Rep: OEB Doc: 12WWF Rev: 0 ONTARIO ENERGY BOARD Volume: 17 30 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 30 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel JAMES WIGHTMAN 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 ROBERT WARREN Consumers Association of Canada MICHAEL JANIGAN VECC VALERIE YOUNG Ontario Association of Physical Plant Administrators ALICK RYDER City of Kitchener TOM BRETT Ontario Association of School Business Officials GEORGE VEGH CEED, OESC, Superior Energy Management, Union Energy, TransAlta 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN [26] EXAMINATION BY MR. PENNY: [30] CROSS-EXAMINATION BY MR. WARREN: [195] CROSS-EXAMINATION BY MR. THOMPSON: [312] CROSS-EXAMINATION BY MR. JANIGAN: [586] CROSS-EXAMINATION BY MR. AIKEN: [684] CROSS-EXAMINATION BY MR. SCULLY: [697] CROSS-EXAMINATION BY MS YOUNG: [720] PRELIMINARY MATTERS: [745] UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN [759] CROSS-EXAMINATION BY MR. BRETT: [763] CROSS-EXAMINATION BY MR. DINGWALL: [852] PRELIMINARY MATTERS: [1111] UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN [1127] CROSS-EXAMINATION BY MR. VEGH: [1131] 10 EXHIBITS 11 EXHIBIT NO. M.17.1: SET OF GRAPHS [89] EXHIBIT NO. M.17.2: DOCUMENT ENTITLED, "FACTS LINE" DATED AUGUST 27TH, 2003 [862] EXHIBIT NO. M.17.3: SAMPLE BUNDLED-T GAS CONTRACT BETWEEN UNION GAS AND COMPANY NAME [1121] EXHIBIT NO. M.17.4: DOCUMENT FROM WEB SITE ARTICLE ENTITLED, "SOUTH BUNDLED TRANSPORTATION, ANSWERS TO CUSTOMER'S QUESTIONS FOR CONTRACT CHANGES EFFECTIVE NOVEMBER 2003" [1123] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.17.1: TO PROVIDE A COPY OF THE EXISTING DIRECT PURCHASE STATUS REPORT [426] UNDERTAKING NO. N.17.2: TO PROVIDE A MOCK UP OF THE PROPOSED STATUS REPORT [556] UNDERTAKING NO. N.17.3: TO ADD THE M9 RATE CLASS COLUMN TO EXHIBIT J.34.165 AND PROVIDE THE LOAD-BALANCING CHARGES FOR THOSE FOUR YEARS [692] UNDERTAKING NO. N.17.4: TO ADVISE WHETHER UNION PURCHASES SPOT GAS TO AVOID INTERRUPTING INTERRUPTIBLE CUSTOMERS, AND IF SO, IF THEY CAN DETERMINE WHAT VOLUMES WERE OVER THE LAST COUPLE OF YEARS' VOLUMES AND COSTS [963] UNDERTAKING NO. N.17.5: TO PRODUCE THE ARBITRATION CLAUSE [1352] 14 --- Upon commencing at 9:33 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? 18 PRELIMINARY MATTERS: 19 MR. PENNY: Mr. Chairman, just to note for the record that we've provided answers to transcript Undertakings 11.1, 11.3, 11.4, N.12.5, and N.15.12. 20 MR. SOMMERVILLE: Thank you, Mr. Penny. 21 MR. PENNY: I have no other matters to deal with at this time, other than to introduce the panel on load balancing. 22 MR. SOMMERVILLE: We also have a document that is today's bundled-T contract on forecast. 23 MR. PENNY: Yes, sorry, sir, I should have mentioned that. That will be identified by Ms. VanDerPaelt in her examination in chief. This is a slightly -- the load-balancing issue has got some history and it's a slightly technical issue and we thought for the assistance of the Board, we'd give you a bit of background and try and simplify how the system operates so you can understand what the load-balancing issue is all about. 24 MR. SOMMERVILLE: Thank you, Mr. Penny. 25 MR. PENNY: So Mr. Isherwood has been sworn, but I think Ms. VanDerPaelt and Mr. Kitchen have not yet, so if they could come forward. 26 UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN 27 S.VANDERPAELT; Sworn. 28 M.ISHERWOOD; Previously sworn. 29 M.KITCHEN; Affirmed. 30 EXAMINATION BY MR. PENNY: 31 MR. PENNY: Now, Ms. VanDerPaelt, I understand you're currently the manager for product and service development for Union Gas? 32 MS. VANDERPAELT: Yes, I am. 33 MR. PENNY: And you've been with Union Gas in various roles since 1999 -- 1991, excuse me. 34 MS. VANDERPAELT: Yes, I have. 35 MR. PENNY: And you are a certified general accountant. 36 MS. VANDERPAELT: Yes, I am. 37 MR. PENNY: And you have a Masters of Business Administration and a Bachelor of Commerce degree? 38 MS. VANDERPAELT: That's correct. 39 MR. PENNY: And you are a member of the Association of Certified General Accountants? 40 MS. VANDERPAELT: Yes, I am. 41 MR. PENNY: And you've appeared before the Board before in RP-2002-0130, RP-1999-0017, and in EBRO 493-494? 42 MS. VANDERPAELT: That's correct. 43 MR. PENNY: And you were involved in the preparation of the evidence relating to load balancing and the terms and conditions of the contract that are involved in the load-balancing proposal? 44 MS. VANDERPAELT: Yes, I was. 45 MR. PENNY: And as well, the answers to written interrogatories on that topic? 46 MS. VANDERPAELT: Yes, I was. 47 MR. PENNY: And do you adopt that evidence for the purpose of these proceedings? 48 MS. VANDERPAELT: I do. 49 MR. PENNY: And then, Mr. Kitchen, you are the manager of rates and pricing for Union Gas. 50 MR. KITCHEN: That's correct. 51 MR. PENNY: And you've been with Union Gas since 1993, I understand? 52 MR. KITCHEN: Yes, that's correct. 53 MR. PENNY: You've previously testified before the Board on rates matters on many occasions but most recently in the last QRAM application RP-2002-0130 and EB 2003-0056? 54 MR. KITCHEN: That's correct. 55 MR. PENNY: And you've, I understand, also testified before the New York State Public Service Commission? 56 MR. KITCHEN: Yes, I have. 57 MR. PENNY: And you have an MA in Economics from the University of Waterloo? 58 MR. KITCHEN: Yes. 59 MR. PENNY: And as well as a Bachelor of Arts in Economics? 60 MR. KITCHEN: Yes. 61 MR. PENNY: And you were involved in the rate aspects of the load-balancing proposal that's currently before the Board. 62 MR. KITCHEN: Yes that's correct. 63 MR. PENNY: And you assisted in preparation of evidence and answers to interrogatories on that topic. 64 MR. KITCHEN: Yes, I have. 65 MR. PENNY: And do you adopt that evidence? 66 MR. KITCHEN: Yes. 67 MR. PENNY: And then Mr. Isherwood, you've of course, already been introduced to the Board as the director of acquisitions for Union Gas and I gather that your role in the load-balancing aspect in the load-balancing proposal has largely to do with the March park? 68 MR. ISHERWOOD: That's correct. 69 MR. PENNY: And you assisted in the preparation of the evidence and the answers to interrogatories on the load-balancing issue? 70 MR. ISHERWOOD: I did. 71 MR. PENNY: And do you adopt that evidence? 72 MR. ISHERWOOD: Yes, I do. 73 MR. PENNY: Now, as I said, Mr. Chairman, it seems to us that because there's some history to this and it does require understanding the load-balancing issue and the proposal requires some understanding of how Union's system operates, it seemed to us to be useful to try and do a brief examination in chief that explained how the system operates and what the proposal is in relation to the system constraints. 74 So let me start, Ms. VanDerPaelt, by asking you to explain what we mean by load balancing in this context. 75 MS. VANDERPAELT: Load balancing is essentially the difference between supply and demand on a daily or seasonal basis. 76 MR. PENNY: And so what is the operational issue that's posed by trying to match supply and demand on a seasonal basis? 77 MS. VANDERPAELT: Historically, customers have consumed more a gas in the winter than they supply and then they supply more gas in the summer than they consume, so there's seasonal imbalances that we need to manage through load-balancing activities. 78 MR. PENNY: And is the load-balancing issue that we're dealing with and has been dealt with by board directives in the past and what you're dealing with here, is this a direct purchase issue or a system supply issue or both? 79 MS. VANDERPAELT: This is an issue that mainly involves direct-purchase customers who are on bundled-T contracts in the southern area only. 80 MR. PENNY: And what is the allocation issue, if you will, that's posed by the fact that we're dealing with direct purchase in the south? How are the costs dealt with, in other words? 81 MS. VANDERPAELT: The costs are dealt with -- for our load balancing, it's dealt with those customers on -- the proposal is between what system customers pay and the direct purchase who are on bundled-T. T1 direct-purchase customers and T3 customers are not part of the costs in this proposal. 82 MR. PENNY: Okay. And so why is Union proposing a change to its approach to load balancing? 83 MS. VANDERPAELT: We had received a directive from the board several years ago to look at the issues around load balancing. 84 MR. PENNY: Why don't you give us a brief description of the board's directive and the history of the board's directive. 85 MS. VANDERPAELT: Essentially, what the board was looking for is some certainty around the fact that system customers were paying for the costs that they incurred and direct-purchase customers were paying for costs that direct-purchase customers incurred, whereas, historically, we've operated it more as a rate-class aggregated system. 86 MR. PENNY: And we'll come back to that in a minute. But why don't we start with the sort of simple operation of the system over a season in terms of the gas supply, and if you could turn up the bundle of four diagrams, we'll start with number one. Mr. Chairman, could that bundle be given an exhibit number? 87 MR. SOMMERVILLE: Thank you, Mr. Penny. 88 MR. MORAN: Mr. Chair, that would be Exhibit M.17.1, a set of graphs. 89 EXHIBIT NO. M.17.1: SET OF GRAPHS 90 MR. SOMMERVILLE: Thank you. 91 MR. PENNY: So how do bundled-T contract customers balance supply and demand today? 92 MS. VANDERPAELT: The example that's in front of you is based on a contract that starts November 1. Approximately 35 percent of our contracts have a November 1 start. And what this illustrates is what their forecast would look like at the beginning of their contract, so the black line shows their normal consumption pattern. As I mentioned, customers would typically consume more gas in the winter than they do in the summer, primarily due to the heating load. 93 The blue line represents their demand contract quantity. This is their supply stream. Customers supply on firm even dailies to us throughout the year. 94 The difference between these two lines is what creates what we call the banked gas account and that is illustrated on the purple line below the graph. So what you see is from November through the winter, the customers essentially borrowing gas and then they come back into balance to a zero position at contract renewal for October 31, and that's what we call the banked gas account. 95 MR. PENNY: And I gather that this first graph or slide shows the operation of the system on a normal winter where the consumption is as planned? 96 MS. VANDERPAELT: Yes, we set up all of the contracts on the assumption that it's normal weather, so all the forecasts are based on a normal weather premise. 97 MR. PENNY: And under the current system, what happens when there is weather variance, and let's say, where planned consumption is higher than forecast? 98 MS. VANDERPAELT: Well, if we can go to the second graph on page 2, what we're illustrating here is that scenario where at the top part of the diagram you see a red line labelled actual consumption. And this demonstrates that we've had colder weather and the customer has consumed more than their forecast. That would be the difference between the forecast black line and the red. 99 As a result, they have borrowed more gas from the system than they originally intended based on their forecast, so their banked gas account is moved from the purple line to the red line. 100 The issue is what Union has to do to deal with the delta as a result of the higher consumption. 101 MR. PENNY: The delta between the purple and the red. 102 MS. VANDERPAELT: That's correct. 103 MR. PENNY: And currently what happens to that consumption that is in excess of the forecast banked gas account? 104 MS. VANDERPAELT: The customer still has to balance their contract at year end, so you see a blue block on the line that says the customer's paying back the gas. Customers will bring in the incremental supply to bring their contract back to zero typically in the summertime, and that's how they move the red and the purple line back together near the end of the contract. 105 MR. PENNY: And at what point do they have to do that in the year? 106 MS. VANDERPAELT: Customers have to -- currently have to be in balance by the end of the year. They are able to bring the gas in at any point in time, subject to our system availability to accept it, but the pattern historically has been in the summertime. 107 MR. PENNY: And when you say, "the end of the year," what -- when you say they have to balance by the end of the year, what do you mean? 108 MS. VANDERPAELT: The end of their contract term. 109 MR. PENNY: And what's the scope of contract terms across your customers? 110 MS. VANDERPAELT: We have contracts that come due every month; however, primarily there's a good chunk that are coming due on November 1st. 111 MR. PENNY: All right. Now, with that explanation of the consumption profile, can you explain what Union does now to load balancing, how does it deal with this consumption issue under the current system? 112 MS. VANDERPAELT: Union is buying incremental winter spot supplies to meet the difference between the forecast consumption on their banked gas account and the new curve, the new red line. We do that by buying incremental winter spot supplies and then currently we defer the difference between the winter and the summer price and seek retroactive recovery of those costs. 113 MR. PENNY: And under the current system, how are those costs of the incremental spot allocated? 114 MS. VANDERPAELT: They are allocated to all rate classes based on their March 31 imbalance position. 115 MR. PENNY: So it's on a rate class basis not an individual customer basis? 116 MS. VANDERPAELT: That's correct. 117 MR. PENNY: Is that right? Okay. 118 And so what -- coming back to the Board directive and the kind of issue that's posed by these consumption patterns, what's wrong with the current approach? 119 MS. VANDERPAELT: With current approach we are continually seeking recovery of costs after the fact. We find that we have customers who have elected marketers or direct-purchase arrangements finding that Union is purchasing commodity on their behalf which they feel is problematic as they have already made their own direct purchase arrangements. We also have customers within a rate class who have taken measures to balance their contracts, but because their rate class was out of balance they were still subject to deferral disposition. 120 In addition, because Union is buying gas in the winter that they would otherwise purchase in the summer we have the potential to experience UDC or unabsorbed demand charges on pipe because we have to move our purchases. 121 MR. PENNY: Can you just elaborate on that last one a little bit. How is it a that the current system gives rise to the risk of UDC? 122 MS. VANDERPAELT: Union plans to purchase gas in the summer to fill the storage. The gas that we're purchasing in the winter is going to be replaced eventually by those direct-purchase customers in the summer. So we end up -- if we continue to fill the capacity in the summer we would have twice the amount of gas on our system. So we've now moved those summer purchases into the winter, the pipe that we were going to use in the summer is now not required because the direct purchaser is going to bring in the supply to make up their imbalance by the end of their contract term. 123 MR. PENNY: Does that mean that Union has been able to reduce its requirements for upstream transportation? 124 MS. VANDERPAELT: No, because we plan based on a normal winter and a forecast so we assume that we are going to be with a purple line which means those plans are in place to buy the gas in the summers as would be our normal practices. 125 MR. PENNY: All right. Good. Thank you. And then with that then, let's turn to the proposal. Can you just briefly outline what Union's proposal is to respond to the directive and to deal with those problems. 126 MS. VANDERPAELT: We are proposing that the contracts will now have two checkpoints in February -- February 28th and September 30th where we will ask the contract customers or all customers, sorry, to come back to their forecast position at that point in time. And then, in addition, they will have their annual balancing that they've had at the end of the contract term. 127 MR. PENNY: Why the two time periods? 128 MS. VANDERPAELT: March 1st is a key point on our system for control. We need to ensure that we have sufficient inventory in our storage pools to meet the deliverability requirements of the entire system for the rest of the winter. September 30th is an important point because we need to ensure that we have sufficient space to meet the firm commitments of those customers who have contracted for storage and have late season injections rates in the month of October. 129 MR. PENNY: Let me just follow up on both of those. What is the importance of the March 1 deliverability requirement? First of all, what is the deliverability requirement and why is the March 1 date important in relation to that? 130 MS. VANDERPAELT: In order to ensure that you are able to get the gas out of the ground in the manner that you'd forecasted, you have to have a set amount of inventory to give you the push and to get the gas to above ground. That's deliverability. So we require to have an inventory level that allows us to meet what our plan was to meet the March winter needs. In addition, you just need a physical amount of inventory in ground so that through March, you are able to get to your March 31 control point as you see consumption. 131 MR. PENNY: Just generally, what are storage levels like by the time you get to March 1? 132 MS. VANDERPAELT: By the time we get to March 1 they're starting to decline, we're getting to the end of the winter. 133 MR. PENNY: And then coming to the September 28th/October 1 date, what's the significance of October 1 injection obligations that Union has and why do those impose constraints on your proposal? 134 MS. VANDERPAELT: We have several contracts that have firm injection entitlements, they would include the T1, T3, M12, C1, as well as the system gas that is coming on the system on firm even dailies that is expected to arrive. 135 If we have customers who are taking more space than was forecast, they're encroaching on the space that was there to meet the injection of those firm commitments. 136 MR. PENNY: All right. Thank you. 137 Then let's go to the third page of the slide, and can you explain how the consumption profile looks under your proposal when there is higher than planned consumption. 138 MS. VANDERPAELT: This slide is really illustrating the February 28th checkpoint. So we have a similar situation as we had on the second slide. Consumption is higher than forecast, as illustrated by the red line. On the banked gas account, you can see that our expected forecast of the banked gas account is also not low enough, the customer has drafted more than we forecast. What we've now asked the customers to do is to bring in that supply so that their banked gas account comes back to their forecast position as of February 28th. 139 MR. PENNY: I see. So it's not that they have to bring their positions back to zero, it's that they have to bring their position back to forecast. 140 MS. VANDERPAELT: That's correct. 141 MR. PENNY: All right. And so is that represented by the uptake in the red line coming back to the purple? 142 MS. VANDERPAELT: Yes it is. 143 MR. PENNY: And then what happens under your proposal when consumption is lower than planned? 144 MS. VANDERPAELT: That would be the fourth slide. So if we have warmer than normal weather in the winter, what we would see is consumption is actually lower than we forecast. So throughout the winter the customer has no obligations because they have not drafted more than we anticipated. However, later in the season we would expect them to shed that gas, so this would be prior to September 30th in order for them to bring their banked gas account back to the checkpoint. 145 MR. PENNY: All right. Now, then, moving to the next stage, how does the proposal that you have which is to have two annual checkpoints, the February 28th and the September 30th, how does that address the problems that you identified with the current method of load balancing? 146 MS. VANDERPAELT: The contract holders will be responsible for bringing gas in in the season in which they burn, which means Union will not be buying gas on their behalf, seeking recovery of those costs after the season for direct-purchase customers because they would have incurred their own costs. Additionally we would no longer be buying supply for those who have made arrangements with a marketer. Because we are now monitoring to a contract level, we would look at each contract individually. So a customer who has taken actions is no longer penalized by the activities of their rate class, if they've taken actions they will be held whole. 147 Finally because Union will no longer be displacing summer supply into the winter, our UDC risk has reduced. 148 MR. PENNY: Thank you. Are there any other benefits to customers of Union's proposal besides those directly related to the consumption profile? 149 MS. VANDERPAELT: As a result of this proposal, we will have greater certainty that supply is coming to our system in the month of February and that customers will be balancing to their forecast. So we are willing to make diversions on your system more open than they have been in the past in the winter. 150 MR. PENNY: And can you just explain that a little bit. What's a diversion and why is your ability to offer more diversions a good thing? 151 MS. VANDERPAELT: A diversion is the ability of a customer to remove gas that they've delivered to the system but no longer need. So, for example, we could have a customer who has not consumed as much as they forecast and would like to sell that gas and the winter is usually a higher price for them to do that obviously. 152 MR. PENNY: Under the current system, what constrains them from doing that? 153 MS. VANDERPAELT: Because we have to manage the whole system and we have no certainty around the consumption or customers matching their forecast as planned, we do not allow diversions in the winter unless we are absolutely certain that it is a warm winter and they usually aren't opened up until the February time frame, or March. 154 MR. PENNY: How does your proposal give more flexibility around the customers' ability to do those diversions? 155 MS. VANDERPAELT: We would open up diversions subject to some rules from November all the way through to March. 156 MR. PENNY: But what is it about the proposal that enables you to do that? 157 MS. VANDERPAELT: Because we now know that customers contractually will be responsible to balance to their February forecast, we have the certainty that we will be on the curve. 158 MR. PENNY: All right. And under the proposal, is there still any need for Union to acquire spot gas for load-balancing purposes? 159 MS. VANDERPAELT: There's none up until the February 28th point that we have forecast based on the weather that we've seen historically. However, the March 31 control point is still an issue. 160 MR. PENNY: All right. Well, perhaps you can explain that. So there is still some need for Union to obtain spot gas under this proposal; is that right? 161 MS. VANDERPAELT: Yes, there is. 162 MR. PENNY: And so why is that? 163 MR. ISHERWOOD: In terms of the proposal, as Sarah described, the balance point in February really makes sure that the customers all are in balance for the end of February time frame. That really covers off the risk or the balancing November through February. The last period that's still exposed is really March. 164 What Union Gas does today in a colder-than-normal March is to buy spot gas and any spot gas we buy in March that is above forecast levels would be billed back to bundled-T and sales-service customers retroactivity. So we've come up with a concept called a March park which is really designed to protect against this customer risk. 165 MR. PENNY: All right. So explain what is the March park? 166 MR. ISHERWOOD: March park is really a gas supply instrument where you pay a third party to deliver gas to Union on a constant even daily basis through the month of March, essentially on a loan basis, and we would then return the gas back to the third party again on a constant even daily basis during the month of May. So in essence, we are parking a volume of gas during the month of March and this really covers off the spot risk that both the bundled-T and sales-service customers would have in March. 167 MR. PENNY: I'll ask you about the benefits of doing that in a second, but can we just go back, from an operational point of view, what is it that's unique about March or what is it that gives rise to the need to cover off March in a way that's different from the rest of the proposal? 168 MR. ISHERWOOD: Typically, when we go through the winter period, if we experience colder-than-normal weather in November or December, we can arrange to have that spot delivered over a monthly period, for example, if we saw colder weather in December and it drove a spot requirement, we can arrange to have that delivered in January or February-type time frame. The difficulty you have in March is you're out of time. You have to meet the end of March, March 30th control point. So if you have a colder-than-normal weather in the month of March, you actually have to buy spot gas during the month on the day market, and our experience last winter was extremely volatile high prices which arose to a lot of the load-balancing costs that we had to recover later. 169 MR. PENNY: Okay. So let's turn to an overview of the benefits of the March park as opposed to the current process of just buying spot when you need it in March. 170 MR. ISHERWOOD: Primarily, there are really two benefits of having the March park available to us. The first is that it would avoid us having to buy spot gas in all but the most extreme circumstances. The volume identified here we feel will cover off most years and that will avoid us having to go back and charge both direct-purchase and sales-service customers retroactively for spot gas costs in the month of March. 171 The second benefit that the March park brings is again more operational flexibility. So as Sarah had mentioned about diversions being allowed during the winter, with the March park in place, we have enough confidence to again allow diversions under certain circumstances to occur even in March. 172 MR. PENNY: All right. And what would be the impact of not having the March park piece of the load-balancing puzzle approved as part of the solution to the load-balancing directive? 173 MR. ISHERWOOD: Again, there would be two impacts and it would be the same impacts that we have experienced recently because we've obviously not had the March park in place. The first impact is that we would be exposed to buying spot gas in the month of March and we have found at least this last March to be extremely volatile and with high prices, and that resulted in, again, a lot of retroactivity in us billing again DP customers for spot gas. Which is really against one of the key business principles we established in the load-balancing evidence. 174 And the second impact of not having the March park would be again our system would be much tighter in the month of March and to the extent that we're looking at potentially having to buy spot gas, diversion activity would be somewhat restricted as well, more so than if we had the March park. 175 MR. PENNY: All right. Thank you. 176 Now, Ms. VanDerPaelt, the evidence describes how part of the implementation of the load-balancing proposal for the end of February and September balancing is through changes to the terms and conditions of the standard contracts. I gather that some customers have expressed concerns about some of the terms and condition changes. Is Union in discussion with those customers? 177 MS. VANDERPAELT: Yes, we are. 178 MR. PENNY: And can you just give us a brief description of where things are at in the context of those discussions? 179 MS. VANDERPAELT: We've received approximately 15 letters from customers who have concerns on the contract wording, which represents about 1 percent of our total contracts. 180 We are in discussions with the customers to see what their issues are and to talk through them. We've been working very well through these negotiations and feel that we will be able to achieve a satisfactory result for all parties. 181 MR. PENNY: And have there been meetings with the customers to discuss these issues? 182 MS. VANDERPAELT: Yes, there have. 183 MR. PENNY: And there was, I gather, a concern that direct-purchase customers whose contracts expired might be returned to system as sales service customers in the absence of a renegotiated contract. Will that happen? 184 MS. VANDERPAELT: We have not had to return anyone to general service or to system as a result of the contract negotiations. 185 MR. PENNY: And as long as the negotiations are underway, do you have any intention of doing that? 186 MS. VANDERPAELT: We have no intention we merely put that wording in there in case we were unable to get a hold of a customer. We continually call them about every two weeks, but they needed to recognize there was no contract in place because to introduce the new language we had to terminate the old contracts. So we didn't did now how to serve them unless they at least talked to us and responded to us, but if we are talking to a customer, we have no intention of returning them to general service or to system. 187 MR. PENNY: All right. And based on your experience to date, has progress been made and is it your expectation that the matter will be resolved? 188 MS. VANDERPAELT: Yes, it is. 189 MR. PENNY: And can you confirm that either parties' rights, Union or the customer, are preserved to return to the Board in the event that there is not negotiated resolution? 190 MS. VANDERPAELT: That's correct. 191 MR. PENNY: All right. Thank you. 192 Thank you, Mr. Chairman, those are my questions. 193 MR. SOMMERVILLE: Mr. Penny. 194 Mr. Warren. 195 CROSS-EXAMINATION BY MR. WARREN: 196 MR. WARREN: Panel, my name is Robert Warren I appear as counsel to the Consumers' Association of Canada. I want to understand the proposal for load balancing principally from the perspective of residential consumers whether they are system gas customers or direct-purchase customers and much of my questioning will deal with some basic concepts that I want to try and understand if I can. 197 Ms. VanDerPaelt, I'd like to begin with you, if I could, and ask very broadly the nature of the problem for which the policy is a solution. You've spoken about the board directive and in your examination in chief a few moments ago, when asked by your counsel about the Board directive, my note of your answer was that the Board wanted -- this is my gloss on it, please correct me if I am wrong, was that the Board wanted certainty that system and direct-purchase customers were paying the costs which they had caused. 198 Do you remember giving an answer something to that effect? 199 MS. VANDERPAELT: Yes, I do. 200 MR. WARREN: Now, can you tell me, Ms. VanDerPaelt, to cut to the essence of it, how it is that this proposal addresses that concern? 201 MS. VANDERPAELT: The customers who are drafting the system more than forecast and have direct-purchase arrangements will incur their own costs to buy supply in the time period which they've drafted and bring the gas in. If it's a colder-than-normal winter and Union has to purchase gas on behalf of system customers, those costs will be directed to the system customers. 202 MR. WARREN: Can you just help me out with the first portion of that. I understand the second portion, that if you purchase it on behalf of the system customers, the system customers are going to have to pay. How does the new system differ from the old system in respect to the first category, that is the direct-purchase customer? As I take it -- as I understand your answer, the direct-purchase customer who now has to -- will be responsible for purchasing -- my apologies I will use his -- his own gas and that will now be tracked by Union specifically and charged back to them; is that how it's going to work? 203 MS. VANDERPAELT: They would actually buy the gas and contract for it themselves, we would just see it arrive. So they wouldn't get a bill from us, we would be looking for the physical gas to show up on the system that they would have contracted through their supplier for and paid their supplier directly for. 204 MR. WARREN: And that is accomplished by having the checkpoint system; is that correct? 205 MS. VANDERPAELT: That's correct. 206 MR. WARREN: With the exception of the spot gas purchases that may be required in March that Mr. Isherwood or Mr. Kitchen just referred to; is that correct? 207 MS. VANDERPAELT: That's correct. 208 MR. WARREN: And the extent of those spot gas purchases, do I understand it, is to be -- or the historic extent of the spot gas purchases is to be mitigated by this concept of the March park; is that correct? 209 MR. ISHERWOOD: That's correct. 210 MR. WARREN: Now, can I then ask you to turn to your prefiled evidence which is Exhibit H.1, tab 4. And in the early portion of that, looking at page 3 of 24. 211 MS. VANDERPAELT: I have it. 212 MR. WARREN: Do you have it panel? Under heading number 2 you talked about the origins of the load-balancing directive and you refer to a portion of the Board's decision in EBRO 493-494. And the portion you've cited says, and I quote: 213 "The Board also directs Union to conduct a cost-allocation study and propose a rate structure similar to that of Centra where the forecast costs of short-term supplies are included in the delivery charge." 214 Has Union conducted that cost-allocation study? 215 MR. KITCHEN: Mr. Warren, I think that in terms of the original response to the directive we made in 493-494/06, was a cost allocation study done, I'm not sure if it was just a modification of the existing cost allocation study in order to move the costs and to take the existing approach that we have now. Essentially what happened out of the 493-494/06 is that we put into delivery rates the concept of the difference between summer/winter spot differential times spot. So have we done a cost allocation study now? No, we've addressed the proposal by looking at the contracting and through the March park. 216 MR. WARREN: Would I be right in understanding that the purpose of the cost allocation study was to address this concern that Ms. VanDerPaelt spoke about of ensuring that there was the appropriate allocation between system customers and direct-purchase customers? Is that the purpose -- 217 MR. KITCHEN: I think that would be the purpose, and that's what we tried address through the response to that directive in 493-494/06, whatever that proceedings was. 218 MR. WARREN: Now, with the apologies for the ignorance which this question reflects, panel, can you tell me what the difference between load balancing and flexibility costs, which were the subject of a Board consideration in an earlier decision this year? What's the difference between them? 219 MR. ISHERWOOD: The load-balancing cost is defined as the difference between the winter price paid and the average summer strip, so it's really the winter/summer differential. But to the extent we're buying spot gas in the wintertime, the load-balancing cost component is strictly the difference between the winter price and the average summer price. 220 Flexibility actually came out of this directive in this hearing as Mr. Kitchen mentioned. Flexibility is really the difference, there's really two components to flexibility: The first component of flexibility is the difference between the supplies we buy from non-TCPL sources and the price we pay from TCPL sources. So it all begins with the Alberta border reference price, you add on top of that the TCPL tolls and fuel, and you get what we call the Ontario reference price, the Ontario WACOG, sometimes it's called. And the system supply primarily for the south customers comes from other sources, so when you compare the price of that gas landed in Ontario compared to the Ontario reference price, you have a differential, and that differential really becomes part of the flexibility cost. 221 There's just one other small component. To the extent that the price paid for spot gas once you remove the load-balancing piece is still above the reference price, then there's also flexibility credits or debits that can arise because spot is priced differently than the reference price as well. 222 MR. WARREN: Does the load-balancing proposal which you've got before the Board now deal at all, either directly or indirectly, with flexibility issues? 223 MR. ISHERWOOD: The flexibility concept has really been dealt with in two other spots in evidence, one is in the deferral account restructuring and in the QRAM evidence as well. And it really shows up now as, we call it the SPCD or the south portfolio cost differential, and that cost differential is essentially the difference between the south portfolio cost and the north portfolio cost, given the north is TCPL based. So it's the same principle, it's just arrived at slightly differently. 224 MR. WARREN: All right. Thank you for that, panel. 225 Ms. VanDerPaelt, returning to you, again at a very crude level, definitional level if you wish, you provide some definitions in part 3 of your prefiled evidence. You talk about load balancing, looking at page 5, "Load balancing," and I'm quoting of your definition of it, "Load balancing is required when customers deliver or more or less gas than they physically consume on a given day and throughout the season." 226 May I take it from that, in addition to your comments earlier today, that load balancing is an issue not for system customers but rather for direct-purchase customers exclusively; is that correct? 227 MS. VANDERPAELT: In this context, yes. 228 MR. WARREN: Now, can you tell me, when you talk about bundled T customers, who are bundled-T customers? 229 MS. VANDERPAELT: Bundled T refers to the contract where any customer has direct-purchase arrangements. So all your retail energy marketers representing homeowners are on direct-purchase bundled T. All of our industrial and commerce gas all supply their own gas, so they would all have bundled T arrangements. The exception would be those who have opted for a T1 or a T3 service. 230 MR. WARREN: So to the extent that, sort of, my client would be with residential customers, they would form a portion of the universe of bundled T customers; is that correct? 231 MS. VANDERPAELT: That's correct. 232 MR. WARREN: And can you give me, in rough terms, approximately the number of residential consumers who would be affected -- sorry, who would be within the bundled T group? 233 MS. VANDERPAELT: We have approximately half, so 50 percent of our homeowners are on direct-purchase arrangements, they would all have bundled T contracts. 234 MR. WARREN: Can I then turn to the business principles that informed your response to the Board's load-balancing directive, and they begin on page 7 of your prefiled evidence, Exhibit H.1, tab 4. And you there outline 7 business principles and I'd like to just deal with three of them briefly if I can. 235 The first is, "the solution should be based on fair and equitable treatment of all customers." And is that -- can I translate that Ms. VanDerPaelt as the issue of the appropriate cost allocation as between system customers and direct-purchase customers? Is that what that's dealing with? 236 MS. VANDERPAELT: Yes, it is. 237 MR. WARREN: Now, looking at number 2, "the solution should not prevent or cause undue switching between service options by creating artificial incentives or barriers." 238 In your view, Ms. VanDerPaelt, or other members of the panel, if you wish, in your view, does the present system cause undue switching between service options? 239 MS. VANDERPAELT: When we saw the effects of the rate adjustment last fall, we saw an increase in customers returning from direct-purchase back to system because they felt that all of their costs were covered under their direct-purchase arrangements and were amazed that they were getting a bill from the utility because they weren't clear that there were still balancing requirements. 240 So I feel the old system, in terms of when things like the retroactive adjustment happened, could cause switching. 241 MR. WARREN: In addressing that, there are several points in your evidence and your interrogatory responses where you refer to the public or the customer response to that substantial retroactive charge. Is that a problem with perception or is there something substantively within the existing arrangement that causes, to use your language, "undue switching between service options"? 242 MS. VANDERPAELT: I don't think there's anything substantive that causes switching today. We wanted to make sure that our proposal didn't cause it in the future. 243 MR. WARREN: So it may not have been a problem, but you're going to make sure that it's not a problem in the future; is that right? 244 MS. VANDERPAELT: Right. We don't want to create more problems as a result of a change. 245 MR. WARREN: And the way that that is accomplished in addressing number 2 is, how? How does the proposal that you have before the Board address number 2, given that there isn't a problem in the first place? 246 MS. VANDERPAELT: When you start to look at the issue of load balancing and who picks up the costs, you want to make sure that the changes still make the service easy for our customer to use and that it doesn't -- what we didn't want to see happen is that the retail energy marketers were all of a sudden into, say, a daily-gas environment or a monthly-gas environment so it made them so hard to manage the system customers were no longer encouraged to go to direct purchase or their costs became too high. So we wanted to make sure that we hadn't put so many barriers in place that movement between system and direct purchase became problematic. 247 In addition, we wanted to make sure that as a bundled-T customer, the ability to manage their load balancing, again, was not onerous that it pushed a group of customers to the T1 service which requires much more management, and something that they really didn't want to do. 248 MR. WARREN: I understand those objectives, but can I get back to the question of how does this proposal accomplish those objectives, Ms. VanDerPaelt? 249 MS. VANDERPAELT: If a customer is tracking to their forecast, they will not need to do anything different today than they did yesterday. So there is no onerous or different requirements on them. If a customer has moved from their forecast, then they will need to take action in February and action in September. They will not need to move to a daily model or a monthly model that you'll find in many other jurisdictions. 250 MR. WARREN: Just staying finally with this point very briefly for one moment longer, is this not though an issue? We have the customer response to the late payment charge, and we have the issue of the ease of the marketers with whom you call the customers dealing with their contract obligations. There's a gap there and is the gap not filled by the customer, that is the marketer, communicating accurate and complete information to his or her end-use customer, the ultimate residential consumer; is that not fair? 251 MS. VANDERPAELT: The customers, the retail energy marketers do disclose in their agreements what their costs and what they will be doing on behalf of the customer. What is not recognized is that -- because Union was responsible for balancing the entire system, and those costs were distributed on a rate-class basis, nobody recognized that whether you were system or direct purchase, Union was acting on your behalf. 252 I don't necessarily see it as a fault in the communication of the marketers. 253 MR. WARREN: Now, may I turn to principle number 3 at that is: "Union is not the gas supplier for direct purchaser customers and Union should not make gas purchase decisions that impact direct-purchase customer supply costs." 254 Is Union, in your view, Ms. VanDerPaelt, now making gas purchase decisions that impact direct purchase customer supply costs? 255 MS. VANDERPAELT: Yes, we are. 256 MR. WARREN: And is that through the purchase of spot gas principally? 257 MS. VANDERPAELT: Yes, it is. 258 MR. WARREN: And it's the March park that's intended principally to deal with that problem; is that correct? 259 MS. VANDERPAELT: The March park deals with March. We're also trying to deal with the weather variances leading up to March, which formerly we would have bought spot gas for. 260 MR. WARREN: Can I turn then finally to the issue of the March park. 261 Can you just describe for me panel, I appreciate that you've tried to do this in your examination in chief, but I want to understand physically what the March park is. Now, to begin with, if you could turn up page 14 of your prefiled evidence, H.1, tab 4, page 14, looking at the bottom, and I quote the very last sentence at the bottom of page 8: 262 "Park is a gas supply instrument whereby molecules are borrowed from a third party and then returned to that party at a later time." 263 Now, does Union actually purchase this gas? 264 MR. ISHERWOOD: No, actually the gas is borrowed or loaned from the third party so we're only borrowing it for the month of March and repaying the loan in the month of May. 265 MR. WARREN: You borrow it at one price and -- is it a wash, or is there a higher price for borrowing it for when you return it? 266 MR. ISHERWOOD: No, there's no buy/sell concept here. We borrow and pay a borrowing fee. 267 MR. WARREN: And if it is borrowed from a third party, why would the third party not want to sell you that gas? Presumably, if they held it and sold it on the spot market, they could sell it to you and they could sell it at a higher price. What's the value to the lender, if you wish, of this arrangement? 268 MR. ISHERWOOD: In the S&T transactional world, loans of gas are quite common between parties and the way the loan price is actually determined in this particular example is the price of gas in March is compared to the price of gas in May and on top of that, there's typically, you would build into the transaction cost or at least the marketer would build into the transaction cost, the cost to carry and a profit obviously as well. 269 So there is the concept of the gas price in March versus the gas price in May, but there's certainly not a buy/sell transaction, but it certainly comes into pricing the instrument. 270 MR. WARREN: Now, at the top of page 15 of your prefiled evidence you say, and I quote: 271 "By purchasing a park for March, Union will no longer have to buy spot gas in March for either sales service customers or bundled-T customers at a time when prices are most volatile." 272 Now, as I understand your evidence earlier, there may still be some purchases of spot gas for bundled-T customers; is that correct? 273 MR. ISHERWOOD: Yes. In extreme weather situations it could still be a case where you have to buy spot gas in the month of March, but with the analysis that was done around the volumes for the general service market and contract market, those instances would be fairly rare, but it was not impossible and still may happen. 274 MR. WARREN: My final series of questions relates to the answers given to an interrogatory posed by my client and they appear at Exhibit J.7.70. If you could turn that up, please. 275 MR. ISHERWOOD: Yes, I have it. 276 MR. WARREN: Now, in this exhibit, among other things, you did a comparison between the costs of the March park and the costs of some other alternatives of supplying gas as required in March; correct? 277 MR. ISHERWOOD: That's correct. 278 MR. WARREN: And I'd like to take you to the first one. The first comparison is March park compared to buying incremental balancing gas. Before I get to that, one of the underlying concepts for the March park is that you estimate the amount of gas that you are likely to require in March based on historic consumption periods, historic consumption information, which is in this case four years old; is that correct? 279 MR. ISHERWOOD: In the case of the general-service market, it goes back to 1990, and in the case of the contract market, it goes back five years. 280 MR. WARREN: Okay. Given that you have that information and that you believe that you accurately forecast the amount that you have to have for the March park, why would you not purchase more gas in the summer and simply leave it in storage to be drawn down in March as required? 281 MR. ISHERWOOD: That's exactly the first example you pointed out. The title on the page 1 of that exhibit, March park compared to buying incremental balancing gas, it really is a case of buying more gas in the summer and storing it through the winter in case you need it in March. 282 MR. WARREN: And as I understand the numbers, there are two components to it, one is the actual cost of the commodity and the second component, if you turn up the second page, is what you describe at the very top of page 2 as the opportunity cost of foregone storage; correct? 283 MR. ISHERWOOD: Actually, can I just make a slight change to the first one? The cost of gas is important, but it's really the carrying costs of gas that comes into play. 284 MR. WARREN: Okay, the carrying cost, but the second component is the opportunity cost of foregone storage; correct? 285 MR. ISHERWOOD: And it can be viewed as the opportunity cost or the cost of purchasing a storage product, but it would be the same cost either way. 286 MR. WARREN: Now, is it fair to say, sir, that the revenue which you forecast for storage may or may not materialize; is that fair? 287 MR. ISHERWOOD: That's true. 288 MR. WARREN: And if it doesn't materialize, if, for example, it is less than -- I'm dealing only with the ratepayers' share here, the 4.4 million that you've got at the top of page 2 -- that if it's less than that, then the cost comparison with the March park -- first of all, just put it on the record, your comparison, your forecast for the March park is, I think, $8.3 million; is that correct? 289 MR. ISHERWOOD: That's correct. 290 MR. WARREN: And looking at page 2, you're saying that alternative number one, which is buying incremental balancing gas, your estimate of the cost of that is 9.4 million; is that correct? 291 MR. ISHERWOOD: That's correct. 292 MR. WARREN: Now, if the revenue from storage doesn't materialize, there's about a $1.1 million spread between them. Let's assume for the sake of discussion that your cost, that the revenue foregone is less than 4.4 million, let's assume for the sake of discussion that it's only 3 million, okay? So that the alternate one, buying incremental balancing gas, and the March park come out to be roughly the same cost. Okay? For the sake of discussion. 293 MR. ISHERWOOD: Okay. 294 MR. WARREN: Would you still seek -- do you still believe that the March park is a better alternative than buying incremental gas, and if so, why? 295 MR. ISHERWOOD: One advantage of the March park compared to having gas in underground storage is that when we have the gas delivered to us during the month of March it's actually delivered to us, if you want, on top of the ground at Dawn, it's not in storage. So as Sarah pointed out earlier, March deliverability is often quite difficult in that you're at the end of the season and it's difficult to get gas out of storage. So having gas on top of the ground is a lot better than having it in a storage field. 296 I'd also point out, I guess, in terms of the pricing here we were very careful when we did the comparison, in that we looked at the storage value the same day we looked at the March park value. So both the storage value and the March park value will change based on market conditions, but they were done on the same day so it was an apples-to-apples type of comparison. 297 MR. WARREN: One of the reasons I asked the question is that earlier in this proceeding, another panel indicated that in Union's view, the likely -- the revenue likely from S&T was likely to decline over time. And I'm wondering in light of that evidence, how confident you feel about your analysis of foregone -- the opportunity of foregone storage? 298 MR. ISHERWOOD: I'm very confident. The actual March park analysis was done on the period of May 15th to June 15th, so this evaluation, I'm sort of estimating here, was done a week or two after that. So the March park costs was compared the very same day as the storage value, so it really is an apples-to-apples comparison. If storage deteriorates in the future as previously testified to, then March park value would likely go down as well, and rather than being $1.50 it would be $1.20 or $1.10 or something. 299 MR. WARREN: Ms. VanDerPaelt, a couple of questions to you, just by way of sort of summing up the issues from the perspective of my clients. Can you give the Board your view, Ms. VanDerPaelt, if the Board accepts this proposal and if it is implemented, what, if any, cost impact would there be on system sales residential customers? 300 MS. VANDERPAELT: There should be no cost impact in that Union is still buying the same gas they had always bought for system customers previously. 301 MR. ISHERWOOD: I would add to that there would be a March park cost allocated to system sales customers, and they would benefit from it. 302 MR. WARREN: Which I presume would be balanced off against the spot gas. 303 MR. ISHERWOOD: Exactly. 304 MR. WARREN: Then the other half of the equation, Ms. VanDerPaelt, what, in your view, is the cost impact, if any, on residential consumers who were on direct-purchase from the implementation of this proposal? 305 MS. VANDERPAELT: We are looking in the future for the contract holders to balance their contract. So the marketer will be purchasing that gas and then will need to seek recovery from their customers which they have signed up. To the extent direct-purchase customers have signed fixed price arrangements or other arrangements, I can't speak to how the marketer will go and seek recovery from them. They will no longer, however, see the recovery of those load-balancing costs from the utility. 306 MR. WARREN: Those are my questions. Thank you very much. 307 MR. SOMMERVILLE: Mr. Warren. 308 Mr. Janigan. 309 MR. JANIGAN: Mr. Thompson is going to be beating the tarmac today, Mr. Chairman. I'm happy to let him do so as he's drafting our argument in the ROE case. 310 MR. SOMMERVILLE: Mr. Thompson. 311 MR. THOMPSON: Thank you. 312 CROSS-EXAMINATION BY MR. THOMPSON: 313 MR. THOMPSON: Thank you, Mr. Janigan and Mr. Chairman. Panel, as you know, I represent the Industrial Gas Users' Association and I'd like to just follow up, if I could, on the March park arrangement. My client wants to make sure it understands all of the implications of this transaction before it takes a position on it. 314 Now, you've indicated, Mr. Isherwood, that this is a supply arrangement, so it's a physical supply deal, is it? 315 MR. ISHERWOOD: That's correct. 316 MR. THOMPSON: And how is it priced? 317 MR. ISHERWOOD: It's priced based on the price of gas in March relative to the price of gas in May. And I think as Mr. Warren pointed out earlier, the -- the third-party marketer will always want to look at his best opportunities. Should he sell it in March or should he sell it in May? So the first thing to look at in terms of pricing out March park is to look at the price differential between those two points based on NYMEX or some other price discovery. 318 In addition to that you would then have to add the fact that that gas is being carried for two months by the marketer. Again, we're not buying it we're just borrowing it for two months, so the marketer would have a cost as well of carrying it for two months, so that would need to be worked into his pricing. 319 The third component would be, obviously, a profit of some kind. 320 MR. THOMPSON: All right and in your evidence you've estimated, as I understand it, the spread to be 1.60. 321 MR. ISHERWOOD: Based on the analysis done at the time, that's correct. 322 MR. THOMPSON: And when was that analysis done? 323 MR. ISHERWOOD: It was done the third, fourth week in June. 324 MR. THOMPSON: In June? 325 MR. ISHERWOOD: It was actually based on pricing between May 15th and June 15th, so the calculation was done shortly thereafter. 326 MR. THOMPSON: Of 20 -- 327 MR. ISHERWOOD: 2004 -- 2003, sorry. 328 MR. THOMPSON: And looking out to 2004; is that correct? 329 MR. ISHERWOOD: That's correct. 330 MR. THOMPSON: And does the 1.60 include everything? 331 MR. ISHERWOOD: Yes, it does. 332 MR. THOMPSON: And what's the spread today? 333 MR. ISHERWOOD: Our estimate -- the last time I looked at it, actually, was a couple of weeks ago and it was about $1.00. And we have seen a range between about $1.00 and about $2.00. 334 MR. THOMPSON: So is that a realistic -- I mean how wide could it get, theoretically? 335 MR. ISHERWOOD: We went back over a number of years and again the range is a little bit below $1.00 and a little bit above $2.00, sort of 90 cents to $2.10 or $2.05. 336 MR. THOMPSON: And to the extent this spread actually turns out to be more in the year that the March park is made, Union pays that, does it? 337 MR. ISHERWOOD: No, our proposal is that the March park costs would be deferrable. So if the costs came in less there would be credits established in the spot gas account, and if the price came in higher then it would be debits in the spot gas account. 338 MR. THOMPSON: I understand you have a deferral account proposal, but if it's not 1.60, which is your benchmark, but 1.80, the 20 cents gets deferred and the ratepayers pay it under your proposal. 339 MR. ISHERWOOD: That's correct. 340 MR. THOMPSON: But if it costs more then that goes to the analysis of costs and benefits of the arrangement. Mr. Warren was discussing with you in the context of J.7.70. 341 MR. ISHERWOOD: That's correct, and to the extent that the March park price fluctuates, it's fluctuating mainly because of the price of gas value in March versus May. The carrying cost is a small component and the profit would be a small deponent of the 1.60. So if the market price in March and May are changing then other alternatives would be changing in price as well. 342 MR. THOMPSON: Okay so the cost consequences that would not necessarily be summer that would be -- 343 MR. ISHERWOOD: What's the reference? This is the top of page 2? 344 MR. THOMPSON: Yes. 345 MR. ISHERWOOD: The value of storage there would be actually -- that would be a peak storage type pricing. You're essentially using storage to provide deliverability in March, which is the most expensive time to do that. 346 MR. THOMPSON: And that opportunity is available because this March park volume, as you say, comes in above the ground; is that right? 347 MR. ISHERWOOD: The comparison here is the March park is above the ground and to do the same thing with storage you need to have a very high deliverability, which is very expensive, that's the 1.13 number. 348 MR. THOMPSON: But it appears then to me as a result of March park, one person that's going to benefit is Duke because they participate some 25 percent in transactional services. So the March park frees up storage for S&T. 349 MR. ISHERWOOD: We're not presently using that storage today, so there's no incremental change to today. I think what we're getting at here if we wanted to buy gas next summer and store to next winter we would be reducing S&T revenue by the same amount or having to have incremental costs when we buy the product on the market. 350 MR. THOMPSON: Does the March park enhance the opportunities for Union's owner to achieve its share of S&T revenues? 351 MR. ISHERWOOD: Compared to today, no. Because today we just buy spot gas at Dawn during the month of March so there's no impact today to storage revenue by buying March spot gas. The example on the top of page 2 is illustrative, it's just what is another alternative. 352 MR. THOMPSON: So you're telling us today this you're doing this today already because you're buying spot above ground? 353 MR. ISHERWOOD: No. 354 MR. THOMPSON: Storage is available for S&T transactions because spot is an above-ground transaction; is that right? 355 MR. ISHERWOOD: It's above ground, that's true. 356 MR. THOMPSON: Now, just for the purposes of accounting for this transaction, you make the deal when? Do you go out on the market now and make your deal for March, or when do you make it? 357 MR. ISHERWOOD: Our expectation would be that because the first year of the load-balancing proposal is a transactional year the first time we would need the March park would be in March 2005. Our proposal would be we would buy that probably during the summer of 2004. 358 MR. THOMPSON: And would that be a tendered transaction? 359 MR. ISHERWOOD: Yes, it would. 360 MR. THOMPSON: And so when do you start paying money when you enter into a March park type of transaction? Is there some down at the time of the deal or does it only flow in March? 361 MR. ISHERWOOD: No, I would expect that you would be paying some up front, if not all up front when you do the transaction. 362 MR. THOMPSON: So the deal is struck on the basis of a forward spread for March and May; is that right? 363 MR. ISHERWOOD: Exactly. We would likely do that in layers. We wouldn't necessarily do it all the same day, because the market does change over the summer. We would probably do that in two or three or four tranches. 364 MR. THOMPSON: What do you say the benefits are to ratepayers in dollars? Is there some estimate? We know what the costs are, what are the benefits? 365 MR. ISHERWOOD: I guess our comparison point was really last March where we end up buying 5.6 petaJoules, so it is slightly more than this March park, and the incremental load-balancing costs was in the order of $26 million. That won't happen every year. That's, I guess, the whole nature of the insurance product. 366 MR. THOMPSON: Let's move from the March park. I should say I used to work for the Parks Board when I was in high school and I had a park and my mother called it Peter's park. I had a park that I was responsible for, not my own personal park. So I can relate to these park issues. 367 Let's move to load balancing. And if I could just start with the directive that Mr. Warren referenced -- 368 MR. PENNY: If Mr. Thompson would support the proposal we'd be happy to name it after him. 369 MR. SOMMERVILLE: The Peter principle. 370 MR. THOMPSON: I'd likely go down in history as having cost 8.4 million bucks. That puts me in the bad debt category right out of the gate. 371 There was the directive that Mr. Warren referred you to, I think, Mr. Kitchen, it's page 3 of H.1, tab 4. This is what's given rise to this new load-balancing proposal, am I correct? 372 MR. KITCHEN: It gave rise to the original proposal. Subsequent to that there was another decision by the Board and a further direction which is on the next page. 373 MR. THOMPSON: Would you agree with me that it was a cost-allocation cost-recovery type of directive? 374 MR. KITCHEN: It was, yes, at the time. 375 MR. THOMPSON: Now, in terms of -- I'd just like to get the big picture here with respect to this proposal in the context of existing situation not only for bundled customers in the south but also T customers. And am I correct that the scope of the changes that are being proposed do not affect in any way the T1 arrangements? 376 MS. VANDERPAELT: That's correct. 377 MR. THOMPSON: And it does not affect in any way the bundled services arrangements in the north? 378 MS. VANDERPAELT: That's correct. 379 MR. THOMPSON: And so it only affects bundled services provided to direct purchasers in the south? 380 MS. VANDERPAELT: Yes. 381 MR. THOMPSON: Have I got that straight? All right. 382 Now, in terms of the current situation, and this, I think, relates to the charts that were filed this morning as M.17.1 you show on page 1 the scenario where the customer -- the contract period for the customer is November 1 to October 31; right? 383 MS. VANDERPAELT: Correct. 384 MR. THOMPSON: Okay. And so the customer here -- let's say the DCQ for the sake of argument is 100 a day, and for the colder period the customer is consuming more than 100 a day so that a debit balance builds up in the banked gas account; right? 385 MS. VANDERPAELT: That's right. 386 MR. THOMPSON: And then as you get to the end of March, they -- the deliveries of 100 a day are more than consumption so that debit balance goes back to zero. 387 MS. VANDERPAELT: That's right. 388 MR. THOMPSON: Now, there are customers, are there not, that have contract periods that go from April 1 to March 31; is that right? 389 MS. VANDERPAELT: There are a few. 390 MR. THOMPSON: All right. And for them, the profile would be exactly the opposite. They would be building up a positive balance in the banked gas account and then drawing it down. 391 MS. VANDERPAELT: April 1 contract starts are the only month of contract starts that don't draft the system at all. 392 MR. THOMPSON: Now, the situation today is that the bundled customers essentially have Union managing the balancing. 393 MS. VANDERPAELT: That's correct. 394 MR. THOMPSON: Whereas T-service customers, it's the opposite. I think they have to start -- they have to jump start their banked gas account, do they not, if they start in November? 395 MS. VANDERPAELT: T-service customers are allocated storage, so they need to fill their storage to whatever they need to meet their plans. 396 MR. THOMPSON: So they have, in effect, an asset allocation and they manage their own inventory requirements in that allocation of storage. 397 MS. VANDERPAELT: That's correct. 398 MR. THOMPSON: So they don't have any checkpoints. Whatever is there they can use and what's not there they have to get in. 399 MS. VANDERPAELT: That's right. The supply and the demand is based on the needs to meet their plant. If they find that they are low in supply they obviously would need to take measures, if they find they need supply they will have to do that on an ongoing basis. 400 MR. THOMPSON: So it's the customers that feel they can manage these balances themselves have the opportunity to go T-service; right? 401 MS. VANDERPAELT: The T-service service requires that the customer is managing it on a monthly basis and looking -- typically they look at their profiles once to twice a week. So the customers that go that route tend to have gas management-type individuals who help them with that and are more active, gas plays a bigger part of their production requirements. 402 MR. THOMPSON: But looking at it from the perspective of the constituents of IGUA, there are some large-volume industrials that have T-service and they look after their balancing requirements themselves; correct? 403 MS. VANDERPAELT: That's correct. 404 MR. THOMPSON: And they have the expertise to do this, but there are also some who opted for bundled service because they'd rather have Union do it. 405 MS. VANDERPAELT: That's correct. 406 MR. THOMPSON: And I think they perceive it, it's easier if Union does it. 407 MS. VANDERPAELT: They had less management responsibilities as a result. 408 MR. THOMPSON: Okay. And the concern that arose in prior cases is that when Union had to acquire gas because collectively, the system was consuming more than Union had forecast, Union would incur those costs and then it was allocating the costs back to the classes based on the class deviation from forecast. 409 MS. VANDERPAELT: That's correct. 410 MR. THOMPSON: Okay. And this was creating inequities within classes because some classes where costs were being allocated to class constituents, some of them were unbalanced. 411 MS. VANDERPAELT: That's right. 412 MR. THOMPSON: Okay. So it seems to me one of the features of your proposal here that's very valuable is that you're now going to track imbalances on a customer-specific basis. 413 MS. VANDERPAELT: That's correct. 414 MR. THOMPSON: And I'd like to just understand that process if I could, compared to the now situation. And it's described, I believe, in a response to an IGUA interrogatory, which I think is J.17.59, if you could turn that up, please. 415 MS. VANDERPAELT: I have it. 416 MR. THOMPSON: And this is describing what, as I understand it, is called a direct-purchase status report; is that correct? 417 MS. VANDERPAELT: Yes, that's correct. 418 MR. THOMPSON: Do we have an example of this in the record somewhere? 419 MS. VANDERPAELT: I don't believe we do. 420 MR. THOMPSON: Do they exist in the -- well, are they used now? 421 MS. VANDERPAELT: Yes, they are. 422 MR. THOMPSON: Okay. Could I have an undertaking that you could file one so we could just see what they look like? 423 MS. VANDERPAELT: Yes, we'll undertake to do that. 424 MR. MORAN: Mr. Chair, Undertaking N.17.1, Mr. Chair, an undertaking to provide a copy of -- 425 MR. THOMPSON: Existing direct purchase status report. 426 UNDERTAKING NO. N.17.1: TO PROVIDE A COPY OF THE EXISTING DIRECT PURCHASE STATUS REPORT 427 MR. THOMPSON: And the response to Exhibit J.17.59 on the last paragraph of page 1 says: "The existing direct purchase status report shows the consumption, supply and banked gas values on a year to date basis." 428 Is that the current situation? 429 MS. VANDERPAELT: Yes. Currently today, the direct purchase status report will show the supplies that have arrived to date, the forecast supplies for the term of the contract. It will show the consumption actuals to date and forecast consumption for those months that haven't occurred yet. There will be the variance by month and then a running total, which would be the banked gas account total going to the end of the contract period. 430 MR. THOMPSON: So taking our illustrative customer on M.17.1, at the end of November, that customer will get a status report showing banked gas account at minus something; is that right? 431 MS. VANDERPAELT: That's correct. 432 MR. THOMPSON: Let's just say for the sake of argument it's minus 10, and what else will it say? 433 MS. VANDERPAELT: It would show, if you had only had one month of consumption and the variance in the first month was minus 10, the other 11 months would show forecast supply and forecast consumption, so his end of year balance would be forecast to be minus 10 at that point. 434 MR. THOMPSON: Why is that? My question is premised on the basis the customer's on track. What does it show then? 435 MS. VANDERPAELT: If it's on track, then it would show the forecast variance, it would essentially show the purple curve and the numbers all the way along each month with the ending balance of zero in the banked gas account. 436 MR. THOMPSON: So if you're on track, your banked gas balance is negative, but your variance is zero; is that what you're saying? 437 MS. VANDERPAELT: That's correct. 438 MR. THOMPSON: So you're showing a variance from forecast monthly and to the extent you're off track, they just carry that to the end of the year, assume you're going to stay on forecast for the balance of the year, but be short the 10; is that what the -- 439 MS. VANDERPAELT: That's the assumption today, yes. 440 MR. THOMPSON: So what's going to change now with your new proposal if it's approved in terms of the presentation to the customer? 441 MS. VANDERPAELT: There will be the addition of two columns, I believe. One will show the variance to a February checkpoint, then the February checkpoint number will actually be illustrated so that customers can track where they are. And then in the same column further down will be the variance to date to September 30th and then the September 30th checkpoint. 442 MR. THOMPSON: Okay. So taking our illustrative customer who is on track as of the end of November, that's going to forecast being on track in February; is it? 443 MS. VANDERPAELT: That would be correct. 444 MR. THOMPSON: Okay. And if he's on track the next month, going to forecast going being on track for February? 445 MS. VANDERPAELT: That's correct. 446 MR. THOMPSON: So it's only if the customer gets off track as it's approaching February that there'll be a forecast variance for February? 447 MS. VANDERPAELT: There will be a forecast variance if they are underconsumed as well, but they don't need to take any action in February. So if it's been warm, you will also see a variance to the forecast. But they only need to take a variance if it's colder and they've had more consumption. 448 MR. THOMPSON: So on it goes and then at some point, Union says, as I understand your evidence, You have to bring in -- if they're forecast to be short on the checkpoint, you have to bring in gas. 449 MS. VANDERPAELT: We have two options for the contract market. The Union-determined option would say that Union will contact you around February, 10 business days into February, so February 12th to 15th, and say, This is the number you bring in to balance to your checkpoint, if there is a requirement, and the customer would be expected to take those actions. A contract customer also has the option of having a customer-balanced option where they will self manage and determine what they need to do in order to balance to their checkpoint number by the end of February. 450 MR. THOMPSON: But the checkpoint number is going to be a forecast; right? 451 MS. VANDERPAELT: Yes. 452 MR. THOMPSON: Even on the 12th of February. 453 MS. VANDERPAELT: Yes. 454 MR. THOMPSON: Okay. So let's say Joe IGUA gets notice, February the 12th you've got to bring in 100 units, that's your forecast of what he's going to be short; right? 455 MS. VANDERPAELT: That's right. 456 MR. THOMPSON: Okay. And then that customer has to find the gas somewhere; right? 457 MS. VANDERPAELT: That's correct. 458 MR. THOMPSON: So his options would be what I would call an inventory transfer. 459 MS. VANDERPAELT: Yes. 460 MR. THOMPSON: And what does he have to pay -- he would have to pay for the gas. 461 MS. VANDERPAELT: That's right. 462 MR. THOMPSON: Does he have to pay a transaction fee to Union for that? 463 MS. VANDERPAELT: An inventory transfer is a third of a penny per gJ. 464 MR. THOMPSON: So you get the transactional services revenue from that transaction. 465 MS. VANDERPAELT: From that transaction, yes. 466 MR. THOMPSON: So in the evidence where it says that the customer has to bring in the gas at no further cost, that's not entirely accurate? 467 MS. VANDERPAELT: If the customer was overconsumed, they would have had to bring in the gas in the summer and they would have paid the third of a penny. So it's no different in the cost it's the timing of when they're bring binge the gas to Union. 468 MR. THOMPSON: Now, suppose the customer gets -- it's not an inventory transfer, but it's sourced either from his own supplier, he's got some swing arrangement or spot and it's delivered at a receipt point on Union's system, does that generate -- does the customer have to pay additional transactional services revenues? 469 MS. VANDERPAELT: No, they don't. 470 MR. THOMPSON: Okay. And then the other option is Union will just buy it for them; is that right? 471 MS. VANDERPAELT: If at the point of the checkpoint they have not taken any action Union will purchase it on their behalf. 472 MR. THOMPSON: And you purchase it at the price that's specified in the testimony somewhere, it's the -- the floor is your WACOG and the other price is something else. What is it? 473 MS. VANDERPAELT: I believe what we've put is the highest spot price in the month, it would be the month of February and the month of March in that example. It's the same price that we currently use when a customer's contract expires and they're out of balance. 474 MR. THOMPSON: And that price may or could be more than what it actually costs Union? 475 MS. VANDERPAELT: That's correct. 476 MR. THOMPSON: And what happens to the difference between what it actually costs Union and that price? Where does that go? 477 MR. KITCHEN: That difference would end up in the deferral, in the spot gas deferral. 478 MR. THOMPSON: And who -- and the credits would go to what customers? 479 MR. KITCHEN: Would end up going to system customers, sales-service customers. 480 MR. THOMPSON: So direct purchasers would be paying a premium for gas and the credits would go back to system gas customers; that's the current proposal? 481 MS. VANDERPAELT: That's because they'd be in a penalty situation. We are assuming that the customers are going to take action prior to the February 28th checkpoint and that's that situation wouldn't occur. 482 MR. THOMPSON: And then we roll along to towards September and what you're concerned about in September that -- that they -- they have too much gas in the system; is that right? 483 MS. VANDERPAELT: That's correct. 484 MR. THOMPSON: So you want to push them out. 485 MS. VANDERPAELT: We want to put them to their forecast. 486 MR. THOMPSON: And if they don't get out, they pay unauthorized storage charges, I think. 487 MS. VANDERPAELT: It's the T1 unauthorized storage space charge, and again it's the exact same charge we use at the end of their contracts today. 488 MR. THOMPSON: But this isn't the end of their contract, this is -- as actually a month before the end of their contract; right? 489 MS. VANDERPAELT: That's correct, it's the same. 490 MR. THOMPSON: But at the end of their contract they only have to be within plus or minus 4 percent. 491 MS. VANDERPAELT: That's correct. 492 MR. THOMPSON: So you've been managing the end of contract situation currently without these push-out charges starting at September 28th; correct? 493 MS. VANDERPAELT: Yeah, the plus or minus 4 percent is to zero at the end of the contract. The customer is supposed to balance to zero, and that's a tolerance recognizing that that's sometimes difficult to do. What we're asking the customer to do is to have as much gas in storage as they forecast to have, so it's not to a zero position. 494 MR. THOMPSON: No, but you're adding -- the way we see it is you're adding a "get out" charge exposure starting at the end of September. Is it the end of September or the beginning of October? 495 MS. VANDERPAELT: It would be -- October 1 is when we would do the check. We're asking the customer to come in line to their forecast to what we've planned to. 496 MR. THOMPSON: So does this feature of the proposal, in effect, eliminate the plus or minus 4 percent tolerance? 497 MS. VANDERPAELT: Not necessarily. The 4 percent -- for a customer who is November 1, they only have a month of consumption that could occur between October 1 and November 1. We have seen very cold Novembers, we have seen very warm Novembers, so they can still be outside of the zero. For a customer whose contract comes due any other time of the year, it won't impact their 4 percent or change that because if they have a June renewal, for example, they'll still have their plus or minus 4 percent and then September will have different issues for them. 498 MR. THOMPSON: Okay. But just standing back and looking at these requirements and these financial obligations as you approach February and as you approach September, it strikes me that this service for customers is more difficult than the T1 service. 499 MS. VANDERPAELT: I would disagree. The T1 service, the customers are managing it weekly and monthly so they are continually looking at their consumption and their meter reads. If this customer's profile is following what they planned, this customer has to do nothing different than they did today. 500 MR. THOMPSON: No, I understand that. And you could be doing nothing different than you're doing today too, you could be buying the gas, but now with this new customer-specific feature that you have built in, you could allocate the costs of acquiring that gas to customers that have caused you to incur those costs. 501 MR. PENNY: Is there a question? 502 MR. THOMPSON: Couldn't you? 503 MR. KITCHEN: I think the -- if it did anything, it would be allocated on a rate class basis as opposed to an allocation based on individual customers. 504 MR. THOMPSON: Well, you now have customer-specific information based on the documentation that you're proposing to use. Why can't you just track the customers that have caused the imbalance and charge them accordingly? 505 MR. ISHERWOOD: I think it goes back to the business principle about not wanting to buy gas for direct-purchase customers to the extent that they are on a direct-purchase arrangement the sense here is that they should be responsible for their own gas costs, and the tracking we do is just to give them information to allow them to manage their own gas account. 506 MR. THOMPSON: But the bundled delivery service, I think certainly from IGUA members' perspective, is Union doing the balancing and buying gas for balancing purposes is part of that service, that's the way I think the customers see it. You disagree with that? 507 MS. VANDERPAELT: Union balances the customers and plans its system based on a forecast, and we agree that Union's responsibility is to balance these customers to that forecast. Outside of that forecast, though, those customers have chosen to enter their own supply arrangements, and we received a lot of feedback last fall that they didn't appreciate the commodity costs that we had purchased on their behalf. They didn't appreciate that we had affected the price of the product that was going out their door and they didn't have any choice in that price. 508 As long as we continue to buy gas on their behalf and balance that system, we will always be affecting their cost of gas when they have a direct-purchase arrangement. 509 MR. THOMPSON: Well, I -- I think they'll know much better with the information that they're now getting that they have actually caused Union to acquire gas on their behalf. They have the option of getting their own. All I'm suggesting is do you really need to have these heavy-duty burdens on these checkpoints to achieve the goal of allocating the cost that you incur to the customers that cause to you incur them? 510 MS. VANDERPAELT: We, first of all, don't perceive them as heavy burdens. If a customer is managing as they do today, it will only be in conditions where either it's colder weather or they've seen a production change that they will have to take some action. 511 These customers have expressed to us that it is not -- the market has evolved, direct purchase has been out there since 1987 and that they are willing to take on responsibility and really don't want the utility making the pricing decisions. 512 I would agree that they would see the volume of what they incurred, but Union would still be making the pricing decision on buying that supply. 513 MR. THOMPSON: Are these marketers that are communicating this information to you? 514 MS. VANDERPAELT: We have heard this from every market segment. 515 MR. THOMPSON: Including marketers? In other words -- 516 MS. VANDERPAELT: No, actually we haven't heard from the marketers specifically, we heard from the homeowners in that group because the marketers didn't incur any costs, the homeowners are the one who saw the bill. 517 MR. THOMPSON: Well, just run that by me. Why -- the marketers don't incur the costs because they're rolled into the delivery charge; is that right? 518 MS. VANDERPAELT: Yes, and to the extent we purchase commodity it would show up on the homeowners bill. Under the new proposal it is the contract holder who will get the bill, if you will, if they don't meet the requirements. So the marketer will be the one who will receive the invoice under the new proposal. 519 MR. THOMPSON: So this is the small market that's driving this proposal? 520 MS. VANDERPAELT: We've heard from all markets. 521 MR. THOMPSON: Let's just consider a phasing in of your proposition. Is there any -- can you see any difficulty with starting first with the change in the direct-purchase status report? Have you got all the bells and whistles you need to put in this operation now? 522 MS. VANDERPAELT: No, we have to -- we're in the process of design. We would actually have to build some IT capability. I believe those costs were filed. 523 MR. THOMPSON: So when is it expected that you will have the capability of providing the modified direct-purchase status report? 524 MS. VANDERPAELT: Assuming that our design is correct and that it's approved, we would be able to have the modified report available in July. 525 MR. THOMPSON: So you're looking for a start-up of this November 1 of 2004; is that the big picture? 526 MS. VANDERPAELT: That's correct. 527 MR. THOMPSON: Okay. So it's up and running -- and I just want to get my head around the marketers' situation. It's up and running, you will be providing the direct-purchase status report to the marketer; is that correct? 528 MS. VANDERPAELT: That's correct it's the same as we do today. 529 MR. THOMPSON: And the marketer will then have to go out and get the gas; right? 530 MS. VANDERPAELT: That's correct. 531 MR. THOMPSON: And then the marketer is going to have to send the homeowner a bill for gas. 532 MS. VANDERPAELT: They will have to come up with a plan. 533 MR. THOMPSON: So how does this help homeowners if they are going to get it one or the other? 534 MS. VANDERPAELT: The homeowners are paying for the costs that they incur. The difference here is that they should be receiving it from Union in a more timely fashion and from the marketers they viewed it that this customer or this person they signed with at the door was supplying all their arrangements and were very confused. There was a lot of confusion about getting a bill from Union Gas for balancing and still being billed by their marketer for their services. This will eliminate that confusion. 535 MR. THOMPSON: Well, it may replace it with their outrage of another sort, but at least it won't be directed at you, but who knows that? 536 Again from the public interest, the marketer could end up charging twice as much as you would charge for load-balancing gas under this proposition. 537 MS. VANDERPAELT: I can't say what the marketers will charge. 538 MR. THOMPSON: I know you can't. But I come back to the question: How does it hope the homeowners? What is the protection for the homeowners? 539 MS. VANDERPAELT: The homeowners have two options in the market today, either system supply or direct purchase. Those who take direct purchase believe that they have left the utility when they really haven't. If they want to be on direct purchase, they would incur the costs that they have -- that they have caused. So it's not a matter of benefit or cost, it's a matter of you're incurring the charges for the services that you took. 540 MR. THOMPSON: But I thought you didn't want to trigger a whole return to system, you may achieve exactly the opposite. 541 MS. VANDERPAELT: I don't believe it will because they currently see those costs from the utility, they're just getting them from a different party. 542 MR. THOMPSON: As far as the homeowner is concerned he's not going to see the direct-purchase status report, he's not going to be any further ahead in terms of having information about the overconsumption unless the homeowner gets it from the marketer. 543 MS. VANDERPAELT: That's correct. 544 MR. THOMPSON: But in terms of the large-volume clients who might benefit from this type of arrangement, I think IGUA might be favorably inclined to something where we phase this in slowly. We make sure the information is out there first so that people get accustomed to seeing the overs and unders, and then Union continue to manage the overs and unders for a transition period, and then subsequently move to the customers managing the overs and unders. 545 Is there some scenario that you could see where that would be feasible? 546 MS. VANDERPAELT: We are trying to do that this year by sending out contracts that have a customer's checkpoints on them. We also are preparing a package of information which will help the customer understand how to read what that checkpoint means and where we believe it would have been at the time and what action they would have had to take. There of course are no consequence to them this year as we're operating under the old system. We're hoping through that phase-in approach and working through our sales reps that our customers will be familiar and comfortable with the system by November. 547 MR. THOMPSON: All right. Well I'll perhaps argue whether -- sorry, the new status reports -- the earliest they're going to receive them is what, July/August of 2004? 548 MS. VANDERPAELT: The reports won't be ready until then, but we are attempting to provide them the information so that they will have all the pieces of the puzzle. 549 MR. THOMPSON: I think they need to see what it looks like. Do you have a format for the new report? 550 MS. VANDERPAELT: Yes, we have a mock up. 551 MR. THOMPSON: Can we provide that by way of undertaking? 552 MS. VANDERPAELT: Yes, we will. 553 MR. THOMPSON: Thanks. 554 MR. SOMMERVILLE: We just have to give that a number, Mr. Thompson. 555 MR. MORAN: That would become Undertaking N.17.2, to provide a copy of the mock up of this status report. 556 UNDERTAKING NO. N.17.2: TO PROVIDE A MOCK UP OF THE PROPOSED STATUS REPORT 557 MR. THOMPSON: We, quite frankly, don't see the need at this stage for the September 28 checkpoint date. Union has managed the these year-end overs and unders to date within the plus and minus 4 percent, is there some reason why that can't continue or are you just trying to generate transactional services revenues? 558 MS. VANDERPAELT: One year and I don't believe it was -- I believe it might have been last year, in the month of October we actually saw an 8 Bcf swing on our system from direct-purchase customers moving gas. So you're referring to the November 1 contracts, We have contracts that come due throughout the year and there are implications on our storage levels and ability to plan going into the winter if we're not sure that customers are on their forecasts. 559 MR. THOMPSON: But the fact of the matter is you have managed without these kind of -- well, with the plus and minus 4 percent at the year end of the contract, Union has managed to serve direct purchasers as well as the system customers. 560 MS. VANDERPAELT: But that's not to say it was without cost. 561 MR. THOMPSON: Well, was it? I'm not suggesting it was without cost but -- 562 MS. VANDERPAELT: I don't have information here, but if we see swings on our system and are unable to plan there are obviously costs in terms of when we have to bring in supply in order to make up or to remove supply off our system in order to create the space for those customers. 563 MR. THOMPSON: Okay. Now, if we were to -- if we were to stick with some system, the transitional measure where Union continued to acquire but allocated to those specific customers who had caused the cost to be incurred, would those allocations take place in the QRAM process after February, Mr. Kitchen? 564 MR. KITCHEN: No, they would not. 565 MR. THOMPSON: Why not? 566 MR. KITCHEN: Well, if you're talking about allocating to individual customers, the QRAM sets a price for the commodity, it also will also set a prospective recovery of any deferral accounts on a class basis, but not deal with individual true-ups in what you've referenced. 567 MR. THOMPSON: Well, I know it doesn't do that now, but if you have the load-balancing costs in a deferral account and you have the data as to who caused those costs it could be cleared at that time, maybe that's the way to put it. 568 MR. KITCHEN: They could be cleared on a frequent basis if we had the information. 569 MR. THOMPSON: Those are my questions. Thank you very much. 570 MR. SOMMERVILLE: Thank you, Mr. Thompson. 571 We'll take our morning break. We'll reconvene at 20 minutes to the hour. 572 --- Recess taken at 11:22 a.m. 573 --- On resuming at 11:45 a.m. 574 MR. SOMMERVILLE: Thank you, please be seated. 575 MR. PENNY: Mr. Chairman, just before we proceed, I wanted to advise the Board with respect to the deferral account restructuring issue that we have spoken with LPMA, VECC, and IGUA about their concerns. Those have been addressed and we have a form of letter which all parties have approved which we'll send out later today to the Board and all intervenors. 576 MR. SOMMERVILLE: Great. Thank you. 577 MR. THOMPSON: Mr. Chairman, if I could just make a couple of points before I have to withdraw to go and write an argument in ROE, it pertains to Mr. Fournier's -- IGUA's evidence in this proceeding from Mr. Fournier. And the parties have been canvassed and as I understand it, no one wishes to cross Mr. Fournier, that's no one here present. I understood that Mr. Moran might be sending around an e-mail similar to some sort that was done for one of the other witnesses and hopefully no one will want to cross-examine him. 578 If someone does want to do those he does have some time constraints next week and I'll apprise the Board of that. I think he will be available on Thursday. He's got his IGUA annual conference the following week so that's something that takes up most of his time. So hopefully no one will wish to examine him, but if someone does, I would ask that consideration be given to fixing a date for his examination. I think his day is Thursday, but I'll get back to Mr. Moran on that. 579 MR. SOMMERVILLE: Thank you, Mr. Thompson. 580 MR. MORAN: Yes, Mr. Chair, we will be sending out an e-mail shortly asking all parties to indicate whether they want to cross-examine any of the intervenor panels, including the IGUA panel. We sent one already to with respect only to Northern Cross because one of the witnesses was located in Britain so that one's been cleared up. We know Coral and Kitchener will definitely be cross-examined, so it's the remainder that we need to find out about. 581 MR. SOMMERVILLE: Thank you. 582 MR. THOMPSON: Thank you. 583 MR. SOMMERVILLE: Thank you, Mr. Thompson. 584 Mr. Janigan. 585 MR. JANIGAN: Thank you, Mr. Chairman. 586 CROSS-EXAMINATION BY MR. JANIGAN: 587 MR. JANIGAN: Mr. Penny, Mr. Warren and Mr. Thompson covered many of the areas that I intended to cover in cross-examination and so my time has been accordingly reduced. I'm going to try to put together those elements that weren't covered and I may be disjointed, but I prefer to disjointed to repetitive. 588 Panel, I wonder if we could take a look at the exhibit that you produced this morning, M.17.1. And I'm looking at the first page of that which shows the current situation for bundled-T customers and as I understand it, bundled-T customers, in effect, supply their annual volume divided by 365 days and they deliver their daily contract quantity, but on each and every day, a bundled-T customer may consume something different. 589 MS. VANDERPAELT: That's correct. 590 MR. JANIGAN: Because these bundled-T customers aren't consuming exactly what they bring into the system, Union Gas is, in effect, balancing them on a daily basis. 591 MS. VANDERPAELT: That's correct. 592 MR. JANIGAN: And that will continue to happen in the new system? 593 MS. VANDERPAELT: Yes, it will. 594 MR. JANIGAN: Now, Mr. Thompson dealt with the situation of T-service customers. Now, I take it another group of potential customers that don't obtain load-balancing services from Union would be unbundled customers? 595 MS. VANDERPAELT: That's correct. 596 MR. JANIGAN: And an unbundled customer is a customer that would be responsible for all its daily load balancing because an unbundled customer is responsible for nominating daily its gas service -- gas supply deliveries to match its annual daily consumption; am I correct on that? 597 MS. VANDERPAELT: That's correct. 598 MR. JANIGAN: And the RP-1999-0017 proceeding was the proceeding that allowed Union to commence to offer unbundled service, as I understand? 599 MS. VANDERPAELT: Yes, that's correct. 600 MR. JANIGAN: And I believe we were in a previous proceeding where we discussed the amount of capital cost to accommodate the offering of these services to the customers, and I think it was about $15 million in capital costs; am I correct on that? 601 MS. VANDERPAELT: It sounds right, subject to check. 602 MR. JANIGAN: Okay. Now, at this time, does Union have any unbundled customers? 603 MS. VANDERPAELT: We have one customer who is planning to go in the spring and we're making preparations for that now. 604 MR. JANIGAN: Okay. Now, in your evidence and in your testimony this morning, I believe you indicated that one of the reasons for changing the load-balancing process for southern customers was that bundled-T customers didn't want Union to be buying gas supply on their behalf; correct? 605 MS. VANDERPAELT: That's correct. 606 MR. JANIGAN: And so in addition to the ability to opt for T-service, a Union customer could become an unbundled customer if they wished to avoid that circumstance occurring in the current system? 607 MS. VANDERPAELT: Yes, that's right. 608 MR. JANIGAN: And I believe we've touched upon the fact that in Union's northern delivery area, Union will continue to provide load balancing for both system sales customers and bundled-T direct-purchase customers. 609 MS. VANDERPAELT: That's correct. 610 MR. JANIGAN: And in that area, load-balancing costs are shared between both sales-service customers and bundled-T direct-purchase customers? 611 MS. VANDERPAELT: That's correct. 612 MR. JANIGAN: Can you briefly explain how in the north load-balancing costs are used for daily and seasonal balancing, these balancing costs which for both daily and seasonal balancing are distinguished from the firm gas supply required for system sales customers? 613 MR. ISHERWOOD: I believe in the north, load-balancing costs would be more of a seasonal type of a cost. Day-to-day is handled through the portfolio designed. 614 MR. JANIGAN: Now, Enbridge also load balances for both bundled-T direct-purchase customers and system-sales customers; am I correct? 615 MS. VANDERPAELT: That's my understanding. 616 MR. JANIGAN: Are you aware of how Enbridge determines load-balancing costs? 617 MS. VANDERPAELT: No, I'm not. 618 MR. JANIGAN: Now, just one clarification on your evidence at Exhibit H.1, tab 4, page 3, you state that: 619 "Union is not proposing to change the contract language associated with balancing direct-purchase customers in Union's northern and eastern operation area at this time." 620 I'm just concerned about "at this time." Is Union considering to make a change in the northern delivery area regarding load balancing in the future? 621 MS. VANDERPAELT: We were always looking at our services. We had some customers who asked about issues in the north. Currently, all the northern bundled-T customers supply in Alberta, there is no such thing as an Ontario-delivered bundled-T in the north, and some customers have expressed interest in, you know, That service is available in the south, could we make that available in the north? The operations are much different there. We've said to them we would try to look at that in the future. 622 Moving to an Ontario bundled-T could change the balancing provisions as a western, but until we investigate that, we couldn't know if there was going to be any changes coming. 623 MR. JANIGAN: Now, the current disposition methodology for load-balancing costs came into existence through the EBRO 493/04-494/06 decision; is that correct? 624 MR. KITCHEN: That's correct. 625 MR. JANIGAN: And this allocation methodology was, in fact, the method that Union proposed in that proceeding? 626 MR. KITCHEN: Yes, it was. 627 MR. JANIGAN: And in your evidence at Exhibit H.1, tab 4, page 4, you set out the Board's response in its decision to Union's proposed methodology and it's noted there that the Board indicated: 628 "In its decision, the Board, while accepting Union's proposal as the best alternative then available, directed Union to develop a method that better tracked and attributed the flexibility in load-balancing costs to those that caused them. The specific issues that the Board wanted Union to consider when preparing a new proposal were included in the Board's EBRO 493-494/06 decision." 629 Actually, that's not the Board's language as I indicated earlier, that's your language. This is the Board's language, the Board said: 630 "The Board considered other possible allocation methods such as direct allocation and direct charging based on cost causality by type of service which is consistent with Union's current practice in charging system supply customers the gas supply administration charge. At this time, the Board concluded that the administrative problems that may be encountered in implementing such a different proposal in a timely manner may outweigh any advantages such proposals may have." 631 Now, would you agree that the Board was concerned that the principle of cost causality didn't seem to be being followed in the allocation method that Union was proposing in that proceeding? 632 MR. KITCHEN: We did attribute it on the basis -- attribute load-balancing costs in terms of the allocation of those costs based on rate class, so to the extent that a rate class had a March 31 imbalance, that rate class would receive a larger allocation of the load-balancing costs either in rates or through the disposition of the deferral accounts. So to that extent, there was cost causality considered and we didn't use the -- in terms of the disposition of deferral accounts, we looked at the actual March 31 imbalances in doing that disposition. So that if a rate class was not contributing to the March 31 imbalance, it received a credit of what was in rates and in allocation of -- and no allocation of cost. 633 MR. JANIGAN: But it's fair to say that the Board considered that particular method to be not the optimal method from a standpoint the cost causality. 634 MR. KITCHEN: I think the Board's direction indicated that they didn't think it was necessarily optimal because they approved it for the test year and required us to come back with and respond to the directive again. 635 MR. JANIGAN: Okay. And the Board also indicated in its decision certain ways in which the issue of cost causality could be addressed, and I'm referring to that part of the decision which is well-quoted in your evidence concerning a possible model with the following features. 636 And that's set out on page 4 of your evidence that, "A possible model might include the following features: Preparation of a monthly supply/demand forecast for each type of service; calculation of monthly differences in the supply/demand balance; comparison of monthly actual results to forecast amounts to isolate variances by type of service at the end of the forecast period; and a true-up mechanism." 637 MS. VANDERPAELT: That's correct. 638 MR. JANIGAN: And do you believe that your current model possesses all of those features? 639 MS. VANDERPAELT: Yes, I do. We are holding the customers to their forecast, their supply and demand forecast for the service, that's the basic premise that underpins the design. Each month the variance to that forecast will be illustrated and reported to them on their DP status reports. 640 There will be a comparison of where their variance is to the original forecast so that they understand how they've moved away from the curve, if they have. And then we have a true-up mechanism to bring them back to that forecast in February and in September. 641 MR. JANIGAN: It's fair to say at the time of in decision that Union did not have the same administrative capacity to track cost causality that it does now. 642 MS. VANDERPAELT: At the time, Union tracked direct-purchase and system customers as one group. 643 MR. JANIGAN: And Union now has a system to track each customers' imbalance situation, whereas in the past it could not do so. 644 MS. VANDERPAELT: That is the system that we are developing and the costs that were referenced to in this proceeding. 645 MR. JANIGAN: Why isn't Union proposing to use these available systems to ensure that load-balancing costs are allocated directly to the customer that causes the load-balancing costs? 646 MS. VANDERPAELT: I go back to our business principles. By us allocating the cost to them we are still in a position of purchasing gas for those customers who have chosen other arrangements, and one of our basic premises was that was not our role. 647 MR. JANIGAN: No. Now, if the Board determines that the availability of other options to the customers outweighs that particular concern, is it fair to say that Union could, in fact, implement a system that could do this? 648 MR. PENNY: Do what? 649 MR. JANIGAN: Track load balancing to the individual customers that causes the imbalance. 650 MS. VANDERPAELT: If the Board saw fit to continue with the development of the systems that we are planning, we would have to look at the issues around timing of those purchases related to when the information -- on our current plan we know the customer is bringing the gas in in February and that underpins the planning assumption and the assumptions we had around diversions in the March park. We would have information that would show the customer's imbalance which would he could use to allocate costs. We would have to examine sort of the timing of that allocation and what that would cause in terms of other issues on our operations. 651 MR. JANIGAN: Because under your proposed system, I take it if a bundled T-service customer is in a situation of drafting the system on any day prior to the checkpoint day, or is grossly out of balance with its forecast volumes say during the winter days of December or January, Union won't be charging these customers any costs associated with spot gas. 652 MS. VANDERPAELT: That's correct, because we don't foresee that we would be buying gas for them if there was just one or two of them who were out, or a handful of them that were heading severely out of one direction. 653 MR. JANIGAN: And at your other checkpoint on September 30th, a bundled-T customer has to shed excess gas and storage on this date if they have consumed less than forecast. 654 MS. VANDERPAELT: They have to shed by that date. They can, you know, start taking that activity at any time. 655 MR. JANIGAN: And this date is important because Union must meet its firm injection rights and make sure there is enough gas in storage to meet winter needs. 656 MS. VANDERPAELT: That's correct. 657 MR. JANIGAN: And if a customer between the February 28th checkpoint and the September 30th checkpoint has overconsumed, the customer's consumption has, in effect, resulted in additional empty space, that's not a matter of concern I take it. 658 MS. VANDERPAELT: No, because it wouldn't affect our injection plans for the spring and summer. 659 MR. JANIGAN: Now, will Union take that additional empty storage space and sell it on the marketplace? 660 MR. ISHERWOOD: It's possible that any excess assets throughout the year would always be looked at from the capacity management group to see if there is a way to get value of it, and that value is shared with infranchise customers. 661 MR. JANIGAN: Now, Union sold some cushion gas in 2001 and 2002, did it not? 662 MR. KITCHEN: I believe so. 663 MR. JANIGAN: If the cushion gas wasn't sold in 2001 and 2002, would Union have less of a concern with the February 28th deliverability checkpoint? 664 MR. ISHERWOOD: I think the cushion gas was sold based on it being it deemed to be an excess asset. 665 MR. JANIGAN: Does have any concern about your February 28th deliverability checkpoint? 666 MR. ISHERWOOD: February 28th has always been a design point, actually March 1, but February 28th for the purpose of balancing, has always been a concern in terms of balancing the system. 667 MR. JANIGAN: Now, I wonder if you could turn to a VECC IR 34.159. In that IR, Union provides the range for the spot prices for the last five years. And when we look at the volatile price ranges for the month of March over the last five years, if you look on -- this is the attached table, line 10, which is March '99, the price range was U.S. 0.150. In line 22, March 2000, the price range was again, I take it that it's U.S. 0.245. Line 34, March 2001, the price range was 1.520 in U.S. dollars. In March 2002, the price range was 0.43 cents. In March 2003, the price range was $16.26. 668 It seems to me that with the exception of March 2003, the price range volatility in the last five years of March really was not that substantial. Would you not agree? 669 MR. ISHERWOOD: I think all price volatility before approximately January of '01, it's a relatively stable market, it's only really been since that winter of '001 that we've seen the kind of price volatility, and I guess we just can't ignore this price volatility of this last March, it's the greatest of all compared. 670 MR. JANIGAN: So it's really the experience of the last winter that is driving this March park proposal? 671 MR. ISHERWOOD: I would say not. I think going back to the -- clearly the key business principles, we're trying to find a way to protect against retroactivity and we're trying to protect against having to buy volume for direct-purchase customers so whether it's this March volatility or not, it's certainly a contributing factor, but I go back to the business principles. 672 MR. JANIGAN: Now, in Interrogatory J.34.160 which is also a VECC interrogatory, and I'm looking at the answer in D, Union provided a table indicating that over the last 20 years, how many years the month of March was, in fact, colder than normal. I believe your response indicated that this happened 60 percent of the time, operating under the 30-year average methodology, and 65 percent of the time, operating under the 20-year trend methodology. Is that correct? 673 MR. ISHERWOOD: Correct. 674 MR. JANIGAN: Finally, I wonder if you could turn up Interrogatory J.34.163. I believe you indicated this morning that one of the benefits of the March park proposal was the benefit for diversions, and in interrogatory part C you indicate that: 675 "Union does not expect any increased diversion revenue as a result of the new load-balancing methodology to the extent a customer diverts gas during the winter, under the new methodology they would have had to previously divert the gas in the summer. The benefit to the bundled-T customer, however, is that they may be able to get a higher value for the winter diversion rather than the summer diversion." 676 Now, were these additional benefits to the bundled-T customer considered when the allocation of the March park costs were being considered? 677 MR. ISHERWOOD: No, they were not. 678 MR. JANIGAN: Thank you, panel, those are all my questions. 679 Thank you, Mr. Chairman, those are all my questions for this panel. 680 MR. SOMMERVILLE: Thank you, Mr. Janigan. 681 Ms. Singh. 682 MS. SINGH: I have no questions, they've been dealt with, thank you. 683 MR. SOMMERVILLE: Mr. Aiken. 684 CROSS-EXAMINATION BY MR. AIKEN: 685 MR. AIKEN: Panel, I just have one question. If you could turn up J.34.165. 686 MS. VANDERPAELT: I have it. 687 MR. AIKEN: Would it be possible on the attachment to that response to add the M9 rate class column and provide the load-balancing charges for those four years? 688 MR. KITCHEN: Yes, we can undertake to provide that. 689 MR. AIKEN: Thank you. 690 MR. MORAN: Mr. Chair, that would be Undertaking N.17.3, to -- I'm sorry, I missed the description. 691 MR. PENNY: Add the M9 rate class to Exhibit J.34.165. 692 UNDERTAKING NO. N.17.3: TO ADD THE M9 RATE CLASS COLUMN TO EXHIBIT J.34.165 AND PROVIDE THE LOAD-BALANCING CHARGES FOR THOSE FOUR YEARS 693 MR. SOMMERVILLE: Thank you, Mr. Moran. 694 MR. AIKEN: Thank you. All of my other questions have already been answered. 695 MR. SOMMERVILLE: That's a unique position; isn't it? 696 MR. SCULLY: Just to change precedent, this time I do have a question. 697 CROSS-EXAMINATION BY MR. SCULLY: 698 MR. SCULLY: Earlier on, talking to Mr. Janigan, panel, you touched on the question of why you aren't proposing to institute the new bundled-T provisions in the north, and I didn't really understand why. The March park is a fit for the north but the bundled-T isn't. Can you teach me why? 699 MS. VANDERPAELT: Certainly. The northern bundled-T is based on the premise that all customers deliver their gas to Union in Alberta and then Union uses the TCPL capacity that they've contracted for to ship that supply into the northern area and serve those customers. 700 The amount that the customer has to supply, their daily contract quantity, is based on their annual demands, but in some cases it also has a load factor component in that the customer may be asked to supply slightly higher in the winter and lesser amount in the summer because Union balances those customers, their bundled-T contract does not have an annual plus or minus 4 provision with a physical carry over. 701 The northern contract, when it finishes at the end of the contract term, is a financial true-up. So if the customer is long in their banked gas account, then we purchase that gas from them. If they are short, then we sell gas to them, and it's based at the current WACOG. 702 It's a fundamental difference. In the south it's always been a physical issue that the customer is allowed a plus or minus 4 physical carry over, no true up, financially. The north has always been financial. 703 Because Union manages into this way financially, we will ask those customers in the springtime if it appears we've had a warm winter, to lower their DCQ, and then we will use the excess capacity to bring additional gas into the system. So they have to take more direction from us in terms of their supply and how it gets to the northern area than the southern customers do. Having storage facilities in the south enable the southern customers to always deliver the same every day and that's not there in the north. 704 MR. SCULLY: Okay. So you've sort of pre-solved this problem of whether the burden ends up with the sales customers or the contract customers because of the contract provisions in the north? 705 MS. VANDERPAELT: I wouldn't say it's pre-solved. This was the Centra service that when we were merged with a Centra company that existed and it hasn't been changed. The supply to the north is limited to routes that are on TCPL, and therefore, we have to have greater control over the supply going into that area and we end up telling them what they need to bring in at different dates so we exert much more control over those customers than we do over the south. So it wasn't a planning issue, it was just that's what we inherited and it works in that system because operationally it is much different. 706 MR. SCULLY: So if you've sort of fixed part of the problem in the bundled-T contract, do the customers in the north get treated differently when it comes to the allocation of the costs for the March park or is that just ignored in that process? 707 MR. KITCHEN: The March park is designed to provide a -- to provide essentially insurance and coverage for both bundled and sales-service customers and so it is allocated to all those customers and recovered in rates in that way. 708 MR. SCULLY: But is it allocated on exactly the same basis for the north and the south? 709 MR. ISHERWOOD: It's based on the same principles. For example, for the general-service rates, we look at the two standard deviation of weather variance, so it was the same methodology to arrive at the number. 710 MR. SCULLY: Did I miss something? Isn't there somewhat of a difference between how there is a balancing between sales and bundled-T customers in the northern region because of this difference in their delivery pattern? 711 MR. ISHERWOOD: I'm not sure I understand the question, sorry. 712 MR. SCULLY: It seems to me that there's some basis for treating the northern customers differently when it comes to the March park because part of the problem of having the costs end up with the wrong party got solved in the bundled-T part of the equation yet they get treated exactly the same. 713 MR. ISHERWOOD: I think the bundled-T part of the proposal really addresses a November through end of February time frame. For the March park, it's addressing only the month of March, so I think we're consistent in terms of applying that to the north bundled-T and north sales customers. 714 MR. SCULLY: Thank you. Those are my questions. 715 MR. SOMMERVILLE: Thank you, Mr. Scully. 716 Mr. Dingwall. We will take our break around 12:30. Do you want to start? 717 MR. DINGWALL: Well, I'm estimating myself to be somewhere between 45 minutes to an hour. I'd expect it to be kind of following the traditional order, sometime after Kitchener, CEED and the two schools of thought. And given that, my friend Mr. MacIntosh, my client, is in the midst of actually photocopying a document that I would be making reference to so I'm wondering if it might be easier to take the break now, or if the panel wishes I could go ahead with a few questions, but I'm flexible either way. Or we could move on and take door number 3. 718 MS. YOUNG: Valerie Young for OAPP, and I just have a two or three questions so I'm happy to go ahead with those now if you like. 719 MR. SOMMERVILLE: Thank you, Ms. Young. 720 CROSS-EXAMINATION BY MS YOUNG: 721 MS. YOUNG: Just to follow up on the proposed March park. That deferral account, is it -- is the proposal to have it cover just price variance, just volume variance or the absolute dollar variance? 722 MR. ISHERWOOD: The actual volume we are proposing, it would be fixed at the 5.2 petaJoules, so it would really cover the price risk or the price variance. 723 MS. YOUNG: So only the price variance? 724 MR. ISHERWOOD: Yes, the volume is fixed. 725 MS. YOUNG: And to whom would the balance be allocated if there is a balance in the account? 726 MR. KITCHEN: It would be allocated on the same basis as it is included in rates. 727 MS. YOUNG: So it would be -- if I turn up the schedule that's in Exhibit H.1, tab 4, page 16. 728 MR. KITCHEN: Yes, that's correct. 729 MS. YOUNG: That would follow -- 730 MR. KITCHEN: It would be also -- the allocation appears at H.3, tab 1, schedule 4. 731 MS. YOUNG: Thanks very much. 732 This morning, Mr. Thompson was talking about what happens at the February 28th checkpoint if a customer -- if it's determined that a customer has to make -- say 100 units available to come back to their forecast balancing position, and you talked about three options for doing that. I think one of them was an inventory transfer and -- there were three of them anyway. Is there not a fourth whereby the customer, if they had the capability to do so, could reduce their consumption? 733 MS. VANDERPAELT: For those customers who have selected the customer-managed option where they're trying to meet a target of their own choosing, yes, that's always an option. For the customers that have selected the Union-managed option where we've given them, you need to deliver 100 by this date, the test is whether or not they delivered the 100 so changing their consumption wouldn't matter on that group. 734 MS. YOUNG: Sorry, can you help -- I don't quite follow. Would you try that again? 735 MS. VANDERPAELT: Yes. The Union-managed option is developed for the highly heat sensitive residential market. So to be blunt, we probably don't see an ability for them to change their consumption, sort of, in the last two weeks of February. 736 For planning purposes we need to know that they're going to meet their checkpoint so we will give them a number under that option of what they have to bring in in order to meet their forecast position. As long as they meet that number, everything will be fine, but that will be the test as to whether or not if we said to bring in a 100 they brought in 100. If after the fact the number was different in either direction, that was the risk that Union took in giving them a number to deliver. 737 MS. YOUNG: Is it possible, though, for a contract customer to -- presumably they could elect the Union-determined option? 738 MS. VANDERPAELT: The contract customer has a choice which they would elect at the beginning of their contract and they can change their election each year. If they chose the Union-managed option they would be subject to the same parameters as anybody else, that we would set out a number and the system is designed that the pass/fail test is whether or not they delivered that number. However if they chose the customer-managed option, I would agree that reducing consumption is one method that would be in their bag of tricks in order to get their projected forecast balance. 739 MS. YOUNG: Thanks very much. 740 Those are all my questions. 741 MR. SOMMERVILLE: We'll stand adjourned until 2:00. 742 --- Luncheon recess taken at 12:20 p.m. 743 --- On resuming at 2:06 p.m. 744 MR. SOMMERVILLE: Thank you, please be seated. 745 PRELIMINARY MATTERS: 746 MR. PENNY: Mr. Chairman, before we carry on, the preliminary matter is that the letter I spoke of earlier that confirms the agreement reached with LPMA, IGUA, and VECC about the deferral account restructuring was finalized. As I said, the draft was approved by all three and so that is now out. 747 MR. SOMMERVILLE: Thank you, Mr. Penny. 748 Are there any other preliminary matters? 749 From a scheduling point of view, my understanding is that we would expect this panel to hold over probably until tomorrow. We would also expect the lines of business panel to proceed tomorrow, but would probably -- defer is probably the wrong word, but not anticipate, not plan for, and not require the attendance of the rate design panel until Monday. 750 MR. PENNY: Yes. 751 MR. SOMMERVILLE: I guess the other issue would be the question of argument. Skipping over intervenor evidence and so on, to the point of argument, do we have a sense -- I know, Mr. Penny, it's your practice typically to argue in chief orally. 752 MR. PENNY: Yes. 753 MR. SOMMERVILLE: Do you have a time frame in which you would prefer to do that? Well, the original -- it was originally contemplated to try to do it on the Friday. Because of the roll back, I think that might be a bit tight, but I can certainly do it on the Monday. 754 MR. SOMMERVILLE: The only difficulty that that would raise is that my colleague, Mr. Birchenough, has an unalterable commitment for Monday. It was acceptable to the parties for Mr. Birchenough to receive your argument through the transcript, and not be personally present for the presentation of your oral argument, we could proceed on the Monday, but otherwise, that would be problematic. 755 MR. PENNY: Perhaps we could consider that and get back. 756 MR. SOMMERVILLE: Without further ado, Mr. Brett. 757 MR. BRETT: Thank you, Mr. Chairman, Mr. Birchenough, I thank my colleagues for going ahead, I have a reasonably brief cross-examination. It will be no longer than my half-hour estimate perhaps a bit shorter. 758 MR. SOMMERVILLE: Thank you. 759 UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN 760 S.VANDERPAELT; Previously Sworn. 761 M.ISHERWOOD; Previously sworn. 762 M.KITCHEN; Previously affirmed. 763 CROSS-EXAMINATION BY MR. BRETT: 764 MR. BRETT: Thank you. Good afternoon, panel. 765 Would you turn up H.1, tab 4, page 3 of 5, please, that's the supplemental evidence that you attached to the main piece of evidence, it's a five-page piece of evidence that considers some alternatives to the one that you ultimately proposed. 766 MR. KITCHEN: What page was that, Mr. Brett? 767 MR. BRETT: It's H.1, tab 4, page 3 supplemental. 768 Do you have that all right? 769 MS. VANDERPAELT: Yes, we do. 770 MR. BRETT: Okay. I wanted to ask you, with respect to your positive rails option that you looked at, I take it that the principal characteristic of that proposal or that option is that the direct purchaser always maintains a positive -- effectively a positive inventory position or a positive storage balance? 771 MS. VANDERPAELT: That's correct. 772 MR. BRETT: So they're never drafting a system under that proposal? 773 MS. VANDERPAELT: No. Typically, a positive rails, I believe we looked at a monthly check, so there might be the minor variations day to day in the month, but the overall assumption could be that they are positive all the time. 774 MR. BRETT: There's not a lot of detail here and I'm not suggesting there should be, but is the notion that they would have to be positive in every single day, or is the idea that there could be small variations around an obligation to be positive each month, for example? 775 MS. VANDERPAELT: The notion would be at the end of each month they were positive, so they may have minor variations day-to-day within the month, but at the end of each month they would show up being above zero. 776 MR. BRETT: And the variations during the month that they might have, those would be filled in by your gas? 777 MS. VANDERPAELT: That's right they would be very minor differences between their supply and their consumption on that day, so we would anticipate that because they had to be positive by the end of the month, they would make arrangements to continually be bringing in gas in order to hit that target at the end of the month. 778 MR. BRETT: Right, and I think you said as a practical matter in your evidence that most customers, meaning most heating load-type direct-purchase customers with reasonably modest load factors would have to have an April 1 start date or something close to that to make that work? 779 MS. VANDERPAELT: That's correct. 780 MR. BRETT: I guess someone who had a 95 percent load factor, a large process customer, could have any start date, I suppose, and make it work, but for a lot of the direct-purchase customers, it would have to be an April 1 start date? 781 MS. VANDERPAELT: That would make it easier because they would have built up inventory through the summer, so the risk of them dropping to a negative position would be much reduced. 782 MR. BRETT: You mention in here, over the page on page 4, after talking about the April 1 start date, you say that it would require -- about the middle of that paragraph first paragraph: "It..." meaning this option "...would require Union to dispose of its current load-balancing inventory." 783 Now, I take it that part of its load balancing inventory, well, it would be -- that item that's identified in your rate-base material as just that, load-balancing gas? 784 MS. VANDERPAELT: That's correct. The inventory that we currently hold, I believe it's approximately 28 Bcf in order to manage those drafts through the winter, if customers remain positive all the time we would not need to hold that inventory. 785 MR. BRETT: And that, as I recall from looking at your Exhibit F, and I don't think you need to turn this up, but I have a number of about 130 million for that in the test year. 786 MS. VANDERPAELT: Is that a dollar amount? 787 MR. BRETT: Yes. 788 MR. KITCHEN: That's reasonably correct, yes. 789 MR. BRETT: Okay. Now, that gas that we're speaking of there, that is just the gas required under the current regime to balance the direct purchasers, that's not the gas that you use to, as it were, balance your own system gas? That's a separate category; is that right? 790 MS. VANDERPAELT: That's correct. 791 MR. BRETT: So when you say you would have to sell that particular gas, you're saying that you would have to sell, if you were to adopt this sort of proposal, $130 million worth of gas? 792 MS. VANDERPAELT: What we are indicating is we would no longer have a need to hold that gas, so that we would have to dispose of it, it would not make sense to hold it. 793 MR. BRETT: And if you were to do that, as I understand it, am I right in thinking that your rate base would drop by that amount? 794 MR. KITCHEN: Just a second. 795 MS. VANDERPAELT: That's correct, the working capital would drop and my colleague Mr. Kitchen added one point. For some of the customers to move to an April 1 start date, it might actually be those customers who we would have to sell the gas to in order for them to start at that position because we've held -- 796 MR. BRETT: Because of the transitional issue? 797 MS. VANDERPAELT: That's right. 798 MR. BRETT: Now, the other point you were making, I just want to go through these points one by one for a moment, you say this option is an inefficient use of storage. Could you just elaborate a bit on that? Am I right in thinking that effectively the storage that -- first of all, as I understand the proposal, or the option, the overall use of storage wouldn't change, it would be that rather than you using the storage for your balancing gas, this collectivity of direct purchasers would be using that storage; is that roughly right? 799 MS. VANDERPAELT: It may be that they would actually use more storage because the 28 Bcf we hold is a result of the diversity of contracts that come due at different times throughout the year, so we have 12 months worth of contracts all with different balances that result in a February 28th requirement for inventory that Union holds as load balancing. Once you move everyone to an April 1st date and all of them staying positive, I would actually expect that number to go up. And what we were getting at there with the inefficiency is that through the diversity of the contracts renewing at different times, we're able to reduce everybody's costs by recognizing that people have contracts at different points and we only need to hold 28 Bcf of inventory. 800 Once you move everybody to one side of the curve, you are no longer having the same efficient use of the diversity of the pool. 801 MR. BRETT: If you look at -- well, just further to that, I guess for a moment, you have, at the moment -- I'm looking at J.23.14, I don't know whether you need to turn this up, it's an interrogatory of my client, but it just simply asks you to list by volume and by number of contract the direct purchase -- the termination dates of the contracts by month throughout the year, and there's a total volume shown here of 522,000 gigaJoules, it looks like, that's a DCQ. So that would be the daily supply obligation; right? 802 MS. VANDERPAELT: That would be their daily contract quantity, yes. 803 MR. BRETT: And it looks like about 60 percent of that is expiring on November 1st or October 31st under the current -- as things now stand. And then the balance is sort of spread throughout the year with a fair amount ending in September -- I'm going by volume now -- well, it's -- September and July and then lesser amounts throughout the rest of the year; right? 804 MS. VANDERPAELT: By volume, it's 60 percent, by number of contracts, it's 35 percent of our contracts that expire in November. 805 MR. BRETT: Okay. I'll get to the numbers in a sec. So volumetrically just getting back to your point about the inefficiency, you're saying that if -- the question is, have you got some measurement that you put around that? In other words, given the circumstance today, the $130 million worth of balancing gas that corresponds with this profile of contract expires by volume, and volume I take it is the significant issue with respect to storage volumes; correct? It doesn't matter whether they're 5 or 10. 806 MS. VANDERPAELT: It's the difference between the consumption and demand, yeah. 807 MR. BRETT: What would the additional storage space roughly be? Could you give an estimate of that or -- 808 MS. VANDERPAELT: We don't have that calculation. 809 MR. BRETT: Would you be able to do that without too much difficulty, at least a high level sort of estimate? I'm not really looking for a fine point here, this is just an order of -- I'd like to know whether it's 10 percent, 15 percent, 20 percent or a doubling, that sort of thing. Can you give us that? 810 MS. VANDERPAELT: You're looking at the aggregate of the system not on a per class basis? 811 MR. BRETT: No, the aggregate of the system. 812 MS. VANDERPAELT: We're not sure. What we'd have to do is simulate all those contracts back to April, and we're not sure quite how we would do that. We have the demands by month, we have the DCQs, but it's a matter of trying to infer them to an April 1 start date. 813 MR. BRETT: Would you like to think about it a little bit and I could raise it with Mr. Kitchen when he comes back next week? 814 MS. VANDERPAELT: Yeah, that would allow us to check with the people that would do this work. 815 MR. BRETT: That might be practical, I'm not trying to push you into doing something. 816 MS. VANDERPAELT: We're not just sure that they can, and unfortunately, it's not our area, but we can make a phone call and check what is involved. 817 MR. KITCHEN: I'll have the definitive answer then. 818 MR. SOMMERVILLE: Sorry, I didn't hear you Mr. Kitchen. 819 MR. KITCHEN: I said I would have the definitive answer at that point. 820 MR. SOMMERVILLE: Thank you. 821 MR. BRETT: And the other point you make is that -- two other points. One you say it would be like a T-service, existing T-service, which would require greater administration by customers than the existing -- than what we have now or than what you're proposing. And I take it that under the T1 service, there is effectively a daily balancing requirement and that's what you are referring to there? 822 MS. VANDERPAELT: Yes on a T-service customer, every day the difference between consumption and demand falls to storage and there is some activity that they look at each week in relation to that. 823 MR. BRETT: And that activity, is it a weekly -- so it's a weekly obligation rather than a daily? 824 MS. VANDERPAELT: If on any day they fell below their -- most of them manage it in a sense on a weekly basis to a monthly basis, but in reality if they ever fell below their storage on a day they would have to deal with it immediately, so they have to stay on top of it. 825 MR. BRETT: The next point you make is that it would require that it's inefficient from administrative terms. That is to say if everyone were to have to accommodate this proposal or this option, if everyone had switched to an April 1 start, each direct purchaser, if they were all on an April 1 starts, you are saying it would be inefficient administratively. Are you saying that's from Union's point of view? First of all, is that a Union administrative problem there? 826 MS. VANDERPAELT: Yes, that was from Union's point of view. Having 1500 contracts all being issued for the same time period would be extremely difficult. 827 MR. BRETT: Whereas in this you can at least spread them out at least to some degree over the year. 828 MS. VANDERPAELT: Exactly. 829 MR. BRETT: All right. Now, this option that was raised in discussions, did you -- is this an option that was raised because you discovered this was a practice in use elsewhere? I know you had some -- you had some consultations with elements of the industry around this and you filed substantial materials, is this something that an industry spokesperson or a part of the industry suggested to you or you had seen it done elsewhere, or it's simply an option that you had conceived as one array of options to put forward? 830 MS. VANDERPAELT: It's one option we thought about. It is also a common option primarily in the United States where they have a monthly obligation to stay above zero. But I would say it was a combination of customers brainstorming, us recognizing that April contracts would not have a requirement to draft the system, so a bit of a blend. 831 MR. BRETT: So in a sense, it's a natural option to think about because the initial problem that caused all of this in part was the drafting of the system. 832 MS. VANDERPAELT: Definitely. 833 MR. BRETT: And I take it that your sense is, at least from your consultations, that -- well me ask you straight out. Can you characterize the sort of response that you got at the end of the day from the various components of the industry that you talked to? Was there much interest, little interest? I take it from the fact that you can -- this is rhetorical, I take it from the fact that you proposed another option that you had concluded that the balance of industry opinion preferred the option you proposed relative to this particular option; is that correct? 834 MS. VANDERPAELT: That's correct. 835 MR. BRETT: But were there people among the industry group that you consulted that liked this option, the second option? 836 MS. VANDERPAELT: There are customers who didn't mind an April 1st, but as a group they felt some of the other ones had more merit to them as a proposal to go forward as a standard. 837 MR. BRETT: Now, my -- the -- I'd like to ask you another general question. Is the March park proposal and your proposal for revision to the two point load balancing, are they inextricably merged or are they independent of one another? 838 MR. ISHERWOOD: They could be independent of one another but they certainly complement each other. 839 MR. BRETT: I suppose if you didn't have the February 28th date as a part of your new proposal or a date comparable to that, it could change the nature of the March park somewhat. 840 MR. ISHERWOOD: March park could stay as it is, you're still protecting March as a stand-alone month. So you could essentially leave March alone but you'd be missing the whole front part of winter protection which is the balance of the load-balancing proposal. 841 MR. BRETT: And I take it with this other proposal, the rails proposal that we've been discussing, you would still -- if I have this -- if my understanding is right you would still have the necessity for the March park or not? I shouldn't put it that way, because my understanding of the interaction of those isn't really sophisticated enough. 842 I guess my question would be: If you went to this always positive balance proposal which you've discussed as the rails proposal, would the requirement for the March park follow it? 843 MR. ISHERWOOD: I think if you went to the rails proposal it would be forcing customers into buying spot gas in March rather than doing a March park. 844 MR. BRETT: Right. So the answer is you wouldn't need the March park. 845 MR. ISHERWOOD: It would be replaced by spot gas. 846 MR. BRETT: You wouldn't need the March park. 847 MR. ISHERWOOD: I haven't thought it through entirely, but you could probably still do a March park option around it. But I think the general case would be no, you would just go with rails and buy spot gas. 848 MR. BRETT: Thank you. Those are my questions, Mr. Chairman. 849 MR. SOMMERVILLE: Thank you, Mr. Brett. 850 Mr. Dingwall. 851 MR. DINGWALL: Thank you, Mr. Chairman. 852 CROSS-EXAMINATION BY MR. DINGWALL: 853 MR. DINGWALL: Good afternoon, panel, my name is Brian Dingwall and I'm here on behalf of Energy Probe. 854 Since we're all looking forward to the month of March, let's start there. Does the risk management activity of the utility as it goes forward, or the use of the weather hedges, have any effect on the forecasted need for the March park service? So if, in any decision on this case, the utility is told that it cannot perform risk management services or that it cannot use weather hedges, would that impact the utility's volumetric forecast or perceived need for the March park facility? 855 MR. ISHERWOOD: No. 856 MR. DINGWALL: Can you explain that? 857 MR. ISHERWOOD: The March park is really intended to protect against the volume variance for the month of March and the weather hedge and the risk management activities have nothing really to do with the volume variance created by weather or by the economy, so the March park is really designed to protect against those two potentials. 858 MR. DINGWALL: Now, I provided to the company before the break, and around the room in general, a document entitled "Facts Line" dated August 27th, 2003. This is a publication put forward by Union Gas, is it not? 859 MS. VANDERPAELT: Yes, it is. 860 MR. DINGWALL: Could we have that market as an exhibit, please. 861 MR. MORAN: Mr. Chair, this would be Exhibit M.17.2, document entitled "Facts Line" dated August 27th, 2003. 862 EXHIBIT NO. M.17.2: DOCUMENT ENTITLED, "FACTS LINE" DATED AUGUST 27TH, 2003 863 MR. DINGWALL: Before we get into the details, is it the intention of this document to be one of the educational pieces surrounding the load-balancing proposal? 864 MS. VANDERPAELT: It would be one of the beginning communications, yes. 865 MR. DINGWALL: Okay. With respect to page 3 of that document on the bottom left-hand side, there's the statement that this proposal would provide interruptible customers some freedom from interruption for inventory related concerns." 866 Could you explain that, please? 867 MS. VANDERPAELT: In the past winter, we had -- this goes to the March deliverability that we require so much inventory in the ground, we had interruptible customers needed to come off the system because we didn't have sufficient deliverability, we designed with interruptible customers off. 868 If the customer supplied the gas to us at Dawn or Parkway depending on our needs, they would be able to stay on because they were meeting their supply above ground. So with having the March park in place, and I believe my colleague expressed that that would be above-ground supplies, we've definitely reduced the risk of interruption due to deliverability issues. 869 MR. DINGWALL: Now, is this because of the timing around the load-balancing proposal and the certainty with respect to storage as a result of that? 870 MS. VANDERPAELT: That would be part of it. 871 MR. DINGWALL: Would another part of it be the March park and its availability? 872 MS. VANDERPAELT: Yes. 873 MR. DINGWALL: Is interruption tied specifically to low inventories are or are there other criteria which relate to that? 874 MS. VANDERPAELT: Interruptions can be caused for a variety of reasons on our system. This one is specifically related to that as a result of low inventory levels. 875 MR. DINGWALL: So is it your evidence then that with the load-balancing proposal on its own, that interruptible customers would no longer be interrupted for inventory-related concerns? 876 MS. VANDERPAELT: It's not that they would be no longer interrupted, the likelihood would go down, and I believe it's in concert with the March park as well as the load-balancing proposal. 877 MR. DINGWALL: The reason I asked the question specifically with respect to the load-balancing proposal is I was going to follow up and try to determine what portion of each might relate to that. So given that you suggest there's a correlation, what additional improvement would there be if you then factored in the March park? Would that be a complete relief from interruption for inventory related interns for interruptible customers? 878 MS. VANDERPAELT: We would never state that there's complete relief. Part of their contract is that they are interruptible and we need to ensure that that maintains as part of our operations in case those unexpected circumstances come out. What we were trying to point customers to on this communication was that the situation that they experienced last winter specifically, the likelihood of that would be reduced as a result. 879 MR. DINGWALL: Can you estimate or have you estimated by what factor that likelihood would be reduced? 880 MS. VANDERPAELT: No, we haven't. 881 MR. DINGWALL: Is that something you could do? 882 MS. VANDERPAELT: No, it would depend on the operations of that year. We'd look at last winter, if we had the March park and customers were at their forecast position, we would have been able to avoid the interruption in that year. It could be a different story depending on the weather, the scenario, the inventory balances year to year. 883 MR. DINGWALL: Well, it really all relates back to the inventory balances and their availability, does it not? 884 MS. VANDERPAELT: And the weather risk that we're experiencing at the time. 885 MR. ISHERWOOD: I also add system equipment as well, compressor operation and that type of thing, so a lot of factors go into determining if interruption should happen or not and not only system inventory but also equipment operation, customer operation, there's many, many factors that go into it. 886 MR. DINGWALL: I'm trying to find some way to get an understanding of how you've changed things from having interruptible customers, having the need to have interruptible customers for flexibility purposes to the August 27 statement that these customers would now have freedom from inventory-related interruptions. Can you give me a bit more information about what you intended on saying when you said as a company freedom from inventory-related interruptions? 887 MS. VANDERPAELT: What we were trying to communicate to customers is the situation they experienced last winter, the likelihood of that occurring and them having to deliver at another end on our system in order to stay on would be reduced if their inventory levels were at the forecast price at the end of February and the March park was in place. 888 MR. DINGWALL: So then your statement, if I can understand it correctly, is that with the bandwidth that you were talking about being last winter's winter, and storage inventories being at a particularly identifiable level, and having the facility of the March park, there would be no need for interruptions; is that correct? 889 MS. VANDERPAELT: In the situation we experienced specifically last winter, we felt we would have been able to overcome that. 890 MR. DINGWALL: Is there a way that you can numerically portray that so that you can show what that presumes from a weather perspective and what that presumes from an inventory perspective? 891 MS. VANDERPAELT: I don't believe we can model that. Mr. Sherwood was trying to suggest that there's other reasons and other factors that play into the interruption. We were able to look back at last winter and we know that we had deliverability issues from storage. We know that that was the primary concern. We have to factor in the other parts on the system in a certain weather forecast that happened then. If you change any one of those factors, it changes the scenario. If you change them both you end up with multiple runs or scenarios that you could develop, so I'm not sure how we would model that. 892 MR. DINGWALL: Well, I'm not asking you to model the variables, what I'm asking is if you can, based on the specifics of last winter, which your evidence has been, had those occurred or should those recur, there would be no interruptions, if you can quantify what that means in terms of storage levels and in terms of the weather bandwidth under which that absence of interruption would occur, not taking into account any of the other compressor-related deliverability issues just simply the weather and inventory issues. 893 MR. ISHERWOOD: You can't ignore the other operating considerations. So in order to design the situation last winter, you have to define every operating characteristic of the system on those individual days, which would be a monumental task to do that. There is many, many factors that impact operation and deliverability and storage levels is but one. 894 MR. DINGWALL: Well, let me take you back to your answer a minute ago, a couple of minutes ago. The statement that you made in this August 27th communication was that if the conditions that occurred last winter recurred, there would be no need to interrupt interruptible customers. 895 MS. VANDERPAELT: Reduced need. 896 MR. SOMMERVILLE: That's not -- it says reduce the chances. The heading is "Freedom from Inventory-Related Interruptions" but the text says "should reduce the chances." 897 MR. DINGWALL: What I'm trying to understand is how if those conditions recurred, that reduction could be identified and quantified. So I'm trying to give you the fixed set of numbers that you've identified and that you've indicated there would be a reduction for and ask you to identify what that level of reduction would be. 898 MR. ISHERWOOD: The answer is really meaningless because as soon as you change one more parameter you're back into interruptions. So you may have defined it relative to one or two parameters, but there's 300 other parameters that you're not considering. 899 MR. DINGWALL: Well, I'd like to ask one question on any given day to give Mr. Penny the option to say that's another panel and this may be the one. Given that you've made the statement that there's a significant potential as a result of these programs that you're proposing that there may be a reduction to interruptability, has the company forecast that and looked at it from a cost allocation perspective that I can then ask the subsequent panel on? 900 MS. VANDERPAELT: No, we haven't. 901 MR. DINGWALL: Does that, then, Mr. Penny move me to the other panel for that question? 902 MR. PENNY: This is the panel to ask that question of, and if they don't know, then they don't know. It's not rates and cost allocation. 903 MR. DINGWALL: What are the current criteria in terms of inventory for choosing when and if to interrupt interruptible customers? 904 MR. ISHERWOOD: It's much more complicated than that, it even goes down to the individual pool level. For example, the interrupted customers, part of the reason last year to was to move them from low-deliverability pools to high-deliverability pools. So we actually interrupted customers to move the same volume of gas into other pools to get the push we needed during the week, so we used to weekend to move some gas around. So it's very complicated, it's not as simple as looking at one inventory level for the whole system and saying interrupt or not interrupt, it goes way beyond that. 905 MR. DINGWALL: So you've mentioned -- well, let's see how much of our time we need to take up with this today. Is this set out in a policy or procedural or operational document within the company? 906 MR. ISHERWOOD: No, it's not. 907 MS. VANDERPAELT: If I add, in a customer's contract who is interruptible, it states that the customer is interruptible at Union's sole discretion for X number of days and it's purely based on what our operational needs are. They change day-to-day year-to-year, there is no way of putting together all the circumstances that would cause an interruption, and that's why it's stated that you have a lower rate because Union has the opportunity to interrupt you if it needs to for operational reasons. 908 MR. ISHERWOOD: I think it's safe to say, maybe to bring some closure here, last winter we interrupted, and I'm going from memory here and I may be slightly off, but I think it was around 13 days which was driven entirely by deliverability-type issues. So I think what this Enerline is suggesting is had we had this process in place we could have avoided most of those days, but we're not suggesting that we can eliminate every day. 909 MR. DINGWALL: Does the company have historical annual and volumetric records of when interruptions have taken place and for what duration? 910 MR. ISHERWOOD: We have it going back for a few years, yes. 911 MR. DINGWALL: Now, you mentioned that interruptions can be for the reason of keeping supply moving in a particular pool. Do the records identify which of the interruptions were for general system purposes or for keeping one pool more fluid than another? 912 MR. ISHERWOOD: The records would indicate the dates and times of the interruptions, the volume that was interrupted, and for the duration. It wouldn't be tied back to the actual operation of those days, not that I'm aware of, anyway. 913 MR. DINGWALL: But in making those decisions, you make them for the basis of a number of different reasons, do you not? 914 MR. ISHERWOOD: Yes, the capacity management group is the group that would evaluate the system operation from day-to-day and they would be the group that would be recommending and calling interruptions. 915 MR. DINGWALL: So at this point in time Union has absolute discretion as to who in what part of the province that are interruptible customers they interrupt and for what reasons; is that correct? 916 MR. ISHERWOOD: That's correct. 917 MR. DINGWALL: And under the current contracts that Union has with those customers, the interruptions are in Union's absolute discretion and there's no obligation to account to the customers for the reason for those interruptions; is that correct? 918 MS. VANDERPAELT: That's correct. For that, they get a lower rate. We also communicate to the customers with as much advanced notice as we can to tell them the interruption is coming and to explain why we need to interrupt. For example, in this last winter we explained that we had deliverability issues. So when customers said, is there any way that I can stay on, we knew the solution was to bring in gas. 919 MR. DINGWALL: Is there an economic decision associated with interruption? Does the company choose when to interrupt a customer based on the cost of bringing in additional spot gas or is it solely based around system controls? 920 MR. ISHERWOOD: We don't know the answer to that question. It's really done through our capacity management group. 921 MR. DINGWALL: Well, this is the panel for the operation of the March park; correct? 922 MR. ISHERWOOD: It's the panel to explain the March park, yes. 923 MR. DINGWALL: So how will the costs associated with March park be used to determine whether or not that facility is used to offset interruption? 924 MR. ISHERWOOD: The economic analysis on the March park was really comparing the cost of the March park compared to buying spot gas in March and the volatility involved with that. 925 MR. DINGWALL: Now, did I hear correctly a couple of minutes ago that last winter at some point, the company chose rather than interrupt some customers to bring more spot gas on system; is that correct? 926 MS. VANDERPAELT: No, we told the customers they would have to bring in additional supply. 927 MR. DINGWALL: So you placed the obligation on the customer and then interrupted them from your perspective. 928 MS. VANDERPAELT: No, we interrupted them for operational reasons. The customers requested to stay on, and the own manner in which they could is if they brought in additional supply in order to meet their needs over that time period because we didn't have enough inventory. 929 MR. DINGWALL: So would gas that is available under the March park be used for interruptible customers? 930 MR. ISHERWOOD: The March park as identified in the Enerline would have a secondary benefit. By providing deliverability above the ground it would provide a secondary benefit of potentially reducing the number of days of interruption from industrial customers. 931 MR. DINGWALL: So if there was an absence of all the other -- if there was by virtue of the volumes associated with the March park an ability for the company to use the March park to avoid interruption, is it then your evidence that the company would do so? 932 MR. ISHERWOOD: I think the main driver for the March park again is to avoid the retroactivity and the volatility around March pricing. I'll come back to it again that the impact on interruption is really a secondary benefit, it's not one of the drivers that we're looking at but it certainly would be an impact of the March park. By having the deliverability available in March it would reduce the number of days interruption due to deliverability reasons. 933 MR. DINGWALL: So how will costs associated with the March park be visited upon the interruptible classes? 934 MR. KITCHEN: The March park volumes were determined on the basis of each rate class, including M5 which is an interruptible rate class in the south, and those costs were included in the rate design for that rate class, but they will be recovered through the delivery rates of the cost allocated to interruptible rate classes would be recovered through the delivery rates. 935 MR. DINGWALL: Sounds like we're moving on to a question that's more for cost allocation and rate design; is that -- a question subsequent in that line be correct? 936 MR. KITCHEN: Well, you may want to try it here and then I'll tell you if I need Mr. McMahon to help me with that. 937 MR. DINGWALL: Okay. 938 MR. PENNY: I think the idea is that the cost associated with the load-balancing March park proposal we would deal with today, if at all possible, because Mr. Kitchen is here. 939 MR. SOMMERVILLE: You had a question, Mr. Dingwall? 940 MR. DINGWALL: Certainly. Does the company intend on tracking when, absent the use of March park, there would otherwise have been interruptions and then identifying the volumes associated with the use of the March park in mitigating that specific circumstance? 941 MR. KITCHEN: No, we do not. 942 MR. DINGWALL: Do you have the ability to track that? 943 MR. KITCHEN: I don't believe we do, but I'm not really sure. 944 MR. DINGWALL: Could I ask for your undertaking to determine whether or not you have the ability to do that and let me know, please? 945 MR. KITCHEN: I think to do that, you'd have to know how much interruption you would need if the March park was in place or not, and I think Mr. Isherwood has said that there's a number of factors that impact interruption and March park is just one of those factors. So I think it would be a hypothetical you would be trying to track. 946 MR. DINGWALL: Well, the March park is a facility that you would be calling upon because it's gas delivered in the delivery zone; correct? 947 MR. ISHERWOOD: It would be available every day during March. 948 MR. DINGWALL: Right, it's a physical transaction. 949 MR. ISHERWOOD: That's correct. 950 MR. DINGWALL: And because it's something analogous to a certain extent to an option, it's not gas that you've committed to using until you decide you're going to use it; is that not correct? 951 MR. ISHERWOOD: No, that's incorrect. It's not an option. It's absolutely there every day of the year -- every day of March, sorry. So it is physically there every day in March. It's not optional. It would be showing up every day in March. 952 MR. DINGWALL: Well, it's an insurance policy then, to use a term that you mentioned earlier? 953 MR. ISHERWOOD: It's an insurance policy against being exposed to higher volatile prices in the month of March. 954 MR. DINGWALL: So the intention would be to use gas under the March park facility in lieu of buying spot gas; correct? 955 MR. ISHERWOOD: That's correct. 956 MR. DINGWALL: Does the company currently buy spot gas to offset or instead of interrupting interruptible customers? 957 MR. ISHERWOOD: We don't know the answer to that question. 958 MR. DINGWALL: Is there a way that you could find that out? 959 MR. ISHERWOOD: Yes. 960 MR. DINGWALL: Could I ask you then to do that through an undertaking, please? 961 MR. ISHERWOOD: Sure. 962 MR. MORAN: Mr. Chair, Undertaking N.17.4, to advise whether Union purchases spot gas to avoid interrupting interruptible customers. 963 UNDERTAKING NO. N.17.4: TO ADVISE WHETHER UNION PURCHASES SPOT GAS TO AVOID INTERRUPTING INTERRUPTIBLE CUSTOMERS, AND IF SO, IF THEY CAN DETERMINE WHAT VOLUMES WERE OVER THE LAST COUPLE OF YEARS' VOLUMES AND COSTS 964 MR. DINGWALL: To embellish that undertaking, if you're able to determine whether or not you do, could you provide some indication of volumes associated for the past couple of years? 965 MR. SOMMERVILLE: In this, Mr. Dingwall, there was an answer from Ms. VanDerPaelt, I think, to the effect that an interruptible customer may elect to purchase gas in order to become un -- to deinterrupt -- uninterrupt their supply. The figures that you're looking for, would they include that incident or are you looking for something that predates that decision by the interruptible customer? Do you understand my point? 966 MR. DINGWALL: I do, sir. And my understanding and Ms. VanDerPaelt can correct me if I'm wrong, is that if a customer chooses to purchase their own commodity, Union Gas will not be providing commodity to that interruptible person, it will be through either self-supply or direct purchase, so it wouldn't show up as system gas. 967 MS. VANDERPAELT: That's right it would not show up as a spot supply that we purchased in order for them to avoid interruption. 968 MR. SOMMERVILLE: Just so that we're clear about what's included in the undertaking. 969 MR. PENNY: So this is whether Union purchases spot to avoid interrupting customers, and if so, if we can determine what volumes were over the last, what did you say, couple of years? 970 MR. DINGWALL: Couple of years' volumes and costs. 971 Moving on to more general matters with respect to the March park, I believe this morning there was some evidence to the effect that it would be over the ensuing months, summer months at some point, that spot gas would be purchased to repay the gas loan which is the March park; is that correct? 972 MR. ISHERWOOD: That's correct. 973 MR. DINGWALL: And is there a fixed time period associated with determining what those months are, or is that part of the negotiation that the company would enter into? 974 MR. ISHERWOOD: From a system sales point of view, the gas has to be purchased before October 31, so they can enter next winter full of gas. From a direct-purchase customers' point of view, they'd have to purchase the gas before the contract expiry in order to balance their VGA balance. 975 MR. DINGWALL: Now, by mentioning those two examples, I take it you're referring to whether or not a direct-purchase customer uses gas under the March park facility or whether a system in system management, that's occurring? 976 MR. ISHERWOOD: That's correct. 977 MR. DINGWALL: So taking that a step further, the March park service is something you're going to make available to the direct purchase community? 978 MR. ISHERWOOD: The March park volume calculation was intended to protect bundled customers in the north and the south and the sales-service customers in the north and the south as well. 979 MR. DINGWALL: So with respect to a direct-purchase customer accessing that, would there be a fee associated with that? 980 MR. ISHERWOOD: The fee is basically the upfront cost of the March park which would be built into delivery rates. 981 MR. DINGWALL: So direct purchase suppliers would not specifically, as part of their commodity transactions, have the ability to access this service and it would be paid for by the customers through their delivery rates. 982 MR. ISHERWOOD: Yeah, in essence, what's happening is we're putting into delivery rates the cost of the March park; whereas, in past years we would have put in delivery rates the cost of the March spot gas we bought because it went through the load-balancing calculations. 983 MS. VANDERPAELT: Maybe to help the understanding, the customers on the direct purchase based on our proposal need to balance back to their forecast for the end of February. Those direct-purchase customers then don't have another requirement until either their contract renewal date or the September 30th checkpoint. The March park is there for Union to manage the operation of the system and it's there so that we can handle the weather variances for all customers between forecast and March actual weather. So it's not a service that somebody accesses, it's part of the portfolio we use to manage our operations. 984 MR. DINGWALL: So once a marketer has brought their customers into line with forecast on February 28th, the March park is used by Union solely for the purpose of balancing system and dealing with the variations between forecast and actual in the month of March. 985 MS. VANDERPAELT: And balancing the system in terms of the operational system, not system customers, yeah. 986 MR. DINGWALL: So while there's no cost implications to the marketers in their balancing fees or commodity transactions with the utility, there are also no accountabilities because they're not being asked to balance at the end of March or deal with other issues of that sort; is that correct? 987 MS. VANDERPAELT: Yes. When we designed the service, there was a couple of reasons why March 1 was important, deliverability we've already touched on, but the other issue we have is that if a customer didn't take action, Union needs time to take the action on their behalf or to manage the system. And so March is a month that we need to make sure we can cover everybody's weather and that we can manage the risks because that's the last month of winter, you're basically hitting the wall at that point. 988 So what we encourage for the customers is to come into balance at that point, and then we would manage the system for the colder weather in March if it occurred, and then after that they could true-up those differences, either at their next checkpoint or at their contract renewal. 989 MR. DINGWALL: Does whatever party that you've been negotiating this March park service with some, I guess, fixed date in mind as to when Union Gas would be completing its repayment of that service? 990 MR. ISHERWOOD: Yes, the evidence states that we would get the gas given to us, equal daily volumes, during the month of March, and we would repay it back to the third party, equal daily payments, during the month of May. 991 MR. DINGWALL: Then Union Gas is extending the repayment period for the direct-purchase community to a broader spectrum of dates which relate to the balancing requirements at the end of contract for those marketers; is that correct? 992 MR. ISHERWOOD: I would say once it's repaid in May through general inventory both the utility and the direct-purchase customers would have some flexibility in -- during the summer to make the final repayment. 993 MR. DINGWALL: So Union Gas would be making the initial repayment to the third party with whom you'd be contracting, and then Union Gas would be receiving from marketers through their broad balancing commitments the repayment specific to the volumes used that were allocated notionally to their customers. 994 MR. ISHERWOOD: I think I used the word through general inventory, and during the month of May we will have volumes flowing into the system that are both direct-purchase volumes as well as system volumes. So since the fact that in May you're definitely injecting gas into Dawn storage, it would be this general inventory which is really a mix of system supply and direct-purchase supply to repay that. 995 MR. DINGWALL: I guess, and correct me if I am wrong, your system planning would be effected, at least certainly for the month of May, depending on the volume of the March park that you chose to draw down; is that correct? 996 MR. ISHERWOOD: We will have to, by contract, pay back the March park in the month of May. So if you looked at our operation with or without the March park, our inventory at the end of May would be 5.2 petaJoules lower if we had the March park being repaid in the month of May, assuming that neither the direct-purchase customer or the system supplier, being Union, bought some spot for payment gas in May. 997 And typically I would expect some repayment to happen in May anyway, but if you assume none then there would be a 5.2 petaJoules difference. 998 MR. DINGWALL: If the March park was not drawn down at all there would be no obligation of repayment; is that correct? 999 MR. ISHERWOOD: That's correct. 1000 MR. DINGWALL: Okay. I believe you stated somewhat earlier that you would be contracting for the March park somewhere in the summer to fall of 2004; is that correct? 1001 MR. ISHERWOOD: That's correct. 1002 MR. DINGWALL: And at that the time that you would be contracting for it, you would be contracting either all at once or in various slices over the ensuing months depending on how you chose to do it; is that correct? 1003 MR. ISHERWOOD: That's correct. 1004 MR. DINGWALL: And these balances would be posted to a deferral account associated with system supply; is that correct? 1005 MR. ISHERWOOD: We have a proposed that any variances in the March park would be tracked in the spot gas account, which based on the load-balancing proposal, spot gas can still be allocated to both direct-purchase and sales service customers in terms of the north and south. 1006 MR. DINGWALL: And this account would be cleared how often? 1007 MR. ISHERWOOD: As part of the QRAM proposal, we're proposing that it gets cleared at each QRAM prospectively. 1008 MR. DINGWALL: So the costs associated with the March park would be cleared prior to March in October 1 and January 1; is that correct? 1009 MR. KITCHEN: In terms of the prospective recovery of the deferral accounts and how the March park would impact those, the way the actual accounting would work is the joint spot account would be credited the full revenue or the full cost that's built into delivery rates, and then once the actual costs of the March park were known, those costs would be debited to the deferral account and any difference would be rolled into the prospective recovery. And that would happen in the next -- in the year after you do that purchase. Because you wouldn't know -- you would have the -- you would only have -- you would have a net balance of zero sitting in the deferral account when you started your year and you wouldn't know what the difference was until you actually got the difference in cost, it was known, and that wouldn't be known until you actually purchased it. 1010 MR. DINGWALL: So that I can understand, the costs that you're referring to are -- have two elements, correct me if I am wrong, the first being the cost of acquiring the March park facility, which maybe we'll refer to as the insurance premium, and secondly the cost of repaying the gas; is that correct? 1011 MR. KITCHEN: No, it would just be the March park. 1012 MR. DINGWALL: Just the cost of acquiring the facility? 1013 MR. KITCHEN: That's correct. 1014 MR. DINGWALL: And at what point would you know then what the cost would be? 1015 MR. ISHERWOOD: The proposal is to put into rates an average cost of 1.60, so that would be the reference price, if you wish, for the actual deferral account. When the product is purchased in the summer of 2004, actual gas costs, my understanding of gas costs accounting, would not be attributed to the March park until actually the March to May time frame. 1016 MR. DINGWALL: So these costs would not go into the delivery rates until March? 1017 MR. ISHERWOOD: Into the deferral account. 1018 MR. KITCHEN: I think what we're really talking about here is the deferral account and the variance between what's built into rates, which is the $8.5 million proposed to be built into rates, and the actual cost of purchasing the March park. What will be in delivery rates, as the way it's been proposed, is $8.5 million roughly, and that would be credited to the deferral account since we will only be going out and collecting the difference through prospective recovery at the time that's known. 1019 MR. DINGWALL: So by the 8.5 going into delivery rates, that would then be, all things being equal and the Board being quick with a decision, for January 1, 2004 rates? 1020 MR. ISHERWOOD: That would be our proposal. 1021 MR. DINGWALL: And then 15 months after that, there would be a reconciliation of the 2004 rates from January to December with the actual 2005 costs for the March park? 1022 MR. ISHERWOOD: I think part of the issue here is the fact that 2004 will primarily be a transition year for the whole load-balancing initiative, including the March park. What we're asking the Board for in this hearing is approval of the March park concept. We recognize it's a fairly new concept it's not been thought about or talked about in the past and it's somewhat creative in its approach. We wanted to come to the Board to get approval of that in advance of actually having to actually go purchase it. So we recognize that 2004, those costs would be in rates and for the most part would be creating credits in the spot gas account, and it would not really be until 2005 when those same costs in rates or revenues in rates get allocated to the deferral account for 2005 that the costs in the March park for 2005 would be then debited against those credits. 1023 So what evolves out of this really is the fact that in 2004, we're asking for it to be included in rates although it's not really actually a gas cost until 2005. And again, it comes back to the fact that prior to us buying a March park next summer, we definitely want to know in advance if the Board is approving that concept. As well I would like to mention, I guess, that typically Union Gas has collected about $6 million in rates for load balancing. Our proposal for 2004 rates is to have zero dollars recovered for load balancing. So to the extent that we have any weather colder than normal next year, 2004 winter, there is no costs being recovered at all to cover off load balancing for the general-service and contract market. 1024 So the March park offers, I think, a creative way of also providing some offset to that potential as well. And to the extent that that colder weather doesn't happen, then just by the natural definition of the whole QRAM proposal, the spot gas account will be accumulating credits because of the March park and those credits would be refunded prospectively as they build up each quarter. 1025 MR. DINGWALL: Wouldn't there though be a consistent degree of retroactivity associated with the March park because you'd be paying for it in advance and then its implications wouldn't be known until 15 months after the customer started paying for it? 1026 MR. ISHERWOOD: Again, I think the QRAM proposal will make sure there's adjustments between actual costs and estimated costs on a quarterly basis. So unlike past years where we were actually looking at more annual-type costing, the new QRAM proposal is unique in that allows us to adjust costs on a quarterly basis, or at least adjust deferral accounts prospectively on a quarterly basis. 1027 MR. KITCHEN: Just one other thing on the QRAM is that the proposal ultimately, once you get moving along in it, is to actually include for prospective recovery an annual projection of the deferral account balance. So to the extent that you're always working on this rolling annual deferral account, you will always be ultimately reflecting an $8.5 million credit, I would think, and some sort of variance off of that in the deferral as you go forward. 1028 MR. DINGWALL: Given that this March park is effectively a physical commodity availability that the utility would have, is there a potential that any portion of this might be released to the storage and transportation group for dispersal into the marketplace under the shared savings or shared revenue mechanism? 1029 MR. ISHERWOOD: Any asset in the company is looked at continuously to see if extra value can be taken out of it and returned back to the shipper. So to the extent we had a very mild winter, then the March park would become an excess asset as would some storage and potentially some transportation asset, so it's just another asset that the capacity management group would be looking at. 1030 MR. DINGWALL: And any revenues associated with the March park, would they then go into the S&T account. 1031 MR. ISHERWOOD: To the extent that the March park was deemed to be an excess asset and there is some way to find value in that, that would be an S&T type transaction. I would caution, however, that if it's a very mild winter, then typically, trying to loan gas in the spring is a very low value proposition. There's no value to it. 1032 MR. DINGWALL: It's conceivable though that at some point within the month of March if you've got consistent daily availability, you may have some days upon which you need more and some days which you need less if you've got a variable winter; would that be a fair statement? 1033 MR. ISHERWOOD: I come back to my original point. If it's an excess asset on a daily or monthly basis and there is a way to find value to that, that is the whole function of the S&T group -- the capacity management group. 1034 MR. DINGWALL: So then would the revenues associated with the March park as an excess asset pass through unshared to the deferral account or would they go to the S&T account? 1035 MR. ISHERWOOD: I think an example I gave, it would go to the S&T account. 1036 MR. DINGWALL: So if these assets are excess, then there is no offset to the deferral account for ratepayers? 1037 MR. ISHERWOOD: The offset is through the S&T account, so the S&T account would -- through the S&T account sharing, the ratepayer gets 25 percent and the customer gets 75 percent -- sorry, the shareholder gets 25 percent, the customer gets 75 percent. 1038 MR. DINGWALL: If the company were directed as a result of any decision of the Board to specifically require that any revenues associated with the disbursal of excess March park assets go unshared back to the deferral account, would the company still proceed with this proposal? 1039 MR. ISHERWOOD: The only caution I would add is when you're looking at assets, in this case it would be deliverability and storage, it's going to be difficult to know where that asset came from, is it March park-related or is it other system assets available? And it could be a combination of both. Generally speaking, I think all the activity through the capacity management group has gone through the S&T account, at least to my knowledge it has. 1040 MR. DINGWALL: Well, would not your group track, in its operation of this, and the capacity management group in its allocation, what volumes were released on a frequent basis? 1041 MR. ISHERWOOD: I think if you're asking if my group does, I would say no. The capacity management group tracks all the assets use and excess and what is available and not available daily. 1042 MR. DINGWALL: Do you specifically know, sir, what the priority would be of assets to be released? Would it be March park first, storage second? 1043 MR. ISHERWOOD: Any asset that gets released is based on it being excess to the need of the system customers, and there is no priority that I know of. If there's transportation available it gets released, if it's storage it gets released, and looking at all assets on a continual basis. 1044 MR. DINGWALL: Time to move on. 1045 With respect to some general contracting issues, there was some questions earlier this morning with respect to the changeover from the general load-balancing rules that exist currently to the two-point balancing rules and that the company had effectively, correct me if I'm mischaracterizing this, but that the company had effectively given an indication to customers that they were terminating the old balancing method and implementing the new balancing method; is that a correct characterization? 1046 MS. VANDERPAELT: We were terminating the old contracts because we were actually standardizing the entire contract format, so there was another project, I guess, that we're working on to standardize our terms and conditions structure and format and that was happening concurrently, so the terminations went out with that. We started to introduce the new load-balancing language with those contracts renewing this November 1st, whereas, the original project, those contracts started last December 1st. 1047 MR. DINGWALL: Now, the last time that Union made a fairly major change to the direct-purchase contracts was when you moved from remittance on deliveries to remittance on consumption; is that correct? 1048 MS. VANDERPAELT: That would be correct. 1049 MR. DINGWALL: And in that specific case, the company was able to renegotiate all those contracts without actually terminating them; was it not? 1050 MS. VANDERPAELT: Remittance on consumption actually does not affected the bundled-T contract. The document that holds the wording is called a collection service agreement and it is an arrangement that is only signed between Union and the retail energy marketers because it's the retail energy marketers that we're providing the collection service to, not the bundled-T holder. So with relatively few retail energy marketers in the area, we were able to work through the three or four parties that we needed to deal with. 1051 MR. DINGWALL: And in dealing with that agreement, I take it the company did not take the process of actually terminating the agreements, it went through negotiations to amend them instead? 1052 MS. VANDERPAELT: What we did is we actually worked with the retail energy marketers when we were redesigning the service, and we have a letter agreement that attaches to the existing document. It's an ever-greening contract we're waiting for some of the results from the GDAR implementation in order to finalize a complete collection service agreement. 1053 MR. DINGWALL: Has Union thought of putting in place a form of dispute resolution in dealing with its contracts such as these balancing contracts? 1054 MS. VANDERPAELT: Are you referring to an arbitration clause in the contract? 1055 MR. DINGWALL: No, I'm referring to a dispute resolution process, possibly involving the regulator, possibly involving an arbitrator? 1056 MR. PENNY: Where I come from, arbitration is a dispute resolution process, so I'm not sure what it is that Mr. Dingwall is asking. 1057 MR. DINGWALL: Well, Ms. VanDerPaelt, what is the current arbitration time frame in the existing contracts? 1058 MS. VANDERPAELT: In the new contracts that started rolling out last December, the arbitration clause was removed from the general terms and conditions. The customer feedback we had at that time suggested that they did not want it in the contract. We subsequently have had some customers who would like to see it in the contract, so we are adding an arbitration clause for those who wish it, into their contract shell, not as part of the general terms and conditions, because we definitely have some customers who don't want an arbitration clause and some that do. 1059 The time limit on it, it's not a time-constrained arbitration clause. 1060 MR. DINGWALL: Okay. Moving on to the load-balancing proposal. I understand with respect to the new two points of balancing, that would be mid contract year, that the company proposes that the balancing tolerance be zero, that there be no imbalance at those two balancing dates. 1061 MS. VANDERPAELT: No imbalance away from the forecast. 1062 MR. DINGWALL: Away from the forecast. 1063 MS. VANDERPAELT: That's correct. You can be over in the winter and you can be under in September, so it's essentially a ceiling and a floor at those times of year. 1064 MR. DINGWALL: And I believe we previously heard this morning on the annual balancing there is a tolerance of a few percent each way. 1065 MS. VANDERPAELT: The contractual requirement is the customer balance to zero. The plus or minus 4 is to recognize that at the end of a contract year there is difficulties to do that. 1066 MR. DINGWALL: Now, when the customers are balancing on the two new proposed balancing points, they will be doing so based on a forecast; is that correct? 1067 MS. VANDERPAELT: That's correct. 1068 MR. DINGWALL: And the forecast is based around some degree of estimation of meter reads versus actual meter reads from the previous month; is that correct? 1069 MS. VANDERPAELT: Are you referring to specifically the M2 cycle read market? 1070 MR. DINGWALL: As an example, yes. 1071 MS. VANDERPAELT: Yes, with a cycle read market there would be estimations, but they are also only entitled to the Union determined option. So if the forecast is wrong, as long as they take the actions that we indicated to them as part of the Union-determined option they will be held whole. 1072 MR. DINGWALL: When you say the actions determine to them, could you give me some indication of what those actions can entail? 1073 MS. VANDERPAELT: At the February point we will be looking at customers on the Union-determined option to forecast where their February position will be based on the actuals that we have to date and the weather forecast that carries us to the end of February. If it's determined that they will be below their forecast tolerance by a set amount, we will ask them to be -- say for example 100, we will ask them to bring that 100 units of gas into the system prior to February 28th. As long as they take that action, if we subsequently find out that the forecast was off marginally there is no issue for them. 1074 MR. ISHERWOOD: If I could just add one exception to that. To the extent that we are relying upon an external forecast company for that forecast, typically, the process I think Ms. VanDerPaelt mentioned we would be sending a letter out sort of early part of February, February 12th, we would be relying upon a weather forecast for the rest of February, time frame would be end of January. To the extent that that weather forecast changed dramatically, and it would have to be a fairly significant change, that may still put us in the market to go buy spot gas to balance. So we're assuming in the base case proposal here that the instructions we give the customers enough to balance the system back to March 1, but there may be a case, an extreme case if the weather forecast does change and get much colder than initially indicated at the end of January, we may still have to buy a little bit of spot gas in February and allocate that to customers as well. 1075 MR. DINGWALL: Moving to the discretionary gas supply service, and I think this is virgin territory for the day so -- is that a service that would be administered by the S&T group or by Union Gas itself? 1076 MS. VANDERPAELT: This is a Union Gas service for infranchise customers. 1077 MR. DINGWALL: Is there any restriction or contemplation of where Union Gas would be acquiring this gas to sell to customers? 1078 MR. ISHERWOOD: You said restriction in terms of what? 1079 MR. DINGWALL: Well, let's start with the first part of that. Where would Union Gas be obtaining this gas from? 1080 MR. ISHERWOOD: Typically, for that type of purchase where we're looking at a one block purchase of gas, we'd typically buy that at Dawn. 1081 MR. DINGWALL: Or on system, would that be correct? 1082 MR. ISHERWOOD: In this case, the service is intended to supply a one-time balancing need or one-time spot need for a customer, a direct-purchase customer, so I wouldn't classify it as being system. It's not for sales service. 1083 MR. DINGWALL: Is it conceivable that excess gas in storage could be used for the discretionary gas supply service? 1084 MR. ISHERWOOD: I think the intent of the service is that -- we use the term back-to-back. So to the extent that we get told from a customer that they need a volume of gas, call it a 1,000 gigaJoules for example, we would go source that gas at the market price at Dawn and sell it to the customer at essentially the price that we bought it at, with an administration charge added in to cover off the cost. So I don't believe the intent is to sell it from our current inventory. Our inventory is valued at WACOG so it would not necessarily reflect the market, in fact, it normally doesn't reflect the market. 1085 MR. DINGWALL: Now, you say the intent, does that mean you would be proscribed from using any of the system assets to provide this service? 1086 MS. VANDERPAELT: We hadn't contemplated that, but if that is one of the rules that comes out of this, we can do back-to-back deals, we're comfortable with that, that was the intent. 1087 MR. DINGWALL: Where would the revenues go from this service? 1088 MR. KITCHEN: If it's a back-to-back service, first of all, there will be no revenues on the gas sold. There will be a small amount of revenue related to the gas supply admin fee that would be charged, but at this point we haven't forecast any revenues of that, and until we get some experience on just how much service take up there would be, it's difficult for us to forecast. 1089 But just to give you an idea of magnitude, the fee itself is small, and on a half a Bcf of discretionary gas you're looking at somewhere in the neighbourhood of 30,000 to 35,000 in revenue. So the revenue is not a large amount, it's not a money maker for Union. All we're trying to do really is to recognize that the same people and the same resources are required when making system gas purchases. So to the extent that we're buying a back-to-back service for another customer, those same fees should apply. They shouldn't be free. 1090 MR. DINGWALL: What kind of visibility did the company intend for this service in terms of its availability? 1091 MS. VANDERPAELT: Are you asking how heavily we were going to market it? 1092 MR. DINGWALL: Well, it's a discretionary service and one of the purposes which I believe you stated it was intended on addressing was assisting parties who might have a need to balance. Presumably if they balance, they avoid balancing penalties, so given that balancing is a -- and the penalties is a fairly key aspect of the marketplace, to what extent would you be making known to participants that they could obviate balancing penalties if they subscribed to the discretionary gas supply service? 1093 MS. VANDERPAELT: That would not be our intent. Possibly I can give you a little bit of history as to how this idea came to fruition. We had a section of customers in a -- actually several customers who have, due to the fall of Enron and other issues, have had difficulty purchasing blocks of gas supply at Dawn to balance, the credit requirements have become onerous and other issues. They have come to us and asked us if we would sell them the gas. The only ability we have to sell gas today is under WACOG and oftentimes WACOG does not reflect the market price. So our position is that if a customer wants gas, they should have to pay the market price in that situation, that it shouldn't be on the backs of any of the customers who have WACOG gas. 1094 So what we're asking for here is for the ability if the customer comes to us looking for a block of gas in order to meet a requirement they have, that we could go to the market on their behalf, tender it, invoice it to them at that cost plus the gas supply charge so that nobody else is subsidizing or paying for any part of that service. 1095 As I said under the current program we only have WACOG. 1096 MR. DINGWALL: Well, if the customer can't get gas from a third party, wouldn't their option be to go back to system? 1097 MS. VANDERPAELT: Often it's a one-time need. For example, it could be a cold winter and the customer's interruptible and he's looking to maybe use more gas instead of oil than he'd forecast, so he's looking for a block of gas. It's not meant to supply an annual supply, it's meant to supply a short-term, one-time need. So they have no desire to turn to system, they're looking for, for example, 5,000 gJs for February and there's nobody willing to do business with them because they're too small and they're not meeting the credit requirements because they've been made so onerous on them. 1098 MR. DINGWALL: Does that mean that Union's credit requirements for this service are going to be less onerous than the marketplace's? 1099 MS. VANDERPAELT: We have credit requirements based on their entire dealings with us on an annual basis, and that would be factored into whether we would , be willing to enter this engagement with them, if you will, or this service with them. What these customers are finding is that going into the market and dealing with somebody who maybe is not familiar with them or they're so small there is a bit of a nuisance fee associated with them, that it drives the cost up and then gas becomes less competitive to oil. And it's in all of our interests to keep the gas flowing into these places as much as possible. 1100 MR. DINGWALL: Why would these customers not go to your S&T group for gas? 1101 MS. VANDERPAELT: Our S&T group does not sell commodity. 1102 MR. SOMMERVILLE: Is there a convenient place, Mr. Dingwall, to take a break? 1103 MR. DINGWALL: If you want to give me another 30 seconds I might relieve you of my presence. 1104 MR. SOMMERVILLE: 30 seconds, the clock is running, Mr. Dingwall. 1105 MR. DINGWALL: Thank you, sir. 1106 And on reviewing my notes, those are my questions. Thank you very much. 1107 MR. SOMMERVILLE: Thank you, Mr. Dingwall. 1108 We'll take ten minutes and reconvene at 27 minutes to the hour, thanks. 1109 --- Recess taken at 3:27 p.m. 1110 --- On resuming at 3:40 p.m. 1111 PRELIMINARY MATTERS: 1112 MR. SOMMERVILLE: Thank you, please be seated. 1113 Just before we have any other business to do, I just wanted to acknowledge we'll be losing our court reporter, tomorrow, I believe, and I just wanted to thank you for your diligence and the excellence of your work. Thank you very much. 1114 MR. PENNY: Ditto. 1115 MR. SOMMERVILLE: I have two documents in front of me, one is a contract between Union Gas and a company name, that's the bundled-T gas contract, and the other document is "South Bundled Transportation, Answers to Consumer's Questions for Contract Changes in November 2003." 1116 MR. MORAN: Yes, Mr. Chair. 1117 MR. VEGH: I will be referring to those in my cross-examination of this panel. 1118 MR. MORAN: Shall we give them exhibit numbers now, Mr. Chair? 1119 MR. SOMMERVILLE: Please. 1120 MR. MORAN: Exhibit M.17.3, appears to be a sample bundled-T gas contract between Union Gas and company name. 1121 EXHIBIT NO. M.17.3: SAMPLE BUNDLED-T GAS CONTRACT BETWEEN UNION GAS AND COMPANY NAME 1122 MR. MORAN: M.17.4, excerpt from a web site article entitled, "South Bundled Transportation, Answers to Customer's Questions for Contract Changes Effective November 2003." 1123 EXHIBIT NO. M.17.4: DOCUMENT FROM WEB SITE ARTICLE ENTITLED, "SOUTH BUNDLED TRANSPORTATION, ANSWERS TO CUSTOMER'S QUESTIONS FOR CONTRACT CHANGES EFFECTIVE NOVEMBER 2003" 1124 MR. SOMMERVILLE: Mr. Vegh, Mr. Moran indicated that you will be taking up your cross-examination now and that you will necessarily be continuing tomorrow as well. If you could find a convenient spot around 4:15, in that range, that would be appreciated. Thank you. 1125 MR. VEGH: Thank you. Thank you, sir. 1126 The original schedule was that I was going to be on tomorrow so I wasn't here this morning and I obviously didn't read the transcript, so I apologize in advance for any duplication of questions. 1127 UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN 1128 S.VANDERPAELT; Previously sworn. 1129 M.ISHERWOOD; Previously sworn. 1130 M.KITCHEN; Previously affirmed. 1131 CROSS-EXAMINATION BY MR. VEGH: 1132 MR. VEGH: Good afternoon, panel, my name is George Vegh. I will be asking you some questions about the load-balancing proposal on behalf of three energy retailers, Superior Energy, Union Energy and Ontario Energy Savings Corp. 1133 The chair has identified a couple of documents, panel. I pulled both of these documents from your web site and I'll confirm that you're familiar with them. The first is the southern bundled-T contract which is a three-page document it has a schedule 1 entitled, "Contract Parameters and Notice Lists," and then a schedule 2, "Southern Bundled-T Terms and Conditions." The second document is also from the web site entitled -- sorry, it's Exhibit M.17.4, "South Bundled Transportation, Answers to Customer's Questions..." 1134 Panel, you're familiar with these documents? 1135 MS. VANDERPAELT: Yes, I am. 1136 MR. VEGH: I'd like to first ask you some questions around Exhibit M.17.3, that's the southern bundled-T contract. This contract, including the schedules, this is a contract that will be in place for November 1, '03? 1137 MS. VANDERPAELT: That's correct. 1138 MR. VEGH: And this contract has already been sent to customers for November 1, '03? 1139 MS. VANDERPAELT: That's correct. 1140 MR. VEGH: And customers who have signed these contracts and returned them to Union? 1141 MS. VANDERPAELT: Yes, they have. 1142 MR. VEGH: And this contract reflects the terms of the load-balancing proposal that you put forward in the evidence? 1143 MS. VANDERPAELT: That's correct. 1144 MR. VEGH: And if this Board directs changes to the load-balancing proposal as a result of this hearing, these changes will be incorporated into this contract? 1145 MS. VANDERPAELT: That's correct. 1146 MR. VEGH: And customers who signed contracts prior to any changes will be able to get the benefits of those changes that come out of this Board decision? 1147 MS. VANDERPAELT: Yes, when we sent out the contracts for November 1 renewal, we included a cover letter stating that we had included these, they were for information purposes and that they would not be operational, we would still be operating under the old provisions. So all customers who have received these contracts are aware that there could be changes as a result of this hearing. 1148 MR. VEGH: And these contracts, they start November 1 as you said, but your new load-balancing proposal, if approved, wouldn't go into effect until November '04; right? 1149 MS. VANDERPAELT: That's correct. 1150 MR. VEGH: And so the 2003/2004 year is sort of a test year to allow customers to gain some experience with this new proposal? 1151 MS. VANDERPAELT: Yes. 1152 MR. VEGH: And this period would also give Union some time to gain some experience with the operation of this new proposal? 1153 MS. VANDERPAELT: It will give us some data so we can understand what the parameters, how things would operate, yes. 1154 MR. VEGH: And so both Union and the customers effectively get the opportunity to test drive this and see if it will actually work as planned? 1155 MS. VANDERPAELT: Yes, what they will be able to test drive is they will have the checkpoints and they will have information that will tell them what would have happened. The systems and the electronic support that goes with this will not be available, although we are making some weather information available to customers in a generic sense on the web site, so they'll also have the look and feel of what we're planning to get to them in a permanent state. 1156 MR. VEGH: And is there a plan to review after this test drive, after this test year, to see if there should be any revisions as a result of some lessons learned over that period? 1157 MS. VANDERPAELT: We would probably -- we would look to customer feedback for what I would suggest some tweaking. I don't think we would overall the service. We would have designed our IT systems and our support, but for example, if we hear issues around some of the reports and how they look and they need some different information or there's a preference that we can manage, we would certainly take that feedback and try to accommodate. We would not be able to overall the entire service because the systems would be designed, the capital spent based on the design as stated or as accepted by the Board. 1158 MR. VEGH: So I understand the design portion. When you talk about design, you're talking about the winter checkpoint, fall checkpoint, balancing towards forecasted consumption, things like that? 1159 MS. VANDERPAELT: That's right. 1160 MR. VEGH: But other things, in terms of peoples' experience with how this works, how the information flows their ability to react in time, things like that? 1161 MS. VANDERPAELT: We would listen to their feedback and we would, to the sense we can make something better, we always like to work with the customers to do that. 1162 MR. VEGH: So customers will have the opportunity to provide you with some feedback on how it actually worked from their perspective after having gained some experience with this? 1163 MS. VANDERPAELT: That's right. 1164 MR. VEGH: And then you'll consider that feedback, you're not going to rethink the whole proposal, but you'll consider that feedback and consider any change as to how this operationally may be improved? 1165 MS. VANDERPAELT: Correct. 1166 MR. VEGH: And if it ends up that Union and the customers end up with some disagreement about how effective this has worked and if there's requests for changes, you're incapable of making those changes or you don't think those changes are necessary, will customers have the opportunity to raise those concerns with someone else? Will they be able to come to the Board and raise those as well? 1167 MS. VANDERPAELT: The customer always has the ability to go with the Board if they don't agree with the way the service is being provided to them. 1168 MR. VEGH: Now, before asking you specifically about how you plan to change the load-balancing service, I'd like to just get some parameters around how the service is currently provided and then contrast it to how the service will be provided after these proposed changes go into effect, all right? 1169 MS. VANDERPAELT: Mm-hm. 1170 MR. VEGH: And again, I apologize, you may have gone through this with earlier questioners but it won't take long. 1171 The current load-balancing service requires customers to balance to within about 4 percent of their actual consumption sufferings by their contract renewal date; right? 1172 MS. VANDERPAELT: Correct. 1173 MR. VEGH: And the 4 percent variance is to be physically cleared within what, six months of that renewal date? 1174 MS. VANDERPAELT: No, as long as the customer is within the 4 percent it's carried forward to the new contract. There is no time limit to clear it. 1175 MR. VEGH: Okay. So there's no time limit to clear it. And during the course of the year, a DP customer under the current proposal doesn't have to balance either their actual or their forecasted consumption, doesn't have to balance to their -- 1176 MS. VANDERPAELT: During the contract term, no. 1177 MR. VEGH: All right. And the new load-balancing service requires DP customers to balance to forecasted consumption in two points of the year, February 28th and September 30th? 1178 MS. VANDERPAELT: It requires them to balance if they are on one side of that forecast position, so in the winter, if they have drafted more, they are required to balance and in the September checkpoint, if they have more gas in storage, they are required to balance, but other than those two scenarios, they don't have any activity required of them. 1179 MR. VEGH: And for nomenclature purposes we'll call these points the winter checkpoint and the fall checkpoint, that's what you call them in the document. 1180 MS. VANDERPAELT: That's right. 1181 MR. VEGH: So effectively, the new balancing proposal that you're putting forward in this case, it basically no longer includes managing variances from forecast to those two checkpoints. 1182 MS. VANDERPAELT: We still manage variances from forecast between the checkpoints. It's at the checkpoint that we then expect the customer to come back in so that we don't have to manage for the rest of the year until the next piece. 1183 MR. VEGH: So you used to manage the variance for an annual period, you now manage the variance between the checkpoints, but on the checkpoint date the customer is responsible for managing the variance. 1184 MS. VANDERPAELT: That's correct. 1185 MR. VEGH: And so this service that you used to provide of managing the variance throughout, that's effectively now carved out of the load-balancing service that you provide to customers. You no longer provide that service. 1186 MS. VANDERPAELT: That's right. 1187 MR. VEGH: And what you've tried to do in the designing this service and the rates such as the QRAM et cetera, is to effectively remove the costs of managing to variance to those dates from the distribution costs, from load balancing, and on to commodity. 1188 MS. VANDERPAELT: Right. We've tried to remove the costs that are incurred as a result of customers moving away from their forecast. The costs that are associated with the customers being on their forecast are still included as part of that load-balancing inventory that's in rates. 1189 MR. VEGH: Right. So the costs of managing away from the forecast -- or the costs of -- the costs of managing to the forecast are out of rates and in the commodity cost for system gas customers and costs that direct-purchase customers manage for themselves as they manage their other commodity costs. 1190 MS. VANDERPAELT: That's correct. 1191 MR. VEGH: Now, the theory is this is for both system gas customers and direct-purchase customers, this removes the cost equally for both sets of customers. 1192 MS. VANDERPAELT: It puts the costs back into the corners of those who are incurring them rather than rate class methodology and us buying gas on their behalf for the direct-purchase customers. 1193 MR. VEGH: And for the system customers, it takes those costs and moves them to commodity costs, removes them from distribution. 1194 MS. VANDERPAELT: That's correct. 1195 MR. VEGH: Okay. So if we're looking at -- when we talk about the costs of managing variances from forecast, I understand you mean just those two specific dates, February 28th, September 30th, and the record will show that, but when we discuss it can I just say the costs of managing variance from forecast and everyone will know what we're talking about? 1196 MS. VANDERPAELT: Yes. 1197 MR. VEGH: So if we wanted to look at how this proposal impacted direct-purchase customers, we would look at the impact of removing the service of managing the variances from forecast for those customers. 1198 MS. VANDERPAELT: Okay. I think I'm with you. 1199 MR. VEGH: And for the purposes of these questions, just one more qualification I wanted to build in or one more elaboration I'd like you to keep in mind, I don't have a specific question on it, but I will be asking you to distinguish between two categories of customers, two categories of DP customers; we have the contract customers, who will be entering into these arrangements on their own behalf, and then we'll have the clients I'm representing, the marketers who enter into this bundled-T contract on behalf of their own customers. 1200 MS. VANDERPAELT: Okay. 1201 MR. VEGH: So I'd like to draw that distinction, but am I right that your proposal and your contract really makes no distinction between direct-purchase customers who are served by a marketer and then the direct-purchase customers who arrange their own gas supply? 1202 MS. VANDERPAELT: Only to the extent that those customers who are part of the M2 market only have the choice of the Union-determined option, that would be the only distinction. Whereas the contract class has the option of the customer-managed option or Union-determined option. 1203 MR. VEGH: But that distinction transcends the issue of whether the customer is represented by a marketer or not; right? 1204 MS. VANDERPAELT: That's correct. 1205 MR. VEGH: The contract treats direct-purchase customers the same whether it's a marketer or an end-use customer. 1206 MS. VANDERPAELT: That's correct. 1207 MR. VEGH: And so they're offered the same service. 1208 MS. VANDERPAELT: Yes. 1209 MR. VEGH: And as I will suggest, they may be differently impacted by the proposal, but we'll get to some of those examples later. 1210 I want to turn now to how the forecasts are carried out, and this is important of course because we're talking about how you manage variances from forecast, and that is what this proposal is about. There is a new impact, new obligation to manage variance in forecast, so the forecasting methodology is really quite important; would you agree with that? 1211 MS. VANDERPAELT: I would agree. 1212 MR. VEGH: Okay. And I asked you in interrogatory about that, interrogatory J.24.2. 1213 MS. VANDERPAELT: I have it. 1214 MR. VEGH: Okay. Now, this question asks how the forecast was carried out. The answer distinguishes between general-service customers and contract customers; right? 1215 MS. VANDERPAELT: Correct. 1216 MR. VEGH: And that distinction is the one you just raised, that contract customers can have what's called a customer-determined option, while general-service customers may only use the Union-determined option. 1217 MS. VANDERPAELT: This is also the way they set forecast today, so there is a distinction today in how we set forecasts. 1218 MR. VEGH: Okay. So when we -- so that -- that's fine. This is how you set forecast today and this is how you will set forecast under the contract. 1219 MS. VANDERPAELT: We have not proposed to change our forecast methodology. 1220 MR. VEGH: Okay. Now, general-service customers, the M2 customers, general-service direct-purchase customers tend to be served by marketers don't they? 1221 MS. VANDERPAELT: Yes. 1222 MR. VEGH: These are not customers who ten to make their own gas supply arrangements, they're served by marketers. 1223 MS. VANDERPAELT: I would agree. 1224 MR. VEGH: So when we look at how you forecast for general-service customers served by marketers, that's the category I'm interested in, their forecasted consumption is effectively the previous year's consumption weather normalized. 1225 MS. VANDERPAELT: That's correct. 1226 MR. VEGH: And then, again, we're looking at general-service customers served by marketers, their weather normalized result, previous year's consumption weather normalized, is then turned into a DCQ by dividing that forecasted amount by 365. 1227 MS. VANDERPAELT: That's correct. 1228 MR. VEGH: And then the DCQ is recorded in this contract M.17.3, in schedule 1. 1229 MS. VANDERPAELT: That's correct. 1230 MR. VEGH: Now, so for a marketer serving a general-service customer, it's Union that sets up the DCQ for that customer? 1231 MS. VANDERPAELT: Yes. 1232 MR. VEGH: Sorry, when I say that customer, I mean the aggregation of customers under the bundled-T contract. 1233 And Union sets that forecast, as you said, using the last year's consumption weather normalized. 1234 MS. VANDERPAELT: That's correct. 1235 MR. VEGH: Now, I haven't been participating in the weather normalization part of this hearing, but my understanding is that by using weather normalization, you're not actually trying to predict the weather for the next year; right? You're looking at a longer-term what is the average weather consumption over a longer term. 1236 MS. VANDERPAELT: All of our planning assumption, both for operations and rate making, basically everything that we do assumes normal weather. So what weather normalization does is it takes a customer's last 12 months and puts it back to what it would have looked like under normal weather so that we can then plan from that basis. 1237 MR. VEGH: That's right. So when you talk about forecasting the customer's consumption for the upcoming year, you're not actually forecasting what you expect the consumption will be, you're weather normalizing last year's consumption. 1238 MR. ISHERWOOD: But you're forecasting it based on a an average year, a normal year. 1239 MR. PENNY: Just so we're clear as well, the assumption in all of these questions, Mr. Vegh, is that we're still talking about the marketer representing general-service customers? 1240 MR. VEGH: Yes. Right. And I know you have a different process for contract customers. 1241 I'm sorry, I was interrupted and I didn't catch the point you wanted to make. 1242 MR. ISHERWOOD: My only point was that when it's weather normalized it's being weather normalized to a normal year. 1243 MR. VEGH: You're not trying to predict what the weather is going to be like in the year coming up. 1244 MR. ISHERWOOD: No, a normal year, just a normal year. 1245 MR. VEGH: Right. Now, of course there are weather forecasters out there who do try to predict what weather will be like in a year coming up but, that's not what your methodology tries to do. 1246 MS. VANDERPAELT: For planning purposes we always assume normal weather. 1247 MR. VEGH: So if a customer were to use a forecast as opposed to weather normalization to try to predict what the weather would be for the upcoming year they could have a dramatically different result from the weather normalization method; right? 1248 MS. VANDERPAELT: They might. 1249 MR. VEGH: They might. Because that's not what the weather normalization method tries to do. 1250 MS. VANDERPAELT: Exactly. 1251 MR. VEGH: Because that customer's trying to forecast the weather and you're trying to normalize a previous year's consumption by referencing a much longer time frame. 1252 MR. ISHERWOOD: A 20-year trend. 1253 MR. VEGH: Right. And one of the ways or the reasons where there may be a variance in forecast, in fact, the main reason why there may be a variance in forecast is because the weather is different than the -- than what's used for the purposes of determining the DCQ. 1254 MS. VANDERPAELT: That's correct. 1255 MR. VEGH: So that's one way to vary from forecast. Another way to vary from forecast would be simply customer attrition or customer movement? 1256 MS. VANDERPAELT: For this market, as customers move to a direct purchaser or a retail energy marketer or away, the forecast position would be varied, so we would update each month to reflect additions or subtractions from the customer base. 1257 MR. VEGH: And would the checkpoint balance be varied as well by that? 1258 MS. VANDERPAELT: Yes, it is, it's reflected in that. 1259 MR. VEGH: I'll return to that because I have some questions on how that's actually addressed in the contract. 1260 So we've talked about variances by weather, we've talked about variances by customer migration to and from, and there may, of course, be customers who simply go out of business or just stop their operations, that could be another reason why you may have a variance in forecast. 1261 MS. VANDERPAELT: Yes, and that would show up as an attrition. 1262 MR. VEGH: Now, when we have a contract customer, so not a marketer serving general service -- not a marketer serving customers but just a contract customer, the idea that they may shut down or move their operations, that may happen as well, right, and they will have to settle up with you in the course of the year? 1263 MS. VANDERPAELT: Yes. 1264 MR. VEGH: But for that customer that tends to be a one-time activity as opposed to a regular part of carrying on business? 1265 MS. VANDERPAELT: That's correct. 1266 MR. VEGH: And if a customer tells you, going into an upcoming year that they plan to shut down halfway through the year or something, you will take that into account when setting that customer's forecast. 1267 MS. VANDERPAELT: For contract customers, we put a forecast as a starting point to them which is based on their last 12 months of activity. The customer will then come back to inform us of any substantial changes and we reflect that in their forecast going forward. 1268 MR. VEGH: And just on customer attrition for marketers then, I take it for your initial planning purposes, you really assume no attrition between system gas and direct-purchase customers? That is, the direct-purchase customers who are forecasted to be out for the year form the basis for the entire year? 1269 MS. VANDERPAELT: That's right. The marketer sends us a list of those homes or meters that are attached to the contract and that's our starting position. 1270 MR. VEGH: And as I understand for gas supply planning purposes, we don't have to go to the evidence, but you do not try to forecast migration between direct purchase and system gas? 1271 MS. VANDERPAELT: No, we don't. 1272 MR. VEGH: So you assume that the level of migration effective April 1 remains for the course of the year? 1273 MS. VANDERPAELT: That's correct. 1274 MR. VEGH: And you would agree, wouldn't you, that what actually happens during the course of the year is that customer attrition can be quite significant and often unpredictable. 1275 MS. VANDERPAELT: With the exception of Bill 58, I would say that on average the attrition between customers and retail energy marketers, if you looked at the entire market, it stayed relatively constant. With the introduction of Bill 58 we did see an increased movement of system customers back to system, more than we had previously. 1276 MR. VEGH: So under the old days it was pretty stable, but as a result of regulatory change, political changes there could be significant and unpredictable changes? 1277 MS. VANDERPAELT: Right, and those are unforecast. We're not able to forecast those changes. 1278 MR. ISHERWOOD: I would say Bill 58 was a one-time issue where we did see migration back to system. Since about June of this year, it's been very steady again. 1279 MR. VEGH: Add political change and the energy sector is often unpredictable so customer attrition is subject to political change as well. 1280 MS. VANDERPAELT: I would agree. 1281 MR. VEGH: And in addition to the migration back and forth between system customers and direct-purchase customers, marketers also face a prospect of customer attrition between and among marketers? 1282 MS. VANDERPAELT: Yes, they do. 1283 MR. VEGH: And the current GDAR requirements allow customers to transfer between marketers, or will allow customers to transfer to marketers on a much more fluid basis than they had in the past? 1284 MS. VANDERPAELT: Yes, they will. 1285 MR. VEGH: So a customer attrition between marketers may be expected to increase from historical standards? 1286 MS. VANDERPAELT: It might be. 1287 MR. VEGH: So just to recap then, for marketers serving general-service customers, Union sets the MDQ and the checkpoint parameters by using a weather-normalized consumption; right? 1288 MS. VANDERPAELT: Correct. 1289 MR. VEGH: Factors such as actual weather and customer migration could have significant impacts on actual consumption. 1290 MS. VANDERPAELT: And customer migration is factored into the forecast checkpoints each month. Each month those contracts are amended, we revise the checkpoints to reflect the new customers that are underpinning that contract. 1291 MR. VEGH: I do want to ask you some questions about the amendment process throughout the course of the contract term. First, I want to finish up talking about the forecast provision because the forecast provision in and of itself is important; right? 1292 MS. VANDERPAELT: Yes, it is. 1293 MR. VEGH: So for forecasting purposes, you assume no customer migration and you assume normalized weather, not forecasted weather? 1294 MS. VANDERPAELT: Yes, that's correct. 1295 MR. VEGH: And in both cases, in terms of your assumptions of migration or your lack of assumptions about migration, your lack of assumptions about -- or your normalization as opposed to forecasting about weather, a marketer serving those customers does not have an opportunity under the contract, does it, to question your checkpoints by, say, providing better information? 1296 MS. VANDERPAELT: Because of the heat sensitive nature of the market and the fact that we base them on a starting position, normal weather, that's how we plan, there is not an opportunity for them to question that. If they had better data that over the last 20 years a homeowner managed differently than we have, we would look at it, but we would be looking to sort of long-term historical trends to say that this is what an average homeowner consumes in a year. 1297 MR. VEGH: So if a marketer says, Well, you're telling me that next year I have to manage variances from forecast and I have what I think is better information about forecasted weather for next year, the marketer can't go to an arbitrator or any third party under the contract and say, Use my forecast for next year because I have a better forecast? 1298 MS. VANDERPAELT: I believe through this process here, the Board could tell us that they would like us to accept that, but our proposal is that it would be Union's forecast. 1299 MR. VEGH: Right. And your contract, as you drafted it, currently doesn't allow a marketer to challenge your forecast by using those other factors. 1300 MS. VANDERPAELT: That's correct, and there's been no change in our forecasting process. 1301 MR. VEGH: Okay. So now let's get to the point where the forecast is set and then throughout the course of the year, a number of things may happen that could require a change to forecast, and we've talked about some of those; customer attrition is one of them. 1302 If there were to be a change in forecasted consumption that's implemented into the contract, that would be implemented through a change to the DCQ? 1303 MS. VANDERPAELT: Yes, through an amendment. 1304 MR. VEGH: Okay. And that's addressed in schedule 2 of the contract, I believe? I think it's section 4, changes to contract parameters. 1305 MS. VANDERPAELT: What section 4 is addressing is the amendment process, yes. 1306 MR. VEGH: Okay. So this is the process we're talking about where you could actually change both the checkpoint and the -- well, the delivery obligation during the course of the contract year? 1307 MS. VANDERPAELT: Yeah, that's the same process we have today and it's based on the new information the marketer has provided us each month. 1308 MR. VEGH: Yeah, it's the same process you have today, but it's fair to say that the obligations on marketers are going to be stricter in the new world than they are today? 1309 MS. VANDERPAELT: The marketers will have to take responsibility for meeting the forecast, yes. 1310 MR. VEGH: Right. And so when I look at section 4, it says: 1311 "If there are any changes to end use locations, conception patterns, upstream supply, any changes to that may have a corresponding change to the parameters in schedule 1." 1312 That's the MDQ? 1313 MS. VANDERPAELT: DCQ. 1314 MR. VEGH: So that's how you have a change to the DCQ through this -- or these are the things that could lead to a change in the DCQ. 1315 Now, as I read this, this says that Union will be the one that determines whether or not there's any change to the DCQ. 1316 MS. VANDERPAELT: Yes, it's based on the information the marketer provides us in terms of customers that have either been added to their contract or deleted. 1317 MR. VEGH: But it's Union -- Union is the one that makes the final determination on this. 1318 MS. VANDERPAELT: And it's formulaic. It's merely, you take a number of houses off, number on, and you look at what their weather normalization factor was. It's -- you actually end up with almost a per-home factor. 1319 MR. VEGH: So the marketer can't talk about or can't rely on changes to their businesses to -- changes to businesses or updated weather forecasts or anything of that sort to request a change under section 4. 1320 MS. VANDERPAELT: If the customer has better forecast information they will use that in order to make plans to balance to the forecast, but it doesn't change the inherent contract parameters. Those are based on the number of homeowners or contracts that underpin that bundled-T contract and based on the forecast methodology we currently have in place. 1321 MR. VEGH: So Union will use its methodology and it will tell the marketer what the change is; right? The marketer isn't in a position to tell Union, I'm going to change my delivery obligation. 1322 MS. VANDERPAELT: The same as it is today. 1323 MR. VEGH: The same as it is today, but the answer is yes. The marketer cannot rely on section 4 and tell Union that it's going to change its delivery obligations. 1324 MS. VANDERPAELT: That's correct. 1325 MR. VEGH: That is a unilateral determination by Union. 1326 MS. VANDERPAELT: That's correct. 1327 MR. VEGH: And again, a marketer cannot go off to a third party resolution process and say: Look it, things have really changed, Union's weather normalization methodology is bearing no reality to what I'm finding out there and my numbers are quite different. There's been unanticipated regulatory changes, political changes, customer attrition is going to be different than I thought, I need a different -- I need -- because of that I need a different margin of error in my delivery obligations. I need to change the parameters or else I'm going to be having difficulty balancing. A customer can't go to a third party and appeal Union's conclusion; right? 1328 MS. VANDERPAELT: I would say there's probably two things a marketer can do. We talked earlier about the arbitration clause, that we had removed it from the general terms and conditions, but we are willing to add it to any customer's contract shell that would like it, including a bundled-T contract. So if the retail energy marketer would like us to put an arbitration clause in, we would be happy to do that, and that would give them an avenue then to take those discussions to a third-party arbitrator. And of course there is always the avenue if you do not like the weather normalization forecasts or methodology that we've been using to go to the Ontario Energy Board. 1329 MR. VEGH: But a marketers is not going to care whether this is accurate over a 30-year period. I don't think there's any concern about your methodology generally. The concern is that I have to balance -- I have to now take on this cost of managing a variance from forecast, and you are setting my forecast consumption, not by reference to a forecast but by reference to something that doesn't even pretend to forecast weather. 1330 MR. ISHERWOOD: If you are concerned about the one-sided nature of that clause, I think that Ms. VanDerPaelt suggested was to add the arbitration clause into those contracts. 1331 MR. VEGH: Let me be clear on that because that could actually be helpful. So an arbitration clause, that could address both forecasting and variances from forecast. 1332 MS. VANDERPAELT: If a customer has a disagreement with the way we're providing service under a contract, that's what the arbitration clause is there for. So those are the ways you have -- that's the way we set the forecast and established a DCQ which is a contract parameter, it would be open for negotiations. 1333 MR. VEGH: It's difficult to negotiate this arbitration clause here as we go, so perhaps recognizing that this could be an issue, perhaps one of the conditions of approval could be some kind of process to negotiate what an arbitration clause could look like around both forecasting the consumption for the course of the year and then managing any variance in forecast. Would Union be prepared to agree to that? 1334 MS. VANDERPAELT: We have a standard arbitration clause that we developed, it's based on the Arbitration Act that's in place and it's a very simple clause. We've been using that as a starting point of negotiations with customers who are adding it on to their contract shells. If you would like -- your customers would like that, they can request us to put that as the starting point of the negotiations. It gives everybody something to work from. 1335 MR. VEGH: It would be a good starting point for the negotiations and I take it you're saying that in terms of what that arbitration clause covers by scope, it would include forecasts and variances from forecasts. 1336 MS. VANDERPAELT: The arbitration clause, the way it's written today is all contract parameters. 1337 MR. VEGH: So will you undertake to do that then? 1338 MR. ISHERWOOD: Do what? 1339 MR. VEGH: To provide a copy of the arbitration clause and undertake to participate in negotiations to address the terms of the arbitration clause and the areas of the contract that can be followed by it. 1340 MR. PENNY: Just a moment. Mr. Chairman, it doesn't seem to me necessarily appropriate to ask these witnesses to commit to negotiate something in the future that's unknown, but I would say that there's an assumption in Mr. Vegh's question, which really goes to a legal issue, which is whether the forecast, for example, has to be specifically mentioned in the arbitration clause in order for it to be covered. And frankly, most arbitration clauses talk about any dispute under a contract, and if parties had a dispute about the application of section 4 then that would be covered. So the assumption that Mr. Vegh is making, in my submission, just as a legal matter, is not really appropriate in all likelihood. 1341 MR. SOMMERVILLE: I think, Mr. Penny, your point is well taken with respect to the second portion of Mr. Vegh's request that the panel undertake to enter into negotiations. That is a matter that's outside the scope of this hearing. That's something that the -- we can certainly raise in argument as a requirement, but to ask the company through this panel to engage in that negotiation, I think, is not an appropriate undertaking per se. 1342 On the other hand, I think your request for the arbitration clause so that you can argue whatever point it is that you want to make with respect to the scope is perfectly appropriate, and I would ask the witnesses to perform that undertaking. 1343 MR. PENNY: Sorry, Mr. Chairman. I wasn't intending to object to the production of the clause. We have no problem with that at all. 1344 MR. VEGH: And sorry, Mr. Chair, but the arbitration was sort of offered up as an answer to some of these concerns, so I thought I'd take it. 1345 MR. SOMMERVILLE: And I take your point, Mr. Vegh, and I don't think that you're barred in any way, shape or form from arguing any part of that proposition in your argument. But I think to ask the panel to undertake on behalf of the company to enter into those negotiations is something that falls outside of the scope of the hearing per se. 1346 What we're trying to do here is establish a series of rules, if you like, that govern the operation and the effect of these rates as they go -- the quantum of the rates and the effects and the circumstances surrounding the implementation of the rates going forward. 1347 It's perfectly appropriate for you to argue in the course of your argument that one of the things that the company needs to do is to be directed to or to undertake to engage in that process, but I think it's not an appropriate undertaking to ask for that. 1348 Mr. Moran would have a hard time trying to enforce that. I'm being facetious there, but I think that's -- the nature of that undertaking is just significantly different and I think unnatural for what we're doing. 1349 I'm not trying to inhibit your argument in any way, shape or form, and I think I've indicated that, but I think it's not appropriate to ask this panel to engage in negotiations with respect to the arbitration and I -- I'm not inclined to ask them to do that. 1350 MR. VEGH: Okay. Thank you. 1351 MR. MORAN: Undertaking N.17.5, to produce the arbitration clause. 1352 UNDERTAKING NO. N.17.5: TO PRODUCE THE ARBITRATION CLAUSE 1353 MR. VEGH: And in the absence of that clause, that clause was not part of the contract, we won't negotiate this contract in front of the panel, I just have a couple questions more around section 4 then as it currently reads with no arbitration clause. 1354 Section 4 as it currently reads, as I read it, is that Union makes a determination of what the impact will be on the MDQ -- DCQ -- I was meeting with Enbridge this morning on a similar issue - on the daily delivery obligation and Union will make that determination and if the customer does not like it under the terms of this contract as it reads now, then the contract is cancelled. The customer does not accept Union's change, the contract is cancelled. 1355 MS. VANDERPAELT: That's correct. 1356 MR. VEGH: So the choice under the contract as it now is is to accept the change or to go out of business because you can't get this service from anybody else? 1357 MS. VANDERPAELT: We've never had to terminate under this clause and it existed pre the load-balancing service that we're processing. 1358 MR. VEGH: Right, but the answer is, yes, you either accept this change or you go out of business? 1359 MR. PENNY: She's answered that. 1360 MR. VEGH: No, she hasn't. 1361 MS. VANDERPAELT: You accept this clause or this contract is terminated. You accept the changes -- I believe what the clause says is you accept the changes that result -- the result, because of the new forecast you provided us or the new homeowner attachments you've provided us, and if you don't accept the changes the result is that that contract changes. I don't believe we're putting you out of business. 1362 MR. ISHERWOOD: If I could just add to that, this whole process is very mechanical, very mechanistic in approach, it's grade 5 math essentially, and as Sarah pointed out, we have not had a lot of concern or issues with this clause at all in the market. It's a very mechanical, the number of houses, the volume it's calculated very simply, and marketers, for the most part, want it done very quickly so they can get on with business. It's not been an issue. 1363 MR. VEGH: And in the past marketers haven't had to deal with the costs of managing variances from forecast either. 1364 MR. ISHERWOOD: That's true. 1365 MS. VANDERPAELT: That's correct. 1366 MR. VEGH: So things have changed. 1367 I want to ask you some questions about the checkpoints -- this is probably a good time to stop. 1368 MR. SOMMERVILLE: Thank you, Mr. Vegh. 1369 MR. VEGH: I'm changing topics. 1370 MR. SOMMERVILLE: Is there anything we need to deal with before we adjourn for the day? 1371 MR. PENNY: Not from our perspective, Mr. Chairman. 1372 MR. SOMMERVILLE: We'll reconvene tomorrow morning at 9:30. 1373 --- Whereupon the hearing was adjourned at 4:22 p.m.