider said, Here's what I'm going to do and here's the cost of it. They looked at what the transition would be, what the services would be, and then followed that with what is the cost, the provider's cost, related to those services. 951 MR. SHEPHERD: I understand that. I guess what I was trying to drive at was sort of the order of your cost-benefit analysis. At what point in the process -- were you already taking services from the Duke affiliates at the time that you started doing the cost-benefit analysis on those services? 952 MR. LAFORET: Yes, that is correct. 953 MR. SHEPHERD: Would it be fair to say that you started to do the cost-benefit analysis when you started to prepare for this rate case? 954 MR. LAFORET: The base information that we use in appendix K was developed in the summer of 2002 as the transition was going on because what we wanted to capture at that point in time was what Union's internal cost was for doing those services on a stand-alone basis at that point in time. That information was then worked on through that period. 955 The service pricing is something that then came in later in the process that was then compared against the two which then allowed us to identify the ratepayer benefit. So in terms of needing both Union's costs on the stand-alone basis, the other element we needed was what the provider's costs would be, which would then calculate out to what the ratepayer benefit was. And that didn't happen in March 2002, that happened after much of the transition had already taken place which I would say in late 2002 and early 2003. 956 MR. SHEPHERD: The -- now, Mr. Birmingham, you said just a second ago that what you did is you compared the -- what the charges were going to be for shared services to what it actually cost you to provide them internally; right? What it used to cost you before shared services, I think that's what you just said a couple of minutes ago. 957 MR. BIRMINGHAM: That's right that's the analysis we've shown in appendix K. 958 MR. SHEPHERD: But you actually didn't use your actual costs for those things, did you? You actually did a budget based on an assumed stand-alone cost; right? 959 MR. BIRMINGHAM: But we had prepared a budget for the 2002 year in 2001 under the Westcoast ownership in the normal course of business. That budget was prepared before the announcement of the Duke purchase of Westcoast and certainly well before the actual closing of the transaction. 960 MR. SHEPHERD: Was that budget approved by your board? 961 MR. BIRMINGHAM: I don't recall, Mr. Shepherd, whether it was approved by the board or not. 962 MR. SHEPHERD: I wonder if you could undertake to file with this Board the final budget that you had before the Duke transaction was announced and advise us, at the same time, whether that final budget was approved by your board or at what level it had been approved at that point. I wonder if you could undertake to do that? 963 MR. BIRMINGHAM: This is the 2002 budget costs? 964 MR. SHEPHERD: The total budget that you just said that you had done before September 2001, yes. 965 MR. BIRMINGHAM: Sorry, Mr. Shepherd, what I was going to ask you was in appendix K under column A which is our historical service cost, that's the 2002 number. Is there something -- did you want something different than that? 966 MR. SHEPHERD: I'm not asking for just the budget for these line items, I'm asking for the total budget. 967 MR. BIRMINGHAM: I understand. So you want the complete budget for 2002 as it was set prior to the Duke purchase, and then indicating whether the board of directors had approved that or not. 968 MR. SHEPHERD: Yes. 969 MR. PENNY: Mr. Chairman, I'm almost certain that we have already filed the 2002 budget, but we'll look that up and -- but certainly the 2002 O&M budget is reflected in for example J.7.22 that's where all those numbers come in. 970 MR. SOMMERVILLE: Right. 971 MR. MORAN: Mr. Chair, that would be Undertaking M.12.9, an undertaking to provide the complete 2002 budget set prior to September 2001 and to indicate whether there was board of directors' approval and when that might have been. 972 UNDERTAKING NO. N.12.9: TO PROVIDE THE COMPLETE 2002 BUDGET SET PRIOR TO SEPTEMBER 2001 AND TO INDICATE WHETHER THERE WAS BOARD OF DIRECTORS' APPROVAL AND WHEN THAT MIGHT HAVE BEEN 973 MR. SHEPHERD: Mr. Birmingham, you're an employee of Union Gas? 974 MR. BIRMINGHAM: Yes, I am. 975 MR. SHEPHERD: At the time that Duke required the introduction of the shared-services model, did you understand your obligation would be to act in the interests of Union Gas or to act in the interests of the Duke group? 976 MR. BIRMINGHAM: I'm not exactly sure what you're asking me, Mr. Shepherd. There are a number of interests that we have to balance, obviously, there are interests of our customers, interests of our employees, interests of our shareholder. It's my obligation to balance those interests. 977 MR. SHEPHERD: Now, finally on this initial point, sometime in the fall, I guess, of 2002, Mr. Laforet, you actually sat down and did a cost-benefit analysis line by line prior to the one you filed, your initial cost-benefit analysis; isn't that right? 978 MR. LAFORET: In the fall of 2002, what we had was the 2002 pre-Duke budget for the functional groups identified and then going forward from that was where we then needed to determine what the service-level pricing was going to be to then determine that ratepayer benefit. 979 MR. SHEPHERD: And you were advised those numbers late in 2002 or early in 2003; right? 980 MR. LAFORET: Yes, and those numbers were updated as we came to final terms on the services and on the service pricing. And so the latest update would be reflected in D.1, tab 14, appendix K, the blue-page update. 981 MR. SHEPHERD: So was there a cost benefit analysis that existed prior to that page that you filed? 982 MR. LAFORET: The last one that we would have had prior to that would have been the appendix K which was provided in the prefiled evidence. 983 MR. SHEPHERD: No, I'm not talking about your prefiles, I'm talking about the internal document where you analyzed the cost-benefit analysis, there was such a document; right? 984 MR. LAFORET: I guess where I'm struggling is whether that document was a cost-benefit analysis, and maybe I'm putting too much thought into this. Appendix K is something that was developed specifically for the prefiled evidence to meet the Board's expectations in terms of identifying the ratepayer benefit. Prior to that, we did have information about what the expected stand-alone cost was and what the forecasted services were going to be and the first minus the second would imply the ratepayer benefit. And appendix K did not exist in terms of that structure prior to that point in time. 985 MR. SHEPHERD: Okay. Let me turn to some higher level numbers and see if I can figure this out. 986 I wonder if you could turn to tab 3 of our cross-examination materials, Exhibit M.12.2. 987 Mr. Chairman, this was provided to the applicant several days ago and provided to everybody else on Tuesday. I should tell you that this morning, my friend, Mr. Seal, found an error in the calculations, and I wonder if I could correct it on the record. 988 If you take a look at line 33, under the column 2001 actual, that number 288,247 is incorrect. That number should be 299,935. 989 MR. PENNY: Can we get that one more time? 990 MR. SHEPHERD: Line 33, the 2001 actual column, the number 288,247 should be changed to 299,935. 991 Then if you look a few lines down, in the same column, there is a number 237,074. That number is also incorrect, it should be 248,762. 992 MR. SHEPHERD: For anyone who's interested, it's because line 4, employee training, is actually a label rather than a number and we subsequently fixed it. 993 MR. LAFORET: I'm sorry, Mr. Shepherd, to back you up for a second and have you go over those numbers, I was thinking rather than writing. For the 2001, line 33? 994 MR. SHEPHERD: The correct number is 299,935. 995 MR. LAFORET: The question I have is when I reran the numbers, I also ended up with a number which was different than the 288,247. Now, I wasn't sure what the source of it was, but when I reran the numbers, I came up with a number at line 33 which was 302,374. 996 MR. SHEPHERD: I'm happy to accept your number. 302,374. 997 MR. LAFORET: 302,374. 998 MR. SHEPHERD: So then your number on line 36 is also changed? 999 MR. LAFORET: Yeah, the number I have on line 36 is 251,201. 1000 MR. SHEPHERD: Wonderful. I'm happy to accept those numbers. I think they are correct. 1001 MR. LAFORET: Thank you. And in terms of the 2002 actual, I have a -- and it may be due to the labelling again, the line 33 total that I got was 296,817, and the line 36 is 247,579. 1002 MR. SHEPHERD: Subject to those corrections, are you in agreement with these numbers? 1003 MR. LAFORET: Yes. 1004 MR. SHEPHERD: Thank you. 1005 MR. LAFORET: Thank you. 1006 MR. SHEPHERD: Mr. Chairman, I'll make sure that cleaned up copies of these are made available to everybody tomorrow. 1007 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 1008 MR. SHEPHERD: So let's start with sort of the raw information now that we've got it right and our apologies for getting it wrong in the first place, Mr. Chairman. 1009 If you look at this net-adjusted O&M number, tell me whether I'm characterizing this right: This is basically your recurring O&M, it takes out one-time charges or things that aren't normal annual items like severances and it takes out flow-through items like compressor fuel; is that right? 1010 MR. LAFORET: Based on what you have laid out here, yes. 1011 MR. SHEPHERD: Thank you. So if I understand this correctly, then, your recurring annual O&M was 251 million in 2001, and you're proposing in this rate case to move it up to 297 million not including management fees; is that right? 1012 MR. LAFORET: Yes, that's the numbers. 1013 MR. SHEPHERD: And that's a $45 million increase over three years -- 46 actually. 1014 MR. LAFORET: 46, yes. 1015 MR. SHEPHERD: And then in addition, you're proposing to increase the management fees by 25 million over that period so the actual total between the two is a $71 million increase in O&M over that period; right? 1016 MR. LAFORET: In terms of the -- yes, if the management fee that is on that second last line were included under line 29, it would create that differential between 2004 and the 2001. 1017 MR. SHEPHERD: And will you accept, subject to check, that that's a 28 percent increase in your O&M over three years? 1018 MR. LAFORET: Yeah, I'll accept that. 1019 MR. SHEPHERD: So I guess, and maybe this is for you, Mr. Birmingham, we're going to go into the details in a minute and I understand that the devil is in the details of these things, but just at a very high-level view, it doesn't look self-evident that paying $25 million more in management fees is saving you any money. Am I being unreasonable there? 1020 MR. BIRMINGHAM: I think you're missing just part of the picture, Mr. Shepherd, so let me try this. With respect to other O&M increases that are unrelated to the shared-services piece, Ms. Elliott and Ms. Brodie Lumley spoke to that and provided, I think, an explanation in Exhibit J.7.1 with respect to the elements of the O&M that are creating or contributing to the overall revenue deficiency. 1021 With respect to the shared services, if we look at Exhibit D.1, tab 14, appendix K, what we see is under column D Union's avoided cost of 36.4 million. And what happened is that 36.4 million would find its way on to the a number of the lines into this schedule under the 2004 year if it wasn't for the fact that we were sharing services with other Duke entities. Instead of 36.4 million we're putting in 28.6 million, and that's where the $7.8 million comes from. 1022 MR. SHEPHERD: Now, we are going to go into a little more detail in a second but correct me if I am wrong, but appendix K that you just referred to that's on a by-administrator basis; right? 1023 MR. BIRMINGHAM: It's actually by service type. In appendix K you will see that there are different types of services, corporate services and finance. 1024 MR. SHEPHERD: And how is service type different from administrator and cost type. It's not the same as cost type; right? 1025 MR. BIRMINGHAM: It's definitely not the same as cost type as you've indicated in the schedule that you've provided under tab 3. 1026 MR. SHEPHERD: Now, we don't have your budget for any year prior to 2003 by either service type or administrator, do we? 1027 MR. BIRMINGHAM: I think with respect to your -- the budget numbers, Mr. Shepherd, the only one that you would have seen would have been the 1999 budget which would form the basis of our last cost-of-service application, but to the extent that the 2000, 2001, and 2002 budgets are not part of this record to my knowledge. 1028 MR. SHEPHERD: And that's by -- you're talking about -- the ones that are missing are by service type or by administrator or both? 1029 MR. LAFORET: In -- I'm just flipping through the prefiled O&M evidence and what we had for -- under Exhibit D.5, tab 3, schedule 1, what we had filed was the operating and maintenance expense by cost type for that year and then I believe -- 1030 MR. SHEPHERD: But you also filed it by administrator for 2003 and 2004, right, but not for 2002 or prior? 1031 MR. BIRMINGHAM: Yeah. 1032 MR. SHEPHERD: Mr. Laforet, there's no trap here. All I'm trying to do is figure out which set of numbers do we have consistently for all the years, that's all. It's cost type, right, that's the only set we have? 1033 MR. LAFORET: Yes, cost type is the -- I guess maybe what we can refer to as the common denominator throughout the period. 1034 MR. SHEPHERD: Just as an aside, do you have 2000, 2001, and 2002 by administrator on a consistent basis to what you filed? Is that something that you have back in Chatham? 1035 MR. LAFORET: My understanding of that situation from the finance people is that we do not have those budgets by administrator that align with the Union Gas structure in 2004. So in 2001, we would have had a budget by administrator, but those administrator groups as they are structured in 2001 are not the same as how the administrator groups are structured in 2004. 1036 MR. SHEPHERD: So without a lot of work to mess around with it we wouldn't be able to use it to compare one year to the next, would we. 1037 MR. LAFORET: That's correct. 1038 MR. SHEPHERD: Wonderful. So we're stuck with cost type. We'll do the best we can. 1039 So I guess let's start with -- what I'm going to try to do is Mr. Laforet, or Mr. Birmingham, whoever wants to answer these, is going to each of the two years in which you had substantial increases in your management fees and try to figure out where we see the benefits in here. And I understand that you have the stand-alone cost calculated, but since we don't have previous actual data on the same basis, I'm just trying to do it with the stuff that we do have actual data for each year. So please bear with me. 1040 So let's go from 2001 to 2002. It's correct, isn't it, that the management fee went up by about $5 million from one year to the next; right? 1041 MR. LAFORET: Yes, I see that number, yes. 1042 MR. SHEPHERD: So -- and your O&M went down by $3.5 million. So if we go and look through the components, we see that your salaries and wages went down, and that's partly offset by your consulting going up, and your bad debt also went up but that has nothing to do with shared services; right? 1043 MR. LAFORET: Yes, that's correct. 1044 MR. SHEPHERD: So if we just take a sort of a birds eye view of 2002 actual, it looks like for the additional $5 million you got some benefit out of that, quite substantial ratepayer benefit; right? You had lots of costs going down. 1045 MR. LAFORET: Yes, in 2002, by the line items we had some items such as the communications costs at line 11 that went down. 1046 MR. SHEPHERD: And that was a direct result of -- that $6 million saving was a direct result of Duke providing services, wasn't it? 1047 MR. LAFORET: Yes. What that was related to was the fact that Union was no longer paying for those services directly itself, but the service was being performed by the affiliate, or in the case of the communications was being provided by a third party through our affiliate that then passed that cost, that flow-through cost on to us. So we have that reduction at line 11 between the 2002 actual and the 2001 actual for the communication costs which then forms a component of that management fee that's coming in because they are now paying it and we're reimbursing it. 1048 MR. SHEPHERD: That's wonderful. So the ratepayers can hardly complain about your performance in 2002 because you've got lots of benefits for them in that year. But I guess I want to move now to the change from 2002 to 2003 because then the management fee goes up another 20 million and I'm trying to find where we have $20 million of savings in other places. For example, you see that there's savings in bad debt, but that doesn't have anything to do with the management fee, does it? 1049 MR. LAFORET: That's correct. 1050 MR. SHEPHERD: And the other categories like salaries and wages didn't go down, it went up. And similarly benefits went up; right? 1051 MR. LAFORET: Yes. 1052 MR. SHEPHERD: So so I'm looking for $20 million, can you help me here? 1053 MR. LAFORET: In trying to -- I guess to try and -- to put this together, what we'd be looking at is in the 2003 bridge yellow update, the amounts that are there, we would see an increase in those costs if we were not participating in the shared services. So for instance, our net salaries and wages would be higher than the 144 million that's depicted there because we wouldn't have done the role reductions and wouldn't have saved the related payroll costs. 1054 In line 2, the benefits related to those additional payrolls for those rolls that would have been eliminated under the shared-services structure would have also been higher than the $43 million that's depicted there. So when you look at 2002 against the 2003 bridge, you don't necessarily see that downward trend to say where's the savings for this cost item or where's the savings for this cost item, because what we're talking about are costs that have been avoided. 1055 So in that respect, what we would say is that the line 33, total adjusted O&M, rather than being 308 million would be some 316 million. It would be that 8 million higher, equal to that ratepayer benefit because Union would be doing these on a stand-alone basis. And communications at line 11, rather than being 2.3 million would return to some number somewhere around the 9.7 million that we incurred in 2001. 1056 MR. SHEPHERD: But I'm trying to look at the comparison between 2002 and 2003. We've already given you credit for saving us a whole lot of money in 2002. I'm trying to see where you save money in 2003. I guess you're talking about an $8 million ratepayer benefit and I understand that, but I guess you'd also have to add another $20 million to this 308 for the management fee too, right, because you have to save the management fee and the ratepayer benefit, so you need 28 million more; correct? 1057 MR. LAFORET: Yeah, actually in terms of the numbers, I understand what you're saying. What we would be actually adding, I had forgot that the 28 million was pulled out of that 308 million number. It would actually be Union's avoided cost that's identified in appendix K, the 36 million that would get added back into the 308. So line 33 would go up by 36 million to represent Union's cost of doing this work on a stand-alone basis and the management fee would then go to zero. 1058 MR. SHEPHERD: So if my math is right, what you're saying is if not for the savings from the system imposed by Duke, your O&M would have gone up from 2002 to 2003 by 16 percent; do I understand that right? Will you accept that subject to check? 1059 MR. LAFORET: Yes, okay. Thank you. Yes, 16 percent. 1060 MR. SHEPHERD: All right. Let me turn away from this. You talked about role reductions and I guess that's the next thing I'd like to talk about. If I understand your evidence, there was a reduction between 2001 and 2004 in the number of people at Union Gas providing these shared-services functions; right? 1061 MR. LAFORET: Yes, that's correct. 1062 MR. SHEPHERD: And that number was originally reported as 318. That 318, by the way, was a head count number; right? 1063 MR. LAFORET: Yes, that was a head count number. 1064 MR. SHEPHERD: Can you just clarify one small thing for me here, it's really a small thing but it's bugging me. If you could turn to Exhibit J.17.39, which is at tab 4 of our materials, on the second page here there's a head count of 652 pre-Duke and there was a number somewhere else of 643, do you recall that number? It's only 9, but which is the right number? 1065 MR. LAFORET: I just want to make sure I quote the right reference. The other exhibit is J.34.98. 1066 MR. SHEPHERD: Yes. 1067 MR. LAFORET: And I guess how I'd put it is they're both the right number. The differential in the response to J.17.39 at line 9 for the internal audit head count, there's a count in there of 9 with a note that that was a 2001 head count. Or is it J.34.98 for the internal audit group for the 2001 year-end, I had a zero in there. 1068 MR. SHEPHERD: All right. So the right number is 643 in terms of before and after? 1069 MR. LAFORET: In terms of the before and after from the year-end 2001 to... 1070 MR. SHEPHERD: All right. Now, this morning you were talking to Ms. Lott and you said that the 318 reduction in head count is actually -- am I correct the number is actually 142? 1071 MR. LAFORET: Yes, that's the number that we came up with after we revisited some of the information out of the HR system. 1072 MR. SHEPHERD: So now I want to try to convert that into a ratepayer benefit. But in order to do that, we have to know what your fully-loaded cost is, and I understood you to say this morning that it was $97,000 per person head count. 1073 MR. LAFORET: Yes, the 97,700 includes salaries, benefits, and incentive pay so it's a fully-loaded number. 1074 MR. SHEPHERD: Okay. So now I want to go back to tab 3 of our materials for a second and when it comes to numbers I'm a bit simpler, perhaps, than other people and I want to make sure I understand this fully-loaded cost thing. 1075 If I look at 2001, for example, there's a net salaries and wages after deducting severances of about $146 million. 1076 MR. LAFORET: Yes. 1077 MR. SHEPHERD: You see that? And then there's a benefit figure of $32 million. 1078 MR. LAFORET: Yes. 1079 MR. SHEPHERD: If I add those together and divide by your head count, shouldn't I get your fully-loaded cost per head count? 1080 MR. LAFORET: I just want to provide the right clarification around this because I know we had some questions about the difference between head count including vacant roles and some of the work that was done by Ms. Brodie Lumley with regard to FTEs. 1081 One of the items here specifically is trying to have the appropriate match where the 146 and the 32 million represent an actual cost, so we'd be looking to divide that by an actual FTE for the period to be able to come up with an average salary rather than dividing it by head count which would include some vacant roles and could dilute that calculation. So the head count is the expected number of roles that the company would have, whereas, the FTE number that Ms. Brodie Lumley calculated would then match what the actual salaries that were paid that year. 1082 MR. SHEPHERD: The head count also includes part-time people in part-year roles; is that right? 1083 MR. LAFORET: Yes, the head count includes the full-time roles, the part-time roles equal to one and the temporary and seasonal equal to one in terms of how I approach my numbers. 1084 MR. SHEPHERD: So then it's not really a good comparison of what your actual complement is as compared to FTEs; right? 1085 MR. LAFORET: FTEs are signs that would match closer to where you want to take the number of hours or the total level of effort and multiply that by an average salary versus taking a head count and overcounting for the part-time people because they only count for approximately .6 of an FTE. 1086 MR. SHEPHERD: Okay. So if we took then the two lines the that we just talked about, the 146 million and the 32 million, for example, in 2001, and we divided it by FTEs, we'd get a number which is your fully-loaded cost per FTE; right? 1087 MR. LAFORET: Yes, that's correct. 1088 MR. SHEPHERD: And we could do the same for 2004. 1089 MR. LAFORET: Yes. 1090 MR. SHEPHERD: Okay. So I'd like you to turn to tab 7 then of our materials, Exhibit M.12.2. And we've attempted to do that calculation for 2001 and 2004. You saw this a couple days ago? 1091 MR. LAFORET: Yes. 1092 MR. SHEPHERD: Are these numbers correct? 1093 MR. LAFORET: I ran through the numbers and they lined up with what I had. The one question I did have, just for clarification, under 2001 actual, for the FTE count you've got 2,450 and then a source on the side as estimate. 1094 MR. SHEPHERD: Your other witnesses said they didn't have that number and so we had to put something in. 1095 MR. LAFORET: Okay. I just wanted to make sure that I was outlining the right comment with the right numbers so okay. 1096 MR. SHEPHERD: Does that number, 2,450 look in the right range for you for 2001? 1097 MR. LAFORET: Yes. What I'm cross-referencing here is Exhibit N.6.11. 1098 MR. SHEPHERD: Yes. 1099 MR. LAFORET: Which is an undertaking that was provided. And what they had done was to do a full-time-equivalent positions count for 2001 that came in at 2,497. 1100 MR. SHEPHERD: 2497? I'm afraid I didn't see that one. That's excellent. That's 2,497 for 2001? 1101 MR. LAFORET: Yes, that's the number that was in for 2001. 1102 MR. SHEPHERD: So it's correct, isn't it, that from 2001 to 2004 although your head counts dropped by 400 which is -- around 400, which is the number everyone's been bandying about, the actual reduction in your FTEs is only about 200; right, or so? 1103 MR. LAFORET: Yes, 200. Sorry, I'm -- I keep picking the wrong numbers and adding them again. 1104 MR. SHEPHERD: And would I be right in saying that for the purposes of your 2004 budget, your fully-loaded cost per FTE is about $88,000? 1105 MR. BIRMINGHAM: That's correct, Mr. Shepherd, that's, in fact, on page 2 of Exhibit J.17.37 where that calculation is shown. 1106 MR. SHEPHERD: Oh, is it? Okay. And so the 97,000 that you used this morning, as I understand it, it's because the people that you were talking about are relatively more expensive people compared to the average for the whole company. 1107 MR. LAFORET: Yes, that's correct. 1108 MR. SHEPHERD: Okay. Do you have a number -- you've told us that your head count reduction for shared services was 142, what's the FTE reduction? 1109 MR. LAFORET: For the -- I don't have a specific FTE reduction. For the functional groups, the significant majority of those people were full-time roles, so there's a very close relationship between the 142 in head count and what that would equal in terms of FTEs, and that would be approximately 140 -- 1110 MR. SHEPHERD: So whereas -- 1111 MR. LAFORET: FTEs. 1112 MR. SHEPHERD: So whereas your overall head count went down twice as much as your FTEx, we shouldn't use the same ratio for this particular component, the shared services. 1113 MR. LAFORET: That's correct. One of the aspects of our human resources structure is asset operations is one of the groups that has the higher percentage of part-time employees and the significant majority of the temporary and seasonal workers for the type of work that they do. So they fall within the operational side whereas with these functional groups, they tend to be full-time roles without part-time roles or without temporary seasonal. 1114 MR. SHEPHERD: Okay. So let's say we use 140 FTEs, is that overstating it, is that too much? 1115 MR. LAFORET: I think that's a fair number. 1116 MR. SHEPHERD: 140. So then 140 FTEs at 88,000 each is $12.3 million; right? 1117 MR. LAFORET: Yes, that's correct. 1118 MR. SHEPHERD: So the head count reductions associated with shared services are 12.3 out of the 36 million; right? 1119 MR. LAFORET: Actually it would be a higher number, because for those 142 roles what we've determined is that the average salary would be the 97,700. 1120 MR. SHEPHERD: Absolutely. So that would be $13.6 million. 1121 MR. LAFORET: That's correct. 1122 MR. SHEPHERD: So then we should be able to find another 23 million in savings in non-salary costs to make up your 36 million; right? 1123 MR. LAFORET: Yes, that's correct, to come up with that -- 1124 MR. SHEPHERD: Can you tell us where that is, that 23 million? I couldn't find it, that's why I'm asking. You could just hit the high points if you want. 1125 MR. LAFORET: After receiving the information that you had provided to us, I undertook to try and align that $36 million in avoided costs that we refer to rather than by the functional groups such as corporate and services and that and bring that into -- try and match by O&M and cost type -- 1126 MR. SHEPHERD: That would be wonderful, do you have that? 1127 MR. LAFORET: -- so that would match yours. So in doing some math on that that night and trying to crunch out some numbers, what we did identify is 9.6 million would be associated with the salaries and wages, and 4.3 million would be related to benefits. 1128 MR. SHEPHERD: So that's exactly almost where we got, the 13.6 and -- 1129 MR. LAFORET: So that brings us into that 13 to 14 million range. 1130 MR. SHEPHERD: It's a miracle. 1131 MR. LAFORET: And going through what we were able to put together for the functional group budgets in 2001 and the budgets they filed in 2004 and then looking at those by cost type, the other items that we came up with was realizing a reduction in employee expenses of 1.7 million. 1132 MR. SHEPHERD: Sorry, where is that? 1133 MR. BIRMINGHAM: Line 4. 1134 MR. LAFORET: I'm sorry that's line 4. It shows as employee training, and this is -- line 4 is employee expenses and training so it's an all-inclusive. 1135 MR. SHEPHERD: Go on. 1136 MR. LAFORET: Sorry. So just for clarity, what I'm looking at right now is your tab 3 and then some of the information I was able to try to put together to work down that. So then when I look at line 5, contract services, I've identified $2.6 million reduction in the budgets of the functional groups. 1137 MR. SHEPHERD: Now let me just stop you right there. 1138 MR. LAFORET: Yeah. 1139 MR. SHEPHERD: You're saying there is a $2.6 million reduction and I'm just looking at it and it looks to me like it actually went up by 7 million. 1140 MR. LAFORET: Yes, that is correct. The change from the 2004 test yellow update is higher than the 2003 bridge yellow update. 1141 MR. SHEPHERD: I was actually looking back to 2001. 1142 MR. LAFORET: Even back to 2001. We would be standing though -- or what I'm putting forward is ine 5, contract services, at 2004, if we had not done the shared services, would be $2.6 million higher. 1143 MR. SHEPHERD: Do you have a break down of that of some sort? 1144 MR. LAFORET: Yeah, it's kind of rough right now. 1145 MR. SHEPHERD: I'll come back to it in a minute. Go on. 1146 MR. LAFORET: What we then identify is line 6, consulting services, in the 2004 test yellow update, would be 1.4 million higher. 1147 MR. SHEPHERD: And again, this is the same as what you were saying about contract services, that even though it's increased by $4.3 million from 2001, it would have actually increased by 5.7 million if not for this Duke model? 1148 MR. LAFORET: That is correct because what we're dealing with is the functional groups, those 15 groups realized the reduction in their budgets for the consulting services of 1.4 million, whereas, other groups within the company -- and this would be something more explained I guess by the O&M panel, I don't know the details, but then had cost pressures that brought that cost up to the number that's depicted forward. 1149 MR. SHEPHERD: Thanks. 1150 MR. LAFORET: So what we're saying is it would be that much higher if we continued on our own, our functional group wouldn't have been able to reduce their budget by 1.4 million for consulting services they would have had to have that added to the budget line that's shown there. 1151 MR. SHEPHERD: Okay. 1152 MR. LAFORET: General expenses would have been -- is 3.7 million. 1153 MR. SHEPHERD: What is that, by the way, what is general expenses, is that just sort of odds and ends? 1154 MR. LAFORET: Yeah, off the top of my head, I can't think of all the categories that fall within it, but there's a number of miscellaneous services that get into there, but just odds and ends. 1155 MR. SHEPHERD: Do you have quite a lot of other numbers to give us for this chart? 1156 MR. LAFORET: I just have a couple of numbers. 1157 MR. SHEPHERD: All right. Go ahead. 1158 MR. LAFORET: Line 11 for communications, we would see that it would be 7 million higher. 1159 MR. SHEPHERD: That's an interesting one because that was actually -- you experienced most of that reduction in 2002, and we already sort of gave you credit for making a good deal there, but you didn't have any additional reductions for the additional 20 million in costs in 2003 and 2004. 1160 MR. LAFORET: What's represented under the 2003 and 2004 are then that portion of communication expenses that are still incurred by either the operational groups or the functional groups that are still doing activity within Union. But what I am putting forward is that that line 11 communications under the 2004 test column of 2.4 million would be 7 million higher than that number because if we're not paying our affiliate for doing the services, then we've got to be paying the third-party provider. 1161 MR. SHEPHERD: Fair enough. Go on. 1162 MR. LAFORET: So that's where that number would come from. 1163 Line 15 on the insurance would be 1.4 million. Line 25, which is computers, would be 4.7 million. And if I read the numbers correctly, that would then come up to the 36.4 million which is Union's avoided cost which is depicted in appendix K. 1164 MR. SHEPHERD: I see. Excellent. Excellent. 1165 Let me turn to some specific items and perhaps I can start with information technology costs. Can you turn up Exhibit J.7.55 which is tab 9 of our materials. Do you have that? 1166 MR. LAFORET: Okay. Yes, I have that. 1167 MR. SHEPHERD: Now, this appears to show that while the mix between direct costs and management fees in the area of IT has changed over the last five years, the overall cost has only gone up by 11 percent in those years; do I have that right? 1168 MR. LAFORET: Yes, I'll accept that. 1169 MR. SHEPHERD: So then I wonder if you could do me a favour and turn to Exhibit D.5, tab 3, schedule 2, page 5. 1170 MR. MORAN: Sorry, what page is that? 1171 MR. SHEPHERD: D.5, tab 3, schedule 2, page 5. 1172 MR. LAFORET: Yes. 1173 MR. SHEPHERD: You have that? 1174 So I'm looking at the bottom here under the heading computers. I take it computers are within the ambit of IT costs? 1175 MR. LAFORET: Yes. 1176 MR. SHEPHERD: So between 1999 and 2002, it looks to me like you shifted $10 million of billing-system costs into contract services and $2.3 million of something else, I don't even know what it is, into information technology infrastructure; isn't that right? 1177 MR. LAFORET: I'm just trying to familiarize myself with this schedule a bit. But yes, the explanation for the variance between the 2002 actual and the 1999 EBRO 499, that difference of 11.4 million is, in part, explained by the reclassification of the 2.3 million to ITI and the reduced cost related to the billing system outsourcing. 1178 MR. SHEPHERD: That's not a reduced cost, right, that's just a reclassification. It was $10 million, but if you look two pages earlier, you have a heading, contract services, and that $10 million shows up again, right? You're still paying it, you're just paying it in a different category. 1179 MR. LAFORET: Yes, I see the connection there. 1180 MR. SHEPHERD: Now I'm going to try to understand J.7.55. Is it correct then if I look across this direct costs line, the current costs for direct costs -- I will ignore the ITI because that was a one-time thing; right? That was a one-time thing? 1181 MR. LAFORET: The ITI was a categorization of the total ITI budget, it's a subset of it. 1182 MR. SHEPHERD: You're not spending that money anymore? 1183 MR. LAFORET: That's correct. What it did was it transitioned from the overall IT budget, was classified as ITI as part of IT, and then became a service provided by DCAN. 1184 MR. SHEPHERD: Okay. So I'm going to ignore the ITI stuff for now and just talk about the 10 million for billing. 1185 So if we look at the direct costs, in order to make these comparable, the most recent years should have 10 million added to them, shouldn't they, because each year you're paying at least 10 million for billing that used to be in your IT costs; right? 1186 MR. PENNY: Well, Mr. Chairman, this last 10 or 15 minutes is, from my understanding at least, pure O&M, all directed at exhibits that were prepared by Ms. Elliott's group. She was here, she testified, she was cross-examined about these very schedules. This is an answer from Ms. Brodie Lumley who was also here and testified about these things. If there's an affiliate transaction point maybe we could get to that, but it doesn't seem to me to be appropriate to be spending long whacks of time examining Mr. Laforet about pure O&M issues. 1187 MR. SOMMERVILLE: Mr. Shepherd. 1188 MR. SHEPHERD: I'll get to it right now, Mr. Chairman. 1189 This Exhibit J.7.55 also shows that the management fees for IT have gone up more than 15 million in that period. And it appears to show that that's okay because you've got a benefit almost equal to that; right? 1190 MR. LAFORET: Yes, that's correct. 1191 MR. SHEPHERD: But you haven't, have you, because there's another 10 million in your direct costs so your benefit is only 5 million for your 15 million cost; isn't it? 1192 MR. LAFORET: I would have to track that back because when I look at the numbers that are presented here that relate to the IT operating maintenance expense, the $10 million that's being discussed relating to the billing system is not a component of these costs in 1999 or 2000. This is where we have one of those issues about a cost-type versus an administrator. 1193 MR. SHEPHERD: But I asked you that. I asked you whether computers was part of IT costs and you said yes. 1194 MR. LAFORET: And computers are part of IT costs and maybe too generally in terms of that response. Computers do form a part of their cost, but also in terms of that cost classification, in looking at how this is set up in the EBRO 499, it would appear that they also had the $10 million relating to the computer leasing classified as a computer expense, but that 10 million while classified as a computer expense was not an IT operating and maintenance expense in terms of what's outlined on J.7.55. 1195 MR. SHEPHERD: So that amount, you see an amount there 23.4 million under 1999 Board-approved, that doesn't include money for the billing system. 1196 MR. LAFORET: That's my understanding of it, is that that does not include the amount related to the billing system or related to the cost or the computers related to the billing system. 1197 MR. SHEPHERD: Are you unsure or are you sure? 1198 MR. LAFORET: In looking at the numbers, I am -- where I would stand on that is what I say is I'm about 90 percent sure because of the work that I did in terms of identifying the 2002 costs and also some of the work that I did in response to IRs asking for the 2001 and 2000 actuals for the functional groups. And those numbers, from my memory, lined up with what I expected to see. 1199 So taking that back, I'm expecting also that the finance group that prepared this would have had the costs in 1999 comparable to the costs that fall within the following budget years or actual years. 1200 MR. SHEPHERD: Well, -- 1201 MR. LAFORET: So I have a high level of confidence that the 23,740 does not include that 10 million that's related to the billing system computer costs. 1202 MR. SHEPHERD: If you find out otherwise, you'll let us know, presumably. 1203 MR. LAFORET: Yes. 1204 MR. SHEPHERD: Thank you. Still in this vicinity, Mr. Birmingham, let's talk for a few minutes about Enlogix. 1205 And Mr. Chairman, for the information of the Board, I am not planning to ask about any of the confidential information. If it turns out that we start to stray in that direction then I'll stop my cross on this point and we can deal with it later, but I don't think it's necessary. 1206 Mr. Birmingham, can you confirm that on September 10th, 2002, Duke sold Enlogix which used to be a Union Gas affiliate to Alliance Data Systems for 35 million U.S. dollars? 1207 MR. LAFORET: I can't confirm the sale price. I'm not sure what the sale price on that was. 1208 MR. SHEPHERD: Do I have the date right? 1209 MR. LAFORET: I believe that is the correct date. That date does sound -- 1210 MR. SHEPHERD: Do you have the sale price available? I just don't want to file the agreement if it is something that they can undertake to provide. 1211 MR. LAFORET: I'm sorry, if I might just have a moment. I know the Westcoast 2002 annual report spoke to the Enlogix sale. I'm just not sure if they provided -- 1212 MR. SOMMERVILLE: If you want to confirm or correct that number later that would be acceptable. 1213 MR. SHEPHERD: Will you accept that number subject to check for now? 1214 MR. LAFORET: What I have here and I'll just read from the Westcoast Energy Inc. 2002 annual report on page 9 where they discuss the Enlogix, and I quote, "Westcoast sold Enlogix which held a customer billing system in September of 2002 for cash proceeds of 21 million resulting in an after-tax loss of 18 million." 1215 The side discussion we were having was to just to clarify that this is the Westcoast statement so those would be in Canadian dollars. 1216 MR. SHEPHERD: Okay. But just -- it's true, isn't it, that Westcoast didn't sell it to ADS, Westcoast sold it to Duke and Duke sold it to ADS; isn't that right? 1217 MR. LAFORET: I was just going to take a quick check or -- Mr. Birmingham. 1218 MR. BIRMINGHAM: Enlogix was part of the group of companies inside Westcoast Energy when Duke purchased Westcoast and then Enlogix was subsequently sold. 1219 MR. PENNY: But the Duke transaction was a share acquisition, I think is the point. It wasn't an asset deal so -- and this is all a matter of public record that the Duke purchase of Westcoast was the purchase of the hold co's shares, so it, by definition, acquired indirectly all of the assets of Westcoast Energy. 1220 MR. SHEPHERD: That wasn't the question I was asking. 1221 My question is this: Westcoast owned Enlogix; right? 1222 MR. BIRMINGHAM: That's right. 1223 MR. SHEPHERD: Duke sold Enlogix to ADS; correct? 1224 MR. BIRMINGHAM: Well Westcoast owned Enlogix and Westcoast, because it still existed as an entity after the Duke purchase sold Enlogix, which is the phrase that Mr. Laforet read from the annual report, but at the time of the sale, Duke Energy was the ultimate shareholder of Westcoast Energy. 1225 MR. SHEPHERD: So you're telling moo the that the transaction was a sale from Westcoast to ADS; is that right? 1226 MR. BIRMINGHAM: In terms of legal entities, that's right. 1227 MR. SHEPHERD: Would you confirm that the agreement for the purchase and sale of Enlogix was executed September 5th, 2002? 1228 MR. PENNY: Well, the annual report that was just quoted from said it was September and does the day matter? 1229 MR. SHEPHERD: Yes. 1230 MR. BIRMINGHAM: It was at the beginning of September. 1231 MR. SHEPHERD: And would you confirm that the date of the current agreement between Union Gas and Enlogix is January 1st, 2002? 1232 MR. BIRMINGHAM: That date is confirmed, yes. 1233 MR. SHEPHERD: When was that agreement actually signed? Was it signed around that time? 1234 MR. BIRMINGHAM: It was signed for services to begin January 1st of 2002. 1235 MR. SHEPHERD: No, I'm asking when it was executed; do you know? 1236 MR. PENNY: If the issue was Enlogix still an affiliate of Union's when the agreement was entered into, that fact is admitted, in fact, I said that this morning when I was giving you the background. So I don't know if the point of this tortuous exercise is simply to establish that fact, it's uncontroversial. 1237 MR. SHEPHERD: It's not, Mr. Chairman. 1238 MR. BIRMINGHAM: The date of the agreement, Mr. Shepherd, is January 11th, 2002. 1239 MR. SHEPHERD: Excellent. So Mr. Birmingham, that agreement between Union Gas and Enlogix was negotiated and signed, tell me if this is true, after the date that Duke agreed to buy Westcoast, which was September 2001, and before the date that the deal actually closed; correct? 1240 MR. BIRMINGHAM: The process to begin the negotiation started well before Duke even announced their purchase, but the signing of the contract, in fact, took place between the September 2001 date where Duke announced the purchase of Westcoast and the closing of this transaction in March of 2002. 1241 MR. SHEPHERD: Excuse me. 1242 MR. BIRMINGHAM: Was it something I said? Are you okay? 1243 MR. SHEPHERD: So is it correct that Duke had to approve the agreement between Union Gas and Enlogix? 1244 MR. BIRMINGHAM: It's my recollection at that time, Mr. Shepherd, was that any significant agreement that Westcoast or its owned companies entered into during that time had to receive approval by Duke. 1245 MR. SHEPHERD: And in order to get that approval, I would assume that you provided some sort of report to Duke on why it was good to sign this agreement; is that right? 1246 MR. BIRMINGHAM: I would assume that's the case, yes. 1247 MR. SHEPHERD: Then I wonder if I could ask you to undertake to provide any such reports that you did at that time to Duke with respect to the approval of that agreement? 1248 And just to be clear on this, Mr. Chairman, I would request that the company provide that document or those documents, it's probably several, with appropriate redactions for the public record and provide a further copy unredacted for those who have signed the confidentiality agreement. And I'll ask the same thing about a number of undertakings on this. 1249 MR. PENNY: Well, Mr. Chairman, I don't know whether the documents exist or not, and I certainly haven't ever seen them before. I think what would be appropriate is that we would undertake to determine whether there are documents of the kind described, and we'll then advise Mr. Shepherd and the Board as to what they are and what the company's position is about the issues of confidentiality because at this point I don't even know, so there isn't, it seems to me, any point in layering a whole bunch of qualifications on something that we're not sure what we're dealing with yet. 1250 MR. SOMMERVILLE: I think that's fair. As I understand the proposal, Mr. Penny, you're going to determine with your client the existence and character of documents that represent advice to the Duke organization with respect to the Enlogix contract from Union Gas and you'll make a determination in concert with Mr. Shepherd as to the nature of redactions, if any, that would be appropriate. 1251 MR. PENNY: Yes. 1252 MR. SOMMERVILLE: And go from there. 1253 MR. PENNY: As a first step, and then we'll advise the Board and all parties. 1254 MR. SOMMERVILLE: I think that's a suitable way of proceeding. 1255 MR. SHEPHERD: That's acceptable, Mr. Chair. Could we have an undertaking number. 1256 MR. MORAN: Mr. Chair, Undertaking N.12.10, an undertaking to advise Mr. Shepherd of the existence of documents relating to the obtaining of Duke approval for the Enlogix sale. 1257 UNDERTAKING NO. N.12.10: TO ADVISE MR. SHEPHERD OF THE EXISTENCE OF DOCUMENTS RELATING TO THE OBTAINING OF DUKE APPROVAL FOR THE ENLOGIX SALE 1258 MR. SOMMERVILLE: The Board itself has an interest in the security of documents which are commercially sensitive. It would be an embarrassment to the Board if there were to be any, how shall I say, untoward disclosures, and I just ask the parties to keep that in mind, it's our reputation, too. 1259 MR. SHEPHERD: Yes, thank you, sir. 1260 Now, Mr. Birmingham, just to follow up on that, on September 5th, 2002, Union Gas and Enlogix entered into an amending agreement; isn't that right? 1261 MR. BIRMINGHAM: That's correct. 1262 MR. SHEPHERD: And that was the same date that the sale of Enlogix to ADS was agreed; correct? 1263 MR. BIRMINGHAM: That's my understanding. 1264 MR. SHEPHERD: So I assume that those two transactions were connected; is that right? 1265 MR. BIRMINGHAM: I would assume that they are, yes. 1266 MR. SHEPHERD: So then I wonder if you can provide us with whatever internal documents you have explaining the connection between those two transactions on the same terms as we've just talked about? 1267 MR. PENNY: Well, Mr. Chairman -- 1268 MR. BIRMINGHAM: Sorry, Mr. Shepherd, you're asking me to indicate the relationship between the amending agreement and the sale of Enlogix to ADS? 1269 MR. SHEPHERD: Yes. 1270 MR. PENNY: Well, Mr. Chairman, I don't think there is any controversy about this. It's this reflect the fact that there is a new counterparty to the agreement. 1271 MR. BIRMINGHAM: The amending agreement was put in place as a result of the sale. I'm not exactly sure what else I can offer you. 1272 MR. SHEPHERD: There were changed terms; weren't there? 1273 MR. BIRMINGHAM: There were terms in the amending agreement that modified some of the terms in the original agreement. 1274 MR. SHEPHERD: So presumably there is some documentation as to why the sale required some changes to the agreement; isn't that right? 1275 MR. BIRMINGHAM: I presume so, they must have been generated from something. 1276 MR. SHEPHERD: That's what I'm asking for. 1277 MR. BIRMINGHAM: Well, that's not what I understood your request to be. 1278 MR. SOMMERVILLE: Do I take it, Mr. Shepherd, that once again, the issue is advice from Union with respect to the requirement related to -- for the amendment of the agreement; is that what you're looking for? 1279 MR. SHEPHERD: Yes, I expect actually, Mr. Chairman, it's probably communications from ADS or Duke saying, This agreement has to be changed this way and this way for these reasons. That's my guess. 1280 MR. PENNY: Well, again, Mr. Chairman, I suppose -- the relevance of this one completely evades me, but I think what we'll do is, again, look at see whether there are such documents and then we can then take it from there once we know whether there's anything that exists. 1281 MR. SOMMERVILLE: Would it be productive, Mr. Shepherd, for you and Mr. Penny, perhaps, to go offline to indicate -- for you to indicate the kind of information which you're looking for here so that you may be able to put some more edges on your requests going forward? I mean, if there's a specific attribute in putting this on the record first, then I'm not going to stop you from doing that, but I'm not sure that there is, and it doesn't appear to me that there is. 1282 What I'm suggesting is it may prove useful if you can discuss it with the applicant, get a feel for how to go forward and maybe come up with a package. 1283 MR. PENNY: I think it would be helpful, Mr. Chairman, if Mr. Shepherd could just give us all the document requests that he has in mind. 1284 MR. SHEPHERD: Mr. Chairman, I only have a couple more questions on this and only one more request for documents so it may be simpler to just finish it. 1285 MR. SOMMERVILLE: Fair enough. 1286 MR. MORAN: Mr. Chair, I guess we have Undertaking N.12.11, to advise of the existence of documents relating to the connection between the Enlogix sale and the amending agreement between Union and Enlogix. 1287 UNDERTAKING NO. N.12.11: TO ADVISE OF THE EXISTENCE OF DOCUMENTS RELATING TO THE CONNECTION BETWEEN THE ENLOGIX SALE AND THE SEPTEMBER AMENDING AGREEMENT BETWEEN UNION AND ENLOGIX 1288 MR. SHEPHERD: Then -- 1289 MR. SOMMERVILLE: Related to the ADS transaction in this case. 1290 MR. PENNY: Related to the September amending agreement. 1291 MR. SHEPHERD: Yes. 1292 Mr. Birmingham, it's correct, isn't it, that at the time of this sale of Enlogix to ADS, the largest single source of revenue in Enlogix was the Union Gas contract; is that right? 1293 MR. BIRMINGHAM: I don't know what their financial circumstance was, Mr. Shepherd. What I do know is that the contract with Union Gas was one of the bigger ones that they had. They were also serving the City of Calgary, but I don't know how our contract compared to theirs, but we were certainly one of their primary customers. 1294 MR. SHEPHERD: Would it be fair for me to conclude that whatever the price was, it was, in large measure, driven by that cash flow from your contract? 1295 MR. BIRMINGHAM: Well, to the extent that there's a contract and a revenue associated with that, generally speaking, when parties are evaluating the worth of a business, that revenue stream as it then translates into cash affects the value of that business. 1296 MR. SHEPHERD: Wonderful. 1297 So this is my last request for undertaking. In the due diligence and negotiating period leading up to the purchase by ADS of Enlogix, did Union Gas provide any information to ADS or to Duke for delivery to ADS with respect to that contract and its affect on the value of Enlogix? 1298 MR. BIRMINGHAM: I'm assuming the answer is no because Enlogix could have provided that directly to ADS. 1299 MR. SHEPHERD: What I'm concerned with is things like estimates of your needs over the next five years, it's a five-year contract, right, or whatever, three-year or five-year, whatever. 1300 MR. BIRMINGHAM: It is a five-year contract. 1301 MR. SHEPHERD: So you would have some estimates, internally, of what you expected to be paying to Enlogix over the years which wouldn't necessarily be the minimums in the contract; right? 1302 MR. BIRMINGHAM: Well there aren't minimums in the contract, Mr. Shepherd, it's a transaction-type fee so it's the number of bills that we send out. And that would be a relatively simple thing for anyone to calculate based on the number of customers that we have, which is a matter of public record. 1303 MR. SHEPHERD: Well, okay. The undertaking request is a simple one. If you provided any information to Duke or to ADS at the time of this transaction with respect to your contract, could you please provide us copies of that? That's all I'm asking. 1304 MR. PENNY: Well, what -- we'll deal with that, can we, on the same basis we'll determine whether there is such a thing first of all and then we can discuss with Mr. Shepherd how to deal with it if it in fact exists. 1305 MR. MORAN: Mr. Chairman, Undertaking N.12.12 [sic], to advise as to the existence of any information provided to Duke or ADS with respect to the sale of Enlogix to ADS. 1306 UNDERTAKING NO. N.12.12: TO ADVISE AS TO THE EXISTENCE OF ANY INFORMATION PROVIDED TO DUKE OR ADS WITH RESPECT TOT HE SALE OF ENLOGIX TO ADS 1307 MR. SHEPHERD: Mr. Chairman, just to make sure that I'm clear on that, I would like if the witness can to ensure that that includes any documents in the possession of Union Gas relating to the valuation of Enlogix that refer to the Union Gas contract. 1308 MR. PENNY: Again, I'm sure there isn't such things but we'll inquire. 1309 MR. SOMMERVILLE: Mr. Shepherd, will you look for a convenient time to break for the day? 1310 MR. SHEPHERD: I may actually be able to finish in the next 10 minutes if -- 1311 MR. SOMMERVILLE: Thank you. 1312 MR. SHEPHERD: If you are agreeable to that. 1313 Mr. Laforet, could you please turn up Exhibit 26.52 which is at tab 10 of our materials. 1314 MR. BIRMINGHAM: We have it, Mr. Shepherd. 1315 MR. SHEPHERD: Thank you. And this, I think, shows the onward march of insurance premiums over the years, and it looks to me that the increase in insurance premiums isn't actually high, the ones that are paid direct by the company; right? 1316 MR. BIRMINGHAM: Well, it doesn't include all of the premiums, but the ones that are paid directly by Union to our broker, which is Marsh Canada you can see starts at $3.9 million in the 1999-2000 year and is forecasted at 4.4 million for the 2004-2005 year. 1317 MR. SHEPHERD: Now there appears to be only one category that was shifted from Union to Duke and that's it's one in lines 7 and 8, "executive protection." That's directors and officers insurance and things like that; right? 1318 MR. BIRMINGHAM: It's directors and officers liability, crime fiduciary liability and excess fiduciary liability, that's right. 1319 MR. SHEPHERD: And that's the only type of insurance that you had in 1999 that you have since shifted to Duke; is that right? 1320 MR. BIRMINGHAM: That's the only type of coverage that is a direct -- is a form of direct liability coverage that is now being offered to Union Gas through Duke, that's right. 1321 MR. SHEPHERD: Okay. So then I'm going to ask you to turn to Exhibit J.1.114 which is found at tab 2 of our materials and there, on the second page, you'll see -- this is a list of flow-thru costs, and you'll see on page 2, insurance, 1.4 million. Do I take it that that's the current cost of executive protection? 1322 MR. BIRMINGHAM: There's three things in there and the largest portion of that charge is the directors and officers' premium and the other aspects are added in there. The other two pieces that are included there is the business continuity planning service that Union is allocated its share of the costs for and excess liability coverages to the extent that we need liability coverage beyond the ones that are contained in the policies that are paid directly by Union. 1323 MR. SHEPHERD: Okay. So the D&O is how much? 1324 MR. BIRMINGHAM: It's the largest portion. I don't have the specific amount, but if we want to use a proxy for it, Mr. Shepherd, I'd say it's probably 90 percent. 1325 MR. SHEPHERD: So let's call it 1.2 million; is that fair? 1326 MR. BIRMINGHAM: Sure. 1327 MR. SHEPHERD: So you used to spend $154,000 on it and now you pay 1.2 million; so why is that? 1328 MR. BIRMINGHAM: There's a couple of contributors to that. One is that under the Westcoast policy what we had coverage up to $100 million Canadian per occurrence and now what we have is coverage of $200 million U.S. per occurrence. 1329 The second thing that's happened, of course, is the insurance coverage for this type of liability has increased substantially. And what had happened before is that up until June 30th of 2002, all of the Westcoast companies, including Union Gas were, in fact, protected from the rising cost of insurance, including directors and officers' insurance because we had set in place a three-year policy where the premiums were largely fixed. So when that policy expired, and it just happened to be that Duke Energy also had a three-year policy in place that expired June 30th, 2002, we saw the effect of the rising costs that had been happen over that period. So it was really the combination of those two things that caused the large increase in the premiums. 1330 MR. SHEPHERD: So D&O insurance went up eight or nine times in cost over that period; is that correct or is that overstating it? 1331 MR. BIRMINGHAM: No, I think that's right, subject to the fact that we now that more coverage as well. We now have 200 million U.S. versus the 100 million Canadian, but certainly they have risen substantially. 1332 MR. SHEPHERD: And one of the things you've told us was in fact you are saving money on this so presumably your costs would have actually increased more than a million dollars if you hadn't had the benefit of the Duke package. 1333 MR. BIRMINGHAM: That's correct. The types of insurers that write these policies don't exist in Canada. Even under Westcoast we had to go to Lloyd's of London, we went to some U.S. firms and some offshore firms to get coverage. And there is, in the opinion of our insurance experts, no way that even the Westcoast group of companies as it existed before would be able to obtain this level of coverage at the price that Duke has been able to obtain it. 1334 MR. SHEPHERD: Have you filed that information somewhere? 1335 MR. BIRMINGHAM: Which information? 1336 MR. SHEPHERD: The opinions of the experts. 1337 MR. BIRMINGHAM: Not to my knowledge. 1338 MR. SHEPHERD: Do you have like a report or something that sets out -- compares what you're paying and what you would have paid otherwise? 1339 MR. BIRMINGHAM: No, this is just my discussion with the people who are developed in the development of the policies. 1340 MR. SHEPHERD: So you have no documentary analysis of the comparison. 1341 MR. BIRMINGHAM: No, I don't. 1342 MR. SHEPHERD: And so then last, we talked earlier about your role in balancing the ratepayers' interest, and I guess I just want to ask one final question. Do I understand your evidence correctly that Union has a large number of employees who actually report to supervisors or managers who work for Duke or other Duke affiliates? 1343 MR. LAFORET: Yes, under the shared-services structure and the reporting relationship we do have staff and management within Union in those functional groups that then report to a manager or senior manager within one of the affiliated companies. 1344 MR. SHEPHERD: Do you have any procedures in place to ensure that your employees understand and meet their duties to their employer as opposed to the employers of their bosses? 1345 MR. BIRMINGHAM: I guess there's a couple of things. The most significant one though, I think, Mr. Shepherd, to deal with your question is the fact that these people provide services to Union Gas and that's what the dotted line relationship is all about. So to give you an example, one of the dotted line relationships I have is with the corporate services group. So I make sure that the people who are taking care of our facilities, as an example, which is one of the services that they do, we meet on a regular basis, just as we did when they were inside Union Gas, to ensure that the services that Union Gas needs to be provided are being provided. 1346 MR. SHEPHERD: So the dotted line relationships operate as sort of a policing function or a -- policing is too harsh a word, but you know what I mean? 1347 MR. BIRMINGHAM: They do act in a way that allows us to be assured that we're going to get the services that we need. 1348 MR. SHEPHERD: Now, you don't have any formal procedures or statements of policy or HR policies or anything like that that sets out how employees deal with their bifurcated reporting, do you? 1349 MR. BIRMINGHAM: No, we don't. Those tend to be at the discretion of the senior manager who has the dotted-line relationship and the nature of the interaction really depends on the type of service. 1350 So as an example, I have a dotted-line relationship with the corporate services people where I will meet with them biweekly to ensure that they understand what Union Gas's needs are and I understand that they're going to be providing those and we have a discussion of any issues around that. But I only have monthly meetings with the tax group because the nature of those issues simply don't justify a biweekly meeting. So it really depends on the type of service and the need. 1351 MR. SHEPHERD: And those methods of handling the divided loyalties those are not formalized, those are left to the responsibility of the individual Union Gas executive? 1352 MR. BIRMINGHAM: They aren't formalized in the sense that they're documented, but in the Duke shared-services model it's very clear that these are service providers so to the extent that those services providers want to make changes in their organization or the way they provide services, they can make a proposal, but it's the business unit people, and in our case, the Union Gas people that have to sign off on those and in that respect it's very much the same as when it was inside Union Gas. 1353 MR. SHEPHERD: Thank you. 1354 Mr. Chairman, subject to the undertakings that I've asked for, those are all our questions. 1355 MR. SOMMERVILLE: Thank you. 1356 Is there anything that we need to deal with before we adjourn for the day? 1357 MR. PENNY: I don't think so, Mr. Chairman. 1358 MR. SOMMERVILLE: We'll reconvene tomorrow morning at 9:30. Thank you. 1359 --- Whereupon the hearing was adjourned at 5:04 p.m.