Rep: OEB Doc: 12WWC Rev: 0 ONTARIO ENERGY BOARD Volume: 15 28 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 28 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff CHRIS MACKIE Board Staff MICHAEL PENNY Union Gas Limited CRAWFORD SMITH Union Gas Limited MARCEL REGHELINI Union Gas Limited MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association PETER SCULLY City of Timmins, City of Sudbury, FNOM ROBERT ROWE Enbridge Gas Distribution Inc. PETER THOMPSON Industrial Gas Users Association VINCENT DeROSE Industrial Gas Users Association ROBERT WARREN Consumers Association of Canada JAY SHEPHERD Ontario Public School Boards Association MICHAEL JANIGAN VECC 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [20] UNION GAS LIMITED - PANEL 9; HYATT, FAY, SANDERS, SHERVILL [34] CROSS-EXAMINATION BY MR. AIKEN: [39] CROSS-EXAMINATION BY MR. DINGWALL: [190] PRELIMINARY MATTERS: [230] UNION GAS LIMITED - PANEL 9; HYATT, FAY, SANDERS, SHERVILL [249] CROSS-EXAMINATION BY MR. DINGWALL: [254] CROSS-EXAMINATION BY MR. MORAN: [377] RE-EXAMINATION BY MR. SMITH: [524] PROCEDURAL MATTERS: [537] UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT [558] EXAMINATION BY MR. PENNY: [563] CROSS-EXAMINATION BY MR. WARREN: [593] CROSS-EXAMINATION BY MR. JANIGAN: [736] CROSS-EXAMINATION BY MR. THOMPSON: [807] CROSS-EXAMINATION BY MR. SHEPHERD: [1239] 10 EXHIBITS 11 EXHIBIT NO. M.15.1: CIS BUSINESS SERVICES AGREEMENT BETWEEN UNION GAS LIMITED AND ENLOGIX CIS INC., DATED FEBRUARY 23RD, 1998 [224] EXHIBIT NO. M.15.2: EXAMPLE OF UNION GAS BILL [369] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.15.1: TO PROVIDE A), THE NUMBER OF LINES THAT ARE AVAILABLE IN AREA A OF EXHIBIT M.15.2 USING THE CURRENT CIS ASSETS; B), THE SYSTEM MECHANICS REQUIRED TO PRODUCE THE TWO LINES THAT WE SEE IN AREA A IN EXHIBIT M.15.2 FOR GAS AND FOR DELIVERY AND WHETHER THE SAME SYSTEM MECHANICS CAN BE USED INSTEAD OF A RATE CHANGE, A RATE RIDER IS THE ISSUE; AND C), HOW MANY LINES OF TEXT AND CHARACTERS CAN BE ACCOMMODATED IN BOTH AREA B AND AREA C OF EXHIBIT M.15.2 [520] UNDERTAKING NO. N.15.2: TO CALCULATE THE IMPACT IN 2004 OF ADDING 1,000 CUSTOMERS IN 2003, AS WELL AS ADDING 1,000 CUSTOMERS IN 2004, WHAT THE IMPACT OF THAT WOULD BE; IDENTIFYING THE INCREMENTAL CAPITAL COST, O&M, REVENUE AND THEN CALCULATING THE REVENUE REQUIREMENT ON THOSE ITEMS [749] UNDERTAKING NO. N.15.3: TO PROVIDE THE WEIGHTS OF THE COMPONENTS OF CAPITAL ON EXHIBIT F.3, TAB 2, SCHEDULE 2, PAGE 2 [877] UNDERTAKING NO. N.15.4: TO PROVIDE A CALCULATION OF THE REVENUE SUFFICIENCY AND EARNINGS, SUBJECT TO EARNINGS SHARING, FOR 2002 ON THE ASSUMPTION OF NO WEATHER HEDGE [960] UNDERTAKING NO. N.15.5: TO PRODUCE AN EXPLANATION OF THE CHANGES IN THE DRIVERS THAT WERE USED FOR CAPITALIZATION OF OVERHEADS AND TO PRODUCE A CALCULATION THAT WOULD INDICATE WHAT THE CAPITALIZATION OF OVERHEADS WOULD BE IF THE DRIVERS HAD NOT BEEN CHANGED, FOR 2004 [1039] UNDERTAKING NO. N.15.6: TO CHECK AND SEE IF THERE IS A CONTEMPORANEOUS DOCUMENT THAT CAN BE MADE AVAILABLE TO BACK UP THE RESPONSE TO UNDERTAKING N.6.13 [1140] UNDERTAKING NO. N.15.7: TO PROVIDE THE CALCULATION OF THE COMMON EQUITY RATIO ADJUSTED FOR THE DEDUCTION OF THE 25 MILLION PRE-TAX DOLLARS THAT RELATE TO WEATHER HEDGING [1164] UNDERTAKING NO. N.15.8: TO PROVIDE THE ACTUAL COMMON EQUITY RATIO OF UNION GAS LIMITED FOR THE PERIOD ENDING DECEMBER 31, 2002 [1190] UNDERTAKING NO. N.15.9: TO PROVIDE A CALCULATION OF THE REDUCTION IN REVENUE DEFICIENCY FOR 2004 THAT WOULD ENSUE WHERE THE OVERFUNDING AMOUNTING TO 4.28 PERCENT OF UTILITY CAPITAL STRUCTURE IS DEDUCTED FROM COMMON EQUITY [1227] UNDERTAKING NO. N.15.10: TO PROVIDE THE CALCULATIONS OF THE DELIVERY-RELATED REVENUE DEFICIENCY IF ROE IS SET AT EITHER 7.5, 8 OR 8.5 PERCENT [1247] UNDERTAKING NO. N.15.11: TO PROVIDE EITHER IN PRINTED OR ELECTRONIC FORMAT THE SPREADSHEET RELATING TO CAPITALIZATION OF OVERHEADS [1275] UNDERTAKING NO. N.15.12: TO PROVIDE THE AMERICAN RATE OF TAX THAT WOULD BE PAYABLE ON THE PROCEEDS FROM THE WEATHER HEDGE CONTRACT IN 2003 [1359] 14 --- Upon commencing at 9:35 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. 16 This is the continuation of the Union Gas Limited application for rates for 2004. 17 Mr. Smith, I think I have a couple more exhibits related to undertakings. 18 MR. SMITH: You do. 19 MR. SOMMERVILLE: As well as an affidavit. 20 PRELIMINARY MATTERS: 21 MR. SMITH: You do, Mr. Chairman. As Mr. Penny indicated at the outset, the Applicant intended to file and has filed a number of affidavits for witnesses who will not be taking the stand, adopting the evidence in the record, and there are two final affidavits, the affidavit of Darrin Canniff and the affidavit of Lynn Galbraith which have been filed. 22 And I've been advised that they have not been provided to the intervenors but can be if so requested. They simply adopt their evidence. 23 With respect to undertakings for the record, Union has provided answers to N.6.4, N.8.1, N.8.8, N.9.3, N.9.7, N.12.3, N.12.4. 24 In addition, Mr. Chairman, I understand that Union can provide an answer on the record to an undertaking given yesterday, N.14.7, given by Mr. Sanders, and I will just read the question into the record. 25 Undertaking N.14.7: Union undertakes to provide the actual capital and O&M expenditures on the pipeline integrity management program for 1999. 26 And Mr. Sanders, do you have the answer to that question? 27 MR. SANDERS: Yes, I do. That answer was actually provided as part of an interrogatory. It was Exhibit J.1.41 and in that response, we show in 1999, the actual capital cost was $1.8 million and the actual operating cost was $1.2 million. 28 MR. SMITH: Thank you, Mr. Sanders. 29 MR. SOMMERVILLE: Thank you. 30 MR. SMITH: I believe that brings us to Mr. Aiken. 31 MR. SOMMERVILLE: Are there any preliminary matters from any other party? 32 There being none, Mr. Aiken. 33 MR. AIKEN: Thank you, Mr. Chairman. 34 UNION GAS LIMITED - PANEL 9; HYATT, FAY, SANDERS, SHERVILL 35 L.HYATT; Previously sworn. 36 B.FAY; Previously sworn. 37 J.SANDERS; Previously affirmed. 38 P.SHERVILL; Previously sworn. 39 CROSS-EXAMINATION BY MR. AIKEN: 40 MR. AIKEN: Good morning, panel. I'm going to start with Exhibit B.1, tab 6, this is the gas chromatographs. The evidence indicates that these are needed at each pool and my question is: How many pools do you have? 41 MR. FAY: We have 20 pools, but only 16 chromatographs will be required. Some of the pools can be monitored by one single chromatograph sampling multiple points. 42 MR. AIKEN: The last paragraph on page 2 of that evidence talks about the ability to manage storage in total. Why is this no longer adequate? 43 MR. FAY: Sorry, could you clarify what is no longer adequate? 44 MR. AIKEN: Why your ability to manage storage in total is no longer adequate? 45 MR. FAY: We monitor our storage with volumetric measurement and as a result, we have been very successful in monitoring the storage inputs and outputs from storage using volumetric measurement and we will continue to do that. Inventory audits for purposes of financial records and that will also be done in volumetric measurement as well as in energy units. 46 The chromatographs are required to reconcile customer transactional business which is being done in energy units versus what we are receiving in terms of receipts from major pipelines, for example, Vector and Great Lakes to name two of them, and what we are trying to do is ensure that the energy coming out of storage with those supplies, we have an accurate idea of what energy is being sent down the lines to the various customers, what is being stored. 47 So it's really supplementing our volumetric measurement of the storage. There's really nothing wrong with measurement that we have right now from a volumetric standpoint, but because the industry is moving to an energy basis, chromatographs were felt necessary to monitor that. 48 MR. AIKEN: Is there any impact on your ability to measure unaccounted for gas? 49 MR. FAY: No, there is not. 50 MR. AIKEN: Okay. At line 12 on page 2, it talks about "it was determined that in the long term this practice did not provide," et cetera, et cetera. My question is, could Union phase in these devices over a number of years instead of doing them all in one year? 51 MR. FAY: I apologize, I'm assuming that you're asking whether they could be installed in a number of years versus one year; is that correct? 52 MR. AIKEN: Yes, instead of doing all 16 in the test year, could you do 16 over two or three years? 53 MR. FAY: We could, but the problem that we would have with that is that the purpose of this is to actually monitor the energy in the total system and to ensure that we have accurate balancing from our financial records with respect to our various customers. And so to do half or a couple of these pools really, in a sense, defeats the purpose that we want to be able to accurately determine the energy within the total storage system. The simple answer to your question is yes, we could, but I'm not sure that it would be an effective way of doing things. 54 MR. AIKEN: If you turn over to page 3 of tab 6, I just want to confirm that the compressor fuel savings referred thereto had been reflected in the test year in the forecast? 55 MR. FAY: If you refer to Exhibit J.18.27 which was an answer to a London Property Management Association interrogatory, Mr. McMahon has provided an allocation of the fuel savings to the various rate classes that were included in the cost of service, yes. 56 MR. AIKEN: Now, also on page 3, and we talked about this a little bit yesterday, the capital cost for that project was forecast to be 959,000 and I believe you said the actual cost was 508,000. Can you explain why there was such a significant difference? Was it a change in the scope of the project or what caused that difference? 57 MR. FAY: Yes, actually there was a change in the scope of the project. Once the contractor and the engineering department had looked at the plans, they were able to eliminate one 36-inch valve to isolate one of the headers. That 36-inch valve is very expensive and as a result, they changed the scope of the project which made the savings between the 959,000 and the 508,000. 58 MR. AIKEN: My next series of questions are going to revolve around Exhibit B.3, tab 2, schedule 3 updated. Again, B.3, tab 2, schedule 3, the blue page. 59 MR. SMITH: I missed the schedule, Mr. Aiken. 60 MR. AIKEN: Schedule 3. 61 MR. SMITH: Thank you. 62 MR. AIKEN: On the first page at line 5 through 9 is the integrity management program with a total cost of 9.3 million. My question is: Is any of this work being contracted out and if so, approximately how much? 63 MR. SANDERS: I don't have a breakdown of the actual components that would be contracted out. There are in all of those categories the contract component, but I don't have that breakout. 64 MR. AIKEN: Was this contracted work tendered, or will it be tendered for 2004? 65 MR. SANDERS: Yes, some of the work will be, some will not. We have standing contracts for some of the work on the construction side that we would use to complete that work. Again, not knowing the breakout exactly of which components there are, I would say the majority of it has already been included in agreements or contracts. 66 MR. AIKEN: On page 2 of that schedule, at lines 11 through 13, the Hearst TBS replacement. First of all, can you explain what this project is? What does TBS stand for? 67 MR. SANDERS: The TBS refers to a town border station, so that would be the regulation over pressure protection between a transmission line and the distribution system. 68 MR. AIKEN: In the explanation it says it's to bring the station up to current standards. How long has that station been operating at other than the current standard? 69 MR. SANDERS: I'm not familiar with the specific -- or the details of this project, so I'm not sure. 70 MR. AIKEN: Lines 3 and 4 on that same page, main replacements and service replacements, in the justification section for both of those it says that, "the analysis of repair versus replacement are completed prior to the actual expenditure." 71 Can you explain what that means. 72 MR. SANDERS: For the replacement, specifically on the leakage, each project is assessed using an economic criteria or economic model to look at the repair versus replace scenarios. For the technical side, a risk assessment is done of each project to determine whether or not it needs to be done at a given point in time or in a given year. 73 For the replacement on the road work, or that would be related to any municipal activity or direct conflict with any road construction. So really the analysis there is to -- simply whether or not there is a direct conflict with our facilities. 74 MR. AIKEN: For the transmission, storage and distribution projects listed on pages 1 and 2, what level of contingency factor has been built into the costing of each of the individual projects? 75 MR. SANDERS: I don't know what that is. 76 MR. AIKEN: Could you undertake to determine what the contingency level is? Does Union -- maybe I should back up and ask a different question. 77 Does Union have a standard contingency rate that it applies to its construction projects? 78 MR. SMITH: I understand, Mr. Aiken, that Wendy Brodie Lumley, who is coming up, will be able to answer that question. 79 MR. AIKEN: Thank you, Mr. Smith. 80 On page 3, line 9, there's a project called, "Data Reconciliation," for $500,000 and I'd like to refer you also to Exhibit J.18.216. 81 The question there asked what savings were associated with the data reconciliation and the tracking gas acquisition project. Now, my understanding is that the tracking gas acquisition project has been deferred as a part of the yellow-page update; is that correct? 82 Or is this a question -- 83 MR. SMITH: This is a question, again, that Ms. Brodie Lumley can answer or Ms. Elliott. 84 MR. AIKEN: I might get the same answer on this, but on item 12 on page 3, the inventory position on demand, that project, again, had been deferred, but my question is: Is there an overlap with the load-balancing cost on line 6; in other words, are those projects somehow related or, again, is that for the next panel? 85 MR. SMITH: Again, Ms. Elliott and Ms. Brodie Lumley should be able to address this. 86 MR. AIKEN: I'm going to turn now to the customer attachments. And this is B.1, tab 3, appendix B updated. 87 Now, in this schedule, Union is forecasting an increase in the number of commercial and industrial customers in both 2003 and 2004, both in the north and the south; is that correct? 88 MR. SHERVILL: Are you referring to tab 3, appendix B updated? 89 MR. AIKEN: Yes. 90 MR. SHERVILL: Thank you. This is an increase in commercial industrial customers from 2003 to 2004 you're asking about? 91 MR. AIKEN: And also from 2002 to 2003. 92 MR. SHERVILL: Yes, certainly in -- yes, in both cases, the commercial and industrial customers increase in both years. 93 MR. AIKEN: Now, if you could turn to Exhibit M.3.1, this is the LPMA WPSGP cross-examination materials 1, and specifically tab 7 of that exhibit. 94 MR. SHERVILL: Yes, I have that. 95 MR. AIKEN: And the first under tab 7 has customer attachments at the top. Do you accept, subject to check, that these customer numbers, customer attachments are taken from B.1, tab 3, appendix B updated? 96 MR. SHERVILL: Yes, it looks like they are. 97 MR. AIKEN: And here, again, we see the increases for the commercial industrial customer classes. For example, in the northern eastern zone between 2002 and 2003, a 13.2 percent increase in commercial customers. 98 MR. SHERVILL: Yes. 99 MR. AIKEN: But at the same time, you're forecasting a decrease in the residential customer attachments, and we see those numbers, for example, the minus 16.4, the minus 15.7, the minus 8.8, in the north and the south. 100 MR. SHERVILL: Yes. 101 MR. AIKEN: And you've explained a little bit yesterday why the forecast was decreasing, so I won't cover that again. 102 If you flip to the next page under tab 7, this is a summary of Exhibit J.18.21 that has year-to-date June attachments. 103 MR. SHERVILL: Yes. 104 MR. AIKEN: And again, subject to check, do you accept that those numbers come from that exhibit? 105 MR. SHERVILL: Yes, they look correct. 106 MR. AIKEN: Now, yesterday, I think it was Undertaking N.14.4, you were going to provide, I believe it was year-to-date September actual attachments. 107 MR. SHERVILL: That's correct. 108 MR. AIKEN: Could I have you undertake to expand that undertaking to update this table so that we have year to date September 2002, year to date September 2003 at the levels shown? In other words, in each of the categories shown here, as well as update the change column so that we have a comparison of year to date September 2003 versus year to date September 2002? 109 MR. SHERVILL: Yes, I can undertake to do that. 110 MR. MORAN: Mr. Chair, that would be Undertaking N.15.1. 111 MR. SOMMERVILLE: I guess we can give it its own undertaking number or we can amend -- was it 14.2, Mr. Aiken? 112 MR. AIKEN: I believe it was 14.4. 113 MR. SOMMERVILLE: I beg your pardon. Is there a -- Mr. Smith, do you have any preference as to how we record that? 114 MR. SMITH: One undertaking would be preferable. 115 MR. MORAN: That's fine then we'll scratch 15.1. 116 MR. SHERVILL: Mr. Aiken, if I could just add, we did do some investigation on that point, I believe it was in discussion with Mr. Janigan yesterday, about why apparently even though the year to date attachments show that 2003 has more attachments than 2002 at the comparable time period, why we still expect, at the end of the year, to be lower in 2003 than 2002. There are a couple of reasons for that. 117 One is that the summer of 2002 was a very cold, wet summer and many of the home builders in our territory use construction heat. Typically, they don't use it to any great extent until the fall period, but because the summer was so wet and cool, this year they have advanced that construction heat into the summer period. So in fact, we have a great deal more attachments, surfaces, if you like, in place earlier in the year this year to facilitate that construction heat component. 118 The other thing that was apparent is we track customer attachments meaning spinning meters. If we look at the comparable service line installation data, we actually have more service lines installed -- or fewer service lines installed year to date September this year than we had year to date September last year, and that's one of the things that gives us an indication that we still expect attachments at the end of the year to be lower in 2003 than they were in 2002. 119 That said, we'll still update the schedule for you. 120 MR. AIKEN: And I take it if I have a question about the impact on the revenue requirement of additional customers, that would be for Ms. Elliott? 121 MR. SMITH: Quite correct. 122 MR. AIKEN: I'm going to move on now to the design-day demands, and that's Exhibit J.1.36 that I will be referring to. 123 My first number of questions are going to be with respect to the regular rate customers which I understand are explained in paragraphs 4 through 6. The description in paragraph 4, I take it, yields a gross figure for design day for the general-service customer class; in other words, it's a design day for all the regular-rate customers; is that correct? 124 MR. HYATT: It creates the demand on a 44-degree day. 125 MR. AIKEN: Okay. Then in paragraph 5, my understanding is that the figure, the 44-degree day estimate is divided by the number of customers and then that figure is compared to similar information for past years? 126 MR. HYATT: That's correct. What we've done is tracked the use per customer at a 44-degree day over the past number of years and done a regression through that data to -- let's call it dampen out any year over year changes that might happen in the regression analysis that we've done on the general-service customers. 127 MR. AIKEN: And that would take into account, for example, impacts on peak day from DSM activities or just efficiency improvements in general? 128 MR. HYATT: The analysis that we've done on the sort of the volumes against the temperature that we described in paragraph 4 would really, I think, take any of the DSM impacts and usage impacts into account in that portion of the analysis. 129 MR. AIKEN: At the end of paragraph 5, you talk about the base year. Am I correct that the base year, in this proceeding, would be the winter of '02/'03? 130 MR. HYATT: For the blue-page update, that's correct. 131 MR. AIKEN: Okay. In paragraph 6, you talk about the growth rate. And this growth rate is calculated based on the future winter season volume, which I would take would be November 2003 through March 2004, divided by the same period from the previous winter; is that correct? 132 MR. HYATT: That's correct. 133 MR. AIKEN: And then on top of that, do you make an adjustment for the number of customers for customer growth? 134 MR. HYATT: No, we do not. That volume forecast will have included -- that's a total volume forecast so that will have included all of the impacts for customer growth, any of the DSM impacts, and any of the reductions in normalized actual consumption. 135 MR. AIKEN: Now, is this analysis on the general-service market done on the aggregate of the M2 customers or is it done separately for the residential component and the commercial and industrial component? 136 MR. HYATT: It is done in aggregate for the total general-service market. 137 MR. AIKEN: Can you tell me then how the M2 rate class is separated into the two figures that are provided on -- I believe it's J.35.1 supplemental? And just to put the numbers on the record, the response there, it's the Dawn-Trafalgar design day demand based on the blue-page update, for general-service residential M2 it's 16,469 and for general-service commercial industrial M2 it's 13,321. Is that a split that you do or is that a split that the cost allocation group does? 138 MR. HYATT: That would be a split that the cost allocation group does. 139 MR. AIKEN: Okay. If I go back now to J.1.36, I'm moving on to the contract customers in the southern area. As I understand it, the first step for the contract customers is similar to the regular rate customers, that being that the regression analysis and estimate of the volume on a 44 degree day is done, and that's done on a per-customer basis on the contract side? 140 MR. HYATT: Yes, it is. 141 MR. AIKEN: Could you explain the last paragraph -- or sorry the last sentence of paragraph 7 it says, "This, along with the customer's firm contract demand, allows a section of an appropriate design-day demand for each customer and thus rate class." 142 MR. HYATT: Yes, when we've done the analysis, as a reality check we would go back and look at the contract demand for that customer to -- just basically as a reality check to ensure that we're in the right range for that customer. 143 MR. AIKEN: Now, are you aware of the wholesale gas service purchases group evidence filed at Exhibit K.35? 144 MR. HYATT: I did look at it. 145 MR. AIKEN: Has this evidence been reflected in the blue-page update? 146 MR. HYATT: I'm not sure. 147 MR. AIKEN: Would you take it, subject to check, that it has not been reflected in the updated evidence of Mr. Kitchen, in particular? In other words, there's no change in the volume or the design-day forecast. 148 MR. SMITH: Well, we can ask Mr. Kitchen for that answer and he can come prepared to provide it, if that's satisfactory. 149 MR. AIKEN: Yes, that's fine. 150 MR. SOMMERVILLE: Thank you Mr. Smith. 151 MR. AIKEN: I just want to walk through an example of your last statement about the checking for a reasonable number. 152 If the design day resulting from the regression analysis was 200,000 cubic metres for a particular customer, and the contracted firm demand for that customer was 150,000 cubic metres, and then the firm CD was reduced by 10,000 cubic metres to 140,000, what would be the impact on the 200,000 design-day estimate as a result of your process? 153 MR. HYATT: So you're saying this is a forecast reduction in the contract demand from 150,000 to 140,000? 154 MR. AIKEN: Yes. 155 MR. HYATT: If that was a forecast, we would, in our design-day demand, we would reduce that design-day demand by that 10,000 cubic metres or whatever -- 10,000 units. 156 MR. AIKEN: Okay. Now, I notice that you don't apply a growth factor to the M9 or the M10 design-day estimates like you do for the M2 customers; is that correct, or is it a different type of growth factor? 157 MR. HYATT: In the contract customers, we are looking at, as a growth factor, we are looking at forecasted changes in the contracted demand and using those as an indication of what the growth on those specific customers would be. 158 MR. AIKEN: What do you do for the M10s, given that those are not contract customers? 159 MR. HYATT: I'm not sure just what -- who would be in that M10 group. 160 MR. AIKEN: The M10 group, my understanding is that they're small wholesale customers, they do not have a contract like the larger customers do under rate M9. 161 MR. HYATT: I don't believe we would have applied a growth factor to them. 162 MR. AIKEN: If I could have you now turn to Exhibit J.35.28, the supplemental response. 163 MR. HYATT: I have that. 164 MR. AIKEN: The last paragraph on the first page, the last sentence, it reads, "In the blue-page update the design-day demand for the M9 customers was adjusted by a factor of 1.00943 to reflect the difference between the demand of the contracts in aggregate at each takeoff point along the Dawn-Trafalgar system and the sum of the individual demands for each contract served at each takeoff." 165 Can somebody please explain what that means? 166 MR. HYATT: Let me try. When we do the regression of the contracts, of the individual contract to a 44 degree day on an individual basis, we also go back through one additional step for a reality check which is to look at all the contracts on the lateral and do a regression of those contracts in total against the weather. Using that information, we could make a further small adjustment to the contract demand of the individual accounts to reflect the larger group as well. 167 MR. AIKEN: It sounds like a -- I hate to use the electricity term, but almost like a coincidence factor that would be applied. 168 MR. HYATT: I'm not sure I would use that term specifically, but it does look at the actions of all the customers in a group on that lateral. 169 MR. AIKEN: Then on page 2 of 4 of the attachment to that interrogatory, we have some regression statistics. And I note here that in this particular case, we have a fairly high adjusted R-squared), a very significant coefficient estimates. And my general question is: Does this specific equation, which was done for the M9 customers, is it representative of the equation statistics for the other contract customers in the general service equation? In other words, are they highly statistically significant? 170 MR. HYATT: Generally, yes. The R-squared values are fairly high. We may find some specific accounts that don't fit as well as some others. But generally speaking, they are fairly high R-squared values. 171 MR. AIKEN: Thank you. I have a number of questions on the pipeline integrity management program, but they're all specific to the deferral account for 2003 and the calculation of some of those figures. Is that for this panel, the following panel, or Mr. Horner on -- I think it's Mr. Horner on panel 11? 172 MR. SMITH: Yeah, taking in mind the Board's direction yesterday, we don't want to catch you out, so I think probably the best thing to do is to begin your questions. 173 Mr. Horner is going to be testifying with respect to deferral account balances, but Mr. Sanders may be able to answer some of your questions. 174 MR. AIKEN: The series of questions all have to do with the calculation of the depreciation costs in appendix B of Exhibit 1, tab 5. 175 MR. SMITH: With that in mind, Mr. Horner is the appropriate person. 176 MR. AIKEN: Okay. 177 MR. SOMMERVILLE: Thank you. 178 MR. AIKEN: A couple of questions on the rate rider. I think, Mr. Shervill, you indicated yesterday that you believed the cost of 3.8 million was a fairly firm estimate; is that correct? 179 MR. SHERVILL: That's my understanding, yes. 180 MR. AIKEN: In the evidence, it indicates that approximately 3.3 million of the cost is vendor-related, and I take that vendor to be Alliance Data Systems? 181 MR. SHERVILL: Yes, that would be the total of 1.829 million for database infrastructure and architecture changes, as well as the 1.525 million for the software testing and implementation. 182 MR. AIKEN: Are those estimates based on a quote or an estimate from ADS? 183 MR. SHERVILL: Yes, they are. 184 MR. AIKEN: Was that quote provided in U.S. dollars or Canadian dollars? 185 MR. SHERVILL: In Canadian dollars. 186 MR. AIKEN: Okay. 187 Thank you, panel. Those are my questions. 188 MR. SOMMERVILLE: Mr. Aiken. 189 Mr. Dingwall. 190 CROSS-EXAMINATION BY MR. DINGWALL: 191 MR. DINGWALL: Good morning, gentlemen, my name is Brian Dingwall. I'm here in the capacity of counsel for the group Energy Probe. My first questions are related to the pipeline integrity program and specifically one kind of broad question associated with its structure in the clearing of the deferral account. So I'll ask you to answer it as best as you can, and if you can't, I'm sure you'll tell me where to go, in a nice way. 192 On Exhibit B.1, tab 5, appendix A, there is a line item that indicates property and capital tax. Can you tell me what that refers to? 193 MR. SANDERS: I believe that would be one of the items that might be better answered by Mr. Horner, but generally, that would be any of the property associated with and the capital costs associated with the project or projects involved in the integrity program. 194 MR. DINGWALL: Why would property tax be separated out from the general property tax that's sought to be recovered by the company every year? Are there new properties associated with this program? 195 MR. SANDERS: I'm not sure. I don't know. I guess specifically your question: Are there new properties associated with the project? No, there are not. All of the activity and work is on existing easements or existing properties associated with the work. 196 MR. DINGWALL: Would that, again, be another question best directed to the deferral account panel? 197 MR. SMITH: Yes, Mr. Horner can provide the answer. 198 MR. DINGWALL: Thank you. Let's move away from the PIMP area for a minute and move on to the rate-rider functionality. 199 Mr. Shervill, I take it the billing system has been your bailiwick for a number of years now, has it not? 200 MR. SHERVILL: I certainly have some knowledge of our billing system, yes, although that hasn't been my primary function in the company, no. 201 MR. DINGWALL: Now, going back to the time that Union began dealing with Enlogix, there were a number of individual service activities that Union had acquired the functionality for. They're contained in a detail to a confidential exhibit so what I'm going to do is to just ask you if you recall these. This exhibit, while being confidential, was also part of a public record in a previous proceeding. 202 One of these activities was customer profile; is that correct? 203 MR. SMITH: I'm not sure if the question is entirely appropriate. I don't have the document in front of me, Mr. Shervill doesn't have the document in front of him, and to be asking specific questions about the contents of the document, given that it's confidential, in addition, is a little bit awkward. 204 MR. DINGWALL: Let me make reference to the document number. Mr. Smith can take a moment to think about it. One of the awkward things that comes out of an in-camera proceeding is that as was chose then this case, all the documents referenced in this proceeding were marked as confidential although some of them were based or sourced from public files, and therefore, are not or may not be inherently confidential. 205 The specific document I'm referring to is document marked X.13.3. 206 MR. SOMMERVILLE: Mr. Dingwall, we don't have to dance quite so lightly. If the document is in a public record, it's in a public record. For the purposes of access in relation to this case, some third party, for example, wanted to access some portion of this record, the document would be confidential, but if you can access the document from a public record somewhere else, there's absolutely nothing wrong with you putting that document to the witness. And rather than engage in a Byzantine - which I'm sure is not very comfortable from your point of view - process to hint at where you're at, if it comes from a public place, put the document to the witness and we can go from there. 207 MR. SMITH: And if I can assist my friend, if it's the old Enlogix contract that my friend is referring to, Union is not taking the position it's confidential, in fact, I think quite the contrary. 208 MR. SOMMERVILLE: Thank you. 209 MR. DINGWALL: That's very helpful, Mr. Smith, thank you. I take it Mr. Goulden has left the room to obtain copies that the witness can refer to? 210 MR. SMITH: I believe that's correct. 211 MR. DINGWALL: In the interim, I would like to move to the cross-examination materials that my friend Mr. Shepherd was referring to yesterday and specifically with respect to tab 1, that tab is an excerpt from the EBO 177-15 decision and the page I'd like you to refer you to is page 11, which is the second page of that tab. 212 MR. SHERVILL: Yes, I have that. 213 MR. DINGWALL: Paragraph 2.2.1, the last line of that is: 214 "As an example, company staff asserted that every change requires at least 1600 hours of staff time." 215 This was a criticism of the functionality of the previous billing system. Would you agree with me, sir, that 1600 hours for a change is a significant amount? 216 MR. SHERVILL: It certainly seems like it was a significant amount, yes. 217 MR. DINGWALL: Thank you. I take it the old Enlogix agreement has been provided to you now? 218 MR. SHERVILL: No. 219 MR. DINGWALL: Not yet. Okay. Let me see how good your memory is, then, in the meantime. 220 MR. SMITH: Well, I can tell you his might be good but mine is non-existent. 221 MR. SHERVILL: In addition, I did testify yesterday in response to Mr. Shepherd that I was not involved in this proceeding, in the 177 proceeding. 222 MR. DINGWALL: Now, with respect to, now that we have it, to the non-confidential previous CIS business services agreement which is identified as X.13.3 on the confidential record and perhaps now might be given an exhibit number for this record. 223 MR. MORAN: Mr. Chair, this would become Exhibit M.15.1. 224 EXHIBIT NO. M.15.1: CIS BUSINESS SERVICES AGREEMENT BETWEEN UNION GAS LIMITED AND ENLOGIX CIS INC., DATED FEBRUARY 23RD, 1998 225 MR. SMITH: Mr. Chairman, I notice that it's approaching 10:30, we only have one copy of it. 226 MR. SOMMERVILLE: We can take a break. We'll take our morning break now and reconvene at quarter to. Thank you. 227 --- Recess taken at 10:25 a.m. 228 --- On resuming at 10:55 a.m. 229 MR. SOMMERVILLE: Thank you, please be seated. 230 PRELIMINARY MATTERS: 231 MR. SMITH: Mr. Chairman, before my friend begins, we have obtained copies of the contract. In addition, before Ms. Brodie Lumley takes the stand or the next panel, I thought I would advise you that we've provided answers to Undertakings N.9.2 and N.9.11. 232 MR. SOMMERVILLE: Thank you. 233 Two brief matters that I'd like to deal with. First off, the Board has a commitment tomorrow morning that will prevent us from starting until about 10:15 tomorrow morning. 234 The other issue I'd like to address is the possibility that the Board may want to issue an interim order with respect to rates to take effect on January 1st to avoid potential divergences in rate and retroactivity. 235 I'd like to hear submissions from the parties on that subject, written ones. I'm suggesting that Mr. Moran canvass the counsel to get some feel for if there's a consensus as to how that matter could be considered, even if it should be considered, and we'll look to have him report back to us at an appropriate point. 236 There is also the outstanding matter of a request by the Applicant related to the change in the deferral account architecture, and I know that a letter has been circulated to all of the parties and we would simply urge the intervenors to put their minds to that subject matter so that the Board has the benefit of their thought on the applicant's request for an early ruling on that subject. 237 So I said there were two things, in fact, there were three and unless there's comment arising from that... 238 Ms. Singh. 239 MS. SINGH: Mr. Chairman, I was wondering if you could just elaborate a little bit on the nature of the submissions you would be seeking from counsel in relation to the interim order. Would it be in relation to the propriety of making an interim order or would it be in relation to what that interim order may, indeed, look like on an interim basis? 240 MR. SOMMERVILLE: I would think probably both and there may be some other categories to comment that may occur to the parties. 241 What we're clearly addressing our minds to is the idea that come January the 1st, unless an order is made, the existing rates would continue to apply and that may well be a perfectly acceptable solution or acceptable approach to be taken. It may also be appropriate to consider some other step related to interim rates in order to ensure that there is not an undue rate shock or not an inappropriate exposure to retroactivity and that sort of consideration. 242 So I'd like the benefit of the parties' thought on that subject. 243 In the absence of a Board order, an interim order, the position is clear, the existing rates would apply, but anything that occurs to the parties surrounding that subject matter we would be interested in hearing. 244 We want there to be a smooth transition, whatever happens, in this rate proceeding. 245 MR. SMITH: Thank you, Mr. Chairman. 246 MR. SOMMERVILLE: Does that help you, Ms. Singh? 247 MS. SINGH: It does, Mr. Chairman. Thank you. 248 MR. SOMMERVILLE: Mr. Dingwall. 249 UNION GAS LIMITED - PANEL 9; HYATT, FAY, SANDERS, SHERVILL 250 L.HYATT; Previously sworn. 251 B.FAY; Previously sworn. 252 J.SANDERS; Previously affirmed. 253 P.SHERVILL; Previously sworn. 254 CROSS-EXAMINATION BY MR. DINGWALL: 255 MR. DINGWALL: Thank you, sir. 256 Mr. Shervill, I'm going to ask you to make reference to Exhibit M.15.1 and specifically attachment 4 to that which is the fee schedule in the CIS Business Services Agreement. 257 It seems to be about 8 or 9 pages from the back of it. 258 MR. SHERVILL: Attachment? 259 MR. DINGWALL: Attachment 4. 260 MR. SHERVILL: Yes, I have that. 261 MR. DINGWALL: Thank you. 262 Now, I'm looking through the second grouping of charges which are entitled, "Service Activity Fees." I take it meter reading, at that time, -- sorry, let me start again. 263 I take it deliver billing at that time was a line item on the bill; is that correct? 264 MR. SHERVILL: Yes, I believe that's the case. 265 MR. DINGWALL: And commodity billing, at that time, was a line item on the bill; is that correct? 266 MR. SHERVILL: Yes, I believe so. 267 MR. DINGWALL: And at that time, rental program was a line item on that bill; is that correct? 268 MR. SHERVILL: Yes. 269 MR. DINGWALL: And at that time, finance program was also a potential line on that bill; is that correct? 270 MR. SHERVILL: Yes, I believe that's correct. 271 MR. DINGWALL: And at that time, the home protection plan was also a potential line item on that bill; is that correct? 272 MR. SHERVILL: Yes, I believe so. 273 MR. DINGWALL: And at that time, warranty program was also a potential line item on that bill; is that correct? 274 MR. SHERVILL: I'm not sure about warranty program, Mr. Dingwall. I believe those were cash sales, but I could be wrong. It was sometime ago. 275 MR. DINGWALL: And at that time, service orders were a potential line item on that bill; were they not? 276 MR. SHERVILL: Yes, I believe so. 277 MR. DINGWALL: And at that time, the natural gas vehicle program was a potential line item on that bill; is that correct? 278 MR. SHERVILL: Yes, I believe that's the case for either rental equipment or fuel sales. 279 MR. DINGWALL: So fuel sales for NGV would also be a separate line item from the rental program. 280 MR. SHERVILL: No, they would be under that line item. 281 MR. DINGWALL: So the line item would contemplate two data inputs; is that correct, one being fuel sales, the other being rental. 282 MR. SHERVILL: Potentially, yes. 283 MR. DINGWALL: And there are three subsequent items, one entitled, "Energy Management Program," one entitled, "Consumer Product Sale," and one entitled, "Miscellaneous Transaction." Would those also be potential line items on the bill back in 1998? 284 MR. SHERVILL: Yes, potentially. 285 MR. DINGWALL: Now, at this point in time, Union Gas has discontinued its natural gas vehicle program, has it not? 286 MR. SHERVILL: Not entirely. 287 MR. DINGWALL: But there's not much left, is there? 288 MR. SHERVILL: That's correct. 289 MR. DINGWALL: And it's anticipated that it will be fully discontinued; is that correct? 290 MR. SHERVILL: Yes, that's correct. Transferred would be a better term, to others more appropriately positioned to run the business. 291 MR. DINGWALL: And at this particular point in time, the rental program, finance program, home protection plan, warranty program, and service orders are no longer used for line items by Union Gas and no longer functions that Union Gas undertakes; is that correct? 292 MR. SHERVILL: They are no longer functions which Union Gas undertakes, but the rental program line was used for the storage line that is currently shown on our bill. 293 MR. DINGWALL: And at the time that Union contracted with Enlogix the first time around, you anticipated that you had data needs, I presume that would encompass all of these functions; is that correct? 294 MR. SHERVILL: Yes, some more, some less. Certainly those that were one-time kinds much charges had less data requirement than those that were recurring charges that needed to be processed each month. 295 MR. DINGWALL: Just making a brief calculation, I may have to take my shoes off to do so, how many line items we've got here. We've got delivery, commodity, rental, finance, home protection, warranties, service orders, NGV, energy management, consumer product and miscellaneous sale, and other. 296 So back in 1998, Union Gas contemplated and contracted for 12 billing line items. What's happening with the ones you're not using now? 297 MR. SHERVILL: I don't know whether we actually -- as I say I'm not a party to this agreement -- I don't know whether we actually contracted for that many line items or whether or not we designed a system that was capable of producing that many line items. 298 I think, Mr. Dingwall, in part where we're at is there are several line items that would be capable of producing charges for customers, but that doesn't mean that we would want to develop the capability in advance of that demonstrated customer need and charge those costs to customers before there was a demonstrated need for the capability. 299 MR. DINGWALL: Back in 1998, Mr. Shervill, were you not billing a rental program? 300 MR. SHERVILL: Under the CICS program? I believe so, yes. 301 MR. DINGWALL: And back in 1998, were you not billing a home protection plan? 302 MR. SHERVILL: Yes, up until the end of 1998. Again, we were billing the customers who took up those product and service offerings for all those service offerings. 303 MR. DINGWALL: So the various line items that we've discussed then, Union Gas actually had active billing interfaces with customers for these; is that not correct? 304 MR. SHERVILL: Up until the end of 1998, that's my understanding, yes. 305 MR. DINGWALL: Why can't these line items now be used for these rate riders? 306 MR. SHERVILL: Again, this is going back to my discussions with Mr. Janigan and Mr. Shepherd yesterday, and the point I was trying to make is it's not simple line items on the bill. Accommodating line items on the bill can be accomplished by reducing the font size on the bill to get more line items. It's the activities that underpin that. If I can refer you to the evidence at D.1, tab 10 updated, the significant portion of the effort and cost to try and introduce rate rider is really related to the increased data storage that we are going to accommodate. Adding a rate rider for each of the four primary rates would double our data storage requirement. Reformatting the database to try and maintain current response and processing times, because that enhanced database design has to be implemented in a way where only the data elements that are relevant for query can be queried without having to query the entire database and slow the entire system now, and changing the current software to recognize the new database design. 307 There is further support for that in Exhibit J.18.232. This is all distinct from the miscellaneous charge information I was discussing with Mr. Janigan yesterday which tend to be one-time non-recurring charges for things like aids to construction or signing bonuses for retail energy marketers that customers make take up on their commodity contracts. 308 As we discussed, we designed a great deal of flexibility into the system to accommodate this but again, a lot of these features were not developed until -- nor costed until we understood that there was a clear customer need for those services. And it would have been imprudent for to us design that capability at the front end and have customers paying for it without using it. 309 MR. DINGWALL: Well, going to database capacity for a minute, Mr. Shervill, whose database is it we're talking about, who owns it? 310 MR. SHERVILL: ADS owns the database. 311 MR. DINGWALL: And is that the Oracle database that you were discussing with Mr. Janigan yesterday? 312 MR. SHERVILL: Yes, it is. 313 MR. DINGWALL: Am I to understand then by your making reference to some need to expand that database that the size of that database that they had was inadequate for your needs? 314 MR. SHERVILL: The size of the database currently is inadequate to accommodate the additional information and the partitioning of that data and the querying of that data to accommodate rate-rider capability, that's correct. 315 MR. DINGWALL: Did you not at the outset with anticipate that with all the ancillary programs that were previously in the utility that you would require a database that had a substantial size? 316 MR. SHERVILL: no, if you recall, Mr. Dingwall we were separating the retail business and we were moving it off to an affiliate. I mean, we expected fully that all those transactions would now be a function of the retail services business and the utility would not be in that business any longer. 317 MR. DINGWALL: But correct me if I am wrong, Mr. Shervill, did not the billing system start out billing and accommodating all of these charges? 318 MR. SHERVILL: Well, no, I don't believe it did, because at the time that the system was designed, and forgive me, I don't have the exact date, but even though we were billing these things, I don't believe we expected that we were going to have to maintain that data for 24 months because we knew at the time that the business was going to be separated from the utility. 319 MR. DINGWALL: Did the separation of the business free up any space? 320 MR. SHERVILL: I believe it freed up some space. As I mentioned earlier, I believe we used the rental line to accommodate the unbundled storage information on the customer bill. 321 MR. DINGWALL: Now, in order to manage the needs of your billing system, you would undoubtedly forecast activity throughout a certain period of time, would you not? 322 MR. SHERVILL: I believe the company did or does do that on a regular basis, yes, in discussions with ADS. 323 MR. DINGWALL: Before developing this question, I just have a couple of questions with respect to the services that ADS is providing with respect to these rate riders. You mentioned earlier that the labour component of that service is 1.5253 million dollars, so that's $1,525,300; is that correct? 324 MR. SHERVILL: I don't believe I referred to that as a labour component, the 1,525,300 refers to software changes, testing and implementation costs of the vendor to migrate the current software to the new database platform, to change the software to recognize the new subrates, including query and rate update and billing and historical tracking functions. 325 MR. DINGWALL: Is that essentially a labour cost? 326 MR. SHERVILL: I wouldn't expect that the software changes are a labour cost, but I assume there are some labour costs embedded in that. More detail than that, I'm not able to provide you. 327 MR. DINGWALL: Do you know what the hourly rate being charged to you for the ADS people is? 328 MR. SHERVILL: I do not. 329 MR. DINGWALL: So if one were to -- okay. 330 Did you do the contracting with ADS, Mr. Shervill? 331 MR. SHERVILL: No, I didn't. 332 MR. DINGWALL: Okay. Would it be possible for you to undertake to obtain the hourly cost for the individuals that are being charged to Union by ADS? 333 MR. SMITH: No, it would not be possible. It's a separate company and in any event, it seems to me that we're beginning to skate dangerously close to confidential information. 334 MR. DINGWALL: In the Board decision that previously -- well, what we have on the record is Mr. Smith's refusal, what I'm wondering is what information is available and then we can determine what is producible and if so, in what contact. 335 MR. SOMMERVILLE: What you want, Mr. Dingwall, is the labour rate attended to this project? 336 MR. DINGWALL: That's correct. 337 MR. SOMMERVILLE: Arising from the ADS contract. 338 MR. DINGWALL: That's correct, which Mr. Smith may or may not maintain is confidential. 339 MR. SOMMERVILLE: I'm not certain that that actually is a component of the ADS contract per se. I'm wondering if -- 340 MR. SMITH: Sorry, I understand that it is. I understand that it's in the contract and further understand and I take from that that my friend doesn't need that information if the contract is already in the confidential record. 341 MR. DINGWALL: Let's leave that moment aside and maybe my friend and I can go offline and discuss what that rate is. 342 MR. SOMMERVILLE: If the answer is sitting there in a schedule to that contract, then that is an answer to your question and you would be in a position to argue that point in a confidential portion of your argument. 343 MR. DINGWALL: Right, and if my friend can point me to that, that would provide some assistance. 344 MR. SOMMERVILLE: Thank you. 345 MR. DINGWALL: Moving on from there, Mr. Shervill, I previously referred you to a decision of the Board in the 177-15 case in which the Board accepted the company's need for a new billing system based on, among other factors, the point that to make even simple changes to the old billing system required significant hours. And the figure 1600 hours was mentioned as being an exorbitant number of hours to have to make a change to a billing system. Are the number of hours associated with this rate-rider implementation in excess of 1600 hours? 346 MR. SMITH: Mr. Chairman, that information is also contained in the contract which has already been filed and my friend is aware that that is confidential. 347 MR. DINGWALL: I'm not asking him to mention the specific number here on the public record, I'm asking him whether or not it's higher than that. 348 MR. SMITH: Well, the number is what it is. We can all look at one number and compare it to another, whether it's higher or lower. 349 MR. SOMMERVILLE: I think the confidentiality of the number isn't protected if you ask whether the number is higher or lower than the number. I think that that compromises the confidentiality of that and we can look at the evidence and determine whether it's higher or lower and you can argue that in the confidential portion of your argument. 350 MR. DINGWALL: Okay. Just one moment, sir. 351 My final question to you, Mr. Shervill, is relating to the Energy Probe cross-examination materials from the confidential portion and the third document within that which is a document filed with the Securities and Exchange Commission in the United States and available publicly, which is the agreement of purchase and sale between Duke Energy Gas Transmission and ADS Data Systems. 352 That's at page 63 in the handwritten numbering. 353 In September of 2002, Mr. Shervill, Duke obtained -- or there were references that the data processing system in place between the parties at the time was adequate to meet the customers' needs at that time. There's also reference within that section to a five-year forecast that was delivered to the purchasers by the vendors, the vendors being Duke Energy Gas Transmission with a forecast of activity and a discussion of additional projects. 354 Mr. Smith can make whatever comments he likes with respect to the confidentiality and how that might be produced and I'm certainly warm to the review of that, but could I ask for the company's undertaking to produce that forecast? 355 MR. SMITH: The answer to the question is no, and the answer is you already have it because it's in the contract that's -- it's in the ADS contract, it's confidential, you already have a copy of it. And although I was not a participant on Friday afternoon, I understand that Mr. Birmingham testified to this forecast at that time. 356 MR. SOMMERVILLE: I think that's right, Mr. Dingwall. You're going to be having some discussions with Mr. Smith offline in any event on some of this subject matter and you may want to include that, but that's consistent with my recollection. And if there's some dislocation arising, a reasonable one, you can address us on that subject later. 357 Is that satisfactory? 358 MR. DINGWALL: Yes, I don't recall seeing it in the materials and it sounds like a discretely different document from the characterization within this paragraph and what I've seen, but Mr. Smith and I can discuss and that we'll return if it's not. 359 MR. SOMMERVILLE: There may be a question as to whether -- and I hesitate to mention this to some extent, but there may be some issue as to whether, if it is not the same question, whether it ought to have been put to Mr. Birmingham on Friday rather than this panel today, but we'll dole deal with that if and when it arises. 360 MR. SMITH: We've dealt with my pre-filing my objections already, Mr. Chairman. 361 MR. SOMMERVILLE: I don't want to predict an outcome, Mr. Dingwall, but that may well be an issue as you can bring it forward. 362 MR. DINGWALL: We'll discuss that if we get to that point, sir. 363 MR. SOMMERVILLE: Thank you. 364 MR. DINGWALL: And those are my questions for this panel. 365 MR. SOMMERVILLE: Thank you, Mr. Dingwall. 366 Mr. Moran. 367 MR. MORAN: Just before we start, I have a couple of documents I'd like to provide to you. 368 The first document is an example of a Union Gas bill which I'd like to mark as an exhibit, Mr. Chair, that would become Exhibit M.15.2. 369 EXHIBIT NO. M.15.2: EXAMPLE OF UNION GAS BILL 370 MR. MORAN: The other document is just for your convenience and the convenience of the witnesses, it's some provisions out of the Ontario Energy Board Act and doesn't need to be marked as an exhibit. 371 MR. SOMMERVILLE: Mr. Smith, are you -- 372 MR. MORAN: It's been provided to -- the bill has been provided to Mr. Smith. 373 MR. SMITH: The bill has been provided not the portions of the Ontario Energy Board Act. 374 MR. MORAN: I'm assuming Mr. Smith has some familiarity with the Act. 375 MR. SMITH: Well, some familiarity. I do. I'm not sure about the witnesses. 376 MR. SOMMERVILLE: You're presuming we have some familiarity with it. 377 CROSS-EXAMINATION BY MR. MORAN: 378 MR. MORAN: I have one very brief question for you, Mr. Hyatt, and it has nothing to do with the pieces of paper that have just been circulated. Can you confirm that Union doesn't need to buy any spot gas on a design-day? In other words, Union has sufficient deliverability when you put the ability to withdraw from storage plus your firm deliveries to meet a design-day peak; is that correct? 379 MR. HYATT: Could you repeat the question? 380 MR. MORAN: When you look at your ability to withdraw from storage and you add that to your firm deliveries, those two things together are sufficient to meet a design-day peak; is that correct? 381 MR. HYATT: From the design of the Dawn-Trafalgar system, we would expect the volumes that were coming from Dawn along with the deliveries that are made at the east end of the system would determine our system capability. Any shortfall between that and the demand would be met by a non-facility option such as winter-peaking service. 382 MR. MORAN: Including on a design-day? 383 MR. HYATT: That is what I was talking about, was on a design day. 384 MR. MORAN: Thank you. 385 The rest of my questions are for you, Mr. Shervill, and they do have to do with the pieces of paper that were just handed to you. 386 Just following up on a couple of questions that were put to you by Mr. Warren with respect to the volatility issue, you identified volatility and regulatory lag as one of the drivers for the proposal to build in rate-rider functionality; isn't that correct? 387 MR. SHERVILL: Yes, that's correct. 388 MR. MORAN: All right. And Mr. Warren already asked you some questions about the proposed change to the QRAM methodology which was accepted by the Board which went some way to addressing the issue of volatility; right? 389 MR. SHERVILL: Yes. 390 MR. MORAN: All right. And if you look at the excerpts of the -- from the Ontario Energy Board Act that you have in front of you, just before I turn to a specific provision in those excerpts, the other -- one of the other things that you pointed to was the significant public reaction to a recent decision of the Board that involved a very large retroactive increase; right? 391 MR. SHERVILL: Yes, that's correct. 392 MR. MORAN: And I take it when people were phoning, they weren't phoning to complain about the fact that the amounts weren't broken out into rate riders and so on, they were phoning to complain about the total amount that they were suddenly asked to pay; right? 393 MR. SHERVILL: I believe it was a combination of both of those things. I think predominantly it was about the size of the charge out of period, but it was also about their inability to understand how that was being reflected on their bill, and much of our call centre activity was designed to try and help customers understand what was actually going on and to match up the costs that were being billed to them with the actual periods where those costs were being incurred sometime prior. 394 MR. MORAN: Right. But it's fair to say that even if it had been broken out like that on the bill, people would still have been complaining primarily about the large bill increase that they were looking at. 395 MR. SHERVILL: I would agree they would certainly complain about the size of the bill in addition, yes. 396 MR. MORAN: Okay. And as you're aware, there were some amendments to the legislation perhaps driven by this particular problem as we see in the sections on the piece of paper that I gave you. If we look at section 4.1, it now says, this is section 36(4.1): 397 "If a gas distributor has a deferral or variance account that relates to the commodity of gas, the Board shall, at least once every three months, make an order under this section that determines whether and how amounts recorded in the account shall be reflected in rates." 398 Were you aware of that amendment to the Act prior to today? 399 MR. SHERVILL: Yes, I was. 400 MR. MORAN: And you'll agree that the purpose that have section is to address the issue that you had to deal with that the customers were complaining about; right? The large increases that appeared to be retroactive, this is a way of smoothing that problem out. 401 MR. SHERVILL: Yes, again, there is more than one way to do that. 402 MR. MORAN: Yeah. And by the same token, section 36(4.2) says: 403 "If a gas distributor has a deferral or variance account that does not relate to the commodity of gas the Board shall, at least once every twelve months, or such shorter period as is prescribed by the regulations, make an order under this section that determines whether and how amounts recorded in the account shall be reflected in rates." 404 So between those two sections, all deferral accounts, in effect, are covered for the purpose of looking at them and determining how they should be dealt with and smoothing out volatility, right? 405 MR. SHERVILL: Certainly the mechanics of how they would be dealt with, but I would note that non-commodity changes could still be a full 12 months out of period. 406 MR. MORAN: Right, and the Board of course, given the language there, can look at that more frequently than 12 months; right? 407 MR. SHERVILL: 12 months or such shorter period, yes. 408 MR. MORAN: At least once every 12 months. 409 MR. SHERVILL: Prescribed in the regulations. I'm not sure if the regulation has been filed on that yet. 410 MR. MORAN: Right and leaving aside whether anything has been prescribed by regulation, are you aware that the Board has in fact sent a letter to all gas distributors basically telling them that every 3 months on the QRAM schedule all balances, gas and non-gas balances, need to be reported to the Board? 411 MR. SHERVILL: Yes, I believe so. 412 MR. MORAN: All right. So again, these are all measures aimed at reducing the kind of volatility that you've indicated as one of the drivers for the rate-rider functionality that you want the ratepayers to pay for; right? 413 MR. SHERVILL: Yeah, again Mr. Moran, as I think I pointed out to Mr. Shepherd yesterday, there are two ways to handle this, one of them is to bury those costs in the primary rate and try to explain it verbally to customers. The other way is to provide for a rate rider, and we believe that providing the rate rider provides better transparency because it can be accommodated in addition to an explanation to the customer. 414 MR. MORAN: So if I understand your answer then, what you're saying is that as the Board receives the reports from the gas utilities and determines that it's necessary to deal with one, or all of, or some of those balances depending on the size of them, one way to deal with them is through a rate-rider process. 415 MR. SHERVILL: That's correct. 416 MR. MORAN: All right. Now, that brings me to Exhibit M.15.2, which is an example of a Union Gas bill. The first thing I'd like you to confirm, I assume you live in the Union franchise area, do you? 417 MR. SHERVILL: Actually I do not, no. 418 MR. MORAN: You do not. Do you recognize the bill format? 419 MR. SHERVILL: I do. 420 MR. MORAN: Thank you. And if you look at the bottom right-hand corner just above the "amount paid" box there is a date there, October 27, 2003. 421 MR. SHERVILL: Yes, sir. 422 MR. MORAN: So this is the current version of the bill, in other words; right? 423 MR. SHERVILL: Yes, I believe that's the case. 424 MR. MORAN: Just to assist you and me in dealing with the next number of questions I have, I wonder if you could just mark three different areas of the bill just so that we can then refer to it. 425 At the top right-hand side, there's a large box that sets out the specific charges for gas and transportation and storage and delivery and all of that. Could you just mark that area with an A, please? 426 MR. SHERVILL: With an A? 427 MR. MORAN: Yes. 428 MR. SHERVILL: Yes. 429 MR. MORAN: And then to the left of that box, there's a narrower box that has some messages in it, "important information about rates, please see this month's insert," there's something about furnace tests and something about smell of natural gas. Do you see that box? 430 MR. SHERVILL: Yes, I do. 431 MR. MORAN: Could you mark that with a B, please. 432 And finally, at the bottom, there's a box that runs across most of the bottom that has a message in it, "notice of gas service disconnection." Could you mark that with a C. 433 Now, Mr. Dingwall has I think covered with you to some extent the number of lines that might be available in area A, and I think you indicated to him that one of the lines that was available and had been used previously for the rental program is now dedicated to the storage charge; is that correct? 434 MR. SHERVILL: That's correct. 435 MR. MORAN: Okay. Now, when I look at this bill, what I see here is -- for gas, which is the commodity charge, I see two lines for the gas charge, one of the -- the first line is charging at a rate of 27.56 cents, the second line is charging at a rate of 25.5158 cents. I assume that what's going on here is that as a result of a Board order in the middle of a billing cycle, the rate changed and so you had to bill at two different rates in order to cover the entire billing period; is that correct? 436 MR. SHERVILL: Yes, sir, that's exactly right. 437 MR. MORAN: All right. So it's fair to say that there's at least two lines available to do that as well; right? It's right on the bill. 438 MR. SHERVILL: Again, it's not so much the lines are available but the physical space is available to accommodate at a smaller font size, which I believe is the case here, more than one line where we have to prorate a charge. 439 MR. MORAN: Right. And of course, when you look at what's going on there, it doesn't immediately jump out at you that there was a change in the rate in the middle of the billing period and so the way that's handled is if we go to area A, there's a message in area A saying, "Important information about rates. Please see this month's insert." Right? 440 MR. SMITH: Area B, Mr. Moran. 441 MR. MORAN: Sorry, my mistake, in area B. 442 MR. SHERVILL: That's correct. 443 MR. MORAN: So what that tells the customer then is there's a bill insert, if you go to the bill insert there will be an explanation saying that there's two rates, there was a rate change on such and such a date, and thus, that's why there are two changes for the gas; correct? 444 MR. SHERVILL: That's correct. 445 MR. MORAN: If we go down a little bit further on the line items in area A, we see the same thing with respect to delivery to you, this is the distribution rates; right? 446 MR. SHERVILL: That's correct. 447 MR. MORAN: And again, there's two lines there for the distribution rates and the same explanation applies here as the one we just discussed for the gas lines; right? 448 MR. SHERVILL: That's correct. 449 MR. MORAN: And then the other two charges that we see are the transportation line that you referred to and the storage line. 450 MR. SHERVILL: And the monthly charge, yes. 451 MR. MORAN: And finally the monthly charge. 452 Now, I'm wondering if you could undertake to provide how many lines are actually available to put into area A. When I look at area A, at least a third of it appears to be empty and so the question is, how many lines can you actually fit into area A? 453 MR. SHERVILL: Can I just clarify, Mr. Moran? Are you asking me whether or not that available space is capable of accommodating more lines or are you asking a more detailed question about the underpinning data management activity that has to go on behind the scenes in order for that line to show up on the bill? 454 MR. MORAN: How many lines can be currently accommodated by the system that you use to produce the bill or that ADS uses, in other words, to produce the bill. 455 MR. SHERVILL: Actually, it's not ADS that produces the bill, but -- yes, we can undertake to get you an answer to that. 456 MR. MORAN: All right. I'm just going to make a note of that because I have a number of things that you'll have to undertake and we'll wrap it up in one undertaking in a few minutes, if that's all right with you, Mr. Shervill. 457 Now, going back to area A again, if there isn't a change in a Board order, but a Board order gives rise to a rate rider that applies to gas or delivery, given what we see here, you could do what you've done here, you could use two lines for gas, one line could show the rate rider for gas, and one line could show the rate rider for delivery; isn't that correct? 458 MR. SHERVILL: I'm not sure of that, Mr. Moran. It would take somebody who is a little more expert in actual bill calculations and how that underpinning calculation is reflected on a bill to be able to give you the proper answer to that question. 459 MR. MORAN: All right. Let's just break that down a little bit then. Let's look at the first line for "gas", it says gas and then it says "at", and then there's a rate figure, "cents per cubic metre" and then a total; right? 460 MR. SHERVILL: Yes. 461 MR. MORAN: All right. Now, the rate rider would work exactly the same way, right, it would be gas at a rate rider cents per metre cubed and then a total; right? 462 MR. SHERVILL: Possibly it would show that way on the bill, what I'm getting at is I'm just not sure how the underpinning calculations and those calculations which are use today support the calculation behind the bill would take effect. 463 MR. MORAN: All right. So we'll add to the undertaking then that we're building here. Could you undertake to describe the mechanics of the system that's used to produce the two gas lines that we see on the bill and whether the same mechanics could be used to show an amount for gas and a rate-rider amount for gas? 464 And also to confirm whatever way the answer goes, that the same applies when you produce two lines for delivery. 465 MR. SMITH: We can do that. 466 MR. SHERVILL: I believe so. I would just point out that in a circumstance such as the one that you've put on the record, there could, in fact, be a need for four gas lines and four delivery lines with a rate rider because that rider might affect both activities. 467 MR. MORAN: Right. Again, that depends on how the Board ultimately ends up choosing to deal with the deferral account balances as they get reported every three months; right? 468 MR. SHERVILL: That's correct. 469 MR. MORAN: Now, turning to -- 470 MR. SHERVILL: Just to clarify in terms of the way the Board deals with it as to whether or not we should build it into the primary rate or, in fact, recover it prospectively through a rate rider. 471 MR. MORAN: That's right. 472 Turning to area B for a second, it is open, is it not, for the rate rider to be built into the primary rate and then a message to be put, as we see it here, "Important information about rates, please see this month's insert," that's an available option, is it not? 473 MR. SHERVILL: Yes, although I believe that the number of lines available in part B of the bill are limited as well and there are other messages that need to be communicated from time to time to customers but... 474 MR. MORAN: Right. In area B right now we see three messages, isn't that correct? 475 MR. SHERVILL: Yes, that's correct. 476 MR. MORAN: And there is a message at the top saying: "Please see the insert for important information about your rates"; right? 477 MR. SHERVILL: Yes. 478 MR. MORAN: There is another message that says: "Heating season is almost here, you might want to get your furnace checked." 479 MR. SHERVILL: Yes. 480 MR. MORAN: And then there is a further message regarding safety, what you do if you smell gas. 481 MR. SHERVILL: Right. 482 MR. MORAN: And there seems to be more space available in that area and we'll get to that in a second. 483 MR. SHERVILL: There may be space, but that doesn't necessarily mean that there are more lines available. I know from my personal experience in marketing that there are limitations on the number of words that can be placed. 484 MR. MORAN: So adding to the undertaking that we are building, I wonder if you could advise how many lines of text is available to be used in area B? 485 MR. SMITH: Mr. Moran, did you want the same undertaking, whether or not area B can also accommodate the rate rider, the description? You're looking for the same thing with respect to area B, I just want to make sure we're responsive. It's not the number of lines? 486 MR. MORAN: Just the number of lines of text that area B can accommodate. 487 MR. SHERVILL: It may actually come out in terms of lines and text and characters. 488 MR. MORAN: That would be fine, the number of lines of text is more useful than the number of characters because that doesn't tell us much about how many words you can put in there. 489 And by the same token, when we turn to area C, that also appears to be an area that messages can be put into because what we see there is not something that would typically show up on every bill; right? 490 MR. SHERVILL: I certainly hope not. 491 MR. MORAN: It's a notice of gas service disconnection, and I wonder if you could advise how many lines of text area C can accommodate and characters, as the case may be? 492 Now, given the language in area B about "Important information about rates, please see this month's insert," is there an insert every month? 493 MR. SHERVILL: There are inserts every month of one shape or fashion. They're not all to do with rate changes, but each time there is a rate change, there is an insert to explain. 494 MR. MORAN: All right. So it's open, therefore, given that there's an insert of some kind every month, to put a standard message in for the relevant months that a rate rider might be in place, right, to continue to explain every month the rate rider? 495 MR. SHERVILL: Yes, within the limitations of the number of text lines and other competition for that, yes, I would say there is. 496 MR. MORAN: And when you say the number of text lines available and other competition, you're talking about the insert now not the bill. 497 MR. SHERVILL: Well I'm talking about the competition for that available space if it is limited, and there are other messages that must be communicated to customers that month, there could be some limitation on that. 498 MR. MORAN: In the bill insert? 499 MR. SHERVILL: No, on the bill. 500 MR. MORAN: All right. If the bill just said, "important information please see this month's insert," if that was there, you're talking -- let's just make sure I know what you're talking about. There might be competition in area B -- 501 MR. SHERVILL: Yes. 502 MR. MORAN: -- for putting that message in on a regular basis. 503 MR. SHERVILL: That's correct. 504 MR. MORAN: All right. And in terms of what goes into the insert itself you have more flexibility; right. 505 MR. SHERVILL: Yes, that's correct, but I would also note there's competition for inserts as well. There are a variety of things that we want and need to communicate to our customers. 506 MR. MORAN: Again, the need to explain a rate rider will ultimately depend on how the Board determines is the most appropriate way to address the recovery of deferral balance amounts as they're reported every three months. 507 MR. SHERVILL: I would expect that regardless of the way the Board directs, there would be a need to explain any kind of a surcharge of some form, whether embodied in the primary rate or explained as a surcharge or rate rider. 508 MR. MORAN: Right, and that's what we see in the current example. There is a change in rate and there's an insert to explain about the details of that change in rate for gas an delivery; right, this is an example of that? 509 MR. SHERVILL: Yes. I'm not sure that this is a change in -- this is not a deferral balance or a surcharge, this is simply an indication that the rate did change midway through a billing period and therefore you are being billed for your consumption at two different rates within the one billing period. 510 MR. MORAN: Yeah, I think that's all I was suggesting, Mr. Shervill, this is one example of something that the Board does that has to be explained to the customers; right? Actual rates got changed in the middle of the billing period and that leads to the two lines for gas, the two lines for deliver, that has to be explained to the customers. 511 MR. SHERVILL: Yes. 512 MR. MORAN: And anything that comes out of the QRAM similarly might have to be explained to the customers, and depending whether the Board uses the rate-rider approach or has to be built into the primary rate, it would still have to be explained to customers. 513 MR. SHERVILL: Absolutely. I was simply trying to point out that if there were also a surcharge or deferral balance clearing on a prospective basis at the same time this was happening, then there would even are more lines required in order to reflect that and more explanation as well. 514 MR. MORAN: Right, again depending on how the Board ultimately chooses to deal with all this as deferral balances need to be cleared and whether it's going to be built into the primary rate or on the basis of a rate rider. 515 MR. SHERVILL: That's right. 516 MR. MORAN: Thank you. Now I think those are all my questions so it's time to summarize the undertaking and give it a number. 517 Mr. Chair, I think we're at Undertaking N.15.1 to provide three things: A, the number of lines that are available in area A of Exhibit M.15.2 using the current CIS assets; B, the system mechanics required to produce the two lines that we see in area A in Exhibit M.15.2 for gas and for delivery and whether the same system mechanics can be used instead of a rate change, a rate rider is the issue; and C, how many lines of text and characters can be accommodated in both area B and area C of Exhibit M.15.2. 518 MR. SOMMERVILLE: Thank you. 519 MR. MORAN: And those are all my questions, Mr. Chairman. 520 UNDERTAKING NO. N.15.1: TO PROVIDE A), THE NUMBER OF LINES THAT ARE AVAILABLE IN AREA A OF EXHIBIT M.15.2 USING THE CURRENT CIS ASSETS; B), THE SYSTEM MECHANICS REQUIRED TO PRODUCE THE TWO LINES THAT WE SEE IN AREA A IN EXHIBIT M.15.2 FOR GAS AND FOR DELIVERY AND WHETHER THE SAME SYSTEM MECHANICS CAN BE USED INSTEAD OF A RATE CHANGE, A RATE RIDER IS THE ISSUE; AND C), HOW MANY LINES OF TEXT AND CHARACTERS CAN BE ACCOMMODATED IN BOTH AREA B AND AREA C OF EXHIBIT M.15.2 521 MR. SOMMERVILLE: Mr. Smith, redirect. 522 MR. SMITH: Just a couple of questions, Mr. Chairman. 523 MR. SOMMERVILLE: Sorry, Mr. Smith, the Board has no questions. 524 RE-EXAMINATION BY MR. SMITH: 525 MR. SMITH: Mr. Shervill, if I can just pick up where Mr. Moran left off. Mr. Moran drew your attention to area B on Exhibit M.15.2. Do you have do you have that? 526 MR. SHERVILL: Yes, I do. 527 MR. SMITH: And he indicated to you that it would be possible, or would it be possible to describe the rate change in an insert that accompanied the bill. And my question to you is whether or not providing that information by way of insert would address the requirement you've raised before about maintaining the data for 24 months and if not, why? 528 MR. SHERVILL: Well, the simple matter of using section B to alert the customer to a bill insert explanation of the rate rider is one matter. It is certainly a separate matter for us to manage the database in order to keep track of that charge for a 24-month period, and that goes to the functionality of the database that underpins the billing system, the Oracle database that we are talking about in the rate-rider functionality. 529 MR. SMITH: Thank you. And Mr. Sanders, Mr. Janigan asked you about the TSSA's authority and whether the TSSA had the authority to fine Union. I ask you to turn to interrogatory J.34.72. 530 MR. SANDERS: Yes, I have it. In that interrogatory, in the answers in paragraph C, it states that the TSSA does have the authority to apply penalties for non-compliance as outlined under section 37 offences of the Technical Standard and Safety Act, 2000. 531 MR. SMITH: The long and the short of it is that you have the authority; is that correct? 532 MR. SANDERS: Yes I do. 533 MR. SMITH: Thank you very much. 534 No further questions, Mr. Chairman. 535 MR. SOMMERVILLE: Thank you. 536 There is -- this panel is excused. Thank you very much for your assistance in this matter. 537 PROCEDURAL MATTERS: 538 MR. SOMMERVILLE: There is a correction matter that arises from yesterday, and I thought I should just put it on the record. Mr. Thompson, during your cross-examination, and I'm referring to the paragraph 1175, I beg your pardon, 1179, I noted it at the time and then was distracted at the end of the day and neglected to highlight it. You referred the witness to Exhibit B.4, tab 4. I think what you meant to say was B.1, and all subsequent references were according to that change. 539 MR. THOMPSON: If you say so, Mr. Chairman. I think that's right, I just haven't checked that. 540 MR. SOMMERVILLE: Just so as we're going through the transcript, we have an accurate record. Thank you. 541 It would seem to be -- do you have an extensive examination-in-chief for the next panel, Mr. Smith? 542 MR. SMITH: The answer is Mr. Penny -- I don't, because Mr. Penny will be handling the next panel, but my understanding is he does not have such an examination. We can certainly get them on and get to the first cross-examination by the lunch break. 543 MR. SOMMERVILLE: That was the point of my question. So should we stand down for ten minutes while we shift chairs and then start the examination. 544 MR. SMITH: Yes, thank you. I should also advise that I understand from Mr. Warren and Mr. Janigan that they may be shorter than their estimates. 545 MR. WARREN: Mr. Chairman, I have an obligation this afternoon which requires me to be downtown and I will be no more than 15 minutes, so if it's possible to accommodate that, I appreciate that very much. 546 MR. SOMMERVILLE: I just want to emphasize to the parties, we are not running a race here. We obviously have an interest in ensuring that we're not languishing in the proceedings, but we're not languishing and we can certainly accommodate that. So we don't have to -- we're not under unnatural time constraint. 547 With respect to Thursday, this will come as no surprise to no anyone, we will be sitting on Thursday. 548 MR. SMITH: Thank you. 549 MR. SOMMERVILLE: And I think that kind of brings us somewhat back on to the track with respect to our projections and we'll see where they go. We'll break for ten minutes. 550 MR. SMITH: Thank you. 551 --- Recess taken at 11:55 a.m. 552 --- On resuming at 12:08 p.m. 553 MR. SOMMERVILLE: Thank you, please be seated. 554 Mr. Penny. 555 MR. PENNY: Thank you, Mr. Chairman. This next panel is the non-O&M financial panel that will deal with aspects of rate base capital budget process, non-O&M-related revenue requirement, capital structure, capitalization, and tax issues. 556 As you know from prior testimony in this hearing, Ms. Elliott is the director of accounting for Union Gas, Ms. Brodie Lumley is the manager of plant and general accounting for Union Gas, and Mr. Broeders, who is again back with us, is the manager of reporting and forecasts. 557 Those three witnesses have already been sworn. And we therefore just need to have Mr. Hebert come forward and be sworn. 558 UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT 559 P.ELLIOTT; Previously sworn. 560 W.BRODIE LUMLEY; Previously sworn. 561 M.BROEDERS; Previously sworn. 562 D.HEBERT; Sworn. 563 EXAMINATION BY MR. PENNY: 564 MR. PENNY: Mr. Hebert, just because you're new, I'll ask you to confirm that you are currently the director of taxation services for Union Gas. 565 MR. HEBERT: Yes, I am. 566 MR. PENNY: And prior to that you held various positions with private sector companies and with consulting firms particularly in the tax area? 567 MR. HEBERT: Yes. 568 MR. PENNY: You are a chartered accountant, I understand. 569 MR. HEBERT: I am. 570 MR. PENNY: And you have Bachelor of Commerce degree. 571 MR. HEBERT: Yes. 572 MR. PENNY: You are a member of the Institute of Chartered Accountants of British Columbia, Saskatchewan, and Ontario? 573 MR. HEBERT: Not of Ontario. 574 MR. PENNY: Not Ontario, all right, but British Columbia and Saskatchewan. And you're a member of the taxation committee of the Canadian Gas Association and the Ontario Energy Association? 575 MR. HEBERT: That's right. 576 MR. PENNY: And I understand, sir, that you have not previously testified before the Energy Board. 577 MR. HEBERT: That's correct. 578 MR. PENNY: So welcome to you, sir. 579 Now, your area of course is tax. Can you simply confirm for the record that the tax aspects of the evidence that are in B.1, D.1, E and F of this testimony and the undertakings relating to the tax issues were either prepared by you or under your supervision? 580 MR. HEBERT: That's correct. 581 MR. PENNY: All right. Thank you. 582 And with respect to the remaining panel members, Ms. Elliott, Ms. Brodie Lumley, and Mr. Broeders, can you simply confirm that the evidence that relates to the non-O&M finance, that is, the rate base, capital budget process, revenue requirement, capital structure, capitalization issues, that you participated in the preparation of that evidence and in the answering of interrogatories relating to that evidence? 583 MS. BRODIE LUMLEY: That is correct. 584 MS. ELLIOTT: Yes, we did. 585 MR. BROEDERS: That's correct. 586 MR. PENNY: Thank you. So you all adopt that evidence for the purposes of these proceedings? 587 MS. ELLIOTT: Yes. 588 MR. PENNY: Thank you. 589 So Mr. Chairman, there is no introductory comments so this witness panel is available for questions from intervenors. 590 MR. SOMMERVILLE: Thank you. 591 Mr. Warren. 592 MR. WARREN: Thank you, sir. 593 CROSS-EXAMINATION BY MR. WARREN: 594 MR. WARREN: Panel, I have only one area that I want to deal with and that is an area that has been shunted down the line by several panels and has been planted in your lap, with apologies, Ms. Elliott, and that is the weather hedges issue. 595 And in order to expedite matters, I'm going to be referring to three separate exhibits and perhaps you could turn them up. The first is the annual report of Union Gas which appears at Exhibit A, tab 12. 596 The second two are interrogatory responses, the first of which is Exhibit J.1.13 which is the response to Board Staff Interrogatory No. 13. 597 And the final one, panel, is a response to a CAC interrogatory and it is Exhibit J.7.3. 598 I apologize, Mr. Chairman, if I thought about it in advance, I would have copied this for you, but I just didn't. 599 MR. GOULDEN: What was the number on the CAC one? 600 MR. WARREN: J.7.3. 601 MS. ELLIOTT: I have all of that. 602 MR. WARREN: Thanks, Ms. Elliott. Now, Ms. Elliott, there is evidence in the record in this case that there were two weather hedges entered into, and before I deal with the specifics of those two weather hedges, I'd like to begin at a high level of generality and ask you to indicate for me what weather hedges are and, in particular, as a sort of subportion of that question, I'd like to know the distinction between weather hedges and the risk management that was discussed by one of the early panels in this proceeding, it seems like six months ago they were here, but it wasn't quite that long. 603 So what is a weather hedge and what's the distinction between a weather hedge and the risk management that we talked about earlier? 604 MS. ELLIOTT: Generally speaking, in the context of this case, the weather hedge that we're referring to is a financial instrument using heating degree days to protect or to manage and mitigate the risk of warmer weather. 605 I guess there are a number of forms, products out there to -- particularly, you can purchase weather insurance, or you can purchase what we've purchased are derivatives, puts and calls on the heating degree days. 606 MR. WARREN: And the distinction between -- you've characterized it in your answer as a way to manage the risk or mitigate the risk of warmer weather. What's the distinction between that and the risk management program that was the subject of another panel's discussion? 607 MS. ELLIOTT: The focus of the risk management program that was an earlier panel here has been the commodity risk management. So at Union Gas, the risk management committee focuses on commodity purchases and prices and enters into transactions, financial transactions to manage the price volatility on gas commodity. 608 MR. WARREN: And the risk, may I assume from your answer, that the risk you're talking about is the risk to utility income for transportation and delivery from movements up and down in weather and consequent changes in the volume of gas which is being moved; is that a fair understanding? 609 MS. ELLIOTT: Sorry, the risk that Union is managing for weather. 610 MR. WARREN: I'm sorry for the weather risk. 611 MS. ELLIOTT: Is the -- yes, we're managing the earnings impact of the delivery margin, if you will, so not the revenue in total and not the cost of gas, but the difference between the revenue and the gas costs which we refer to as delivering margin. So the volatility -- the weather variance impacts the margin of the company and then, therefore, the earnings of the company, and the weather hedge is designed to manage the variability in margin, delivery margin. 612 MR. WARREN: Now, can you describe for me, Ms. Elliott, what the process is which leads to the decision whether or not to enter into a hedge, and if I can focus the question a little bit, I'm interested in who makes the decision and on what information those people make the decision? 613 MS. ELLIOTT: At Union Gas, we've been subject to variations in earnings and margin due to weather sort of forever, I guess. The volatility in the most recent -- most current years has been getting to be fairly extreme. We've had warm winters for the last at least five years where we've had, on an ongoing basis during the year, to manage the impact that warm weather has on earnings. 614 We have periodically looked at options like weather insurance for mitigating some of that risk and have, in the past, found them to be fairly expensive options to purchase to manage the volatility. 615 Traditionally we've used our flexibility in managing O&M and deferring discretionary costs. We've had -- we look at our opportunities for additional revenue as a result of the warm weather to create a revenue stream that will help mitigate the earnings impact of weather, but more and more, it's becoming -- those options, the flexibility is being limited in terms of year after year managing and deferring discretionary O&M, and the S&T market has changed significantly with the Enron situation. To put -- some of those options have less flexibility than they have in the past. 616 So we started to look at options on the market which are becoming more prominent, and with the help of the risk management group in Houston, we looked at what options weather hedge puts and calls, what kind of arrangements we could have or enter into that would protect our earnings from the impact of warm weather. 617 It was a combination of sort of Union's management looking at the risk, and having gone to market and obtained a favorable arrangement for a costless collar in 2002, that caused us to enter into that transaction. It was approved by Union's management as well as the risk management committee in the Duke Energy Gas Transmission group. 618 MR. WARREN: Now, I asked a question of one of the earlier panels, the panel that Mr. Gardiner was on, whether or not the commodity folks were involved in it and he said no, it was -- he said it was you, not personally but -- let me turn the questions around. What is the data on which the decision is made? Is there some forecast within Union of anticipated likely temperatures over the course of a winter? 619 MS. ELLIOTT: It was not based on any forecast data, it was based on an assessment of the actual variances we've experienced over the past five years and looking at the situation where we've had, in each of those years, had to manage the impact of warmer than normal weather. The costless collar that we entered into in 2002 for November and December was an arrangement that limited or capped the exposure for warm weather in those two months, and in return, they provided the upside to the counterparty. 620 So it was at no cost to us to protect ourselves from the impact of warm weather in that year. 621 MR. WARREN: So may I take it from that answer that there was no analysis of particular forecast data for the winter of 2002-2003. 622 MS. ELLIOTT: No, we don't look at the weather forecast in entering into these transactions. 623 MR. WARREN: Who is involved, on the Union side, in addition to you? 624 MS. ELLIOTT: The arrangement was through the -- with the -- the information provided by the finance group under my direction, and approved by the president, who at the time was Ms. Peverett. 625 MR. WARREN: And then looking, I don't know that you need to turn it up in particular, but one of the interrogatory responses refers to approval from Duke Energy's risk management committee. I take it from the answer that without that approval you can't enter into these transactions; is that correct? 626 MS. ELLIOTT: That's correct. 627 MR. WARREN: Now, I'd like to turn from those general questions to -- sorry, one other question. When you -- you gave me an answer a moment ago indicating that weather insurance had become expensive. Can you give me an order of magnitude -- first of all can you describe what's involved in weather insurance and what kind of expense we're talking about? 628 MS. ELLIOTT: Several years ago, we looked at an insurance option, and I don't have all the specifics of that transaction but at the time it was going to cost us $5 million to purchase the insurance that we needed over -- in an insurance arrangement, you basically are just levelizing your -- the cost and the volatility in earnings. So over a period of time your premiums end up being equal to the amount of your losses. 629 MR. WARREN: It's a wash at best. 630 MS. ELLIOTT: Yes, over a number of years what it has the impact of doing is stabilizing your earnings. 631 MR. WARREN: If it's a wash over a period of years, the distinction -- would it be fair for me to say that with the derivative instruments, there is an upside possibility that you may make money and there's a downside possibility that you may lose money; is that fair? 632 MS. ELLIOTT: Sorry, the derivatives that we entered into have a band around them so that the strike heating degree days was higher than our forecast for the period and the protection was lower than our forecast. So there was a range in which we have some upside and some downside, but we've limited our downside. 633 MR. WARREN: I appreciate that. You're anticipating where I'm going to go, but I just want to make a distinction between the insurance on the one hand and the derivatives on the other. Do I understand, at a crude level, that with insurance the best you can do is that it's a wash over a period of time, as opposed to the derivatives where there may be some upside and there may be some downside? 634 MS. ELLIOTT: Actually I probably misspoke myself on the insurance. I think we were also exposed to some level of downside as well as under an insurance option, you would have potentially some upside in the period, but over the time that would come out in your premiums. 635 MR. WARREN: Now, the first of the two hedges was entered into as I understand the evidence in September of 2002 and was to cover a two-month period, that is November and December of 2002. 636 MS. ELLIOTT: That's correct. 637 MR. WARREN: And if you would turn up, please, the Board Staff interrogatory J.1.13. 638 MS. ELLIOTT: I have that. 639 MR. WARREN: Now, looking at your answer in the first small Roman numeral on the first page, the second to last paragraph indicates that Union paid Entergy-Koch, E-n-t-e-r-g-y K-o-c-h-, a sum of about $1.5 million; is that correct? 640 MS. ELLIOTT: That's correct. 641 MR. WARREN: Now, just for clarification purposes, Ms. Elliott, could you turn up the annual report which is Exhibit A.12 and turn to page 4. And in the second-to-last full paragraph on page 4 -- do you have it there, Ms. Elliott? 642 MS. ELLIOTT: Yes, do I. 643 MR. WARREN: It refers to the November/December weather hedge and it indicates that the company, being Union, paid out $2 million to the counterparty. And just for clarification purposes, I wanted to know what the difference was between the $2 million reported in the annual report and the $1.57 million in Exhibit J.1.13? 644 MS. ELLIOTT: There is no difference. The annual report just rounds to the nearest million dollars for reporting purposes. 645 MR. WARREN: We should a all be so lucky. That's what I'll tell my banker the next time I go in about debt. 646 Now, Exhibit J.1.13 on the first page also indicates that the amount paid under the hedge was reported as a reduction of gas sales and distribution revenue in 2002; is that correct? 647 MS. ELLIOTT: That's correct. 648 MR. WARREN: Now, I'd like you then to turn to the second -- if we could turn to the second of two weather hedges which was entered into on December 10th of 2002, and it was to cover a full year period, January 1, 2003 to December 31, 2003; am I correct? 649 MS. ELLIOTT: That's correct. 650 MR. WARREN: Now, the statement which appears -- the source of the statement -- on page 2 of Exhibit J.1.13, it says that the agreement, this is in the second paragraph, second last sentence, it says: "The agreements set the maximum payout by either party of $25 million Canadian." 651 Now, can you help me, Ms. Elliott, and tell me where it is that that is found? Just before you do that, Ms. Elliott, I'd like to clear up some confusion which may be mine alone, but if we could just sort out this exhibit and its appendices. 652 If you look at the first page, the second full paragraph, you'll see that the reference to the September 9th, 2002 contract between Union and Entergy-Koch is attached as appendix A. Now, when I look at what is marked as appendix A, it appears to be an agreement between Duke Energy Gas Transmission and Entergy-Koch Trading LP and the effective dates are January 1, 2003 to December 31, 2003. 653 MS. ELLIOTT: Okay. 654 MR. WARREN: I'm assuming that that's mismarked; is that fair? 655 MS. ELLIOTT: Yes, it is. That should be appendix C. 656 MR. WARREN: Okay. 657 MS. ELLIOTT: And conversely, appendix -- the copy I have has appendix B typed on it with A marked over it. 658 MR. WARREN: I don't have an appendix B marked in mine, but there is a second agreement and it's between Union Gas Limited and Entergy-Koch Trading LP for a period between January 1, 2003 and December 31, 2003, should that be appendix B? 659 MS. ELLIOTT: Yes. 660 MR. WARREN: And what is now marked as appendix B should be A; is that correct? 661 MS. ELLIOTT: That's correct. 662 MR. WARREN: All right. Now that we've identified what is appendix A, could you take me to that agreement and show me where the maximum pay-out of $25 million Canadian is stated? 663 MS. ELLIOTT: Appendix A is the agreement in effect for November 2002 and December 2002? 664 MR. WARREN: Yes, that's correct. 665 MS. ELLIOTT: The limit of that agreement was less than 25. 666 MR. WARREN: I apologize, I'm sorry. I should be dealing with appendix B. Having tried to clear up the confusion, I've just compounded it. 667 Let's deal for appendix B, and for the record, members of the Board, that is the agreement between Union Gas Limited and Entergy-Koch Trading LP, and it's for the period of January 1 to December 31, 2003, and it's respect of that that J.1.13 says the maximum exposure is $25 million Canadian, and I want to know in respect to appendix B, where we find the $25 million. 668 MS. ELLIOTT: Yes, if you look at the third page of the agreement. 669 MR. WARREN: Yes. 670 MS. ELLIOTT: Under subbullet P. 671 MR. WARREN: Sorry, subbullet...? 672 MS. ELLIOTT: P, the payment amount, the last sentence: 673 "The maximum amount payable by the floating amount pair shall not exceed $25 million Canadian." 674 MR. WARREN: Okay, thanks. Now, looking at Exhibit J.7.3, the answer to the CAC interrogatory, the third paragraph of the answer indicates that the estimated payout under the weather hedge, this is the second of the two weather hedges, is $20 million. It is reported in the 2003 bridge forecast as a reduction in gas sales and distribution revenues. Correct? 675 MS. ELLIOTT: That's correct. 676 MR. WARREN: Now, you and I agree that Union has had to pay $20 million under this, and that is substantially more expensive than it would have cost for you to obtain insurance for that period? 677 MS. ELLIOTT: The $20 million is an accrual as of the end of May, which reflects the impact of the favourable weather, if you will, for the period January to May 2003. So the heating degree days for that period have been colder than forecast and colder than the strike price on the hedge. So that revenue is repaid in return for this agreement. 678 MR. WARREN: So the net effect of that is what? 679 MS. ELLIOTT: The revenue we've received from our customers as a result of the colder weather is being accrued as payable to the counterparty under this hedge. 680 MR. WARREN: So is there an offset to the $20 million? 681 MS. ELLIOTT: We have received the additional revenues through higher volumes during the period as a result of colder weather, yes. 682 MR. WARREN: What's the net effect? Is Union having to pay something to Entergy-Koch, they have to pay for it, but is there an offset so it balances at the end? 683 MS. ELLIOTT: Yes, we've received 20 million in incremental revenue and accrued 20 million in payments for the same period. Sorry, we've actually received 27 million in incremental revenue because the hedge doesn't payout until after the first 100 heating degree days. 684 MR. WARREN: Now, there is also, as I understand the evidence, Ms. Elliott, in respect of the second of the two hedges for all of 2003, there is a separate agreement between Duke Energy Gas Transmission and Entergy-Koch Trading LP; is that correct? 685 MS. ELLIOTT: That's correct. 686 MR. WARREN: Could you explain to me what the relationship is between the what I'll call the Duke agreement and the Union agreement? 687 For the record, Mr. Chairman, the Duke agreement is at appendix C to Exhibit J.1.13. 688 What's the relationship between the two agreements? 689 MS. ELLIOTT: For 2003, those two agreements are opposite sides of the collar, if you will, so Union sold a call option on heating degree days, the transmission company, Duke Energy Gas Transmission, purchased the put option for this same transaction for 2003. 690 MR. WARREN: What's the practical effect of that, Ms. Elliott? 691 MS. ELLIOTT: The practical effect is it still remains to be a costless collar for the company. The reason for the differentiation was purely one of a tax issue in the U.S. that put the put in the U.S. company. 692 MR. WARREN: Is there any impact on who has to pay Entergy in the events that you have colder-than-normal weather? 693 MS. ELLIOTT: No, Union will pay Entergy-Koch in the event of colder weather under this hedge. 694 MR. WARREN: And under what circumstances would Duke be paid money by Entergy? 695 MS. ELLIOTT: Duke Energy Gas Transmission would be paid in the event that weather was warmer than the option, and the strike on appendix C was for 3,550 heating-degree days, so in the event that the temperature at Toronto Pearson for the year falls below that level, Duke Energy Gas Transmission would receive a payment from Entergy-Koch. 696 MR. WARREN: Now, would it be an accurate if somewhat crude summary of these two agreements that Union, if there's money to be paid to Entergy, Union has to be pay it. If there's money to be paid by Entergy, it goes to Duke? 697 MS. ELLIOTT: That's the structure of the 2003 agreement, yes. 698 MR. WARREN: And if the money is paid by Union to Entergy, it is recorded for accounting and rate-making purposes as a deduction from the revenues of the company; is that correct? 699 MS. ELLIOTT: It's records as a deduction from the revenues of Union Gas. 700 MR. WARREN: Union Gas. 701 MS. ELLIOTT: For 2003, yes. 702 MR. WARREN: And that has an adverse impact on the earnings sharing mechanism under the PBR regime; is that fair? Adverse impact from the perspective of the residential consumers among others. 703 MS. ELLIOTT: It have a net impact of zero in terms of the difference of the revenue we've received as a result of colder weather and the amount of the payout. The shareholder and the ratepayer still get a $7 million advantage for the colder than forecast weather. 704 MR. WARREN: That's the step that I'm not understanding, Ms. Elliott. If you get colder than normal weather there is money that is paid to Entergy; is that not right? 705 MS. ELLIOTT: It's money that the utility has received from its customers as a result of the colder weather, which in turn is then paid to Entergy-Koch under this call option, yes. 706 MR. WARREN: But in the circumstances of the warmer than normal weather, that's revenue which goes from -- there's a payment from Entergy to Duke; is that correct? 707 MS. ELLIOTT: The structure of this option for 2003 would have -- Union would experience a reduction in revenues due to the warmer weather and the payout to the shareholder would have been to the Duke Energy Gas Transmission company in the U.S. Under those circumstances for the purposes of computing earnings sharing for 2003, Union would have brought that payment into the earnings sharing calculation because it was a payment that the shareholder received the benefit of, but simply because the transaction wasn't booked in Union's accounts for the year it would have brought into the earnings sharing calculation and balanced the ratepayers' interests with the shareholders' interests in those circumstances. 708 MR. WARREN: Just keeping that answer in mind, if you could turn up J.1.13 at page 2 of 3, and it's about halfway down the page just before the small Roman numeral ii, the following statement appears, "Any payment received by DEGT," which is Duke Energy Gas Transmission; correct? 709 MS. ELLIOTT: Yes. 710 MR. WARREN: "In the event of warm weather will be reflected by Union in the calculation of earnings for sharing to ensure that the ratepayer also receives the benefit of the weather hedge." 711 What is the obligation of Duke Energy Gas Transmission to pay that money over to Union? 712 MS. ELLIOTT: There is no obligation for the transmission company to pay that money over to Union. 713 MR. WARREN: How, then, does Union and its -- Union and thereafter its ratepayers get the benefit of that money? 714 MS. ELLIOTT: It would have been an adjustment in the earnings sharing calculation. So today, our earnings sharing calculation is the earnings of Union Gas adjusted for some S&T revenues that are subject to sharing through the deferrals. That's, at a high level, the calculation, the earnings that will be subject to sharing. 715 In the event that in 2003, weather was warmer and we had experienced a reduction in revenues as a result of that warm weather yet we had, as a company, the shareholder had received a payout under the weather hedge, we would have adjusted earnings for sharing purposes to take that payout into account to calculate the ratepayers' portion of any earnings sharing for 2003. 716 The structure of the deal was one to deal with a tax issue created, potentially an issue with respect to earnings sharing. Making that adjustment brings that back to treating it, for regulatory purposes, as if the transaction had been done at Union Gas. 717 MR. WARREN: Now -- thank you for those answers, Ms. Elliott. 718 Now, the -- one of the earlier panels in this proceeding was the -- dealing with the risk management for the commodity portion of the business and it was seeking the approval or affirmation, if you wish, from the Board for the risk management activities. And I'm wondering, has Union ever sought approval of the Board for these weather hedges? 719 MS. ELLIOTT: No, we have not. 720 MR. WARREN: Is there a reason why you haven't sought approval from the Board for weather hedges? Why you have sought approval from the Board, if I can call it that, the other portion of your risk management activity? 721 MS. ELLIOTT: The use of the weather hedge in 2002 and 2003 was really just sort of another tool that the management of the company has used in addition to managing its O&M and looking for revenue opportunities to mitigate the impact of weather. It was not a transaction that we thought required regulatory approval to enter into. 722 MR. WARREN: Is it Union's intention to continue to use weather hedges? 723 MS. ELLIOTT: We are continuing to look at them, yes. 724 MR. WARREN: And in the appropriate circumstances, may I take it that Union will use weather hedges? 725 MS. ELLIOTT: Yes. 726 MR. WARREN: Those are my questions. 727 Thank you very much, sir. 728 MR. SOMMERVILLE: Thank you, Mr. Warren. 729 I think it's probably appropriate at this stage to take our lunch break. 730 We'll adjourn until 2:00. Thank you. 731 --- Luncheon recess taken at 12:45 p.m. 732 --- On resuming at 2:05 p.m. 733 MR. SOMMERVILLE: Thank you, please be seated. 734 Mr. Janigan. 735 MR. JANIGAN: Thank you, Mr. Chairman. 736 CROSS-EXAMINATION BY MR. JANIGAN: 737 MR. JANIGAN: First of all, there's a clean-up question that I have from the customer attachment panel that was kindly referred to this panel by them, and it refers to the impact upon rate base and the revenue requirement and rates for additions to the customer attachments for the years 2003 and 2004, the effect upon 2004 rate base revenue requirement and rates. 738 I wonder if it's possible to get an undertaking to -- and as I understand it, this measure is a straight mathematical calculation from the number of customer attachments; in other words, if you have 2000 customer attachments rather than 1,000, it's simply a matter of multiplying the number by two. So I was hoping to get the impact per thousand of customer attachments so that that could be used in terms of the -- as the factor in assessing the impact upon revenue requirement rates and rate base based upon that number. 739 Do you understand what I'm attempting to do? 740 MS. ELLIOTT: I think there were several interrogatories asked dealing with a similar issue. Unfortunately, I can't refer them to you at this point. 741 MR. JANIGAN: There's a number of them and one of them deals with 2003 adding mid-year, and what I would like to do is to try to get a per thousand customer attachments for both 2003 and 2004. I take it that if you increased the number in 2004 by a thousand, you would probably take a mid-year as the basis for that attachment, if you were taking the 2003, you would assume a full-year effect upon that. 742 I'd just like to get that on the basis of per thousand customer attachments, and it may well be that it's in the answers to the interrogatories and you're able to pull that out, but it I wanted to deal with issues associated both with rates, revenue requirement and rate base. Is that possible? 743 MS. ELLIOTT: You're looking for a calculation that says if we add a thousand more customers in 2003, what the impact would be in 2004, as well as if we added a thousand more customers during 2004, what the impact of those customers would be? 744 MR. JANIGAN: That's correct. 745 MS. ELLIOTT: Identifying the incremental capital cost, O&M, revenue and then calculating the revenue requirement on those items? 746 MR. JANIGAN: Yes, please. 747 MS. ELLIOTT: That can be done. 748 MR. MORAN: That would be Undertaking N.15.2, what Ms. Elliott just said. 749 UNDERTAKING NO. N.15.2: TO CALCULATE THE IMPACT IN 2004 OF ADDING 1,000 CUSTOMERS IN 2003, AS WELL AS ADDING 1,000 CUSTOMERS IN 2004, WHAT THE IMPACT OF THAT WOULD BE; IDENTIFYING THE INCREMENTAL CAPITAL COST, O&M, REVENUE AND THEN CALCULATING THE REVENUE REQUIREMENT ON THOSE ITEMS 750 MR. JANIGAN: Thank you. Now, I wanted to deal with cost of capital issues, and I want to first find out what the approach of Union would be in the event that the actual amount of common equity fell below the 35 percent amount in any year during the cost-of-service regime. Would you use the actual cost or would you use the deemed capital amount to calculate the return on equity? 751 MS. ELLIOTT: Sorry, could you repeat the question? 752 MR. JANIGAN: Well, assuming you were in a cost-of-service year and the actual component of the common equity fell below the 35 percent allowable level, would you use the actual level to calculate the return on equity and the subsequent revenue requirement, or would you use the 35 percent deemed amount? 753 MR. PENNY: Sorry, may I ask, Mr. Chairman, through you, whether when Mr. Janigan says "when you are in a cost-of-service year," do you mean in a year leading up to a test year or do you mean actually in a year in respect of which cost of service has been used to set rates? 754 MR. JANIGAN: The latter. You would be operating in a cost-of-service regime and the actual common equity percentage of the company is less than the Board's deemed common equity of 35 percent. What common equity ratio would you use in deriving the revenue requirement? Would it be the 35 percent or the lesser amount? 755 MS. ELLIOTT: Sorry, the revenue requirement is a concept that applies to the test year forecast. 756 MR. JANIGAN: Yes. 757 MS. ELLIOTT: The calculation of the rate of return -- the rate of return is earnings to common shareholder over average common equity. 758 MR. JANIGAN: Yes. 759 MS. ELLIOTT: In doing that, you have utility earnings and utility equity, we typically use the actual. The undertakings we have with the government would require the company to maintain the approved level of common equity, so I'm not sure how the level falls below the 35 percent during the period, but to the extent that it is as a result of warmer weather and earnings are less than we had expected and equity falls slightly below the 35 percent, we would use the actual common average equity for utility purposes in the ROE calculation, if you're talking about actuals. 760 MR. JANIGAN: I'd like to deal with rate base, and according to the blue-page update, the 2003 general capital budget, that's B.1, tab 2, page 2, the 2003 general capital budget has been reduced by approximately 1.4 million. 761 MS. BRODIE LUMLEY: That is correct. 762 MR. JANIGAN: And one of the reasons cited for the decline is commercial systems, Union Line, .8 million, and commercial system E-profile .8 million will be reduced respectively and replaced with the GDAR project spending of 2.8 million. Am I correct on that? 763 MS. BRODIE LUMLEY: That is correct. 764 MR. JANIGAN: Now, given that the GDAR project spending is a replacement of the commercial systems Union Line and E-profile does that mean that GDAR system will be and can be used for purposes that are normally carried out by Union Line and E-profile systems? 765 MS. BRODIE LUMLEY: That's not my understanding. My understanding is that that's a substitute of capital spending, so reduced capital spending on the two projects mentioned to allow for the capital spending in GDAR. 766 MR. JANIGAN: So there's no equivalents in terms of functionality? 767 MS. BRODIE LUMLEY: My understanding is that there is not. 768 MR. JANIGAN: Thank you. Now, my friend, Mr. Warren, took you through the evidence associated with the weather hedge this morning and I don't want to repeat that but I'd like to ask first, as a general proposition, as I understood it, weather risk is a risk that is to be borne by the Union shareholder; am I correct in that understanding? 769 MS. ELLIOTT: Yes. The risk of warmer weather is a risk that the shareholder is exposed to. 770 MR. JANIGAN: Now, how does your weather hedge reflect that particular understanding? 771 MS. ELLIOTT: I'm sorry, I'm not sure that I understand what you're... 772 MR. JANIGAN: Well, as I understand the way in which the weather hedge operates, there are costs of the weather hedge that are applied against the general revenue requirement and there are -- the general revenue is also reduced by amounts that are paid out under the weather hedge; am I correct on that? 773 MS. ELLIOTT: Sorry, you have to repeat that. 774 MR. JANIGAN: Well, the -- put it in another way. 775 Both the expenses and the revenues have implications in terms of the numbers for revenue requirement that don't simply involve the shareholders; in other words, there are amounts that are by which general revenue are reduced or amounts that are charged against the revenue requirement that are not simply the shareholder's responsibility. 776 MS. ELLIOTT: The weather hedge is a transaction that has taken place in 2002 as well as 2003. There are no costs or transactions in the test year that would impact our 2004 revenue requirement as a result of the weather hedge. 777 MR. JANIGAN: Well let me go at this another way. Is it possible that you could give me a -- you could produce the impact upon the revenue requirement and the rates as well as the impact upon the earnings sharing of the PBR if the weather hedge amounts were not included in the -- those calculations; in other words -- 778 MR. PENNY: Which calculation? 779 MR. JANIGAN: The calculations deriving the revenue requirement and the earnings sharing for the PBR. 780 MS. ELLIOTT: Sorry, there is no -- 2004, there's no impact. The weather hedge has no impact on the 2004 revenue requirement. 781 MR. JANIGAN: Okay. But, however, you were -- as I understood your evidence earlier that you were at the moment negotiating to enter into the weather hedge for the 2004 revenue requirement; am I correct. 782 MS. ELLIOTT: I said we were looking into continuing weather hedges, but we haven't entered into any agreements and there's been nothing -- the 2004 forecast is based on our forecast of, I'm going to use the word "normal weather", but the weather in the forecast is the 20-year trend forecast and that's the forecast we're using to set rates for 2004. So the revenue is a result of weather being on the -- the 20-year trend line is how we're setting rates. 783 As the company goes into 2004, a weather hedge would put a limit on the potential earnings losses as a result of weather being warmer than that level and could also, if we enter into a transaction similar to 2003, put a cap on the revenue generated by weather being colder. 784 MR. JANIGAN: Okay. Let's take it back to 2003. Can you give me the impact on the revenue requirement in 2003 in the event that the costs of the weather hedge and the payments from Union to the weather hedge company were not included in the calculation of the revenue requirement? 785 MR. PENNY: Well, Mr. Chairman, Ms. Elliott has said now three times in my notes that there is no revenue requirement, that the revenue requirement is only relevant to 2004. There is no revenue requirement for 2003. 786 MR. JANIGAN: But it has an impact upon 2003 rates, as I understand it. 787 MS. ELLIOTT: No, 2003 rates are set, they're in effect today. What the application that we're dealing with here is for rates effective 2004 for the 2004 test year. The weather hedge has no impact on those rates. 788 MR. JANIGAN: Okay. Now, in terms of the earnings sharing in 2002, is there any impact on the earnings sharing in 2002 as a result of the weather hedge? 789 MS. ELLIOTT: The weather hedge in 2002, we recorded increased revenues in November/December due to colder weather and paid $1,571,000 out in the weather hedge. So that was a cost in the 2002 forecast -- or in the 2002 actuals. That cost would have reduced earnings from what they otherwise would have been if the company had not entered into this costless collar to hedge weather for November and December. 790 MR. JANIGAN: I'm sorry, you paid out 1.5 million to the weather hedge company because of colder than normal weather? 791 MS. ELLIOTT: Yes, we received more revenue in the November/December period from our customers and that was paid out to Entergy-Koch as per the terms of the hedge agreement. 792 MR. JANIGAN: And if you did not have that hedge agreement, presumably that would not have been paid out to Entergy-Koch. 793 MS. ELLIOTT: That's correct. 794 MR. JANIGAN: And that money would have been available for earnings sharing; is that correct? 795 MS. ELLIOTT: Those earnings would have been reported to the shareholder and included in the earnings subject to sharing, yes. 796 MR. JANIGAN: And I believe you indicated in 2003 the impact of the weather hedge was that $20 million was paid to the earnings sharing -- the energy sharing -- 797 MS. ELLIOTT: Nothing at this point has been paid to the counterparty, but we have accrued at the end of May approximately $20 million. We also received a premium by selling the call option of 4.5 million, so we have a net payable or cost of the weather hedge in 2003 of 15,500,000. Sorry, those are pre-tax numbers. 798 MR. JANIGAN: And for 2004, there's no weather hedge entered into and there are no costs anticipated and associated with the weather hedge? 799 MS. ELLIOTT: There is nothing in our forecasted test year results other than a forecast of weather on the 20-year trend line. 800 MR. JANIGAN: And in the event that you do enter into a weather hedge, how will those amounts be reported? Similar to 2003? 801 MS. ELLIOTT: It will depend on the transaction we enter into, but if we enter into a similar arrangement where we purchase the downside protection and sell the upside, they would be recorded the same way as the 2003 transaction. 802 MR. JANIGAN: Thank you. 803 Mr. Chairman, those are all my questions for the panel. 804 MR. SOMMERVILLE: Thank you, Mr. Janigan. 805 Mr. Thompson. 806 MR. THOMPSON: That's me. 807 CROSS-EXAMINATION BY MR. THOMPSON: 808 MR. THOMPSON: Now, panel, I'd like to start, if I could, with just confirming the impact of the revisions, rate base revisions, capital budget revisions, white pages to yellow pages. Am I correct that the capital budget in the white pages was originally about $218 million. 809 MS. BRODIE LUMLEY: That is correct. 810 MR. THOMPSON: And that it then reduced in the blue-page update to about $163 million? 811 MS. BRODIE LUMLEY: That is correct. 812 MR. THOMPSON: And in the yellow-page update it's down to about $158 million, and this is for the 2004 test year. 813 MS. BRODIE LUMLEY: That is correct. 814 MR. THOMPSON: So the budget has reduced by $60 million between the time of the white-page presentation and the yellow-page update? 815 MS. BRODIE LUMLEY: That is correct. 816 MR. THOMPSON: And the white-page presentation was dated approximately, what? 817 MS. BRODIE LUMLEY: May 2003. 818 MR. THOMPSON: May. And the yellow page is based on actuals and forecast, is it a 5 and 7, roughly? The date of it and then the data that it's based on. 819 MS. BRODIE LUMLEY: The 2004, pardon me? 820 MR. THOMPSON: Yes. 821 MS. BRODIE LUMLEY: The 2004 is a forecasted 2004 spending. 822 MR. THOMPSON: Right. 823 MS. BRODIE LUMLEY: Dated October 2003. 824 MR. THOMPSON: Right, but it takes into account 2003 actuals to a certain period and then forecast to a certain period; am I correct, is it a 5 and 7? 825 MS. BRODIE LUMLEY: The 2004 is a 12-month forecast. 826 MR. THOMPSON: I appreciate that, but the inputs on the white-page presentation were 2003 forecasts in their entirety if I'm not mistaken. 827 MS. BRODIE LUMLEY: The 2003 actuals today do not affect the 2004 forecast. 828 MR. THOMPSON: They do not? 829 MS. BRODIE LUMLEY: No. 830 MR. THOMPSON: They have no influence? 831 MS. BRODIE LUMLEY: The 2004 capital forecasts, specific to that. 832 MR. THOMPSON: Okay. So what's happened to date in 2003 has no impact on this $60 million -- was not a driver for this $60 million reduction in capital budget; is that what you're telling me? 833 MS. BRODIE LUMLEY: There could be some cascading effect or some realignment of spending so I have to -- I misspoke myself. So, for example, GDAR, there was an affect in the GDAR where it was realigned between 2003 and 2004, whereas, it was originally forecasted to be spent in 2004. 834 MR. THOMPSON: Okay. But I take you to be telling me generally speaking, the impact of what has happened to date in 2003 is not a driver for the capital budget reductions that you're now forecasting for 2004. 835 MS. BRODIE LUMLEY: Generally speaking; however, it can have a cascading effect and a realignment of spending. 836 MR. THOMPSON: All right. Now, we've also, I believe, seen a significant decline in 2003 capital spending; is that right? Have I got that straight? 837 MS. BRODIE LUMLEY: From the white to the blue? 838 MR. THOMPSON: From the white to the blue. 839 MS. BRODIE LUMLEY: Yes, there was a $10.1 million decrease. 840 MR. THOMPSON: Thanks. 841 All right. Back to 2004 again, this $60 million reduction in capital spending appears to me to lead to about a $42 million reduction in rate base; is that the order of magnitude? I got these numbers from the B exhibit and from the testimony. Your evidence in B.1, tab 1 updated at line 10, this is the blue sheets, tells us that rate base has decreased by $40 million and then the yellow-page update doesn't give us the further reduction, but it's something slightly less than $2 million so that's where I got the 42 million. 842 MS. ELLIOTT: That's correct. 843 MR. THOMPSON: And -- 844 MS. ELLIOTT: Excuse me, maybe I should look at the line items before the total. 845 MR. THOMPSON: Yeah, the total is in the yellow sheets at B.3, tab 1, schedule 1. 846 MS. ELLIOTT: The net utility plant is only down by about $14 million, that would be the impact of the reductions in capital. The bigger reduction is in the working capital components. 847 MR. THOMPSON: Okay. 848 MS. ELLIOTT: And it's in the ABC receivable and the customer deposit line where the biggest impact has taken place. 849 MR. THOMPSON: I think you're right, Ms. Elliott, we really should look at Exhibit B.3, tab 1, schedule 1, white sheet and compare it to the yellow sheet to see which line items have changed to reduce the rate base by about $42 million? 850 MS. ELLIOTT: Yes. 851 MR. THOMPSON: All right. And as you pointed out, it's not all plant, it's other items as well. 852 Am I correct that the delivery-related revenue deficiency for the test year has declined by about $6 million? I found in the white sheets in the evidence 110 million was the delivery-related revenue deficiency, the blue sheets, 105, and the yellow were down to 104 million. 853 MS. ELLIOTT: That's the estimate of the delivery-related deficiency. Certainly the cost-allocation and rate design evidence would have a more accurate number, but at a high level, that's correct. 854 MR. THOMPSON: Okay. And the overall rate of return that the company is seeking on that rate base, I think I find in F.3, tab 1, at 9.64 percent; is that -- maybe it's not tab 1. It's in here somewhere. Yeah, F.3, tab 1, schedule 2, page 1, line 5, requested rate of return, 9.64 percent. 855 MS. ELLIOTT: That's the after tax rate of return on rate base. 856 MR. THOMPSON: All right. 857 MS. ELLIOTT: The requested rate of return on equity is on the next page at Exhibit F.3, tab 1, schedule 2, page 2 of 2, line 5 is 11.63 percent. 858 MR. THOMPSON: Right. Well I'm talking about overall return on rate base because as I understand it, that number is the sum of the weighted components that appear on the page you just read from F.3, tab 1, schedule 2, page 2. 859 MS. ELLIOTT: That's correct. 860 MR. THOMPSON: Okay. And would you take, subject to check -- well, could you just undertake to provide for me the weighted components of the capital -- the overall -- I'm sorry, the weighted components of the overall return on rate base that's being sought? In other words, just add a column to Exhibit F.3, tab 1, schedule 2, page 2 to show the weighted cost of long-term debt, unfunded debt, and so on. 861 MS. ELLIOTT: I think we have an interrogatory response, but we will -- if we can't find the response, we'll provide this schedule. 862 MR. THOMPSON: In it's in the record, fine, if you could tell me where it is, and what I was interested and maybe you could provide it to me, and maybe it's a simple calculation you could do now, is the pre-tax overall return on rate base, we have to gross up the equity component for taxes, as I understand it. Is that number easy to do? 863 MR. BROEDERS: It's 11.64. 864 MR. THOMPSON: It's 11.64? 865 MR. BROEDERS: Percent, yes. 866 MR. THOMPSON: And is it only the equity component that's subject to tax. 867 MR. BROEDERS: Both classes of equity, the preference shares and common equity. 868 MR. THOMPSON: Thanks very much. 869 So just as a rough check on the reasonableness of the decline in the delivery-related revenue deficiency from 110 million to 104 million I did a ballpark calculation of 12 percent times the $42 million reduction, it came out to something in the order of $5 million and that suggested to me that this reduction was tracking the -- was tracking the overall reduction in rate base. Is that a high-level check that is appropriate to perform? 870 MS. ELLIOTT: I think that's a reasonable calculation, yes. 871 MR. THOMPSON: Okay. Let's turn -- 872 MR. SOMMERVILLE: Mr. Thompson, there was an undertaking embedded in your questioning. I believe Ms. Elliott was undertaking to either provide you with a reference to the interrogatory that answered your question or to provide you with the answer, and just so that we don't lose sight of it. 873 MR. THOMPSON: Yes thank you, Mr. Chairman, much appreciated. 874 MR. PENNY: And that was for the weights of the components of capital on F.3, tab 2, schedule 2, page 2. 875 MR. THOMPSON: Yes, that produce the 9.64 percent overall return on rate base. 876 MR. MORAN: That would be become Undertaking N.15.3. 877 UNDERTAKING NO. N.15.3: TO PROVIDE THE WEIGHTS OF THE COMPONENTS OF CAPITAL ON EXHIBIT F.3, TAB 2, SCHEDULE 2, PAGE 2 878 MR. THOMPSON: I'd like to turn to the weather hedge topic that's had a lot of air time. And we've been told the weather hedge is a financial instrument, is that the phrase that its -- that describes it, Ms. Elliott? Is that the way you describe it? 879 MS. ELLIOTT: Yes, it's a derivative. 880 MR. THOMPSON: And I'm a little bit unclear, maybe everybody else isn't unclear about the parameters of the coverage. I understood that if weather is colder than normal, then Union would pay to the company that's providing this coverage money up to a certain level; is that right? 881 MS. ELLIOTT: That's correct, although I'm not sure I'd use the word "normal." There's a strike amount in the contract so that if the heating degree days at Toronto Pearson are greater than 3,808 for the full year -- 882 MR. THOMPSON: Yes. 883 MS. ELLIOTT: -- for each heating degree day above that strike, we'll pay $78,000 per heating degree day. That's approximately equal to the revenue, the delivery margin that we will get from our customers as a result of that heating degree day. 884 MR. THOMPSON: Okay. And I guess what I'm confused about is where does the 3,808 sit in reference to the normal degree day at Pearson in the 30-year average weather normal methodology? 885 MS. ELLIOTT: It's about 100 heating degree days more than the average, so I'm going to say the average at Toronto Pearson would be about 3,700 heating degree days. 886 MR. THOMPSON: Okay. And so the -- if I can put it this way, the shareholders' reward for colder than normal weather under the 30-year average methodology kicks in at 3,700 degree days at Pearson. 887 MS. ELLIOTT: The 3,700 heating degree days, I'm not sure that it's the 30-year average. 888 MR. THOMPSON: Is it close? 889 MS. ELLIOTT: I mean the point is if normal at Pearson is 3,700 and the actual heating degree days are at 3,710, those 10 heating degree days, the revenue from those will be recorded as revenue and booked as shareholder earnings for the year. 890 MR. THOMPSON: Okay. And so the -- it's the -- about 100 basis points in this heating degree day spread above 3,700 that provides the $7 million that you're talking about with Mr. Warren? 891 MS. ELLIOTT: That's correct. The fact that the strike on the option doesn't kick in until we've recorded 100 heating degree days favorable to the forecast. 892 MR. THOMPSON: So then basically then the shareholder has made a deal where it can keep the first $7 million of reward associated with colder than normal weather, but above that, it coughs it up to the hedge provider. 893 MS. ELLIOTT: We sold the variance in heating degree days above the 3,800 heating degree days and we received a $4.5 million premium for that sale, yes. 894 MR. THOMPSON: Well let's just talk about before the sale of the coverage. You had -- you had a deal, as I understood it, where -- I now understand it where the first $7 million, in effect, dollars of reward associated with colder than normal weather Union would keep, and then the rest, up to the next 25 million, it would have to pay to the hedge service provider; do I understand that right? 895 MS. ELLIOTT: Yes. 896 MR. THOMPSON: Okay. And so if there were $32 million of reward associated with colder-than-normal weather, Union would get 7 and the -- a third party would get 25; right? 897 MS. ELLIOTT: If the weather variance for the year resulted in $32 million more revenue from our customers or margin, Union's shareholder would keep 7 and the pay-out to -- on the weather hedge would be 25, yes. 898 MR. THOMPSON: So put another way, Union's shareholder was prepared to forgo $25 million of colder than normal reward, colder than normal weather reward, to obtain downside coverage. 899 MS. ELLIOTT: The sale of the call option, yes, was what Union's shareholder agreed to provide in return for the purchase of the put option to protect against warmer weather. 900 MR. THOMPSON: Okay. Well, I'm not -- I haven't got to the sale of anything yet. I'm just talking about what the original deal was. 901 For $25 million of foregone reward, Union's shareholder would get, as I understand it, $25 million of underearnings protection caused by warmer-than-normal weather. 902 MS. ELLIOTT: We gave up the opportunity to earn in a colder-than-normal scenario to protect the warmer-than-normal situation. 903 MR. THOMPSON: Right. And the degree of protection you got, as I understand it, was $25 million? 904 MS. ELLIOTT: Yes. 905 MR. THOMPSON: Was there, again, a corresponding strike level below the 3,700 or did it kick in at 3,700. 906 MS. ELLIOTT: No, the floor is at 3,550, so there's 150 heating-degree days on the downside. 907 MR. THOMPSON: And then below the 35 -- so there was a band above and below the 3,700. 908 MS. ELLIOTT: Yes. 909 MR. THOMPSON: Where it was, in effect, business as usual and then this protection kicked in and the protection was an equivalent amount, $25 million. 910 MS. ELLIOTT: That's correct. 911 MR. THOMPSON: All right. Okay. Now you sold something, what is it you sold? 912 MS. ELLIOTT: Sorry, what we gave up was the opportunity to earn additional revenues in a colder-than-normal scenario for the protection in a warmer-than-normal scenario. 913 MR. THOMPSON: Right. 914 MS. ELLIOTT: So we bought the protection in return for providing the upside to the counterparty. 915 MR. THOMPSON: Then you sold something. 916 MS. ELLIOTT: No, that is what we -- the option we sold was a payment in the event that weather was colder than the 3,800 heating-degree days. 917 MR. THOMPSON: Okay. All I do is lose money buying shares, puts and calls is not in my portfolio yet, so you'll have to bear with me. 918 Looking at the coverage, I've got that straight, there's the dead band around 3,700 degree days and then above and below, you either pay or you either receive. 919 MS. ELLIOTT: That's correct. 920 MR. THOMPSON: And the reality is, in 2002 you paid. 921 MS. ELLIOTT: For the hedge we entered into for November and December, yes, we paid. 922 MR. THOMPSON: And the amount, as I understand it, that you paid, was about 1.2 million. 923 MS. ELLIOTT: 1.6 million. 924 MR. THOMPSON: $1.6 million. And that amount was recorded in the books as a reduction to revenues; have I got that straight? 925 MS. ELLIOTT: Yes. 926 MR. THOMPSON: Now, were there any other costs associated with the transaction recorded in the books for 2002? 927 MS. ELLIOTT: There were brokerage fees paid to the broker that did the deal for us of 25,000. 928 MR. THOMPSON: And that's it? 929 MS. ELLIOTT: That's it. 930 MR. THOMPSON: Okay. And were those costs recorded as a reduction to revenues or were they below the line, i.e., expenses? 931 MS. ELLIOTT: I don't know. 932 MR. THOMPSON: Okay. We'll come back to it in a second. Perhaps an undertaking that may clarify some of this. 933 Let's move to 2003. For the coverage that you obtained which was 25 million above -- sorry, 25 million below the 3,500 degree days, $25 million in exchange for $25 million above the 3,800 some-odd degree-day threshold. It's been colder than normal in 2003. 934 MS. ELLIOTT: Yes, it has. 935 MR. THOMPSON: All right. And so you've had to pay money to third parties. 936 MS. ELLIOTT: We haven't paid anything. 937 MR. THOMPSON: Sorry, you've accrued payments to third parties. 938 MS. ELLIOTT: Yes. 939 MR. THOMPSON: All right. And the amount accrued is a net payment that's amounting to about $15 million; is that right? 940 MS. ELLIOTT: At the end of May, it was $20 million that we had accrued. It's about 17 at this point. 941 MR. THOMPSON: All right. About 17. 942 MS. ELLIOTT: Yes. 943 MR. THOMPSON: All right. And between now and the end of the year, what is it that will drive that number up and what is it that will drive that number down? 944 MS. ELLIOTT: Warmer weather for the balance of the year will drive that number down, and colder weather will drive that number up. So year to date, we are above the strike price on that option since we're accruing the payment. If we continue to see weather colder than average, that 17 million will increase. If it's warmer for the balance of the year, the 17 million will decrease. 945 MR. THOMPSON: So we've got roughly two months left to go in the year. Is there any scenario where that number comes back to zero? 946 MS. ELLIOTT: In an extreme warm December, it could come back to zero. 947 MR. THOMPSON: All right. That would be a highly unlikely probability. 948 MS. ELLIOTT: Actually, in the last couple of years, we've had that kind of variance in the month of December, so it is possible. 949 MR. THOMPSON: Okay. And so you've accrued these charges at the moment and they may go up or down. Are they being accrued as reductions to revenue? 950 MS. ELLIOTT: Yes, they are. 951 MR. THOMPSON: All right. And are there any costs other than these accruals that have been incurred in 2003 that are recorded in the books? 952 MS. ELLIOTT: None. I think the brokerage fee for 2003 was expensed in 2002. 953 MR. THOMPSON: Okay. So in terms of this debate about the impact of these transactions on earnings sharing, we have, in the record somewhere, an earnings calculation for 2002 and there's the historic revenue sufficiency/deficiency calculations in the record, and it may be there that that document surfaces. But what I would ask you to provide is a calculation of the revenue sufficiency and earnings, subject to earnings sharing, this may be two documents or one, I don't know, for 2002 on the assumption of no weather hedge. 954 Could that be done? 955 MS. ELLIOTT: The revenue sufficiency for 2002 and the earnings sharing calculation for 2002 assuming that the company did not enter into the weather hedge? 956 MR. THOMPSON: Correct. 957 MS. ELLIOTT: That can be done. 958 MR. THOMPSON: All right. And then moving it forward. 959 MR. MORAN: That would be Undertaking N.15.4. 960 UNDERTAKING NO. N.15.4: TO PROVIDE A CALCULATION OF THE REVENUE SUFFICIENCY AND EARNINGS, SUBJECT TO EARNINGS SHARING, FOR 2002 ON THE ASSUMPTION OF NO WEATHER HEDGE 961 MR. THOMPSON: Moving to forward to 2003, please, we have in Exhibit F.4, tab 1, schedule 1, the blue sheets, a current revenue sufficiency calculation of about $2.5 million. 962 MS. ELLIOTT: That's correct. 963 MR. THOMPSON: And I'd ask you to redo that to show what the sufficiency would be assuming no weather hedge in 2003. The blue sheets reflect your forecast accrual of the 15 or the 17 -- how much -- 964 MS. ELLIOTT: They reflect the accrual of $20 million. 965 MR. THOMPSON: $20 million. Okay. So if the weather hedge comes out of the revenue sufficiency calculation for 2003, it would increase to about $22.5 million? 966 MS. ELLIOTT: Sorry, the $20 million accrual should probably be reduced by the fact that we received $4.5 million of revenue in return for that option. So it's the $15 million that would... 967 MR. THOMPSON: So this number, exclusive of the weather hedge, would be something in the order of 15 -- sorry, $17.5 million; is that right? 968 MS. ELLIOTT: Yes. 969 MR. THOMPSON: All right. So unless you want to check that, I'm happy with that number and I just need the other undertaking. 970 MR. PENNY: Can we just clarify whether that's before or after tax? 971 MR. THOMPSON: Sorry? 972 MR. PENNY: Do you want to clarify whether that's before or after tax? 973 MR. THOMPSON: 17.5 million is -- 974 MS. ELLIOTT: Is before tax. 975 MR. THOMPSON: Okay. Well, the total revenue sufficiency number is an after-tax number; right? 976 MS. ELLIOTT: No, it's a pre-tax number. 977 MR. THOMPSON: It's a pre-tax number. This is gross revenue. 978 MS. ELLIOTT: The 2,496,000 as a pre-tax would be increased by the $15 million. 979 MR. THOMPSON: So Penny is just trying to confuse me. 980 Gross and the 17.5 is gross. Right? 981 MS. ELLIOTT: Yes. 982 MR. THOMPSON: And we won't do the earnings sharing calculation now because that's a year-end calculation that would then be taken into account in 2005; is that right? 983 MS. ELLIOTT: 2004, I think. 984 MR. THOMPSON: Oh, yeah. We're only in 2003? Right. Next year. 985 MS. ELLIOTT: Next year. 986 MR. THOMPSON: All right. And it may change depending on how weather plays out between now and the end of the year. 987 MS. ELLIOTT: It may change, yes. 988 MR. THOMPSON: Okay. Now, as you're aware, -- well let me just ask you a few more questions about the weather hedge, and I think this is pretty clear, but let me preface this. Would you just describe, Ms. Elliott, in your own terms what this weather hedge is designed to do? 989 MS. ELLIOTT: The weather hedge is really intended to mitigate the impact on earnings of warmer weather and stabilize the company's earnings. As you know, our earnings are subjects to variances depending on actual weather, and it is one of the things that has probably the most significant impact on our results. And the purpose of the weather hedge was to mitigate that volatility. 990 MR. THOMPSON: Okay. So would it be fair to characterize the measure as a weather-related underearnings protection caused by warmer than normal weather, or underearnings protection caused by warmer than normal weather? Is that a fair description of the objective of the measure? 991 MS. ELLIOTT: It's to limit -- to put some limits on the variability -- the impact of weather on earnings. 992 MR. THOMPSON: Well, do you agree that it reduces the shareholder's risk of exposure to the consequences of warmer than normal weather? 993 MS. ELLIOTT: It's one of the ways the shareholder has available to it to manage that risk, in addition to managing expenses and looking for additional revenue opportunities, it provides yet another tool to manage the risk of associated with weather variances. 994 MR. THOMPSON: And I think that's a yes answer to my question. 995 MS. ELLIOTT: The risk is still there, it's a tool to manage the risk, and the use of the tools, the expectation would be is as management uses the tools available to it, it can reduce the risk. 996 MR. THOMPSON: And at the time that you used these tools in 2002 and 2003, normal weather was being measured by the 30-year average method; is that correct? 997 MS. ELLIOTT: For our forecast purposes, we had started to use the 20-year trend method in 2002. We had actually used a 30-year trend in 2001, so for management purposes and operational purposes, the company had begun to forecast the forecast of impact of weather on its revenues so that it could take some action and look at revenue opportunities and cost management opportunities to do that. Rates were set on the 30-year average, but management's forecasts were recognizing the warming trend. 998 MR. THOMPSON: All right. Well, the exposure to the risk of warmer than normal weather was based on the 30-year average method. Surely that's correct. 999 MS. ELLIOTT: The difference between the actual weather and the weather used in setting rates would be the difference between actuals and the 30-year average if that's your measure of exposure. We had recognized some of that reduction in our forecast in order to take corrective action in our cost and revenue management. 1000 MR. THOMPSON: Well, I won't fence with you anymore, I think you're agreeing with the substance of my question. If not, I'll argue it. 1001 I suggest to you that for the shareholder, the weather hedge against the risks of warmer than normal weather in 2002 and 2003 achieved a result very similar to the result that the adoption of the 20-year trend normal method will achieve. Do you agree with that? 1002 MS. ELLIOTT: No. 1003 MR. THOMPSON: Why not? 1004 MS. ELLIOTT: We were forecasting in those periods revenues using the 20-year trend. We were -- the hedge activity was to deal with variances from that forecast level. We had already taken steps in revenue and cost management to deal with the difference between the 30-year trend -- 30-year average and the 20-year trend. We still had the difference between the actuals and the 20-year trend to deal with, and that's what the weather hedge took account of. 1005 MR. THOMPSON: Well let me try this. I would suggest to you there are probably two ways that you could -- a shareholder could reduce its exposure to this warmer than normal weather risk. One would be by changing the definition of "normal," which is what you're doing in this case, or two, foregoing some of the colder than normal reward, colder than normal weather reward to obtain the warmer than normal weather protection. Do you agree? 1006 MS. ELLIOTT: I don't think they're exclusive. As I said, our current rates are set using the 30-year average. That assumes more revenue than we're actually seeing so there's a difference between the 30-year average methodology and the actual weather. We've reduced that by changing our forecast methodology to use the 20-year trend. There's still a difference between the 20-year trend and the actual, and we've reduced or mitigated that risk through the weather hedge. I don't think those are two items that are interchangeable, I think they all need to be used to manage the weather risk. 1007 MR. THOMPSON: Well, they may not be interchangeable, but there certainly is some similarity. Would you agree with me that the -- what the 2003 weather hedge demonstrates is that Union's shareholder is prepared to forego up to $25 million of reward associated with colder than normal weather to be relieved a commensurate degree of warmer than normal weather exposure? 1008 MS. ELLIOTT: We have, in order to gets the $25 million worth of protection against warmer than normal -- warmer weather, we have given up the opportunity to earn $25 million in circumstances where the weather was colder. 1009 MR. THOMPSON: Okay. And we know that the 20-year trend is going to add $20.4 million of cost to ratepayers for the 2004 test year; correct? 1010 MS. ELLIOTT: That's the difference between the 20-year trend and the 30-year average in 2004. 1011 MR. THOMPSON: All right. And would you not agree that in determining just and reasonable rates for 2004, some weight should be given to the fact that the company's shareholder was prepared to forego $25 million of colder-than-normal weather reward to obtain the benefits of reduced warmer-than-normal weather risk? Benefits of reducing warmer-than-normal weather risk? 1012 MS. ELLIOTT: I'm not sure how the two can be interchanged like that. We're still dealing with managing actual weather. Since we can't forecast or predict what that will be in advance in any given year, we still need the opportunity to manage that risk. 1013 The difference between the 30-year average and the 20-year trend recognizes that the company's revenues do not reflect the 30-year average weather any longer and the rates should be reset to reflect the 20-year trend. 1014 MR. THOMPSON: Well, we may support that in argument but on condition that there's some credit given for the reduced risk. But I'll move on to another topic, capitalization of overhead, we did discuss this on a previous panel and it was bumped over, in part, to this panel, as I recall it. 1015 There are just two questions that I wanted to ask in this area. When we discussed this the last day, reference was made to a study that was done to justify the reduced capitalization amounts; do you recall that? 1016 MS. BRODIE LUMLEY: Yes, I do. 1017 MR. THOMPSON: Could that study be produced? Is it in writing? 1018 MS. BRODIE LUMLEY: It's not a formal study as much as it is an internal order by internal order review of the capital component of each of those orders. There's about 2,700 orders in total. 1019 MR. THOMPSON: So what does it look like? 1020 MS. BRODIE LUMLEY: A very large spreadsheet. 1021 MR. THOMPSON: So there's no formal study? 1022 MS. BRODIE LUMLEY: We did not adjust the methodology, the methodology remained the same, so there was not a study of the methodology, rather, an update of the cost drivers. 1023 MR. THOMPSON: Surely there would need to be some -- how big a spreadsheet is it, the width of this room or... 1024 MS. BRODIE LUMLEY: In terms of size, do you mean in terms of how thick is it, if we print it out? 1025 MR. THOMPSON: Well, is there not a summary page that someone can look at and say this is how you got to where you get. 1026 MS. BRODIE LUMLEY: Yes, we can put it together in a summary page. 1027 MR. THOMPSON: Could I have an undertaking to have you produce it, please? 1028 MR. MORAN: Mr. Chair, Undertaking N.15.5, to produce a summary page of -- 1029 MR. THOMPSON: Of the capitalization study referred to in the prefiled testimony that led to the changes in capitalization of overheads for 2004. 1030 MS. BRODIE LUMLEY: Just to make sure I understand the undertaking, you want to see the cost-driver updates by administrator group, perhaps, as a comparison to 2002, the last full year of actuals? 1031 MR. THOMPSON: Well, you had something before that you applied. 1032 MS. BRODIE LUMLEY: That's right. 1033 MR. THOMPSON: And it changed. I don't know how you display it internally. Just show me how it was on the before scenario by whatever categories you used and how it was on the after scenario, and if there's any data that helps us understand how you got from the before to the after, I'd encourage you to produce it. 1034 The violins are playing, I must be over my time. 1035 And the second thing I'd like you to undertake to do is to provide the capitalization of overheads that would have resulted had you continued to apply the old capitalization approach. Is that clear enough? 1036 MS. BRODIE LUMLEY: Yes, that can be done. 1037 MR. THOMPSON: Thanks. 1038 MR. MORAN: Mr. Chair, we're looking at N.15.5, which as I understand it now is to produce an explanation of the changes in the drivers that were used for capitalization of overheads and to produce a calculation that would indicate what the capitalization of overheads would be if the drivers had not been changed. 1039 UNDERTAKING NO. N.15.5: TO PRODUCE AN EXPLANATION OF THE CHANGES IN THE DRIVERS THAT WERE USED FOR CAPITALIZATION OF OVERHEADS AND TO PRODUCE A CALCULATION THAT WOULD INDICATE WHAT THE CAPITALIZATION OF OVERHEADS WOULD BE IF THE DRIVERS HAD NOT BEEN CHANGED, FOR 2004 1040 MR. SOMMERVILLE: For 2004. 1041 MR. THOMPSON: For 2004. I think that's close enough. And then there is the second one which is apply the old capitalization methodology and show what it would have produced for 2004. 1042 MR. SOMMERVILLE: I think that's included in the undertaking. 1043 MR. THOMPSON: Is that wrapped up in there? 1044 MR. SOMMERVILLE: Yes. 1045 MR. THOMPSON: Thanks. 1046 If I could move then to capital structure, costs of capital. This is my last area, Mr. Chairman. It might take me 15 minutes or so. Do you want to take the break now? 1047 MR. SOMMERVILLE: Why don't we take our break now. We'll break for 10 minutes. Thank you. 1048 --- Recess taken at 3:12 p.m. 1049 --- On resuming at 3:25 p.m. 1050 MR. SOMMERVILLE: Thank you, please be seated. 1051 MR. PENNY: Mr. Chairman, before Mr. Thompson resumes, he's kindly agreed to let us deal an issue that came up before the evidence actually started and it was a correction that was made to the evidence and a number of updates were filed to correct the error but a couple got missed, and I wonder if we could just take a minute and Mr. Broeders so explain what the -- the what the background to the issue was and what these additional corrections represent. 1052 MR. SOMMERVILLE: Thank you, Mr. Penny. Mr. Broeders. 1053 MR. BROEDERS: Through the process of the interrogatories, it came to our attention that the benchmark return for 2002 was misstated. We've corrected portions of that through the interrogatory process, but there's a couple of pieces of evidence that we discovered that we had not updated. 1054 If I can take you to Exhibit A, tab 11, page 3 of 3, I believe copies of that have been made available to everyone. The updated version should be in front of you. 1055 MR. PENNY: That's the one that says addendum corrected. 1056 MR. SOMMERVILLE: Thank you. 1057 MR. BROEDERS: Under the earnings sharing on line 14, the number was changed from 9. -- sorry the number was changed to 9.62 percent -- changed to 9.62 percent, sorry. And on the next page, Exhibit A, tab 11, schedule 5, addendum corrected on line 6, the benchmark ROE was changed to 9.62 percent, and the numbers below that are just reflecting the band limits, 10.62 percent and 8.62 percent. Thank you. 1058 MR. SOMMERVILLE: Thank you, Mr. Broeders. 1059 MR. PENNY: Thank you, Mr. Chairman. 1060 MR. THOMPSON: Panel, I'd like to turn to capital structure and formula ROE recommendation. This is Exhibit E.1, tab 1, white sheets page 1. And I appreciate there's some overlap between this case and the ROE proceeding, but I see here at line 18 that it's described that Union is requesting the use of the formula ROE mechanism, and then you have a 562 and a half risk premium at a 6 percent long Canada, and you make reference to Ms. McShane who testified in the ROE proceeding. That is Union's request, as I understand it. 1061 MR. BROEDERS: That's correct. 1062 MR. THOMPSON: And would you take, subject to check, that the Board's existing formula produces an ROE for Union at 9.86 percent at a 6 percent long Canada, i.e., a 386 basis point risk premium? 1063 MR. BROEDERS: What would be the reference to check that to? 1064 MR. THOMPSON: The ROE proceeding, Ms. McShane's evidence. You can do the calculation yourself if you want. 1065 MR. BROEDERS: Sorry, where are you getting the risk premium from? What's the rate you were quoting? 1066 MR. THOMPSON: 6 percent long Canada, that's down from what it was when the long Canada was 7.25, I think when the ROE was struck. 1067 MR. BROEDERS: That's correct. 1068 MR. THOMPSON: Okay. 1069 MR. BROEDERS: But you're referring to a risk premium. Were you referring to a risk premium number? 1070 MR. THOMPSON: I'm referring to your risk premium of 563 basis points at line 19, and simply comparing it so what the existing formula allows at 6 percent, which I suggest is 386 basis points. 1071 MR. BROEDERS: Right, and that is what I was requesting, what is the reference to figure that number? Where is the 386 coming from? 1072 MR. THOMPSON: Well as I said it's Union's ROE proceeding, but as well it's just the math applied -- 1073 MS. ELLIOTT: The product of the existing formula? 1074 MR. THOMPSON: Yes. 1075 MS. ELLIOTT: We can check that. 1076 MR. THOMPSON: Thank you. Well, have you folks followed the ROE case? Your evidence is sort of giving the Union sum up of the ROE case in which Union was a party. Are you familiar where what's gone on in that case? 1077 MS. ELLIOTT: Not closely followed it at this point, no. 1078 MR. THOMPSON: Well, can the Union witnesses confirm that what Union is asking the Board to do is stay with a formula approach, change the benchmark ROE, but change the adjustment mechanism? Are you folks aware of that or unaware of that? 1079 MS. ELLIOTT: This application would incorporate the results of the ROE proceeding into the 2004 rates. 1080 MR. THOMPSON: Okay. We didn't have a Union witness in the ROE case and there is this overlap, but I take it nobody on the panel has anything to offer to support the ROE increase request, we should look to Ms. McShane. Is that right? 1081 MR. PENNY: Well, whether or not anyone on this panel has anything to offer, that case is over with and we're not getting into that. 1082 MR. THOMPSON: Well, this -- you've -- 1083 MR. PENNY: The evidence is closed in that case, in my submission. 1084 MR. THOMPSON: Well, the evidence in this case isn't closed and you've incorporated the request into this case, but let me just come at it this way. In this case in -- if you turn up transcript volume 6, Board Staff is looking for theirs, they won't find it because I borrowed your volume 6. There was a discussion at -- what this is getting to is other evidence in Union's possession that relates to this ROE issue. 1085 There was a discussion starting around transcript 1227 with Mr. Witts about Towers Perrin's recommendations to Union about the returns that could be earned on its pension fund for the 2004 test year. And that went over and -- and what we were told was that Towers Perrin recommended to Union and that Union accepted the recommendation that the overall portfolio returns in the pension fund would be about 7.5 percent, and that was numbers mentioned at 1251 in one place. 1086 And then we asked Towers Perrin: "Well, how do you develop that number?" And we were told that "Towers Perrin has a capital markets economic model," this is at paragraph 1254, "in conjunction with external academics most notably from Princeton University. And what that model does is to provide us estimates of expected real yields on different asset classes which, as I mentioned when add it to our outlook for price inflation gives us a range for the nominal yields that we might expect for a portfolio of pension fund investments." 1087 He then went on and acknowledged that these -- this model developed the numbers, as I understood it, for classes of assets and then undertook at paragraph 1268 to provide the expected returns from the various classes of assets that their model recognizes. 1088 Do you see that? 1089 MR. BROEDERS: Yes, we do. 1090 MR. THOMPSON: And we've now had on the record Exhibit N.6.13 that is reportedly a response to this undertaking, and I'd ask you to turn it up, please. 1091 MR. BROEDERS: We have that. 1092 MR. THOMPSON: All right. And this isn't the -- this document is not the -- is not a copy of any document that Towers Perrin gave to Union. Do you know what Towers Perrin provided to Union? Does Union have the models, the results of the models that they're talking about? 1093 MR. BROEDERS: No, I don't. 1094 MR. THOMPSON: All right. Does Union have, then, a letter from Towers Perrin or a report that summarizes -- 1095 MR. PENNY: Well I can advise that what Mr. Thompson is looking at is what was sent to us in answer to this interrogatory or undertaking. 1096 MR. THOMPSON: Just let me finish. The recommendation that Towers Perrin provided to Union to support the 7.5 percent, I guess what I'm asking, that was provided to Union sometime ago. Towers Perrin said they did this in the fall, I think, of 2003, around September. 1097 MR. BROEDERS: These numbers reflect the submission that Towers Perrin gave us when they were recommending the 7.5 return. 1098 MR. THOMPSON: Did Towers Perrin provide anything to Union in writing at the time they gave the recommendation of 7.5 percent that Union accepted? 1099 MR. BROEDERS: The document wasn't provided to Union Gas. I know that's an excerpt from that document that was prepared, but I don't know what the full extent of that document entailed. 1100 MR. THOMPSON: Well, what document are you referring to? There obviously is a document that exists, what is it? 1101 MR. BROEDERS: I can't recall the document. I don't know what the document was. I only know that they said that they had prepared something for -- I don't know if it was when they were preparing the items for the Westcoast management when they were looking at their pension funds and they had provided an excerpt from that which is what this Undertaking N.6.13 is referencing. 1102 MR. THOMPSON: Sorry, when you say you don't recall what the document was, you obviously have knowledge of a document. 1103 MR. BROEDERS: I don't know if it's a full document, a presentation, excerpts from a phone call, I don't know what was there. I know that they had prepared something when they were recommending the rate of return and that this is a representation of that. 1104 MR. THOMPSON: And who did they make this recommendation to? I'd understood it was to Union. 1105 MR. PENNY: Mr. Chairman, these are all questions that could have been put to Mr. Witts when he was on the stand. Mr. Thompson cross-examined for pages. These are not questions, in my submission, that depended on the answer to N.6.13. Mr. Broeders clearly doesn't have the answers to the question and these are, as I say, questions that could have been put to Mr. Witts when he was here. 1106 MR. THOMPSON: Well, with respect, they couldn't because I didn't have the response to the undertaking. Quite frankly, I expected to get a document that Towers Perrin had provided to Union at the time the recommendation was made. Now, I haven't got that. I'm trying to avoid bringing Mr. Witts back, if I can, but if I'm forced to bring him back, I will. 1107 MR. PENNY: What Mr. Witts was asked for was to provide the expected returns, that's what he's done. It was clear from his evidence, and Mr. Thompson read it, that he had an economic model. If Mr. Thompson wanted access to the model, perhaps he should have raised that with Mr. Witts, but he clearly testified at 1254 that Towers Perrin has a capital markets economic model that was used to develop this material. 1108 MR. THOMPSON: Well, hindsight is perfect, Mr. Penny, but my expectation was, and what I thought I was asking for, was the production of documents that Mr. Witts and Towers Perrin had provided to Union or to whoever he provided when he made the recommendation. 1109 If there's some way we could have that produced without bringing him back, I'm in favour of accommodating that process. 1110 MR. PENNY: Well, I'm sorry, Mr. Chairman, but that -- Mr. Thompson asked: 1111 "And do you have available the data, the yields for each of those that produce your 7.5 percent recommendation and if not, could you get them for us by way of undertakings?" 1112 "Mr. Witts: Yes, we can provide that information." 1113 Then there's a discussion about precisely what it is, it was read and Towers Perrin and Mr. Thompson: 1114 "Yes, Towers Perrin has undertaken to provide the expected returns from the various classes of assets that their model recognizes, which I understand are Canadian equities, U.S. equities, cash and government bonds." It's then said. 1115 So the question was squarely put and that's exactly what Mr. Witts provided. There is no mention of producing the model or of any documents in that question, and there could have been, there absolutely could have been. Mr. Thompson did not need the answer to N.6.13 in order to ask for the document, if there even is one. 1116 MR. THOMPSON: I can bring him back and cross-examine on these documents and ask it then. But let me ask you, Mr. Penny, who has the documents? Does Union have them or some other Union affiliate? Do you know? 1117 MR. PENNY: Mr. Broeders has testified he doesn't even know if there is a document. 1118 MR. THOMPSON: There was a document. 1119 MR. SOMMERVILLE: I wonder if paragraph 1270 doesn't provide us with some assistance. The fact is, I think, Mr. Thompson, that the undertaking is limited, and from the transcript, it is not clear that the undertaking was intended to be broader. 1120 There is reference in 1270 to a series of assumptions that Mr. Witts provides to the company, and I think if that provides you with an opportunity to seek some more grounding for the raw data that you've received with respect to 6.13... 1121 I'm not in a position where I can say that Mr. Witts has failed to provide you with he undertook to provide you with. 1122 MR. THOMPSON: No, and I wasn't putting it that strongly. 1123 MR. SOMMERVILLE: I understand. 1124 MR. THOMPSON: I was suggesting that we have a right to cross-examine on an undertaking response and were he available and not out in Vancouver, I'd bring him back to try and get clarity on this and pursue it. 1125 But Mr. Penny is quite right, I didn't precisely ask: Produce these documents. 1126 MR. SOMMERVILLE: Can you give me some idea as to the specific materiality of the request that you're making of this witness panel? The model itself, what do you expect that to assist you? 1127 MR. THOMPSON: I'm not so sure it would assist me. What I was more interested in what was provided in writing by Towers Perrin to Union, if it's a letter or to the management group. I was just trying to get the contemporaneous documents dealing with the recommendation. 1128 MR. SOMMERVILLE: In that case, I think that's a proper question to put to this panel. Is there a writing from Towers Perrin that informs their point of view and if they have an answer to that, then you're entitled to it. 1129 MR. THOMPSON: What's the answer to that? 1130 MR. SOMMERVILLE: In terms of Mr. Witts' role, I think his role is -- unless further circumstance arises, I think his role is over. 1131 MR. THOMPSON: Yes. You're quite right, Mr. Chair, that's what I was trying to get, something contemporaneous in writing to Union or the pension group from Towers Perrin. 1132 Can you undertake to check to see what it was and produce it if it's available. 1133 MR. BROEDERS: Yeah, that's what I was going to say I will undertake to see what type of documentation I have, be it e-mail or if there is a printed document. I can certainly undertake to see what I can find. 1134 MR. THOMPSON: Okay. And perhaps, Mr. Broeders, you could help me with understanding this response -- 1135 MR. BROEDERS: Sorry, is this in addition to the undertaking or should we get that part down. 1136 MR. THOMPSON: You'd better give it a number. 1137 MR. MORAN: Undertaking N.15.6 is an undertaking to check and see if there is a document that can be made available to back up the response to Undertaking N.6.13. 1138 MR. PENNY: Well, no, I think what's been requested is a contemporaneous, and by contemporaneous I think it is meant not when this answer was prepared but when the information was originally provided, when the recommendation from Towers Perrin was originally provided, whether there is a document that was associated with that recommendation provided to Union. 1139 MR. MORAN: I think the phrasing can be the same with the addition of the word contemporaneous. 1140 UNDERTAKING NO. N.15.6: TO CHECK AND SEE IF THERE IS A CONTEMPORANEOUS DOCUMENT THAT CAN BE MADE AVAILABLE TO BACK UP THE RESPONSE TO UNDERTAKING N.6.13 1141 MR. THOMPSON: Sorry to get bogged down on this document, but there is a reference in Exhibit N.6.13, Mr. Broeders, to DEGT asset mix. What does DEGT stand for, do you know? 1142 MR. BROEDERS: That would be the Duke Energy Gas Transmission group, so in this specific reference, it is referring to the DEGT Canada's investment portfolio or approximate asset mix. 1143 MR. THOMPSON: Okay. And then can you help us with the meaning that we should ascribe to the second column, "index return," and then the third column, "active manager added value"? 1144 MR. BROEDERS: The index return would be the results of Towers Perrin's model as to what their expected return on the portfolio of that asset class would be. 1145 The active manager added value, the asset classes are the investments that DEGT Canada has, we have chosen active managers to manage those funds. This is the assumed added value that that group would add over having a simple passive investment, for instance, index investments. 1146 MR. THOMPSON: Okay. So do I -- do I understand this document correctly then, in light of that explanation, to reflect an equity return, prospective looking equity return on Canadian equities of 8 percent on an index basis and then 9.5 after active manager added value is taken into account. 1147 MR. BROEDERS: On a portfolio of those investments, that would be the expected return, yes. 1148 MR. THOMPSON: Okay. And then the U.S. equities, S&P 500 index returns 7.7 percent looking forward, with active manager added value to bring it up to 8.7 percent? Am I reading that properly? 1149 MR. BROEDERS: Yes, you are. I just wanted to clarify that the added value is approximate. So when we're getting to these final figures we could say that would be the range. If you wanted to add some conservatism you could drop a little bit, and if you wanted to be aggressive and say that these fund managers are very good at their job and we hope it would be higher. 1150 MR. THOMPSON: Let's move to capital structure. You say in your testimony at line 17, E.1, tab 1 that you are continuing with the 35 percent common equity ratio. That's prevailed for Union for some years, I believe; am I right? 1151 MR. BROEDERS: That's correct. 1152 MR. THOMPSON: And I don't know if you can help me with this or not, but I would suggest to you, subject to check, that in the ROE case, Union is not alleging any material changes to its business risks between the time the Board adopted its ROE mechanism and today and prospectively into 2004. Is that Union's position? 1153 MR. PENNY: Well, with respect, Mr. Chairman, it seems to me that we're now not even the guise of a relevant issue in this case. Mr. Thompson is clearly trying to bolster his position in some other case and this is not an appropriate question, in my submission, for Union's 2004 rates case which is -- the only mention of ROE is simply by way of noting that we wish to incorporate the Board's finding in the ROE proceeding into the results in this case. 1154 MR. SOMMERVILLE: Mr. Thompson. 1155 MR. THOMPSON: Let me try it this way. Capital -- the equity ratio -- is it Union's position that changes in risks should be reflected in the equity ratio? I'm trying to tie this back to the weather issue. Do you understand what I'm -- let me put it another way. 1156 Ms. McShane, I believe, accepted in the ROE case, and you can take this subject to check, that changes in risks under these adjustment formulas are normally reflected in the equity ratios and not in the ROE. What I'm trying to get at is you have made a 35 percent common equity ratio recommendation, which is continuous of the status quo in this particular case. 1157 MS. ELLIOTT: Well I'd say it's consistent with the evidence in the ROE case. What I can't speak to is the evidence in the ROE case at this point. 1158 MR. THOMPSON: What does $25 million, this ties back to your weather hedge and the 25 million, what does that translate into in a reduction to the common equity ratio of 35 percent? Can you help me with that? 1159 MS. ELLIOTT: I can't, Mr. Thompson, no. 1160 MR. THOMPSON: Could you undertake to do that? In other words, 25 million pre-tax dollars, if that were deducted, if you will, from the common equity ratio, it would go from 35 percent to something. I'm just wondering if you can give me that calculation or that number? 1161 MS. ELLIOTT: We can undertake to do that. 1162 MR. THOMPSON: All right. Thanks very much. 1163 MR. MORAN: That would become Undertaking N.15.7, Mr. Chair. 1164 UNDERTAKING NO. N.15.7: TO PROVIDE THE CALCULATION OF THE COMMON EQUITY RATIO ADJUSTED FOR THE DEDUCTION OF THE 25 MILLION PRE-TAX DOLLARS THAT RELATE TO WEATHER HEDGING 1165 MR. THOMPSON: Now, I'd like to just look at the capital structure for both -- you can probably start with E.5, and then bring it forward to E.4. E.5, tab 1, schedule 1, and then E.4, tab 1, schedule 1, and E.3, tab 1, schedule 1. 1166 Now, in E.5, tab 1, schedule 1, is this showing actual capital structure for 2002? This is the white sheets corrected where your common equity is 33.42 percent. Are we on the same sheet? 1167 MS. ELLIOTT: I think the difficulty we're having is the actual capital structure will be the corporate capital structure, so the actual short-term debt component may be different at the corporate level. 1168 MR. THOMPSON: Maybe I didn't -- 1169 MS. ELLIOTT: This is actual rate base. 1170 MR. THOMPSON: Maybe I didn't phrase the question properly. 1171 What is this showing for the utility as of December 31, 2002? Is this based on actual numbers? 1172 MS. ELLIOTT: These are actual utility rate base and capital structure numbers, yes. 1173 MR. THOMPSON: So it's an allocation of the corporation's capital to the utility on an actual basis. 1174 MS. ELLIOTT: Yes. 1175 MR. THOMPSON: So in 2002, the company actually operated in a over-leveraged position opposite to the 35 percent deemed common equity ratio; correct? 1176 MS. ELLIOTT: For 2003, the utility capital structure, the reason that common equity is less than the 35 percent is because the calculation of common equity was based on the 1999 rate base adjusted for those rate-base items that are passed through during the PBR term and taken -- and 35 percent of that is taken as the common equity. So it's the approved level of equity as opposed to a mathematical calculation that says it's 35 percent of total rate base. It's the component of rate base that has an approved equity component associated with it. 1177 MR. THOMPSON: So what are you telling me, it's equivalent to the 35 percent? 1178 MS. ELLIOTT: Yes. 1179 MR. THOMPSON: And then we move forward to the -- what was -- what was the -- when you talk about the corporation's capital structure, what corporation are you talking about. 1180 MS. ELLIOTT: Union Gas corporate. 1181 MR. THOMPSON: Was it Union Gas Limited? 1182 MS. ELLIOTT: Yes. 1183 MR. THOMPSON: And what was the actual common equity ratio of Union Gas Limited for the period ending December 31, 2002. 1184 MS. ELLIOTT: We don't have that information with us. 1185 MR. THOMPSON: Is that in the financial statements, in effect? 1186 MS. ELLIOTT: These are average numbers. What would be in the financial statement is the value at year-end. 1187 MR. THOMPSON: All right. Could I have an undertaking to provide that? 1188 MS. ELLIOTT: Yes. 1189 MR. MORAN: That's Undertaking N.15.8. 1190 UNDERTAKING NO. N.15.8: TO PROVIDE THE ACTUAL COMMON EQUITY RATIO OF UNION GAS LIMITED FOR THE PERIOD ENDING DECEMBER 31, 2002 1191 MR. THOMPSON: All right. We then move forward, if you wouldn't mind moving forward with me, to E.4, tab 1, schedule 1. This is now the forecast capital structure for 2003 for the utility. Right? 1192 MS. ELLIOTT: That's correct. 1193 MR. THOMPSON: And we're showing now, in the prior year, we didn't have a negative unfunded short-term debt position, but this has now surfaced in 2003. 1194 MS. ELLIOTT: Yes. That's a cash position as opposed to an average borrowing position. 1195 MR. THOMPSON: All right. Well, it appears to me to indicate that the utility is operating in am over-leveraged position in 2003. Is that a fair conclusion to draw? 1196 MS. ELLIOTT: No. I think it's a trade-off between the long-term debt component and the short-term. So on average, in 2003, the company has cash, where in previous years, on average, it would have had short-term borrowings. 1197 MR. THOMPSON: Well, you've got cash because of what? You've borrowed more against -- you've long-term debt obligations which in conjunction with 35 percent equity produce a total capital that's more than rate base by about $151 million. 1198 MS. ELLIOTT: In order to operate, our operating lines are, for 2003, on average, in a cash position, although there are times of the year where we have borrowings, particularly during the fall when our inventories are peaking. This is an annual average calculation which says for the year, we have on average $151 million worth of cash on hand. That doesn't say we're over-leveraged it's part of the flexibility to manage the company. 1199 MR. THOMPSON: All right. Well, maybe I'll leave this for argument, but I need some numbers to do it. I think there are two ways from a regulatory perspective to address this so-called unfunded short-term debt issue. One is to cost the credit at the same cost rate that you apply to the long-term debt and so if you do that, if the unfunded short-term debt rate is costed at the same rate as you cost the long-term debt, am I correct that the revenue deficiency would reduce by the amount shown in J.14.43 which is about $5.6 million? 1200 MR. BROEDERS: Sorry, what was the number? 1201 MR. THOMPSON: 5.6 -- the interrogatory number? 1202 MR. PENNY: Yes. 1203 MR. THOMPSON: J.14.43 is the number I had. 1204 MS. ELLIOTT: Sorry, the number that you're referring to isn't in that response. The response is the impact -- 1205 MR. BROEDERS: We don't have the corrected version in this binder. 1206 MR. THOMPSON: Oh, I see. 1207 MR. BROEDERS: That's the problem. I found a corrected copy in another binder here. I've got it here. We agree with the 5.6 million. 1208 MR. THOMPSON: Okay. And that, as I understand it, reflects the blue-page update. Is there any material change -- 1209 MR. BROEDERS: Sorry, to be clear this is for 2004, whereas I think when we're looking at the references, we were looking at 2003. 1210 MR. THOMPSON: Yes, so that I jumped ahead of myself there and that number reflects the situation in E.3, tab 1, schedule 1, blue-page update. Correct? 1211 MR. BROEDERS: That's correct. 1212 MR. THOMPSON: So if the unfunded short-term debt were in effect costed at the long-term debt rate, then the revenue deficiency would decrease by about $5.6 million. Are we on the same page? 1213 MR. BROEDERS: We are now, yes. 1214 MR. THOMPSON: And the unfunded short-term debt is increased slightly from blue page to yellow page; does that increase the $5.6 million amount materially? 1215 MR. BROEDERS: I don't think so, no, not materially. 1216 MR. THOMPSON: All right. Now, the other calculation I'd like you to put in the record is to assume that if the, if you will, credit amount in the capital structure that you're showing for unfunded short-term debt were applied to common equity, it would be the same so that the common equity would not be 35 percent but in the 2003 case, would be 30.72 percent. My question is: On that assumption, what would be the reduction in revenue deficiency? I think it would just be the previous number plus tax; is that right? Sorry, it's a higher rate, yeah. 1217 MS. ELLIOTT: You're asking for a -- basically reducing common equity by the cash -- 1218 MR. THOMPSON: That's right. 1219 MS. ELLIOTT: -- that we have in the capital structure? 1220 MR. THOMPSON: Yes, so it's a different rate and it involves tax. Could you do that for me, please? 1221 MS. ELLIOTT: We probably should undertake to do it as opposed to doing it here. 1222 MR. THOMPSON: Thank you. 1223 MR. MORAN: Mr. Chair, Undertaking N.15.9. I don't think we have a clear description. I wonder if Mr. Thompson could just repeat it. 1224 MR. THOMPSON: Yes, it's to provide a calculation of the reduction in revenue deficiency for 2004 that would ensue where the overfunding, if you will, amounting to 4.28 percent of utility capital structure is deducted from common equity. 1225 MR. PENNY: Without acceding to your rhetoric in the description, we can do the calculation. 1226 MR. THOMPSON: There wasn't any rhetoric in there at all, it's just the IGUA plain way of speaking. 1227 UNDERTAKING NO. N.15.9: TO PROVIDE A CALCULATION OF THE REDUCTION IN REVENUE DEFICIENCY FOR 2004 THAT WOULD ENSUE WHERE THE OVERFUNDING AMOUNTING TO 4.28 PERCENT OF UTILITY CAPITAL STRUCTURE IS DEDUCTED FROM COMMON EQUITY 1228 MR. PENNY: The thing speaks for itself. 1229 MR. THOMPSON: And with that I'm finished. Thank you very much, Mr. Chair. 1230 MR. SOMMERVILLE: Thank you, Mr. Thompson. 1231 We are not going to finish with this panel today and we have -- the next panel is the deferrals panel. 1232 MR. PENNY: That's right. 1233 MR. SOMMERVILLE: I think we are going to adjourn for the day, but I'm sort of giving an indication that tomorrow may be a long day in that I think we want to finish deferrals tomorrow. 1234 Mr. Shepherd? 1235 MR. SHEPHERD: Mr. Chairman, my estimate has moved from an hour to about 10 or 15 minutes. Would it be an inconvenience if I did my cross now rather than tomorrow morning? I have the DSM consultative tomorrow morning. 1236 MR. SOMMERVILLE: I'm certainly prepared to accommodate that. 1237 MR. PENNY: Absolutely. I was going to suggest, Mr. Chairman, that if there weren't some constraint on you or the Board members to be somewhere, that perhaps someone with that length of a cross-examination could proceed. So we're happy to deal with that. 1238 MR. SHEPHERD: I appreciate it, Mr. Chairman. 1239 CROSS-EXAMINATION BY MR. SHEPHERD: 1240 MR. SHEPHERD: Let me start with the ROE issue, and I wonder if you could tell me, is it Ms. Elliott, is this for you, I guess, if the eventual ROE for 2004 is 7.5 percent instead of what you've asked for, am I correct that the revenue deficiency is around 36 million rather than 104 million? Or would you prefer to undertake to do these calculations. 1241 MS. ELLIOTT: I think I would prefer to do the undertake to do the calculations. Would it be th reduction in the deficiencies or -- 1242 MR. SHEPHERD: No, I'm asking for the amount of the delivery-related deficiency at 7.5, 8 and 8.5 percent. 1243 MS. ELLIOTT: 7.58 and 8.5 percent? 1244 MR. SHEPHERD: That's correct. 1245 MS. ELLIOTT: We can undertake to do that. 1246 MR. MORAN: Mr. Chair, that would be Undertaking N.15.10, to recalculate the delivery-related revenue deficiency if ROE is set at either 7.58 percent or 8.5 percent. 1247 UNDERTAKING NO. N.15.10: TO PROVIDE THE CALCULATIONS OF THE DELIVERY-RELATED REVENUE DEFICIENCY IF ROE IS SET AT EITHER 7.5, 8 OR 8.5 PERCENT 1248 MR. SOMMERVILLE: I think that's 7.5, 8 or 8.5 percent, the band between 7.5 and 8.5. 1249 MR. BROEDERS: Sorry, I got confused on that again. 1250 MR. SOMMERVILLE: I think the idea is 7.5, if the ROE was 8 percent, or if the ROE was 8.5 percent. 1251 MR. BROEDERS: So three cases? 1252 MR. SHEPHERD: Yes, that's right, Mr. Chair. 1253 MR. BROEDERS: I heard 7.58, one number. 1254 MR. MORAN: So did I. 7.58 percent -- 1255 MR. SHEPHERD: Three cases; 7.5 -- 1256 MR. MORAN: 7.5, 8 percent and 8.5 percent. 1257 MR. SHEPHERD: Three cases. It's getting late. Look what I started. 1258 The second thing is Mr. Thompson asked you some questions about the change in capitalization and we heard about your very large spreadsheet which makes those changes. Just let me ask you: How big is that spreadsheet, how many pages would that be printed roughly? 1259 MS. BRODIE LUMLEY: I'd be guessing at that, I'm going to guess 150 pages, but like I said, I'm taking a stab at that. 1260 MR. SHEPHERD: And does that spreadsheet show individual changes in capitalization? Will it show us for individual items what your judgment was in each case? 1261 MS. BRODIE LUMLEY: What the judgment was, no, it would not. 1262 MR. SHEPHERD: It won't show what the changes from one method to the other. 1263 MS. BRODIE LUMLEY: It would show the effect of the change from updating the cost driver. So if the cost-driver resulted in capitalization of X dollars in 2002, it will, once updated, result in capitalization of Y dollars in -- 1264 MR. SHEPHERD: Once more I haven't made myself clear. It's a motif. 1265 What I'm after is: Is there a column in the spreadsheet that says, or a set of columns that says here's what the number would be under the old method, here's the change we're making for this category of expense, and here's the new number? 1266 MS. BRODIE LUMLEY: On the IO by IO level, the 2,700 IOs, it likely wouldn't detail the cause for the change in each IO. But at the administrative or the higher summary level, which I believe is in response to the undertaking that we previously taken today, it will provide an explanation at an administrator level of what was changed. 1267 MR. SHEPHERD: But the main spreadsheet will tell us what the amounts are. 1268 MS. BRODIE LUMLEY: What the amounts were. 1269 MR. SHEPHERD: The amount of the change. 1270 MS. BRODIE LUMLEY: The amount of the change. 1271 MR. SHEPHERD: Well, I hate to do this, but I wonder if you could undertake to provide us with a printout or a CD with that spreadsheet so we can see what the big amounts are. 1272 MS. BRODIE LUMLEY: Yes, we will. 1273 MR. SHEPHERD: My apologies for asking for that. 1274 MR. MORAN: Mr. Chair, Undertaking N.15.11, to produce either in printed or electronic format the spreadsheet relating to capitalization of overheads. 1275 UNDERTAKING NO. N.15.11: TO PROVIDE EITHER IN PRINTED OR ELECTRONIC FORMAT THE SPREADSHEET RELATING TO CAPITALIZATION OF OVERHEADS 1276 MR. SHEPHERD: And just while I'm at it, when were you doing that spreadsheet, someone actually sat down with that spreadsheet and looked at the line items and decided what would be the right adjustment in each case or for each category; is that correct. 1277 MS. BRODIE LUMLEY: That is correct. 1278 MR. SHEPHERD: So somebody went through it line by line and said, this is wrong, we should use this number, and here's why. And you didn't necessarily put in the "here's why," but you had it in your mind why you were changing it. 1279 MS. BRODIE LUMLEY: That's right. 1280 MR. SHEPHERD: Now, was that in response to -- what was the reason why you did that? 1281 MS. BRODIE LUMLEY: Lower capital activity. So the recognition that accruing Union's internal work crews were performing less capital activity and more maintenance. 1282 MR. SHEPHERD: So somebody told you that or -- 1283 MS. BRODIE LUMLEY: No. 1284 MR. SHEPHERD: Like you wouldn't see that yourself; right? 1285 MS. BRODIE LUMLEY: No, we wouldn't see that, but at the district office level they do see that because they do the work plans or they forecast that the work crews are going to do so many units of work for the upcoming budget. And those units of work will be tagged as either capital or non-capital related. 1286 MR. SHEPHERD: So then you didn't make the changes in the capitalization, they did? 1287 MS. BRODIE LUMLEY: We made the changes as a result of interviews and discussions with various administrative level managers within Union Gas. 1288 MR. SHEPHERD: They didn't provide you with any reports or analysis or -- like written input that would tell you this number you've been using for years, what is it 1.1 percent or something or -- I don't remember what the number was -- is no longer right, we've changed how we do things. You didn't get anything like that? 1289 MS. BRODIE LUMLEY: Written input is not anything that I've seen, but I am aware that there were interviews and discussions and that the updates were made based on those interviews and discussions. 1290 MR. SHEPHERD: You didn't do those interviews? 1291 MS. BRODIE LUMLEY: No, I did not. 1292 MR. SHEPHERD: Did somebody under your supervision do those interviews? 1293 MS. BRODIE LUMLEY: No, not somebody under my supervision. 1294 MR. SHEPHERD: Who did it, do you know? 1295 MS. ELLIOTT: The work was done by Mr. Little, Mr. Bob Little, under our direction. In terms of conducting the interviews and updating the spreadsheets, Mr. Little did the work. 1296 MR. SHEPHERD: So let me understand, something made you think that the capitalization number was no longer right. You hadn't talked to the district offices yet, so what was it that made you think that you needed to talk to them and change it? 1297 MS. BRODIE LUMLEY: That we hadn't reviewed and updated the drivers in a significant way in 7 years since the methodology had been implemented, so there had been routine maintenance but there needed to be a more comprehensive review of the internal orders. 1298 MR. SHEPHERD: So it was just time for a review? 1299 MS. ELLIOTT: It was also done in conjunction with this cost-of-service file much like our depreciation study was done in the cost-of-service filing. It was a review of the allocations being done. 1300 MR. SHEPHERD: So there was no real need to do it in the last few years because you were under a PBR, but once you were doing a cost-of-service you had to get the numbers right and so had you to go review it in more detail; is that fair? 1301 MS. ELLIOTT: Certainly the timing for the review in more detail was coincident with the application for the cost-of-service rate filing. 1302 MR. SHEPHERD: Sorry, that's what I'm trying to get at. Was it coincident or was it as a result of the fact that this was a cost-of-service application? 1303 MS. ELLIOTT: The review of the drivers, as I say much like the review of the depreciation study, those drivers weren't changed during the PBR term and the cost-of-service application provided the opportunity to put those changes through. 1304 MR. SHEPHERD: Fine. Thanks. 1305 Now, finally, let me ask you a couple of questions about the weather hedge. I take it from your answers to Mr. Warren and Mr. Janigan earlier today, who, by the way, covered -- this is the reason why I don't have an hour anymore, Mr. Chairman, they covered most of this -- that there's some reasonable possibility that you'll do the same or do some sort of weather hedge in 2004; is that right? 1306 MS. ELLIOTT: Well, we continue to have the risks associated with warm weather and to take action to mitigate those risks, we will look again at weather hedges. 1307 MR. SHEPHERD: So in the vernacular, in 2003, you sort of got whacked a little bit on this weather hedge, it hurt you, but you're thinking of this more as a longer-term thing, if you do it every year, eventually it should protect you when you need it; is that right? 1308 MS. ELLIOTT: I'm not sure I would agree that it hurt us in 2003. Certainly 2003 was a year which was colder than normal, but the hedge was in place to protect against warmer than normal. The way we did that was providing or giving up the opportunity to earn additional revenues from colder than normal. 1309 Generally speaking, what we're looking for is stable earnings related to normal weather and what we're faced with on an annual basis is unfavorable variances due to warmer weather, and we still have to manage that, we will continue to look at ways to do that going in to 2004, the weather hedge will be one of them. 1310 MR. SHEPHERD: The result in 2003 was that you end up with $15 million less than you would have had; right? 1311 MS. ELLIOTT: The result is we end up with less revenue on an actual basis than we would have had, had we not hedged, but that revenue is attributable to cold weather which is a situation that the company can't rely on cold weather to meet its earnings so in order to manage the impact with the downside, we've hedged that to mitigate that risk, giving up the opportunity was the price we paid for that hedge. 1312 MR. SHEPHERD: When you hedge things, there's two types of hedge that you can use with respect to weather or anything else, right, there are operational hedges that actually hedge against the problem arising which you can't really do very much with weather because the weather is the weather, but you hedge other things too and they are operational. They fix the problem. And then there are financial hedges which say that whatever the problem is, we want to hedge the financial impact of the problem. This is the latter; right? 1313 MS. ELLIOTT: This is the latter, yes. 1314 MR. SHEPHERD: Okay. Finally, on this question, you said that -- this is an open-jawed collar, right, it's a collar in which the parties on either side aren't the same, you've got Houston on one side and Toronto, I guess, on the other side in the 2003 collar; right? 1315 MS. ELLIOTT: Sorry, the collar is between Entergy-Koch and Entergy-Koch and the Duke Energy Gas Transmission group. So they're not really the same -- I'm not sure that I understand the terminology, but they are not the same parties in both sides of the transaction. 1316 MR. SHEPHERD: All right. And I understood you to say today that the fact that it's non-symmetrical, that is, that you don't have Union Gas on the other side of both transactions, has no impact on the ratepayers; is that right? 1317 MS. ELLIOTT: What I said was that it would not have had an impact on the earnings sharing calculation for 2003. We would have brought -- had weather been warmer, we would have brought the payment into earnings for the purposes of calculating sharing with the ratepayers so that the ratepayers got the same benefit as the shareholders. It would be unreasonable to expect the ratepayers to take the risk on the downside while protecting the shareholders, so we would have brought in the proceeds on the put into our earnings for earnings sharing purposes, to make sure the ratepayer was getting the same benefit as the shareholder. 1318 MR. SHEPHERD: So if you did the same thing in 2004, then again -- and assuming there's no earnings sharing -- I'll have to think about this for a second. No, never mind. 1319 All right. So let me get to the final question. 1320 The reason why you used DEGT as the other party, Duke Houston as the other party, is a tax issue in the U.S.? 1321 MS. ELLIOTT: That's correct. 1322 MR. SHEPHERD: Can you describe what that problem is? 1323 MS. ELLIOTT: There's a tax in the U.S. on global income proceeds from the derivatives, so had the transaction been at Union Gas, the revenue received on the put transaction would be taxed in the U.S. even though it was received in Canada. So we've put the transaction into the U.S. to deal with that tax issue. 1324 MR. SHEPHERD: Well, it's a tax on global consolidated income; right? 1325 MS. ELLIOTT: This is an additional tax on derivatives that would have been -- the U.S. entity would have been subject to the tax on the proceeds from the derivative. 1326 MR. SHEPHERD: How did changing it to Houston fix that? 1327 MS. ELLIOTT: The transaction at Union Gas would have been taxed at Union Gas, it also would have been taxed in the U.S. 1328 MR. SHEPHERD: So it's like a double taxation. 1329 MS. ELLIOTT: Putting in the U.S. only taxes it in the U.S. 1330 MR. SHEPHERD: So you avoid a Canadian tax on this and that was the -- that was the double tax was you avoided the Canadian tax on this? 1331 MR. PENNY: Be careful when you're using the word avoidance when you are talking about tax, but it was to avoid double taxation. 1332 MR. SHEPHERD: Avoidance is actually the term for legally reducing tax; evasion is the term for illegally doing it. 1333 MR. PENNY: So they say. 1334 MR. SHEPHERD: But that was the -- 1335 MS. ELLIOTT: The result is the proceeds from the derivative are taxed only in the U.S. 1336 MR. SHEPHERD: And this is the $4.5 million premium, right? 1337 MS. ELLIOTT: No, had the weather been warmer than normal in a situation where we received $25 million from the derivative, those proceeds are taxable revenue. It's also taxable as proceeds for a derivative. 1338 MR. SHEPHERD: So it would have been taxable as revenue to Union Gas at 35 percent or whatever, and it would have been taxable to Duke as a sort of a unitary tax as proceeds from a derivative; is that right? 1339 MS. ELLIOTT: It would have been taxed as part of their global income from derivatives in the U.S. 1340 MR. SHEPHERD: Can you tell me what the tax rate is on the derivatives? 1341 MR. PENNY: Well, I'm sorry, Mr. Chairman, but I can't imagine what difference it could possibly make. The only relevance to this case and to the ratepayer for 2003 would be in respect of earnings sharing. We're not dealing with 2003 earnings sharing. Ms. Elliott's also testified that if there were to be payments made because the weather was warmer, they will be brought into income for the purposes of determining earnings sharing and that's the part that's relevant to this case, in my submission. 1342 What the rate of tax would have been in the United States and why they decided to do it the way they did is completely irrelevant, in my submission. 1343 MR. SOMMERVILLE: Mr. Shepherd. 1344 MR. SHEPHERD: What I'm trying to see, and I don't know whether there's a problem here, but what I'm trying to see is, is there a tax benefit that should have been shared with the ratepayers rather than just simply taken by Duke. I don't know unless I know -- 1345 MR. SOMMERVILLE: If there is a lower tax rate in the United States as opposed to the tax rate that would be applicable in Canada. 1346 MR. SHEPHERD: Yeah, if it's substantially lower, it could be a big amount of money. 1347 MR. SOMMERVILLE: I'm going to permit the question. I'm not sure that anybody on the panel knows the answer but -- 1348 MR. SHEPHERD: I will be happy with an undertaking just to tell me what the difference is. 1349 MR. PENNY: But as I understood it, Ms. Elliott's evidence is that Union pays the tax no matter what, so again, there's no issue of a benefit here. Union gets taxed on the transaction because it's income and because of U.S. tax rules that have special rules on derivatives, the parent also gets taxed on it. So I don't know how there could possibly be, under that scenario, any benefit. 1350 MR. SHEPHERD: That's not what I understood the witness to say, Mr. Chairman. 1351 MR. SOMMERVILLE: I think what Mr. Shepherd is getting at is that the -- and I'll use that word, the avoidance of tax in Canada in favour of paying the tax in the United States. If the taxation rate in the United States is a lower rate than would have been the case had it been taxed in Canada, that represents a margin that ought to accrue, that arguably ought to accrue to the ratepayer. I think that's the theory that Mr. Shepherd is exploring. 1352 MR. PENNY: That would be so, but the premise, all I'm saying is that it seems to me, based on what Ms. Elliott said, the premise of the question is wrong, it's not avoidance of tax, is wasn't done to avoid tax in Canada, it was to avoid double tax. 1353 MR. SOMMERVILLE: And I think that's correct, but I think that the point that Mr. Shepherd is driving at, and I'm not sure, frankly, how much weight it actually has, but I think the question is not improper and if somebody on the panel can answer it... 1354 MR. PENNY: Fair enough. 1355 MR. HEBERT: I'll undertake to do that. 1356 MR. SHEPHERD: Thank you. 1357 MR. SOMMERVILLE: The American rate of tax that would be payable on the proceeds from the weather hedge contract. 1358 MR. MORAN: That would become Undertaking N.15.12. 1359 UNDERTAKING NO. N.15.12: TO PROVIDE THE AMERICAN RATE OF TAX THAT WOULD BE PAYABLE ON THE PROCEEDS FROM THE WEATHER HEDGE CONTRACT IN 2003 1360 MR. SHEPHERD: And Mr. Chairman, with that, those are our questions. Thank you very much. 1361 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 1362 MR. BROEDERS: Could we be clear on the year that we're applying that to. 1363 MR. SHEPHERD: 2003. 1364 MR. SOMMERVILLE: Thanks for that, Mr. Broeders. 1365 We'll stand adjourned until 10:15 tomorrow. As I've indicated, it would be very helpful to the schedule both in this case and the one that comes after it, if we can try to conclude the deferrals matter tomorrow as well. That's just -- I'm not trying to create an unnatural pace but if there's any organization of matters that could result in that, that would be great. 1366 Thank you very much. We'll adjourn until 10:15. 1367 --- Whereupon the hearing was adjourned at 4:29 p.m.