Rep: OEB Doc: 12WWD Rev: 0 ONTARIO ENERGY BOARD Volume: 16 29 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 29 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN Board Staff CHRIS MACKIE Board Staff NEIL YEUNG Board Staff MICHAEL PENNY Union Gas Limited MARCEL REGHELINI Union Gas Limited MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association PETER SCULLY City of Timmins, City of Sudbury, FNOM ROBERT ROWE Enbridge Gas Distribution Inc. PETER THOMPSON Industrial Gas Users Association TOM BRETT Ontario Association of School Business Officials MICHAEL JANIGAN VECC 8 TABLE OF CONTENTS 9 UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT [20] CROSS-EXAMINATION BY MR. AIKEN: [25] CROSS-EXAMINATION BY MR. BRETT: [304] CROSS-EXAMINATION BY MS. SINGH: [536] CROSS-EXAMINATION BY MR. DINGWALL: [611] PRELIMINARY MATTERS: [751] UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT [772] CROSS-EXAMINATION BY MR. MORAN: [777] RE-EXAMINATION BY MR. PENNY: [871] UNION GAS LIMITED - PANEL 11; HORNER [914] EXAMINATION BY MR. PENNY: [916] CROSS-EXAMINATION BY MR. JANIGAN: [942] CROSS-EXAMINATION BY MR. AIKEN: [1047] CROSS-EXAMINATION BY MR. THOMPSON: [1075] RE-EXAMINATION BY MR. PENNY: [1123] 10 EXHIBITS 11 EXHIBIT NO. M.16.1: EXCERPT FROM DECISION EBRO 496 [211] EXHIBIT NO. M.16.2: CROSS-EXAMINATION MATERIALS FILED BY CME FOR PANEL 10 [542] EXHIBIT NO. M.16.3: EXCERPTS FROM EBRO 499, EXHIBIT D.1, TAB 2 [770] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.16.1: TO PROVIDE THE LEVEL OF CONTINGENCY, IF THERE IS ONE, FOR THE INTEGRITY MANAGEMENT PROGRAM [33] UNDERTAKING NO. N.16.2: TO REVIEW THE CALCULATION FOUND AT LINE 7 OF EXHIBIT B.3, TAB 4, SCHEDULE 2 UPDATED, THE YELLOW PAGES [96] UNDERTAKING NO. N.16.3: TO PROVIDE THE IMPACT OF THE WORKING CAPITAL ALLOWANCE FOR GAS PURCHASE COSTS OF UPDATING TO THE GAS COSTS FROM THE OCTOBER 1ST QRAM AND TO PROVIDE THE IMPACT IF THE MARCH PARK COSTS WERE REMOVED ON THE WORKING CASH [108] UNDERTAKING NO. N.16.4: TO PROVIDE AN UPDATE REFLECTING THE IMPACT OF THE OCTOBER QRAM ON EXHIBIT B.3, TAB 1, SCHEDULE 1 UPDATED, AND TO PROVIDE THE IMPACT ON THE REVENUE REQUIREMENT OF THE CHANGE IN RATE BASE [119] UNDERTAKING NO. N.16.5: TO PROVIDE AN EXPLANATION FOR THE INCREASE FROM THE 2003 BLUE PAGE TO THE 2004 YELLOW PAGE FOR LINE ITEM 10 ON EXHIBIT J.17.7 [134] UNDERTAKING NO. N.16.6: TO PROVIDE THE MAKE-UP OF THE OTHER OPERATING REVENUE OF 700,000 IN THE 2003 BRIDGE YEARS [158] UNDERTAKING NO. N.16.7: TO CHANGE THE $200 MILLION THAT UNION BORROWED AT LINE 17 IN DECEMBER OF 2002, IF THAT 200 MILLION WERE 100 MILLION, IF YOU COULD CALCULATE THE RESULTING FIGURES ON LINE 18 FOR THE COLUMNS TITLED, AVERAGE MONTHLY AVERAGES, CARRYING COST, AND PROJECTED AVERAGE EMBEDDED COST RATE; SECONDLY, IF THE 200 MILLION IS REPLACED WITH ZERO, CALCULATE THOSE THREE NUMBERS AGAIN; AND REFERRING TO EXHIBIT F.3, TAB 1, SCHEDULE 2, PAGE 2, THE YELLOW-PAGE UPDATE, TO ADD A COLUMN FOR THE REQUESTED RETURN FOR THE $100 MILLION SCENARIO LESS AND ANOTHER COLUMN FOR THE REQUESTED RETURN FOR THE $200 MILLION LESS LONG-TERM DEBT [284] UNDERTAKING NO. N.16.8: TO PROVIDE THE CASH POSITION IN EACH OF THE 36 MONTHS, 2002, 2003, 2004, AND TO SHOW THE CALCULATION OF THE ANNUAL AVERAGE [452] UNDERTAKING NO. N.16.9: TO PROVIDE THE BREAKDOWN OF THE 131 MILLION GAS LOAN AMOUNT SHOWN ON MARCH 31, 2003 Q1 FINANCIAL STATEMENTS AND DETERMINE HOW MUCH WAS REPRESENTED BY GAS LOANS OF THE ENRON TYPE [525] UNDERTAKING NO. N.16.10: TO RECALCULATE THE FOUR ENRON LOANS USING THE WACOG THAT WOULD APPLY AT THE EXPIRY DATE OF THOSE LOANS [628] UNDERTAKING NO. N.16.11: TO PROVIDE A COPY OF THE APPROVAL GIVEN BY DUKE ENERGY TO UNION GAS TO PROCEED WITH WEATHER HEDGE [647] UNDERTAKING NO. N.16.12: WITH RESPECT TO EXHIBIT J.1.13, APPENDIX B, TO CONFIRM IF THERE IS A SEPARATE MASTER AGREEMENT FROM WHAT IS REFERRED TO WITHIN APPENDIX B, WOP-020977 [685] UNDERTAKING NO. N.16.13: TO PROVIDE THE CALCULATION OF HOW MUCH THE 2004 RATE BASE WOULD HAVE BEEN DECREASED HAD UNION CAPITALIZED THE HISTORIC AVERAGE AMOUNT OF OVERHEADS IN 2002, 2003, AND 2004 USING THE HISTORIC AVERAGE OF 0.137 [866] UNDERTAKING NO. N.16.14: TO UPDATE EXHIBIT J.34.4 ATTACHMENT FOR ANSWER B TO REFLECT THE CHANGES IN THE BLUE-PAGE UPDATE [952] UNDERTAKING NO. N.16.15: TO EXPLAIN THE DIFFERENCE IN DEPRECIATION RATES SHOWN ON EXHIBIT J.18.24 IN ANSWER C AND EXHIBIT M.3.1, TAB 8, ANSWER C [1064] 14 --- Upon commencing at 10:22 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 Are there any preliminary matters that we need to deal with before we recommence cross-examination of this panel? 18 Mr. Aiken. 19 MR. AIKEN: Thank you, Mr. Chairman. 20 UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT 21 P.ELLIOTT; Previously sworn. 22 W.BRODIE LUMLEY; Previously sworn. 23 M.BROEDERS; Previously sworn. 24 D.HEBERT; Previously sworn. 25 CROSS-EXAMINATION BY MR. AIKEN: 26 MR. AIKEN: Good morning, panel. I'm going to start with a number of areas that have been referred to this panel. I'm starting with rate base, first of all. If you could turn up Exhibit B.3, tab 2, schedule 3, blue-page update. And on pages 1 and 2 of that update, there's a number of storage, transmission, and distribution projects listed, and my question is, what level of contingency factor has been built into the costing of these projects? 27 MS. BRODIE LUMLEY: The only project which may have a contingency level in it is the integrity management program. For the rest of the projects, there is no contingency spending built in to the forecasted spending level. 28 MR. AIKEN: Am I correct that for the integrity management program, you are not requesting a variance account in 2004? 29 MS. BRODIE LUMLEY: That is correct. 30 MR. AIKEN: Could you undertake to provide the level of contingency, if there is one, for that program? 31 MS. BRODIE LUMLEY: Yes, we can. 32 MR. MORAN: Mr. Chair, that's Undertaking N.16.1. 33 UNDERTAKING NO. N.16.1: TO PROVIDE THE LEVEL OF CONTINGENCY, IF THERE IS ONE, FOR THE INTEGRITY MANAGEMENT PROGRAM 34 MR. SOMMERVILLE: Thank you. 35 MR. AIKEN: If you could turn now to the response to an interrogatory from the London Property Management Association, it's J.18.216, the question talked about the data reconciliation and tracking gas acquisition projects and my understanding is that tracking gas acquisitions has been deferred in the yellow-page update; is that correct? 36 MS. BRODIE LUMLEY: That is correct. 37 MR. AIKEN: Then with respect to the data reconciliation project, which I believe is a half million dollars in the 2004 capital budget, the answer indicates that there's no reductions in the O&M as a result of this project. Can you explain to me what the benefits to the company and to ratepayers are of this project? 38 MS. ELLIOTT: The inventory for the data reconciliation project is driving at improving the accuracy -- increasing the accuracy and timing of the information that's reported financially, in a more automated fashion than it's currently being done. 39 MR. AIKEN: But there are no O&M savings? 40 MS. ELLIOTT: No, there are not. 41 MR. AIKEN: If we could go back to the previous exhibit, B.3, tab 2, schedule 3. On page 3 of that schedule at line 12, there's a project called, "Inventory Positions on Demand," and this is another project that has been deferred as part of the yellow-page update. My question is: How does this project relate to the project on line 6, which is the load balancing? 42 It would seem to me that as part of the load balancing, you would need to be able to provide a system to provide the daily gas inventory to direct-purchase customers. 43 MS. ELLIOTT: I don't have the specifics on either project. It may be more appropriately asked of the load-balancing panel when they are here. 44 MR. AIKEN: My next series of questions refer to Exhibit J.1.43, but I don't think you actually need to pull it up to look at the numbers. On page 1 of schedule 1 attached to that exhibit, there's a comparison of actual spending as compared to budgeted spending in 2000 and my question is, can you tell me when the 2000 budget was completed, the date? 45 MS. ELLIOTT: You're asking when the 2000 budget was completed? 46 MR. AIKEN: Yes. 47 MS. ELLIOTT: I'm not sure we can provide that date to you. The normal budget process would have the final submission in the fall of the previous year, so it would be the fall of 1999. I can't give you the specific date on which that budget was finalized. 48 MR. AIKEN: That's fine. 49 Then on schedule 2, attached to that response, we have the 2001 information. Again, the question, when was the 2001 budget completed? 50 MS. ELLIOTT: It was it would be the same timing, it would be the fall of 2000. 51 MR. AIKEN: And then schedule 3, the 2002 budget would be the fall of 2001? 52 MS. ELLIOTT: Yes, the normal timing is to complete the budget in the October/November time frame. 53 MR. AIKEN: If I could have you turn to tab 5 of Exhibit M.3.1. 54 MR. SOMMERVILLE: That reference again, Mr. Aiken? 55 MR. AIKEN: M.3.1, cross-examination materials 1 from LPMA. 56 MS. BRODIE LUMLEY: Yes, we have it. 57 MR. AIKEN: Do you take, subject to check, of course, that these numbers are accurate? 58 MS. BRODIE LUMLEY: Yes, we do. 59 MR. AIKEN: To what do you attribute the reason for the consistent overforecasting of the level of capital expenditures over this time period? 60 MS. BRODIE LUMLEY: There's an Exhibit J.1.45 that responds to the variance between the Board-approved 1999 capital spending and the actual 1999 capital spending. And the types of things that happened in 1999 are very similar to what we see throughout the four-year period including project deferrals, fewer customer attachments than forecasted, reduced construction costs due to material changes, reduced vehicle and ITE spending. 61 MR. AIKEN: And we see that for the 1999 results that the overforecast was approximately $15 million -- sorry, $50 million. Am I correct in assuming that this $50 million was effectively built into rates in 1999, or approximately half of the 50 million would be built into the rate base and therefore into the revenue requirement? 62 MS. ELLIOTT: The capital would have been built into rate base in 1999 as would any revenue or cost reductions attributable to those projects. So to the extent that they were storage projects, there would have been revenue attributed to them in the test year as well. 63 MR. AIKEN: And was that revenue requirement that underlined the 1999 rates in any way adjusted during the PBR term for the fact that you underspent by $50 million? 64 MS. ELLIOTT: There was no adjustment to rates to reflect either the underspending or the revenue that didn't materialize as a result of these projects. 65 MR. AIKEN: Is Union on target to hit the $139 million of capital expenditures in the most recent forecast for 2003? 66 MS. BRODIE LUMLEY: Yes, it is. 67 MR. AIKEN: What type of assurances can Union provide to the Board and to ratepayers that it will actually spend the amounts forecast in both 2003 and 2004? 68 MS. BRODIE LUMLEY: The $139 million budget in 2003 is reflective of -- in excess of 25 percent lower than the actual expenditure over the previous four years, so it's 25 percent lower than the -- more than 25 percent lower than the actual spending, which is indicative of the fact that there's very low probability of that fund not being spent. 69 MR. AIKEN: What about for 2004? 70 MS. BRODIE LUMLEY: For 2004 as well it's actually -- it is the 24 percent lower than the average spending. So if I -- expanding on the exhibit which you have provided, the 2003 budgeted capital spending is 139 million, approximately, and the average, as you've shown it to be, is 208 million, which is a $70 million reduction, or 33 percent. 71 For the 2004 forecast, the yellow-page update, the forecasted spending is approximately 158 million, which is 51 million lower than the average as you have calculated it, which equates to 24 percent lower than the actual average spending. 72 MR. AIKEN: So as I understand your answer then, it's the fact that the forecast levels are substantially lower than the average of the last number of years should give the Board confidence that you will spend those lower amounts. 73 MS. BRODIE LUMLEY: That is correct. 74 MR. AIKEN: If I could have you turn to Exhibit J.17.7 now, I'm moving on to the inventory component of rate base. 75 MR. BROEDERS: We have that. 76 MR. AIKEN: And the inventory is shown at line 8 of the attached schedule. And I see there that the actual 1999 level was approximately 30 million, it fell through to 2002 to approximately 25 million, I believe it is, and then for 2003, the blue-page forecast also is a slight decline of about half a million dollars, but there's no decline, in fact, there's an increase, in 2004. 77 Can you explain why there is an increase in that year? 78 MR. BROEDERS: When the forecast was made, we had assumptions in there to track previous years' balances. We didn't adjust for the complete drop that was experienced in late 2002, all of 2003. The schedule that you actually provided as part of M.3.1 is likely more indicative of what the balance will be, which is approximately about $24 million. 79 MR. AIKEN: Okay. Thank you. 80 If we look now at Exhibit B.3, tab 4, schedule 2 updated. 81 MR. SOMMERVILLE: Tab 4? 82 MR. AIKEN: Yes, B.3 Tab 4, schedule 2, yellow-page update. I first want to look at line 14. 83 MR. BROEDERS: Sorry, too much binder flipping. What was the full reference, B.3, tab 4? 84 MR. AIKEN: Tab 4, schedule 2 updated, the cash working capital schedule. 85 MR. BROEDERS: Okay, I have that now. 86 MR. AIKEN: At line 14, I think I understand how the 3311 is calculated, and I understand it's line 12 times 18.9 days, divided by 365, times 7 percent; is that correct? 87 MR. BROEDERS: That's correct. 88 MR. AIKEN: Can you then explain to me how line 7 is calculated, the minus 219? 89 MR. BROEDERS: It should be calculated in the same manner. I cannot reproduce the figure of the .0584. 90 MR. AIKEN: Could you undertake to update that number if it's required? 91 MR. BROEDERS: We can do that calculation now if you just give us a moment. 92 MR. AIKEN: Okay. 93 MR. BROEDERS: We can't agree on the figure so we will undertake to do that. Sorry. 94 MR. AIKEN: Okay. 95 MR. MORAN: Mr. Chair, Undertaking N.16.2 is an undertaking to review the calculation found at line 7 of Exhibit B.3, tab 4, schedule 2 updated. The yellow pages. 96 UNDERTAKING NO. N.16.2: TO REVIEW THE CALCULATION FOUND AT LINE 7 OF EXHIBIT B.3, TAB 4, SCHEDULE 2 UPDATED, THE YELLOW PAGES 97 MR. SOMMERVILLE: Thank you. 98 MR. AIKEN: Sticking with this schedule, I'm going to put forward a number of proposals that may require calculations as well. I think they're fairly simple calculations, however, so I'll ask the first one. Can you confirm that for every $10 million reduction in O&M expenses that may be approved by the Board, the reduction in the working capital would be approximately $400,000? And I can tell you how I came up with that number. I took the 12894 at line 8, divided by the 321,226 at line 5, I guess it is, and then multiplied that by 10 million. 99 Perhaps you could take that subject to check. 100 MR. BROEDERS: Yes, we will. 101 MR. AIKEN: In the same schedule, the working capital allowance for the gas purchase cost has gone up from an original white-page number of 792,000 to 1,059,000. What's the reason for this increase? 102 MR. BROEDERS: Comparing the white and yellow pages, line 9 changed as a result of an update in the gas pricing. 103 MR. AIKEN: And is the yellow page based on the October 1st QRAM or the July 1st QRAM gas cost? 104 MS. ELLIOTT: It's the July 1st QRAM. 105 MR. AIKEN: Could you provide the impact of the working capital allowance for gas purchase costs of updating to the gas costs from the October 1st QRAM? 106 MS. ELLIOTT: We can calculate that. 107 MR. MORAN: Mr. Chair, that would be Undertaking N.16.3. 108 UNDERTAKING NO. N.16.3: TO PROVIDE THE IMPACT OF THE WORKING CAPITAL ALLOWANCE FOR GAS PURCHASE COSTS OF UPDATING TO THE GAS COSTS FROM THE OCTOBER 1ST QRAM AND TO PROVIDE THE IMPACT IF THE MARCH PARK COSTS WERE REMOVED ON THE WORKING CASH 109 MR. AIKEN: Am I also correct in assuming that the gas costs shown here, the 909,272 include the March park costs which are in the neighbourhood of $8 million? 110 MS. ELLIOTT: Yes, they do. 111 MR. AIKEN: Could you, perhaps as part of the previous undertaking, provide the impact if the March park costs were removed on the working cash. 112 MS. ELLIOTT: We can do that. 113 MR. AIKEN: Thanks. 114 If you could turn now to Exhibit B.3, tab 1, schedule 1, yellow-page update. 115 MR. BROEDERS: We have that. 116 MR. AIKEN: It would appear that a number of the lines under the working capital and other components section of that schedule would be impacted by an update to the October 1st QRAM cost. I'm talking specifically about the cash working capital which we've just referenced, the gas and storage and line-pack gas, balancing gas, APC receivable, perhaps some of the others. Could you provide the impact on rate base of updating to the October 1st QRAM gas costs on those line items. 117 MS. ELLIOTT: We can do that. There is no impact on balancing gas it will be lines 4, 5, and 8 that will be impacted. 118 MR. MORAN: That will be Undertaking N.16.4. 119 UNDERTAKING NO. N.16.4: TO PROVIDE AN UPDATE REFLECTING THE IMPACT OF THE OCTOBER QRAM ON EXHIBIT B.3, TAB 1, SCHEDULE 1 UPDATED, AND TO PROVIDE THE IMPACT ON THE REVENUE REQUIREMENT OF THE CHANGE IN RATE BASE 120 MR. PENNY: Can you just identify the schedule, Mr. Moran. 121 MR. MORAN: An update reflecting the impact of the October QRAM on Exhibit B.3, tab 1, schedule 1 updated. 122 MR. PENNY: Thank you. 123 MR. AIKEN: As part of that undertaking, could you also provide the impact on the revenue requirement of the change in rate base? 124 MS. ELLIOTT: Yes. 125 MR. AIKEN: What is included in the pre-paid and deferred expenses at line 9 on that schedule? 126 MS. ELLIOTT: I believe there was an interrogatory response addressing that question. We're just looking at the reference now. 127 MR. BROEDERS: The interrogatory reference is J.18.35. The response was: 128 "The major prepaid and deferred expenses included in B.3, tab 4, schedule 7, are prepaid insurance and prepaid property tax." 129 MR. AIKEN: If you look back at Exhibit J.17.7, we have a comparison of the number of years there. Could you explain the increase from roughly 2 million in 2001 actual to 7.5 million in 2002 actual? Would this relate to some of the increase in the insurance cost? 130 MR. BROEDERS: I believe the majority of the difference is due to a financial reporting classification difference. Back in '99, the way that we recorded in our system is through our liability section and it was within the last couple of years where we moved that prepaid or that debit balance up into the prepaid section. So we are seeing in the latest values that prepaid position. 131 MR. AIKEN: Can you also explain then the increase from 6 million in the 2003 blue page to, I believe the figure is 7. -- yeah, 7.5 million in the yellow-page update for 2004? 132 MR. BROEDERS: I think I'm going to have to take an undertaking to do that. 133 MR. MORAN: Undertaking N.16.5, to explain the increase from the 2003 blue page to the 2004 yellow page for line item 10 on Exhibit J.17.7. 134 UNDERTAKING NO. N.16.5: TO PROVIDE AN EXPLANATION FOR THE INCREASE FROM THE 2003 BLUE PAGE TO THE 2004 YELLOW PAGE FOR LINE ITEM 10 ON EXHIBIT J.17.7 135 MR. AIKEN: I am now moving on to a new section of cross-examination, this is on other revenue, another section that was also deferred to this panel. And for this, I had provided Exhibit M.5.3, it's cross-examination materials number 2. 136 MR. SOMMERVILLE: What was that reference, Mr. Aiken? 137 MR. AIKEN: M.5.3. 138 MR. SOMMERVILLE: Thank you. 139 MR. AIKEN: And it's the first page of that exhibit that I'm going to be referring to. 140 MR. BROEDERS: We have that. 141 MR. AIKEN: I'm just going to ask questions about a few of these line items. First of all the account opening charges, are these charges for new customer attachments? 142 MS. ELLIOTT: If there are new customer attachments, as well as any existing customer whose service is turned off and then turned back on again. 143 MR. AIKEN: Would you have an approximate idea of how much is related to new customer attachments out of the total? 144 MS. ELLIOTT: I don't have a break down of that amount, no. 145 MR. AIKEN: If the Board were to determine that the 2004 customer attachment forecast was understated, how would the Board determine how much it should increase the account opening charges to reflect a higher customer attachment forecast? 146 MS. ELLIOTT: There's an interrogatory response J.7.52 that sets out the connection charge as $35 per customer. 147 MR. AIKEN: As a general question then, on all the revenues shown on this summary page, has there been any changes to the charges or the rates that make up these revenues? 148 MS. ELLIOTT: Changes since when? 149 MR. AIKEN: Changes between 2003 and what underlies the projected revenues for 2004? 150 MS. ELLIOTT: Not to my knowledge, no. 151 MR. AIKEN: The rental income line, there's rental income in the bridge and test years, what is Union renting? 152 MS. ELLIOTT: That's the sublease on our North York office space. 153 MR. AIKEN: The next line, the "other operating revenue" drops to 0 from 700,000 in the bridge year. Why is there no other operating revenue? 154 MS. ELLIOTT: I'm not sure I can tell you what's in that line item. The 2002 and 2003 numbers are likely actuals, it's not a component for which we forecast activity. 155 MR. AIKEN: Could you undertake to provide what that 700,000 in the bridge year forecast is? 156 MS. ELLIOTT: We can see what we can do. 157 MR. MORAN: Mr. Chair, that would be Undertaking N.16.6. 158 UNDERTAKING NO. N.16.6: TO PROVIDE THE MAKE-UP OF THE OTHER OPERATING REVENUE OF 700,000 IN THE 2003 BRIDGE YEARS 159 MR. MORAN: I wonder if Mr. Aiken could just restate the undertaking. 160 MR. AIKEN: An undertaking to provide the make-up of the other operating revenue of 700,000 in the 2003 bridge year. 161 The next two lines, "cushion gas sales" and the "sale of land and building," I take it that these reflect the gain on the sale of non-depreciable assets. 162 MS. ELLIOTT: They do, yes. 163 MR. AIKEN: In 2002. 164 MS. ELLIOTT: Yes. 165 MR. AIKEN: If Union were to dispose of unforecasted non-depreciable assets in the test year, to whom would this gain be accrued? 166 MS. ELLIOTT: The gain would be recorded as other revenue and contribute to the earnings for the year on an actual basis. 167 MR. AIKEN: So the entire gain would go to the shareholder under a test year, the cost-of-service test year if it was on forecast? 168 MS. ELLIOTT: Variances from the forecast would go to the shareholder, yes. 169 MR. AIKEN: The next item is foreign exchange difference. Can you explain to me what this item records. 170 MR. BROEDERS: The foreign exchange we had been deferring from what our system was calculating due to not knowing exactly what all those losses or gains that attribute over a number of years were -- were attributable to. 171 We had undertook a project during 2002 to strip out the gas costs that were -- the foreign exchange relating to gas cost to get a true expense figure related to that and the remaining difference we put to the income statement. 172 MR. AIKEN: What is the current exchange rate that Union is forecasting for 2004? 173 MS. ELLIOTT: We don't have a foreign exchange rate that we use in our forecast. 174 MR. AIKEN: Do you know where Mr. Birmingham got his estimate of $1.50 they were using for the affiliate transactions? 175 MS. ELLIOTT: That would have been provided from the treasury group in the U.S. 176 MR. AIKEN: Mr. Laforet actually referred me to you, Ms. Elliott, about the exchange rate forecast. That's transcript volume 13, paragraph 340 and 341. Actually it's Mr. Birmingham, sorry. 177 MS. ELLIOTT: I guess if you could repeat your question, the difficulty I'm having is we don't communicate, as part of the budget instructions, a foreign exchange rate. 178 MR. AIKEN: Okay. Well, I'll make do my question in two parts then. First of all, if you could pull up Exhibit J.7.37, which was an exhibit I was dealing with with Mr. Birmingham and Mr. Laforet. And first of all, even before we get to that, would you take it, subject to check, that the current foreign exchange rate for 2004 for the U.S. dollar is approximately 1.32. 179 MR. BROEDERS: The October consensus forecast dated approximately October 11th, the three-month forward was 1.348, the 12-month forward was 1.327, for an average of 1.3375. I would consider that more representative for 2004. 180 MR. AIKEN: Would you take it subject to check that as of yesterday, the foreign exchange rate for one year was 1.329, for six months was 1.3212, and for three months was 1.3164? 181 MR. BROEDERS: Sorry, what were those time periods again? 182 MR. AIKEN: The one year forward 1.329, the six month forward, 1.3212, and the three-month forward, 1.3164. 183 MR. BROEDERS: Okay. 184 MR. AIKEN: Now, in the response to J.7.37, it indicates that a one-cent change in the exchange rate equates to a $60,000 change in this $5.9 million contract with the U.S. affiliate, so would you agree that the difference between the $1.50 exchange rate that Mr. Birmingham indicated was used and the 1.32, would be in excess of a million-dollar decrease in the Canadian dollar cost? 185 MR. BROEDERS: Yes. 186 MR. AIKEN: And the last line of J.7.37 talks about the natural gas purchases. How are the gas purchases dealt with through the exchange rate forecast used in the PGVA versus the actual cost? 187 MR. BROEDERS: As I explained with the foreign exchange difference question that you had earlier, the changes in the foreign exchange rate for our gas purchases are put into the deferral accounts, PGVA account. 188 MR. AIKEN: So it's a flow-through. 189 MR. BROEDERS: That's correct. 190 MR. AIKEN: Okay. The last line also talks about other goods and services from third parties located outside of Canada. Do you have any way of tracking how much of your O&M or capital budgets are based on expenditures in U.S. dollars? 191 MR. BROEDERS: Sorry, could you repeat the question? 192 MR. AIKEN: Do you have a methodology or a system in place that you could go back in and tell us how much of your O&M budget and capital budgets are based on information or quotes that were received in U.S. dollars? 193 MR. BROEDERS: No, we don't. 194 MS. ELLIOTT: No. 195 MR. AIKEN: Back to the first page of Exhibit M.5.3, the writeoff of capital projects, what type of capital projects were written off in 2002 for the $4.3 million write-down? 196 MS. ELLIOTT: This is largely the writeoff of historic spending on the Bickford to Dawn project, projects that haven't been approved by the Board for which we've incurred costs. 197 MR. AIKEN: If I could turn now to the capital budget process, a couple of questions on that. And you may have already talked about this, but in Exhibit F.1, tab 1, page 1, I believe this was on the yellow-page update, yes, it was the yellow-page update, the second paragraph talks about a review by management of the capital budget for 2004 that took place. My question is really more on the original capital budget for 2003 and 2004 and the question is: When were those capital budgets done for 2003/2004? 198 MS. ELLIOTT: The budget process is somewhat continuous. The 2003 budget was finalized in the fall of 2002. At that time, we would have also prepared a preliminary budget and forecast for 2004 which, in this case, because of the rate case filing, went through additional process and reviews in the first quarter of 2003, and then went through an update when we were doing the blue page and now we're at a point where we are finalizing our 2004 budget, which is sort of the typical schedule being October/November of the previous year, of the year before. 199 MR. AIKEN: On to the issue now of taxes, the provincial capital tax, in particular, sorry, and the large corporations tax. If you could turn up Exhibit J.18.134. It's my understanding that Union has not taken any portion of the provincial capital tax exemption into account. 200 MR. HEBERT: That's correct. 201 MR. AIKEN: Would you confirm that if Union was taxed for regulatory purposes on a stand-alone basis, the reduction in the provincial capital tax would be $15,000? 202 MR. HEBERT: If it was taxed on a stand-alone basis, that would be the amount. I guess there is still a question on the sharing of that exemption. 203 MR. AIKEN: Yes, and we're going to get to that in a moment. If you could go ahead two pages to J.18.136, this deals with the large corporations tax. Would you also confirm that if Union was taxed for regulatory purposes on a stand-alone basis, the reduction in the large corporations tax would be $20,000? 204 MR. HEBERT: The $10 million exemption, yeah, $20 million -- or, sorry, $20,000. 205 MR. AIKEN: We have heavy taxes, but not quite that high. 206 If you could now turn to the response to Exhibit J.18.236. I see the witness on here is Mr. Birmingham, but I'm assuming I can ask you a question on this, and that question is: My understanding is that Union believes it should -- that income taxes, including the large corporations taxes, should not be based on some theoretical stand-alone basis; is that correct? 207 MR. HEBERT: Yes, we agree. 208 MR. AIKEN: Now, I provided Union a handout from an EBRO 496 decision a few days ago. I'm going to refer to that next so I'm wondering if that could be given an exhibit number. 209 MR. HEBERT: I have that. 210 MR. MORAN: Mr. Chair, Exhibit M.16.1, excerpt from decision EBRO 496. 211 EXHIBIT NO. M.16.1: EXCERPT FROM DECISION EBRO 496 212 MR. AIKEN: Now, this excerpt from the EBRO 496 decision for Natural Resource Gas Limited. Page 39 of the decision talks about the large corporations tax, and on page 40 under the Board findings section, the first two paragraphs I just want to read into the record for clarity. Paragraph 3.2.59 reads: 213 "The Board notes that the avoidance of cross subsidization between regulated and non-regulated activities of a company or group of companies is a key principle in regulation. While there may be benefits to NRG for being part of the GRAAT group of affiliated companies, there are benefits to other entities within the group from the presence of NRG within the family. NRG's management fee compensates the GRAAT group of affiliated companies for any access to financing or management support provided." 214 Then the first sense in paragraph 3.2.6 reads: 215 "Consequently, the Board finds that NRG should be treated as a stand-alone entity for purposes of calculating the federal capital tax to be included in NRG's cost of service." 216 Would you agree with me that the Board was fairly clear that in this particular case, this gas utility should be treated on a stand-alone basis for the purposes of calculating the federal capital tax? 217 MR. HEBERT: No, I don't know the facts of NRG and the corporate structure, so in that decision, you know, I'm not going to disagree with the Board. But in Union Gas's position, I think the one thing -- the exception that I think we probably have here is that we have a number of utilities within a corporate -- within a corporate group. And if you were to take that position that each utility was entitled to this $10 million exemption, there is only one $10 million exemption that is available. So where you have three regulated businesses within one company, you would have the result that you would end up giving the ratepayers a benefit of a $30 million exemption when, in fact, there is only a $10 million exemption available to the whole corporate group. 218 So I would think that that would be one of the mitigating factors that we would have here in Union Gas as opposed to NRG. 219 MR. AIKEN: So are you saying that ratepayers should be penalized by the fact that the parent of Union Gas happens to own other regulated entities? 220 MR. HEBERT: I guess my suggestion would be that where you have benefits that you wouldn't multiply that benefit, that it should be shared among all of the regulated groups and the shareholder and that you shouldn't -- that you shouldn't have to give away more benefit that what, in fact, actually exists. 221 MR. AIKEN: So I take it you're continuing to disagree that a gas utility regulated by the OEB should be taxed as if it were on a stand-alone basis regardless of who's standing beside it? 222 MR. PENNY: Frankly, Mr. Chairman, I'm not sure what Mr. Aiken said even means, but it certainly sounded like argument to me. 223 MR. AIKEN: That's fine. 224 I'll move on to page 41 of that decision. Paragraph 3.2.67 and 68 and again, I will read these into the record. 225 "As previously stated, the Board is a strong proponent of the principle of avoidance of cross subsidization. Consequently, the Board finds that NRG should be treated as a stand-alone entity for purposes of calculating the income tax to be included in NRG's cost of service. The Board finds that since NRG should be entitled to the federal small business deduction, this deduction must be included in the calculation of income tax for regulatory purposes." 226 I'll stop there. 227 Again, if the Board were to determine that Union should be taxed on a stand-alone basis, would I be correct in assuming that for 2004, the first $250,000 of taxable income would be taxed at a lower rate than the general taxation rate ? 228 MR. HEBERT: No. I guess -- the $250,000 number you're referring to, could you explain that please? 229 MR. AIKEN: Yes, I believe it's scheduled to be $250,000 for 2004, it's currently at a level of something under -- 230 MR. HEBERT: What does the $250,000 -- is that a capital tax, is that an income tax, I'm not sure what you're referring to. 231 MR. AIKEN: My understanding that it's the federal small business deduction. 232 MR. HEBERT: Oh, okay. Union Gas would not be entitled to the small business deduction. 233 MR. AIKEN: Even if it was taxed on a stand-alone basis? 234 MR. HEBERT: What you do is you look to the shareholders of the corporation and on a stand-alone basis, Union Gas is, at this point in time, owned by a non-resident, and corporations owned by a non-resident do not qualify for the small business deduction. 235 MR. AIKEN: So it were a Canadian-controlled private corporation, it would be. 236 MR. HEBERT: Yeah. If it were a Canadian-controlled private corporation, but it isn't. It does not meet the definition of Canadian-controlled private corporation in the Income Tax Act. 237 MR. AIKEN: My next topic on my list is the short-term debt rate, starting off here on Exhibit J.18.217. 238 MR. SOMMERVILLE: What was that reference? 239 MR. AIKEN: Sorry, J.18.217. 240 MR. SOMMERVILLE: Thank you, Mr. Aiken. 241 MR. BROEDERS: I have that. 242 MR. AIKEN: The last sentence of paragraph B indicates that, "Union is requesting an interest rate on deferral accounts in this proceeding of 4.15 percent." And it references E.3, tab 1, schedule 1 updated. 243 Now, how would this interest rate be applied to deferral accounts under the currently hypothetical assumption that we go into a PBR period starting in 2005? Would that rate be changed or would it remain fixed? 244 MS. ELLIOTT: Once the rate is set, it is fixed until it's changed, so it would carry through until there was a change in the accounting orders to change the interest rate. 245 MR. AIKEN: Now, if we look at Exhibit E.3, tab 1, schedule 5 updated, we see the derivation of the 4.15 percent. And you may also want to turn up Exhibit J.18.143 at the same time. 246 MR. BROEDERS: I have that. 247 MR. AIKEN: The 4.15 is made up of three different components, the first one being the spread, the second one being the cost, 20-basis point spread and a 35-basis point cost. My question here is: Is there any update to those costs based on current conditions from the response in J.18.143? 248 MR. BROEDERS: No, there is not. 249 MR. AIKEN: Okay. Back on the original schedule, or sorry, the updated schedule, there's a 3.60 percent figure shown for the three-month T-bill rate and that's also referred to in the response to J.18.141, and I take it the 3.6 percent is a forecast for 2004? 250 MR. BROEDERS: That's correct. 251 MR. AIKEN: Does this forecast come from consensus economics or consensus forecasts or... 252 MR. BROEDERS: I received that number from our treasury group in Charlotte. I'm not exactly sure what their source is. I think it's the RBC forecast. 253 MR. AIKEN: Do you have a more recent forecast for this 90-day T-bill rate than the information that was provided in August? 254 MR. BROEDERS: I haven't received anything from Charlotte since this time, or since that time. 255 MR. AIKEN: Do you know what the current three-month T-bill rate is? 256 MR. BROEDERS: The October consensus forecast values for the three-month was 2.6 and the 12-month was 2.9. 257 MR. AIKEN: Sorry, what were those numbers, 2.6 and 2.9? 258 MR. BROEDERS: Correct. 259 MR. AIKEN: Do you believe it would be more appropriate and fair to allow the interest rate used on deferral account balances in the future to reflect the actual 90-day T-bill rate along with the spread and the cost rather than using a forecast? Maybe let me expand on that a little bit. It would be something that would let you -- the Board will allow you to adjust the interest rate to be used on deferral accounts, perhaps as part of a QRAM process, to reflect actual interest rates. 260 MS. ELLIOTT: You're asking instead of fixing the short-term interest rates in the accounting orders, that the accounting orders apply a variable rate that is driven off of the current -- 261 MR. AIKEN: Current or the actual for the previous quarter, for example. 262 MS. ELLIOTT: I think that would be reasonable. It would likely reflect the company's cost of interest at the time. 263 MR. AIKEN: If I could turn to the earnings sharing calculation for 2002, you provided a corrected schedule 5 for Exhibit A, tab 11 yesterday, I believe. 264 MR. BROEDERS: We have that. 265 MR. AIKEN: In line 1, this is the average corporate common equity, the 1,067.4; is that correct? 266 MS. ELLIOTT: That's correct. 267 MR. AIKEN: Then when the 3.4 is removed, is the 1,064 then the adjusted average common equity for the utility? 268 MS. ELLIOTT: No, that's still the -- I guess in terms of -- it's not 35 percent of the utility rate base, it's the actual equity of the company adjusted for the equity component that applies to the UEI pref shares. Typically, when we used word utility equity it goes to the rate-base calculation. 269 MR. AIKEN: Yes, and I guess that's my next question and this probably will lead to another undertaking, but if you compare the 1,064 shown at line 3 in Exhibit A, tab 11, schedule 5 addendum corrected, what is the difference between that number and the number shown in Exhibit E.5, tab 1, schedule 1 corrected of 1,038.7 which is the utility capital structure and the actual common equity of 33.42 percent? 270 MS. ELLIOTT: The difference is one is the utility rate-base calculation and the calculation of equity that goes along with that. The earnings sharing calculation is not limited to the utility calculation, it's the total earnings. The only adjustments that have been made from earnings as reported and equity as reported relate to the UEI pref and the S&T revenues that are already subject to sharing. 271 What you're looking at in the earnings sharing calculation is the company's financial results including the equity. What you see in the utility calculation is basically a calculation of equity driven from the rate-base calculation. So to the extent that there are assets and liabilities that are on the books that aren't part of the rate-base calculation, like deferral account balances, they will have an impact on the company's financial balance sheet. 272 MR. AIKEN: Okay. Thank you, Ms. Elliott. 273 My cross-examination has already been too long, so I'm going to short circuit the remainder of it and ask for an undertaking, and the undertaking is related to Exhibit E.3, tab 1, schedule 2 updated. This shows the embedded cost of long-term debt and the undertaking has two parts within each of two parts. 274 The first section is if you would change the $200 million that Union borrowed at line 17 in December of 2002, if that 200 million were 100 million, if you could calculate the resulting figures on line 18 for the columns titled, "Average Monthly Averages, Carrying Cost," and "Projected Average Embedded Cost Rate". That's the first scenario. 275 The second scenario is if the 200 million is replaced with zero, calculate those three numbers again. 276 And then the second part of the undertaking refers to Exhibit F.3, tab 1, schedule 2, and page 2 of that update, it's the yellow-page update. And if you could add a column for the requested return for the $100 million scenario less and another column for the requested return for the $200 million less long-term debt. 277 Would that be possible? 278 MR. BROEDERS: We can undertake to do that. 279 MS. ELLIOTT: In each of those scenarios the difference between the resulting long-term debt common equity pref shares would be through the short-term debt. 280 MR. AIKEN: Yes. 281 MS. ELLIOTT: We can do that. 282 MR. AIKEN: I hope I don't have to explain that again, Mr. Moran. 283 MR. MORAN: Undertaking N.16.7. I think it was clear enough. 284 UNDERTAKING NO. N.16.7: TO CHANGE THE $200 MILLION THAT UNION BORROWED AT LINE 17 IN DECEMBER OF 2002, IF THAT 200 MILLION WERE 100 MILLION, IF YOU COULD CALCULATE THE RESULTING FIGURES ON LINE 18 FOR THE COLUMNS TITLED, AVERAGE MONTHLY AVERAGES, CARRYING COST, AND PROJECTED AVERAGE EMBEDDED COST RATE; SECONDLY, IF THE 200 MILLION IS REPLACED WITH ZERO, CALCULATE THOSE THREE NUMBERS AGAIN; AND REFERRING TO EXHIBIT F.3, TAB 1, SCHEDULE 2, PAGE 2, THE YELLOW-PAGE UPDATE, TO ADD A COLUMN FOR THE REQUESTED RETURN FOR THE $100 MILLION SCENARIO LESS AND ANOTHER COLUMN FOR THE REQUESTED RETURN FOR THE $200 MILLION LESS LONG-TERM DEBT 285 MR. AIKEN: Thank you, panel, my apologies for being so long. 286 MR. SOMMERVILLE: Thank you, Mr. Aiken. 287 We'll take 15 minutes. Mr. Dingwall, Ms. Singh and Mr. Brett, is it your intention to cross-examine this panel? 288 MR. BRETT: Yes, sir, it is. 289 MR. SOMMERVILLE: I do have estimates from each of you. It is our intention to try to complete this panel before the lunch break, that means we may go a little bit longer before we have the lunch break. Is that a realistic prospect? 290 MR. DINGWALL: If you're asking me to speak to Ms. Singh and Mr. Brett's -- 291 MR. SOMMERVILLE: No. 292 MR. PENNY: Feel free. 293 MR. SOMMERVILLE: If you feel able to do that, Mr. Dingwall, but I guess I'm asking you severally. 294 MS. SINGH: Mr. Chairman, I anticipate being less than my original forecast of I think 15 minutes. 295 MR. SOMMERVILLE: Thank you. 296 MR. BRETT: Sir, I would be about the same as my forecast of half an hour. 297 MR. DINGWALL: And I will be somewhere between 15 minutes and half an hour. 298 MR. SOMMERVILLE: That means that that is an achievable goal. That's great. We'll break for 15 minutes. Thank you very much. 299 --- Recess taken at 11:35 a.m. 300 --- On resuming at 11:55 a.m. 301 MR. SOMMERVILLE: Thank you, please be seated. 302 Mr. Brett. 303 MR. BRETT: Thank you, very much, Mr. Chairman. Good morning, Mr. Chairman, Mr. Birchenough, the panel. 304 CROSS-EXAMINATION BY MR. BRETT: 305 MR. BRETT: I'd like you to start, if you would, by turning up Exhibit J.23.18, please. That's an interrogatory of my client, J.23.18. 306 This is probably a question for you, Ms. Elliott, to begin with. Do you have it there? 307 MS. ELLIOTT: I do, yes. 308 MR. BRETT: If you can see in the preamble to my question, I cite a couple of paragraphs from the Union 2000 annual report. Do you have it up at the front, sir? 309 MR. SOMMERVILLE: Yes, we do, sir. 310 MR. BRETT: And I talk about -- the paragraphs that I quote talk about that in July 2002, Standard & Poors placed its ratings for Duke Energy and some of its subsidiaries, including Union, on credit watch with negative implications. And then in August 2002 Duke Energy was advised that its credit ratings and some of its subsidiaries, including Union, would be lowered one level and S&P would change its negative outlook to stable. As a result, the company, that is Union's, corporate credit rating was lowered by Standard & Poors from A plus to A, it's unsecured get debt was lowered from A plus to A. 311 And then in January 2003, S&P again lowered its long-term ratings and lowered the short-term ratings for Duke and some of its subsidiaries. And it talks about the company's corporate credit rating, that's Union's corporate credit rating, was lowered from A to A minus, its commercial paper was lowered to A1 low, and its senior unsecured debt lowered to A minus. 312 Now, in connection with this, just before I put the question, I'd like you to look at one other piece of information which is to be found in Exhibit A, tab 15, schedule 1, and that is the -- schedule 2, I'm sorry. That's Exhibit A, tab 15, schedule 2. What that is, just while you're finding it, I'll describe it, it's the S&P report, or one of the S&P reports that is being -- it's actually a different -- it's one of the two S&P reports that's being referred to here and I wanted to just -- do you have that? 313 MS. ELLIOTT: I do, yes. 314 MR. BRETT: I just wanted to point out that when they talk about -- this is done on Union Gas, but on the first page under rationale, if you look at the paragraph at the bottom under rationale, they say here, S&P say, "The ratings and outlook on Union Gas Limited reflect the credit strength of its ultimate parent company, Duke Energy Corporation. Even though no explicit parental guarantees have been provided, the ratings on Union Gas have been equalized with those on Duke Energy which is in line with Standard & Poors consolidated ratings methodology." 315 Now, I had asked you a question, the question I had asked in the interrogatory, the first question was in A, this is J.23.18, A, "Please describe fully the impact of these credit downgradings on the cost of debt capital to Union Gas. What has been the impact in basis points on the cost of each form of debt capital raised by Union in 2003 and the latter half of 2002 compared to what costs would have been had the downgrades not taken place." 316 So I was trying to get at the impact. So the -- you had -- first of all, with that background and posing that question, you agree with me that Union raised capital, raised debt, medium-term notes 200 million worth in December of 2002? 317 MS. ELLIOTT: Yes, we did. 318 MR. BRETT: At a rate of 5.19 percent. 319 MS. ELLIOTT: That's correct. 320 MR. BRETT: And so my first question really is: Had you not had that downgrading, how much lower would you have been able to raise that debt at? Is it 20 basis points, 30 basis points, 50 basis points? Do you have a sense of what the difference in cost of debt would have been? 321 MS. ELLIOTT: I don't have any indication of what the rates would have been if the S&P rating had been different, although for the most part, Union is looked upon -- the DBRS rating has probably more weight for Union Gas individually than the S&P rating in Canada. 322 MR. BRETT: Why is that, as a matter of interest? Why do you say that the DBRS rating which is one of three rating services has a higher impact on Union than Standard & Poors? Standard & Poors is a large, well-known international rating. 323 MS. ELLIOTT: It's just the relationship between the Dominion Bond Rating Service, which is a Canadian agency, and the Canadian lenders, and the fact that Union has historically been rated by DBRS. 324 Standard & Poors is -- their ratings are consolidated entities so they're rating the Duke entity, and Union's rating will be whatever Duke's is. 325 MR. BRETT: You do agree with me though that in general, I take it, that everything else being equal, the higher the credit rating this actually is -- the higher the credit rating the lower the cost of capital, for debt capital, will be, and the converse is true as well. 326 MS. ELLIOTT: Well, our goal is certainly to maintain as high a credit rating as possible in order to get the -- the flexibility in our financing and our lowest cost of debt. 327 MR. BRETT: And lowest cost. 328 MS. ELLIOTT: Yes. 329 MR. BRETT: Yes, right. And I take it that under -- under S&P's method, at least, that Union's rating is going to be -- you're saying a function of Duke's ratings. I take it it can't be any higher than Duke's rating. 330 MS. ELLIOTT: That's right. The approach that Standard & Poors uses is a consolidated methodology, so that the rating of the parent is the rating of all of the subsidiaries. 331 MR. BRETT: Now, the -- just as an aside, in the Standard & Poors report that I was referring to a moment ago, that's tab -- Exhibit A, tab 15, schedule 1, there is a -- on page 2, top of the page -- 332 MR. BROEDERS: Sorry, is that schedule 2 or schedule 1? 333 MR. BRETT: Schedule 2, sorry. Schedule 2, I believe, is the -- have you got the Standard & Poors report? Do you have that? 334 MS. ELLIOTT: Yes. 335 MR. BRETT: Top of page 2, the first full paragraph, "Duke Energy's average business risk profile," this is the writer, "is enhanced by the strong competitive position of Duke Power," blah blah, "with its competitive rates, and by the stable cash flow generated by its regulated U.S. regulated electric utility, U.S. gas transmission and Canadian gas transmission and distribution business that are expected to provide about 75 percent of --" 336 So you would agree with me that in this sense, Union's business, that's the financial stability of the gas distribution business, and as you know Union is the first gas distribution business that Duke has owned, that contributes to the financial stability of Duke itself. In other words, it's a positive factor influencing the rating agencies' view of Duke as a whole. 337 MS. ELLIOTT: That is correct. 338 MR. BRETT: Now, in the attachment dated July 23rd, this is the -- this is J.4 -- I'm sorry, I need just a moment here. J.1.128, I'm sorry, J.1.128, we were looking at this a moment ago, I think. 339 MS. ELLIOTT: We have that. 340 MR. BRETT: All right. And that is the current -- I take it that's the most current DBRS report on Union Gas, J.1.128, it's dated July 23rd of 2003? 341 MS. ELLIOTT: Yes, it is. 342 MR. BRETT: There's nothing since then? 343 MS. ELLIOTT: There is not. 344 MR. BRETT: In that report, they show on page 1, at the bottom of the first page, you'll see down at the bottom there, under authorized paper amount, limited to 340 million. 345 MS. ELLIOTT: Yes. 346 MR. BRETT: And what that says is that your use of the commercial paper market is restricted to a total dollar volume of 340 million; right? 347 MS. ELLIOTT: That's correct. 348 MR. BRETT: And you will confirm for me that commercial paper is generally the lowest cost borrowing for a major corporation, it is subprime borrowing, typically? Do you want to take that subject to check? 349 MS. ELLIOTT: It's lower than our long-term debt, it's certainly lower than our embedded long-term debt, yes. 350 MR. BRETT: All right. And it is only large corporations that are financially sound which have access to the commercial paper market; right? It's not a privilege that is extended to every small corporation? 351 MS. ELLIOTT: I'm not sure that I can speak to who has access to the commercial paper market. 352 MR. BRETT: Okay. But in any event, it is the lowest cost of -- it's a lower cost funding than your long-term debt and it typically is backed up by a bank line of credit; correct? 353 MS. ELLIOTT: That's correct. 354 MR. BRETT: Now, I just wanted to have you note with me that your -- well, I'll ask you. This $340 million number is down very substantially from what you had authorized in your commercial paper in June, as recently as June of 2002 which, as I make it, was 750 million; is that right? Does that ring a bell or can you take that subject to check? That's from a former DBRS report. 355 Let's look at it. It's Exhibit A, tab 15, schedule 1. There are two DBRS reports that we're working with, one is the recent one we just spoke of which is July 23rd of 2003, and then you filed in Exhibit A, an earlier one dated June 20th of 2002, that's again a DBRS report; right? 356 MS. ELLIOTT: Right. 357 MR. BRETT: And you also filed -- that's attachment 1 to that exhibit and then as attachment 2 to that exhibit you filed the Standard & Poors report that we've been discussing; right? 358 MS. ELLIOTT: Yes. 359 MR. BRETT: If you look at page 1 again of the 2002 DBRS report, you see at the bottom, authorized paper amount, 750 million. 360 MS. ELLIOTT: That's correct. 361 MR. BRETT: And then if you were to turn over to the Standard & Poors study that we just spoke of on schedule 2, which is schedule 2 to that same exhibit, you will see in here at, I believe, page 6 -- sorry, at page 2 of 6, a little paragraph entitled, "Liquidity," do you see that? 362 MS. ELLIOTT: Yes. 363 MR. BRETT: And it talks about a 600 million commercial paper program. And this document is dated February 23rd of -- February 12th of 2003. 364 MS. ELLIOTT: Yes. 365 MR. BRETT: So effectively, your authorized short-term borrowing program has gone down from 750 million in June of 2002 to 340 million currently; correct? 366 MS. ELLIOTT: That's correct. 367 MR. BRETT: Now, the operating line that backs it up has gone down accordingly. 368 MS. ELLIOTT: Yes. 369 MR. BRETT: Now, I guess the broad question, what do you attribute that to? Does that, in part, reflect the difficulties that Duke has got involved in and it represents a sort of rationing of credit among the various entities that Duke owns? Is that not what you attribute that to, that rationale? 370 MS. ELLIOTT: I think in part it's more general than that in terms of the tightening of the capital markets and the lending institution's willingness to make available lines of credit. 371 The other reason, one of the significant reasons for the degrees from 700 million to 340 million -- the 700 million was an increase to accommodate the higher cost of gas that we experienced through 2001 that was also combined with warmer weather. So we were carrying significantly more gas in inventory and it was costing us much more than we typically had been carrying in short-term debt. 372 MR. BRETT: Can I just ask you there to pause for a second. The high cost of gas I understand, that's the winter of 2000/2001. 373 MS. ELLIOTT: Yes. 374 MR. BRETT: And then the warmer weather you're referring to is the spring and summer of 2001; is that... 375 MS. ELLIOTT: The warm weather was really compounding from 2000 through 2001. 376 MR. BRETT: Right. 377 MS. ELLIOTT: So we had two warm years back to back, which caused our inventory levels to go up. 378 MR. BRETT: But you had a very cold winter in between, did you not, the winter of 2000/2001? 379 MS. ELLIOTT: 2002, it didn't get cold until 2002. 380 MR. BRETT: I'm sorry, 2001 -- the spiking that took place was in early 2002; is that what you're -- $15 gas in March, that was 2002. 381 MS. ELLIOTT: 2001. 382 MR. BRETT: 2001 is what I thought. 383 MS. ELLIOTT: Yes. So in 2001, we were carrying higher inventories and we needed higher credit lines, commercial paper programs to finance that. So we had an increase from our previous lines which were 500 -- 384 MR. BRETT: You historically carried about 500 million. 385 MS. ELLIOTT: About 500. 386 MR. BRETT: But are you suggesting to me that when you came down from 750 to 600 and then to 340, was this something that you chose to do or was this something that the market imposed on you? I thought your material read like the market imposed this on you. 387 MS. ELLIOTT: The change from 700 to 600 was something that was planned at the time we increased it to 700, so that was at our doing. The drop to 340 was a result of the lines coming due and the financial institutions and what they were going to make available to us. So we got 340 as a result of that, which would be a reflection of the tightening in the capital markets in general. 388 MR. BRETT: And that actually confirms what you've said at J.1.125, you've said as much as that. I don't think you have to turn that up. 389 All right. So you have a lower short-term debt raising capability. Now, you also -- and this, again, I guess the place to see this would be J.1.128, page 4, if you could just turn back to that, J.1.128, that's the DBRS report, the current one dated July 23rd of 2003, on page 4. 390 MS. ELLIOTT: I have that. 391 MR. BRETT: And you'll see there that under summary on the bottom of that page: "Union Gas paid a special dividend of 100 million to its parent." 392 When was that paid in 2002? 393 MS. ELLIOTT: It was in May. 394 MR. BRETT: May of 2002? 395 MS. ELLIOTT: It was after the sale of our Union Energy. 396 MR. BRETT: After the sale of Union Energy. And what were the proceeds due from that sale; do you recall? 397 MS. ELLIOTT: Sorry, it was the redemption of our pref shares of Union Holdings. 398 MR. BRETT: The amount of 150 million? 399 MS. ELLIOTT: Yes, yes. 400 MR. BRETT: Okay. And the reason you paid the dividend as stated here in the DBRS report is in order to maintain the company's capital structure close to the 65 percent, 30 percent debt equity deemed by the regulator; is that a correct characterization of what lead you to pay the $100 million? 401 MS. ELLIOTT: Yes. 402 MR. BRETT: There were no other reasons? 403 MS. ELLIOTT: No. I mean, it was attributable to having redeemed the Union Holdings shares and looking at the equity, the approved levels, we paid up. 404 MR. BRETT: So it was the shares of an affiliate company, another Duke company that you were redeeming effectively or that they were redeeming? They were paying you cash in return for you giving back the shares. 405 MS. ELLIOTT: Yes. 406 MR. BRETT: Now, does that mean -- I just -- does that mean that effectively that your equity, when you paid the dividend of 100 million, your equity is reduced by 100 million; does that have that effect? 407 MS. ELLIOTT: Yes. 408 MR. BRETT: So that directly, then, impacts on your debt/equity ratio. 409 Now, the question I guess I -- the next question is -- you seem to have between 2001 and 2002, I'm looking at the DBRS report still under change in working capital -- 410 MR. PENNY: Which page? 411 MR. BRETT: Page 4, same page. You switched from negative working capital position in 2001 of 382 million to a positive cash position of 340 million. And a little further down in that summary that we were just talking about it explains that. 412 It says, "The significant swing in working capital is due to a decrease in gas inventory levels as a result of colder weather." Now this would be colder weather in the 2001 -- this is colder weather when roughly? Between those two periods? 413 MS. ELLIOTT: Yeah, it would be through the -- the end of 2002. 414 MR. BRETT: Right. And then also a collection of receivables for gas deferral balances, those were the receivables that had been deferred for some time. 415 MS. ELLIOTT: That's correct. 416 MR. BRETT: What I'm trying to get at here indirectly, I guess, or piecemeal is how is it -- you seem to have gone from a what I'll call a cash poor position to a cash rich position rather quickly, and do you have any comment on the components of that? Well, let me add to that the fact that while that was happening, you were also borrowing more money. You went to the capital markets in December of 2002, as we discussed a moment ago, and borrowed $200 million at 5.19 percent. You were getting a lot of cash coming into the company here from a number areas and why is that? 417 For example, why did you feel compelled to 200 million at the end of 2002? Is that capital that was required or was that capital that you sought to take advantage of an interest rate situation? 418 MS. ELLIOTT: At the end of 2002, we were still carrying the deferred receivables and we were looking at our short-term commercial paper lines as well as our ability to raise capital and the opportunity was there to raise the capital at the end of 2002 which had the impact of reducing our short-term borrowing requirements at that time. 419 We were also managing inventories to shed supplies and get back into a normal inventory position, as well as the cold weather through the November/December period also injected cash into the organization. 420 MR. BRETT: You also repaid debt in that period of 2002; you repaid 119 million of long-term debt; correct? 421 MS. ELLIOTT: We also had a redemption. 422 MR. BRETT: That was a redemption under outstanding debentures? 423 MS. ELLIOTT: Yes, they were refinanced by the long-term debt issue in December of 2002. 424 MR. BRETT: Right. Now, I think you've referred to this with others, so I don't think it's -- to shorten things up here you probably don't have to turn things up if you don't wish to, but as you will recall in the E series of exhibits, the capital structure series in schedule 1, page 1, you show unfunded short-term debt of 130 million; right? That's the yellow page. 425 MS. ELLIOTT: That's correct. 426 MR. BRETT: That's the most recent. And you've spoken about the rates and so on and so forth about that. 427 Now, that amount has increased fairly substantially from the white page, the white page of the same exhibit that shows 103 million; right? 428 MS. ELLIOTT: Yes. 429 MR. BRETT: And the blue page for the bridge year shows a cash amount of 151 million; correct? 430 MS. ELLIOTT: That's correct. 431 MR. BRETT: But if you go back to 2002, it shows December 2002, that's E.5, it shows an honest to God debt of 47.4 million; right? 432 MS. ELLIOTT: Right. 433 MR. BRETT: Just as an aside, you call it unfunded debt. What's the reference there? Is that a fancy way of saying it's cash or is that describing the fact that that doesn't have a debenture associated with it? 434 MS. ELLIOTT: It's just short-term debt as if there's no debenture. 435 MR. BRETT: It's short-term debt that's actually a cash balance in this case. 436 MS. ELLIOTT: It's a cash balance when it's negative. 437 MR. BRETT: When it's negative. 438 Now, you were asked yesterday by Mr. Thompson about, paragraph 1198 in yesterday's transcript, about why this -- you've got the cash, why you have so much cash here on the balance sheet as opposed to short-term debt, and this sort of odd position you're in where you have more than enough long-term debt offset by a cash position. And paragraph 1198, you said, and I think I may as well just quote this is the faster way to do this. 439 "In order to operate, our operating lines are for 2003, on average, in a cash position although there are times of the year when 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 150 million worth of cash on hand." 440 I have a couple of questions surrounding this. When you say it's an annual average, how do you make that calculation, is that a question of taking what you have in each month, whether it's negative or positive, and then arithmetically sort of adding it up in such a fashion that the negatives and the positives cancel out, taking the positive that's left and dividing that by 12; is that what you do? 441 MR. BROEDERS: We do the average of the monthly averages calculation. 442 MR. BRETT: So that's the same calculation that you do for long-term debt? 443 MR. BROEDERS: For all rate base components. 444 MR. BRETT: Just describe to me how that would work with this -- when some of these amounts are positive and some of these are negative. 445 MR. BROEDERS: We would take whether -- we take a look at our indebtedness, our cash position. For purposes of presentation here, the indebtedness would be a positive number, the cash position would be a negative. We would add up the December of -- for 2003, we would add December 2002 as well as December 2003, and we would double weight the components of January through November, and then you take that summation and divide by 24. 446 MR. BRETT: Would you do this for me, would you just file the -- as an undertaking could you give the calculations that you made and would you mind doing it for each of 2002, 2003, and 2004? I'd like to see the monthly pattern of cash for each of those three years, and then how you go from the monthly cash, whether it's positive or negative and what amount, and how you get this number. 447 MS. ELLIOTT: We can do that. 448 MR. MORAN: Mr. Chair, I wonder if Mr. Brett can describe the specific calculations he's looking for. 449 MR. BRETT: It's really a twofold thing. First, part A would be the cash position in each of the 36 months, in the three years, and part B would be the calculation of the average for the year, the annual average which is -- and showing the actual calculation, the way they do it for the long-term debt. They have a schedule for long-term debt that shows that; right? 450 MR. BROEDERS: That's correct. 451 MR. MORAN: That would be Undertaking N.16.8. 452 UNDERTAKING NO. N.16.8: TO PROVIDE THE CASH POSITION IN EACH OF THE 36 MONTHS, 2002, 2003, 2004, AND TO SHOW THE CALCULATION OF THE ANNUAL AVERAGE 453 MR. BRETT: That's a bit crude, but that's what I want. 454 Now I take it based on what you've told me, Ms. Elliott, already, going back to the years pre-2003, I take it that normally, in the normal case, prior to 2003, that is 2002 and earlier, you would be operating with some kind of -- on an annual average basis, to use your phrase or the -- sort of typical way of doing it, you'd be operating with a debt, with a short-term debt position as opposed to a cash position. 455 MS. ELLIOTT: That has been historically the way we've operated given the level of capital spending and the gas costs, yes. 456 MR. BRETT: And so what has changed? The capital spending has not changed dramatically, has it? 457 MS. ELLIOTT: The capital spending for 2003 and 2004 is significantly lower than it has been historically. 458 MR. BRETT: All right. And the gas costs have been both -- well, the gas costs have certainly been higher, which would tend to have been historically; right? I mean broadly speaking, the last two years, we've had a quantum leap in gas prices upwards. 459 MS. ELLIOTT: We had that peak period in 2000 where gas costs were higher. We also had, at the same time, very large deferred receivable balances. In 2003, we've been collecting those deferred receivable balances on a prospective basis so we haven't been carrying them for as long as we have in the past. 460 MR. BRETT: And on the gas costs side, you'd agree with me, I guess, that gas prices haven't declined to the levels they were at pre-2002, pre-2001, they've stayed up. Gas prices, putting it another way, are higher now, perhaps by a factor of 2, than they were in the years 2000 and previous on an average basis? 461 MS. ELLIOTT: I'm not sure that a factor of 2 would apply, but we also are collecting the cash on a more timely basis in 2003. 462 MR. BRETT: And now, if I could ask you to look for a moment at -- going back, I want to look at two sets of statements here. We talked about, and others have talked about the utilities statements, the regulated utilities statements which are the E series. I'd like to take you to Exhibit A, tab 11, schedule 1 and you spoke a little bit about this with Mr. Aiken, I believe. These are the yellow pages at the front of that exhibit, and I'm interested in page 5. 463 MR. SOMMERVILLE: There was an addition to this schedule yesterday. 464 MR. BRETT: A further update, Mr. Chair? 465 MR. SOMMERVILLE: Yes, there was an addition to Exhibit A, tab 11, at page 3 of 3, the addendum corrected dated October 28th that would relate to some portion of this, I believe. 466 MR. BROEDERS: What is the reference? 467 MR. BRETT: With respect to my question, I don't think it will matter. 468 I'm looking at page 5, Ms. Elliott, and I'm looking at the short-term borrowings at the end of the year of 197 million. 469 MS. ELLIOTT: Yes. 470 MR. BRETT: Now, are these statements, and I did hear the answer to this earlier today, but I didn't understand it fully. These Union Gas Limited statements, these are corporate statements not utility statements; is that what you said or are these utility statements? Are these comparable on an apples and apples basis with the statements in Exhibit E? 471 MS. ELLIOTT: These are Union Gas's financial statements. For balance sheet and cash flow, we don't have an equivalent utility statement. What we do in E would be calculate the utility income which is a different statement than the statement presented at page 4 of 6. The majority of the components are the same, the difference is the calculation of interest, and taxes for the utility purposes is driven from the rate base number not from the actual or forecasted levels. 472 MR. BRETT: So looking at that 197 million, that number, and I realize that's an end-of-year number, that's like a balance sheet number. 473 MS. ELLIOTT: Yes. 474 MR. BRETT: If that were not, if that were the -- does the 197 correspond to the 130 we just spoke about a few minutes ago, the average number, the annual average? I mean, is the only difference that one is an end of year number and the other is an annual average number? 130.7 was the number. 475 MS. ELLIOTT: The 197 will be the balance sheet number, so that's the December balance in the financial statements. 476 MR. BRETT: I understand. 477 MS. ELLIOTT: The 130 is a calculation which is -- 478 MR. BRETT: It's the annual average calculation. 479 MS. ELLIOTT: Well, it's the utility rate base taking out the long-term debt, the equity, and the pref shares, it's the residual, the 130 is the residual. 480 MR. BRETT: I see. So it's really a balance... 481 MS. ELLIOTT: In response to your undertaking, you will get the balance sheet cash position on a monthly basis. 482 MR. BRETT: Could you make -- yes, that would be helpful. Could you reconcile those numbers as well by stating what you've just stated? 483 MS. ELLIOTT: Yes. 484 MR. BRETT: Because am I right in thinking then that the number that's shown on the E exhibit as a negative short-term debt number is not really cash at all? It's just a notional balancing number that results when you take away from rate base those three other things? In other words, that the only number that really relates to the cash on hand are in the -- was in the A.1 utilities statement we've been talking about. 485 MS. ELLIOTT: That's correct it would be a notional cash on hand. 486 MR. BRETT: Okay, thank you. That's helpful. 487 Mr. Chairman, this is probably, in the interests of moving things along, a good place to stop and I will do so and -- 488 MR. SOMMERVILLE: Well, that's not our highest interest, Mr. Brett. 489 MR. BRETT: No, but the other areas I have -- well, I have about five minutes of questions on one other subject which perhaps I will do because the other two are going to be covered well enough and I can cover in argument. 490 MR. SOMMERVILLE: Thank you. 491 MR. BRETT: Thank you. 492 The last one I wanted to ask you a couple of questions on was the question of loans and this is in J.1.14. 493 MR. SOMMERVILLE: J.1.14? 494 MR. BRETT: Yes. This is a Board Staff interrogatory and this is with respect to -- do you have that, Ms. Elliott? 495 MS. ELLIOTT: I do, yes. 496 MR. BRETT: It's with respect to $13.6 million worth of gas loans to Enron back in 2000 and 2001 which you wrote off ultimately at an approved rate of $5.08 per gJ. And these were then deducted from the S&T revenue, that's how that was done? 497 MS. ELLIOTT: That's correct. 498 MR. BRETT: And these are gas loans, so these are physical transactions rather than financial transactions, or do you view them as a loan of money? 499 MS. ELLIOTT: No, it's a loan of gas, it's a physical loan of gas. 500 MR. BRETT: You loan the gas on a certain date and the person to whom you've loaned it must give you back the molecules at an agreed time? 501 MS. ELLIOTT: That's correct. 502 MR. BRETT: And the price doesn't factor into it? In other words, these loans don't go on your balance sheet in any way as receivables or -- 503 MS. ELLIOTT: That's correct, the gas remains in inventory. 504 MR. BRETT: Sorry, the gas remains in inventory? 505 MS. ELLIOTT: On the financial inventory. On the balance sheet, the gas molecule will be shown as gas inventory. 506 MR. BRETT: All right. But I notice in looking at these loans there are four of them, and number 1 is for a period of 20 months and number 3, that's for June of 2000 to February of 2002, and the third one is from 17th August of '01 to 31st October '03. The other two are shorter term. 507 But my question is: These longer-term loans, these are not in the same category as the -- these aren't released assets, if I can put it that way, in the sense of storage that you make available or transportation capacity you make available, this is gas that you're loaning for more than a full cycle. I mean, one of these is for more than two years, and I guess I was surprised a bit at the length of these. Is it typical for you to loan gas out for that length of period or are these unusual in some sense? 508 MS. ELLIOTT: I'm not sure I'm in a position to answer whether or not those were typical transactions. 509 MR. BRETT: Okay. Are they -- do you know off-hand -- do you know whether or not Union has any guidelines as to how many loans or what concentration of gas loans it will take in its portfolio? Is there any restrictions in that regard? 510 MS. ELLIOTT: From a credit standpoint, there certainly are restrictions as to the concentration of credit risk with any one party. So in evaluating whether or not to transact any business with a third party, we do a credit risk, and the value of the gas loan is considered in that analysis. 511 MR. BRETT: And I noticed in your first quarter report, and I'm looking for the cite for it here. I apologize for that. I have it as an attachment to Exhibit A, tab 11, that we spoke about a while ago, those are the corporate statements. I have this as the Q1 interim report, this is the three-month interim report dated March 31st of 2003. I have no great confidence that this is the right place, that I have this necessarily in the right place, but have you got it? 512 MS. ELLIOTT: I have that report, yes. 513 MR. BRETT: Okay. And I'm only going to read one section from it so I don't know that all of the particulars of the report aren't really too important to my question, but at page 8 in the footnotes there is a little item entitled, "credit risk." And in here, you talk about many of the company's customers purchased gas directly. So you talk about the direct-purchase customers. 514 You go on to say, "Thus during the first quarter of year customers have burned more gas than has been delivered to the company and Union has, in essence, loaned gas to brokers." 515 So that's one kind of loan. That's not the type of loan I'm talking about here, I'm not interested in that for the purposes of my question. That's the load-balancing thing that we're going to discuss in a couple of days. 516 The next part I'm interested in. "Furthermore, the company in the normal course of its operations provides from its holdings of gas in storage gas loans to other parties." That's what we're talking about with the Enron; right? 517 MS. ELLIOTT: That's correct. 518 MR. BRETT: "The replacement amount of both types of gas loans," and you put these together here, "on March 31st 2003 was 131 million." That's up from 117 million in 2002. 519 Now, my question is: Do you know how much of that 131 million is the loans that we're discussing, the type of loan that was made to Enron? 520 MS. ELLIOTT: I don't have that split with me here. 521 MR. BRETT: Okay. Would you be able to get that? 522 MS. ELLIOTT: We could undertake to do that. 523 MR. BRETT: Thank you very much. 524 MR. MORAN: That would be Undertaking N.16.9, Mr. Chair. 525 UNDERTAKING NO. N.16.9: TO PROVIDE THE BREAKDOWN OF THE 131 MILLION GAS LOAN AMOUNT SHOWN ON MARCH 31, 2003 Q1 FINANCIAL STATEMENTS AND DETERMINE HOW MUCH WAS REPRESENTED BY GAS LOANS OF THE ENRON TYPE 526 MR. BRETT: Mr. Chairman, those are all my questions, thank you very much. 527 MR. SOMMERVILLE: Are we confident that we have a description of the last undertaking? 528 MR. PENNY: It was to breakout the 131 million by the -- and determine what portion of that was represented by gas loans of the type that was made to Enron. 529 MR. BRETT: Right. 530 MR. SOMMERVILLE: Thank you. 531 MR. BRETT: Thank you. 532 MR. SOMMERVILLE: Thank you, Mr. Brett. 533 Mr. Dingwall. 534 MR. DINGWALL: I thought Ms. Singh was ahead, but I'm at the disposal of the Board. 535 MR. SOMMERVILLE: I'm indifferent. Ms. Singh, would you like to go ahead. 536 CROSS-EXAMINATION BY MS. SINGH: 537 MS. SINGH: Good morning, panel, I have a few questions, most of my questions have been asked by my colleagues. 538 First of all, a couple of questions with respect to the capital budget process. I provided the panel and everyone with two documents. The first document is entitled, "Financial Panel 10, capital forecast 2003 bridge year," and the second document is, "operating and maintenance expense by administrator." I'm wondering if I could just, for ease of the questions, have these marked as exhibits. 539 MR. SOMMERVILLE: Mine is stapled together so one exhibit. 540 MS. SINGH: One exhibit would be fine. 541 MR. MORAN: Mr. Chair, Exhibit M.16.2, cross-examination materials filed by CME for panel 10. 542 EXHIBIT NO. M.16.2: CROSS-EXAMINATION MATERIALS FILED BY CME FOR PANEL 10 543 MS. ELLIOTT: We have that. 544 MS. SINGH: Thank you. 545 And I was wondering if I could direct you to the updated Exhibit B.1, tab 2 which is reproduced in Exhibit M.16.2. 546 This update suggests that the 2003 bridge year revised capital forecast without overhead expenses, found at line 8, is 93.1 million, and that the overhead expense forecast is unchanged at 46.3 million. Is that correct? 547 MS. BRODIE LUMLEY: I'm sorry, I've lost the reference. 548 MS. SINGH: B.1, tab 2, which is reproduced at Exhibit M.16.2. 549 MS. BRODIE LUMLEY: Could you repeat your question, please? 550 MS. SINGH: If you look at the 2003 bridge year revised capital forecast, without the overhead expenses, is that 93.1 million and the overhead expense forecast is unchanged at 46.3 million? 551 MS. BRODIE LUMLEY: That is correct. 552 MS. SINGH: Am I also correct that overheads, as a percent of capital expenditures in the 2003 bridge year, are now forecast to increase from 45 percent to 50 percent? You'll see that at line 9 of Exhibit M.16.2, and that for the 2004 overheads are forecast to increase from 21 percent of capital expenditures to 31 percent. Would you accept those figures, subject to check? 553 MS. BRODIE LUMLEY: Yes, we would. 554 MS. SINGH: Could you advise why the 2003 overheads were not reduced when the total capital expense is forecast to go down by 10.1 million? For example, could you explain why there's no reduction in overhead expenses related to the replacement of the commercial systems which you outlined at Exhibit B.1, tab 2, page 2? 555 MS. BRODIE LUMLEY: The total amount of the O&M capitalized in a given year is a function of the O&M spending and the proportion of that O&M spending that is related to capital. I can draw your attention to an exhibit that describes how the capitalization works, and it's J.7.25. 556 MS. SINGH: Yes. And can you summarize that for me? 557 MS. BRODIE LUMLEY: Yes. So the cost-driver approach operates as follows: For each internal order in the O&M budget a cost driver is established for allocating capital cost to the capital based on the nature of the specific activities performed within that order. So the cost driver is established, and as the budget is updated subsequently the cost driver doesn't change but the O&M budgeted by element may change. So the capitalization, which is the result of the outcome of the element level of spending times the capitalization percent, will change if the element budgeted amount changes. 558 MS. SINGH: So there is not a direct relationship, then, between the total capital expenses and the overhead expenses? 559 MS. BRODIE LUMLEY: That's right. 560 MS. SINGH: Am I correct in my understanding that the forecast of overheads for 2003 is 46.3? 561 MS. BRODIE LUMLEY: Yes, you are. 562 MS. SINGH: And the forecasted overheads for 2004 are 38.4? 563 MS. BRODIE LUMLEY: Yes, you are. 564 MS. SINGH: So could you also explain why the overheads for the 2003 bridge year are 7.9 million higher than the forecasted overheads for the 2004 test year when, again, the capital expenditures are forecasted to be 24 million more than in 2003? 565 MS. BRODIE LUMLEY: The cost-driver update that was undertaken starting in 2002 and proceeding through 2003, the results of the updates that needed to be made to the drivers were put in place for the 2004 forecast. 566 MS. SINGH: Okay. Am I correct in my understanding that in your discussion with Mr. Aiken this morning, that the variances in overcasting of capital expenditures go directly into Union's revenues? 567 MS. ELLIOTT: The variances between actual and forecast capital spending will have an impact on our interest costs, it's the impact on interest expense that will affect earnings. 568 MS. SINGH: So if you overforecast, I think you said to Mr. Aiken, capital expenditures, that difference will go into Union's revenues; is that correct, Ms. Elliott? 569 MS. ELLIOTT: It's not the difference between the capital forecast. If we underspend the capital budget by $10 million, it will be the carrying cost impact on that, so it will be the interest on the $10 million that will be reduced and any corresponding revenue or cost savings that were projected to take place as a result of the spending would also be eliminated. So there will be an impact on the revenue requirement, but it's not the $10 million variance in capital. 570 MS. SINGH: Okay. And is your answer the same in relation to the overcasting of overheads? 571 MS. ELLIOTT: If the actual overheads capitalized are greater or less than the forecast amount, it will have the same impact as a capital dollar, yes. 572 MS. SINGH: Thank you. I'll just move on now very quickly to some questions about the revenue deficiency. If you want to turn up Exhibit F.1, tab 1, page 2 of the October updates. 573 MS. ELLIOTT: I have that. 574 MS. SINGH: It states that the revenue deficiency for 2004 has been reduced by 1.627 million to 23.499 million and the delivery-related portion is a revenue deficiency of approximately 104 million. Is that correct? 575 MS. ELLIOTT: That's correct. 576 MS. SINGH: Would it be possible for you to provide the revised numbers for the components of the delivery-related revenue deficiency that in total make up the 104 million? 577 MS. ELLIOTT: That's an interrogatory that was updated. I'm just looking for the reference number. 578 MR. PENNY: It's J.7.1. 579 MS. SINGH: Okay. Ms. Elliott, thank you. I'll find that. May I now direct your attention to Exhibit D.3, tab 3, schedule 1, and page 2 of the exhibit that I just handed you takes extracts from that schedule. 580 MS. ELLIOTT: That was D.3, tab 3 -- 581 MS. SINGH: Tab 3, schedule 1, page 2, the yellow updates. 582 MS. BRODIE LUMLEY: Yes, we have that. 583 MS. SINGH: Subject to check, would you agree that when the indirect and direct capitalization amounts found at lines 33 and 34 of that exhibit are added for the 2003 and 2004 budgets, the 2004 total is 19 percent lower than the total in 2003? You'll just see that calculation on page 2 of the exhibit that I provided you with. 584 MS. BRODIE LUMLEY: Yes, we'll agree with that. 585 MS. SINGH: Can you explain the reason for this reduction in capitalized overheads for 2004? 586 MS. BRODIE LUMLEY: Because there was a study -- there was a review of the cost drivers that resulted in an update of the capitalized percentages of various elements of Union Gas's expenditures as a result of reduced capital activity. 587 MS. SINGH: Is that a physical study or analysis that was undertaken? 588 MS. BRODIE LUMLEY: Yes, it is. 589 MS. SINGH: Would it be possible to provide a copy of that? 590 MS. BRODIE LUMLEY: I believe we've already acknowledged -- 591 MR. PENNY: Mr. Chairman, the witnesses have already been cross-examined on this and Mr. Shepherd asked for it yesterday and there's an undertaking to produce it. 592 MS. SINGH: Thank you. 593 Could you advise what the impact of this lower 2004 capitalization of overheads is on the revenue deficiency set out in lines 33 and 34 of Exhibit D.3? If you want to do that by undertaking, that's fine. 594 MS. ELLIOTT: Well, the impact on the revenue deficiency of the change in O&M is calculated at line 36. The variance between the 2004 costs and the 2003 costs has a direct impact on the revenue deficiency for 2004 when you compare it to 2003. 595 MS. SINGH: And if you could just give me a moment, I'll just try to wrap up. I had several questions in the area of weather hedges, but I think most of them have been asked. 596 Perhaps one question. If the actual volumes are higher than the forecasted volumes what happens to the additional revenue that is not collected assuming that there are no weather- hedge agreements in place? Does it get returned to the ratepayer or does it go into revenues? 597 MS. ELLIOTT: Sorry, could you repeat your question? 598 MS. SINGH: About the weather normalization, Ms. Elliott, if the actual volumes are higher than the forecasted volumes using a 20-year trend methodology, what happens to the additional revenue that would be collected? 599 MS. ELLIOTT: If the actual volumes are higher than forecast and the revenue is higher than forecast, that will increase earnings relative to the forecast, so it has a positive impact on the earnings of the company for 2004. 600 MS. SINGH: And is there a mechanism to return that to the ratepayer? 601 MS. ELLIOTT: No, there's not. 602 MS. SINGH: And if the volumes are less than the forecasted volumes, is there a revenue deficiency and is that deficiency collected from the ratepayers? 603 MS. ELLIOTT: No, it is not. 604 MS. SINGH: And finally, am I correct in assuming that there's no mechanism in place which, after the fact, could reconcile over or under actual volumes relative to forecasts and Board-approved levels? 605 MS. ELLIOTT: For 2004, for the purposes of truing up earnings, there is no mechanism in place, no. 606 MS. SINGH: Thank you. Those are my questions. 607 MR. SOMMERVILLE: Mr. Dingwall. 608 MR. DINGWALL: I'm looking at the time. I'm not going to be 15 minutes, I will probably be closer to half an hour and I'm at your disposal. 609 MR. SOMMERVILLE: Proceed, please. 610 MR. DINGWALL: I will try to do so expeditiously. 611 CROSS-EXAMINATION BY MR. DINGWALL: 612 MR. DINGWALL: Very briefly, going back to Board Staff Interrogatory No. 14, which is J.1.14, I note that the company has chosen the date of December 2001, which I understand is also the date of Enron's bankruptcy, to choose as a date on which to begin the calculation of the reduction in storage and transportation revenue associated with the written-off gas loans; is that correct? 613 MS. ELLIOTT: I'm sorry, could you repeat that question? 614 MR. DINGWALL: Very possibly, let me try. 615 With respect to the aforementioned exhibit, it appears that the company has chosen December 2001 and the WACOG rate at that point in time as the time and price at which to write writeoff the Enron gas loans; is that correct? 616 MS. ELLIOTT: That's correct. 617 MR. DINGWALL: And had these loans actually continued to the point at which they would have come due, the expiry dates, there would have been different WACOGs in place on those dates, would there not have been? 618 MS. ELLIOTT: It is likely. I'm not sure when the weighted average cost of gas changed in 2002, but it likely changed in the first quarter. Had Enron not gone bankrupt, they would have repaid loans at the point in time where they became due. The WACOG would have been different. 619 MR. DINGWALL: Could I very simply ask for your undertaking to recalculate the four loans based on the WACOGs at the expiry dates. 620 MR. PENNY: You've got the 31st of October -- 621 MS. ELLIOTT: We can calculate the value of the loans at the expiry date. The write off took place as soon as Enron declared bankruptcy, at the point in time where we knew the amounts were not recoverable. 622 MR. DINGWALL: So do I have the undertaking? 623 MR. PENNY: Well, I just note, Mr. Chairman, that one of them is -- expires on the 31st of October 2003 which hasn't quite happened yet. 624 MR. DINGWALL: Though I don't believe that there's a WACOG application underway, so I think we we've probably got a basis on which to calculate that, do we not? 625 MS. ELLIOTT: We can calculate the value of the loan at the expiry date at the WACOG that was or will be in place at that date. 626 MR. DINGWALL: Thank you. Those are my questions with respect to that exhibit. 627 MR. MORAN: Mr. Chair, Undertaking N.16.10, to recalculate the four Enron loans using the WACOG that would apply at the expiry date of those loans. 628 UNDERTAKING NO. N.16.10: TO RECALCULATE THE FOUR ENRON LOANS USING THE WACOG THAT WOULD APPLY AT THE EXPIRY DATE OF THOSE LOANS 629 MR.DINGWALL: Would you agree with me, Ms. Elliott, that notwithstanding any bankruptcy legal interpretations there might be, the actual effect of these loans on S&T revenue would have been borne out to the date of -- to the expiry dates of the contracts? 630 MS. ELLIOTT: I'm sorry, I didn't understand the question. 631 MR. DINGWALL: Would you agree with me that the actual effect on S&T revenues, had Union Gas not terminated them on the bankruptcy for accounting purposes, would have been borne out by the cost of the WACOG on the expiry dates? 632 MR. PENNY: Well, there's no evidence that Union terminated anything. What the evidence was they wrote them off in December of '01. 633 MR. DINGWALL: Well, I think the response from the previous undertaking will be sufficient for me to deal with whatever is here in argument. I'll move on to the next point. 634 Moving to J.1.13, an exhibit with a lot of footprints on it. 635 MS. ELLIOTT: I have that. 636 MR. DINGWALL: Thank you. I believe you mentioned earlier in cross-examination, as well as in one of your undertaking responses that the transactions referenced in the documents attached to this exhibit were approved by the Union Gas management and by the Duke Energy Risk Management Committee; is that correct? 637 MS. ELLIOTT: That's correct. 638 MR. DINGWALL: In what form did the approval from the Duke Energy Risk Management Committee take? Was it written? 639 MS. ELLIOTT: It was confirmed in writing, yes. 640 MR. DINGWALL: Were any alternate forms of weather hedge suggested to the risk management in the presentation that led to the approval? 641 MS. ELLIOTT: No. 642 MR. DINGWALL: Do you have a copy of that approval? 643 MS. ELLIOTT: Not with me, I don't. 644 MR. DINGWALL: If I could ask for that by way of undertaking, please. 645 MS. ELLIOTT: I can give that, yes. 646 MR. MORAN: Mr. Chair, that would be Undertaking N.16.11. 647 UNDERTAKING NO. N.16.11: TO PROVIDE A COPY OF THE APPROVAL GIVEN BY DUKE ENERGY TO UNION GAS TO PROCEED WITH WEATHER HEDGE 648 MR. DINGWALL: With respect to appendix A to Exhibit J.1.13. 649 MR. SOMMERVILLE: What was that reference again? 650 MR. DINGWALL: Appendix A. 651 MR. SOMMERVILLE: Appendix A. 652 MR. DINGWALL: Which is the Duke Energy Gas Transmission contract with Entergy-Koch Trading LP. 653 MR. BROEDERS: I note that it was revised to appendix C. 654 MR. SOMMERVILLE: It's not appendix A anymore. It's appendix C. 655 MR. DINGWALL: Thank you for the clarification. 656 MR. SOMMERVILLE: Thank you, Mr. Broeders. 657 MR. DINGWALL: Does that make the new appendix A the December 10, 2002 Union Gas to Entergy contract entitled, "confirmation WOP 020977"? 658 MS. ELLIOTT: No, that's appendix B. 659 MR. DINGWALL: That's appendix B now. Is A WOP 020623? 660 MS. ELLIOTT: That's correct. 661 MR. SOMMERVILLE: You've got them in reverse order. 662 MR. DINGWALL: Okay. So moving over to appendix C. This is a document that you've discussed in detail before, and I note that this document was faxed to a 519 number to the attention of someone named Pat Elliott, I presume that's you. 663 MS. ELLIOTT: That is, yes. 664 MR. DINGWALL: So you effectively have some degree of visibility into Duke's weather hedging activities, at least for the purposes of this document; is that correct? 665 MS. ELLIOTT: I have knowledge of this transaction. 666 MR. DINGWALL: I note that this transaction and this confirmation sheet, this is effectively a deal sheet which makes reference to a master agreement; does it not? 667 MS. ELLIOTT: This is the only agreement. So the agreement is included in this document. 668 MR. DINGWALL: Well, I'm looking at clause 10.9 of that where there's reference to, "the parties are currently negotiating master swap agreement." Do you know if such an agreement was concluded? 669 MS. ELLIOTT: No, I don't. 670 MR. DINGWALL: Okay. Moving to appendix B, as I understand it's now called. There's reference in this agreement as well to a master agreement. Has Union entered into a master agreement with Entergy that in any way either amends or adds conditions to the terms and conditions of this agreement? 671 MS. ELLIOTT: Not to my knowledge, we haven't, no. 672 MR. DINGWALL: Is that something you could confirm one way or the other, and if there is something else, could I ask you to produce it. 673 MS. ELLIOTT: I can confirm whether or not another agreement exists. 674 MR. SOMMERVILLE: Mr. Dingwall, where is the reference to the master agreement in appendix B? 675 MR. DINGWALL: In appendix B on the first line, there is: "This letter constitutes a confirmation as referred to in the master swap agreement specified below." 676 I take it from the absence of a clause similar to the previous mentioned appendix where at the end of that they said, "We are in the process of negotiating one," that by there being no such mention, they actually have one? 677 MS. ELLIOTT: I'm not aware that we have one. I will check the language in this agreement as to whether it was a copy from the previous agreement. 678 MR. SOMMERVILLE: That language could bear more than one interpretation. 679 MR. PENNY: That's right, it's just a definition. 680 MR. SOMMERVILLE: But that's -- 681 MR. DINGWALL: But the confirmation would be helpful. 682 MR. SOMMERVILLE: Indeed. I suppose we should give that an undertaking number. 683 MR. MORAN: Yes, Mr. Chairman, Undertaking N.16.12 with respect to Exhibit J.1.13, appendix B, to confirm if there is a separate master agreement from what is referred to within appendix B. 684 MR. SOMMERVILLE: Just for absolute clarity, let's indicate that the confirmation number related to that appendix is WOP-020977. 685 UNDERTAKING NO. N.16.12: WITH RESPECT TO EXHIBIT J.1.13, APPENDIX B, TO CONFIRM IF THERE IS A SEPARATE MASTER AGREEMENT FROM WHAT IS REFERRED TO WITHIN APPENDIX B, WOP-020977 686 MR. DINGWALL: Thank you, sir. 687 Looking at the two agreements I've just mentioned appendix B and appendix C, there have been some discussions in the past, and I won't go too far into the detail, but I notice the premium amounts are identical and there's been reference to costless collars and things like that. Did Union Gas receive a premium from Entergy for this agreement? I'm referring specifically to B. 688 MS. ELLIOTT: Yes, we did. 689 MR. DINGWALL: Okay. And do you know whether or not Duke paid the premium referred to in appendix C? 690 MS. ELLIOTT: Yes, they did. 691 MR. DINGWALL: These weren't offsetting in any way, were they? 692 MS. ELLIOTT: They were not, no. 693 MR. DINGWALL: What form of financial reconciliation or statement does Union Gas refer or receive with respect to appendix B? Is it a monthly statement, is it a quarterly statement? 694 MS. ELLIOTT: There won't be a statement until the end of the year, a determination of what the heating-degree days at Toronto Pearson were for the year relative to the strike price in the agreement -- or the -- a strike in the agreement. 695 MR. DINGWALL: What does Union Gas receive in the interim to track progress under the agreement? 696 MS. ELLIOTT: We do a calculation comparing heating-degree days at Toronto Pearson with our forecast of what those heating degree days should be each month given the strike level of the agreement, and we calculate an accrual for the estimated payout. 697 MR. DINGWALL: Now, in the operation of this particular agreement, appendix B, there's been no approach of Union's credit threshold with Entergy in respect of it, has there? Has there been any reason, during its currency to date, for there to be any call for any form funds from Entergy to Union? 698 MS. ELLIOTT: There has not. Currently we are in a payable position in Entergy-Koch not the other way around. 699 MR. DINGWALL: Right. And with respect to appendix C, do you know what form of communication, if any, Duke has received in respect of this agreement? 700 MS. ELLIOTT: I'm not aware of any communication that has gone to Duke from Entergy-Koch with respect to appendix C. 701 MR. DINGWALL: Has there been any communication from Duke to Union that tracks the progress among or between these agreements? 702 MS. ELLIOTT: Because we're in a position where the heating-degree days are above the strike on the call option, there really is nothing to report on the put option. 703 MR. DINGWALL: Yet the potential of the put option, I believe you've specified earlier, would have a negative revenue impact on Union Gas, would it not? 704 MS. ELLIOTT: As we're tracking actual heating-degree days relative to the forecast, if the heating-degree days fall below the heating-degree days specified in the put option, we would begin to report to Houston a receivable position from Entergy-Koch. Today, we're in a payable position to Entergy-Koch. 705 MR. DINGWALL: But effectively you're in a receivable position with Duke with respect to your obligations with them on appendix C, are you not? 706 MS. ELLIOTT: No, we're not. 707 MR. DINGWALL: Is that because it's treated as a revenue reduction? 708 MS. ELLIOTT: Appendix C is an agreement between Duke Energy Gas Transmission and Entergy-Koch which comes into effect when the heating-degree days fall below the strike which are 3,550. Our current heating-degree days are above the limit on the call option. The put option isn't in effect right now. 709 MR. DINGWALL: Well, you'll have to forgive me naivete on terminology, but there was discussion yesterday of an agreement that had effectively a $20 million, either on its face or in its interpretation, negative impact on Union Gas S&T revenue. 710 MS. ELLIOTT: No, the $20 million referred to is the accrual. Year to date May, the weather at Toronto Pearson has colder than the forecast; as a result, Union's distribution revenues are higher, customers are using more gas and those revenues in turn Union has accrued the portion of the payout to Entergy-Koch because what the call option does is provide Entergy-Koch with a payment when heating-degree days are higher -- when it's colder than the 3,808 strike on the call option. 711 It's revenue that Union has received from its customers that it is accruing a payout to Entergy-Koch. 712 MR. DINGWALL: And perhaps you can point that to me, which agreement is that reflected in? 713 MS. ELLIOTT: That is appendix B. 714 MR. DINGWALL: So it's under this agreement that Union Gas is paying out to Entergy-Koch? 715 MS. ELLIOTT: Forecasting it will pay out. 716 MR. DINGWALL: Forecasting it will pay out. 717 So what's the impact of appendix C on that? 718 MS. ELLIOTT: Appendix C is the protection for weather that's warmer than forecast. If weather had been warmer than we were forecasting it to be during 2003, Union's revenues would be lower than we had forecast them to be and the receivable from Entergy-Koch would offset that reduction. 719 MR. DINGWALL: And would that receivable go to Union Gas? 720 MS. ELLIOTT: In terms of the agreement, the receivable -- the amount would be paid to Duke Energy Gas Transmission for purposes of calculating earnings sharing with its ratepayers in 2003, as I said yesterday, we would adjust Union's earnings to reflect the amount paid under appendix C, so that the ratepayer gets the same benefit as the shareholder in the sharing calculation. 721 MR. DINGWALL: I believe you mentioned to Mr. Warren yesterday that these agreements were not agreements that you sought pre-approval from the OEB for. Do you know the date on which the existence of these agreements were communicated first to the regulator? 722 MS. ELLIOTT: The direct communication to the regulator would be in conjunction with the filing of this evidence as well as the fact that they are part of our 2002 annual report. 723 MR. DINGWALL: So that would be May 2003 for the filing of this application and then whatever the year-end was for your 2002? 724 MS. ELLIOTT: The annual report was released at the end of March 2003. I'm not aware of any other formal communication. 725 MR. DINGWALL: End of March. 726 Now, in looking at Exhibit -- or appendix C that we've been discussing, I'm somewhat challenged trying to find where that agreement reflects the adjustment to revenues. Is there some other document that might display or show that obligation from Duke? 727 MS. ELLIOTT: I'm not aware of -- I don't understand what obligation you're looking for or what report you're looking for. Under appendix C, current weather for 2003, there is no obligation for Entergy-Koch to pay Duke Energy Gas Transmission. 728 MR. DINGWALL: Now, correct me if I am wrong, but one of the things you mentioned earlier that in the event that Duke Energy were to receive such a payment, one of the things that would be done would be that Duke Energy would somehow credit for revenue sharing purposes the amounts that would be received under this agreement. Am I correct in hearing that? 729 MR. PENNY: Mr. Chairman, this matter was gone into at considerable length by Mr. Thompson yesterday. All of these questions were asked, they've all been answered. This is purely repetitive, in my respectful submission. 730 MR. DINGWALL: In reading through yesterday's transcript, I did not see on the record a request for documentation that clarifies or crystallizes the obligation for Duke to account to Union under these benefits that have been discussed. 731 MR. PENNY: Well, the evidence is very clear, Mr. Chairman, that there is no obligation on Duke to credit anything. What the company has said in its answer to J.1.13 and what Ms. Elliott said yesterday in answer to a number of questions was that Union will reflect that in its calculation for earnings sharing on its records. Duke -- it doesn't mean Duke's actually going to pay any money to Union, it's simply that Union will reflect the receipt of that money as if it were paid to Union for the purposes of doing an earnings sharing calculation, because that's the only possible relevance that those funds could have. 732 MR. SOMMERVILLE: That was the burden of the test. Is there something in addition, Mr. Dingwall, that you're seeking from the witness? 733 MR. DINGWALL: Well, the nature of the discussion effectively sounds like an agreement between a company and its shareholder and -- I mean we've got what appears to be a written commitment from the company that its shareholder will accept this. I'm just wondering if there's something else that sets that -- 734 MR. PENNY: Mr. Chairman, it has nothing to do with the shareholder. 735 MR. SOMMERVILLE: The evidence -- I think the evidence is that Union, in its own right, reflects any payments received by Duke for the purposes of calculating the earnings sharing calculation, and that that is, in effect, a -- do I understand you to be seeking some form of documentation that authorizes Union to do that? 736 MR. DINGWALL: Or understanding what might be in place that crystallizes that. I'm not sure what would give comfort to the regulator that such an obligation exists, but that's why I'm exploring that. 737 MR. SOMMERVILLE: If you're asking: Is there a documentation that authorizes Union to do that, I think that's a fair question. 738 MR. DINGWALL: Is there such a document, Ms. Elliott? 739 MS. ELLIOTT: There is no document authorizing Union to do that, but Union will have to file the earnings sharing calculation before this Board for 2003. The adjustment that we were referring to was simply an adjustment to that calculation to take effect if, in the event that between now and the end of the year, weather turns warm and we are in a position to have received money from Entergy-Koch, that adjustment would show up on the 2003 earnings sharing calculation filed with this Board. 740 MR. DINGWALL: Now, my final question with respect to these documents is that there's a paragraph in each of the documents that refers to the netting out of obligations between parties. 741 Do you know whether Duke, in its position as Union's shareholder, has entered into any agreement with Entergy which might cause any amount that might be due to Union to be netted out against Entergy's net commitments with Duke? 742 MS. ELLIOTT: At this point, Union has the obligation to pay Entergy-Koch. I am not aware of any obligation that Entergy-Koch has with Union that would be netted against it. 743 MR. DINGWALL: Those are my questions for this panel. Thank you very much. 744 MR. SOMMERVILLE: Thank you. 745 There is a question that arises from your last question that I think I'll ask now, and it relates to the question of this balancing out. When you include the amount that is payable to Duke from Entergy with respect to this weather hedge contract, do you get an aggregated amount or do you get an amount that is specifically referable to this contract without regard for any netting out that may occur with respect to any other arrangement between Entergy and Duke? 746 MS. ELLIOTT: We'll get the amount that specifically applies to this contract before any netting out. 747 MR. SOMMERVILLE: Thank you. 748 We'll take our break now, leaving Mr. Moran's ross-examination for after lunch. We'll reconvene at 2:15. Thank you. 749 --- Luncheon recess taken at 1:25 p.m. 750 --- On resuming at 2:15 p.m. 751 PRELIMINARY MATTERS: 752 MR. SOMMERVILLE: Thank you, please be seated. 753 I note, Mr. Penny, that we have a couple of -- Undertaking 3.4, I think. 754 MR. PENNY: Yes, Mr. Chairman. Exhibit N.9.12, 10.2, 11.2, and 14.3 have been answered and those are available to the parties. 755 MR. SOMMERVILLE: Thank you. 756 MR. PENNY: The other preliminary matter I thought I would alert the Board or advise the Board about, it relates to the deferral account restructuring and the Board will know that both Mr. Aiken and Mr. Janigan raised concerns about it. We've spoken with both Mr. Aiken and Mr. Janigan and we think we have a way of resolving their concerns. What I probably will do is reduce the commitment that Union will make in order to respond to those concerns to writing, I'll review it with them and perhaps, either file it with the Board or send it in so that everyone knows. 757 In retrospect, I probably should have put some indication in my correspondence about this issue as to the time frame and it seems to me, in fairness, that if a week goes by and we haven't heard any of those concerns that that would be a suitable amount of time. So I think we would be able to resolve this by the end of this week, would be my hope. 758 MR. SOMMERVILLE: We did raise it yesterday encouraging the parties, if they had some concerns, to make them known. 759 MR. PENNY: Thank you. 760 MR. SOMMERVILLE: So we'll raise it at the appropriate time. Thank you. 761 MS. SINGH: Mr. Chairman, if Mr. Penny could just set out in a letter for the rest of us what the agreements were that satisfied Mr. Janigan and Mr. Aiken so that we have the benefit of understanding that as well. 762 MR. PENNY: That's what I think I just indicated I was going to do. 763 MS. SINGH: Okay. Perfect. Thank you. 764 MR. SOMMERVILLE: Are there any other preliminary matters? 765 Mr. Moran. 766 MR. MORAN: Thank you, Mr. Chair. 767 As a preliminary matter I have some materials for cross-examination which should be marked as an exhibit. These are excerpts from EBRO 499, Exhibit D.1, tab 2. That would become Exhibit M.16.3, Mr. Chair. 768 MR. SOMMERVILLE: 15.3? 769 MR. MORAN: That's right. 770 EXHIBIT NO. M.16.3: EXCERPTS FROM EBRO 499, EXHIBIT D.1, TAB 2 771 MR. MORAN: I believe the witnesses have that already. 772 UNION GAS LIMITED - PANEL 10; ELLIOTT, BRODIE LUMLEY, BROEDERS, HEBERT 773 P.ELLIOTT; Previously sworn. 774 W.BRODIE LUMLEY; Previously sworn. 775 M.BROEDERS; Previously sworn. 776 D.HEBERT; Previously sworn. 777 CROSS-EXAMINATION BY MR. MORAN: 778 MR. MORAN: If you could just turn up Board Staff Interrogatory J.1.48, Ms. Elliott. And I will be going to Exhibit B.5, tab 2, schedule 2. 779 MS. BRODIE LUMLEY: Yes, we have those exhibits. 780 MR. MORAN: Thank you. Now, in this interrogatory response J.1.48, you were asked why the capitalized overheads were larger in 2003 than in either 2002 or 2004, yet capital spending was less in 2003 than it was in either of those two years and there's been many questions asked about that. 781 But in your response, you indicated that the increase in pension and benefit costs, the inflation provision and costs associated with new customers were some of the factors contributing to this; right? 782 MS. BRODIE LUMLEY: Yes, that is correct. 783 MR. MORAN: Okay. And you also referenced Exhibit D.4, tab 3, schedule 2 in your response as part of the explanation. 784 MS. BRODIE LUMLEY: Yes, that's correct. 785 MR. MORAN: If you could then turn up B.5, tab 2, schedule 2 at page 6 of 6. What we see there is an indication that indirect overheads are in the order of $41 million. 786 MS. BRODIE LUMLEY: Yes, I have that. 787 MR. MORAN: For the year ending 2002; right? 788 MS. BRODIE LUMLEY: Yes. 789 MR. MORAN: As it says there, this equals total other; right? 790 MS. BRODIE LUMLEY: Correct. 791 MR. MORAN: Does this represent the capitalized overheads then? 792 MS. BRODIE LUMLEY: Yes, it does. 793 MR. MORAN: Thank you. 794 MS. BRODIE LUMLEY: The capitalized indirect overheads. 795 MR. MORAN: Thank you. If you could go then to Exhibit B.5, tab 2, schedule 2, page 1 of 6. Total capital spending for 2002 is 192.72 million; is that right? 796 MS. BRODIE LUMLEY: That's correct. 797 MR. MORAN: And that's including capitalized overheads. 798 MS. BRODIE LUMLEY: That's correct. 799 MR. MORAN: All right. Subject to check, would you agree that the ratio of overheads capitalized to capital spending in 2002 is 21.35 percent or 0.214. 800 MS. BRODIE LUMLEY: Yes, I would. 801 MR. MORAN: Now, similarly, if you look at Exhibit B.4, tab 2, schedule 2, page 6 of 6, the blue-page update. 802 MS. BRODIE LUMLEY: Yes, I have that. 803 MR. MORAN: All right. So as we saw for 2002, what we see here for 2003 is indirect overheads at 46.25 million. 804 MS. BRODIE LUMLEY: Yes, that is correct. 805 MR. MORAN: And that is equal to total others, so that's the capitalized indirect overheads; right? 806 MS. BRODIE LUMLEY: That is correct. 807 MR. MORAN: And then if you go to page 1 of the same schedule. 808 MS. BRODIE LUMLEY: Yes, I have that. 809 MR. MORAN: Total capital expenditures are set out there for 2003 as being 139.265 million. 810 MS. BRODIE LUMLEY: That is correct. 811 MR. MORAN: Okay. So again, subject to check, would you agree that for 2003, the ratio of overheads capitalized to total spending is 33.21 percent or 0.332? 812 MS. BRODIE LUMLEY: Yes, I would. 813 MR. MORAN: Then, to perform the same exercise for 2004, if you could turn up B.3, tab 2, schedule 2, page 6. Capitalized overheads is $38.4 million. 814 MS. BRODIE LUMLEY: Yes, it is. 815 MR. MORAN: Which is the total others; right? 816 MS. BRODIE LUMLEY: That is correct. 817 MR. MORAN: Okay. And if you go to page 1 of 6 in the same schedule. 818 MS. BRODIE LUMLEY: Yes. 819 MR. MORAN: Total capital expenditures are 163.379 million. 820 MS. BRODIE LUMLEY: That is correct. 821 MR. MORAN: And then, again performing the same calculation, would you accept, subject to check, that for 2004, the ratio capitalized overheads to total capital spending is 23.51 percent or 0.235? 822 MS. BRODIE LUMLEY: Yes, I would. 823 MR. SOMMERVILLE: Mr. Moran, I have an updated schedule. 824 MR. MORAN: It's the updated blue page. 825 MR. SOMMERVILLE: Well actually a yellow page. 826 MS. BRODIE LUMLEY: Yes, I have that. 827 MR. SOMMERVILLE: Which changes the last -- not the last number but the penultimate number to 158,060. 828 MR. MORAN: With the yellow page, my apologies to the witness panel, the total is 158.06 million; right? 829 MS. BRODIE LUMLEY: That is correct. 830 MR. MORAN: Which will, as I buy time for Mr. Wightman to do the calculation, increase the ratio, right, to 24.03 percent -- 24.30 subject to check. 831 MS. BRODIE LUMLEY: Yes, that's correct. 832 MR. MORAN: If we could then turn to Exhibit M.15.3, just marked, -- sorry 16.3. I said earlier that this was 15.3, it should be 16.3. 833 MR. SOMMERVILLE: It feels like day 16. 834 MR. MORAN: It feels like day 20, perhaps. 835 Exhibit M.16.3, which are excerpts from an exhibit filed in the EBRO 499 proceeding. And I see your name, Ms. Elliott, as one of the authors, I guess, or one of the persons responsible for this evidence. 836 MS. ELLIOTT: So do I. 837 MR. MORAN: If you could turn to -- the pages are hand numbered, if you could turn to page 4. In the exhibit you will see a table of ratio of overheads capitalized to capital spending for the years ending December 31, and the table covers the years 1999 back to 1996; do you see that? 838 MS. BRODIE LUMLEY: Yes, we have that. 839 MR. MORAN: And the ratios as they're calculated for those years are -- as they're set out: For 1999, .16; 1998, .142; 1999 is .139; and 1996 is .132; correct? 840 MS. BRODIE LUMLEY: Yes, we see that. 841 MR. MORAN: All right. Now, comparing those ratios to the ratios that we just dealt with for years 2002, 2003, 2004, the ratios are clearly much higher now, are they not? 842 MS. BRODIE LUMLEY: Yes, they are. 843 MR. MORAN: In the text right underneath the table, the evidence at page 4 states that the capital expenditures -- have you got that paragraph starting with, "the capital expenditures"? 844 MS. BRODIE LUMLEY: Yes, we do. 845 MR. MORAN: About halfway down that paragraph, on the fourth line, there is a sentence starting, "restating." 846 "Restating the 1999 capital to include approximately $60 million of capital for the rental programs would result in a ratio of overheads capitalized to capital expenditures of 0.130. This restated ratio is comparable to the historical ratios of .132 to .142." 847 MS. BRODIE LUMLEY: Yes, we see that. 848 MR. MORAN: Now, subject to check, would you agree that the average of 0.132 and 0.142 is 0.137? 849 MS. BRODIE LUMLEY: Yes, we would. 850 MR. MORAN: And can you accept or confirm, subject to check, that had Union capitalized the historic average of 0.137 of total capital costs including capitalized overheads in 2003, that the rate base in 2004 would be smaller by approximately $31.4 million, adjusted for depreciation? 851 MS. ELLIOTT: Could you repeat that, please? 852 MR. MORAN: Had you Union capitalized the historic average of 0.137 of total -- if Union had capitalized overheads the historic average of 0.137 of total capital costs including the capitalized overheads in 2003, that the rate base in 2004 would be smaller by approximately 31.4 million, adjusted for depreciation. 853 MS. ELLIOTT: The number I'm coming up with is about $27 million of reduction. 854 MR. MORAN: Right. So in that ballpark. 855 MR. PENNY: Of 27 million. 856 MR. MORAN: Yeah. 857 MS. ELLIOTT: If the capitalized overheads in 2003 had been at the historic average of 13.7, the capitalized overheads would be reduced by about $27 million. 858 MR. MORAN: Thank you. All right. Do you agree that by capitalizing overheads in 2003 rather than expensing them results in shifting costs incurred under a trial PBR plan to ratepayers in a cost-of-service rebasing exercise as we are now? 859 MS. ELLIOTT: If the capitalized overheads were lower in 2003, I agree the rate base would be lower, going forward, operating expenses would be higher, and that increase would continue through to the cost-of-service period. 860 MR. MORAN: Okay. Perhaps then you could give me an undertaking to provide an answer to this question: Had Union capitalized the historic average amount of overheads in 2002, 2003, and 2004, by how much would the 2004 rate base be reduced using that historic average of .137? 861 MS. ELLIOTT: We can do the mathematical calculation. The difficulty I'm having is the basis for which the overheads would be capitalized. Capitalized overheads are a product of the cost-driver analysis, so they're related to the O&M spending and the drivers. They're not capitalized based on the historic percentage, that's really the product of the capitalization not the driver of the capitalization. 862 MR. MORAN: So with that qualification, you can undertake to do the calculation. 863 MS. ELLIOTT: We can undertake to do the calculation. 864 MR. MORAN: Thank you very much. 865 That would become, Mr. Chair, Undertaking N.16.13. 866 UNDERTAKING NO. N.16.13: TO PROVIDE THE CALCULATION OF HOW MUCH THE 2004 RATE BASE WOULD HAVE BEEN DECREASED HAD UNION CAPITALIZED THE HISTORIC AVERAGE AMOUNT OF OVERHEADS IN 2002, 2003, AND 2004 USING THE HISTORIC AVERAGE OF 0.137 867 MR. MORAN: Those are all my questions, Mr. Chair. 868 MR. SOMMERVILLE: Thank you, Mr. Moran. 869 [The Board confers] 870 MR. SOMMERVILLE: The Board has no questions, Mr. Penny. 871 RE-EXAMINATION BY MR. PENNY: 872 MR. PENNY: Thank you, Mr. Chairman. 873 I just have a few questions in re-examination. 874 On the weather hedge, I think this came up in the context of Mr. Janigan's cross-examination but I'm not sure, it may have been Mr. Thompson, but there was a -- there were questions relating to the amount under the 2003 weather hedge that accrued to the end of May being $20 million; do you recall that? 875 MS. ELLIOTT: Yes. 876 MR. PENNY: And my question was whether you could tell us over what period of time that $20 million accrued, like what was the period of time when the bulk of it actually took place, over what period of time? 877 MS. ELLIOTT: It's the accrual for the January to May period. 878 MR. PENNY: When was most of the 20 million actually incurred, if I can put it that way? 879 MS. ELLIOTT: I don't -- 880 MR. PENNY: Or put another way, when was the cold weather that caused this to happen? 881 MS. ELLIOTT: I don't have the monthly breakdown with me but it -- we do the calculation on a monthly basis so it would be January through to May, each month there's an adjustment. 882 MR. PENNY: All right. Thank you. 883 There were some questions about the negative unfunded short-term debt and the positive cash position and you were taken to Exhibit J.17.43, and there was also an undertaking to calculate the common equity by the cash position and what I wanted to ask you is: If you actually reduced debt to the level where the cash position was zero or, sorry, if you reduced long-term debt by the amount of the positive cash position, would Union's credit line have been sufficient to meet its short-term debt requirements for 2004? 884 MS. ELLIOTT: I don't believe it would be. We have a debt redemption at the end of 2004. We would be in excess of our credit lines at that point if we had not issued our long-term debt in 2002. 885 MR. PENNY: All right, thank you. Now, you said to a couple of cross-examiners that in your treatment of the weather hedge in earnings, and in particular, in relation to the amount that might become payable to DEGT if there was weather colder than the strike heating-degree day amount, that you wanted to make sure that the ratepayer was getting the same benefit as the shareholder and I'd like to you explain that, please. What do you mean by making sure that the ratepayer would get the same benefit as the shareholder? 886 MS. ELLIOTT: The purpose of the weather hedge was to mitigate some of the variability in earnings. It comes from unfavorable variances in weather. By putting that protection in DEGT, we wanted to make sure that in the event that the shareholder received the benefit of that hedge, that there wasn't a disadvantage to the ratepayer if weather had been warmer than normal and we were in an earnings sharing position on the negative side of the band. We need to make that adjustment so that the ratepayer and the shareholder, in fact, do share in the earnings. The purpose of the earnings sharing band was to share between ratepayer and shareholder and in no way wanted to disadvantage the ratepayer by excluding the benefit of that weather hedge which brings our earnings up for the year. 887 MR. PENNY: How does the ratepayer benefit from the weather hedge? 888 MS. ELLIOTT: One of the benefits is the impact it has on stabilizing earnings so to the extent that we can take that volatility out, we can -- sorry, it has a benefit in terms of our credit rating and our ability to and our flexibility in terms of issuing debt. It also has the benefit of protecting us from an unfavorable earnings variance due to weather. The shareholder, as well as the ratepayer, in the event of extreme warm weather, there could be a situation where under earnings sharing the ratepayer would be subject to sharing on the downside. 889 MR. PENNY: All right. All right. 890 Ms. Brodie Lumley, there were a number of questions put to you about the fact that the capital budgets for 2003/2004 are lower than the prior four years, and I'd just like to you explain at a high level, if you would, why the 2003/2004 capital budgets are so much lower than in the previous four years? 891 MS. BRODIE LUMLEY: The major difference between the 2003 and 2004 budgets and the actual spending from the prior four years is that there is not forecasted expansion spending for 2004 and there's a very minor amount of budgeted expansion spending for 2003. 892 The historical average for the previous four years was about $40 million worth of expansion spending per year. 893 MR. PENNY: All right. Thank you. 894 Mr. Hebert, with respect to taxes, Mr. Aiken had asked you some questions about J.18.134 and J.18.136, and I wanted to ask you with respect to the two tax deductions that are referenced in those two interrogatories, under the Income Tax Act, what is the entitlement of legally-associated entities to these deductions? 895 MR. HEBERT: Under the Income Tax Act, corporations are entitled to an exemption for the large corporation tax. If corporations are associated, they are deemed -- that exemption is deemed to be zero, so they are not entitled to that exemption. 896 MR. PENNY: And what is the only way then under that deemed zero that there is any entitlement? 897 MR. HEBERT: Corporations will need to make an election and all corporations within the group will have to agree to it, and if they don't, the Minister has the ability to go in and dictate what that allocation will be. 898 MR. PENNY: All right. Thank you. 899 And you'd mentioned that Westcoast had three other -- I can't remember if it was three other regulated entities or just three regulated entities, but what are the other regulated entities in Westcoast? 900 MR. HEBERT: That would be the transmission business that they have in the west, then there is Maritimes & Northeast Pipeline and Union Gas. 901 MR. PENNY: All right. Thank you. 902 Mr. Moran had asked you, panel, for an undertaking to determine if Union's capital overheads, by how much the rate base would be reduced if Union's capital overheads were -- in the ratio that they were in the 1996 to 1999 period, and I wonder if you could supplement that by indicating by how much the operations and maintenance expense would increase? 903 MS. BRODIE LUMLEY: Yes, we can. 904 MR. PENNY: Thank you. And just on the -- a number of cross-examiners asked you about capitalization and the methodology. First of all, let me ask you: Did you change the capitalization method during 2000, 2001, 2002, or 2003 as compared to 1999? 905 MS. BRODIE LUMLEY: No, we did not change the methodology. 906 MR. PENNY: And why don't the amounts of O&M capitalized decrease when capital activity declines as it did in 2004 as compared to 1999? 907 MS. BRODIE LUMLEY: Sorry, could you repeat that question? 908 MR. PENNY: Why doesn't the amount of capitalized O&M decrease when capital activity declines? 909 MS. BRODIE LUMLEY: The amount of capitalized overheads does or can decrease when the amount of capital activity is decreased, or actually, it will decrease when the amount of capital activity is decreased. The amount of capital activity decrease or change cannot necessarily be tied to the amount of change in capital base. The capital base can change significantly by the deferral or removal of some major projects such as the TEFEP expansion of $25 million. That doesn't necessarily correlate to a 25 percent -- or a significant change in the capitalized overheads. 910 MR. PENNY: All right. Thank you very much. 911 And thank you, Mr. Chairman, those are all my questions. 912 MR. SOMMERVILLE: The panel is excused, thank you very much for your assistance. A safe trip back to Chatham. 913 MR. PENNY: Mr. Chairman, Mr. Horner who is going to speak to the non-gas supply deferral accounts is here and ready to go. 914 UNION GAS LIMITED - PANEL 11; HORNER 915 K.HORNER; Sworn. 916 EXAMINATION BY MR. PENNY: 917 MR. PENNY: I should advise the Board and the parties that one of the answers to undertakings that we gave this morning, 10.2, contains some updated information on gas supply deferral accounts that came from Mr. Dent. And on gas supply as well reflecting the October QRAM, I think that was one of Mr. Aiken's themes. 918 Just briefly by way of introduction, Mr. Horner, you're currently the manager of revenue and gas accounting for Union Gas? 919 MR. HORNER: That's correct. 920 MR. PENNY: And you've been involved with the financial group at Union Gas since you started working there in 1995. 921 MR. HORNER: That's correct. 922 MR. PENNY: And before that, you were also doing revenue forecasting and accounting work at Centra Gas since 1993. 923 MR. HORNER: Yes. 924 MR. PENNY: And you, I understand, are a certified management accountant. 925 MR. HORNER: Yes. 926 MR. PENNY: And you have a bachelor in arts and commerce from the University of Toronto. 927 MR. HORNER: Yes. 928 MR. PENNY: And you are a member of the Society of Management Accountants of Ontario. 929 MR. HORNER: Yes. 930 MR. PENNY: And you have appeared in relation to finance matters and specifically deferral account matters before the Energy Board in RP-2002-0130 and RP-2001-0029. 931 MR. HORNER: Correct. 932 MR. PENNY: And you're responsible for the preparation of evidence that we find in Exhibit D.1, tab 4 in these proceedings. 933 MR. HORNER: That's correct. 934 MR. PENNY: And you also are responsible for answering written interrogatories that related to deferral account matters. 935 MR. HORNER: That's correct. 936 MR. PENNY: And do you adopt that evidence for these proceedings? 937 MR. HORNER: Yes, I do. 938 MR. PENNY: All right. Thank you, Mr. Chairman, there being no preliminary matters, that concludes my examination and Mr. Horner is available for questions from intervenors. 939 MR. SOMMERVILLE: Thank you, Mr. Penny. 940 Mr. Janigan. 941 MR. JANIGAN: Thank you, Mr. Chair. 942 CROSS-EXAMINATION BY MR. JANIGAN: 943 MR. JANIGAN: Mr. Horner, I wonder if you could turn up J.34.4, please. That's an interrogatory from the Vulnerable Energy Consumers' Coalition whom I represent. 944 MR. HORNER: I have it. 945 MR. JANIGAN: And if you look the table that's associated with this interrogatory, the non-gas supply deferral accounts that you're speaking to are identified on lines 18 to 24, I take it. 946 MR. HORNER: That's right. 947 MR. JANIGAN: And am I correct in assuming that this table has not been updated with the information that is on the blue-page update? 948 MR. HORNER: That's right, these balances reflect the white-page forecast. 949 MR. JANIGAN: Is it possible that this table could be updated? 950 MR. HORNER: It's actually not a table that I created, but I would have to accept it on behalf of Mark Kitchen. 951 MR. MORAN: Mr. Chair, Undertaking N.16.14, to update Exhibit J.34.4 attachment for answer B to reflect the changes in the blue-page update. 952 UNDERTAKING NO. N.16.14: TO UPDATE EXHIBIT J.34.4 ATTACHMENT FOR ANSWER B TO REFLECT THE CHANGES IN THE BLUE-PAGE UPDATE 953 MR. JANIGAN: Thank you. Now, in general when I look at this table, it appears to indicate that the total non-gas supply deferral account balances that Union is seeking to clear, about 85 percent of the costs are to be recovered from general service customers; am I correct on that? 954 MR. HORNER: Yes, I'll agree that approximately 75 percent of the balances are allocated to the general service class. 955 MR. JANIGAN: You'd say about 75 percent? 956 MR. HORNER: Sure. 957 MR. JANIGAN: Okay. Now, I'd like to take you to a specific account and that's in your evidence at Exhibit D.1, tab 4, page 3. That's the deferred customer rebates and charges deferral account. And I believe your evidence notes that this deferred customer rebate charge deferral account has been capturing amounts back to 1999; am I correct on that? 958 MR. HORNER: The balance in this account captures the amounts related to the disposition of the '99 through 2001 deferral balances as well as the 2001 through -- sorry, pardon me -- 2001 and 2002 retroactive delivery charge. It also includes the amounts related to the disposition of the 2002 deferral balances as well as the disposition of the 2003 retroactive delivery-rate charge. 959 MR. JANIGAN: Now, if we look in appendix A to Exhibit D.1, tab 4, on page 5, this is described as an account that records the amounts of any charges or rebates less than $10 for final customer accounts and records amounts that cannot be settled with a specific customer when the customer cannot be located. Is that essentially correct? That charges under $10, or $10, or are less than $10 and the customer cannot be located. 960 MR. HORNER: That's correct. 961 MR. JANIGAN: Okay. Now, as I understand it, the difference between uncollected amounts falling into this account as opposed to the bad debt account is if you cannot physically locate the customer; am I correct on that, or is there any other differences between them? 962 MR. HORNER: Sorry, could you repeat that question? 963 MR. JANIGAN: I'm trying to establish the difference between this account and the bad debt account, and as I understand it, the only difference between the two accounts is in this case, you cannot physically locate the customer; am I correct on that? 964 MR. HORNER: This account captures those amounts where we cannot locate the customer for -- with respect to retroactive charges or rebates. Bad debt expense captures those amounts that we've billed to customers and cannot collect because what -- because perhaps the customer can't be located or the customer refuses to pay. 965 MR. JANIGAN: Okay. So if it's -- the first element is -- there has to be some element of retroactivity; is that correct? 966 MR. HORNER: It's my understanding that when this account was created, it was created specifically to address those amounts for retroactive charges or rebates. 967 MR. JANIGAN: So retroactive charges and rebates that are less than $10, what happens to those that are above $10? 968 MR. HORNER: For final-billed customers or with respect to all customers? 969 MR. JANIGAN: With respect to this account? If there is a charge or rebate that's larger than $10 would that be excluded from this account? 970 MR. HORNER: Yes, those amounts would essentially be billed to customers and collected. 971 MR. JANIGAN: And if they couldn't collect it, that would fall into the bad debt account? 972 MR. HORNER: That's correct. 973 MR. JANIGAN: So the three characteristics are, first of all, it's a retroactive charge or rebate, secondly, it's less than $10, and thirdly, you can't locate the customer? Have I got that correct? 974 MR. HORNER: If we can't locate a customer who has been final billed. 975 MR. JANIGAN: Okay, let me go back. I understand that the first qualification for a charge to get in this account is that it would have to be -- it has to be concerning a retroactive charge or rebate? 976 MR. HORNER: That's correct. 977 MR. JANIGAN: And secondly, it has to be less than $10. 978 MR. HORNER: That's correct. 979 MR. JANIGAN: And thirdly, the customer cannot be located. 980 MR. HORNER: Cannot be located within reasonable efforts. 981 MR. JANIGAN: Okay. But there wouldn't be anything else in this account, there wouldn't be any other charges or debts in this account apart from what you've indicated. 982 MR. HORNER: No, there would not. 983 MR. JANIGAN: Okay. Now, I wonder if you could turn up VECC Interrogatory 34.150. 984 MR. HORNER: I have it. 985 MR. JANIGAN: And in this interrogatory, we requested the amounts that accumulated in the deferred customer rebates charged deferral account for each year, given the account balance of $4 million that is projected for the end of 2003. And the answer is as set out in part A of that interrogatory. Am I correct on that? 986 MR. HORNER: Yes. 987 MR. JANIGAN: And in 1999, the year-end balance was a credit of 1.398 million. 988 MR. HORNER: That's correct. 989 MR. JANIGAN: And when was that cleared? Was that amount cleared? 990 MR. HORNER: That amount would have been cleared in the disposition, the retroactive charge that would have occurred in the first six months of this year. 991 MR. JANIGAN: So that amount of the credit was cleared in 2003? 992 MR. HORNER: That's correct. 993 MR. JANIGAN: And was applied against some other retroactive charge; am I correct on that? 994 MR. HORNER: That's correct. 995 MR. JANIGAN: Okay. Now, in 2000, 2001, 2002, there is no amount in this deferral account. 996 MR. HORNER: That's correct. 997 MR. JANIGAN: Am I given to understand that there were no debts or credits arising from customer rebates or charges to customers during this period? 998 MR. HORNER: This account captures amounts related to the -- during the time that the deferred rebates, retroactive charges would actually be physically disposed of, not accumulated. We have not had a retroactive charge or rebate since 1999, and that's why you don't see any activity since 1999 until 2003. 999 MR. JANIGAN: Well, what occurred, for example, in 2002 with respect to retroactive charges associated with commodity? That would not have, in any way, affected this account? 1000 MR. HORNER: The commodity-related deferral accounts were disposed of in 2003, along with the other delivery-related deferral account balances. 1001 MR. JANIGAN: And there were no credits or rebates to customers during that period of 2001 -- 2000, 2001, 2002? 1002 MR. HORNER: That's my understanding. 1003 MR. JANIGAN: And the amounts are recorded in this account when an application is brought forward to clear those amounts; am I correct on that? That it arises upon clearance rather than upon... 1004 MR. HORNER: That's correct. Once we receive Board approval to dispose of these balances and the Board approves the allocation of the deferral balances to customers, we would physically dispose of those balances and it's during that time that these amounts would accumulate in this account. 1005 MR. JANIGAN: So the balances may be accumulating somewhere but they don't get recorded in this account until there is an actual application to the Board; am I correct on that? In other words, there may be credits and rebates being assessed and paid to customers but until you make application to actually clear an account, you don't record that in this account; am I correct on that? 1006 MR. HORNER: I'm not sure if I'm following. 1007 MR. JANIGAN: Okay. In any given year where there is a rebate or a charge to the customer that arises that is either not paid or not collected, that amount is only assessed to this particular account when you make application to the Board, or does it arise -- when would it arise, I guess, is the question? 1008 MR. HORNER: An example would be this year when -- I'm going to use the '99 through 2001 deferral balances as an example, along with the '01 and '02 retroactively rate increase. Balances in this account would not arise until we physically dispose of these retroactive balances, and in this particular example, it would be in January through June of 2003. That's the period that customers were actually billed these charges or if they had gotten a rebate. 1009 Secondly, we would have an opportunity to try to locate these customers once they are, in fact -- for final billed customers, we would have an opportunity to try to locate these customers. So in that case, it would happen in 2003, as opposed to when the balances, the retroactive charges were actually accumulated. So it's the amounts accumulated in the account when the retroactive charges are physically disposed of. 1010 MR. JANIGAN: So what has to first happen is the customers have to be billed the amounts that are uncollected or unpaid. How long a period of time does that involve? 1011 MR. HORNER: Sorry, could you repeat that question, please? 1012 MR. JANIGAN: Well, as I understand your answer, the first thing that has to be done is the customers either have to be billed or credited with the amount, and this arises after the fact that the application has been made to clear those balances. The customers have to be billed, the amounts either have to be not paid or not collected and then there is another period by which they -- which you wait to see whether or not they will be paid or not collected; am I correct on that? 1013 MR. HORNER: That's correct. 1014 MR. JANIGAN: Okay. And what period of time is that waiting period? 1015 MR. HORNER: Maybe I want to try and clarify something. If, in fact, we are billing a customer, that means that we've located that customer. At the point that they don't actually pay it, if they choose not to pay it or it's part of the bill that they're not -- they've ignored, it would fall into our general collection processes, and I'm probably not the appropriate person to discuss our collection processes. 1016 MR. JANIGAN: And not be part of this account. 1017 MR. HORNER: This would not be part of this account. Those amounts would be written off against our bad debt. 1018 MR. JANIGAN: So it would be that portion of the amounts that the Board ruled that were either due to the customer or to be collected by the customer that were not billed to customers? 1019 MR. HORNER: That's correct because the customer could not be located. 1020 MR. JANIGAN: Okay. And that determination of that amount is done after you sent out the bills; am I correct on that? 1021 MR. HORNER: The amount in this account will not be known until the amounts are billed. 1022 MR. JANIGAN: And it's at that point in time, the amount in the account for any given year crystallizes. 1023 MR. HORNER: That's correct. 1024 MR. JANIGAN: And in the course of the 1999, 2000 -- sorry, the 2000, 2001, and 2002 year, that event did not occur? 1025 MR. HORNER: That's correct. 1026 MR. JANIGAN: Okay. I have a question with respect to your GDAR deferral account. This is found at Exhibit D.1, tab 4, page 8. 1027 MR. HORNER: I have it. 1028 MR. JANIGAN: Is this GDAR account capturing all GDAR cost differences in 2004, even if these GDAR costs are not related to the chapter 4 changes? 1029 MR. HORNER: Sorry, I'm not familiar with the chapter 4 changes. I can speak to the mechanics behind this account. I can't speak to the specific costs and what's driving those costs and the requirement for the changes and system changes. 1030 MR. JANIGAN: I guess I will ask for an undertaking if you're not -- but what I'm interested in is whether or not these GDAR costs are -- this GDAR account captures more than the GDAR costs associated with the chapter 4 changes. Perhaps if I could ask, Mr. Chairman, and Mr. Penny, through you. 1031 MR. PENNY: I think I can clarify that. Its intent is only to capture the chapter 4, and if there was thought to be a need to expand that beyond those costs, there would be notice and further application to do so. 1032 MR. JANIGAN: Thank you. 1033 Now, finally, Union is proposing to change some existing storage and transportation accounts and it's requesting approval to combine the balancing service and short-term storage services account into one account. Do you know, Mr. Horner, how long these two accounts have been treated as separate accounts? 1034 MR. HORNER: I know that it predates EBRO 499. I don't know specifically when these accounts were actually created. 1035 MR. JANIGAN: And as I understand the rationale for the combining of these accounts is that there is similarity between the two services and balancing services are provided by accommodation of storage and loans depending upon the availability of the assets; is that correct? 1036 MR. HORNER: That's correct. The services currently captured in these two accounts are very similar in nature and depending on the market conditions and weather and other variables, the services in one account can be a substitute for the services in the other account. 1037 An example of that would be in a year where the weather is extremely warm, we would have excess gas that we would be able to loan, therefore driving loan revenue; however, we'd have limited storage space available to sell. Whereas, in a year that's extremely cold, we would have storage assets to sell and very limited gas to loan out. 1038 MR. JANIGAN: Now, by combining these accounts, will the Board or intervenors lose a source of information as to what Union is selling short-term storage for on the market? 1039 MR. HORNER: Collapsing these two accounts shouldn't in any way impede the availability of short-term storage information to the Board. 1040 MR. JANIGAN: And for example, if Union was selling short-term storage to an affiliate, it would be able to have information concerning the amounts of those transactions and what short-term storage was being sold for in general, separate from balancing. 1041 MR. HORNER: A better source of information than the deferral accounts for S&T activity would likely be the detailed schedule. For example, I believe Steve Poredos's evidence provides a breakdown of the S&T revenue by component, essentially. So in no way should the collapsing of these two accounts provide any less information than what's already available. 1042 MR. JANIGAN: Thank you, Mr. Chairman, those are all my questions for this panel. 1043 MR. SOMMERVILLE: Thank you, Mr. Janigan. 1044 Ms. Singh. 1045 MS. SINGH: I have no questions for this panel, thank you. 1046 MR. SOMMERVILLE: Mr. Aiken. 1047 CROSS-EXAMINATION BY MR. AIKEN: 1048 MR. AIKEN: Just a couple of questions on the pipeline integrity deferral account and this is Exhibit B.1, tab 5, appendix A. 1049 MR. HORNER: Yes, I have it. 1050 MR. AIKEN: And I also notice that on Exhibit N.10.2, the 3302 has been updated to 3358; is that correct? 1051 MR. MORAN: Mr. Aiken, could you repeat the exhibit number, please? 1052 MR. AIKEN: Yes, Exhibit N.10.2. It's one of the undertakings that was handed out today. 1053 MR. HORNER: The 3358 in Exhibit N.10.2 is not an updated number, that number includes interest, so it would equal the 3302 located at B.1, tab 5, appendix A, plus interest to the end of 2003. 1054 MR. AIKEN: Okay then. On B.1, tab 5, appendix A, line 3, the property and capital tax, 260,000, do you know the approximate breakdown between the property tax and the capital tax in that total? 1055 MR. HORNER: Yes, I believe capital tax is 30,000 and the property tax component is 230,000. That was provided in an IR as well. It was provided at Exhibit J.34.20. 1056 MR. AIKEN: Now, is there going to be any update to that property tax, which I take it is 230,000, is there any update to that property tax based on the yellow-page update where it indicated the property tax in 2003 in total was being reduced by approximately $2 million? 1057 MR. HORNER: Not that I'm aware of. 1058 MR. AIKEN: Then if we turn to appendix B, B.1, tab 5, appendix B, this is a calculation of the depreciation expense, amongst other things. And there's two exhibits other than that that you should have in front of you. One is the response to J.18.24, and the other one is again in my book of cross-examination materials, M.3.1, and it's tab 8 of Exhibit M.3.1. 1059 And my question here is on J.18.24, part C, there is a depreciation rate of 5 percent used for construction costs, pipe and materials, whereas in the response to basically the same question from RP-2002-0130, it indicates that in part C of that answer that the depreciation rate was 2.5 percent. Can you explain the difference in the rates used between 2002 and 2003? 1060 MR. HORNER: At this point in time, I cannot explain those differences. 1061 MR. AIKEN: Would you undertake to provide that explanation? 1062 MR. HORNER: Yes, I would. 1063 MR. MORAN: Mr. Chair, that would be Undertaking N.16.15, to explain the difference in depreciation rates shown on Exhibit J.18.24 in answer C and Exhibit M.3.1, tab 8, also answer C. 1064 UNDERTAKING NO. N.16.15: TO EXPLAIN THE DIFFERENCE IN DEPRECIATION RATES SHOWN ON EXHIBIT J.18.24 IN ANSWER C AND EXHIBIT M.3.1, TAB 8, ANSWER C 1065 MR. AIKEN: Thank you. Those are my questions. 1066 MR. SOMMERVILLE: Thank you, Mr. Aiken. Just a question arising from that, Mr. Aiken. In your reference to -- well, it applies to both the answer to J.18.24 and the reference to the previous case. The factor of one half is used, why is that? In the formula in the answer to J.18.24, for example, it's times 5 percent plus 5249 times one half, what's the one half. 1067 MR. HORNER: The reason you apply one half is in the first year that the capital is spent the project goes into service, you get -- the depreciation is one half of the annual rate. 1068 MR. SOMMERVILLE: Thank you. 1069 I think we'll take ten minutes now. Thank you. 1070 --- Recess taken at 3:20 p.m. 1071 --- On resuming at 3:35 p.m. 1072 MR. SOMMERVILLE: Thank you, please be seated. 1073 Mr. Thompson. 1074 MR. THOMPSON: Thank you, Mr. Chairman. 1075 CROSS-EXAMINATION BY MR. THOMPSON: 1076 MR. THOMPSON: Mr. Horner, do I understand that you're responsible for managing the recording in these accounts, but the allocation is left to somebody else? 1077 MR. HORNER: That's correct. The allocation is left up to the cost-allocation group. 1078 MR. THOMPSON: Thanks. Could I ask you to turn up Exhibit D.1, tab 4, appendix B, page 2 of your evidence, and I want to look at both the white sheets -- the white sheet and the blue sheet just to compare the numbers. 1079 MR. PENNY: D.1, tab 4, appendix B, page 2 of blue and white. 1080 MR. THOMPSON: Correct. 1081 MR. PENNY: Thank you. 1082 MR. HORNER: I have it. 1083 MR. THOMPSON: And the first category of accounts shown on page 2 are the storage and transportation accounts and there are five of them; is that correct? Lines 16 to 20. 1084 MR. HORNER: There currently are 6 approved S&T accounts. 1085 MR. THOMPSON: What is the -- 1086 MR. HORNER: For the purposes of this schedule we've combined accounts 179-70 and 179-71. Assuming the Board approves our plan to collapse 70 and 71 there would be five accounts. 1087 MR. THOMPSON: So this is reflecting what the list will look like if your proposal is approved. 1088 MR. HORNER: That's correct. 1089 MR. THOMPSON: And I notice from the white sheets to the blue sheets there's been some reduction in the credits at lines 17 and 18. They're down from 11.3, roughly, 11.4, to something in the order of 9.1 million, roughly. Can you explain the reasons for the decline? 1090 MR. HORNER: It's my understanding that the decline is due to a drop in our forecasted transactional activity for 2003. At this point in time, I'm not prepared to talk about the S&T revenue forecast for '03, I believe that was handled by Steve Poredos in his testimony. 1091 MR. THOMPSON: All right. Now, the other S&T services, what does that capture, account 179-73? Do you know? 1092 MR. HORNER: I believe it -- a couple of different services that are captured in that account would be the hub-to-hub service as well as the services such as name changes and some other miscellaneous services. 1093 MR. THOMPSON: And do you know why those are debit balances and why they're increasing from 300-and-some-odd thousand to 1.7 million? 1094 MR. HORNER: I know that the change from the white page to the blue page was primarily due to the drop in the hub-to-hub revenues. 1095 Mr. Poredos mentioned in his evidence, in his written evidence, that the -- that Union Gas is currently in the midst of lining up that business. 1096 MR. THOMPSON: But I thought these were services that would attract revenue and they're shown as debits. This is where I'm a little confused. 1097 MR. HORNER: This would be the difference between what the Board-approved level of revenue is and our actual revenue. So, for example, in this circumstance, a debit balance would simply accumulate due to the fact that we're not achieving the Board-approved level that was established in EBRO 499. 1098 MR. THOMPSON: Okay. I understand now. Thank you. Now, in terms of -- on a go-forward basis, my client takes the position that the ratepayer share of the transactional services forecast revenue should be embedded in rates, but that the company should have deferral account protection equivalent to that which it currently enjoys, and this assumes the continuance of the 75/25 sharing. 1099 Can you tell me what change needs to be made to these accounts to achieve that objective? 1100 MR. HORNER: Sorry, can you repeat that question, please? 1101 MR. THOMPSON: Yes. My client takes the position that the forecast S&T revenue and ratepayer's share of that, which I understand to be about give or take $15 million, should be embedded in rates but that the company should have deferral account protection to keep it whole to the same level that it currently has where, as I understand it, some 5 million is embedded in rates. And my question is: Can you tell us what changes need to be made to the terms of these deferral accounts to achieve that objective? 1102 MR. PENNY: And can I just ask for clarification. Mr. Thompson, you're not talking about 2003, in particular, you're asking a technical question about what the technical changes would have to be to the deferral account structure in order -- if the Board, for example, were to order what your client's position is. 1103 MR. THOMPSON: Right. The evidence before us, as I understand it, is proposing to continue these accounts into 2004, and I'm just trying to get a high-level description of the language that we need to achieve the objective that we propose. Can you help us with that? 1104 MR. HORNER: I don't believe there would be any change to how these accounts operate or a change to the structure of these accounts, it would just be a matter of increasing the Board-approved level of S&T transactional revenue that would become embedded in rates. So in this particular example, the 5.5 million that's embedded in rates will then increase to somewhere in the neighbourhood of $20 million and then on a go-forward basis, any variance from that $20 million would get captured in this deferral account and shared 75/25 with ratepayers. 1105 MR. THOMPSON: Thanks very much. 1106 The only other area I have some questions on is with respect to the pipeline integrity deferral account, and this account you're proposing to close, as I understand it, for 2004; is that right? 1107 MR. HORNER: We're proposing to close it following the true-up of the 2003 actual balances. So right now, we're proposing of disposing of an estimate for 2003. At year-end, we will go back and calculate what the actual deferral balance was. The difference between those two would then follow -- be recorded in this account and following the disposition of that balance, we would close the account. 1108 MR. THOMPSON: All right. Now that's your proposal. And on a go-forward basis, you have pipeline integrity costs for 2004 forecast both as to capital and as to operating costs; correct? 1109 MR. HORNER: That's correct. 1110 MR. THOMPSON: All right. And the company has told us they don't want any variance account protection but ratepayers take the position that they ought to have it. So my question is and just one other point of ratepayers want the protection, not the company, obviously, but the current account operates around incremental costs, costs incremental to something; is that correct? 1111 MR. HORNER: That's correct. 1112 MR. THOMPSON: Now, what would it take to create a pipeline integrity deferral account on the go-forward basis to capture variances below budget and variances below O&M, so in other words it's an asymmetric ratepayer protection account for both capital and O&M. Would that be one account with just two subsets? 1113 MR. HORNER: I would expect it would still remain as one account and it would operate in a similar fashion as to the account as it operates now. 1114 As you mention, it would just capture, I guess, the potential underspending or overspending in that instance. 1115 MR. THOMPSON: Okay. Thanks very much. Those are my questions, Mr. Chairman. 1116 MR. SOMMERVILLE: Thank you, Mr. Thompson. 1117 Mr. Rowe. 1118 MR. ROWE: No, sir, no questions. 1119 Mr. Moran. 1120 MR. MORAN: Nothing, sir. 1121 MR. SOMMERVILLE: The Board has no questions. 1122 MR. PENNY: I just have one brief series of questions, Mr. Chairman, to clear up the mess that Mr. Janigan made of the deferred rebates and charges account. 1123 RE-EXAMINATION BY MR. PENNY: 1124 MR. PENNY: Just assume, Mr. Horner, that there was a gas cost deferral disposition at a point in time. Does anything get recorded in the deferred rebates and charges account during the year in which -- prior to the disposition by the Board, during the year in which the gas cost deferral is actually accumulated. 1125 MR. HORNER: No, nothing would get caught in that deferral account. 1126 MR. PENNY: And does anything get recorded in the deferred rebates and charges account when Union applies for the recovery of the deferred amount but before the Board's final rate order approving disposition? 1127 MR. HORNER: No, there would be no activity. 1128 MR. PENNY: So after receipt of the final rate order and Union bills those customers that are still active, if any of those customers don't pay after being billed, does any of that get recorded in the deferred rebates and charges account? 1129 MR. HORNER: No, it would not, it would go to bad debt expense. 1130 MR. PENNY: And at what point in the process does it get recorded in the deferred rebates and charges account? 1131 MR. HORNER: It's only at the point where the Board has given their decision and Union Gas physically disposes or bills customers for the retroactive rebate or charge. 1132 MR. PENNY: All right. And with that background, can you just explain why there were no amounts recorded in this account in 2000 to 2002? 1133 MR. HORNER: Since 1999, there were no decisions, no approvals of retroactive charges or rebates until 2002, and the disposition occurred in 2003. 1134 MR. PENNY: All right. Thank you. Those are all my questions. 1135 MR. SOMMERVILLE: Thank you, Mr. Penny. 1136 We'll adjourn for the day. I guess the secret is to threaten everybody with a long day and -- 1137 MR. PENNY: It worked. 1138 MR. THOMPSON: And start late too. 1139 MR. SOMMERVILLE: It's counterintuitive, but there you go. We'll adjourn until tomorrow morning at 9:30. 1140 MR. PENNY: Thank you, sir. 1141 --- Whereupon the hearing was adjourned at 3:47 p.m.