Rep: OEB Doc: 12WW8 Rev: 0 ONTARIO ENERGY BOARD Volume: 13 24 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 24 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff MICHAEL PENNY Union Gas Limited MARCEL REGHELINI Union Gas Limited MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association PETER SCULLY City of Timmins, City of Sudbury, FNOM ROBERT ROWE Enbridge Gas Distribution Inc. 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [20] UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET [78] CROSS-EXAMINATION BY MR. DINGWALL: [81] CROSS-EXAMINATION BY MS. SINGH: [193] CROSS-EXAMINATION BY MR. AIKEN: [310] CROSS-EXAMINATION BY MR. MORAN: [371] QUESTIONS FROM THE BOARD: [649] RE-EXAMINATION BY MR. PENNY: [669] [In-camera session commenced at 2:46 p.m.] [711] [In-camera session ended at 4:50 p.m.] [712] PROCEDURAL MATTERS: [713] 10 EXHIBITS 11 EXHIBIT NO. M.13.2: ENERGY PROBE CROSS-EXAMINATION MATERIALS [721] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.13.1: TO PROVIDE THE ACTUAL NUMBER OR COST ASSOCIATED WITH THE PREMIUMS THAT DUKE ENERGY PAYS FOR ITS DIRECTORS' AND OFFICERS' LIABILITY COVERAGE FOR ALL OF THEIR DIRECTORS AND OFFICERS [120] UNDERTAKING NO. N.13.2: TO PROVIDE A TABLE THAT WOULD BREAKOUT TOTAL REDUCTION ASSOCIATED WITH MOVING TO THE SHARED-SERVICES MODEL, HOW MANY EMPLOYEES ARE ATTRIBUTABLE AS A REDUCTION OF EMPLOYEES FOR EACH OF THOSE LINES, WHICH OF THOSE REDUCTIONS ENDED UP BEING TRANSFERS TO THE SERVICE PROVIDER; AS WELL, AS FOR THE ONES THAT WEREN'T TRANSFERRED TO A SERVICE PROVIDER, PROVIDE THE SEVERANCE AND PENSION COSTS ASSOCIATED WITH THOSE EMPLOYEES; AS WELL, A FURTHER BREAKOUT OF THE EMPLOYEES TO REFLECT THE ONES WHO TRANSITIONED OUT OF UNION TO ONE OF THE SERVICE PROVIDERS WHO ARE STILL LOCATED IN CHATHAM, AND HOW MANY NEW PEOPLE FROM THE SERVICE PROVIDERS ARE NOW LOCATED IN CHATHAM AS WELL [600] 14 --- Upon commencing at 9:39 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. 16 Good morning. 17 MR. BIRMINGHAM: Good morning. 18 MR. SOMMERVILLE: This is the continuation of the Union Gas application for rates for 2004. 19 Are there any preliminary matters that we need to deal with before we commence? 20 PRELIMINARY MATTERS: 21 MR. PENNY: Mr. Chairman, just one if I might put it on the record, there are now answers to transcript undertakings -- a further package available, they are for the record, 6.3, 6.9, 7.2, 7.11, 8.2, 8.3, 8.5, 8.7, 9.9, and 12.10 to .12. And I would just add that with respect to 12.10, 12.11 and 12.12, that these were the document requests by Mr. Shepherd yesterday concerning the Enlogix contract and we were able to communicate with Mr. Ydreos who is the senior Union executive who was responsible for the negotiations with the Union employee who has primary frontline responsibility for the Enlogix relationship and with Union legal counsel, and they've all confirmed that there were no documents of the kind that Mr. Shepherd was asking about. 22 I gather Mr. Shepherd is not here, but we faxed these to Mr. Shepherd this morning. 23 MR. SOMMERVILLE: Thank you. 24 MR. DINGWALL: I don't know if this is an appropriate time to update the Board with respect to scheduling in the matter but as of the end of business on Wednesday I had received from the company a copy of the confidential services agreement between ADS and Union Gas and then as of yesterday morning, first thing, I had received a copy of the previous-filed service agreement between Enlogix and Union Gas. There are a couple of documents in addition to that that I've requested that I understand from the Union Gas people will be provided at some point this morning. What that does is that enables me to speak to the scheduling a little bit. 25 I am very cognizant of the Board's challenge in this case and the timing that is facing us, the fact that we're now probably a day behind schedule at the end of today. To the same extent, though, there is also the challenge of assimilating information quickly and trying to put it into proper context and also go through the history lesson of reviewing previous cases, transcripts, et cetera which have to be culled from storage in order to put together proper information and time frames and time lines and history in order to gain a full understanding to prepare a cross-examination. 26 So with respect to that, I'd like to suggest to the Board that for the purposes of today's panel, I would like to begin with the public portions, meaning the non-confidential materials, which I anticipate I should be able to complete today and within the one-hour time frame that I had estimated for the panel; however, with respect to the confidential portions and with respect to the correlation of information that's present and also would need to address some of the recent disclosures and some of the still expected disclosures, I don't anticipate, sir, quite clearly, that I could complete or be in a position to complete the confidential aspects that relate to this panel. 27 I've also had word from Mr. Shepherd that he may have some questions, depending on the substance or lack thereof, I'm not sure what's appropriate, of his undertakings from yesterday for the panel in the in-camera session. Now, I don't anticipate that once the background is complete that the time I would take with the in-camera panel would be in an excessive one, going forward, but I would like to put on the record the fact that I don't believe that there's enough information in place at this time and enough time to digest it to fully complete the in-camera proceedings this morning. 28 MR. SOMMERVILLE: You're suggesting that this panel would have to return at some later point in this proceeding for the in-camera portion of the cross-examination to take place. 29 MR. DINGWALL: That's correct, sir. And I don't anticipate it would be anywhere near a half day, it would be maybe somewhere in the line of an hour, but that's the challenge. 30 MR. SOMMERVILLE: Mr. Penny. 31 MR. PENNY: Yes, thank you, Mr. Chairman. 32 The answers to the interrogatory that's given rise to all this was sent out on August the 13th. So Mr. Dingwall and Mr. Shepherd have had the redacted version of the Enlogix contract since that time and, in fact, the Board's procedural rules -- I mean, we did the best we could with the request made late in the day, but in fact, the Board's procedural rules call for a party who is not satisfied with document production in the interrogatory process to bring a motion. Mr. Dingwall did not do that. The first we knew that they had any concerns about this issue was the day he raised it on the transcript, a day or two before Mr. Birmingham and Mr. Laforet were scheduled to testify. 33 We did, as I indicated before, put together a practical solution to the situation and Mr. Dingwall does now have, with respect to the affiliate issue, all of the documents that are relevant that he has asked for. The outstanding documents are recent agreements entered into between Union and ADS at a time when it was not an affiliate, that relate to the GDAR and the rate rider functionality, which you've already had evidence about. We weren't sure -- well, we agreed to give Mr. Dingwall those documents in spite of the fact that that issue has already come and gone. So in my submission, the outstanding documents don't have anything to do with affiliate relations. 34 So the burden of my submission is that if Mr. Dingwall has found himself with insufficient time, it is a problem of his own making which he could have done something about months ago and we are here, this panel has been already on the stand for an extraordinarily long period of time. We're now talking about a fourth day. Based on the -- and I guess I would add as a final submission that based on the estimates we have, because Mr. Shepherd was able to conclude his cross-examination earlier than expected, based on the estimates we have for today, it's only -- we've probably only got an hour and a half. So if Mr. Dingwall wants to take a couple of additional hours and go off and prepare, he can do that and we can come back at 2:00 or 3:00 or something. But in my submission, the appropriate way to deal with this is to carry on. The expectation was, from the outset as I indicated yesterday, is that we would conclude this panel, including any in-camera portion of the hearing. And we actually now have the two documents that Mr. Dingwall wanted so they're being given to him right now. 35 So in my submission, we ought not to defer any further cross-examination on this issue. Mr. Dingwall has the documents he needs, he's had them for a couple of days, could have had them earlier if he'd asked for them, and in any event, there is some spare time today so Mr. Dingwall can take a few extra hours if he needs it and we can return and finish up. 36 MR. SOMMERVILLE: Which is the interrogatory in question? 37 MR. PENNY: It's 26.59, it was a request to produce the renewed Enlogix contract. 38 MR. SOMMERVILLE: Mr. Dingwall, the interrogatory itself was answered with the redacted version of the Alliance Data Systems contract. The contract that you're interested in is the predecessor to that contract; is that right? 39 MR. DINGWALL: In terms of how this worked, I believe it was mid last week that I gave notice on the record that I would be seeking not only the unredacted version of this contract, the one that's filed with respect to the interrogatory, but also the previous one. 40 I've had the unredacted version since Wednesday at 5:00. I've had the previous one since yesterday morning. And that's not a lot of time. 41 What I -- just to respond to Mr. Penny's comments, I think that there are some fairly material issues with respect to these agreements. There is a significant difference in the structuring between the two which really only became apparent on viewing the unredacted version of the new contract Wednesday evening. So I'm in the Board's hands to a certain extent. 42 I've tried to give Mr. Penny as much notice as possible that this would be coming up. He's known about this for, I guess, a week and a half. With respect to the question of which panel it involves, I'm -- in any event, the folks that were talking about GDAR and rate rider implementation were not the negotiators. Mr. Birmingham was on the panel in the previous proceeding -- I believe in the previous proceeding which addressed the first contract, and essentially a lot of these issues relate to the transition of Enlogix from being an affiliate to being a third-party service provider and how that impacts the negotiation of the previous contract, the structure of the previous contract, the structure of the new contract, and the fact that -- 43 MR. SOMMERVILLE: Let me ask you a specific question about that. You've indicated that there are material issues that arise from -- as you see them, that arise from the predecessor contract and then this contract. Can you give me some idea -- I may be more inclined if I have some idea as to the heart of the matter and some sense of the materiality of the issue or issues that you are pursuing. Can you give me some idea about that? 44 MR. DINGWALL: Certainly, sir. 45 At the time of the previous hearing, there was significant representations made on the record and through the evidence that the Enlogix agreement would enable the utility to have a sufficient degree of flexibility to encompass all of the myriad possibilities that deregulation might allow for at that point in time. Back in 1998, direct purchase was in its infancy. The contemplation of GDAR was in the air but not fully fleshed at that point and everybody interpreted that the market would become a vibrant and interesting place. So the -- so what we were told then was that this Enlogix agreement would be the beginning of a relationship that would enable the utility to manage that. 46 The utility then, rather than letting the agreement run its full term, renegotiated a year early, subsequent to the utility's parent company's sale to Duke Energy and then subsequently Duke Energy sold the Enlogix contract -- or sorry the Enlogix company -- 47 MR. PENNY: I'm sorry, Mr. Chairman, that is incorrect. What Mr. Dingwall said is completely incorrect. 48 MR. DINGWALL: Can I finish, Mr. Penny, before you comment? I'd like that opportunity, if you don't mind. 49 MR. SOMMERVILLE: Continue, Mr. Dingwall. 50 MR. DINGWALL: On September 5th, 2002, Enlogix was sold to ADS. On the same day, Enlogix entered into an amending agreement with Union Gas making some changes to the terms and conditions under which they were operating. It's my contention, which I hope to -- it's my -- it's frankly a concern that I hope to address through the cross-examination of this panel that the accommodations made in the September 5th, 2002 amending agreement were to Union's detriment and were solely for the benefit of the shareholder in negotiating a higher purchase price for Enlogix. It's my contention, that I hope to explore similarly through cross-examination, that the subsequent agreements that it was necessary for Union Gas to enter into with ADS to accomplish fairly fundamental expected changes were solely the result of Union Gas not being prudent in providing sufficient flexibility in the new agreement with Enlogix. 51 MR. SOMMERVILLE: Do you have a sense of the monetary magnitude if your assertions are accurate? What's the monetary scope of that? 52 MR. DINGWALL: Well, the ADS agreement with respect to GDAR was, I believe, $540,000. The ADS agreement with respect to the rate rider functionality was, I believe, around $1.6 million, and the annual billing costs are well in excess of $10 million. 53 MR. SOMMERVILLE: Mr. Penny. 54 MR. PENNY: Well, with respect to the last issue with the GDAR and the rate rider, that's, of course, an issue that Mr. Andrews testified about -- sorry, GDAR was Mr. Andrews, Mr. Shervill will be here to talk with about the rate rider functionality. Those agreements are entered into recently with the supplier and are not affiliate transactions, and indeed Mr. Moran conducted a cross-examination on the very issue that Mr. Dingwall just outlined. So that one is done and I think -- I would be repeating myself otherwise. 55 MR. SOMMERVILLE: Mr. Dingwall, Mr. Penny's made a suggestion that if we deferred your cross-examination until later today, that would effectively give you say three hours between now and then; is that -- I'd like to you comment on that proposition. 56 MR. DINGWALL: Well, what I'm putting forward to the Board is the fact that there's a time challenge in terms of digesting the information and addressing it. I'm always happy to take more time to try and improve on that. I can't speculate at this time whether that will be sufficient to cover everything, but I'm certainly going to do my best. 57 MR. PENNY: The wing thing I should have said, Mr. Chairman, is that Mr. Birmingham is able to deal with all these issues. 58 MR. SOMMERVILLE: I assumed that. I assumed that this panel -- 59 MR. DINGWALL: I assumed that as well. 60 MR. SOMMERVILLE: -- that this panel is in fact the appropriate panel to deal with the subject matter. 61 The Board will take a few minutes to consider this subject and I think we probably need to resolve that now. 62 Mr. Penny, I understand that the additional documents are available for Mr. Dingwall right now. 63 MR. PENNY: He has them. 64 MR. SOMMERVILLE: He has them. 65 So we'll take until 10:15 and we'll be back to give some indication as to how we intend to proceed. Thank you. 66 --- Recess taken at 9:58 a.m. 67 --- On resuming at 10:15 a.m. 68 MR. SOMMERVILLE: Thank you, please be seated. 69 Mr. Dingwall, the Board has some sympathy for your position. It occurs to us that this set of circumstances has come about through really no fault of anyone. We would expect you to be prepared to pursue the in-camera portion of the cross-examination this afternoon no later than 1:30, so that we'll take our break for the lunchtime and would expect you to take up that portion of your cross-examination this afternoon. 70 My understanding is that you would prefer to do the public portion ever your cross-examination now; is that so? 71 MR. DINGWALL: That's correct, sir, that would enable me to take leave of the room and find someplace quiet to move on with the rest. 72 MR. SOMMERVILLE: And I think it's not atypical that the other parties who are looking to cross-examine probably would prefer that as well. So we'll ask you to proceed now with the public portion and, as I have indicated, we would expect you to proceed with the cross-examination of the in-camera portion this afternoon. 73 MR. DINGWALL: Thank you, sir. 74 MR. SOMMERVILLE: I take your point that Mr. Shepherd has indicated to you some interest in asking some questions about the -- this matter. I'm going to have to hear from Mr. Shepherd on that subject and -- if at all. So without further ado, Mr. Penny, do you have any comment? 75 MR. PENNY: No, thank you, sir. 76 MR. SOMMERVILLE: Mr. Dingwall. 77 MR. DINGWALL: Thank you, sir. 78 UNION GAS LIMITED - PANEL 8; BIRMINGHAM, LAFORET 79 R.BIRMINGHAM; Previously sworn. 80 J.LAFORET; Previously sworn. 81 CROSS-EXAMINATION BY MR. DINGWALL: 82 MR. DINGWALL: Yesterday, gentlemen, we were dealing with the question of insurance premiums in Mr. Shepherd's materials. As a result of the integration within the Duke Energy organization, has Union Gas gained any new forms of coverage, any new areas of coverage? I believe the panel spoke yesterday to the fact yesterday that the limits under the policies had increased to 200 million U.S. 83 MR. BIRMINGHAM: There are no new areas of coverage, Mr. Dingwall. The example that I used with Mr. Shepherd yesterday was with respect to the directors and officers' insurance which under the previous Westcoast policy provided 100 million Canadian of coverage and under the Duke Energy policy, provides 200 million U.S. of coverage per occurrence. 84 With respect to the other policies, we have the same types of coverage although under the Duke Energy policies, they have excess liability coverage available to us on a per-occurrence basis. 85 As an example, for the policies where the premiums are billed directly by Marsh Canada to Union Gas for property liability, our coverage under that policy is $250 million per occurrence, and that's the same coverage limit that we had under the Westcoast policies prior to the Duke Energy purchase. 86 To the extent that we had an occurrence where a liability was exceeded $250 million, then Duke provides coverage for that liability beyond the $250 million. That's liability coverage that we did not have under the previous Westcoast Energy policies. 87 MR. DINGWALL: How does Duke provide that coverage, Mr. Birmingham? 88 MR. BIRMINGHAM: They contract with insurers and pay premiums for that coverage. 89 MR. DINGWALL: So Duke is not providing any self-insuring services for the additional coverage? 90 MR. BIRMINGHAM: No, they don't cover any insurance costs directly themselves. 91 MR. DINGWALL: Now, is Marsh Canada the broker that you've been dealing with previously? 92 MR. BIRMINGHAM: Yes, they are. 93 MR. DINGWALL: And they usually do risk analysis for their clients, do they not? Have they done such analysis for you? 94 MR. BIRMINGHAM: I don't know, sir. I assume that they have, although because the coverages are similar to what we have had before, I'm assuming that their analysis or their view of our risk profile is unchanged over the last little while with respect to the types of the liability coverage that they are providing. 95 MR. DINGWALL: Out of the total Union Gas insurance costs that are being put forward in this case, what portions are costs that Union Gas has directly contracted for and what portion are costs that Duke has contracted for on Union's behalf or to Union's benefit? 96 MR. BIRMINGHAM: If I can ask you to look under tab 10 of Mr. Shepherd's material or Exhibit J.26.52, Mr. Dingwall, you'll see that the insurance premiums that we pay directly, coverages that we pay for directly, include the property coverage, the primary liability, the umbrella liability, and the auto liability, the aviation, and all of those continue to be paid directly. 97 The ones that are paid for through Duke Energy is with respect to the directors' and officers' liability, crime fiduciary liability and excess fiduciary liability which is on line 7 and 8 of that table. 98 MR. DINGWALL: I don't see an amount there for 2003-2004, 2004-2005, I'm not sure if my copy is defective. 99 MR. BIRMINGHAM: No, it isn't. This is discussion that I was having with Mr. Shepherd yesterday, and that is, if I could draw your attention to Exhibit J.1.114, you'll see that that's the table that lists the flow-through costs that form part of the $28.6 million charge for the shared services. Or said another way, with respect to the 28.6 million, we have $10.7 million of flow-through charges and roughly $18 million of other services. On that table, you'll see a charge for $1.4 million for insurance services and there are three things included in that charge: The first one is the directors' and officers' liability and the other protections that are listed at lines 7 and 8 of Exhibit J.26.52. 100 The second thing is the business continuity planning service that Duke Energy provides with respect to being able to continue to operate in the event of a physical disaster, and in particular, the types of things that we plan for are a disaster that would see our head office be inaccessible to us and how we would continue to operate our system and serve our customers. 101 The third thing that they provide in that charge is the excess coverages for the other liabilities beyond the coverages that are inside the policies that we pay directly to Marsh Canada, and as I indicated to Mr. Shepherd yesterday, of that 1.4 million, the most significant portion is the directors and officers' coverage and I had indicated to him that of the 1.4 million, about 90 percent of it is associated with the coverages that are listed at lines 7 and 8 of Exhibit J.26.52. 102 MR. DINGWALL: Now, when you're making reference to directors and officers would these be directors and officers of Union Gas, Westcoast or Duke? 103 MR. BIRMINGHAM: These are the coverages that apply for the directors and officers of Union Gas Limited. 104 MR. DINGWALL: So is this a specific policy solely for the Union Gas directors and officers? 105 MR. BIRMINGHAM: No, sir, it's a policy that covers all of the directors and officers for Duke Energy. This is the portion that Union Gas pays as an allocation to cover the officers and directors of Union Gas. 106 MR. DINGWALL: Now, the officers and directors of Union Gas are not officers and directors of Duke Energy, are they not? Or are they? 107 MR. BIRMINGHAM: Maybe if I could just direct your -- or refer to Exhibit A, tab 7, schedule 3, Mr. Dingwall. You don't necessarily need to turn it up, but there is a listing there of the Union Gas Limited board of directors and officers. And there are some members in that listing, for instance, Thomas C. O'Connor who is the chair of our board who would also be an officer of other Duke Energy entities. But the coverage that we're paying for is the coverage with respect to his capacity and his role as a director of Union Gas and not his capacity as an officer or direct are of any other company. 108 MR. DINGWALL: So the 1.4 million effectively is an allocated cost, allocated by Duke to Union Gas for the D&O coverage. 109 MR. BIRMINGHAM: That's correct. 110 MR. DINGWALL: What is the total cost that Duke pays for its D&O? 111 MR. BIRMINGHAM: Mr. Dingwall, I don't know the total premium precisely that Duke Energy pays for directors' and officers' liability, but I can give you a very close proxy for it. As I mentioned, the charge from Duke Energy for these coverages including the business continuity plan and including the excess coverage liabilities is $1.4 million Canadian. 112 I also indicated that of that charge, about 90 percent of it for the directors' and officers' insurance, so 90 percent, let's just call it 1.2 to $1.3 million of that would be for the directors' and officers' coverage. 113 Now, Union Gas represents 7.2 percent of the charges that come from Duke Energy, and that's found in the response to Exhibit J.1.120. So if I took the roughly $1.2 million that represents the directors' and officers' charge to Union Gas and divided it by the 7.2 percent that we represent of Duke Energy's costs, that would suggest that the Duke Energy premium for directors' and officers' coverage is roughly $17.5 million Canadian. 114 MR. DINGWALL: Do you have a way of confirming what the total premium is? I appreciate the estimation. 115 MR. BIRMINGHAM: I'm not sure what more that number would get you, Mr. Dingwall, but I can try to contact the Charlotte people and obtain that number for you. 116 MR. DINGWALL: To clarify that for the record, then, I would request that you obtain the actual number or cost associated with the premiums that Duke Energy pays for its directors' and officers' liability coverage. 117 MR. BIRMINGHAM: This is the total premium that they pay for all their directors and officers? 118 MR. DINGWALL: Yes. 119 MR. MORAN: Mr. Chair, that would become Undertaking N.13.1. 120 UNDERTAKING NO. N.13.1: TO PROVIDE THE ACTUAL NUMBER OR COST ASSOCIATED WITH THE PREMIUMS THAT DUKE ENERGY PAYS FOR ITS DIRECTORS' AND OFFICERS' LIABILITY COVERAGE FOR ALL OF THEIR DIRECTORS AND OFFICERS 121 MR. SOMMERVILLE: Thank you. 122 MR. DINGWALL: Now, I note from line 8 of section 10 of Mr. Shepherd's materials that Union's coverage now includes fiduciary and excess fiduciary liability claims. Is Union anticipating becoming a public company at any point in time. 123 MR. BIRMINGHAM: No, sir. 124 MR. DINGWALL: Is this a form of coverage that Union Gas has ever had in the past? 125 MR. BIRMINGHAM: These are the same types of coverage that we had when we were owned by Westcoast. 126 MR. DINGWALL: Did Union Gas or Westcoast have a similar level of fiduciary liability coverage? 127 MR. BIRMINGHAM: Well, the overall coverage under these policies, as I mentioned before, was $100 million Canadian. We now have 200 million U.S. 128 MR. DINGWALL: I guess what I'm trying to understand here is now you're owned by Duke Energy, a large company which is traded on the New York Stock Exchange and which has the interesting background of having some energy trading experiences in the past. Fiduciary liability and excess fiduciary liability coverage seems somewhat out of the ordinary for a regulated gas utility in southern Ontario, especially associated with the limitations you're talking about. Did Marsh Canada give you any guidance as to what level Union Gas would need for its directors on a stand-alone basis? 129 MR. BIRMINGHAM: Not with respect to the current environment; obviously with respect to our previous policy they had given us some guidance and that's how Westcoast came up with the -- or at least in part how they came up with the $100 million Canadian worth of coverage. And with respect to the need for fiduciary liability and excess fiduciary liability, surely as an officer I'm happy that it's there, I was happy that it was there under the Westcoast ownership as well, they were a publically-traded company, and I don't necessarily see that the circumstances are any different under Duke ownership. 130 The one thing that I will comment on, and again I'm glad the coverages have gone up, is that this area tends to be, I think, a little more sensitive and a little more public since some of the recent events with other companies. 131 The last thing I'd add, Mr. Dingwall, is that with respect to the Westcoast Energy group of companies, it isn't necessarily different that Duke Energy has a trading and marketing company, Westcoast Energy also had Engage Energy which was a trading and marketing company. 132 MR. DINGWALL: Now, my last question in the area relates to the fiduciary coverage. Is this intended to cover the company in the event that its officers don't do their job with respect to carrying out corporate policy or to cover the officers and directors individually? 133 MR. BIRMINGHAM: That may have been two different questions, so can you try that one again? 134 MR. DINGWALL: Well, under these executive protection forms of coverage, there are some interesting headlines such as crime fiduciary liability and excess fiduciary liability. Are these forms of coverage that benefit the companies in that the companies have insulation through these coverages, or are these forms of coverage solely to the benefit of the individuals holding the offices? 135 MR. BIRMINGHAM: Well, my understanding is that it, in fact, covers both, so to the extent that I, as an officer of Union Gas, was named in some form of lawsuit, then it's these policies that would cover me from suffering any personal financial loss. And to the extent that we had an officer or a director who undertook some form of crime, they would also protect the company against that. So I guess the answer to your question is that it's both. 136 MR. DINGWALL: So does this coverage extend to the benefit of the company solely for the circumstance of crime, or is breach of fiduciary duty another ground on which a company could claim its losses? 137 MR. BIRMINGHAM: I haven't read the specific language of the policy, Mr. Dingwall, so I won't be able to answer that question. 138 MR. DINGWALL: Okay. Moving on to storage and transportation, just for background, I understand that storage and transportation -- 139 MR. SOMMERVILLE: Mr. Dingwall, just before we leave that, it seems to be that the crime heading is probably protection for the company in the event that it is a victim of crime. 140 Is that -- 141 MR. PENNY: I think that's what Mr. Birmingham said, in effect. 142 MR. SOMMERVILLE: Right. Sorry. 143 MR. DINGWALL: That's what I had understood, sir. 144 MR. SOMMERVILLE: I just wanted to be clear on that. 145 MR. BIRMINGHAM: That is what I had said, Mr. Chair. Sorry if I wasn't clear. 146 MR. SOMMERVILLE: Thank you. 147 MR. DINGWALL: I understand that storage and transportation transactions are conducted through one of the Duke affiliates once Union Gas releases excess capacity; is that correct? 148 MR. BIRMINGHAM: Yes, the asset optimization of marketer services group in Houston provides two services for Union Gas, one of which is, once we release assets for sale to the market, then they are the ones that, in fact, perform that sale and try to maximize the economic value of those released assets. 149 MR. DINGWALL: Who is it that determines what types of structures of transactions this group can enter into? I'm thinking about duration, I'm thinking about maximum dollar value. 150 MR. BIRMINGHAM: It is that group that determines the dollar value. Mr. Vegh had asked for a sample of a communication where we release assets, and that defines two things: It defines the term for which that capacity would be available, so the group in Houston doesn't determine the term other than they can determine it within the parameters of the released capacity that we give them. 151 The second thing that we let them know is that there's a minimum that needs to be charged, because of the way some of the assets operate or some of the costs are attracted to those assets. 152 As an example, some transportation capacity we would have to incur fuel on, and so there would be a minimum charge that they would have to be able to achieve when they're selling it into the market. So the Houston group determines the term within the parameters of the release capacity that we give them and they determine the value subject to the minimum that we've them. 153 MR. DINGWALL: Who is it that determines what credit rating or form of deposit, letter of credit, credit instrument might be necessary in dealing with the storage and transportation customer? 154 MR. BIRMINGHAM: Because the Houston group is actually doing the sale, they are responsible for ensuring that the customer that they're selling assets to has an appropriate credit rating. 155 MR. DINGWALL: And before the transition to this, was it Union Gas's own group that performed that function? 156 MR. BIRMINGHAM: When Union Gas's S&T marketing group was responsible for selling those released assets, they were responsible for ensuring that there was an appropriate credit rating for the customers that they were selling to. 157 MR. DINGWALL: If I can turn your attention, for a moment, to J.1.14. 158 MR. BIRMINGHAM: I have that, Mr. Dingwall. 159 MR. DINGWALL: This is a Board Staff interrogatory relating to gas loans written off to a company -- I think it's called Enron, that we've probably heard of once or twice. 160 MR. BIRMINGHAM: Sorry Mr. Dingwall, I've got J.1.114 which is the flow-through cost for the charges can you give me the exhibit that you're looking at. 161 MR. DINGWALL: 14, not 114. 162 MR. BIRMINGHAM: We have it, Mr. Dingwall. Thank you. 163 MR. DINGWALL: Now, this relates to the number of two-year gas loans that Union Gas entered into prior to the Duke arrangement; is that correct? 164 MR. BIRMINGHAM: These were gas loans that were made well before Duke announced its intention to purchase Westcoast Energy. 165 MR. DINGWALL: And would you agree with me that one of the reasons these transactions didn't work was that they were multiyear? 166 MR. BIRMINGHAM: Absolutely not. The reason that Union Gas incurred this loss, the same way that a lot of companies incurred the loss, was that they were relying on the credit rating of Enron at the time. Enron had a very, very strong credit rating, which you may recall at the time, and we also had a parental guarantee that went along with that. The fact that the credit rating did not reflect the company's financial circumstances was the reason why a lot of companies, including Union Gas, ended up with this type of writeoff. 167 MR. DINGWALL: Would you agree with me that circumstances such as this transaction have really refocused peoples' minds on the issue of credit? 168 MR. BIRMINGHAM: There's actually a couple of dimensions to that, Mr. Dingwall. Certainly, the credit rating agencies are, since the Enron situation, much more leery of increasing companies' ratings for credit, in fact, they tend to be more conservative than they have in the past. I don't think that's necessarily changed anything with respect to how Union Gas or other companies look at credit. We've always ensured that companies have adequate credit rating and to the extent that companies get themselves in circumstances that don't support the level and types of transactions that we have with them simply through their credit rating, then we go and ask for additional security. There's nothing new or changed about that policy, but what I will say is that the credit ratings that we rely on now are I think more conservative than they have in the past largely as a result of the credit rating agencies taking a more jaundiced view of companies representations and their financial circumstances. 169 MR. DINGWALL: With that being the case, why is Union leaving storage and transportation counterparty credit up to Duke? 170 MR. BIRMINGHAM: Duke Energy's policy with respect to credit applies to both Duke Energy Gas Transmission and to Union Gas, and that is that there has to be sufficient credit in order for the company to be able to do business with a particular customer. And that credit check and the monitoring of credit and the availability of remaining credit is actually a function that is performed within the controller's group who interact with the entity within Duke that is then doing the business. 171 So in this case, the S&T marketing group in Houston would be interacting with the controller's group in Houston looking at the credit ratings, the available credit, and what the appropriate circumstance and support should be for a particular transaction. 172 MR. DINGWALL: What visibility does Union Gas have into the decisions that Duke is making with respect to counterparty credit on Union Gas's behalf? 173 MR. BIRMINGHAM: Well, with respect to the sales that the S&T marketing group performs with, we rely on the fact that they will follow the overall corporate policy just as we do. We don't have any specific insight or say into the types of credit that might be offered to support a particular transaction. 174 MR. DINGWALL: What recourse does Union Gas have in the event that Duke is not diligent in its pursuit of credit with counterparties? 175 MR. BIRMINGHAM: Well, my trouble with the question, Mr. Dingwall, is that Union Gas is Duke with respect to following those types of policies. 176 Any transaction that happens with the S&T marketing group as a result of Union Gas releasing assets has that revenue recorded on Union's books. To the extent that, in your example, the S&T marketing group wasn't diligent in extending credit, then obviously there would be the potential for a write off in that circumstance, but there would be many other repercussions for the individuals who didn't follow the company's policy. 177 MR. DINGWALL: Now, you made reference to individual repercussions, what about corporate repercussions? Does Union Gas have any financial recourse to Duke in the event that Duke doesn't comply with acceptable credit standards? 178 MR. BIRMINGHAM: Just a couple of things on that, Mr. Dingwall. In respect -- in the -- on the first point, within the master services agreement there is a requirement that the service provider, in this case, the S&T asset optimization and marketer services group, comply with all policies and procedures. The second thing is that with respect to the -- or what we refer to as deal sheets, this is the one-page summary of the arrangement once the asset optimization and marketer services group actually conducts a transaction, that deal sheet has to come to Steve Baker within Union Gas for approval. 179 So to the extent that Mr. Baker received one of those sheets, he will also interact with the controllers' group that supports Union Gas. So there is -- while we don't have direct say in the credit assessment, there is a check and balance on it when that deal sheet comes to Mr. Baker for signature. If he has any question about credit he will be interacting with the Union Gas controller's group to deal with those concerns. 180 MR. DINGWALL: With Union Gas's current policy of forecasting demand on an annual basis, is it conceivable that the two-year gas loan is going to be something that the company will enter into as an S&T transaction in the future? 181 MR. BIRMINGHAM: I don't know, Mr. Dingwall. I think in some respects, it would depend on the circumstances at the time and the value that we could obtain from that. 182 MR. DINGWALL: Isn't the multi-year arrangement of some sort really dependent on what your forecasting is for the subsequent years? 183 MR. BIRMINGHAM: It does depend on our supply and demand forecast and the inventory balances that would carry over. Typically, if we're going to enter into a multi-year arrangement, we would be looking at the gas supply plan going forward, our inventory situation going forward, and to the extent that a gas loan is going to be extended beyond a year, we would be allowing sufficient flexibility within the gas supply parameters to accommodate that. 184 MR. DINGWALL: So to characterize that, then, your mind is still open to multi-year transactions in the future? 185 MR. BIRMINGHAM: I think we're still open to it, Mr. Dingwall, but I think we will, again, have a more critical view of multi-year deals, given the experience that we had with Enron. 186 MR. DINGWALL: The balance of my questions relate, really, to the matters that we're going to be talking about later on, so thank you very much, gentlemen. 187 MR. SOMMERVILLE: Thank you, Mr. Dingwall. 188 I see Mr. Aiken and Ms. Singh, do you have a preferred order? 189 MS. SINGH: I'll go first. 190 MR. SOMMERVILLE: Ms. Singh. 191 MS. SINGH: Yes. 192 MR. SOMMERVILLE: Thank you. 193 CROSS-EXAMINATION BY MS. SINGH: 194 MS. SINGH: Good morning panel. I wanted to look a little bit at the issue of cost-based approach to prices for the Board's setting of its rates. 195 Mr. Birmingham, you're the senior vice-president of regulatory and marketing, I guess, with Union; is that correct? 196 MR. BIRMINGHAM: That's correct. 197 MS. SINGH: And you've been in that position since June of this year? 198 MR. BIRMINGHAM: That's right. 199 MS. SINGH: And prior to that, you were the vice-president of regulatory affairs and business services? 200 MR. BIRMINGHAM: That's correct. 201 MS. SINGH: Looking at Exhibit A, tab 8, schedule 1, which is Union Gas corporate organization chart dated May 2003 -- 202 MR. SOMMERVILLE: Sorry, Ms. Singh, could you give me that reference again? 203 MS. SINGH: Exhibit A, tab 8, schedule 1. 204 MR. SOMMERVILLE: Thank you. 205 MS. SINGH: Which is the corporate organization chart dated May 2003. 206 MR. SOMMERVILLE: Thank you. 207 MS. SINGH: Is that up to date or have there been any changes to that? 208 MR. BIRMINGHAM: In looking at Exhibit A, tab 8, schedule 1, page 1, there was a change in June of this year. The role that's entitled, "Vice-president sales and marketing" was eliminated. Those responsibilities were divided between myself and Mr. Steve Baker. Mr. Baker's title is now vice-president gas supply and market planning, and mine, as you mentioned earlier, assumes both regulatory affairs and marketing. 209 MS. SINGH: Can you tell us, Mr. Birmingham, was there any particular reason that prompted that change? 210 MR. BIRMINGHAM: Yes. That timing was coincident with the departure of Jane Peverett who was our president at the time. Upon Ms. Peverett's departure, Mr. John Wellard, who held the position of vice president sales and marketing was made president of our company. That created a vacancy in his role and it was at that time that the company took the opportunity to reorganize the executive group in the way that I just described to you. 211 MS. SINGH: So there are three vice-presidents now in the executive group; is that correct? 212 MR. BIRMINGHAM: There are three vice-presidents within the executive group that are on the Union Gas payroll. There's also Mr. Steve Bush who is a vice-president, he is in charge of the controller's group for Union Gas, but because he is a U.S. citizen, there are some very complicated tax matters for him if he was to relocate to Canada and become a Canadian employee. So his services are actually provided through a service-level agreement so that he can remain on a U.S. payroll simply for his personal tax reasons. 213 MS. SINGH: But he's not part of the executive, the controller, if I understood you correctly? 214 MR. BIRMINGHAM: He is an officer of Union Gas and he is part of the executive group. I was just distinguishing between which executives were on the Union Gas payroll and which ones were provided by a service-level agreement. Mr. Bush is only being provided -- his services are only being provided through a service-level agreement because of this, the international tax complications for him. 215 MS. SINGH: And I see on schedule 1, Mr. Birmingham, that you would report directly to the president; is that correct, of Union Gas? 216 MR. BIRMINGHAM: I'm sorry, that I would? 217 MS. SINGH: Yes. 218 MR. BIRMINGHAM: Yes, do I. 219 MS. SINGH: And the manager of affiliate relations, Mr. Laforet, I see that you would report to Mr. Birmingham, I see that on schedule 3 or page 3, rather, of schedule 1. 220 MR. LAFORET: Yes, on page 3 of schedule 1, that shows my position as manager, affiliate relations reporting to Mr. Birmingham. 221 MS. SINGH: And Mr. Birmingham, would I be correct in understanding that you are responsible for the 16 business or operating units with approximately 210 employees? Again, I'm just looking at page 3 of schedule 1. 222 MR. BIRMINGHAM: Yes, the organization chart that is on Exhibit A, tab 8, schedule 1, page 3, shows both the solid-line reporting relationships that I'm responsible for as well, as the dotted-line relationships to some of the functional groups that support Union Gas. With respect to the change that happened in June 2002, if I ask you to look at page 5, you will see in the middle of the page there is a role entitled, "Director sales and marketing." 223 MS. SINGH: Yes, I see that. 224 MR. BIRMINGHAM: And then if you move to the left and down one box there is a role entitled, "Director channel management." 225 MS. SINGH: Yes. 226 MR. BIRMINGHAM: Both of those individuals report to me as well. 227 The remaining roles with respect to that organization chart now report to Mr. Baker. 228 MS. SINGH: To Mr. -- 229 MR. BIRMINGHAM: Steve Baker. 230 MS. SINGH: Okay. And as an officer of the Union company, a director -- you're an officer, and part of the Union executive -- 231 MR. SOMMERVILLE: Ms. Singh, I'm sorry to interrupt you but if you could position the microphone a little more directly -- we're having a little trouble hearing you. 232 MS. SINGH: I was trying to make up for the fact that I was loud the other day. I'll get it right. 233 MR. SOMMERVILLE: On average, we can hear you. Thank you. 234 MS. SINGH: And as an officer of the company, Mr. Birmingham, and part of the executive, am I correct that you are fully accountable for decisions regarding the utility and its assets and operations? 235 MR. BIRMINGHAM: Well, as an officer, I'm given certain executive responsibility that deals with the regulatory affairs and marketing areas of the company. 236 With respect to asset operations, that executive accountability is with Mel Ydreos and with respect to contracting for upstream pipeline capacity and gas supply, that executive responsibility is with Mr. Steve Baker, and then ultimately, of course, all of those roll up to the accountability of the president, John Wellard. 237 MS. SINGH: Going back to the organization chart and the reporting line, would each of the different business units that we see on page 3 of schedule 1, would they be responsible for preparing, on an annual basis, their own budgets for operating and maintenance purposes? 238 MR. BIRMINGHAM: They do prepare their budgets that are then rolled up into the budgets of the functional areas to which they report directly. 239 MS. SINGH: And looking at Exhibit A, tab 13, pages 4, 5, and 6 dealing with the operating budget process, can you tell us, Mr. Birmingham, if that is the process that those units would undertake in setting their annual budgets for O&M purposes? There is an elaborate diagram at page 4 -- 240 MR. LAFORET: Yes, we see that. 241 MS. SINGH: And then there, of course, has to be a description, of course, explaining the diagram and the various 26 steps that take place prior to Board approval. 242 MR. LAFORET: In terms of the O&M budget process that's depicted at page 4 of 6 of tab 13, schedule 1, under Exhibit A, in general, that is the same process that is followed by those functional groups in terms of budgeting their costs that they will incur internally within Union Gas, and then the other component of that, which may take on a bit of a different flavour, is also then determining the inbound shared-services fees that are relating to the services that we're receiving from affiliates. 243 So if I put it in terms of pre-Duke acquisition, those groups that are depicted under Mr. Birmingham under tab 8, schedule 1, are following the same budget process after the transition in terms of the costs that they continue to incur within Union Gas so their payroll forecast for the Union Gas employees, their expected general expenses and expenditures that Union Gas will be paying for. They follow, in general, that same budget process. And then when to comes to the inbound shared services, what we then turn to is the information or the numbers that come out of the master services agreements and the service schedules, and then those also come into the overall budget process that results in, as Mr. Birmingham referred to, a utility budget that then goes through the end of that process when all those dollars come together. 244 MS. SINGH: Thank you, Mr. Laforet. 245 I just want to go back and kind of look at this in more of a staged way, if that's all right, but that's very helpful. 246 Now, in terms of this document, you did mention, Mr. Laforet, that this was a pre-Duke document. Have there been any changes to this document since March of 2002? 247 MR. LAFORET: I don't know if there is, that's something that would be handled by Ms. Elliott's group. And just for clarification, maybe what I should state is when I had mentioned the pre-Duke, what I was trying to depict was how the functional group would have done it -- followed its budget process in terms of forecasting or budgeting all of its costs following this operating budget process. And then the post-Duke would continue, my understanding is, to be the same process, but it would only deal with those dollars that they're going to incur internally. So I didn't mean to state that this as a pre-Duke or post-Duke budget process. 248 MS. SINGH: Would you know if there have been any changes or would it very difficult to reflect the changes to the document? I assume this is an internal policy document -- sorry, an operating document for Union, what the budgeting process was and what it is today, and I assume that this is a current document. 249 MR. PENNY: Well, Mr. Chairman, I guess I'm perhaps -- this panel was here to deal with affiliate relations not the operating budget process. Ms. Elliott was here to testify at some length about the operating budget and to some extent the operating budget process. So I'm not sure why these questions are being put to these witnesses, I guess, is my question for clarification, through you, sir. 250 MS. SINGH: Well I do intend to get to the relevance of this and go directly to affiliate relations, but I think this is material to my understanding of the cost-based approach to the setting of rates, Mr. Penny. So with the Board's indulgence, I can assure you that I will make sure that my questions are relevant for this panel. 251 MR. SOMMERVILLE: Thank you, Ms. Singh. 252 MR. LAFORET: Just in reaffirming with Mr. Birmingham, this would be the process that is currently in place within Union and the process that was followed in terms of the 2004 cost-of-service O&M evidence. 253 MS. SINGH: Okay. And in your experience, Mr. Birmingham or Mr. Laforet, by the time the proposed consolidated budget goes through these 25 steps, before it goes to step 26 which, on the diagram, is the presentation to the board, would the board's approval, step 26, in your experience, be very much pro forma? 254 MR. BIRMINGHAM: I guess there's a couple of things there, Ms. Singh, let me try to address your question fully. 255 By the time that we have gone through this elaborate process to come up with the dollars, we have a very good understanding of the activity drivers and of the details that underlie the budget. When it goes to our board of directors then, it typically is handled in a couple of ways. Often there is a financial presentation to the audit committee and there is also a presentation to the board of directors, but it is far from a rubber stamping process, if that really was your question. 256 When it gets to the board of directors, that does tend to be quite a detailed presentation, there are plenty of questions, in particular, understanding around the budget and what some of the risks and opportunities inside the budget might be. And it's only after the audit committee and the full board look at this that any approval or changes are put forward. 257 MS. SINGH: Thank you. And I certainly can see from looking at this diagram that it's a very elaborate process that would give a board a lot of satisfaction about the reasonableness of the numbers based upon the view that the budgeting units have gone through this, the operating units have gone through this process and followed this process and adhered to it in a very logical and formal way. Is that fair? 258 MR. BIRMINGHAM: Yes, one other dynamic in this process that, for me, has been very interesting over the years is as we do board of directors' presentations of course we have a requirement to have a certain number of independent members. So while the board of director members who are part of the corporate entity may have an initial understanding of the components and the dynamics and the risks and opportunities of a budget, it's in particular those independent directors who take their roles very seriously and put us through our own form of cross-examination. 259 MS. SINGH: They put you through the paces. 260 MR. BIRMINGHAM: They do, indeed. 261 MS. SINGH: Would the board, in your experience, Mr. Birmingham, seek to satisfy itself that each stage in the process was followed? I see, for example, event 6 to 9 or stage 6 to 9, looking at page 5 where it's described, is a functional expert would have the responsibility of ensuring that the price for a service was no more than the fair market price. And would it be your evidence that the board would rely upon that as an assumption for the budgeted items? 262 MR. BIRMINGHAM: I may not be reading the same language here, Ms. Singh, maybe I could just bring you back for a second. On page 5 of Exhibit A, tab 13, schedule 1, events 6, 8 and 9 indicate that within the process, the ratifier is a functional expert with the responsibility for determining pricing in their particular area of expertise. 263 MS. SINGH: Perhaps you could explain what that means. 264 MR. BIRMINGHAM: As an example, I think the example that we've got here is a good one is, which is when we're looking at what type of wage increases do we put in place for the budget, the individual that is responsible for that, who is the functional expert in that area is our manager of compensation. That individual would have market data that would be indicating that for the coming year, we can expect to see increases in wages both for the collective bargaining unit and for management personnel within some range and they'll make a recommendation to be able to put that into the budget. 265 MS. SINGH: So as I understand it there are a lot of checks and balances in this budgeting process to ensure that there is full accountability for the budgeted items that are being put forward. 266 MR. BIRMINGHAM: Well there's both accountability for the budget items, but there's input from the subject matter experts on particular items of the budget where the budget administrators themselves may not have that particular expertise. 267 MS. SINGH: Thank you. 268 MR. SOMMERVILLE: Ms. Singh, you did promise that we were going to get to the affiliates. 269 MS. SINGH: Okay. Would I be correct in my understanding that in the normal course the services purchased from Duke would undergo the same budgeting-review process that's described in Exhibit A, tab 13? 270 MR. LAFORET: Yes, in terms of identifying the value of the inbound shared-services fees and also the outbound affiliate charges, it would follow along this same process. 271 MS. SINGH: But you told Mr. Warren and confirmed again with Ms. Lott that there was no tendering of the Duke services by Union but that you simply adopted the shared-services model and I'm wondering, given what you're saying, Mr. Laforet, and your experience with these shared services, what deliberations the board went through in relation to the shared services that are being proposed? 272 MR. LAFORET: I think there's two aspects to this that I'd like to cover. One is that they are cost-based prices, so we didn't go to market to look at them. What we looked at was what was the cost, and then that number is what then is input into the budget process which then flows through and ends up in box 21, I believe, box 21 of the operating budget process chart where we have the final pooled budget, so that information based on the service-level agreements is brought into the budget process. 273 MS. SINGH: So just for my understanding, Mr. Laforet, the shared-services agreement, the proposed costs for all of the agreements at Exhibit M then, started the budget process or fit into the budget process at stage 21 being the final pooled budget? Or would they have gone through the review from steps 1 to 21? 274 MR. LAFORET: Where it would flow through, and I just want to make sure I find -- and refer to the right box, box number 20 which is the determined level of purchase of outside services, that's where those numbers would start to come into the process. So we would have identified, through the service agreements, the level of activity or the level of service that we're receiving and then also the pricing related to that. 275 In that same category of costs would be other services that Union is purchasing from a third-party provider. When we look at the costing from ratifier, and this was the other item that I wanted to bring forward, is what the ratifier's looking to do is identify what a reasonable price is or what a reasonable forecast is for that type of activity or service. 276 So the ratifier, with regard to benefits costs, would be our benefits group that would then tell the company what we should budget for benefits. 277 Box 19, costing from ratifier, would then deal with some of the outside services, if they have a ratifier assigned to them. With regard to the inbound shared services, we don't have that ratifier process. One of the activities that I undertake with Union's controller's group and the other controller's group is to identify what the provider's cost of the service is and what the price of the service agreement will be and then bring that into the budget process. 278 We don't have a ratifier per se involved in that because we aren't looking at market-based prices in terms of these so we aren't asking somebody to say, Can you look at this and say whether there is a better price or a higher, you know -- or not better price out in the market for comparison purposes, which is something that we may do on another type of purchase of outside services. 279 MS. SINGH: Is there an equivalent diagram or a diagram that Union would use that would demonstrate what scrutiny, so to speak, shared services would go through as contrasted with market-based services? Maybe I can ask another question. 280 MR. LAFORET: Yeah. 281 MS. SINGH: Was there a board package, my familiarity is there is often a board package when they are approving a budget and they have a section that would deal with the costs for the shared services that wouldn't simply be the agreements, I assume, it would be a reflection of, you know, all of the steps that management went through in putting together those costs. Maybe you can help me, Mr. Birmingham. 282 MR. BIRMINGHAM: I think I see where you're going and maybe I can. Typically, the board of directors doesn't make a lot of inquiries about the steps of the process. They really rely on management to follow a detailed process and come up with the appropriate costs so that when we present our O&M expenses to them as an example, the costs of the shared services will be included in that. Typically, we would let them know what that magnitude is and the fact that they are based on the costs of the service provider, but it would really be just at that level. Their inquiries then go into things like what are you budgeting for, wage increases, what other things might affect your O&M up or down, do you have the appropriate budget for insurance premiums, and that type of thing. So they don't typically get into what are the details of the process, how did you come up with this stuff? It was more looking at the end result and asking questions about it. 283 MS. SINGH: But an outside director or a director that is required to make inquiries to satisfy himself or herself that the costs are reasonably incurred and justified could ask, could they not, to see what process was undertaken in terms of coming up with the figures, for example, for the shared-services agreements. Am I correct? 284 MR. BIRMINGHAM: Oh, yes. Any member of our board of directors could ask for the details of the process around how we accumulated the amounts that make up our budget including the shared-services amounts. 285 MS. SINGH: And I understand from your discussion with Mr. Shepherd yesterday, that the evidence in this proceeding that supports a ratepayer benefit arising from these shared-services agreements was created for the purposes of this hearing; am I correct in saying that? 286 MR. LAFORET: Yes, that would be correct. To meet what we understood to be the Board's expectations in terms of identifying why we did this and what was involved and to also identify the ratepayer benefit related to doing this. 287 MS. SINGH: And turning back then to the board meeting, what would be the equivalent that would have been provided to the Board or will be provided to the board to satisfy the Board that there is a benefit for Union? 288 MR. BIRMINGHAM: Simply that we have included the service-provider's costs for the shared services, they have been included in our overall O&M and that we are in compliance with the regulator's expectations around those services including the determination of a ratepayer benefit. 289 MS. SINGH: Well finally, and this is my final question: Is it your view that the Board should rely on Union's cost benefit analysis as the basis to approve the 26.4 million increase in management fees, or is there something else that the Board can look to to ensure that these costs are just, reasonable, and fair? 290 MR. PENNY: Can I just ask for clarification of which Board your question is addressed to, is it the board of directors or is it the Ontario Energy Board. 291 MS. SINGH: Maybe I should say both, but it's the Ontario Energy Board. 292 MR. BIRMINGHAM: Certainly I think the primary test that we are trying to meet was initially found in the Affiliate Relationships Code which required us to hold the ratepayers harmless with respect to this type of reorganization. 293 Subsequent to the issuance of the Affiliate Relationships Code, the Board indicated that this type of reorganization, in fact, should not just save ratepayers harmless because that would, in one interpretation, assume that we could use the utility's avoided cost for the purpose of those affiliate transactions. Instead, the reorganization should ensure that there is a ratepayer benefit. And it's in appendix K where we accumulate the service provider's costs, compare that to a proxy of what Union's costs would be to provide those same services and show that ratepayer benefit. 294 So I do think that appendix K and the information that supports appendix K, the process that was used to accumulate the information that is in appendix K are the primary things that the Board can rely on. 295 The other things, though, Ms. Singh are quite relevant and I indicated those, I think, primarily in my testimony on Tuesday, and that is the Board can rely on the fact that the information that is being provided to us that supports the service-provider's costs comes from financial systems that are also used to report to other regulators. So they are used to report to the Federal Energy Regulatory Commission, to the State regulators in North and South Carolina, to the National Energy Board, and they're also used for external reporting purposes, and for that matter they are also used to report to investors. 296 Second, the methodology that we're using with respect to using the service providers cost and how we determine those costs has to comply with international tax rules and the transfer pricing regulations for the tax authorities, and ours do. 297 And then in addition to what we have in appendix K we have done two other reasonableness tests. One is that we are being allocated between 3 and 4 percent of the costs that are in the overall pool, and yet on any other measure of Union Gas's size relative to the overall size of Duke Energy, we are in the 7 to 8 percent range. So at a very high level, the Board can take some comfort that we are being allocated a reasonable amount of cost. 298 The second test that we did, which is more explicit, is actually found in appendix J where we took a look at the overheads that were being charged through the shared services from our affiliates and compared that to the methodologies that we use to charge out to affiliates, which is we would want symmetry, you'd want to use a similar type methodology for inbound services as you would for outbound. And when we performed that test, we found that in fact under Union's methodology for charging out to affiliates, our overheads would be about half a million dollars higher on that same basket of our services than our affiliates were charging. So again, I think there's a reasonableness test that gave us comfort. 299 And then finally under appendix K we show that there's the $7.8 million benefit. 300 MS. SINGH: Thank you very much for that, and those are my questions. 301 MR. SOMMERVILLE: Thank you, Ms. Singh. 302 Maybe we'll take ten minutes and then take up Mr. Aiken's cross-examination. 303 Is that suitable, Mr. Aiken? 304 MR. SOMMERVILLE: We'll try to finish up the cross-examination other than Mr. Dingwall before we take the afternoon break. We'll see how that goes, in any event, if that helps the parties in any way. We'll stand adjourned for 10 minutes. Thank you. 305 --- Recess taken at 11:30 a.m. 306 --- On resuming at 11:47 a.m. 307 MR. SOMMERVILLE: Thank you, please be seated. 308 Mr. Aiken. 309 MR. AIKEN: Thank you, Mr. Chairman. 310 CROSS-EXAMINATION BY MR. AIKEN: 311 MR. AIKEN: Good morning, panel. 312 MR. BIRMINGHAM: Good morning, Mr. Aiken. 313 MR. AIKEN: As you can imagine, most of my questions have been asked, some of them multiple times, so I'm not going to cover those questions again, I'm just going to follow up on one area. If you could turn to Exhibit M.12.1, and this was the exhibit from Ms. Lott yesterday. 314 MR. LAFORET: Yes, we have that. 315 MR. AIKEN: And I'm looking at the section in the middle and the section at the bottom, and these numbers are taken from appendix M2 and appendix M3 of D.1, tab 14, am I correct in assuming that those figures in there are in U.S. dollars? 316 MR. LAFORET: I'm just going to do a quick cross-reference. Yes, that's correct, the appendix M2 and appendix M3 are quoted in U.S. dollars, and that's what's depicted on the M.12.1 also. 317 MR. AIKEN: Now, will you take, subject to check, that the middle section, which is labelled, "Duke Energy Business Service LLC," totals approximately $2.2 million? 318 MR. LAFORET: Yes, I can accept that subject to check. 319 MR. AIKEN: And subject to check that the bottom section the Duke Energy Gas Transmission Corporation totals 3.1 million? 320 MR. LAFORET: Yes, I can accept that. 321 MR. AIKEN: So in total, we then have a total in U.S. dollars of 5.3 million. 322 Now, if you could turn up Exhibit J.7.37. 323 MR. LAFORET: Yes, I have that. 324 MR. AIKEN: In the second paragraph it talks about U.S. affiliates of a forecast cost of 5.9 million U.S. Can you tell me what the difference between this 5.9 and the 5.3 of the total is, what I'm missing? 325 MR. PENNY: I missed the number, Mr. Aiken, I'm sorry. Could I have that again? 326 MR. AIKEN: Yes. In the second paragraph of J.7.37, it references a total cost of $5.9 million U.S. as being the total value of goods and services provided by the U.S. affiliates. 327 MR. LAFORET: I'm just looking back into my evidence. What that does relate to on an overall basis, is the blue-page update that we provided for Exhibit D.1, tab 14, appendix K, where we had that change in the inbound shared-service charge which was prefiled at the 29.2 million and then was restated in the blue-page update as the 28,649,000. What I'm just checking here to see is if I have the specifics of what shifted. 328 I think, yeah, I've got this tracked down now. There were two elements that resulted in a change, so when we look at the 5.3 million, if we take those numbers from the M.12.1, and we take the 5.9 million which is at the J.7.37, we have that differential there. Part of that is due to a change in the exchange rate forecast that we had used to convert the U.S. dollar service fees to Canadian dollars between the prefiled evidence and the blue-page update. 329 So with the decrease in the exchange rate, the cost of services in Canadian dollars had come down. Offsetting that, one of the changes that we have relates to the Microsoft enterprise licensing agreement. Originally, this charge was going to be coming through Westcoast Energy to Union and was included in the $20.5 million that they were going to be charging to Union Gas. 330 One of the things that we started to revisit as we worked through the service-level agreements is the fact that it is Duke Energy Corporate Centre that actually pays that licensing fee to Microsoft for the entire entity, so what we wanted to do was take out that process where the Duke Corporate Centre would charge the Westcoast Centre who would then charge Union, and make it a direct line so that the Duke Corporate Centre would be directly charging Union for it. 331 In terms of some of the cross-boarder tax issues and the interprovincial tax issues, we just wanted to make sure that the charge for the service was flowing as directly as possible so that we knew who the provider was and who the receiver was and weren't putting anything in the middle of that. 332 So that being said, what would come out of that is that the charge from Duke Energy or from DCAN or from Westcoast would go down by the amount of the Microsoft enterprise agreement and the charge coming from the Duke Corporate Centre would go up, so it was just a shift in terms of who the provider was. So the 5.3 which comes from the M.12.1 is where we stood with the prefiled evidence. With the blue-page update what we had was a decrease because of a decrease in the forecasted interest rate and then an increase because we were going to pay Duke Corporate Centre directly for the Microsoft enterprise agreement and that's where the 5.9 million then comes from in a very long explanation. 333 MR. AIKEN: Maybe I can have you turn to appendix G then of D.1, tab 14. 334 MR. LAFORET: G? 335 MR. AIKEN: Yes, appendix G. And perhaps what I could have you undertake to do is to provide the U.S. dollar figures that apply to lines 2 and 3 for the budget of 2004, along with the corresponding Canadian-dollar figures that would match the blue-page update. 336 MR. LAFORET: If I might just have one moment please. 337 Just to put the numbers out right now, what I can tell you is if we look at Exhibit D.1, tab 14, appendix G, the 2004 budget which is depicted at column G, the update to this, based on the blue-page update of appendix K at line 1, the Westcoast Energy charge would now be 19,703. At line 2, for Duke Energy Corporation, and this number I will give you will be in Canadian dollars, would be 4,288. And at line 3, for the Duke Energy Gas Transmission Corporation the number also in Canadian dollars would be 4,658. And that would total the 28,649 in Canadian dollars. 338 The exchange rate that we used for the blue-page update based on the controller's group's forecast was $1.50. So when I apply that exchange rate to the Duke Energy Corporation, the Canadian figure is the 4,288, the U.S. figure would be 2,859. And when I apply that exchange rate to line 3, the 4,658 in Canadian dollars would be 3,105 in U.S. dollars. 339 The total of those would be 5,964 or in that area of the 5.9 million referred to in J.7.37. 340 MR. AIKEN: And I take it if I have questions on the exchange rate forecast, I should take that up with Ms. Elliott and the finance panel? 341 MR. BIRMINGHAM: I guess it depends on what the question is, Mr. Aiken. We may be able to help you out if it has to do with the impacts on the U.S. dollar affiliate services. If it's more general than that, then it probably does belong to Ms. Elliott. 342 MR. AIKEN: Yes, and it is more general than that. I think the response in J.7.37 states that the impact of a one cent change in the exchange rate equates to a $60,000 change in the cost of the service. My question is more general on the exchange rate side, so I'll hold that for Ms. Elliott. 343 I want to look at one specific example and this is D.1, tab 14, appendix M3, page 21, it's the S&T marketing. 344 MR. LAFORET: The S&T marketing service schedule with Union and Duke Energy Gas Transmission? 345 MR. AIKEN: Yes, that's schedule 6 on page 21. 346 MR. BIRMINGHAM: We have that, Mr. Aiken. 347 MR. AIKEN: And I guess this will relate to your change in using the exchange rate as well. 348 MR. SOMMERVILLE: My -- sorry, Mr. Aiken, my reference for that storage and transmission operations, asset operations service schedule is D.1, tab 14, appendix M5, page 21 of 26, schedule 7. Am I reading from the wrong one? 349 MR. AIKEN: Yes, mine is the storage and transportation marketing D.1, tab 14, appendix M3, page 21. 350 MR. SOMMERVILLE: Thank you. 351 MR. PENNY: M5 is an outbound service, Mr. Chairman. 352 MR. SOMMERVILLE: Thank you. 353 MR. AIKEN: The question I had there was we see the U.S. dollar figure of just under 1.3 million and with the new exchange rate forecast of 1.5, that would have reduced the Canadian dollar cost of that from what is shown in J.23.3, attachment 1. I don't know if you have it in front of you but there was a total charge to Union for storage and transportation marketing of $2.1 million Canadian. 354 MR. LAFORET: I'm sorry, J.23 -- 355 MR. AIKEN: 23.3, attachment 1. 356 MR. LAFORET: That's why it wasn't making sense. 357 MR. AIKEN: Page 2 of 2 of attachment 1, line 39. 358 MR. LAFORET: Okay, I'm there, but I think I'll need to hear this again. 359 MR. AIKEN: Yes, I guess my question is: Is the 2.1 million shown there now approximately 1.9-something million based on the new exchange rate or your blue-page update? 360 MR. LAFORET: I just want to -- the -- I'm sorry, line 39, storage and transportation marketing the total charge to Union of the of the 2,102,000, that is -- that number aligns with the prefiled evidence so that would have used the exchange rate that we used when we did the prefiled evidence which would be the 1.63, in that range. So when I divide the 2.1 million by the 1.63, I come back to the 1,291,950 in U.S. dollars at schedule 6. 361 MR. AIKEN: Okay. Then my question is using your exchange rate of 1.50 now, that 2.1 million would be reduced to approximately 1.94 million. 362 MR. LAFORET: Yes, that's correct. 363 MR. BIRMINGHAM: Mr. Aiken, you can actually see that in the blue-page update in appendix K. If you take a look at column E and line 12, you'll see the 1.938 million that I think you're just referencing. 364 MR. AIKEN: Thank you, Mr. Birmingham. 365 Thank you, panel, those are all my questions. 366 MR. BIRMINGHAM: Thank you. 367 MR. LAFORET: Thank you. 368 MR. SOMMERVILLE: Thank you, Mr. Aiken. 369 Mr. Moran. 370 MR. MORAN: Thank you, Mr. Chair. 371 CROSS-EXAMINATION BY MR. MORAN: 372 MR. MORAN: Panel, I'd like to just explore a little bit of the detail that's set out in relation to the schedules attached to the various master service agreements. So I'd like to start with D.1, 14, appendix 1. 373 What we see there is the agreement that Union has with Westcoast Energy Inc., and just for purposes of the record, that's the same entity that's also been referred to as DCAN elsewhere, right? 374 MR. LAFORET: Yes, that's correct. 375 MR. MORAN: So we can refer to this as the DCAN service-level agreement. 376 MR. LAFORET: Yes, that would be appropriate. 377 MR. MORAN: And before I look at some aspects of this, as I understand it, the overall rationale behind the shared-services model is that you have the ability to achieve economies of scale vicariously because someone is able to achieve that for you through these service-level agreements; is that right? 378 MR. BIRMINGHAM: That's right, through the spreading of the costs through the companies we are able to achieve cost reductions. 379 MR. MORAN: And as a result, through a methodology that you've described in your evidence you come up with a calculation or an estimate of ratepayer benefits in the order of about $7.9 million; right? 380 MR. BIRMINGHAM: With respect to the inbound services. 381 MR. MORAN: With respect to the inbound services. 382 And as I understand it, what you're telling the Board is that in the absence of those shared-services agreements and in the absence, therefore, of that $7.9 million, that Union's revenue requirement would be $7.9 million higher than it would otherwise be; right? 383 MR. BIRMINGHAM: That's correct, based on the calculated proxy for the 2004 stand-alone budget, that's right. 384 MR. MORAN: Which, in the circumstances of this case, would then contribute an additional $7.9 million to the revenue deficiency; is that right? 385 MR. BIRMINGHAM: That's correct. 386 MR. MORAN: All right. And I think you've also indicated that Union is the sole local distribution company in the Duke family; is that right? 387 MR. BIRMINGHAM: We're the sole local gas distribution company in the Duke Energy group of companies. 388 MR. MORAN: And is Union the sole Duke company located in Ontario? 389 MR. BIRMINGHAM: No, we aren't, Mr. Moran, I think the St. Clair group of companies, as well, as an example, and Market Hub Partners Canada would also be affiliates of ours that are located in Ontario. 390 MR. MORAN: All right. And Market Hub is a merchant storage company, right, as I think you've indicated? 391 MR. BIRMINGHAM: They are planning to be a merchant storage company, yes. 392 MR. MORAN: And the St. Clair group of companies, how would you characterize them? 393 MR. LAFORET: The two companies that we refer to in the St. Clair group, there's St. Clair 1996 Limited and then there's St. Clair Pipelines Limited Partnership. St. Clair Pipelines Limited Partnership is the entity that owns the St. Clair river crossing and the Bluewater river crossing and they own those and are responsible for the operation of those. 394 The St. Clair 1996, in essence, has become a management company which has relationships with Maritimes and Northeast Pipeline in that employees of St. Clair 1996 provide services to Maritimes and Northeast. 395 MR. MORAN: And they are not rate-regulated in Ontario, are they? 396 MR. LAFORET: No. 397 MR. MORAN: Okay. So given that, then, is it fair to say that in terms of the relationship that Duke companies have with Ontario government regulatory regulation, we're basically talking about Union as being the primary company that has to engage with Ontario government regulators? 398 MR. BIRMINGHAM: I think that's fair. 399 MR. MORAN: All right. And that would, of course, include what this Board does; right? 400 MR. BIRMINGHAM: Absolutely. 401 MR. MORAN: And it includes environmental protection out of the Ontario Ministry of Environment? 402 MR. BIRMINGHAM: Yes. 403 MR. MORAN: And Occupational Health and Safety. 404 MR. BIRMINGHAM: Yes. 405 MR. MORAN: Workers' Compensation through the Workplace Safety Insurance Board? 406 MR. BIRMINGHAM: Yes. 407 MR. MORAN: And I believe the TSSA, the Technical Standards & Safety Authority also; right? 408 MR. BIRMINGHAM: Right. 409 MR. MORAN: I wonder then, if you could turn up schedule 3 to the M1 appendix at page 17. Schedule 3 deals with the environmental health and safety services that are provided by an affiliate, right, at a fee? 410 MR. LAFORET: Yes, that's correct. 411 MR. MORAN: And in this case the affiliate is DCAN. 412 MR. LAFORET: Yes, DCAN. 413 MR. MORAN: In light of the fact that only Union has to deal with the regulatory authorities that we just mentioned, what would be the economies of scale that Union would achieve as a result of the relationship that's governed by schedule 3? 414 MR. LAFORET: In one aspect, one of the costs that Union avoids and then pays to DCAN is part of that management or management oversight of the EH&S group, and they provide that leadership out of Vancouver on a Canada-wide basis for all of the business entities, and Union Gas is one of the ones that receives that. So Union did have a director of environmental health and safety services and that role was removed from Union, and that type of administrative and strategic planning and management function is now provided to Union at a lower cost than what Union was incurring on a stand-alone basis. 415 In terms of some of the other aspects, when we get to national standards in terms of the greenhouse gas emissions or national standards in terms of other environmental areas, they also provide the guidance, the research, and the information on that. When we come to the local basis, my understanding is that they do provide support with regard to specifics in Ontario and policy and legislation and regulation in Ontario. But the other aspect of that is a portion of the EH&S function still remains within Union, and those are the individuals that focus on the specific activities with regard to operating the utility in the Ontario environment. 416 So there is a bit of a mix on the things where we can get a collaborative approach on a company-wide basis, those are handled at that tier, and when we get down into the specifics at the utility basis, those are handled by that tier and also directly by staff within Union. 417 MR. MORAN: All right. So if you were to look at page 18 of schedule 3, appendix M1, just to follow up on what you've indicated, looking at the heading, "Workers' Compensation," for example, which makes a specific reference to the Workplace Safety Insurance Board, what is it that somebody out west is doing that wouldn't be done in almost exactly the same way by somebody in-house at Chatham? 418 MR. LAFORET: This is one of the ones where I said there's some things in the top tier that they continue to do that would be specific to Ontario. So in regards to the Workers' Compensation, the complete administration of that activity is managed by staff in Vancouver, and Union no longer does that. 419 Our Workers' Compensation activity was a component of our health management group within human resources and that group no longer exists within Union and that administrative function, the tracking and filing the Workers' Compensation, is now done centrally out of Vancouver. 420 MR. MORAN: All right. So does that mean that there would be some associated role reductions in Chatham? 421 MR. LAFORET: Yes, there were. 422 MR. MORAN: Okay. If we could then turn to schedule 5 of appendix M1. This is, again, another schedule on the DCAN agreement dealing with external relations. 423 MR. LAFORET: Yes, I've got that. 424 MR. MORAN: There's a list of specific services that are set out and I have a couple of questions about some of the bullet points. Under external communications, the last bullet point says: Promote Duke Energy brand across DEGT business units. 425 I wonder if you could indicate what benefit there is out of that activity for Union ratepayers, given that Union is a monopoly service and has its own name? 426 MR. BIRMINGHAM: First of all, I guess, Mr. Moran, when we talk about the brand, what we're talking about in this context is what customers think about Duke Energy and, in part, what we're doing is promoting the Duke Energy brand, increasing the awareness and what customers and users think about the Duke Energy brand for a couple of reasons: 427 One is that, as you'll know from the earlier discussion, we are selling S&T services using the marketing group out of Houston. They are a Duke Energy group, so to the extent that customers and potential customers have a favorable view of Duke Energy, that could translate into additional services as they approach Duke Energy to contract for those S&T services. So that's the first piece. 428 The second piece is that Duke Energy has a very strong view of the company's role in supporting communities. Just to give you an example, they have something called the Duke Energy Foundation where Duke Energy employees, and those would include Union Gas employees, when they make charitable donations, Duke Energy matches those charitable donations one-for-one, dollar-for-dollar, and to the extent that they're making those contributions, again, they would like to see the communities and the end-users of our product think of Duke Energy in a favorable way. So that's really, in our view, what the benefit is. 429 MR. MORAN: All right. And that's why you would say that ratepayers should pay for that. 430 MR. BIRMINGHAM: There is a benefit to Union Gas and Union Gas's ratepayers because of this. 431 MR. MORAN: All right. Would you agree that the Duke Energy brand and the value of that brand is really something that accrues more to the benefit of the shareholder ultimately? 432 MR. BIRMINGHAM: I don't think so, necessarily, Mr. Moran. I grant you that there is, certainly, an element of shareholder benefit to it, but in the first area that I talked about, to the extent that customers and potential customers have a positive view of Duke Energy and want to contract for contract for S&T services, that S&T revenue gets reported on the books of Union Gas. They are subject to the existing deferral accounts, which are shared 75 percent with customers, so there is a direct financial benefit that comes out of that one. 433 And to the extent that customers view Duke Energy favorably and the types of participation they have in our communities then that has had a direct benefit on the end-users that reside in those communities. 434 MR. MORAN: The S&T benefit that you just referred to, wouldn't that benefit be obtained simply through the direct interaction between the entity that actually markets the S&T and its customers? If it does a good job it will have a good reputation, won't it? 435 MR. BIRMINGHAM: I think the issue is one of geography, it depends where those customers are. This is an example where we're promoting this across the DEGT business units, in particular in Canada, so existing and potential Canadian customers will want to use the S&T services that are offered by the Duke Energy Gas Transmission marketing group. 436 MR. MORAN: Okay. If we move to the next heading, government relations, there's a number of bullet points there: Provide strategic advice on all issues related to the Ontario provincial government; maintain effective network of contacts and knowledge of government processes; device and implement plans to advance corporate interest on policy and legislative matters related to distribution, storage and transmission; and finally, coordinate political contributions. 437 Isn't it fair to say that again, these are activities that are intended primarily to accrue to the benefit of the shareholder? 438 MR. BIRMINGHAM: Again I'd disagree with that, Mr. Moran. As an example of that, the third bullet point, talking about policy and legislative matters related to distribution, storage and transmission, that directly affects the interests of Union Gas, the type of business environment that we operate in. It may even directly affect the legislation that affects the regulation of our company. So to that extent, there's a direct impact on the company and its ratepayers. 439 MR. MORAN: All right. And to the extent that you're engaging with government on initiatives that government might be thinking about, isn't it fair to say that the company will look at it from the perspective of what it means for the company and ultimately what return it can give to its shareholder and what effect that might have on that return? 440 MR. BIRMINGHAM: That would certainly be one dimension of it, but the other key stakeholders in this, certainly from the company's standpoint, are our customers and our employees. Maybe, again, an example might be helpful in this regard. 441 When I take a look at something like Bill 23 which then contemplated the prospective recovery of deferral account balances, while there may be a company benefit to the extent that we aren't put through the pain of retroactive charges and their related collection, there is also a benefit to the ratepayers because we've heard customers' displeasure with that. And there's also a benefit to the employees because when they are out in the communities and end users are upset about things like retroactive charges, they are one of the groups that pay the price for that. 442 MR. MORAN: All right. Why should ratepayers have to pay for an activity in relation to the coordination of political contributions? 443 MR. BIRMINGHAM: Well, again, I think generally, to the -- first of all, there's an effectiveness issue with respect to the coordination of political contributions that would make the costs that Union Gas would incur more effective and at the lowest cost possible to achieve whatever outcome is intended from them. And I think, again, this is something that goes to ultimately how the Union Gas's business environment and the effect on its ratepayers are determined. So it's just one more influence on that overall environment, which does affect ratepayers. 444 MR. MORAN: And all of this, of course, is in the context where the rates are not actually set by the government, they're set by the Ontario Energy Board; right? 445 MR. BIRMINGHAM: Oh, yes, absolutely. But they're set in the context of a business environment as well. 446 MR. MORAN: All right. What expertise does DCAN have, based as it is in Vancouver, with respect to relationships with the Ontario provincial government that Union itself wouldn't already have at Chatham? 447 MR. LAFORET: And what I would cover on this, and this is somewhat similar to the comments I made with regards to the environmental health and safety and earlier comments about how we transition where there is a reduction of activity within Union, and then that service provision was picked up by the affiliate. So when I look at schedule 5 for external relations, also known as the public affairs group, Union did have a role for a director of public affairs which was eliminated as part of the transition and, once again, some of that activity and responsibility was picked up by the DCAN organization. 448 With regard to government relations, they are providing policy, direction, and advice to an individual to our -- to Union's director of government affairs, so Union, once again, in terms of the sharing of services, still has an individual who is responsible for that interaction in Ontario with the Ontario provincial government, and they, then, have a direct line reporting relationship to the DCAN vice-president of public affairs, who then provides support, management, strategic advice on government relations. And once again, Union's director of governmental affairs then takes that and manages the relationship specifically within the Ontario framework. 449 MR. MORAN: All right. While we're on the issue of external relations, could you turn up schedule 5 to appendix M2, again Exhibit D.1, tab 14, appendix M2 and that's at page 20. 450 MR. LAFORET: Yes, I have that. 451 MR. MORAN: Now, this is a schedule to the agreement between Union and Duke Energy Business Services LLC. Duke Energy Business Services LLC, is that what we've been referring to elsewhere as DCC? 452 MR. LAFORET: Yes, Duke Corporate Centre or DCC. 453 MR. MORAN: So just to be consistent we can refer to this as the service provided by DCC? 454 MR. LAFORET: Yes, that would be appropriate. 455 MR. MORAN: Again, when you look at the specific services that are listed, there's not much detail set out in the list of specific services. If you look at what's actually there there's things like brand management, brand management education, media relations training, employee communications, and so on, all of which are also addressed under the appendix M1 schedule. What's being added by DCC to the DCAN service? And just before you answer that question, where -- could you just remind me where DCC is located? 456 MR. LAFORET: DCC, the Duke Corporate Centre is out of Charlotte, North Carolina. 457 MR. MORAN: Thank you. So my original question: What's added by the folks in Charlotte that isn't being done by the folks out of Vancouver or Chatham? 458 MR. LAFORET: Yes, and one of the things as you go through and primarily as -- or as you go through the appendix M1, which is our agreement with Westcoast Energy, M2, which is with DCC, and M3, which is Duke Energy Gas Transmission out of Houston, is in terms of the wording there would be an apparent overlap of some of the services or some of the same references are used. 459 This, once again, goes back to how we structured some of the work or -- how the costs would flow. What this represents is support that's being provided by Duke Energy Corporate Centre to the Westcoast or to the DCAN public affairs group, and also some services that are being provided directly to Union Gas or that Union benefits from in terms of information that they put on the Duke portal, the web site that all the employees have, and the press releases that they do and distribute. 460 So that being said, what we had looked at as one model is that the Duke Energy Corporate Centre is providing these services and would charge DCAN. DCAN would then receive that charge and reallocate those costs back out to Union and that's where we get into that long route of how the costs flow. And what we had said is that if Union's benefiting from services being provided by DCC, whether they're in support of DCAN that then provides services to us or directly in support, that cost will come directly from Charlotte to Union even though some of the support that they're giving in terms of brand management and media relations governance may be more direction that they give to our vice-president of public affairs in Vancouver, who then uses that to provide service to Union. 461 Once again, I think I've gone rather long and roundabout on this. One of the other things that we did was to make sure that Westcoast was not also getting charged by DCC and then passing that cost back to Union. So one of the things that the controller's group said was that, If Charlotte's charging you direct leer for that service, then Westcoast won't be picking up anything and also loading that on. So it goes once again back to the provider's cost that that's all Union's paying. 462 So maybe I should summarize this to make it a bit easier to deal with. 463 MR. MORAN: I think I've been following you. 464 MR. LAFORET: The wording is the same but it is different services, and it's different in terms of these relate to what they're providing to Westcoast who helps us, but they charge us directly for them. 465 MR. MORAN: Right. So if I understand you correctly, the external relations originally done in-house at Chatham, there's now been some role reduction and as a result of the shared-services model, the people left in Chatham who deal with this issue interact with the folks in Vancouver who, in turn, interact with the folks in North Carolina, and out of that arrangement comes a couple of charges back to Union, one from North Carolina and one from Vancouver. 466 MR. LAFORET: That would be the short, snappy response, yes. 467 MR. MORAN: Okay. I think I have it, thanks. 468 If we could then turn to schedule 8, going back to appendix M1, that's at page 27 of 33. 469 MR. LAFORET: Page 27, yes. 470 MR. MORAN: This is the information technology infrastructure or ITI services. This is a charge of about $1.1 million per month as I see at the end of the schedule. Does the service provided under this schedule have anything to do with the Sapient project that is also the subject of this hearing, the upgrades to Union Line and to accommodate GDAR and the rate rider issue? 471 MR. LAFORET: I just want to be careful about how I respond to this. I don't know the details of the Sapient project. What this service schedule refers to is, I guess, the standard package of services that Union receives for the day-to-day operation of its information technology infrastructure, so it's support in terms of our telecommunications systems, our radio systems, our computer desktops, the hardware and software within the company, and keeping that infrastructure going. 472 Something such as the Sapient, once again, not knowing too much of the details, would be a project specific that would not be within this package of services. 473 MR. MORAN: If you could just turn -- 474 MR. BIRMINGHAM: Mr. Moran, maybe I could just help you out a little bit, because I am the receiver contact on this schedule, as you'll see. 475 Just in further clarification in our response to J.26.75, you'll see that we have four areas within IT, and on the top of page 2 is a description of the information technology infrastructure group and that is the group of services that is being covered under this schedule 8. Back on page 1 of that same exhibit, on the very bottom is a function called information systems which provides software development and support for applications, and it's really that group that deals with the programming changes that are required to implement GDAR and the rate rider functionality. 476 MR. MORAN: I'm sorry, I'm looking at J.26.75, and which group did you identify as dealing with that issue? 477 MR. BIRMINGHAM: The one on the bottom of page 1 called, "Information Systems" is the group that deals with the software development and applications. And then over on page 2 of that same exhibit, you'll see the description of the information technology infrastructure group, and it's that group and that grouping of services that is then covered under schedule 8 of Exhibit D.1, tab 14, appendix M1, page 27. 478 MR. MORAN: All right. So if the Sapient project to upgrade Union Line is dealt with by the information group, then what you're telling me, I think, is that this schedule doesn't involve any services in relation to that; is that correct? 479 MR. BIRMINGHAM: That's correct. The only relation it has to it is at some point, as our system applications grow, there may be a requirement for upgraded or replacement hardware, servers, as an example, and that's when the information technology infrastructure services group would become involved, but it's an indirect relationship, not a direct one. 480 MR. MORAN: So, again, just turning back to schedule 8 and turning over the page to page 28, the top bullet point entitled, "Projects provide project resources and project management," that doesn't have any relationship to the proposed Union Line upgrade project? 481 MR. BIRMINGHAM: No, it doesn't. 482 MR. SOMMERVILLE: Mr. Moran, we have an external driver to some extent that requires us to be somewhere in about five minutes ago. 483 MR. MORAN: This would be a convenient point, Mr. Chair. 484 MR. SOMMERVILLE: So we'll adjourn to take up your further cross-examination and the confidential cross-examination of Mr. Dingwall will be undertaken after lunch. 485 I'm going to be asking Mr. Wightman and Mr. Moran to ensure that handling of the confidential transcript and recording and all of that material is handled according to Board requirements, and Mr. Penny, I would invite you to ensure that you're comfortable that that has, in fact, been accomplished so that we don't have any problems. 486 MR. PENNY: Yes, thank you, Mr. Chairman. I had actually jotted down from our perspective and from what I understand the ADS concern is, the key elements are that no one other than Mr. Dingwall and the applicant and Board and Board Staff and counsel would be present, that it wouldn't be broadcast, that there be a separate transcript prepared marked in-camera, which would not be circulated except to those that I have listed. I think those would be the essential elements. There may be some other bits and pieces but I'll talk to Mr. Moran about that. Thank you. 487 MR. MORAN: That's right, and Mr. Penny has provided me with three packages of the confidential material, one for staff and one for each of you. 488 MR. SOMMERVILLE: Thank you. We'll stand adjourned until 2:00. 489 --- Luncheon recess taken at 12:35 p.m. 490 --- On resuming at 2:02 p.m. 491 MR. SOMMERVILLE: Please be seated, thank you. 492 Mr. Moran. 493 MR. MORAN: Thank you, Mr. Chair. 494 Panel, if you could turn now to D.1, tab 14, appendix M2, just continuing on the comparisons that we have already discussed somewhat before lunch. Looking at schedule 1, at page 13, this is the service schedule that deals with audit services that Union receives from DCC; right? 495 MR. LAFORET: Yes. 496 MR. MORAN: All right and there's three bullet points setting out what the specific services are. Now, again, if you could just turn up schedule 1 under M1, which is also a schedule that deals with audit services, but this time provided by DCAN to Union; right? 497 MR. LAFORET: Yes, that's correct. 498 MR. MORAN: All right. In looking at these two schedules, is your answer going to be the same as it was previously that this is the path that's traced from Chatham to Vancouver to North Carolina? 499 MR. LAFORET: Yes, it would follow that same. 500 MR. MORAN: All right. And I guess we could go through a number of these but essentially that's the relationship between M1 and M2 overall; right? M1 deals with the services provided from Vancouver to Chatham; right? 501 MR. LAFORET: Yes. 502 MR. MORAN: And M2 deals with the services provided out of North Carolina, but the linkage is through Vancouver but the charge is direct. 503 MR. LAFORET: Yes, in terms of the services from DCC, some of those would follow that flow from Charlotte to Vancouver to Union in terms of that service activity. Some of the services though out of DCC also come directly to Union. So there are some that come direct and there are some relate to what we discussed earlier. 504 MR. MORAN: All right. And maybe I could just touch on a couple more examples, again just to see how this fits together. If you look at M1 at page 15, looking at schedule 2, corporate services. 505 MR. LAFORET: Yes. 506 MR. MORAN: And included in corporate services, we have library services; right? 507 MR. LAFORET: Yes, that's correct. 508 MR. MORAN: Document management? 509 MR. LAFORET: Yes. 510 MR. MORAN: And turning over the page, graphics services? 511 MR. LAFORET: Yes, that's correct. 512 MR. MORAN: And then if you turn to M2 at page 16, which is part of schedule 2 under the contract with DCC, also dealing with corporate services. 513 MR. LAFORET: Yes. 514 MR. MORAN: So at page 16 under office services you can see a reference to library services and records document management and record services. In what way are these not overlapping, if I might put it that way? 515 MR. LAFORET: In terms of these activities, the ones under the M1, the corporate services that are provided there, those relate to the support services that are provided by the DCAN corporate services group to the other functional groups that are located in Vancouver that then support Union. So it's providing those services to those functional groups and then passing that cost to Union. 516 The services from Duke Energy Business Services under that then refer to more of that management oversight and direction relating to these types of activities. 517 MR. MORAN: Did you get this kind of management service from Westcoast prior to the Duke acquisition? 518 MR. LAFORET: No, we did not. That was located within Union Gas. 519 MR. MORAN: Thanks. Okay. Then there's just one last area in this part that I want to touch on and that has to do with -- starting with schedule 7 under M1, that is human resources, page 25. M1, page 25. 520 MR. LAFORET: Yes. 521 MR. MORAN: And again, there's a list of specific services that relate to human resources as they are provided to Union by DCAN; right? 522 MR. LAFORET: Yes, that's correct. 523 MR. MORAN: And then if we turn to M2, page 24. 524 MR. LAFORET: Yes. 525 MR. MORAN: M2, page 24 is schedule 9 that deals with human resources that are also charged to Union by DCC; right? 526 MR. LAFORET: Yes, that's correct. 527 MR. MORAN: Okay. And if you go to M3 at page 18. 528 MR. LAFORET: Yes, I have that. 529 MR. MORAN: We have a schedule 4 that's also dealing with human resources, but this time provided to Union or charged to Union by DEGT. So this is an example now where we have three service providers. Do we now trace the path by going a bit further south to Houston to trace how this all works its way down to Chatham in terms of the services provided, or is there something different going on? 530 MR. LAFORET: That would be correct that you trace back through. So Westcoast Energy is the provider of a number of the services that Union actually receives with regard to human resources. 531 MR. MORAN: That's DCAN. 532 MR. LAFORET: So that's the DCAN. That function within DCAN reports to a role within Duke Energy Gas Transmission, and so that's where they then receive management oversight and direction with regards to that activity for all of the Duke Energy Gas Transmission business entities, including Union. And then when we return to appendix M2, schedule 9 for the Duke Energy Corporate human resources, that's what brings it up to that top tier of the Duke Energy overall corporate strategy approach as such. 533 The one that I would identify specifically out of the schedule 9 is that the fifth bullet point under the specific services which is the HRMS system. Union Gas utilizes the PeopleSoft system for its human resources system and previously was paying a licence fee directly to PeopleSoft for use of that system which was in the range of $200,000 a year. We are now rolled under the licencing agreement that Duke has and we are being billed, I believe it's approximately 50,000 U.S. a year for our share of that licence. So that is one where we're getting something direct versus the tiered for the other services. 534 MR. MORAN: Okay. And then just while we're on human resources, if you could turn up M4 at page 15. 535 MR. LAFORET: Yes, I have that. 536 MR. MORAN: Unlike the other three agreements, this is an agreement that is dealing with outbound services; is that correct? 537 MR. LAFORET: Yes, that's correct. 538 MR. MORAN: So in this particular situation we have human resources services being provided by Union Gas to B.C. Pipeline and Field Services. 539 MR. LAFORET: Yes, that's correct, that's what's here. 540 MR. MORAN: Now, how does that all fit into the overall scheme or the managed -- or the shared-services model that allows other companies to charge you to do things, and how does that relate to when you do something for someone else? 541 MR. LAFORET: Yeah. Under the shared-services structure, as we've described, some service activities are reduced within Union and replaced by services from other affiliates. With regards to the benefits administration, that is one where the ultimate service on a Canada-wide basis was retained within Union Gas, and Union then became the provider of that service to other affiliates. 542 So for instance out in DCAN, they no longer do benefits administration, they had the reduction in roles and the reduction in cost and reduction in activity and are no longer doing that. Union now does benefits administration for all the Canadian business entities and then charges out to recover our costs for doing the work for them. 543 MR. MORAN: Thank you. And then my last specific question on schedules relates to M3, schedule 2. And you'll find that starting at page 14 of M3. 544 MR. LAFORET: The engineering service schedule. 545 MR. MORAN: The engineering services, and this is provided by DEGT; right? 546 MR. LAFORET: DEGT Houston. 547 MR. MORAN: Out of Houston. And I think you indicated earlier that the services provided here supplement or support or sometimes take on entire projects; is that right? 548 MR. LAFORET: Yes, that's correct. 549 MR. MORAN: And in terms of what you're forecasting in relation to this particular service for the year 2004, do you have a specific list of projects that are administered under this contract? 550 MR. LAFORET: Not that I have. This is something that would have been worked out or developed between the service provider, being the vice-president of engineering out of DEGT and the receiver contacts which are listed, our project director and our director of engineering services and such within Union, but I don't have anything that states which projects are involved. 551 MR. MORAN: Is the -- 552 MR. LAFORET: And the one thing though is that it does tie in or is consistent with the capital budget or the capital planning for 2004. 553 MR. MORAN: All right. So I can follow that up with another panel, that's fine. Thank you. 554 Now moving on, you've indicated that one of the savings has to do with the role reductions as a result of the shared-services model; is that right? 555 MR. LAFORET: Yes, that's correct. 556 MR. MORAN: And if we could just start with J.34.98 and while you're getting that if you could just have Exhibit N.6.11 handy as well. 557 MR. SOMMERVILLE: J.34 -- 558 MR. MORAN: Point 98. And Exhibit N.6.11. This is going to be really the only other exhibit I'm going to be referring to, Mr. Chair. 559 So J.34.98, I should have said "corrected," and then the undertaking exhibit N.6.11. 560 So then just looking at that then, starting with J.34.98, this is the interrogatory response that traces the change in the number of employees over a number of years; right? 561 MR. LAFORET: Yes. 562 MR. MORAN: Okay. And if we look at the total number, the total employees column, C, in the first page of that exhibit, do I understand it correctly that when we look at what happened in 2001 versus 2002, the reduction that you see there from 2,772 down to 2,469 that this was, at least in part, as a result of going to the shared-services model? 563 MR. LAFORET: Yes, at least in part in going to the shared services. 564 MR. MORAN: And I think there was a reference to a number of 142 being the specific component, did I understand that correctly? 565 MR. LAFORET: Yes, that's the number that we had come up with. 566 MR. MORAN: All right. So there's a reduction of 142 in employees as a result of the shared-services model? 567 MR. LAFORET: Yes, related to the functional groups and tied to the shared services. 568 MR. MORAN: All right. And were these employees part of the voluntary early-retirement program that took place around that time or was that a different program? 569 MR. PENNY: That was 1999. 570 MR. LAFORET: My understanding of it is that there was no voluntary-retirement program related to the -- 571 MR. BIRMINGHAM: The last time that we had a voluntary early-retirement program, Mr. Moran, was with respect to the reorganization that we did in 1999. 572 MR. MORAN: All right. And so when we look at the 1999 number of 2,891, is that before or after that voluntary early-retirement program? 573 MR. LAFORET: That should represent a number after that program because what we looked to provide here was a December 31st or a year-end number. 574 MR. MORAN: Okay. 575 MR. LAFORET: One of the things that I'll put in there, and we had discussed before, is that my accounts were based on the number of roles identified on the PeopleSoft system, whether they were filled or vacant. So this may still have some roles included in there that the person had already left the company but that was still being counted by the PeopleSoft system as a vacancy. 576 MR. MORAN: Okay. Thanks. 577 And if we turn to Exhibit N.6.11, if we're looking at page 3 of 3, the effect of the shared-service model is reflected in the data that we see on that table when we compare 2001 to 2002? 578 MR. LAFORET: Yes, the difference between the 2001 actual and the 2002 actual, in part, reflects the impacts of the shared services. 579 MR. MORAN: Thanks. 580 Now, in making these reductions, I assume there were some severance costs associated with those reductions? 581 MR. LAFORET: Yes, there were. 582 MR. MORAN: Okay. And those would be for the ones who actually lost their jobs, but I think you indicated some of them actually ended up transferring to other companies and continuing employment with the service provider. 583 MR. LAFORET: Yes, that's correct. 584 MR. MORAN: And did any of those ones who didn't transfer to a service provider, who actually were terminated, end up taking or qualifying for early-retirement benefits, that you know of? 585 MR. LAFORET: That, I don't know. 586 MR. MORAN: Okay. If you could just turn up Exhibit D.1, 14, appendix K, the updated. 587 MR. LAFORET: I have that. 588 MR. MORAN: You have that? I wonder for the line items, just the titles that you have there, corporate services, engineering and procurement, et cetera, if you could provide a table that would breakout that total reduction associated with moving to the shared-services model, how many employees are attributable as a reduction of employees for each of those lines, and as part of the exercise, if you could indicate which of those reductions actually ended up being transfers to the service provider. 589 And for the ones that weren't transferred to a service provider, if you could provide the severance and pension costs associated with those employees. 590 MR. PENNY: Sorry, just so I'm clear, Mr. Moran, what do you mean by pension costs? 591 MR. MORAN: Any of the employees who were terminated but qualified for pension benefits which are now reflected in the pension expense, early-pension retirement. 592 MR. PENNY: I'm not sure there is any, but we'll include that in the mix. 593 MR. MORAN: To the extent that there are. 594 MR. LAFORET: To the extent that that exists. 595 MR. BIRMINGHAM: So Mr. Moran, just to be really clear about that last one, you want us to identify any employees who were either eligible to retire at the time of the role reduction or that we made some bridging arrangement to allow them to retire at the time of the role reductions. 596 MR. MORAN: That's right and the associated cost that goes with that. 597 MR. BIRMINGHAM: Fair enough. 598 MR. MORAN: Mr. Chair that would be Undertaking N.13.2. 599 MR. SOMMERVILLE: Thank you. 600 UNDERTAKING NO. N.13.2: TO PROVIDE A TABLE THAT WOULD BREAKOUT TOTAL REDUCTION ASSOCIATED WITH MOVING TO THE SHARED-SERVICES MODEL, HOW MANY EMPLOYEES ARE ATTRIBUTABLE AS A REDUCTION OF EMPLOYEES FOR EACH OF THOSE LINES, WHICH OF THOSE REDUCTIONS ENDED UP BEING TRANSFERS TO THE SERVICE PROVIDER; AS WELL, AS FOR THE ONES THAT WEREN'T TRANSFERRED TO A SERVICE PROVIDER, PROVIDE THE SEVERANCE AND PENSION COSTS ASSOCIATED WITH THOSE EMPLOYEES; AS WELL, A FURTHER BREAKOUT OF THE EMPLOYEES TO REFLECT THE ONES WHO TRANSITIONED OUT OF UNION TO ONE OF THE SERVICE PROVIDERS WHO ARE STILL LOCATED IN CHATHAM, AND HOW MANY NEW PEOPLE FROM THE SERVICE PROVIDERS ARE NOW LOCATED IN CHATHAM AS WELL 601 MR. MORAN: If you could turn up Exhibit J.1.23. And this section, I misled you, Mr. Chair, I said I wasn't going to refer to any more exhibits, there was one more. J.1.23. 602 My questions relate to the release of assets that you don't need that are marketing on your behalf by, I guess, Houston; is that right? 603 MR. LAFORET: Yes, that's correct. 604 MR. MORAN: And as I understand it, what we see in this exhibit is at least those -- that part of those transactions that involve related parties. 605 MR. BIRMINGHAM: For the year 2002, that's right. 606 MR. MORAN: For the year 2002. 607 So just so I understand the process, Union has assets which it determines it doesn't need, it releases those assets to the affiliate, the affiliate undertakes to market them on behalf of Union; is that correct? 608 MR. BIRMINGHAM: That's correct. And to that extent, to the extent there's a successful marketing of those assets then that revenue is recorded on Union Gas's books. 609 MR. MORAN: And into the deferral account and shared with ratepayers on a 75/25 split; right? 610 MR. BIRMINGHAM: That's right. 611 MR. MORAN: And in exchange for that they charge a fee and that's what we see in the service schedules; right? 612 MR. BIRMINGHAM: That's right. 613 MR. MORAN: So when an affiliate or a related party is interested in the assets that have been released by Union, what assurance do you have that the service provider won't turn those over to an affiliate at a lower than market price allowing the affiliate then to flip it in the market? 614 MR. BIRMINGHAM: I'd say there's at least three things that give us that assurance, Mr. Moran. The first one is the master services agreement with the service provider that indicates that they have to follow all of the company's policies. 615 The second is the company's code of business ethics which lays out the company's policies around protecting confidential information and giving non-preferential access to affiliates. 616 And third, those employees are governed by the FERC, the Federal Energy Regulatory Commission's, code of conduct which also indicates that they can not give preferential access to assets by affiliates. 617 MR. MORAN: Then leading to a more general question with respect to the shared-services model, you have, as I understand, the affiliates will actually tell you what the fee is; right? And that's as a result of a process that they carry on internally to determine what's appropriate to allocate to Union; is that right. 618 MR. LAFORET: Yes, that's correct. 619 MR. MORAN: And that's passed on in the service schedule, and as I understand it you do something that you call a reasonableness check to make sure that you're okay with the price; right? 620 MR. LAFORET: Yes, that's correct. 621 MR. MORAN: All right. Do you have any audit rights so that you can go to the affiliate and say, Well I'd like to send in an auditor and make sure that in fact what you're charging us is a fair reflection of what you allocated to us? When I looked at the master agreements there didn't seem to be any reference to audit rights, but I may have missed something. 622 MR. PENNY: That was a generic question about all of the services not just the S&T? 623 MR. MORAN: That was -- the introduction was overall. 624 MR. LAFORET: Yeah, there's not wording in the master services agreement that would indicate or would provide that right to audit on our behalf. 625 MR. MORAN: And have you ever sought to or requested the opportunity to do an audit of any of the service that are being provided to you to satisfy yourself that in fact what was being allocated was a fair allocation? 626 MR. BIRMINGHAM: No, we haven't. 627 MR. MORAN: And I guess specifically on the S&T services then, I take it you wouldn't have done or requested an audit to make sure that the assets aren't being sold for the most that they can be sold for. 628 MR. BIRMINGHAM: Sorry, that's a different question, Mr. Moran. We were responding to the costs that are being allocated to us pursuant to the service schedules and pursuant to the master services agreement. 629 MR. MORAN: That's right. And now with respect to the revenues that are generated by the -- 630 MR. BIRMINGHAM: With respect to the revenues, when those assets are being sold, there is a one-page summary known as the deal sheet which is effectively the obligation between the Duke Energy marketing group and the customer who's contracting for that service, and it indicates what the price is. And when that deal sheet is struck, that has to be authorized by Union Gas and specifically authorized by Steve Baker under his executive authority for that transaction. 631 So we do get specific authorization rights over each and every transaction. 632 MR. MORAN: All right. So for the S&T, the actual transactions that are done on your behalf, you have the final approval on those transactions? 633 MR. BIRMINGHAM: That's correct. 634 MR. MORAN: Okay. And then leaving that aside, with respect to the service fees that are charged, you haven't done any audits and it doesn't appear that you have audit rights in your service agreements; is that right? 635 MR. LAFORET: I would agree with that. 636 MR. MORAN: Those are all of my questions, Mr. Chair. 637 Sorry, Mr. Wightman is pulling me by the elbow. One last question if I might, Mr. Chair. Sorry. 638 You made a reference to the company's code of ethics, are you talking about Union or Duke or the Duke family code of ethics? 639 MR. BIRMINGHAM: What I was referring to, Mr. Moran, was in response to your question about what assurance do we have that the employees within the S&T asset optimization and marketer services group were going to comply with the company's policies, what that policy was. And the -- what I was referring to was the code of business ethics for Duke Energy. We filed a copy of that attached to Exhibit J.1.122 and you'll see it's quite a lengthy document. It deals with a number of aspects including the accuracy of books and records, affiliate rules, confidential proprietary and personally identifiable information, conflicts of interest and those types of things. 640 MR. MORAN: And -- sorry. 641 MR. BIRMINGHAM: Lastly, if I could just finish that out, on page 5 of that which is section 3 called affiliate rules, there's a number of affiliate rules that Duke Energy employees have to comply with, and the listing there includes the FERC pipeline standards of conduct which is the one that I was referring to that indicates that they cannot give preferential access to their system to their affiliates, and the of course the Ontario Energy Board code which is also listed there. 642 MR. MORAN: So in the context of Duke's code of ethics as you've described it as it relates to the affiliate rules set out in that document and its reference to the FERC affiliate rules, since the acquisition of Union by Duke, are you aware of any investigations or compliance activity involving Duke in relation to those affiliate rules? 643 MR. BIRMINGHAM: Certainly none with respect to Union Gas or with respect to Duke Energy Gas Transmission. To the extent that there are others outside of or within the Duke Energy group of companies outside of the natural gas transmission company, I'm not aware of them. 644 MR. MORAN: And you when you say outside of the natural gas company, are you referring to Union? 645 MR. BIRMINGHAM: No, outside of the Duke Energy Gas Transmission set of companies. So to the extent that they existed within the power side or the trading side or within their capital ventures side, then I'm not aware of any of those. 646 MR. MORAN: Thank you, Mr. Chair. 647 MR. SOMMERVILLE: Thank you, Mr. Moran. 648 Mr. Birchenough has no questions. 649 QUESTIONS FROM THE BOARD: 650 MR. SOMMERVILLE: I have a question with respect to the DCAN organization. Does DCAN have any employees that are resident at Chatham, Ontario? 651 MR. LAFORET: Yes, they do. The first group would be the internal audit group. I believe it's approximately -- it's five people are employees of Westcoast Energy, but their office is located in Union's offices in Chatham. And with regard to information technology infrastructure, some of those employees who are Westcoast employees, are also located in Union Gas's offices in Chatham. 652 MR. SOMMERVILLE: Would they have been Union Gas employees who transitioned to the DCAN organization in connection with the shared-services arrangement? 653 MR. LAFORET: With regard to the internal audit group, they transitioned in 2001 prior to this. 654 MR. SOMMERVILLE: Right. 655 MR. LAFORET: With regard to the ITI group, they started to do some transitioning in late 2001 as part of a project that they were undertaking which then became a fuller scope when the Duke transition started to occur and they went to one group to provide services on a Canada-wide basis. 656 MR. SOMMERVILLE: And those are the only non-Union employees that are resident in Chatham? 657 MR. LAFORET: The other one that comes to mind, which Mr. Birmingham mentioned earlier today, is Mr. Bush, who is our vice- president and controller. 658 MR. SOMMERVILLE: Right. 659 MR. LAFORET: Who is a U.S.-paid employee but has an office in Chatham. 660 MR. BIRMINGHAM: He also resides in Chatham. 661 MR. SOMMERVILLE: Thank you. 662 MR. MORAN: Mr. Chair, I wonder if it would make sense to add to the Undertaking N.13.2, a further breakout of the employees to reflect the ones who transitioned out of Union to one of the service providers who are still located in Chatham, and the flip side, I guess, how many new people from the service providers are now located in Chatham as well. That would seem to cover the field. 663 MR. BIRMINGHAM: We can add that if you'd like, Mr. Moran. I just want to note that both with respect to the internal audit group and the information technology infrastructure group, those initiatives were undertaken well before the Duke Energy purchase was a twinkle in anyone's eye. So the ability to obtain economies of scale through the information technology infrastructure group was an issue we actually undertook almost two years before it was actually implemented. 664 So I just want to be clear that we can indicate that, but those movements were independent of the shared-services model that we adopted when Duke Energy purchased us, but it was good that we had done them because they fit nicely with the Duke Energy model. 665 MR. SOMMERVILLE: I think it would be helpful if you could provide that qualification on the undertaking. 666 MR. BIRMINGHAM: Okay, we can do that. 667 MR. SOMMERVILLE: Mr. Penny. 668 MR. PENNY: Thank you, Mr. Chairman, I just have a few questions in re-examination on this portion of the hearing. 669 RE-EXAMINATION BY MR. PENNY: 670 MR. PENNY: With respect to some questions early on in Mr. Warren's cross-examination and some others had touched on this as well, you gave evidence about the Duke shared-services model and how the adoption of Duke companies by this model was the expected norm. My question is simply this, in relation to the specific services that you ended up contracting for: Would Union have agreed to contract for these services without the demonstrated benefits in the form of reduced costs that were below Union's avoided cost? 671 MR. BIRMINGHAM: No, we wouldn't. The underlying premise, as I tried to explain earlier, was that the shared-services model would reduce costs, and that has been Duke Energy's experience with that model. To the extent that we adopted in our cost increase, then we'd be looking for a different way to provide those services. 672 MR. PENNY: All right. Thank you. 673 And then Mr. Brett had asked you a number of questions about the service schedules and in particular, M2, 3, 4, and 5. And the questions were around whether Union could find that kind of -- I think Mr. Brett said "that kind of service" in the market. And I just wanted to ask the more specific follow-up question: Is Union able to acquire the particular level of service it needs, such as are reflected in the service levels in these agreements? Is Union able to acquire those particular services and level of service readily from the market and if not, why not? 674 MR. BIRMINGHAM: I would say generally speaking, we wouldn't be able to. And the reason for that really goes to the description that Mr. Laforet was giving to Mr. Moran under his cross-examination with respect to how the services have been divided up. The services used to be almost entirely within Union Gas, and under the Duke shared-services model we've taken certain aspects of that and had them provided by one or more service providers, and that's typically not the way the market would organize or bundle the services and then charge the service providers. 675 So the way that services are being provided with some of a particular function remaining inside Union and then the remainder of the necessary services being provided by one, two or three service providers is a fairly unique situation and we argue that that's a very difficult configuration to define in the market. 676 MR. PENNY: All right. Thank you. Then Mr. Brett had also asked, I think this was in particular reference to the S&T, but then, at least it started out in particular reference to the S&T group in Houston, but I think it was also a more general question, how does Union ensure that it gets the service level that it needs? 677 And my question by way of follow up is whether Union has experienced any decline in the level or quality of service since it began participated in this shared-service model? 678 MR. BIRMINGHAM: We have not, and generally, that's, in my view, because the way that we have set out the services, both with respect to the commitments that are in the service-level agreements and the very practical way that we manage it, which is to have regular meetings just like we did when the services were entirely within Union Gas, to ensure that the service levels are being met is really the practical application of that model and we haven't seen a decline in the services. 679 MR. PENNY: All right. Then both Mr. Dingwall and Mr. Moran asked some questions about the S&T group and I think Mr. Dingwall's questions, and someone else touched on this but I've forgotten who it was, some discussion around credit worthiness in relation to the controller's function. You've already indicated to Mr. Moran a few minutes ago that Mr. Baker has the ultimate authority to enter into the contracts. Can I just, on that point, ask you to confirm who are the counterparties to an S&T transaction that is facilitated by the S&T group in Houston? Are the counterparties DEGT and the third party, or are the counterparties Union and the third party? 680 MR. BIRMINGHAM: The counterparties are the customer and Union Gas, and DEGT is simply providing a marketing service. 681 MR. PENNY: All right. And then coming back to the controller function, what role does Union's finance group play in the assessment of Union's credit exposure to S&T counterparties? 682 MR. BIRMINGHAM: Well, in the context of offering services, whether that's S&T or any other type of service we would offer a customer, it's the controller's group inside Union Gas who tracks the credit worthiness of customers, tracks the amount of credit they have used up, and when an incremental transaction opportunity is presented to us, they are the ones that calculate whether it can fit within the current credit limits or whether additional collateral would be required from that customer. And that would hold true for the S&T transactions as well. 683 MR. PENNY: And this may flow from what you just said, but does Union's credit assessment play a role in whether Mr. Baker approves a particular transaction? 684 MR. BIRMINGHAM: Yes, it does, directly, because one of the things that Mr. Baker will do is ensure that through our controller's group, that customer has adequate credit to be able to offer them this transaction. 685 The only exception I can think of, Mr. Penny, is to the extent that it's a customer that Union Gas has not dealt with before, but may be a customer of Duke Energy Gas Transmission, Union's controller's group may go to the Houston controller's group and get that credit information from them in the first instance. But in the end, it will be the Union Gas controller's group that would indicate to Mr. Baker whether that transaction should go forward under the existing credit arrangements or whether additional credit arrangements are required. 686 MR. PENNY: All right. So just to close the loop on that then, what happens if a proposed contract does not meet Union's finance group's credit requirements? 687 MR. BIRMINGHAM: Then we either obtain additional credit or collateral from the customer or the transaction does not go forward. 688 MR. PENNY: Thank you. 689 When -- in answer to a question from Ms. Singh on behalf of CME that related to some checks and balances around the cost-based -- the cost basis of the affiliate transactions, you had mentioned the tax authorities were a regulatory body that had oversight with respect to the affiliate transactions. Can you explain what role the tax authorities pay with relation to the affiliate transactions and what the risk is if the affiliate doesn't charge at its real cost? 690 MR. BIRMINGHAM: The tax authorities require an appropriate methodology to be used for the pricing between affiliates. The reason for that is, I think you can probably come up with yourself, to the extent that an organization wanted to charge one of their affiliates a particular price, they could price that in a way that would give the most taxable income in the jurisdiction that had the lowest tax rates. So one of the things that the tax authorities want to make sure is that, in fact the fully-loaded cost for the service provider is being charged for the service to make sure that there isn't any gaming, if you will, between tax jurisdictions. 691 The methodology that we're using with respect to the services that we are receiving from our affiliates and the methodology that we're using to provide services to our affiliates meet with the approval of the tax authorities and agree with their methodology. 692 MR. PENNY: And what's the risk if that -- if that methodology isn't followed? 693 MR. BIRMINGHAM: Well, clearly the risk is that the deductions for these costs would be disallowed and would effectively result in the double taxation of these transactions in each country. 694 MR. PENNY: All right. Thank you. 695 My final question arises out of some answers to both Mr. Moran and an earlier examiner about the 142 reductions as a result of the shared-service model. With respect to the transfers, first of all, as opposed to the terminated employees, with transfers, are there severance costs associated with that? 696 MR. LAFORET: With regard to the transfers, that's just the movement of them from the Union Gas payroll system to the Westcoast Energy payroll system. So there's no severance or other cost related to that. 697 MR. PENNY: And in respect to employees who were terminated and in respect of employees where there were severance costs, those were -- when were those incurred and who bore those costs? 698 MR. BIRMINGHAM: They would have been incurred in 2002, and they would have been borne by Duke Energy to the extent that they ended up forming part of the purchase transaction and the accounting for that transaction. So just to be clear on that, Mr. Penny, the severance costs for individuals who are in roles were, in fact, not recorded on the books of Union Gas but rather accounted for in the context of the purchase transaction. 699 MR. PENNY: All right. Thank you, Mr. Birmingham and panel, those are all my questions in re-examination. 700 Thank you, sir. 701 MR. SOMMERVILLE: Thank you. We will now proceed to the in-camera cross-examination portion. 702 Madam Reporter, do you need to do anything particular? Do you need to stand down for a minute? 703 MR. MORAN: Mr. Chair, I think you do, though, you have to go off air otherwise we'll be broadcasting throughout the building and over the web. 704 MR. SOMMERVILLE: Thank you. 705 MR. PENNY: Does that mean it doesn't go to the telephone lines or anything? 706 Mr. Chair, I think the only people in the room are the people we contemplated. The gentleman in the back, Mr. Caddotte, is with Union Gas. 707 MR. SOMMERVILLE: I gathered that. You're comfortable that there's nobody here that ought not to be? 708 MR. PENNY: Yes. 709 MR. SOMMERVILLE: Nobody hiding in the back? 710 MR. PENNY: Probably not. 711 [In-camera session commenced at 2:46 p.m.] 712 [In-camera session ended at 4:50 p.m.] 713 PROCEDURAL MATTERS: 714 MR. SOMMERVILLE: So we'll come back on to the public portion, Madam Reporter, and my experience in this goes back and it was a little bit more complicated than it appears to be now. 715 So we're back on the air. Mr. Dingwall, in the course of the confidential portion of this proceeding, you proffered a document, that was your materials for cross-examination. Is it your desire to have that document placed as an exhibit in the public record? 716 MR. DINGWALL: Yes, it is, sir. 717 MR. SOMMERVILLE: Mr. Wightman, I wonder if we could give that document an exhibit number in the public record. This is the Energy Probe Cross-Examination Materials, the Union Gas affiliate panel. 718 MR. PENNY: M.13 something. 719 MR. WIGHTMAN: M.13.2. 720 MR. SOMMERVILLE: Thank you very much. 721 EXHIBIT NO. M.13.2: ENERGY PROBE CROSS-EXAMINATION MATERIALS 722 MR. PENNY: Mr. Chairman, may I just thank Mr. Dingwall and Mr. Shepherd, in his absence, for their cooperation in developing an expeditious means of dealing with this issue. 723 MR. SOMMERVILLE: Let me add my voice to that course. These things can be exceedingly awkward, and I would like to thank all of the parties for the very cooperative means of handling it. It's much appreciated, it makes our life a lot easier, certainly. 724 Is there anything that we need to deal with before we adjourn for the day? 725 Mr. Penny, what panel will we be seeing on Monday morning? 726 MR. PENNY: That will be the Capital Additions and some miscellaneous rate base issues. 727 MR. SOMMERVILLE: So we'll adjourn until Monday morning at 9:30. I'd like to thank the panel for its contribution in this manner and I hope you have a safe trip back to Chatham. 728 Thank you very much. 729 --- Whereupon the hearing was adjourned at 4:55 p.m.