Rep: OEB Doc: 12WWG Rev: 0 ONTARIO ENERGY BOARD Volume: 18 31 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 31 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 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 JAY SHEPHERD Ontario Public School Boards Association VALERIE YOUNG Ontario Association of Physical Plant Administrators ALICK RYDER City of Kitchener GEORGE VEGH CEED, OESC, Superior Energy Management, Union Energy, TransAlta 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [19] UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN [24] CROSS-EXAMINATION BY MR. VEGH: [28] CROSS-EXAMINATION BY MR. SHEPHERD: [518] PROCEDURAL MATTERS: [560] UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN [659] CROSS-EXAMINATION BY MR. RYDER: [663] CROSS-EXAMINATION BY MR. MORAN: [989] RE-EXAMINATION BY MR. PENNY: [1152] 10 EXHIBITS 11 EXHIBIT M.18.1: COPY OF A POWERPOINT PRESENTATION TO GREENHOUSE GROWERS' MEETING, DATED MARCH 26TH, 2003 [342] 12 UNDERTAKINGS 13 UNDERTAKING N.18.1: TO PROVIDE ANSWERS TO QUESTIONS 4 THROUGH 11 AS SET OUT IN A LETTER FROM MR. RYDER TO MR. REGHELINI DATED OCTOBER 29, 2003 OR PROVIDE REFERENCES TO THE TRANSCRIPT IF IT'S ALREADY ON THE TRANSCRIPT [656] UNDERTAKING N.18.2: TO ADVISE IF HubPlus HAS BEEN OFFERED TO ANY CUSTOMER; AND TO DESCRIBE THE METHOD BY WHICH THE HubPlus SERVICE HAS BEEN OFFERED TO CUSTOMERS, AND IF IT'S NOT BEING OFFERED GENERALLY, TO PROVIDE AN EXPLANATION AS TO WHY UNION HAS BEEN SELECTIVE IN THE CUSTOMERS IT OFFERS THIS SERVICE TO [974] UNDERTAKING N.18.3: TO DETERMINE WHETHER WE HAVE INFORMATION THAT BREAKS OUT THE SPECIFIC CONCERN ABOUT GAS COSTS IN DIRECT-PURCHASE CUSTOMERS VERSUS THE GENERAL CONCERN ABOUT THE INCREASE [1083] 14 --- Upon commencing at 9:38 a.m. 15 MR. SOMMERVILLE: This is the continuation of the Union Gas Limited application for rates for the year 2004. 16 Are there any preliminary matters that we need to deal with before we take up Mr. Vegh's cross-examination? 17 MR. PENNY: I have none, Mr. Chairman. 18 MR. SOMMERVILLE: Mr. Shepherd? 19 PRELIMINARY MATTERS: 20 MR. SHEPHERD: Mr. Chairman, the School Boards have given to the Board and to the Applicant and placed at the back of the room some materials for panel 15. The reason I'm raising it because we've included there quite a number of interrogatory responses which other intervenors might want to use in their cross-examinations as well, so I'm warning people in advance. 21 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 22 MR. MORAN: That's for the next panel, Mr. Chair. I have them here. 23 MR. SOMMERVILLE: Mr. Vegh? 24 UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN 25 S.VANDERPAELT; Previously Sworn. 26 M.ISHERWOOD; Previously sworn. 27 M.KITCHEN; Previously affirmed. 28 CROSS-EXAMINATION BY MR. VEGH: 29 MR. VEGH: Thank you. Good morning, panel. I wanted to ask questions first about the winter checkpoint and how the checkpoint obligations are going to operate. 30 To understand the obligations of the direct-purchaser customer to meet the winter checkpoint, I'd like to take the approach I took before, which was to contrast that with the obligations under the current methodology, the current load-balancing service. So under the current load-balancing service, going into the March 1-February 28 date, if a direct-purchase customer has met its delivery obligations but has consumed more gas than forecast, that customer has a negative balance, but the customer faces no immediate financial consequences as a result of that overconsumption? 31 MS. VANDERPAELT: That's correct. 32 MR. VEGH: That's because as part of Union's current load-balancing service what would happen as I understand it, is Union would simply acquire delivered supply on behalf of all customers? 33 MS. VANDERPAELT: That's correct. 34 MR. VEGH: And that delivered supply that's sometimes called spot gas, we could use the terms interchangeably? 35 MS. VANDERPAELT: Yes. 36 MR. VEGH: And the spot gas purchases that we're just talking about, those are to meet the incremental consumption for both system and direct-purchase customers? 37 MS. VANDERPAELT: Yes, that's correct today. 38 MR. VEGH: Okay. Now, again, today's model, looking at the direct-purchase customers, they repay the spot gas purchases made by Union and I understand they repay it in two ways. First, they repay the commodity in kind eventually by bringing themselves into balance as is required under the system, and second, they pay the incremental costs of winter gas through the load- balancing charge that's collected -- or the load-balancing variance that's collected through the PGVA? 39 MS. VANDERPAELT: Yes, the contract holder in an REM* case would be bringing in the gas later in the contract year, and then the end-use customer, which is either the contract holder in a commercial case or in a residential case would be the homeowner, would pay the differential between the summer and winter spot prices. 40 MR. VEGH: Right. So when I said earlier that the direct-purchase customers face no immediate financial consequences, they ultimately do pay the price of this gas, both the commodity and the incremental cost of buying the gas in the winter? 41 MS. VANDERPAELT: Yes, they pay the rate class disposition of those costs. So it may or may not be what they directly incurred themselves. It's reflective of what the rate class did. 42 MR. VEGH: Right, and they would pay that rate class component through the PGVA? 43 MS. VANDERPAELT: That's correct. 44 MR. ISHERWOOD: Actually, to be correct, it would be through the other purchase gas account, but the same principle. The spot costs are recorded in the other purchase gas costs account. 45 MR. VEGH: I see. Same principle, same process -- 46 MR. ISHERWOOD: Different accounts. 47 MR. VEGH: -- different accounts. 48 So that's where a customer had overconsumed going into the winter checkpoint period. 49 Now, in the case where a customer has underconsumed relative to forecast, then these incremental spot gas purchases we talked about, those purchases would simply not be made; right? 50 MS. VANDERPAELT: That's correct. 51 MR. VEGH: And just as under the current system, all customers, system-gas and direct-purchase customers, would have paid for the incremental spot gas purchases all distribution customers would benefit from the avoided cost and those purchases do not have to be made? 52 MR. ISHERWOOD: I would just add, I think in terms of the total rate class you're correct, but situations also exist where one customer or contract may be oversupplied, but in essence, the system is short supply, so if we buy spot gas in that case, there could be a case where we're allocating spot gas costs to a customer that's actually in balance or in excess of balance. 53 MR. VEGH: Okay. So we're looking now on a rate class basis. I think that's clear. So again, when you purchase incremental spot gas in the winter under the current system, it's paid for by both classes of customers, direct purchase and system customers, in the same way. 54 MR. ISHERWOOD: That's correct. 55 MR. VEGH: And when you don't purchase incremental spot gas, they benefit from that through avoided purchase costs in the same way? 56 MS. VANDERPAELT: I wouldn't say it's an avoided cost. It was never a planned purchase, so we don't save any money. These are always out-of-plan purchases. 57 MR. VEGH: So I guess the question is: Where is your comparator? If you were -- as I understand in your supply planning, you typically plan for some spot gas purchases. 58 MS. VANDERPAELT: Those plans though are related to the forecasts based on normal weather. We don't plan to purchase spot in case it's cold. 59 MR. VEGH: As I understand it, you do have spot gas as part of your supply portfolio, and when bundle demands are less than forecast, these spot gas purchases simply are not made? 60 MR. ISHERWOOD: I guess for the '04 gas year which is the focus of today's hearing, there is no spot gas forecast for the winter, so that may help with the answer to that question. 61 MR. VEGH: Maybe we'll just turn to your evidence in this case. That's Exhibit D.1, tab 1, page 6 of 27. This your gas supply evidence, not the updated but the original. So Exhibit D.1, tab 1 at page 6. 62 MR. ISHERWOOD: What was the page reference? 63 MR. VEGH: Page 6. 64 MR. ISHERWOOD: Page 6? I have it. 65 MR. VEGH: Under the heading, "Spot Gas Purchases," it talks about how spot gas purchases are part of the portfolio, and let's leave aside any given year because we're talking about a system you have in place regardless of what your forecast is for a particular year. It says, I'll just put it on the record: 66 "The primary objective of Union's supply plan is to ensure there is sufficient gas supply through sales-service delivery, bundled direct-purchase delivery, Dawn-delivered supply including spot gas, and gas and storage to meet the demand of all infranchise customers." 67 It says: 68 "Portfolio flexibility is also required to meet this objective." 69 So it's this flexibility that I'm drawing your attention to, and it says: 70 "A key component in achieving portfolio flexibility is a planned use of spot gas. If overall bundled customer demands are higher than forecast due to colder weather, the spot requirement will increase as Union's manages its seasonal and daily balancing requirements." 71 And that's what we spoke about, that is where customers overconsume. This second example was where customers underconsumed, and I think that's addressed in the next sentence: 72 "If warmer than normal weather reduces demands below forecast, then planned winter spot purchases can be foregone. Since there are no fixed costs, i.e., demand charges, associated with spot gas, this supply is the most economical component to be shared first when a supply portfolio and bundle demands are less than forecast." So the supply plan is structured to include discretionary spot gas purchases, but sometimes they don't have to be made and that's a benefit to all customers because they avoid that cost. 73 MR. ISHERWOOD: And again, I do want to make it specific to the gas year. This is actually the white-page evidence and it was updated in the blue-page version, and the '04 plan has no spot gas, so that reference there wouldn't exist in the '04 plan. It did exist in, for example, the '02/'03 winter, there was spot that was part of the plan and to the extent had it been warmer-than-normal last winter, then we could have backed off spots. We had had that as a condition of some of the gas planning. It's not in the gas planning going in '04, forward in '04. 74 MR. VEGH: But it's a regular part of the way you plan the system. 75 MR. ISHERWOOD: It was last year. And typically, it has been in past years. 76 MR. VEGH: Right. And when we look at how this load-balancing proposal is to work for the course of however long this is supposed to work for, we can expect that you'll continue to use the same supply plan; some years you'll be expecting to purchase spot gas, other years you won't be, I guess. 77 MR. ISHERWOOD: I think the updated evidence though addresses the fact that, in our view, the market has changed. The supply and demand has tightened and we have gone to having no spot in the winter, in the winter plant. 78 MR. VEGH: For this upcoming year. 79 MR. ISHERWOOD: The upcoming year and the foreseeable future. 80 MR. VEGH: My only point is as a routine part of your planning on a -- supply planning on a go-forward basis you would take into account the considerations addressed under the heading spot gas purchases in your gas-supply plan filed in this case. 81 MR. ISHERWOOD: As we complete the gas-supply plan, we certainly look at what level of spot would be appropriate. 82 MR. VEGH: Right. And as the plan is described here, it's -- the supply plan is structured to be flexible enough to capture any benefits of underconsumption if that were to take place. 83 MR. ISHERWOOD: Again, the white page evidence, that flexibility is done through spot gas. In the blue-page update, the spot gas is taken out and it would be done through leaving pipe open if it was warmer than normal. 84 MR. VEGH: So there are a couple of options. One is leaving pipe open and the other could be spot gas? 85 MR. ISHERWOOD: That's correct. 86 MR. VEGH: Again, for '04, you say you'll leave pipe open, but you're not committing now that you'll never go back to using spot gas as a method to capture that flexibility. 87 MR. ISHERWOOD: We will always look at the most appropriate methodology based on market conditions and -- market conditions. 88 MR. VEGH: Right. So then that's the current system where we talk about what happens in the case of overconsumption and underconsumption and one prospect for underconsumption is you simply don't make planned spot-gas purchases and that flexibility is built into the system so that you don't face unabsorbed demand charges for gas. 89 MR. ISHERWOOD: That's why you would have spot gas in the portfolio for wintertime. 90 MR. VEGH: Right. But you're agreeing with what I just said? 91 MR. ISHERWOOD: Yes. 92 MR. VEGH: Let's compare that to the proposed system. Under the proposed system, again at the winter checkpoint, if the direct-purchase customer overconsumes and has a negative -- negative balance to forecast, then that customer will have to make up the difference? 93 MS. VANDERPAELT: Yes, that's correct. 94 MR. VEGH: And the cost of purchasing the gas at that time is borne entirely by the direct-purchaser customer? 95 MS. VANDERPAELT: Yes. The contract holder that was out of forecast would be the customer incurring the cost. 96 MR. VEGH: So Union's not going to purchase gas for that customer any more. That's the basic change as brought about by the winter checkpoint. 97 MS. VANDERPAELT: As part of our business principles we laid out at the beginning Union feels that direct purchasers have elected to have someone other than Union supply their gas. 98 MR. VEGH: To get a concrete example of the implications of this proposal, I'd like to look, sort of look back to last year, see how the old proposal worked, and then contrast that to what would have happened under the new proposal. 99 So, if we could just put some numbers around this, orders of magnitude, I'm not asking for actual numbers because we don't have them handy, but how much -- what was the approximate value of the incremental gas supplies Union purchased last year for both system gas and direct-purchase customers? 100 MR. ISHERWOOD: I'm trying to think where that would be found most easily. Are you looking for the volume or the cost? 101 MR. VEGH: Cost. 102 MR. ISHERWOOD: Cost. It's approximately $100 million. 103 MR. VEGH: That's in total for both system and DP? 104 MR. ISHERWOOD: That's correct. 105 MR. VEGH: What would the breakdown be, roughly, between DP and system. 106 MR. ISHERWOOD: For the core market or the general-service market, we generally assume 50/50. 107 MR. VEGH: Okay. Why don't we use that as a ballpark then. 108 MR. ISHERWOOD: Sure. 109 MR. VEGH: Fifty direct purchase, fifty system gas? 110 MR. ISHERWOOD: Correct. 111 MR. VEGH: For that 50 of system gas, I'm sorry, for that 50 of direct purchase, what would be a rough breakdown between the amount collected from consumers and the amount collected from marketers? By "consumers," I just mean customers who have their own balancing obligations, direct-purchase customers. 112 MS. VANDERPAELT: All costs are collected from consumers today. 113 MR. VEGH: Right. So those consumers who had marketers versus the consumers who didn't, what would be the breakdown roughly? 114 MS. VANDERPAELT: Well, if 50 percent of the numbers that we estimated were direct purchase, I guess the whole 100 million would have been collected from consumers. 115 MR. VEGH: I know that. What I'm asking you is how much of the 50 million that was collected from direct-purchase customers are attributable to customers who were served by marketers? 116 MS. VANDERPAELT: The entire direct purchase market is served by marketers. 117 MR. VEGH: Some customers have their own direct-purchase contract and some have appointed marketers who have direct-purchase contracts for them; right? 118 MR. ISHERWOOD: Perhaps I could help. There's a table in Exhibit D.1, tab 1, updated, page 4 of 7, and it's not by cost but it's by volume. And it shows that the total is 24.2 petaJoules that we bought. 18.1 petaJoules was for the M2 class which would be, I think, in your definition, marketer-supplied, and another 4.3 petaJoules to the rate 1, rate 10 class in the north, which I think, again, to your point, would be marketer-supplied. And in terms of contract customers that generates contracts for themselves, the rate 4 class was .9 petaJoules, and the M5 class was .8 petaJoules. 119 MR. VEGH: I actually don't have that evidence handy. Can you do a quick percentage breakdown looking at that. 120 MR. ISHERWOOD: 1.7 of the 2.4 petaJoules would be contract market, and the rest would be general service which would be split 50/50 between direct purchase and sales. 121 MR. VEGH: I don't have a calculator with me. 122 MS. VANDERPAELT: Neither do we. 123 MR. VEGH: Choose a number, say 60 percent of the customers. 124 MS. VANDERPAELT: It would be closer to 90 percent. 125 MR. VEGH: So of this $50 million, let's say 45 million is attributable -- $50 million paid by direct-purchase customers, about 45 million of that would be attributable to customers who were served by a marketer under a bundled-T contract. 126 MR. ISHERWOOD: In the general-service market that's correct, or based on those assumptions, that's correct. 127 MR. VEGH: Now, so if we look at the $5 million that was paid by what I'll call a direct-use consumer, a direct-purchase consumer, that is someone who had their own bundled-T contract, now I'm trying to compare again how the old system worked as opposed to the how the new system worked. How the old system worked that $5 million was collected from that customer through the clearance of the other-gas-purchased accounts. 128 MR. ISHERWOOD: Actually, it was a rate class. It was recovered through the whole rate class rather than by customer. 129 MR. VEGH: I'm using customer as an example. That class of customer? 130 MR. ISHERWOOD: That's right. 131 MR. VEGH: Okay. Now, under the new proposal, that class of customers, instead of having Union purchase $5 million worth of gas on their behalf, they would go out in the market and purchase $5 million worth of gas or something close to $5 million worth of gas? 132 MS. VANDERPAELT: Yes, the customers who were out of balance would purchase the equivalent of the $5 million. 133 MR. VEGH: Right. So from their perspective the only real difference, as I understand it from your proposal, is really one of timing? 134 MS. VANDERPAELT: The other difference is there were customers in that rate class who were not out of balance who picked up a chair of the $5 million. Under the proposal we have, those customers would no longer have to pick up those costs. 135 MR. VEGH: Okay. There's that difference and the other difference would be timing for those customers who do pay? 136 MS. VANDERPAELT: That's correct. 137 MR. VEGH: But for those customers who paid, it's really from one pocket into the other. They paid through the ultimate clearance of the accounts, but it's really the same amount of money that they would have paid if they bought the gas themselves. 138 MR. ISHERWOOD: I think what the one advantage of the load- balancing proposal does is it allows the customer individually to deliver the gas when they so choose. So to the extent they want to be more proactive and start buying spot gas in other months than we would normally buy, there may actually be a slight cost differential but it is for them to manage, which is really the import point. 139 MR. VEGH: That's fair. My only point is Union bought this gas in the market, the customer is going to buy the gas in the market, you're both going to pay a market price; fair? 140 MR. ISHERWOOD: That's correct. 141 MR. VEGH: That's for a consumer who has their own bundled-T contract. Now, if we look at the rest, the 45 million number, and we're now looking at consumers who have a marketer enter into a bundled-T contract on their behalf, the proposal as I understand it is quite different. In the past, this $45 million would have been collected from those consumers, but under the new methodology, that $45 million, assuming it's the same amount, would now be collected from the marketer? 142 MS. VANDERPAELT: That's right. The marketer is the contract holder. 143 MR. VEGH: So unlike the direct-purchase consumer with their own bundled-T, we're now talking about changing a payment obligation from the end-use consumer to the marketer who serves them? 144 MS. VANDERPAELT: The marketer who serves them, who has those customers and has chosen to supply them, would then seek recovery from those end users. I believe ultimately the end users would receive the bill from the marketer. It's just in the old format Union billed them. In the new format their supplier bills them. 145 MR. VEGH: So you'll collect from the marketer and then it's a question really of how effectively the marketer can collect from the consumer? 146 MR. KITCHEN: There will be no collection from the marketer. 147 MS. VANDERPAELT: The marketer will be supplying the commodity, so the marketer will actually be purchasing that gas in the market. There would be no exchange of invoice between Union and the marketer. 148 MR. VEGH: That's right. I think we're getting overly technical here, this is a cost that is imposed on the marketer directly now, as opposed to being imposed on the consumer, regardless of who you sent the invoice to? 149 MS. VANDERPAELT: It's being imposed on the marketer as they are the agent representing those consumers. 150 MR. VEGH: I'm just trying to get a straight answer of how this is going to work. The cost is to be internalized by the marketer now, not internalized by the consumer. 151 MS. VANDERPAELT: I agree. 152 MR. VEGH: And now, the marketers in your franchise who serve these customers that we're talking about, they tend to use your ABC service? 153 MS. VANDERPAELT: That's correct. 154 MR. VEGH: Now, can the ABC service pick up these incremental charges or do they just pick up the charges in unit price of gas? 155 MS. VANDERPAELT: The ABC is our billing and collection service. What that service does is we bill the end user for the costs based on the price that the marketer has told us, so the price point that the marketer has agreed to with that homeowner. We collect that from the end user and then we remit those funds back to the marketers. So we're really just collecting the funds. These costs, if the marketer told us to increase the price point for these customers, they would be collected through that mechanism. If the marketer went and bought supply directly and did not increase the price point, it would not be collected through that mechanism. 156 MR. VEGH: So when you talk about the price point, you're talking about the unit price in the contract. 157 MS. VANDERPAELT: That's correct. 158 MR. VEGH: So if the marketer is not in a position to change the unit price of the contract, then you're not in the position to -- if the marketer cannot change the unit price to reflect these incremental amounts that he is a now responsible for, then Union is not in a position to collect those amounts from customers for a marketer? 159 MS. VANDERPAELT: That's correct. We followed the marketer's directions on their pricing. 160 MR. VEGH: So if a marketer cannot change the unit price for whatever reason, then the marketer just absorbs that cost themselves? 161 MS. VANDERPAELT: If they can't change the price, I would assume that's correct. 162 MR. VEGH: And so, for those customers who are in contracts where the price cannot be changed, then this is simply a wealth transfer from those customers to the marketer -- I'm sorry from the marketer it those customers? 163 MS. VANDERPAELT: We'd agree. 164 MR. VEGH: Okay. Now, turning again to spot purchases, now looking at unplanned spot purchases, okay? So the winter is colder than weather normalized or colder than forecast. As I understand it, Union will still be making spot purchases but they'll make them for system customers only, no longer for direct-purchase customers. 165 MS. VANDERPAELT: That would be correct. 166 MR. ISHERWOOD: If I can add to that, there would be two exceptions to that. I think the general proposal is that we're trying not to be in that position of buying spot gas but there's two exceptions and the one I mentioned yesterday was to the extent that we give direction to customers to bring gas in in February based on the February 12th letter, that would be based on a forecast we have as of the end of January. If that forecast were to change dramatically, then we may be in a position of having to buy spot gas for both system sales customers and DP customers in February. And those costs would be allocated back to both system-sales customers and direct-purchase customers based on imbalances that each group created or each rate class related. 167 The other example I would give is the March park is intended to cover the first 5.2 petaJoules of March weather risk. To the extent we exceeded that, we may also be in a position, although fairly rare, of having to buy March spot gas. And again that would be allocated back to both sales and service customers and direct-purchase customers based on the imbalances that they created. 168 MR. VEGH: So in rare circumstances, you may make spot gas purchases that are effectively using spot gas as load balancing, and charge that through to all customers, but the plan would be that your spot gas purchases on a going forward basis would be for system customers as needed when it's colder than forecast? 169 MR. ISHERWOOD: That's correct. 170 MR. VEGH: And again, I suppose that the reason you'd buy these spot gas or make spot gas purchases to deal with unexpected or colder-than-normal winter, colder than expected winter, is because you'd like to keep open the flexibility, that is, not have gas backed by transportation if you don't think you're going to need it, so you buy spot gas so that still gives you flexibility to buy it when needed? 171 MR. ISHERWOOD: Yes, our base gas plan especially going forward in '04, has no spot gas, so all of our supplies are underpinned by firm transportation. So spot would be used in the case of it being colder-than-normal to respond to that. 172 MR. VEGH: And looking out because again, we're talking about a system that's going to be in place for several years presumably, looking out in a future year, if things change and you do include planned spot gas purchases in the portfolio as you have in the past, the reason you would choose planned spot gas is because it's flexible and economic because you can shed those purchases if you don't need them; right? 173 MR. ISHERWOOD: Compared to the other alternative we mentioned earlier, that's right. 174 MR. VEGH: Right. Okay. And this year looking out, if you do make spot gas purchases because system customers overconsume relative to forecast, then the cost of those purchases, as I understand it with the new QRAM methodology, the cost of those purchases will be found in gas supply charges and not in the load balancing charges? 175 MR. KITCHEN: Could you repeat that, please? So that I'm absolutely clear. 176 MR. VEGH: If system customers overconsume relative to forecast and Union makes spot gas purchases on their behalf, as I understand it, the cost of those purchases will now work their way to the gas supply charge and no longer be part of the load-balancing charge. 177 MR. KITCHEN: That's correct. 178 MR. VEGH: And that's because the beneficiary of spot gas purchases on a going-forward basis will be system customers, not all distribution customers. 179 MR. KITCHEN: To the extent that we have planned purchases and on behalf of the sales-service customers, they'd be recovered from sales-service customers. 180 MR. VEGH: Even if they're unplanned purchases, if you have to purchase spot gas because the winter is colder than forecast, then you'll purchase those for the benefit of system customers, not for DP --not for all distribution customers? 181 MR. ISHERWOOD: Except for those two rare cases. I would also point out the proposal only really covers off Union south. We may still be buying spot gas for bundled-T customers in Union north. 182 MR. VEGH: Fair enough. I think this entire cross-examination has been about Union south. Subject to those rare exceptions you talked about. 183 MR. ISHERWOOD: Right. 184 MR. VEGH: Let's leave those qualifications aside. They're on the record. You can rely on them but just for the sake of answering the questions, why don't we just leave those rare cases aside and focus on the south. 185 So we've now looked at if a DP customer, I'm sorry, if a customer overconsumes, you may still buy spot gas on their behalf, but you'll collect all the costs of that gas from those customers. 186 MR. KITCHEN: That's correct. 187 MR. VEGH: Now, if a direct-purchase customer underconsumes now, we're going to the winter checkpoint, the direct-purchase customer underconsumes and it has a positive VGA relative to forecast for the winter checkpoint, is that gas physically kept separate in their account or is it available for Union to use for other purposes? 188 MR. ISHERWOOD: The one advantage that the load-balancing proposal has is that to the extent the customer has excess gas in the system, bundled-T customer has excess gas in the system in the winter, then there is additional diversion rights that we're going to have available to direct-purchase customers. So the one advantage they have is they are long on gas they can divert that off subject to system operations during the winter. But in the past, bundled-T customers have not had much flexibility getting gas off the system in the wintertime. So the proposal does a allow to hat. 189 To the extent the customer doesn't choose to do that, then the capacity-management group is always looking at all gasses on the system on any given day in terms of a bundled operation of the system. I guess the answer to both of your questions is they do have the option to get it off. If they choose not to, then it is considered part of the overall system balance. 190 MR. VEGH: I do want to ask you some detailed questions really on diversion, so let's leave that aside for a moment. Say, for whatever reason, the direct-purchaser customer has underconsumed relative to forecast and they have a positive amount relative to forecast in their VGA, Union -- as I understand your answer, you do not keep that gas separate. Union is capable of using that gas for whatever it -- whatever Union consideration is a best use for that gas? 191 MS. VANDERPAELT: I think what Mr. Isherwood is agree to is that's correct subject to on any day the customer requests it, subject to our operations, we have to have it ready there for them. It's not -- it's not for of free there we can grab it and hold on to it the whole winter. If on Tuesday they haven't requested a diversion, it's part of our total portfolio. If on Thursday they request a diversion and we can accommodate it, we have to accommodate it because it's their gas. 192 MR. VEGH: Okay. So I'll ask you questions about diversion, and maybe we could leave that aside a bit. 193 MS. VANDERPAELT: That's the qualification on your answer. Is it there for Union to use? It's part of our portfolio, but it has to be available to them on any given day. 194 MR. VEGH: So it's there subject to diversion? 195 MS. VANDERPAELT: Yes. 196 MR. VEGH: So then when it's there, so the direct-purchase customers has underconsumed and if can system customers have overconsumed, then Union can draw on the gas delivered by the direct-purchaser customer and effectively loan that gas to the system customers, couldn't they? 197 MS. VANDERPAELT: The way we are looking at the proposal, going forward, is each group of customers would be accountable for their own inventory. 198 Operationally, we don't colour code the gas to say we loaned or borrowed from one or the other. We look to make sure the total system is working. 199 MR. VEGH: Right. So can that be used for system customers? 200 MR. ISHERWOOD: I hate to keep going back to the diversion case. But because of the diversion opportunity always existing, to the extent that the gas there is being used, it could be used for the whole system balancing portfolio, if you look at the whole system in total. But because the diversion option is there, we can't count on it long-term. This is counted on through day-to-day. 201 MR. VEGH: Okay. On a day-to-day basis, let's say today is the day, and that gas is there, so instead of making an incremental, unplanned spot gas purchase today to meet unexpected needs, couldn't you just draw on the gas delivered by a DP customer who has underconsumed. 202 MS. VANDERPAELT: Yes, and likewise, because the direct-purchase customers don't have to be at their forecast until the checkpoint, they could be using system gas in January or December without any cost consequences knowing that they're coming to their forecast in February. So it really is bilateral. 203 MR. VEGH: But your answer is yes, Union can use that gas to serve system customers. 204 MR. ISHERWOOD: I would add to that we don't typically make spot gas decisions. In fact, we don't make spot gas decisions to balance day-to-day needs. It's really to balance the seasonal aspect of the winter being colder-than-normal. We wouldn't buy spot gas today because it's cold, we would buy spot gas if the season or the term between now and the end of season is cold. 205 MR. VEGH: We're now looking at unforecasted gas spot purchases. These are unplanned, you're now expecting colder-than-normal weather. Don't you use whatever gas you have available in the system to balance it and if that means you buy less spot gas, you buy less spot gas. 206 MS. VANDERPAELT: Yes, but if we're having colder-than-normal weather, typically it is the entire M2 market is all heading in the same direction. So it would be very unusual for the direct-purchase market to be on one side of the curve and the system customers to be on the other side of the curve, because they're all homeowners. 207 MR. VEGH: Well, unless we talked about some of the scenarios we talked about yesterday, direct-purchase customer has delivered on a certain basis, a marketer delivers on a certain basis, and then a number of its customers migrate or depart or something happens. There are other variances, other reasons why consumption can vary from forecast other than weather. 208 MS. VANDERPAELT: Yes, but those are extremely minor in comparison to the weather. 209 MR. VEGH: Well, we won't -- it's a situation that could arise and the gas is available to be used for system customers. Right? 210 MS. VANDERPAELT: Under the circumstances that you present, I'll agree. 211 MR. VEGH: Okay. If that's used -- if it is used under those circumstances, is there any compensation for the direct-purchaser customer who has underconsumed? Is there any compensation for Union's use of that gas for another purpose. 212 MS. VANDERPAELT: No, just like there is no compensation for the direct-purchaser customer who used system gas in the month of January, in my example. 213 MR. ISHERWOOD: I think it's important to note that all bundled customers, whether it's the system-sales customer we talked about here or even the T-service customers we all consider to be bundled. When we look at the whole balance of the system each and every day and as we plan the winter week-to-week and month-to-month, so there really is no looking at is one class compensating another class. It's looked at in its entirety. 214 MR. VEGH: Right. So there's no compensation? 215 MR. ISHERWOOD: Either way. 216 MR. VEGH: Right. I'd like to speak to you about diversions then because you talk about that a lot. And can you go to the bundled-T contract, please? That's Exhibit M.17.3. 217 MS. VANDERPAELT: We have it. 218 MR. VEGH: Now, if a direct-purchaser customer has overdelivered relative to forecast, I take it that they still have subject -- they still have a base case delivery obligation to Union. 219 MS. VANDERPAELT: Yes, their obligated deliveries to Union don't change as a result of the proposal that we have here. 220 MR. VEGH: Right. And the consequences for failure to make a delivery are in section 5 of the bundled-T contract? 221 MS. VANDERPAELT: That's correct. 222 MR. VEGH: And as I read that, if a customer does not deliver, then effectively the customer is in breach of the contract and must pay a failure-to-deliver rate? 223 MS. VANDERPAELT: That's correct. 224 MR. VEGH: And this rate is meant to incent delivery, so it's effectively a penalty they pay? 225 MS. VANDERPAELT: That's right. 226 MR. VEGH: And even if a customer has, I think you've already agreed to this, a customer has overdelivered, that doesn't give them the right -- if the customer has underconsumed, that doesn't give them the right to stop delivery under this contract? 227 MS. VANDERPAELT: Right. The obligated delivery is tied to our requirement to have gas at Parkway or at Dawn, so it's related to our needs for meeting the system and keeping it whole through the winter. 228 MR. VEGH: So the customer must make a specific diversion request? 229 MS. VANDERPAELT: That's correct. 230 MR. VEGH: And Union treats these diversion requests at its discretion? 231 MS. VANDERPAELT: Yes, Union looks at them to see if they are able to operationally accommodate them on the days that the diversion has been requested. 232 MR. VEGH: So they'll consider these diversion requests as to how that request, if granted, could impact on the rest of the assets and services that Union has to provide? 233 MS. VANDERPAELT: That's correct. 234 MR. VEGH: And so diversion requests end up being part of a priority ranking of assets and services that Union would consume? 235 MS. VANDERPAELT: That's correct. 236 MR. VEGH: And you were asked an interrogatory at Exhibit J.5.11 -- 237 MS. VANDERPAELT: I have it. 238 MR. VEGH: -- on the diversion -- well, the policy on priority of service. The question asked to produce your policy and written and verbal instructions to staff respecting level of priority service. And you attach your policy and you say that staff are instructed to administer the policy of service as described. Then on page 2 there is a listing of services and this listing is in priority, right, it's in priority, so the top services that have to be provided are at the top of the list and the services that are lower priority are closer to the bottom of the list? 239 MS. VANDERPAELT: That's correct. 240 MR. VEGH: And at the top of the list, very top of the list are, not surprisingly, firm service entitlements to infranchise customers or to enfranchise customers; right? 241 MS. VANDERPAELT: That's correct. 242 MR. VEGH: So assets have to be available to provide those services and then each service going down the list, before the next request on the list is granted? 243 MS. VANDERPAELT: That's correct. 244 MR. VEGH: And I don't want to go through every item on this list, but I notice that diversion activities and suspensions are, well, frankly they're pretty low on this list, aren't they? The only thing that they're ahead of is late nominations. 245 MS. VANDERPAELT: That's correct. 246 MR. VEGH: And in fact, they're below transactional services such as peak storage, which is number 5, off-peak storage, number 7, hub activity, number 8. Those are all transactional services; aren't they? 247 MS. VANDERPAELT: Some of those transactional services do have firm contractual requirements under them, though, that's why they're ahead. But those are all S&T transactional services, yes. 248 MR. VEGH: As I understand it, assets are only supposed to be made or are only made available for transactional services once it's determined that they're not required to serve all infranchisees; is that right? 249 MS. VANDERPAELT: That's right. These were determined we did not need them at the time the contracts were entered into. Diversions don't have a contract entered at the time. So they're a weekly request or a day-to-day request. So we're unable to ascertain that those requests were outstanding at the time that those assets were released and somebody contracted for them. 250 MR. VEGH: So it appears to me that since assets for S&T services are only available when they're accessed to infranchisees, when you look at a ranking of services, diversions fall somewhere below redundant. That's a rhetorical question. 251 Diversions, I guess, are just one way to deal with underconsumption of gas? 252 MS. VANDERPAELT: That's correct. 253 MR. VEGH: And there are other ways to deal with underconsumption of gas? 254 MS. VANDERPAELT: That's correct. 255 MR. VEGH: One is a title transfer? 256 MS. VANDERPAELT: Yes. 257 MR. VEGH: And a title transfer is effectively a notional transfer from one account of Union to another account of Union? 258 MS. VANDERPAELT: That's correct. 259 MR. VEGH: And so from Union's perspective, this is really like a bookkeeping entry? 260 MS. VANDERPAELT: Yes. 261 MR. VEGH: And Union charges a fee for title transfers? 262 MS. VANDERPAELT: There is a nominal fee to cover administration, yes. 263 MR. VEGH: And so that's from Union's perspective. From a customer's perspective, it's effectively a sale of gas from one customer in Union's franchise to another customer in Union's franchise? 264 MS. VANDERPAELT: I would agree. 265 MR. VEGH: Now, Ms. VanDerPaelt, I guess this goes to your observation that all of these customers in your franchise are effectively working off the same forecasting methodology; right? 266 MS. VANDERPAELT: All the M2 marketers, yes. 267 MR. VEGH: Right. And so, for these customers, and leaving aside customer migration issues, the main reason one customer may have some oversupply is weather related; right? 268 MS. VANDERPAELT: Yes. 269 MR. VEGH: So if one customer in the franchise is underconsumed, it's likely that the other customers in the franchise have also underconsumed. 270 MS. VANDERPAELT: It's likely that another M2 customer has underconsumed, but there's always contract customers out there as well. 271 MR. VEGH: Okay. They make up, I think when we looked at the -- so that's a fair point, and I'll take that point. So the market would be those other customers, because the other M2 customers are all going to be in the same market position really? 272 MS. VANDERPAELT: Yes, but there's also the diversity in the contract renewal base of the M2 market. Retail energy marketers have contracts that come due each and every month, so we have seen in the past, depending on where the contract is renewing, a customer who has a retail energy or a DP contract with a marketer may becoming into a position where they actually need to buy supply to close out the year end of their contract, even though everybody else is has sustained a warmer-than-normal November 1 and they're flush with gas. So there has been the circumstance where there is an opportunity within the M2, but the more frequent market to look for would be the industrial market. 273 MR. VEGH: Now, if a customer wanted to sell gas to someone who was outside the franchise, so we're no longer looking at a title transfer, but say, a sale of gas at Dawn or something, if a customer wanted to do that, would they be in position to do that? 274 MS. VANDERPAELT: That would be considered a diversion. 275 MR. VEGH: So it would be an issue of priority ranking. 276 MS. VANDERPAELT: Yes. The distinction between a diversion is the gas leaves the system. On an inventory transfer, the gas is staying on Union's system. 277 MR. VEGH: Okay. And when you talk about the diversion, I've looked at non-delivery in the contract. I don't see any diversion rights in the contract. 278 MS. VANDERPAELT: The contract assumes the customer is balancing to forecast. Diversions are a separate service. It's not part of the bundled-T service. 279 MR. VEGH: Okay. So are there rights to diversions set out anywhere other than this list of priorities that you responded to in the interrogatory? 280 MS. VANDERPAELT: No, it's a service that the customer would request. It's not part of the bundled-T contract. 281 MR. VEGH: Okay. So now let's look at -- well, we've been talking about diversions where a customer has -- I've been asking questions about diversions where a customer has underconsumed. I want to ask you some questions about make-up deliveries which are another diversion. We've talked about diverting gas off the system. Make-up would be sort of diverting additional, not diverting, moving additional gas on to the system? 282 MS. VANDERPAELT: Yes, we refer to that as incremental supply. 283 MR. VEGH: And this scenario arises where a customer has underconsumed gas, say, going into the fall checkpoint where they have to take positive steps to bring -- 284 MS. VANDERPAELT: I think you mean February. If they're underconsumed, they have to shed gas in September. 285 MR. VEGH: So they've underconsumed, right, and they have to shed their gas from storage in September. Right. Okay. 286 So now we're talking about -- I'm sorry for confusing this. The customer has overconsumed going into the fall checkpoint. The consequence that they face is a possible unauthorized storage charge because they have to shed their gas, the excess gas from storage in September or else they pay this penalty, the unauthorized storage charge. 287 MS. VANDERPAELT: I just want to check, you said underconsumed, I heard "over." If the customer is underconsumed, yes, they have to shed the gas by September 30th. 288 MR. VEGH: That's what I meant to say. And again, the consequences for not shedding the gas is effectively they're paying a penalty or incentive to get the gas out. It's not like they're buying storage. 289 MS. VANDERPAELT: That's correct. It's a penalty situation. 290 MR. VEGH: Okay. I'd like to ask you some questions about this -- I don't think I need those anymore. 291 Now, the last area I want to ask you some questions around on the load-balancing proposal was in relation to how the, there was a system planning for -- system planning works for both direct purchase and system customers on this new proposal. These two checkpoints, February 28th and September 30th, these are system-wide checkpoints that Union has in place; right? 292 MS. VANDERPAELT: That's correct. 293 MR. VEGH: And so, there is a consumption or there is a forecast of direct-purchase consumption for those dates, February 28th, September 30th. Is there a similar sort of forecast that's carried out for system customers for their forecasted consumption to February 28th and to September 30th? 294 MS. VANDERPAELT: The demands on the system, the consumption is forecast on a bundled basis so the entire M2 market, and then based on that requirement of gas and storage, we back off the load-balancing gas that's needed for the direct-purchase market, and the difference is the forecast of what a system group would have. 295 MR. VEGH: So is there a discrete forecasted -- forecasted equivalent of a BGA for system customers at those two checkpoint dates? 296 MR. ISHERWOOD: I think the best way to look at the two checkpoint dates is the gas-supply plan that Mr. Newbury arrives at would really look at the bundled -- we'll use the M2 class of customers here as an example in entirety, you wouldn't separate out the bundled-T versus general sales service. But for example, under the load-balancing proposal, if we can be assured that the direct-purchase customers will be balanced on February 28th, then the remainder, essentially, is what the utility would have to buy for the sales-service customers. 297 MR. VEGH: So for direct-purchase customers, you say you're forecasted to have consumed this much, and there's like an actual amount, quantity, that they're told to forecast towards, and there are consequences for not doing that. For system customers, I guess, do you say to yourself as Union Gas supplier for those customers, They're forecasted to have consumed X amount? 298 MS. VANDERPAELT: Yes. When we do the plan, we, the total plan and find out what system customers are going to be consuming, that's the basis of our purchase plan over the summer. We purchase in the summer for consumption in the winter. System-gas customers are all assumed to have an April 1 start. 299 MR. VEGH: Okay. And so you forecast an estimated consumption, and then when you get to February 28th, if there's a variance from -- do you track the variance from that forecast and the way you track the variance in the forecast for direct-purchase customers and then automatically purchase gas for the system customers in the same way that direct-purchase customers have to automatically purchase gas. 300 MS. VANDERPAELT: It's not down to the contract level, but if we're noticing that we are running out of gas, we would be out purchasing spot gas in order to balance that market as we are their supplier. 301 MR. VEGH: Right. So you look at the system as a whole and if there's -- if there's enough gas in the system as a whole, then that's what drives your purchasing decision, not whether or not the system gas component or customers have consumed to hit a forecasted amount. 302 MR. ISHERWOOD: I'd go back to a previously-discussed principle, that basically the direct-purchase market and the sales-service market will move in the same direction. If you see a colder-than-normal winter, we'll see both markets requiring incremental gas and what the utility will do is look at that requirement throughout the winter and a recommendation to the DP market would be to look at it through the winter and not wait to February to, necessarily, do all the transactions. 303 MR. VEGH: Yes, that's prudent. If you find that by the February checkpoint, by February 28th, system customers have actually consumed more gas than forecast, but there's enough gas in the system to serve those customers, you just let them use the gas -- you just use that a gas in the system for those customers? 304 MR. ISHERWOOD: I think we're back to the point we talked about earlier where the direct-purchaser customer will have flexibility to divert gas off throughout the winter, and so we would not necessarily count on that gas being there on February 28th. 305 MR. VEGH: Right. But if there is, you could just draft that gas for the system customers. 306 MS. VANDERPAELT: But from a planning purpose, we don't wait until the last minute to make purchase, so we would never plan on it being there. 307 MR. VEGH: That's going to the winter checkpoint. Now, for the fall checkpoint, a direct-purchase customers has to shed any excess gas from storage on September 30th; right? 308 MS. VANDERPAELT: They can shed at any time. It has to be off by September 30th. 309 MR. VEGH: Right. Now, is there a similar obligation, say, for gas purchased for system customers? Does any excess gas have to be removed from storage by September 30th? 310 MR. ISHERWOOD: Again, the system market, system-supply market and the DP market on the M2 class of customers would move in the same direction. So if, directionally, the direct-purchase M2 customers had to get gas off the system by September 28th, our experience at the utility on the system-sales side would be we would be leaving pipe open throughout the summer to get that excess gas from the previous winter off before we hit October 31. 311 MR. VEGH: Right. But going to September 30th, could you have a scenario where, because things didn't work out as planned, you've actually purchased more gas for system customers than you have planned so you have some excess gas in storage. Is that possible? 312 MR. ISHERWOOD: I would say it would be unlikely. 313 MR. VEGH: But is that possible? 314 MR. ISHERWOOD: It's possible some of the DP market might not get some of the gas off the system on time as well. I think directionally, from a planning point of view, you would assume that both the DP market and the sales customers are free of any excess inventory by the end of September. 315 MR. VEGH: You assume that, but you enforce that against the direct-purchase customers. I'm just asking you: Do you enforce that against system customers as well? 316 MR. ISHERWOOD: I think the capacity-management group would be looking at that. I'm sort of speaking on their behalf here, but October is a very difficult month to get gas into the storage. As you fill the inventory up, the last few molecules you put into storage are very difficult to get in storage. So if we are long on supply coming out of the winter, we typically act on that very early in the summer season in order to make sure we have the room we need in October to deliver the normal firm deliveries. 317 MR. VEGH: But you don't notionally impose a penalty on yourself for unauthorized use of storage if things didn't go as forecast and you end up having gas in storage on September 30th; right? 318 MS. VANDERPAELT: No, we don't. As system operator, that would be impractical. 319 MR. VEGH: Now, on a going-forward basis to sort of see how this system is working, I'm going to ask you for an undertaking, you could refuse it now or you could think about it and do it later, but I ask you to consider this as a reporting matter in order to see how this new proposal works on an even- handed basis with system customers and direct-purchase customers when it comes to the use of assets. 320 And what I'd like to see is a reporting requirement, and I'd ask you to react to it, would be to file a report, say, as part of the quarterly QRAM application, that sets out the equivalent of a VGA forecast for system customers, so that it's public and transparent. So that would include a forecast of consumption at each checkpoint, February 28th to September 30th, and then a report on actual consumption at each checkpoint, and a report on what steps were taken to manage the variances from forecast, including the costs of any transactions involved in managing the variance from forecast. Would you be able to provide that kind of information? 321 MR. ISHERWOOD: That really goes outside the basic premise of the QRAM. The QRAM is really intended to set the commodity pricing for the sales-service customers. I believe the actions that you want us to report on are typically now reported on in terms of the prudency review of the gas-supply cost for any given year. So if we have to buy spot gas for sales-service customers or incur UDC for sales-service customers, those are all reviewed as part of the annual prudency review. 322 MR. VEGH: We're not looking at the issue of prudency here. We're looking at the issue of having similar or fair treatment between system customers that Union serves and direct-purchase customers that marketers serve. The question is, or the issue is that you're imposing obligations on marketers to meet certain requirements so that in terms of their use of assets, and then the question is, are you imposing the same kind of requirements on yourself on behalf of system customers? 323 So the only way to really -- that's not going to be addressed in a prudency review. So what I think would be helpful in order to evaluate whether or not you are treating system customers and direct-purchase customers fairly and equitably with respect to the use of assets for balancing purposes, is to provide a similar report. 324 MR. PENNY: Mr. Chairman, I think that the issue of whether there should be such reporting or not is really a question of argument. Mr. Vegh can make his argument in support of that proposal and I suppose Union can react to it. I think perhaps what is of relevance to factually underpin that argument is whether such information is available and that, I think, is a perfectly valid question. But the question of whether it should or shouldn't be done, and in what context in my submission, is really a matter of argument. 325 MR. VEGH: If the Board were to direct you to provide that sort of report, would you be able to do that? 326 MS. VANDERPAELT: I think if the Board directed us to we'd have to. 327 MR. VEGH: Okay. Thank you. Those are my questions on the load-balancing proposal. I wanted to ask some questions on the discretionary gas supply proposal. This should probably take us up to the break around 11, 11:15. 328 Panel, for the last issue on load balancing, I would asking questions just on behalf of retail marketers. The questions on discretionary gas supply service I'm asking on behalf of retail marketers and wholesale marketers. You've done what is sometimes the impossible, but brought together the entire spectrum of the gas supply industry around this issue. This issue of Union providing gas services through the utility. 329 So these questions are asked on behalf of CEED as well as on behalf of Union Energy, Ontario Energy Savings Corp., and Superior Energy Management. And your evidence on discretionary gas supply service, just so everyone has it handy, is Exhibit H.1, tab 1, page 25. 330 And it's succinct. Despite that I do have some questions about it because I have to confess, as I read your evidence, I confuse both about the offering and what it looks like as a commercial offer and the regulatory treatment of this offer, so I'll have questions in both categories. 331 First in terms of what the offer would look like, it's described very briefly at Exhibit H.1, tab 1, page 25. The first sentence in that evidence says that this offer of a discretionary gas supply service is consistent with Union's response to the load-balancing directive. And I've gone through earlier decisions on the load-balancing directive and I haven't seen anywhere where the Board directed Union to provide a commodity sales service as part of a new load-balancing proposal. Have I missed something? 332 MS. VANDERPAELT: It was consistent to where we were going is that customers recognize that they would have a requirement to potentially bring in a small amount of gas in the month of February, and what the customers expressed to us is they've had difficulty buying that in the market in the past couple of years and said, Can utilities sell us this gas if we need it? Our only mechanism that exists today is WACOG, and our thoughts were if we were going to sell them the gas it had to be at a market-based price. 333 MR. VEGH: So the Board didn't -- the Board never directed you to provide this sort of service to customers? 334 MS. VANDERPAELT: No, they haven't. 335 MR. VEGH: I have asked you -- that will do. 336 You mentioned just now and you say in the first sentence here that this offer of discretionary gas supply services is based on the express interest of customers, and I asked you an interrogatory of that evidence. That interrogatory is J.24.8, if you'd pull that up. 337 MS. VANDERPAELT: I have it. 338 MR. VEGH: That interrogatory enclosed a copy of a document that I don't think made it into the response to the interrogatory so that's the document I have just handed around. It's a PowerPoint presentation from Union Gas to the Greenhouse Growers' meeting dated March 26th, 2003. 339 Do you have a copy of that? 340 MS. VANDERPAELT: I do. 341 MR. MORAN: Mr. Chair, this would be Exhibit M.18.1, a copy of a PowerPoint presentation to Greenhouse Growers' meeting, dated March 26th, 2003. 342 EXHIBIT M.18.1: COPY OF A POWERPOINT PRESENTATION TO GREENHOUSE GROWERS' MEETING, DATED MARCH 26TH, 2003 343 MR. VEGH: And so this presentation entitled "Service Enhancements," the second slide on the first page just after the cover slide, there is an agenda that explains -- the first item on the agenda is a bundle T-service and that's the new load-balancing proposal we were just talking about. The second item on the agenda, there are a number of potential optional services that are identified there. The first one listed is discretionary gas supply service. Then there are some subbullets that provide some elaborations, fixed-price service, price hedges, insurance. But this discretionary gas supply service that's described in this presentation, I take it that's an earlier version of the discretionary gas-supply service that you ultimately came to propose in this application. 344 MS. VANDERPAELT: Yes, at this meeting customers had said what are some ideas? We bought forward some concepts. I believe in my IR response I indicated those were preliminary concepts and the final product is different from what is listed there, although the name is very similar. 345 MR. VEGH: And the discussion of these potential new services including the discretionary gas-supply services started around page 5 of that handout. The slides on page 5, and 6, and 7, describe some services and it looks like there were a few innovative services that Union was working on internally at that time; is that fair? 346 MS. VANDERPAELT: We're always looking at innovative ways of serving the customers. 347 MR. VEGH: Right. And one of the services that's discussed here, we have the discretionary gas-supply service at page 5, and then at page 6 there is a financial options project, a gas-price hedge. Has Union determined that it will not offer that service? 348 MS. VANDERPAELT: That's correct. 349 MR. VEGH: So that service didn't make it through whatever internal thresholds a new service has to make for Union to offer it? 350 MS. VANDERPAELT: That's correct. 351 MR. VEGH: So whatever the internal risk and reward criteria or appropriate service criteria is, it just didn't cut it. 352 MS. VANDERPAELT: Yes. What we determined in talking with some of the energy marketers, so the wholesale providers, is that the gas-hedge service is probably something that should be something they offer, but that we help them market because the message wasn't getting through to this market that that product was available to them. 353 MR. VEGH: Well, this financial service was to be available, as I see it described here and presented to the greenhouse growers, that this service would be available to end-use consumers. 354 MS. VANDERPAELT: What we're suggesting is this was a service that Union might provide. Upon further analysis, we determined that that service is available to end users from marketers, it just needs to be marketed or advertised, if you will, to the end users by that group of marketers in a way that they understand how it works. 355 MR. VEGH: But you've concluded that Union would not provide this service. 356 MS. VANDERPAELT: That's correct. 357 MR. VEGH: The original idea was Union at least was thinking about providing this service. 358 MS. VANDERPAELT: It was a concept. 359 MR. VEGH: It was a concept. So the earlier version of the DGSS was a concept? 360 MS. VANDERPAELT: That's correct. 361 MR. VEGH: And this was a concept? And as you say, Union is always looking for innovative ways to serve customer needs. So given that, that this service seemed to grow out of your proactive marketing efforts, it seems a bit odd to suggest that all you're simply doing here is responding to customer requests. 362 MS. VANDERPAELT: It's customer requests that drive us to develop new services. And it was those requests that drove us to some brainstorming sessions which came up with these concepts and then through further evaluation, as part of our product development process, we established that what we could do was something much simpler and that our place in the market was much smaller than the original customer input had led us to believe. So we downsized what we were looking for, and as a result, you have the DTSS that's in front of you today. 363 MR. VEGH: So you're routinely considering customer requests for services, looking internally whether it makes sense for you to offer them, and then making a determination yes or no. There's nothing unique about this that this arose from customer requests. 364 MS. VANDERPAELT: That's correct. 365 MR. VEGH: The third sentence in your pre-filed evidence at Exhibit H.1, tab 1, also struck me as a bit confusing and I'll read the sentence and tell you why I thought it was confusing. 366 "The DGSS will allow direct-purchase customers who are unable to access supplies to meet their February 28th checkpoint the ability to buy a quantity of gas from Union." 367 So a couple of things about that sentence. First, for direct-purchase customers, don't they all either have some kind of marketer or supplier who arranges gas supply for them? 368 MS. VANDERPAELT: Yes. 369 MR. VEGH: And those marketers or agents, they're in the business of supplying gas or arranging for supply of gas. 370 MS. VANDERPAELT: Yes. 371 MR. VEGH: And under the market structure in Ontario, apart from default supply or system gas, customers are supposed to rely on the market for gas supply and not on the utility; right? 372 MS. VANDERPAELT: And this customer group that we're dealing with at the greenhouse has found for an annual supply, that marketing group is there, but when they're looking for a one-time purchase, they can't always find someone to supply them. 373 MR. VEGH: Well, are you saying that the suppliers will not supply them or that the customers do not like the terms of the offer? 374 MS. VANDERPAELT: I would suggest it's probably the price in terms of the offer. 375 MR. VEGH: Right. For example, you mentioned yesterday the credit terms may be onerous. 376 MS. VANDERPAELT: Correct. 377 MR. VEGH: So what this proposal does, then, is allow Union to offer credit terms that are more attractive for gas, that are more attractive than the terms offered in the market. 378 MS. VANDERPAELT: Sometimes it's not just credit. In those cases, I would say you're correct, but it's also sometimes the volume. A lot of times what we find is there's a bit of a nuisance factor. We would actually be going to those same wholesale providers for the back-to-back service so they still would get the business as a result of this service. 379 MR. VEGH: Now, what did -- now, these customers last year before you were in a position to provide this service, they ended up buying their gas somewhere, didn't they? 380 MS. VANDERPAELT: No, they burned oil. 381 MR. VEGH: None of them bought their gas? 382 MS. VANDERPAELT: Well, obviously some did. 383 MR. VEGH: All right. So for those of whom it was worth it, they bought the gas; and for those for whom it wasn't, they burned oil. 384 MS. VANDERPAELT: And our business is to try and keep the oil out. 385 MR. VEGH: Well, I won't respond to that. Now, when we talk about the credit terms, and that's the one you offered up, presumably the market charges credit terms that it believes is appropriate in light of the risk of non-payment? Fair? 386 MS. VANDERPAELT: Fair. Now, if Union is offering better credit terms than the market is offering, then I guess Union's prepared to take that risk out without the level of compensation the market would ask for. 387 MS. VANDERPAELT: As I suggested yesterday, we have the distribution services which we sell to these customers, and we continually evaluate their creditworthiness with the utility. We would factor any other services into that credit equation to ensure we had sufficient coverage to meet the needs of the customer with supplying the service. 388 MR. VEGH: Let's put it this way. If you have a customer who wants to take advantage of the below market credit costs that Union is providing to it, what happens if that customer is unable to pay? 389 MS. VANDERPAELT: Why would you think our credit requirements are below market? 390 MR. VEGH: Because they can't meet the market's requirements. The costs -- you said that these customers are not prepared or don't want to pay the costs that the market is requiring from a credit perspective. 391 MS. VANDERPAELT: But I didn't say ours were below market. We have a credit formula that's established based on well, I can't speak to the formula because it's our finance department, but it's based on a number of factors. We don't change our credit formula when looking at providing them this service. We would still factor that into the normal equation of all business that we do on our system. 392 MR. VEGH: But the cost of purchasing -- the cost of credit for these customers in purchasing from Union would be lower than the marketplace, that's what justifies this service; right? 393 MR. ISHERWOOD: We can't agree to that. We don't know what the market credit requirement is relative to the Union Gas requirement. We also state these customers have an option of being served by a marketer or being served under sales service. Our credit requirement would be the same whether they're sales-service customer or whether they're buying a small slice of gas under this service. 394 MR. KITCHEN: To the extent that we're adding the gas supply admin fee, there is a component of a fee related to bad debt. 395 MR. VEGH: So again, what happens if this customer who has decided no the to buy gas from a marketer because the marketer demands too expensive or onerous credit terms, so this customer now turns to Union, and this customer goes under. What happens to the unrecovered or what happened to the revenues that you would have received from this customer? Is is this a shareholder risk, is this a ratepayer risk? What happens to it? 396 MR. KITCHEN: To the extent that we have a letter of credit from customers that are taking the service, we'd exercise that letter of credit. In the event that the customer failed and there was no letter of credit, then it would presumably be covered off in our existing bad-debt provision. 397 MR. VEGH: Now, you described this service as a back to back service. So I guess what that means is a customer pays Union, Union pays a supplier? That's what you meant by back to back? 398 MR. ISHERWOOD: When we refer to the term back to back, we're essentially establishing the price point at which that transaction takes place. So if you have a request from a customer to go and purchase gas on their behalf, we will go to the market and establish the price and we will charge the same price essentially back to back to the end user with the addition of the gas supply admin charge added in. 399 MR. VEGH: Okay. So does Union take title to that gas? 400 MS. VANDERPAELT: No. 401 MR. VEGH: You never take title to the gas? 402 MS. VANDERPAELT: I believe the way it works is we arrange the supply -- correction, we do take title to the gas. We arrange the supply, it comes to Union and we would put it to the customer's account. 403 MR. VEGH: So you purchase that gas, you own the gas, and you pass the gas on to the customer at cost plus the admin charge? 404 MS. VANDERPAELT: That's correct. 405 MR. VEGH: And will there always have to be an actual exchange of molecules or if Union has excess gas on hand, could it simply sell that gas to the customer? 406 MS. VANDERPAELT: We discussed that yesterday. We are open to whether or not it has to be a molecule purchase or whether it could be a sale from our inventory. If the Board approves the service but directs us that it must be a physical purchase, we are comfortable with that. 407 MR. VEGH: Okay. If the Board approves it and says it must be a physical purchase, how is the Board going to ensure that for each particular transaction that the molecules that the customer receives are actually part of the back-to-back transaction? 408 MS. VANDERPAELT: We would have documentation showing the purchase and documentation showing the request from the customer, so there will always be an audit trail available. 409 MR. VEGH: And this audit trail will allow the Board and everyone else who is interested to ensure that the gas was actually passed through at cost? 410 MS. VANDERPAELT: If we are asked to produce the records, we would be willing to subject to the privacy rules around customer information. 411 MR. ISHERWOOD: I would just add to that. To the extent a customer has asked us to purchase gas on their behalf and we now have in our hands both the price that he's paying, as well as the volume he has requested, I would view that as being customer information that's confidential. What has happened in the past, we have been audited by the ERO I believe, and as Sarah pointed out, those transactions would be quite available. 412 MR. VEGH: To the ERO. 413 MR. ISHERWOOD: And based on their audit, they would be able to recommend that the audit trail was appropriate. 414 MR. VEGH: I want to ask you another question about your pre-filed evidence at Exhibit 1, tab 1. Probably the best way is if you could also turn up the proposed R1 rate schedule where this service is now added. I apologize for not having it, it's in the H binder, but I don't have the explicit page number here. I just have R1. 415 MR. KITCHEN: It would be in H.3, tab 3. 416 MR. VEGH: Thank you. So it's rate R1 entitled, "Bundled Direct-Purchase Contract Rate," and this includes as small letter (i) the "Discretionary Gas Supply Service." That's the rate for this service. 417 MR. KITCHEN: That's where it would appear on the rate schedule, yes. 418 MR. VEGH: So, yes, if you could have that handy. I want to ask another question about your prefiled because you say you in prefiled, in the sense we talked about, you say: 419 "The DGSS will allow direct-purchase customers who are unable to access supplies to meet their February 28th checkpoint the ability to buy a quantity of gas from Union." 420 But when I look at the qualifications for service under the tariff, it looks to me like it's available to all bundled DP customers; is that right? 421 MS. VANDERPAELT: Bundled DP are the bundled-T. Yes. 422 MR. VEGH: So it's not restricted to DP customers to meet their February 28th balancing obligations? 423 MS. VANDERPAELT: No, not at all. 424 MR. VEGH: And it's not restricted to customers who are unable to access supplies? 425 MS. VANDERPAELT: No. 426 MR. VEGH: It's available to whatever customer wants it. 427 MS. VANDERPAELT: On a non-discriminatory basis, yes. 428 MR. VEGH: In light of that, isn't this statement a little misleading that this is what this service does? 429 MS. VANDERPAELT: I think we're trying to establish the drivers for the service, not to explain the fact that we were not limiting to a market. In fact, I don't think we can limit service to a particular client group in a particular market under a certain set of circumstances. 430 MR. VEGH: Now, in terms of just operational terms, if a customer wanted to access this service, how would this work? Would they call their Union sales rep? 431 MS. VANDERPAELT: That's correct. 432 MR. VEGH: And in terms of that call, could you turn up, this is a document I passed out yesterday, Exhibit M.17.4. This is the Q and A sheet for Union. 433 MR. KITCHEN: Excuse me, Mr. Vegh, are we done with the R1 rate schedule? It's just we're getting crowded with binders up here. 434 MR. VEGH: Yes. Okay. So looking operationally, a customer wants to purchase gas because they're heading into February 28th and they need to do something. So I guess the direction in this Q and A sheet on -- page 3 of this Q and A sheet sort of gives some direction or instructions to customers on what they should do. 435 It says: "What should I do if by bank gas account balance..." 436 This is at the top of page 3: 437 "...Is expected to be below by February check point for the winter 2005 and beyond?" 438 And your question is: 439 "If you have consumed more gas than planned in the winter, you need to contact your supplier or Union for additional supply or other services such as gas loans, et cetera." So as I read this, what you're saying to the customer is, Call up your sales rep, say that you're in a debit position and the sales rep will be able to help you. And whether it involves gas supply or some other alternatives such as a loan, it's the sales rep that can help you. 440 MS. VANDERPAELT: Or your supplier. 441 MR. VEGH: Right. So they can call the supplier or they can call the Union sales rep, and this is telling them the Union sales rep could help you with supply or a loan or something else. 442 MS. VANDERPAELT: That's right. 443 MR. VEGH: And a loan is a transactional service? 444 MS. VANDERPAELT: That's correct. 445 MR. VEGH: And now, if the price of purchasing gas is particularly high at that time, and for whatever reason Union can offer the gas through a better price, a better price through a loan than through a sale, the sales rep is more likely to suggest: We can work out a loan for you, it's more economical than a sale; isn't that fair? 446 MS. VANDERPAELT: Yes, and loans are available in the competitive marketplace from a variety of providers. 447 MR. VEGH: Right. There could be other transactional services that may suit the customer's needs perhaps better than a gas purchase. 448 MS. VANDERPAELT: That's correct. 449 MR. VEGH: An exchange or whatever. It all depends what assets are available to Union at that time. 450 MS. VANDERPAELT: Well, the customer's requirement is to make sure there's molecules there, so whatever service they chose to meet their checkpoint with, there would have to be physical gas arriving, so it would be restricted to those that ensure that that capability is part of the service. 451 MR. VEGH: Right. But whatever would be the best service, what your sales rep is going to do is look for what's the best or optimal service for that customer that will meet the February 28 obligations. 452 MS. VANDERPAELT: Or the marketer. They deal with both parties. 453 MR. VEGH: Right. But now we're looking at the example where they're calling Union. 454 MS. VANDERPAELT: Okay. 455 MR. VEGH: So, in order for the sales rep to know what assets are available, is gas available to loan or what other -- what else may be available to meet this customer's needs, the sales rep is going to have to contact the S&T group and say, Look it I have a customer here who is short, what can you do for me; right? 456 MR. ISHERWOOD: Actually, they'd more likely contact the capacity-management group which looks at the point whole system operation at any one time. 457 MR. VEGH: But it's the S&T group that would have the products that are available for the customer. 458 MR. ISHERWOOD: The capacity-management group essentially looks at the system operation every day and we refer to it as putting assets on the shelf to be sold, essentially. Stocking the shelf is sort of a retail example. But to the extent there's excess assets being identified, they would be identified by the capacity-management group, and so the sales rep would typically call that group for help and to see if any assets were available that would help this customer, and it would be the sales rep that would be doing the transaction with the customer in most cases, unless it was a fairly complex, unique situation. Typically a sales rep would be doing the transaction. 459 MR. VEGH: So the capacity-management group, as I understand it, determines what assets are available on shelf, but then it lets the S&T group know these assets are available on the shelf to use as a product such as a loan or any other S&T product, and -- but they are the ones who would use those assets to structure the product. 460 MR. ISHERWOOD: To the extent that there is a need being identified, the sales rep that would serve the customer would have equal access to the assets on the shelf. So to the extent there was a loan capability that was being identified and put on the shelf and the sales rep would have access to that as much as the S&T group would have access to that. 461 MR. VEGH: So then the sales rep -- you're saying the asset's available, that's been made known to the S&T group and to the sales rep, and then either the sales rep or the S&T group would structure that into a product to fit the customer's need. 462 MR. ISHERWOOD: And the only thing I would add to that would be if it's a fairly unique or complicated type of asset or product, then the sales rep may rely upon the S&T group to help him structure it. 463 MR. VEGH: Okay. Now, in today's environment, Union, whether through the S&T group or through the sales rep can offer some product, but they can't offer gas sales; right? They can offer alternative products. 464 MS. VANDERPAELT: We can sell gas to the customer today at WACOG based on the R1 rate schedule. 465 MR. VEGH: Right. But you can't offer the supplemental gas service that you're talking about here. 466 MS. VANDERPAELT: I think we can't offer it at the price. We can sell the molecules today. The problem is the price. 467 MR. VEGH: Right. So you can't -- well, you can't offer it. You can't offer it on the basis that you're offering it, that you want to offer it. 468 MS. VANDERPAELT: That's correct. 469 MR. VEGH: You can't offer it the way you want to offer it. And competitors to Union, such as wholesale marketers, as you mentioned, they could offer the other products like a gas loan or something, but they can also offer gas sales in whatever form the market wants; right? 470 MS. VANDERPAELT: That's correct. 471 MR. VEGH: So the ability of Union, whether through the sales rep or through the S&T group, to be able to offer the gas sale as you're proposing here helps Union and the S&T group in the marketplace. 472 MS. VANDERPAELT: Well, this wouldn't be something available to the S&T group. I want to be clear. It's for in-franchise customers only. It does help us to address competitive threats such as oil, and as I illustrated, we would be purchasing it from the wholesale providers that are in the marketplace so they will still get the business. 473 MR. VEGH: But you're also -- but Union, and whether it's formally or internally through the S&T group or through the sales rep, and you say both can offer S&T services, the sales rep can offer an S&T service if it's simple and doesn't require the assistant of the S&T group. 474 MR. ISHERWOOD: But the focus for the sales rep is the franchise market as Ms. VanDerPaelt was saying. 475 MR. VEGH: The S&T group sells gas loans to the infranchise market too, don't they? 476 MR. ISHERWOOD: Typically no. Typically they focus on the exfranchise market, the S&T group. 477 MR. VEGH: For a short-term transaction, they provide products to infranchise customers for balancing purposes. 478 MS. VANDERPAELT: Currently, it's their infranchise sales rep who manages that transaction, if it's straightforward, not the S&T group. 479 MR. VEGH: I think we're getting too caught up in whether -- it's all Union. 480 MS. VANDERPAELT: Yes. 481 MR. VEGH: It's all Union. And Union sells S&T services. 482 MS. VANDERPAELT: Yes. 483 MR. VEGH: And those services compete with services provided by competitive suppliers? 484 MS. VANDERPAELT: Yes. 485 MR. VEGH: And your services, Union services, can be made more attractive if it can include a commodity component such as you're proposing here. 486 MS. VANDERPAELT: I'm not clear on how we make our current services more attractive with the addition of the commodity component. This is a stand-alone service. 487 MR. VEGH: Well, I guess a menu is made attractive by the more components you can put on it. But we can go on. 488 So that was the substance of the service, and now just a few questions on the regulatory approval. And I'd like to ask a question, and this question refers to Exhibit C.1, tab 5, page 1. This is your request for approval to continue ABC and gas molecule activities. 489 MR. KITCHEN: Would you repeat the reference? 490 MR. VEGH: Exhibit C.1, tab 5, page 1. 491 MR. PENNY: Are you referring to the addendum or the original evidence? 492 MR. VEGH: The original evidence. Okay. Now, this is the request for approval to continue ABC and gas molecule sales activities, and at page 1 of that evidence, there is a quotation from the undertakings between Union and the Lieutenant Governor in Council under the heading "background" there is a quotation from the undertaking and it says: 493 "Union shall not, except through an affiliate or affiliates, carry on any business activities other than the transmission, distribution or storage of gas without prior approval of the Board." 494 First off, the discretionary gas supply service does not fall within one of those business activities, right: Transmission, distribution, or storage? 495 MS. VANDERPAELT: I don't think so. 496 MR. VEGH: Right. And your description of the gas molecule sales for which you are seeking approval to provide in this case is on page 2, and the it says: 497 "Union intends to offer bundled gas sales service for the foreseeable future." 498 Now, that description does not include discretionary gas-supply service, does it? 499 MS. VANDERPAELT: No, because that refers to an annual service and this is one-time short-term needs. 500 MR. VEGH: Okay. So this service is not authorized under the undertakings or any previously-approved request under the undertakings. 501 MS. VANDERPAELT: That's why we're here today to request approval. 502 MR. VEGH: Well, are you? Where is your request for approval under the undertakings to provide this service? 503 MS. VANDERPAELT: I believe it's in the request for approval on the rate. 504 MR. VEGH: So you need two things. You need an approved rate and you need an approval under -- as I read it, maybe you could tell me if I'm wrong, but I understand your request for the approved rate. I don't see a request for approval under the undertakings. Is it your position you don't need one? 505 MS. VANDERPAELT: That's a legal interpretation that I don't have an answer to. 506 MR. VEGH: Maybe your lawyer does. 507 Are you requesting approval under the undertakings to provide this service? 508 MR. PENNY: We are, and we are requesting the necessary rate in the schedule that you were just speaking to a few ago. 509 MR. VEGH: So in terms of how we can approach this in argument, Mr. Penny, we can treat this as you have effectively amended the request at Exhibit C.1, tab 5, to include a request to provide the DGSS. 510 MR. PENNY: I don't think this requires an amendment. This is evidence. C1 tab 5 is evidence. You can treat our request as being a request both under the undertaking and with respect to section 36 of the Act. 511 MR. VEGH: Okay. Thank you. Those are my questions on the service. Thank you. 512 MR. SOMMERVILLE: Thank you, Mr. Vegh. We'll take our morning break and reconvene at 20 minutes to the hour. 513 --- Recess at 11:18 a.m. 514 --- On resuming at 11:43 a.m. 515 MR. SOMMERVILLE: We have a number of undertaking materials in front of us. For the record, Mr. Penny, would you like to indicate which ones have been -- 516 MR. PENNY: Yes, thank you, Mr. Chairman. Answers have now been provided for N.13.1, 14.6, 15.2, 15.3, 16.6, 16.9 and 16.12. 517 MR. SOMMERVILLE: Thank you. Mr. Shepherd? 518 CROSS-EXAMINATION BY MR. SHEPHERD: 519 MR. SHEPHERD: Yes, Mr. Chairman. Mr. Ryder has graciously allowed me to go ahead because I only have a short cross. I only really have one question that I want to run down. This is concerning the March park. There is an Interrogatory J.18.170, one-seven-zero, that asks why, if the March park is for 2005, it's being included in the rates for 2004? It's a very short one so I'll read your answer: 520 "The March park was included in 2004 rates given it is part of the new load-balancing method. To have the March park available for March 2005, Union will be required to purchase the March park service during the summer of 2004. Union will require the Board's approval of the March park in this proceeding." 521 Now, I guess I understand why you want approval prior to spending $8 million, that makes sense. But I guess what I don't understand is why ratepayers should pay for it in 2004 rather than pay for it in 2005 when they're getting the benefit of it. Could you help me with that? 522 MR. ISHERWOOD: I actually answered that question in some detail yesterday. 523 MR. SHEPHERD: I read the transcript and actually I have the transcript and I still don't understand it. That's why I'm asking. 524 MR. ISHERWOOD: Okay. I think as I stated yesterday, what we were tying to do first and foremost is to get the Board's approval on the March park as part of this proceeding so we can have some confidence in transacting the March park for the March 2005, which would be done next summer in terms of transaction will be done next summer. Recognizing that it is a March 2005 essentially gas cost, it would be recorded as a gas cost in 2005 and the point I made yesterday is that if it's included in rates in 2004, really a couple of things will be happening. 525 First and foremost, we have taken load-balancing costs out of rates so in the current year, for example, we have approximately $6 million that we recover from customers to cover off load balancing, and load balancing, as we have defined in the past, is the difference between the winter price we pay and the average spot price we pay. 526 So those costs are no longer in rates for 2004. So the one advantage of having the March park cost established and put in rates in 2004 is that if it is colder than normal, those costs could offset -- the load balancing costs in 2004 would be partially offset at least, by the March park revenue that we're collecting. 527 The second point I made yesterday I believe was to the extent that it is not colder than normal and we have a normal year, then the March park costs will be March park revenue -- sorry, will be in the spot gas deferral account and that deferral accounts has been in the QRAM to be disposed of prospectively during QRAM. So the money that we do collect if it's not being used effectively would be refunded to customers prospectively. 528 MR. SHEPHERD: Let me just understand that. I have that transcript reference here. Are you saying that the reason why you're not including load-balancing costs in 2004 rates is because of the March park? 529 MR. ISHERWOOD: The main reason we're not putting it in 2004 is our gas-supply plan has no spot planned for 2004, and the load-balancing accounts that were in rates for 2003 actually was based on a forecast of spot back in the 499 proceeding and was carried from that proceeding right through 2003. 530 MR. SHEPHERD: So there's no connection between the two expenses, the 6 million that you're taking out and the 8 million or whatever that you're adding in, is there? 531 MR. ISHERWOOD: There is no direct connection. It is just, as I pointed out, with load balancing being out of rates and we do have a colder-than-normal year, there would be a natural offset to that credit. 532 MR. SHEPHERD: But you could, for example, just say, you know, our pension costs are going up by $6 million this year but it's okay because we're saving 6 million on spot gas purchases. That would have the same connection; right? 533 MR. ISHERWOOD: I think there's a closer connection between the March park and the load-balancing costs that were in rates in that both essentially are tied to the spot market and spot gas. 534 MR. SHEPHERD: You're not suggesting that ratepayers will get any benefit from this expenditure in 2004, are you? 535 MR. ISHERWOOD: The benefit for the expenditure will be in 2005. 536 MR. SHEPHERD: So then I'm coming back to the same question. I understand why you want approval in advance. I understand why you feel that the ratepayers should be happy because they're saving money somewhere else. But I don't understand why somebody would pay for something, ratepayers would pay for something in 2004 and get the benefit in 2005. Why don't we just include it in rates in 2005? 537 MR. ISHERWOOD: As I mentioned in my original answer, the true cost of that March park will show up as a gas cost in March 2005, most definitely. Having said that, my earlier answer identified one reason why having those costs in rates would be helpful in the event we got into a colder-than-normal year, and if that doesn't happen or occur, then it would be refunded to customers essentially at each QRAM. 538 MR. SHEPHERD: So the effect is you're effectively borrowing $8 million from the ratepayers in 2004 and paying it back in 2005? 539 MR. ISHERWOOD: No, that's incorrect. The QRAM would be refunding it during 2004 for the most part. Prospectively there is a formula in terms of prospectively recovering it or paying it back, but it's essentially a 2004 issue. 540 MR. SHEPHERD: Okay. Now, I don't understand that. How does the QRAM refund that amount? That's a premium you're paying on the March park transaction; right? You're paying for the service next summer. And so how does the QRAM give that back? What it gives back is load-balancing costs that you didn't incur; right? That just happens to offset it. 541 MR. ISHERWOOD: The way the deferral account would work, and I'll let Mr. Kitchen add to this if I miss something, but the way it would work would be during the 2004 year, the amount that it built into rates to cover the March park would be credited into the spot gas account, and during 2004, there would not be a corresponding debit in terms of the March park costs. That debit would not occur until March of 2005, when it is essentially useful. 542 So in essence, the credit would accumulate in the spot gas account, would show up as a credit in the spot gas account, and at each QRAM that account is intended to be cleared. 543 MR. KITCHEN: Just to add, the 2004 year is a transition year. We're going to have, since the new load-balancing proposal would not be implemented until November 1st, 2004, through the winter, I guess through January and February and March of 2004, we will potentially be buying spot gas on behalf of both sales- service and direct-purchase customers. To the extent that we do that, we will need to seek recovery of those costs and at this point we're looking at doing that through a QRAM in the same way that we did the prospective recovery of the load-balancing costs under the existing method. 544 Once we're into a full-blown acceptance of the proposal, assuming it is accepted, then we won't have those, that same level of need to recover prospectively deliberated cost of gas. 545 MR. SHEPHERD: So I'm probably just dense, but bear with me here. So I thought the ratepayers were paying for this in 2004, but what you appear to be saying is, all other things being equal, they're not going to pay anything for it in 2004. They're going to get a credit for it, dollar for dollar in 2004 and they'll actually pay for it in 2005; is that right? 546 MR. ISHERWOOD: What they pay for in 2005 would be based on the recovery in rates in 2005. 547 MR. SHEPHERD: But my initial proposition is correct, they're not actually going to pay for it in 2004? 548 MR. KITCHEN: There will be no March park purchased for the winter -- for March of 2004. 549 MR. SHEPHERD: That's not my question. You include in the rate $8.6 million or something, but you're going to give that back in the deferral account during the year, so you'll take it in distribution rates and you'll hand it back in the rate rider; yes? 550 MR. KITCHEN: It would be -- it would be offsetting any load-balancing costs that are incurred through the transition period so the extent that there is an $8 million credit that is being recovered through delivery rates, that would offset any load-balancing costs incurred in January, February, March of 2004 because we're not on to the new -- the proposal during that year until November 1st of 2004. 551 MR. SHEPHERD: But we've established those load-balancing costs and the March park are not connected. I guess what I'm trying to get at, and let's simplify it. If there are no load-balancing costs, then every month, the ratepayers are going to get back through a rate rider a proportionate amount of that 8.6 million. By the end of the year they'll be even; right? 552 MR. KITCHEN: If there are no load-balancing costs incurred in 2004, they would get back the full 8.5. 553 MR. SHEPHERD: And so do I understand correctly then when we charge it in distribution rates, we charge it on one basis; and we give it back in a rate rider, the same people are going to get back the same amounts. 554 MR. KITCHEN: It would be allocated -- it would be allocated based on the way it's been built into rates. 555 MR. SHEPHERD: So then I don't get the point. Why would you ask for this money be charged to the ratepayers if you're just going to give it back to them? 556 MR. KITCHEN: I think it goes back to Mr. Isherwood's point or my point that we are in transitionary period and to the extent that we incur load-balancing costs, we will -- we will have that ability to offset those with something in delivery rates just as we do now with load-balancing costs currently with delivery rates. 557 MR. SHEPHERD: Last year you had load balancing costs and you charged them to the ratepayers. What would be the difference this year? 558 MR. KITCHEN: We also credited the amounts in rates to offset that recovery. 559 MR. SHEPHERD: Mr. Chairman, I have no further questions. 560 PROCEDURAL MATTERS: 561 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 562 Mr. Ryder. 563 MR. RYDER: Thank you, sir. 564 MR. PENNY: Mr. Chairman, before Mr. Ryder begins, I advised him yesterday that we had a concern about one aspect of his proposed cross-examination and I thought rather than interrupt Mr. Ryder once he gets started, in fairness to Mr. Ryder, we should speak to those concerns at the outset so that he can deal with them and the Board can either make a determination or wait as is your discretion. 565 The issue I want to speak to is the scope of the cross-examination. The other day, Mr. Ryder was claiming that he was unclear which panel he should be addressing questions to and it was left that he would provide certain questions he might have for Mr. Isherwood appearing to speak to the March park issue on the load-balancing panel, but going back to questions that may have arisen from gas supply or from Mr. Hyatt's panel. 566 And Mr. Ryder did give us the questions that he has and, as I say, I have concerns about the scope of these questions because, in my submission, they return to issues that the City of Kitchener and others have already cross-examined on at some length. 567 Now, Mr. Ryder's letter was addressed to the Board. We have additional copies if it would assist you. 568 MR. SOMMERVILLE: This is the letter of October 29th, 2003? 569 MR. PENNY: That's correct, sir. 570 MR. SOMMERVILLE: We have that. 571 MR. PENNY: Thank you. It all arises out of an exchange on day 14 with Mr. Hyatt who, as you know, is responsible for determining when additional Dawn-Trafalgar transmission facilities are needed. 572 And it was at paragraph 516 that the issue arose, and Mr. Ryder referenced back to a question he'd asked the gas supply panel on, I think, day 10, at paragraph 312 and 313. And the original question of Mr. Isherwood was: 573 "So do you anticipate a winter-peaking requirement for further use after 2004-2005?" 574 And Mr. Isherwood's response to that was: 575 "Larry Hyatt is actually the fellow who does the converting the whole system into a winter-peaking service forecast. Directionally, I would see the requirement continuing until we do a build directionally." 576 What Mr. Ryder quoted from the day 10, paragraph 313, was the only question that Mr. Isherwood deferred to Mr. Hyatt. So the only question that was deferred was, therefore, whether Union would have a need for winter-peaking service beyond 2005. And frankly, Mr. Isherwood actually answered the question, but the only reason the issue of deferral of that question came up was because it's Mr. Hyatt who actually looks after the long-range planning for Dawn-Trafalgar expansion. 577 So Mr. -- apart from that one question that was deferred, Mr. Isherwood on day 10 was, in fact, cross-examined on winter-peaking service by Mr. Ryder at some length. It goes on for five pages of transcript. It's from paragraphs 302 to 373, and Mr. Ryder clearly knew and understood that the gas-supply panel were the people to answer detailed questions about what winter-peaking service was and about historic winter-peaking service transactions, and he clearly knew that, I say, because he asked those questions of that panel and others did as well. 578 So, for example, Mr. Dingwall cross-examined the gas-supply panel on winter-peaking service and asked specifically what it was at paragraph 875, and whether winter-peaking service product had been acquired by gas supply since 1999. That was at paragraph 882, and the answer was no. 579 So I come back to the only issue, the only question that Mr. Isherwood deferred to Mr. Hyatt was the question about the need for winter-peaking service beyond 2005. 580 So, then coming back to day 14, a few paragraphs later on, at paragraph 533 Mr. Ryder then posed a series -- Mr. Ryder didn't ask Mr. Hyatt the question that was deferred to Mr. Hyatt, i.e., whether there was a need for winter-peaking service beyond 2005. He, in fact, asked him a series of questions about winter-peaking service, what it was, and how it worked. All questions which had been the subject of Mr. Ryder's cross-examination of the gas-supply panel. 581 Then when Mr. Hyatt said to some of those that "Mr. Isherwood knows this" or "I don't know," Mr. Ryder then said at paragraph 533: 582 "Well, this is a case where Mr. Isherwood did defer us and he should have been more responsive and less quick to defer us." 583 And that, in my submission, is absolutely wrong and the criticism of that was levied against Mr. Isherwood, it was quite improper. And the criticism is improper because the questions Mr. Ryder was putting to Mr. Hyatt were not about the likelihood of a need of winter-peaking service beyond 2005 which was the only question that was deferred to Mr. Hyatt, but the same type of detailed questions that Mr. Ryder and others had already asked about the nature and workings of winter-peaking service. 584 So the implicit criticism that he's somehow getting the runaround or he does not know who to ask his question of is, in my submission, disingenuous and, completely unfounded. Mr. Ryder has been at this a long time, a lot longer than me, and he knew gas supply was the panel to ask detailed questions about winter-peaking service, and we know that because he asked them. And the only matter that was deferred, as I say, is this question of what would happen beyond 2005. 585 What is telling, in my submission, is that the one question that was asked by Mr. Ryder of the gas-supply panel, and which was deferred to Mr. Hyatt about the need for winter-peaking service beyond 2005, he never even asked that question. What he was doing, in my submission, was nothing more than circling around to the same issue that he'd already examined on to try and get a second kick at it, and anyway -- so that's the background. 586 As a result of the exchange on day 14, a bit later at paragraph 584 and 586, Mr. Ryder gave us a series of questions which he says were deferred by panel 9, that was the Larry Hyatt panel from day 14, but in my submission, I have concerns about a number of these which I will address now. 587 First of all, this is not, as described, a list of questions that were deferred by panel 9. I'm not sure there were any questions deferred by panel 9 with respect to this. But they are, for the most part, additional and repeat questions on topics that were already addressed in detail on day 10. And there's two areas which are improper in my submission. There is a series of questions about storage allocation which are 4 to 7 and a series of questions about winter-peaking service which are 8 to 11. 588 With respect to storage allocation, that is the questions, and I should say 1, 2 and 3 although they weren't deferred by panel 9, they are the subjects that this group, this panel, the load-balancing panel, is here to talk about so I take no exception to those. 589 But dealing with the group on storage allocation, you may recall that it was Mr. Quinn who conducted the cross-examination of gas supply on the Friday, but he did not finish, and it was therefore Mr. Ryder who returned on Monday to complete the questioning. 590 The one thing that Board made clear when it permitted the City of Kitchener to have two examiners was that there was to be no repetition and tag-teaming, if you will, to use an old WWF term. 591 Mr. Quinn's cross-examination was virtually exclusively related to storage allocation. This went on for about 20 pages of the transcript on day 9, and it goes from paragraphs 1058 to 1350. 592 This discussion was almost exclusively as well with Mr. Newbury and there was nothing on storage allocation with respect to Kitchener deferred by the gas supply panel on this topic to Mr. Hyatt. 593 Storage allocation was not the subject of your direction on day 14, that Mr. Ryder should provide us with additional questions that he might have for Mr. Isherwood about winter-peaking service, and beyond that, if I can give you an example, one of the questions in that group, question 6, deals with Exhibit J.1.60, that was the subject of explicit cross-examination of Mr. Newbury on day 9 by Mr. Quinn at paragraph 1285. 594 So, in my submission, if Mr. Ryder is now permitted to go back to these issues at 4 to 7 and pursue them, it will have the following effect: 595 First of all, it would be getting around your prohibition against tag-teaming because these are questions Mr. Quinn put to the panel. 596 It will be asking a panel that has no knowledge of this particular area, because these questions on storage allocation were all put to Mr. Newbury, not to Mr. Isherwood. 597 And finally, it will be covering ground that was already explicitly dealt with at great length by the City of Kitchener in the original cross-examination. 598 So with respect to that group, all they're doing, in my submission, is circling back to an issue that came up seven or eight days ago because one member of that former panel, the gas supply panel, happens to be back to speak to another entirely different issue. 599 The second group, 8 to 11, in my submission, are also questions that are returning to a subject that's already been covered. This is presumably the winter-peaking service, and Mr. Ryder cross-examined on this, as I said, for about five pages of transcript. And we see another example, question 10 talks about the last three years Union has entered into these types of arrangements and Mr. Ryder asked, at paragraph 325 of day 10, whether these arrangements had been entered into in '02 and '03 and Mr. Dingwall, later that day, asked whether these arrangements had been entered into since 1998? And the answer was no. 600 So those issues have already been explicitly canvassed. 601 The one thing that was deferred to Mr. Hyatt, Mr. Ryder didn't even bother to ask him. 602 So again, in my submission, this is nothing more than trying to get a second kick or try to shore up a position because they either neglected, or having thought about it more, have more questions now. 603 There has to be some finality to examination. Parties have had months to prepare for this hearing and due process, in my submission, is not served by permitting examiners or intervenors to circle back around to issues over and over again. 604 So in my submission, it should not be permitted and the questions that Mr. Ryder has posed from 4 through 11 ought not to be permitted. 605 MR. SOMMERVILLE: Mr. Ryder? 606 MR. RYDER: Yes, two observations. The first is that me thinks Mr. Penny protests too much. I mean, this is a major argument that he's formulated, so I'm not prepared to respond in the sense that I don't have the transcript references with me. 607 I think, first off, that his argument introduces a complication into the conduct of a litigious proceeding which is not supported by any rule of evidence honoured in this country and has no parallel in any other civil or criminal case or tribunal conducting business in this country. 608 The rule is, and if I'm wrong, Mr. Moran can correct me, the rule is in all proceedings, administrative or judicial, if a question is relevant and if the witness has knowledge which permits a contribution to the answer so that it enhances the Board's understanding, then it should be answered. 609 And what is important, it's fundamentally important for the conduct of your proceedings, I think, is that the witness hasn't got the right to decide whether or not he or she should answer the question, and whether or not somebody else is better placed to do that. I don't think that's a right that any witness in this country has. 610 Now, I think that's a principle that should be kept in mind especially in a rate case. These questions relate to storage. There is no specific panel that is being given the responsibility of addressing storage, winter peaking, whatever. Some of it goes to panel 5, some of it goes to panel 9, some to panel 13, and arguably, some to panel 15. 611 So when they spread out the issues so diffusely as they've done here, I think it stands to reason that more than one panel can be cross-examined. 612 Now, the second line of questions that I had outlined in my letter, and this I take it is questions 8 to 11, I simply say that these questions relate to a transaction, the type of which I believe exists. These transactions have potential cost implications to Union, and if you decide that the question is relevant, and if you decide that there is some knowledge amongst the witnesses to contribute to your understanding, then there is no rule on this earth that prohibits it that I am aware of. 613 Now, there's one other final observation. The purpose of cross-examination is to test Union's evidence, and Union bears the onus, and the onus requirement assumes that their evidence can be tested. Their evidence should not be protected in the way Mr. Penny wants it to be protected because if you give that protection as he asks, then I think it's hard to say that the full onus imposed by the Act is being discharged and I think you're doing the process a disservice, frankly, or he is proposing that you do that. 614 After all, these questions were given Wednesday afternoon, so they've had some time to review them and inform themselves and if they have a problem with them, they say, We don't know anything about them and we didn't have an opportunity to inform ourselves, fine. That's a complete answer. Otherwise, they should be required to answer them. 615 MR. SOMMERVILLE: Mr. Ryder, the Board will reserve on this question over the lunch break. 616 MR. PENNY: Mr. Chairman, I just have one thing I'd like to say in response to Mr. Ryder, and that is that I am not basing my position on a question of law, nor am I speaking to protect anyone. The issue is your discretion. There's no doubt about that. 617 But the issue that I am focusing on which Mr. Ryder has not responded to is that he's already dealt with these issues, either he or Mr. Quinn, so it's not a question of law. It's a question of the exercise of your discretion and whether it's appropriate to permit parties to come back to issues a second or a third or a fourth time. 618 MR. SOMMERVILLE: Mr. Ryder, that's exactly what is my initial thought, and I want to be fair enough to let you know that the Board does regard as a part of its process the idea that panels are presented and the subject matters defined with some degree of particularity and that questions are issued from intervenors to those panels that are appropriate to the panels, and that at some point we do have to have a finality with respect to the subject matters and that if we do not do that, we end up with a situation, if relevance is the only criteria we use in the situation that faces us here, we would never end. 619 We do have to determine some finality with respect to these matters, and we cannot permit a duplication of questions that really doesn't assist the Board in coming to the important determinations that it has to make. 620 Now, can you respond to that? 621 MR. RYDER: Yes, two things. First of all, questions 4 to 7. My recollection is never good at the best of times, I don't have the transcripts in front of me, but I don't recall that these questions were answered, and that's why they were brought back on. I didn't think we got a straight answer on these questions. 622 With respect to 8 to 11, the answer was extremely curious. They didn't say -- they left it open that it was possible that they enter into a contract to provide a service but then they don't call on the service. And so, when they said no, they were referring to the calls and not the contract. 623 MR. SOMMERVILLE: Let me say this, too, in fairness. It is the applicant's burden in this case to provide evidence sufficient to enable the Board to make the determinations that it needs to make in this case. It is fully open to an intervenor to say the applicant, by one way or another, has failed to discharge the evidentiary onus that's upon him in order to support the application. And if it's your view, for example, and I'm not -- I'm trying to be fair in letting you know the kind of thoughts that are going through my head as I consider Mr. Penny's position. If the answer to a question that you think is a material and relevant question, and I'm not going to make a determination about that, but let's, for the purposes of illustration, assume that it is, it's perfectly within your right in the course of your argument to say that's not an answer to the question at all, and that the applicant has not discharged its onus accordingly. 624 The difficulty that I see here is that I do know, and without going back to the transcript right now, but I do know that the matter of the allocation of storage was the principle and overwhelming preoccupation of Mr. Quinn's questioning of the gas-supply panel, and that is an important element in how I consider Mr. Penny's point of view and how the Board will proceed further. 625 The Board will reserve on this question and we'll come back at -- is 1:30 a convenient time for all parties? We'll come back at 1:30 and provide you with some guidance. 626 Maybe, Mr. Ryder, there is -- you can look at the list, you can have a look at the transcript and that may -- you may have a proposal to put to us after the break and we'd certainly hear that before we make our ruling. 627 So we'll stand adjourned until 1:30. Thank you. 628 --- Luncheon recess taken at 12:15 p.m. 629 --- Upon resuming at 1:30 p.m. 630 MR. SOMMERVILLE: We try to catch at least one person at least every time. I see we've caught a couple more. 631 MR. RYDER: That completes my argument. 632 MR. PENNY: Sorry. 633 MR. SOMMERVILLE: Not at all. 634 Where we left off, Mr. Ryder, do you have any submissions? 635 MR. RYDER: Mr. Penny did kindly allow me to review the transcripts that he had and I have two points. One is with respect to questions 4 to 7, they deal with the issue of storage usage after the plan set out in J.1.60 is established, and paragraphs 498 to 502 deal with the deal with the decision to see if we could ask these questions of panel 13 when Mr. Isherwood was expected back, and that resolution was done with the agreement of Union just a few days ago. 636 Secondly on this point, I reviewed the transcript of Mr. Quinn's cross-examination and he didn't ask for the usage. He didn't deal with the usage of the storage after the plan was established. He was concerned with the storage allocation to T3 and the City of Kitchener. That's how I read his transcript. 637 And with respect to questions 8 to 11, these were not asked before either. These questions -- the prior questions related to winter-peaking services, and these questions relate to transactions that the company doesn't identify as winter-peaking services, so I don't think there's any duplication. Those are the only observations I have after reading the transcripts. 638 MR. SOMMERVILLE: Mr. Penny. 639 MR. PENNY: Just very briefly, Mr. Chairman. I think my position from this morning wasn't necessarily that exactly these questions had been asked. That's, in fact, part of the point. What seems to me we're trying to avoid is having a circumstance where people think up additional questions that they wish they'd asked or things of that nature after the fact and then try to shoehorn them in. To me, the issue doesn't turn on whether the precise question was asked but whether the subject area was covered. 640 With respect to Mr. Ryder's last point, if they're not about winter-peaking service then why are they being asked at all? The gas-supply panel was here, was testifying to their gas-supply plan, it includes some winter-peaking service and that's the issue. That was, I understood, the scope of your ruling from day 14, that if Mr. Ryder could justify additional winter-peaking service questions, that he should do so. If he's now conceding these are about something else, then I'm not sure why they would be permitted at all. So those are my only responding submissions. 641 MR. SOMMERVILLE: One of the things that concerns us in this aspect is that Mr. Isherwood was one quarter of the gas-supply panel or one-third. One-third, I beg your pardon. 642 MR. ISHERWOOD: One quarter. Sorry. 643 MR. SOMMERVILLE: A third in effect, and a quarter by number. And in his ability today to respond to these questions is, I think, compromised somewhat. What I was going to suggest is that the way through this may be to treat, and I'll ask for submissions on this proposal, to treat this letter as an undertaking, in effect, to provide Union with the opportunity to answer these questions or to refer to those parts of the transcript which provide an answer to the subject, and to handle the matter in that fashion. 644 Now, that does not go all the way, Mr. Penny, to your point which is that the opportunity to ask these questions has come and gone. I have some sympathy for that point of view, but at the same time, I recognize the importance of ensuring that the record is as complete as we can make it. 645 Can I have your thoughts on that proposal, Mr. Penny? 646 MR. PENNY: Well, if you're inclined to permit the questions to be put and indicate that you would like them to be answered, then I think that is the best way to deal with them. 647 MR. SOMMERVILLE: Mr. Ryder? 648 MR. RYDER: Yes, I appreciate that. 649 MR. SOMMERVILLE: We would ask that -- well, it's as simple as that. I think that's the way we're going to approach this subject is to regard this letter as an undertaking and give Mr. Isherwood and his colleagues a fair opportunity to respond to these and to find those portions of the transcript if they wish to do so to highlight the responses. We'll deal with it on that basis. 650 MR. RYDER: Would that cover all the questions in the letter? 651 MR. SOMMERVILLE: Yes, it would. Well, I guess there are questions that are appropriate to this panel which would be the March park questions, the direct-purchase balancing requirement, and I would think question 12 which is a broader contextual question, but I'm specifically referring to questions 4 through 7 and 8 through 11. 652 MR. RYDER: Thanks. 653 MR. SOMMERVILLE: Those that were challenged. 654 Let me say I have an evolving interest in ensuring that the scope of a panel's expertise and the questions that are properly put to it and the opportunity to ask those questions. I think we need to sharpen our practice, to some extent, on that subject, and in subsequent matters, you may find a harsher result, Mr. Ryder. 655 MR. MORAN: Mr. Chair, Undertaking N.18.1 to provide answers to questions 4 through 11 as set out in a letter from Mr. Ryder to Mr. Reghelini dated October 29, 2003. 656 UNDERTAKING N.18.1: TO PROVIDE ANSWERS TO QUESTIONS 4 THROUGH 11 AS SET OUT IN A LETTER FROM MR. RYDER TO MR. REGHELINI DATED OCTOBER 29, 2003 OR PROVIDE REFERENCES TO THE TRANSCRIPT IF IT'S ALREADY ON THE TRANSCRIPT 657 MR. SOMMERVILLE: Thank you, Mr. Moran. 658 Mr. Ryder. 659 UNION GAS LIMITED - PANEL 13; VANDERPAELT, ISHERWOOD, KITCHEN 660 S.VANDERPAELT; Previously Sworn. 661 M.ISHERWOOD; Previously sworn. 662 M.KITCHEN; Previously affirmed. 663 CROSS-EXAMINATION BY MR. RYDER: 664 MR. RYDER: Panel, can I go to the February 28th direct purchase balancing plan requirement. 665 MR. MORAN: Sorry, Mr. Chair, I should have added to that or provide references to the transcript if it's already on the transcript. 666 MR. SOMMERVILLE: Answer in whichever way is appropriate. 667 MR. PENNY: I understand, thank you. 668 MR. RYDER: I understand that historically, Union's planning respecting the storage balances on control dates have taken into account the practice of direct-purchase customers drafting storage. 669 MR. ISHERWOOD: That's correct. 670 MR. RYDER: And absent -- and the February 28th balancing requirement is designed to limit that practice? 671 MR. ISHERWOOD: No, the actual gas-supply plan is set based on normal weather and the February 28th balance requirement is really to get customers back to the plan, planned amount, planned requirement. 672 MR. RYDER: So absent the February 28th balance requirement -- put it this way. Is there currently in your plan an amount kept in anticipation of drafting. 673 MR. ISHERWOOD: Yes. Union Gas carries 28.6 petaJoules in inventory for the purpose of direct-purchase contracts drafting the system. 674 MR. RYDER: Do you expect that level of drafting to occur in 2004. 675 MR. ISHERWOOD: That's the number in the plan. 676 MR. RYDER: And are you telling me that the February 28th balancing requirement has no impact on that? 677 MR. ISHERWOOD: It has no impact on setting the actual amount. It gives us more certainty that those customers drafting will take corrective action rather than the utility taking corrective action. It wouldn't change the amount actually being used for that purpose. 678 MR. RYDER: By the direct-purchase customers? 679 MR. ISHERWOOD: That's correct. 680 MR. RYDER: Now, March park, does it have an impact on the storage level set for March 31st? 681 MR. ISHERWOOD: No, it does not. 682 MR. RYDER: Does it have any financial implications with respect to, say, inventory? 683 MR. ISHERWOOD: No, it does not. It's really intended to cover off, again, March weather risk. The base plan covers off how to serve the market during the month of March in normal circumstances. The March park is really to cover off the out-of- the-ordinary circumstance of colder-than-normal weather. 684 MR. RYDER: So then my third question in the letter is irrelevant, I take it? 685 MR. ISHERWOOD: The answer is no as well. You're right. 686 MR. RYDER: I know you told me that the March park is to cover off colder-than-normal March, am I right? 687 MR. ISHERWOOD: That's correct. 688 MR. RYDER: But the gas is in storage as of November? 689 MR. ISHERWOOD: No, the gas actually arrives to Union on equal daily basis throughout the month of March and then we repay it back to the third party who we bought it from in equal daily amounts during the month of May. 690 MR. RYDER: Could a park arrangement be used for other purposes? 691 MR. ISHERWOOD: Such as? 692 MR. RYDER: Well, to avoid winter spot needs? 693 MR. ISHERWOOD: That's essentially what it's doing for the month of March. 694 MR. RYDER: Yes, could it be used for prior months? 695 MR. ISHERWOOD: There is actually an IR that was put to us from, I believe, ECNG that asked that question. 696 MR. RYDER: Do you recall what it is? 697 MR. ISHERWOOD: J.9.3. 698 MR. RYDER: And what, briefly, is the response? 699 MR. ISHERWOOD: Essentially, the way the load-balancing proposal was put together was to allow the customer to be able to supply any incremental amounts they need between November to the end of February. So really putting the onus back on the direct-purchaser customer to make up those balancing requirements. Union Gas does carry load-balancing inventory, as I previously identified, the 28 petaJoules. That's meant to provide a core service. 700 So the answer to this IR was to be able to supply a park for the whole winter to go above and beyond what we believe to be a core service, and we'd rather have the design point end of February where the customer would be allowed to do their own balancing and have some control over their own balancing. 701 MR. RYDER: So for those reasons, then, you wouldn't consider a park as an alternative for your March 1st to March 31st control points? 702 MR. ISHERWOOD: It is used for the March 31st control point. With the assumption being that the system is balanced on March 1st by the very nature of the proposal. The only outstanding risk really is a March risk. So it is used for the March spot requirement. 703 MR. RYDER: Does it reduce the level of gas, your target level for March 31? 704 MR. ISHERWOOD: It doesn't change the target level for March 31st. 705 MR. RYDER: Why wouldn't it, if you have in addition the assurance of the park? 706 MR. ISHERWOOD: The March park is intended to cover off the unplanned situation. 707 MR. RYDER: Could a park be -- all right, I think you answered that. 708 Let me turn to Kitchener's proposal for an arbitration facility, and you told us, Ms. VanDerPaelt, yesterday, that some classes can have an arbitration clause inserted in their contracts if requested. 709 MS. VANDERPAELT: Any customer can, yes. 710 MR. RYDER: And so that would apply to the T1 and the T3 customers as well? 711 MS. VANDERPAELT: That's correct. 712 MR. RYDER: And I thought I heard you say that it would permit a customer to refer a requested change in parameters mid-contract to arbitration. 713 MS. VANDERPAELT: Arbitration in my understanding is used to resolve disputes between how a service is being operated and the initial intent of the contract. 714 MR. RYDER: So it wouldn't address a requested change of parameters mid-contract? 715 MS. VANDERPAELT: If this is in the context to an M2 customer adding accounts, those amendments, I believe, were identified or captured in point 4 of the bundled-T contract. It would depend what parameters you were considering amending. If you could clarify that for me? 716 MR. RYDER: Well, let me turn to the parameters in the T3 contract and the T1 contract. 717 MS. VANDERPAELT: Okay. 718 MR. RYDER: They include contract demand; right? You agree with me? 719 MS. VANDERPAELT: Correct. 720 MR. RYDER: And DCQ. 721 MS. VANDERPAELT: Correct. 722 MR. RYDER: And storage space. 723 MS. VANDERPAELT: Correct. 724 MR. RYDER: And storage deliverability. 725 MS. VANDERPAELT: Correct. 726 MR. RYDER: Are there some others I have missed? 727 MS. VANDERPAELT: I believe they're all listed in the schedules. 728 MR. RYDER: All right. So, a customer in the T3 or other class that has your standard arbitration clause in the contract, that requests a change in those parameters, is that something that you envisaged could be referred to arbitration? 729 MR. PENNY: Mr. Chairman, that's clearly, I think, a legal question. The issue would be if a contractual commitment, for example, had been made to a certain DCQ, then a request to change that DCQ would not be, and even a dispute about that request, would not really be an arbitrable dispute because there was a clear commitment to have the DCQ where it was. 730 MR. RYDER: Okay. That's fine. So that means, then, I take it that the arbitration clause that -- your standard arbitration clause does not address changes in parameters mid-term. 731 MR. PENNY: Well, again, I think it depends what those parameters are. If the contract fixes those parameters, I think the legal answer would be that it would not. If the contract provides for some mechanism for changing them and there was a dispute around the application of that mechanism, then they might well be. It's, I think, hard to answer in the abstract. 732 MR. RYDER: Now, when a contract terminates, the customers on your system are candidates for a renewal. I mean, your customers are in an ongoing relationship with Union? 733 MS. VANDERPAELT: That's correct. 734 MR. RYDER: And so these contracts are not one-off contract, but they express the relationship for a defined period of time with the expectation of a renewal? 735 MS. VANDERPAELT: That's correct. 736 MR. RYDER: All of the contracts envisage or contemplate negotiations for new parameters when the contracts are expired? Or are expiring? 737 MS. VANDERPAELT: A lot of them are evergreen, so it's not always new parameters. A lot of them evergreen to the existing parameters if there's been no substantial changes in the customer's business. 738 MR. RYDER: In the situation of the T3 contract, can you look at Exhibit J.5.1, and I think it's on page 4, paragraph 14. 739 MR. ISHERWOOD: I'm sorry is the reference 5.1? 740 MR. RYDER: Yes, sir. 741 MR. ISHERWOOD: There is only one page. 742 MR. RYDER: It is page 4. 743 MR. ISHERWOOD: There's only one page. 744 MR. RYDER: Sorry, I'm referring to 5.2. That's where the contract is concerned. 745 MS. VANDERPAELT: Page 4? 746 MR. RYDER: Yes. 747 MS. VANDERPAELT: I have it. 748 MR. RYDER: You see the overholding clause on paragraph 14? 749 MS. VANDERPAELT: I do. 750 MR. RYDER: So I take it on the expiry of this contract if the parties haven't been able to negotiate a new one, the storage spacial location -- the storage space allocation would revert from the contractual level to that under the excess-over-average approach? Is that what would happen? 751 I'm not negotiating a contract, Mr. Chairman. 752 MR. PENNY: Certainly sounds like it. 753 MR. RYDER: I want to find out what happens on termination. 754 MS. VANDERPAELT: I'll have to speak a little bit more generic because I'm not in sales and I don't negotiate the contracts. But if a customer's on a contract service such as a T1 or T3 and the service expires, if the customer is returning to say an M7 or an M9-type service, the storage would revert back to Union's management for that bundled T-service. 755 If the customer wishes to renew the contract, we use the excess-over-average methodology to calculate all storage positions for contracts. 756 MR. RYDER: All right. What about DCQ and CD? What happens there? 757 MS. VANDERPAELT: Again, it's a very mechanistic formula for the M2 market, we discussed that. When you get into a T1 or M7, that is a negotiation between the sales rep and the party entering into the contract based on -- the CD is based on the needs that they feel they have to meet in terms of transportation to their plant, and the DCQ is based on the supply Union feels they need in order to meet those requirements on the days throughout the year, but it become comes a negotiation between the two parties for the larger accounts. 758 MR. ISHERWOOD: I would just add to that the excess-over-average calculation assumes that the DCQ is basically 1/365th for the same forecast that is used for the excess-over-average calculation. So to the extent that the DCQ became a different number, it makes storage very difficult to operate. 759 MR. RYDER: To the extent that negotiations are required, because I'm not negotiating a contract, what happens if you can't reach an agreement? 760 MR. ISHERWOOD: I think I've answered this question on two other occasions as well, but essentially my sense is, and my experience has been that two reasonable parties negotiating a contract will come to terms. 761 MR. RYDER: That's because there's no place for the customer to go to if he doesn't agree with Union. Isn't that so, Mr. Isherwood? 762 MR. PENNY: Well, with great respect, this very discussion, I feel this is deja vu all over again. This very discussion took place on day 9 or 10 with Mr. Isherwood and that's when I piped up and said that the customer had legal right to come to the Board in the event that no agreement was made and that the position is exactly the same today as it was four or five days ago. 763 MR. SOMMERVILLE: I think there was an undertaking to that effect. 764 MR. RYDER: But this is presumably the contract panel, the panel where I deal with contract issues. 765 MR. PENNY: My point is, Mr. Chairman, that this very question has been asked and answered. It doesn't advance the issue to put the same question to a different panel. If Mr. Ryder has some different questions, then by all means, let's hear them. 766 MR. RYDER: Doesn't it occur to you, and I put this to any member of the panel, that the reason that customers are inclined to agree with Union is because they have no practical recourse? 767 MR. ISHERWOOD: I would argue they would agree with our contract that we put and negotiated with them because it meets their needs. They're agreeable to it because it serves their business needs. 768 MR. RYDER: And if they differ on that issue, they have no practical recourse. 769 MR. ISHERWOOD: It's already been discussed. 770 MR. RYDER: All right. Well, the customers with the parameters that we listed together, Ms. VanDerPaelt, CD, DCQ, storage space and storage deliverability, I take it those parameters exist in the T3 and T1 contracts. 771 MS. VANDERPAELT: And additionally in some rate 100 and rate 20 contracts of the north. 772 MR. RYDER: And I understand that there are 72 T1 customers and there's one T3 customer and then how many other additional customers would there be that would need to negotiate these parameters? 773 MS. VANDERPAELT: All of our contract customers negotiate CD and DCQ and storage parameters, there would be three in the north, in addition. 774 MR. RYDER: So the exact same parameters would be R 73 and T1 and T2 or T1 and T3 and plus three more? 775 MS. VANDERPAELT: Including storage, yes. 776 MR. RYDER: And in the undertaking that Mr. Penny responded to, one of the suggestions was that an individual customer with an individual issue could bring that matter forward to the Board for determination in a rates case. Do you want to deal with that now? And would you just simply address the scheduling problem? I take it that the scheduling problem of that determination would be dependent on the schedule for the entire rates case? The individual customer wouldn't get its decision until after the rate case was finished and decided. 777 MS. VANDERPAELT: I don't know. 778 MR. RYDER: The other suggestion was section 39.2 which requires the Board to give its approval where Union enters into a contract for storage with any customer. Now, Mr. Kitchen, can you tell me, is that approval required for every storage contract? 779 MR. KITCHEN: Every storage contract is filed for approval for T1 and T3 for a certain term and certain volume, there's a blanket approval. 780 MR. RYDER: Yes. And isn't there a minimum threshold volume that applies to that type of application. 781 MR. ISHERWOOD: The City of Kitchener volume would be above that threshold. I don't know the exact number but it's around Bcf, I thought. 782 MR. RYDER: Yes, 2 Bcf. 783 MR. ISHERWOOD: Could be. 784 MR. RYDER: If the threshold is, you can take that subject to check, please, 2 Bcf, that means that storage contracts below 2 Bcf would not be subject to that provision of the Act? 785 MR. KITCHEN: I think they're still filed but they're under the blanket. 786 MR. RYDER: Pardon? 787 MR. KITCHEN: They're under the blanket. They're still filed. 788 MR. RYDER: For those contracts for storage under the threshold, you obtain blanket approval in your rate cases> 789 MR. KITCHEN: I believe we have blanket approval to file the contract. I'm not sure if it's necessarily part of the rate case. 790 MR. RYDER: So most of the 73 T1 and T3 contracts would not qualify for an application under 39.2. 791 MR. PENNY: We just established that T3 does qualify. 792 MR. RYDER: T3 does, yes. But most of the T1 don't; is that right? 793 MR. ISHERWOOD: The blanket approval is designed to facilitate the whole contracting practice of the small customer with the small storage position. It's designed to facilitate that transaction. 794 In the case of T3 where it's a large volume, typically at least a recent example would be in a long term, then that contract would be subject to specific approval. 795 MR. RYDER: I'm dealing with a T1 customer with a storage requirement under 2 Bcf. I take it it's agreed that that customer can't come to the Board under 39.2 of the Act? 796 MS. VANDERPAELT: I don't think it's that they can't come to the Board. They're not required to. 797 MR. RYDER: they're not required by 39.2? 39.2 doesn't -- all right. We'll move on. 798 MR. ISHERWOOD: It doesn't prevent them. 799 MR. PENNY: Hang on. We're deeply into the realm of argument, in my submission, Mr. Chairman. 800 MR. RYDER: Now, your standard arbitration clause, which I take it resolves disputes arising during the course of a contract, was that -- how did -- did you advertise the availability of that clause on the web site? 801 MS. VANDERPAELT: We have just reached discussions with customers over the last two weeks that -- we have a lot of customer consultation when developing the new standard contracts that we started issuing last December. It was through that customer contact that the recommendation came forward to remove the arbitration clause. Since we've had a few customers who said they would like it back in, that was probably as recent as the last 10 days, and we've said we do not see a problem with inserting it. It is available to anyone who asks. 802 MR. RYDER: Right. And are you communicating the availability of that clause to your customers on your web site? 803 MS. VANDERPAELT: We will be, but due to the hearing and timing of me being here, it just hasn't been possible yet. 804 MR. RYDER: But It will be done? 805 MS. VANDERPAELT: Yes. 806 MR. RYDER: In this year? 807 MS. VANDERPAELT: Yes. 808 MR. RYDER: Is it possible if a customer feels that its needs are not met by the existing parameters, is it possible -- is Union receptive to a request to discuss a change in parameters? 809 MS. VANDERPAELT: Are you referring to during the contract term? 810 MR. RYDER: Yes. 811 MS. VANDERPAELT: We would listen to what the customer was requesting. It would depend on what they were asking for and the implications on our system and, you know, forecasts. 812 MR. RYDER: But subject to operational constraints, the possibility of altering a parameter in mid-contract exists? 813 MR. ISHERWOOD: An example I would raise would be if an industrial customer had a change in their process and wanted to increase their contract demand level midway through the term, we would certainly consider that if our system allowed us to do that. If the customer came to us midway through a contract and wanted to reduce a contract demand level which would be a negative revenue impact, we would typically not agree to that until the end of the contract. 814 MR. RYDER: Now, so, customers -- take the situation of the T3 class where there's just one customer. Does the CD level have an impact on the rate of the T 3 class? 815 MR. KITCHEN: Do you mean in terms of the calculation of the rate or -- 816 MR. RYDER: The level of the rate and the calculation. 817 MR. KITCHEN: costs are allocated on design-day demand and the rate is calculated based on the contract and demand. To the extent that contract demand changes, there could be a change in the unit rate but that doesn't necessarily affect the allocated costs. 818 MR. RYDER: It's important to arrive at an appropriate CD level for the T3 class, because there's only one customer, in order to set an appropriate T3 rate; is that a fair proposition? 819 MR. PENNY: Mr. Chairman, having regard to the - did shall to what you said 15 or 20 minutes ago about panels, we seem to be off the subject of contracts and arbitration provisions and fully immersed in cost allocation and rate design for T3, and Mr. Kitchen is coming back on Monday morning with Mr. McMahon who prepared the cost-allocation study that underpins the rates. And having regard to your ruling, it would seem to me appropriate that this particular aspect of the cross-examination be conducted when Mr. Kitchen is ready to go on rates and has his colleague with him. 820 MR. RYDER: This is a different topic, and if you bear with me, I think I can show you that. 821 What I'm addressing here is -- let me just change the question. 822 MR. SOMMERVILLE: Proceed, Mr. Ryder, and you're mindful of Mr. Penny's concern and I'm sure you'll steer away from -- 823 MR. RYDER: Of course I am. 824 MR. PENNY: That doesn't give me a lot of comfort. 825 MR. RYDER: We can agree that the purpose of this case is to set rates for 2004. 826 MR. KITCHEN: I think that's why we're here, yes. 827 MR. RYDER: All right. And that the 2004 rates could possibly become base rates for a longer period of PBR. That's a possibility. 828 MR. KITCHEN: What we're here to talk about is 2004 rates. I haven't even turned my head to what will happen after 2004. 829 MR. RYDER: It's possible they could become base rates for a longer period. 830 MR. KITCHEN: It's possible. 831 MR. RYDER: And as a monopoly utility, Union has the responsibility to meet with its customers to ensure that their needs are being met? 832 MR. ISHERWOOD: That's fair. 833 MR. RYDER: And we could agree that for the T3 class, a single customer class, the level of the CD that is in place when rate setting starts will affect the rate? 834 MR. KITCHEN: It is used in the calculation of the rate, yes. 835 MR. RYDER: Right. And if -- I mean in the old days before PBR it may not have mattered, because if the rate's set on an erroneous CD it would only last for a year because you're going to another rate case in the next year. But isn't it important for you to meet with a customer like Kitchener which is claiming it has an inappropriate CD before the rate case commences? 836 MR. ISHERWOOD: The actual contract I think you're discussing is the T3 contract which renews April 2005, and we've committed to begin those discussions April 2004. 837 MR. RYDER: Yes. And we've heard from prior witnesses that the CD for Kitchener under that contract is 1911, and we've heard that the peak demand is 2557. So isn't that an indication that the CD is inappropriately set under current circumstances? 838 MR. ISHERWOOD: I believe it's a parameter selected by the City of Kitchener so I wouldn't say it's inappropriate. 839 MR. KITCHEN: The only parameters that I have to design a rate are those parameters that are sitting in the City of Kitchener contract. I don't have anything else. I don't have a hypothetical to design a rate on. 840 MR. RYDER: Well, isn't the requirement under the City of Kitchener contract to commence negotiations no later than one year prior to its termination? 841 MR. ISHERWOOD: That's true. 842 MR. RYDER: And so negotiations must begin before April 1, 2004. 843 MR. ISHERWOOD: Actually, it says no later, that's correct. 844 MR. RYDER: And in fact, in anticipation of this rate case, negotiations did take place last spring. 845 MR. ISHERWOOD: There was some discussions, that's correct. 846 MR. RYDER: Yes. And after a few discussions, Union unilaterally terminated those discussions. 847 MR. ISHERWOOD: I was not party to the discussion. I don't know the outcome of the discussions. 848 MR. RYDER: Well, can you undertake to inform yourself and let me know whether you agree with my proposition that Union unilaterally terminated the discussions and declined to meet until April of 2004? 849 MR. PENNY: Mr. Chairman, I'm going to ask that the witness not be required to respond to that because it bears no relevance whatsoever to 2004 rates or indeed even to the City of Kitchener. We've already established that the contractual obligation is to commence negotiations no later than April 2004. Whether either party, on some other basis sought to initiate those discussions is completely irrelevant in my submission. And why, who, for what reason those early negotiations were terminated is equally completely irrelevant. 850 MR. SOMMERVILLE: Mr. Ryder? 851 MR. RYDER: Well, if the panel refuses to answer, that's fine. We have our own evidence and we'll call it. But they've had their opportunity. 852 But the result is that for this rate case, if I am right in my propositions to you, for this rate case we are proceeding on your determining rates for the T3 class based on a CD of 1911; is that right, Mr. Kitchen? 853 MR. KITCHEN: That's right. I think I've answered that, yes. 854 MR. PENNY: That's what in their contract. 855 MR. RYDER: Do you not recognize an obligation, Union Gas, to address a customer request to alter their CD when it is obviously no longer appropriate in mid-contract? 856 MR. KITCHEN: I'm not sure that we can answer that question. 857 MR. RYDER: You're not familiar with the obligation? 858 MR. PENNY: There is no such obligation, with great respect. There is a contract, the City of Kitchener signed it, a contract is a contract, as we used to say. And there is no such obligation in my respectful submission. 859 MR. RYDER: That's Union's position. 860 Can I turn to your other policies, do you recall, panel, that in the ADR agreement in our last customer review case that Union made a commitment to ensure that its written policies were made available to customers and updated? 861 MS. VANDERPAELT: I believe we committed to do that as we were able to, yes. 862 MR. RYDER: Yes. And for that purpose a working group was established? 863 MS. VANDERPAELT: That's correct. 864 MR. RYDER: And the customer review agreement was dated January 20th, 2003? 865 MS. VANDERPAELT: That's correct. 866 MR. RYDER: And when was the first meeting? 867 MS. VANDERPAELT: I believe it was in March, March 20th, subject to check. 868 MR. RYDER: And how many times has it met since? 869 MS. VANDERPAELT: Three subsequent meetings since then. 870 MR. RYDER: And when were they, please? 871 MS. VANDERPAELT: June 20th, September 25th and October 17th. 872 MR. RYDER: So notwithstanding the demands of the rate hearing which was filed, the current rate hearing which was filed in the spring, you've had three meetings in quick succession. 873 MS. VANDERPAELT: When we started these meetings we worked with a customer and a lot of the beginning meetings were to establish what the format of the document would look like, what sort of things it should include, and then the group of intervenors who chose to join us did some brainstorming around what policies they thought would be appropriate and from that group they selected six as the top priorities, and then from that six, one customer actually selected one policy and suggested the group should work through one policy to see if the process worked, which is what we did. 874 Subject to that, we have concluded that, we had a meeting in June to meet on the policy, and then, recognizing that summer vacations were coming and in preparation for the hearing we did inform all participants we would be unable to return to them until September, which everybody recognized they also have vacations. 875 In September we finalized that policy, but in the background Union had been working on three additional policies to get ready that once the customer agreed the process worked, we would be able to advance policies in a quicker fashion. 876 At the September 25th meeting, we did a round table discussion to make sure all parties who were participating found value in the process and they all concurred that they thought it was extremely valuable. We were then able to place three policies with them and have their comments returned to us in October. We perceive it will run at a much faster pace as a result of this. 877 MR. RYDER: How many policies are there in total? Wasn't a list produced? 878 MS. VANDERPAELT: There was a list of ideas produced as to where customers would like to see written policies. Some of these Union does not have written policies on right now, they're practices and procedures that may or may not be documented. I'll get the number in a moment. 879 I would estimate we have between 20 to 30 on the list. 880 MR. RYDER: Why do you say 20 to 30? You don't know the number with any greater precision than that? 881 MS. VANDERPAELT: In the document I have they're not numbered. In some policies, when we dove into them we had them listed as one and there were three scenarios behind it and it turned into three policies. 882 MR. RYDER: All right. So you have 20 to 30 policies. Of those, how many have been reduced to writing for the purposes of advising your staff that they have to administer a policy? 883 MS. VANDERPAELT: The external policy committee has seen four of those policies. I believe we have another three that are being in the draft mode for our internal review prior to going to the external group. There is also a group of policies that were related essentially to how residential customers deal with shutoff, credit, and those sort of issues, and that was filed as a book, if you will, and it's being put on our web site next week, it's called: "The Rules and Regulations to Gas Distribution Service" and is filed as part of our hearings typically. 884 So that actually covered several of the policies as a result of the nature of that document. 885 MR. RYDER: Well, if I am a Union Gas staffer with responsibility to administer the company's policies, of the 20 to 30 policies that I'm responsible for, how many are reduced to writing? For my purposes, as a Union Gas staffer, not for the purposes of your meeting, but for practical application in the field? 886 MS. VANDERPAELT: This was the issue I believe that was addressed in January. A lot of them weren't in a written policy format. There are procedures on how to handle things, a lot of them are driven by the rates, and we are making the efforts to document them today. 887 MR. RYDER: Are you saying that none were reduced to writing for the purposes of your field staff. 888 MS. VANDERPAELT: I'm saying they're not in policy format. There were process steps that a customer service rep must take to process a document. There are procedures around when rates are used, what are the rates for certain services and how are they charged. A lot of it is issues that we've done over time and are just well known to the group as to how we administer them. 889 MR. RYDER: So I take it in summary to date you've got one policy produced and there's three more in the works? Is that right? 890 MS. VANDERPAELT: One is on the web site, three are completed by the external group, and there's three that are completed by the internal group, and the rules and regulations handbook which covers several, will be on the web site next week. 891 MR. RYDER: When do you think that there will be a customer access to your entire policies that could affect the services that you provide your customers? 892 MS. VANDERPAELT: I don't have a set date. We agreed to work on them in a practical manner and we are continuing to do that. As we work through them, we will continue publishing them in a timely manner. But I don't have a final date as to when everything will be there. 893 MR. RYDER: Well, timely matter by your standards, you have to agree with me, could be a decade? 894 MS. VANDERPAELT: No, I don't agree. 895 MR. RYDER: Well, it's been a year and we've got one that's being published on the web site. 896 MS. VANDERPAELT: And the rules and regulations were published, which covered several of them. 897 MR. RYDER: The DCC claw-back, I take it Union's policy is fully described in Exhibits J.5.6 and J 5.7? Am I correct in that? 898 MS. VANDERPAELT: That's correct. 899 MR. RYDER: Now, so is this a complete description of the DCC claw-black policy? 900 MS. VANDERPAELT: Yes, it is. 901 MR. RYDER: And is the DCC claw-back policy one of the ones that's been reduced to writing. 902 MS. VANDERPAELT: Yes, it has. It's one that the internal group is reviewing right now. 903 MR. RYDER: So, why hasn't it been given to the group if it's already set out in these interrogatories? 904 MS. VANDERPAELT: It was an internal review. It has not gone to our external team and it was not one of the ones at the top list chosen by the external customer group. 905 MR. RYDER: Is anything preventing you from reducing it to a policy when you've already -- you know what it is and it's already been reduced to writing in some form. 906 MS. VANDERPAELT: And therefore you have the instructions there. We do like to make sure that the external customer group is happy with the presentation of it and that we've captured their concerns. We haven't gone that route yet. 907 MR. RYDER: Let me deal with the portion of the policy which my client objects to. I take it that a customer's obligation is to meet its DCQ? 908 MS. VANDERPAELT: To deliver its obligated deliveries? Yes. 909 MR. RYDER: And if it does that, Union's concern respecting east-end deliveries is satisfied. 910 MS. VANDERPAELT: Yes. 911 MR. RYDER: And customers are entitled to arrange for additional deliveries above the DCQ with Union's consent; is that right? 912 MS. VANDERPAELT: If they require them, yes. 913 MR. RYDER: And with respect to these additional deliveries, no DC is paid? 914 MS. VANDERPAELT: That's correct. 915 MR. RYDER: And when additional deliveries are sold exfranchise, Union imposes a DCC claw-back? 916 MS. VANDERPAELT: Yes, I believe we stated that and the logic behind it in J.5.7. 917 MR. RYDER: All right. And J.5.7, the last three lines sets out your justification: 918 "If not refunded, customers could be motivated by the DCC payment to continue their deliveries to Union to enable their collection of the DCC and then subsequently request an exfranchise transaction." 919 Is that your justification? 920 MS. VANDERPAELT: That's correct. 921 MR. RYDER: I thought we were dealing with a situation where no DC had been paid? So there's no refund. 922 MS. VANDERPAELT: If a customer's delivered incremental supplies to us, they don't typically need to remove it from the system otherwise we wouldn't have authorized the incremental supplies in the first place. 923 MR. RYDER: Yes, but the situation I just described to you, you agree with me that no DCC is paid for these incremental deliveries? 924 MS. VANDERPAELT: No DCC is paid for incremental deliveries. 925 MR. RYDER: It is paid. 926 MS. VANDERPAELT: No. No DCC is paid for incremental deliveries. 927 MR. RYDER: Yes. And if it's not paid, how can you characterize your charges as a claw-back? A claw-back of nothing? 928 MS. VANDERPAELT: Customers who are diverting gas off our system, as I was suggesting, may or may not have had incremental deliveries. Once the gas has arrived to Union, we don't track whether it was an obligated or an unobligated, which is an incremental supply. 929 MR. RYDER: But if the customer can prove to you that with respect to the transfer out exfranchise, no DC had been collected by the customer, how can you lawfully issue a claim for a refund. 930 MR. PENNY: Well, Mr. Chairman, the last question suggests to me that what we're perhaps doing is fighting a -- having did discovery for a civil proceeding or fighting a court battle. If there's some issue that Mr. Ryder wants to put before this Board then I think he's entitled, and clearly is entitled to ask questions about it. But if we're really dealing with what Union can lawfully do or not do under its contract that, I would submit, is not an issue that's properly before the Board. 931 MR. RYDER: The issue before the Board, Mr. Chairman, is that we are dealing with a policy which, in our contention, is improper and should be struck. 932 MR. SOMMERVILLE: My only interest, Mr. Ryder, is in asking this panel to characterize an activity as lawful or unlawful. That's not within the scope of their expressed expertise. 933 MR. RYDER: Now, if you can turn, please, to J.5.8. And that was an interrogatory from my client that asked you to provide the specific regulatory authority for the DCC claw-back charge, and you referred to the interrogatory that my client filed in the last proceeding, and you acknowledged that no specific regulatory authority exists; however, it flows from the underlying purpose for which the DCC was approved. 934 MS. VANDERPAELT: That's correct. 935 MR. RYDER: So there's an implied authority is what you're saying. Implied from the purpose of the DCC. 936 MR. KITCHEN: I think, Mr. Ryder, the premise of the DCC payment was to recognize the benefit provided by obligated deliveries, and Ms. VanDerPaelt and I talked a lot about that in the last case. Subsequently, DCC is being eliminated. 937 Now, to the extent that a customer brings in an obligated supply and then moves it off our system, they should never have received that payment in the first place. And so what we do with that claw-back is it's no win to Union, we actually take the claw-back and put it into the deferral account as a credit to offset any additional DCC costs that may be incurred by customers. 938 So I think your characterizing this as -- the base of your -- the premise of your assumption is the volume that you're moving off the system is the incremental delivery and Ms. VanDerPaelt has already said, and I think we said back in 0017 or 0029, we don't colour code the molecules. We pay DCC on an obligated delivery. To the extent that a customer brings in an incremental supply, the assumption is they would not move that off, otherwise why would they bring that in? 939 MR. RYDER: Well, if your assumption is that the DCC was paid where a claw-back is imposed? 940 MR. KITCHEN: That's correct. 941 MR. RYDER: And whether it was or wasn't paid is a question of fact. 942 MR. KITCHEN: I don't know if it's a question of fact. We paid the DCC on the obligated delivery. 943 MR. RYDER: Yes. But whether on the deliveries we're discussing on any particular delivery, the DCC was paid, is a question of fact. 944 MR. KITCHEN: I'm not following you. 945 MR. RYDER: Well, I think you just told us or Ms. VanDerPaelt did that on incremental deliveries, no DCC is paid. 946 MR. KITCHEN: Right. Because those deliveries are not obligated and we can't count on them to provide a benefit at the east end. 947 MR. RYDER: So if the obligated deliveries are a hundred units, then DCC related to a hundred units will be paid? 948 MR. KITCHEN: If it's obligated a hundred, yes. 949 MR. RYDER: And where the obligated requirements of a hundred units are met but additional deliveries are paid an additional 10 units, you would pay the DCC on a hundred and then claw-back DCC on 10? 950 MR. KITCHEN: Sorry, no. Are you suggesting we would pay the DCC on the firm 100 and to the extent another 10 were delivered, there would be no DCC paid on those 10, nothing would be clawed back. 951 MR. RYDER: No, but when that extra 10 is transferred out, then you collect the extra. 952 MR. KITCHEN: That's our point. We do not know what 10 are pulled out. If you bring in 10 today and pull out 10 tomorrow, you should never receive the DCC. You should never have brought in the 10, the incremental 10 in the first place. 953 MR. RYDER: Well, we only did it with your approval. 954 MR. KITCHEN: Right. And we assume when you bring in the 10, you're bringing it in because you need to bring it in because you have a requirement to meet a demand. 955 MR. RYDER: I'm turning to another topic. And it's your policies relating to the provision of new services; is that a proper topic for this panel? 956 MS. VANDERPAELT: We'll try it on. 957 MR. RYDER: All right. Is there such a thing as a basic hub contract? 958 MS. VANDERPAELT: Yes, there is. 959 MR. RYDER: And what services does it provide? 960 MS. VANDERPAELT: A hub contract is an S&T contract and it provides for parking services so short-term storage, if you will, less than a month, loan services, again very short-term, small, it provides for transportation on different parts of our system, so from Ojibwe to Dawn or from Dawn to Parkway, it would also provide for exchange transactions. I think I've got them all. 961 MR. RYDER: Okay. Thank you. And did the company recently develop a new service or product called HubPlus? 962 MS. VANDERPAELT: Yes, we did. I believe that was our S&T group. I'm not familiar with the contract though. 963 MR. RYDER: All right. Do you know what it does that the basic hub contract does not do? 964 MS. VANDERPAELT: I'm not familiar with the contract. 965 MR. RYDER: All right. And has Union offered the HubPlus to any customer? 966 MS. VANDERPAELT: I don't know. 967 MR. RYDER: My understanding is that it has offered the HubPlus to certain selected customers. 968 MS. VANDERPAELT: I don't know. 969 MR. RYDER: But not generally. 970 MS. VANDERPAELT: I don't know. 971 MR. RYDER: Can you give me an undertaking with respect to whether HubPlus has been offered to any customers? 972 MS. VANDERPAELT: Yes. 973 MR. MORAN: Mr. Chair, Undertaking N.18.2 to advise if HubPlus has been offered to any customer. 974 UNDERTAKING N.18.2: TO ADVISE IF HubPlus HAS BEEN OFFERED TO ANY CUSTOMER; AND TO DESCRIBE THE METHOD BY WHICH THE HubPlus SERVICE HAS BEEN OFFERED TO CUSTOMERS, AND IF IT'S NOT BEING OFFERED GENERALLY, TO PROVIDE AN EXPLANATION AS TO WHY UNION HAS BEEN SELECTIVE IN THE CUSTOMERS IT OFFERS THIS SERVICE TO 975 MR. RYDER: And do you know what has been offered generally, to your customers generally over the Internet, over the web site? 976 MS. VANDERPAELT: I don't have any familiarity with this topic. 977 MR. RYDER: I would like another undertaking to describe the method by which the HubPlus service has been offered to customers, and if it's not being offered generally, to provide an explanation as to why Union has been selective in the customers it offers this service to. 978 MS. VANDERPAELT: We will undertake that. 979 MR. PENNY: Let's just include that in M.18.2. 980 MR. SOMMERVILLE: Sorry, Mr. Penny. 981 MR. PENNY: Mr. Chairman, I was suggesting we include all of that in N.18.2. 982 MR. SOMMERVILLE: Is that suitable, Mr. Ryder? 983 MR. RYDER: Yes, thank you. I think those are all my questions. Thank you. 984 MR. SOMMERVILLE: Thank you, Mr. Ryder. We'll take 10 minutes and reconvene, actually, 12 minutes and reconvene at quarter to three. Thank you. 985 --- Recess at 2:32 p.m. 986 --- On resuming at 2:47 p.m. 987 MR. SOMMERVILLE: Mr. Moran? 988 MR. MORAN: Thank you, Mr. Chair. 989 CROSS-EXAMINATION BY MR. MORAN: 990 MR. MORAN: I'd like to start off with Interrogatory J.7.70, this is the interrogatory where the cost comparison was done between March park and incremental storage. 991 You've described March park. You're borrowing gas that's going to be delivered on a daily basis and even volumes during March; right? 992 MR. ISHERWOOD: That's correct. 993 MR. MORAN: And you pay a borrowing fee for it and in May you have to give it back. 994 MR. ISHERWOOD: That's correct. 995 MR. MORAN: As I understand it, you described the size of it on the basis of what you think you would need to cover, I think, 80 percent of what you normally see? 996 MR. ISHERWOOD: That's correct. 997 MR. MORAN: Okay. And the remaining 20 percent, that's sort of the worst-case scenario, extra-cold weather; right? 998 MR. ISHERWOOD: Actually, I characterize it that two standard deviations covers off 95 percent, which is how we looked at it in the core-market side, and in the contract market we looked at it from the point of view of the worst case we've seen in each of the rate classes over the last five years, that's how we calculated the initial total number which covers off all but the last five percent in the core market and probably most of the exposure in the industrial market. Then I applied the 80 percent factor, really, to adjust for diversity between markets. 999 MR. MORAN: Right. This is a proposal for 2005; right? This is when it will actually first be implemented? 1000 MR. ISHERWOOD: That's correct. 1001 MR. MORAN: You talked about with Mr. Shepherd, I think, about building it into rates for 2004, but I'll deal with that separately. 1002 MR. ISHERWOOD: Right. 1003 MR. MORAN: So on that basis then, given that it covers a range of experience as you would measure it, it will actually depend on what happens in March with respect to how much of that borrowed gas will actually get burned; right? 1004 MR. ISHERWOOD: That's correct. 1005 MR. MORAN: And is there a way to understand for the purposes of 2005, how likely it is that zero percent will be needed versus 100 percent of it versus 50 percent of it? 1006 MR. ISHERWOOD: I guess as long as the base-gas supply plan were to occur, then none of it would be used, and based on the weather methodology we've chosen, there's equal distribution or equal probability of being warmer or colder-than-normal. 1007 Maybe to give some experience, I refer to J.34.160, which goes back 20 years. And assuming we had the number of customers and heating-degree days we had in March of 2003, it indicates how much of the March park had been used in each of the 20 years under both the 20-year trend and the 30-year average. 1008 MR. MORAN: Maybe I'll come at it this way. If your gas plan is right on, you don't need to burn any of that borrowed gas; right? 1009 MR. ISHERWOOD: That's correct. 1010 MR. MORAN: So it would be available to give back, in other words, in May? 1011 MR. ISHERWOOD: Exactly. 1012 MR. MORAN: And if you had to burn all of it because it's colder than you expected, you still have to give back 100 percent of what you borrowed; right? 1013 MR. ISHERWOOD: That's correct. 1014 MR. MORAN: And you'd have to replace it because it was burned, so you would have to replace 100 percent of it as well; right? 1015 MR. ISHERWOOD: That's correct. 1016 MR. MORAN: Okay. So that I guess takes me then to the cost comparison to replace it there is a cost associated with replacing it if it was burned? 1017 MR. ISHERWOOD: Exactly. If you look at the three examples I gave, the one example was, we buy gas the summer before and store it during the winter. If that was the option we had chosen, then if we had consumed the gas that we had stored all winter, we would have to replace that gas as well. Likewise, if we have a March park and we use it, we have to replace that gas as well. And the third option was if you actually burn spot gas in March, then we have to replace that as spot gas. 1018 So in all three cases I think the cost comparison is accurate, in that we don't include the costs of the actual replacement gas. 1019 MR. MORAN: All right. If you approached it on the basis of storing some incremental gas though you would have paid for that gas, right, already? 1020 MR. ISHERWOOD: But the cost comparison in this J.7.70 doesn't include the cost of gas. It just includes the carrying costs of the gas. So if you actually had to burn it and replace it, then we have to add also the cost of gas. 1021 MR. MORAN: Okay. If you're going to approach it on the basis of some incremental balancing gas that would be put into storage and brought through, wouldn't that just be part of your gas plan for that year? 1022 MR. ISHERWOOD: It would not because our gas plan assumes normal weather, so we wouldn't be including the cost of replacing it. 1023 MR. MORAN: All right. So if we're to understand what you've done then in J.7.70 what you say is that if the borrowed gas or the stored gas had to be burned, as the case may be, either way the cost to replace that gas is the same. 1024 MR. ISHERWOOD: Exactly. 1025 MR. MORAN: Thank you. The next area I'd like to address then is the issue of, well, the rationale, I guess, for the new proposal. As I understand it, it was in response to a Board directive and one of the concerns that was identified was the way in which load balancing is allocated, the problem being if it's allocated to rate classes there are people within the rate class who might be balanced, and therefore, there's some inequity. That was one of the drivers; is that right? 1026 MS. VANDERPAELT: That's correct. 1027 MR. MORAN: Now, what you're proposing then is to remove, I guess, inequity to the extent that direct-purchase customers are now required under your proposal to balance to their forecast at two checkpoints depending on the weather, and because you're no longer going to be billing for that, it's just a question of having physical gas to bring them to the forecast volumes at those two checkpoints. The equity disappears, the inequity disappears at that point because you're not billing anybody for load balancing amongst the direct-purchase customers; right? 1028 MS. VANDERPAELT: That's right, outside of the base 28 Bcf of inventory that's in the rates for the forecast, we're not billing them any. 1029 MR. MORAN: However, when we look at the March park proposal you're proposing to allocate that on the basis of rate class; isn't that correct? 1030 MR. ISHERWOOD: That's correct. That's because both sales-service customers and direct-purchase customers would pen benefit from the March park. 1031 MR. MORAN: All right. But March park is there for system load balancing even in the context of direct-purchase customers who will have been balanced under the rest of your proposal; right? 1032 MR. ISHERWOOD: I think the assumption for the March park is that the entire system, both sales-service and direct-purchase is balanced on March 1 and then the March park, the 5.2 petaJoules is strictly for any volume or weather variance in the month of March for both sales-service and direct-purchase. 1033 MR. MORAN: Okay. But it's conceivable under that scenario that within the rate class, there will be people who are balanced who are still going to be charged now for March park, isn't that correct? 1034 MR. ISHERWOOD: I think the majority of the March park is being allocated to the M2 and rate 1 class which are in general service. There is some still being allocated to contract markets. So going back to some earlier discussion, in terms of the general-service market, that would generally move all in the same direction especially in the short period of time like the month of March. Your assumption may be more true, I think, in the contract market where you may have individual contract customers, some long, some short but still allocated part of the cost. 1035 MR. MORAN: The M2 is the residential market. 1036 MR. ISHERWOOD: That's correct. 1037 MR. MORAN: Out of the residential market, what percentage is -- of that market is signed up with marketers? 1038 MS. VANDERPAELT: Approximately half. 1039 MR. MORAN: So 50 percent of that market, under your proposal, would be in balance, right, because they're supposed to be in balance under your two-checkpoint system, but there's still going to be an allocation to that market. 1040 MR. ISHERWOOD: Actually 100 percent of the M2 market will be balanced on March 1. The direct-purchase market will balance themselves and Union Gas will balance the sales-service customers on March 1. So again, the March park is to help both customers groups get through the month of March. 1041 MR. MORAN: All right. So where there's a marketer who is operating on the basis of balancing monthly, and they have a number of residential customers, even those customers are still going to be visited with some of the March park expenses; right? 1042 MR. ISHERWOOD: They will have some of the expenses and some of the benefits as well. 1043 MR. MORAN: So to the extent that there was a concern previously about intraclass equity that might still -- there will still be some vestiges of that remaining in the context of March park; is that true? 1044 MR. ISHERWOOD: I think as I said earlier, probably more so in the contract market. 1045 MR. MORAN: Okay. Now, I guess to the extent that March park is built into the rates, at least you're avoiding a rider problem; right? 1046 MR. ISHERWOOD: Avoiding the which? 1047 MR. MORAN: The issue of a separate charge later on because it's already built into rates? 1048 MR. ISHERWOOD: That's exactly right. 1049 MR. MORAN: Now, while we're on the allocation, there was some discussion about the fact that there was some side benefits resulting from March park to interruptible customers because they might not need to be interrupted as frequently because of the March park facility, at least during March. 1050 Is there any allocation to, in your proposal right now, with respect to interruptible rate classes? 1051 MR. ISHERWOOD: We have typically had very little infranchise interruption so it was not really a driver in determining the requirements in March park and as a result, it is not really incorporated in the cost of the March park. 1052 MR. MORAN: Okay. Is there any allocation to interrupt the rate classes? 1053 MR. ISHERWOOD: Oh, I'm sorry, yes, there is. 1054 MR. MORAN: There is. If you could turn up Exhibit H.1, tab 4, page 16. Page 16 of 24. 1055 MR. SOMMERVILLE: 16? 1056 MR. MORAN: That's correct. Table 1 sets out the allocation I think by rate classes; right? 1057 MR. ISHERWOOD: That's correct. 1058 MR. MORAN: And I don't see any breakout with respect to the interruptible rate classes here or maybe I'm missing it. 1059 MR. ISHERWOOD: M5 is 100 percent interruptible. 1060 MR. MORAN: Thank you. Is there any of the rate classes that contain interruptible customers? 1061 MR. ISHERWOOD: M7 would be a combined interruptible and firm. 1062 MR. MORAN: Is there a way to understand what component of that is dedicated to interruptible classes or is it an even class? 1063 MR. KITCHEN: In terms of how much is going within M7 to interruptible customers? 1064 MR. MORAN: Yes. 1065 MR. KITCHEN: Give me a second, I might be able to find that. Of the 383,000 allocated to M7, approximately 15,000 of that goes to interruptible. 1066 MR. MORAN: Sorry, what percentage of M7 is interruptible? 1067 MR. KITCHEN: I don't actually have the volume breakouts. I'm not able to provide that now. 1068 MR. MORAN: They're not large amounts. 1069 MR. KITCHEN: I think it's mostly firm at this point because that would explain the low allocation. 1070 MR. MORAN: Other than M5 and M7, are there any other rate classes that contain interruptible customers? 1071 MR. ISHERWOOD: None on the schedule, no. 1072 MR. MORAN: Now, as I understand it another driver for the proposal before the Board was, as I understand it, the reaction from homeowners when load balancing was billed as a rider the last time around, particularly the ones who had signed up with marketers and thought they had made arrangements for their gas and so they were wondering why they were getting billed for gas. 1073 In logging those calls, did you break -- did you track the percentage of people that specifically had that complaint as opposed to people who were simply complaining about a large increase in their bill? 1074 MS. VANDERPAELT: I'm not sure if we did. 1075 MR. KITCHEN: I might be able to shed some light on that. We actually provided an IR back in the 0056 case that provided a number of letters from just such disgruntled customers. I don't know that we have the exact number, but I know that we have given examples of it. 1076 MR. MORAN: All right. I was more interested in the breakdown. Maybe you could just undertake just to check with the customer care people to see if they have those stats available and provide them on best efforts. 1077 MR. KITCHEN: I can undertake to do that. 1078 MR. MORAN: Mr. Chair, Undertaking N.18.3. 1079 MR. SOMMERVILLE: Thank you, Mr. Moran. 1080 Are we clear about the terms of that? 1081 MR. PENNY: I think we're to determine whether we have information that breaks out the specific concern about gas costs in direct-purchase customers. Am I right? Versus the general concern about the increase. 1082 MR. SOMMERVILLE: Thank you. 1083 UNDERTAKING N.18.3: TO DETERMINE WHETHER WE HAVE INFORMATION THAT BREAKS OUT THE SPECIFIC CONCERN ABOUT GAS COSTS IN DIRECT-PURCHASE CUSTOMERS VERSUS THE GENERAL CONCERN ABOUT THE INCREASE 1084 MR. MORAN: That's it, Mr. Chair. 1085 Now, under your proposal as I understand it, there would no longer be a charge by Union, at least, to that set of people, the residential customers who were signed up with the marketer; right? 1086 MR. ISHERWOOD: The only example we gave this morning is if you had very unusual circumstances in February or March where we had to still buy a little bit of spot gas. I classify those as being very unusual. 1087 MR. MORAN: Right. 1088 MR. KITCHEN: I would just add through the transition period, since we're not implementing until November 1st. 1089 MR. MORAN: So in the context of your proposal then, it's left to the marketers to figure out how they want to deal with it and presumably they might factor that into their offering price so it's still a fixed price or they may have a contract that says, We can bill for extra stuff like load balancing. 1090 MS. VANDERPAELT: We actually began talking to the marketers about this proposal in 2002 and suggested they probably want to think about these things, going forward, and we've also delayed the implementation to 2005 hoping to give them three years in order to start making adjustments. 1091 MR. MORAN: All right. And in the residential market as I understand it, we're really talking about OESC and Direct Energy at this point. 1092 MS. VANDERPAELT: Yes, I believe there's also Superior is a fairly new one but they're getting a market share there as well. 1093 MR. MORAN: You've had conversations with everybody who's operating in -- 1094 MS. VANDERPAELT: Oh, yes. 1095 MR. MORAN: Operating in the residential market? Okay, so operating under this scenario then, potentially, I guess you could have the bill from Union, the normal bill from Union, a second bill from the marketer and in Union's bill under certain circumstances where there's very cold weather requiring spot gas purchases, another charge along the lines of what we saw already for the much larger amount last year, right? 1096 MR. ISHERWOOD: That's correct. 1097 MR. KITCHEN: Although I think I would temper that, there may be a charge, but it should be small because we're dealing rather than the whole winter of load balancing, we would be dealing with two scenarios. 1098 MR. MORAN: Right. And if the amount is small enough, maybe they won't complain to Union about it because it's not worth complaining about; right? 1099 MR. KITCHEN: Well, they may still complain. 1100 MR. MORAN: All right. Now, I gather the impression from what you said about this problem that there was a sense maybe that residential customers of marketers didn't understand, perhaps, that load balancing was outside the fixed price and that's why it was being billed to them because it still had to be paid for? Is that something that's reflected in the responses that you gave to customers who were complaining? 1101 MR. KITCHEN: We would have provided reasons in the billing services as to why costs were incurred. The customer obviously, based on their response, didn't know that they were also paying load balancing. 1102 MR. MORAN: Right. Obviously, marketers are licensed by the Board and there's a code of conduct that governs the activities of marketers in the marketplace, and are you aware that the current code of conduct contains provisions that deal with information requirements to be provided by marketers to customers? 1103 MS. VANDERPAELT: I am aware they are, but I don't know the details of them. 1104 MR. MORAN: Fair enough. And in that context did you have any opportunity to discuss your proposal with the licencing people at the Ontario Energy Board to discuss implications of this change and informational requirements that might flow from that for marketers? 1105 MS. VANDERPAELT: We haven't had any discussions with the licencing board. 1106 MR. MORAN: All right. Are you aware that the code of conduct is currently under review? 1107 MS. VANDERPAELT: No, I wasn't. 1108 MR. MORAN: All right. Given that it is, would you I guess be prepared to consider at least raising this issue with the licencing people so that they understand -- 1109 MS. VANDERPAELT: We would be happy to discuss it with them. 1110 MR. MORAN: I won't ask you for an undertaking. 1111 MR. PENNY: You looking for work? 1112 MR. MORAN: No, we're not looking for work. 1113 MR. SOMMERVILLE: It's the phone number. 1114 MR. MORAN: That's right. And for your assistance, it's on the Board's web site if you want to follow up. 1115 Okay. That's fine. I wonder if you could then just turn up Exhibit M.17.2, that was the Facts Line dated October 27, 2003. As I read this document, it seems to be tailored to the proposition I think you described earlier, that 2004 is a transition year on the assumption that the Board approves what you're looking for, so you're telling the people who are bundle-transportation contract customers, this is what's going to be happening in the future, we're doing a trial run in 2004, nothing flows from it but this is why you'll be getting certain information around the checkpoints and so on; right? Is that the intent of this document? 1116 MS. VANDERPAELT: Yes, it is. 1117 MR. MORAN: And then subject to Board approval, this will become the nature of the game for 2005? 1118 MS. VANDERPAELT: That's correct. 1119 MR. MORAN: And today to the extent there might be some incremental load balancing charges from Union, it doesn't appear to have been mentioned anywhere in this document, maybe I missed it. 1120 MS. VANDERPAELT: Are you referring to the end of February and early March situation? Yes, we feel those cases are going to be very extreme so they weren't mentioned here. 1121 MR. MORAN: Thank you. 1122 Now, Mr. Vegh asked you a hypothetical question with respect to contracts that marketers that he represents have with their customers. And this was about how they might use, if you remember the line of questioning, it was about what you do on the bill for them and how you go about collecting money for them and I think your answer was you take your direction from the marketers, and this hypothetical appeared to be centered around the idea that if we have a fixed-price contract that doesn't allow for us to direct Union to collect other money like load balancing money... 1123 Do you remember those questions? 1124 MS. VANDERPAELT: Yes, I do. 1125 MR. MORAN: Okay. The marketers when they're interacting with you and when you discussed this in the past with them, did they review their customer contracts with you to discuss that problem? 1126 MS. VANDERPAELT: They indicated at a high level that they have some fixed-price contracts with varying terms, so some are one year, some are three year. And so that they felt that they would be exposed on some of those contracts. To alleviate some of their concerns we were sort of doing the early warning system and having a transition period in order to help them manage that. 1127 MR. MORAN: All right. And did they actually show you contracts? 1128 MS. VANDERPAELT: No, they didn't. 1129 MR. MORAN: So in terms of understanding Mr. Vegh's concern, you haven't actually seen any of the contracts that he might have been referred to? 1130 MS. VANDERPAELT: No, I'm just aware there are fixed-price contracts out there. 1131 MR. MORAN: All right. Thank you. And finally, with respect to March park, I assume you haven't actually entered into any March park arrangements? 1132 MR. ISHERWOOD: That's correct, we have not. 1133 MR. MORAN: The first March park arrangement would be for the year 2005. 1134 MR. ISHERWOOD: That's correct. 1135 MR. MORAN: But you are asking for inclusion in 2004 of $8.4 million associated with what you think the cost will be for 2005. 1136 MR. ISHERWOOD: That's correct. 1137 MR. MORAN: And I think you offered as some sort of a justification in response to Mr. Shepherd that you wanted in 2004 because you haven't put in anything for load-balancing for 2004 although I think you agreed there was no direct connection between those two things; right? 1138 MR. ISHERWOOD: That's correct. 1139 MR. MORAN: And previously what was in rates for load balancing? 1140 MR. ISHERWOOD: Approximately $6 million. 1141 MR. MORAN: Okay. And in terms of the principle that rates should reflect costs that are incurred in the year that they're charged, how would you explain the inclusion of 8.4 million dollars in 2004 rates given that you won't incur those costs until 2005? 1142 MR. ISHERWOOD: I think the fundamental need and request here is to get Board approval of the concept and of the costing of the March park and to then include them in the 2004 rates, and I guess there's two things we talked about. One is around the potential offsetting of load-balancing costs if you have a colder-than-normal year that we just described. And the second, I guess, is through the QRAM process to the extent those costs don't occur, and in fact, the March park money recovery in credits would be refunded through the QRAM process. 1143 MR. MORAN: So the idea would be to track the revenue that comes from this 8.4 in rates in a variance account essentially. 1144 MR. ISHERWOOD: Yes. In the spot account. 1145 MR. MORAN: Then to the extent that you have to buy spot during March, then it would be a credit against those required purchases? 1146 MR. ISHERWOOD: That's correct. 1147 MR. MORAN: Is this, and I'm no not saying this pejoratively, but is this part of the pretending it's in place for 2004 to see how it works? I really didn't mean it pejoratively. We're telling the customers this is what it will look like, we're not enforcing it for 2004, but we're going to pretend it's in place so you'll understand how it works and at the same time we've got this March park proposal and we're going to collect the money for that as part of that and to the extent that we need it, we'll use it to meet load-balancing requirements that aren't covered, and to the extent we don't there will be a QRAM process. Is that a fair way to put it? 1148 MR. ISHERWOOD: I never thought of it that way, but that's probably a fair way to look at it. 1149 MR. MORAN: Okay. Thank you. Those are all the questions I have, Mr. Chair. 1150 MR. SOMMERVILLE: Thank you, Mr. Moran. The Board has no questions. Mr. Penny. 1151 MR. PENNY: Thank you, Mr. Chairman, I have just three or four questions in re-examination. 1152 RE-EXAMINATION BY MR. PENNY: 1153 MR. PENNY: Mr. Thompson had asked about which customers were concerned about Union buying their gas and about their retroactive charge issue historically, and the impression I was left with was that this was a general-service marketer-driven issue. But can you comment on the concerns expressed, if there were any, by other customer classes such as commercial and industrial bundled service customers? 1154 MS. VANDERPAELT: Yes, we did receive a lot of comments from the contract market as well. I can categorize them into two categories. The first one was that we were now collecting charges from them on product that they had already pushed out the door. So they were looking for -- one of the big factors we consistently hear from our industrial group is they have a budgeting process and they need to have those costs in the time frame in which they incur. 1155 So that was one comment that we had heard and the other part with that is they like to control their costs. They would like to be in control of what the product costs are, what they budgeted. It's part of their management system. 1156 The second comment we heard is for industrial customers, they will often have several feeder plants so they will have an M2 account, for example, feeding into a large steel mill like a M7. So they would take proactive actions in order to stay balanced, recognizing that their large account was probably the driver of any imbalances, for the most part, and then were subsequently were surprised that their M2 rate class was out of balance and got substantially large bills because, as you can imagine, they were although an M2 customer, a much higher consumer of gas in that category so proportionally they got a lot more than $120. And you know, had taken all the actions, had bought gas in the time period and were still subject to these costs. 1157 MR. PENNY: Thank you, Ms. VanDerPaelt. 1158 Again, both Mr. Janigan in this case and Mr. Thompson asked about Union's ability to continue to buy the load-balancing gas for direct purchase. In other words, to continue the old load-balancing service with Union acquiring the gas, but to bill those costs directly to customers rather than having a delivery charge on a rate-class basis, and I wanted to ask you two aspects of that. 1159 First of all, is it operationally possible for Union to offer the option to direct-purchase customers where some would do it as you are proposing in this case, in other words, they take on that responsibility and -- but at the same time some of them do it the old way where Union would still be buying the load-balancing gas but being billed directly for whatever costs they caused? 1160 MS. VANDERPAELT: We think it would be very difficult to operate two plans. If we were still purchasing gas for a group of customers to then bill them retroactively based on their balances, we would have difficulty managing our system in determining who we were buying gas for or, alternatively, we would have to wait until very late in February to ascertain their balance and then managing that with those customers who did bring in their gas. So it would be very difficult to manage two systems at the same time. 1161 MR. PENNY: Then so, the second part of the question is even if you did treat everyone, all direct purchase the way the hypothetical that Mr. Janigan and Mr. Thompson were suggesting such that Union buys the load balancing gas for direct purchase but rather than charge it back on a delivery basis, on a delivery rate -- on a delivery charge rate-class basis you bill the individual customer directly for the gas that's attributable to them to bring them into balance, what -- so in other words, the hybrid of your proposal and the old system, what operational or other constraints or problems would such an approach give rise to, if any? 1162 MS. VANDERPAELT: I would say if we approached it like that, we would have not met some of our business principles that we established at the beginning. First of all, we would still be buying gas and making cost decisions, commodity-purchase decisions on behalf of customers who have other arrangements. They've made direct purchase arrangements. So we would still be involved in their business and we expressed that we don't believe that's what we should be doing for load balancing. 1163 We would still have the issue that the charge would be after the fact whereas if a customer has purchased the gas in January, their supplier will invoice them right at the end of January whereas we would have to wait until the winter is over in order to be able to go back and look at the balances and then collect those costs. 1164 Finally, if we moved to a hybrid system where we were again tracking based on a contract and then revisiting those costs back to them, the flexibility of diversions that we have opened, we would have to revisit that. We do not believe we would be able to offer that flexibility into the marketplace because we would be back to trying to manage and overall system without any certainty of people taking action and us trying to manage to that. 1165 So they may want to bring in gas, as incremental supply. We're trying to plan whether or not we're purchasing it for them on their behalf so there would be some restrictions back on the winter activities so we could manage the system. 1166 MR. PENNY: Then just finally on this topic, are the load-balancing system changes that Union is proposing in this case to support its proposal in this case, would those system changes be capable of handling either of the two scenarios that I just asked you about? 1167 MS. VANDERPAELT: Not as they are designed right now. 1168 MR. PENNY: Thank you. And I have I think one question arising out of some questions or perhaps two, some questions that Mr. Vegh put to you. One had to do with the fact that the marketers for general service customers don't get access or are not initially treated as having the self-managed option, they have the Union-managed option. And my question to you is, is there a way that a marketer, representing general service customers, can get the self-managed option? 1169 MS. VANDERPAELT: A marketer can create the self-managed option by moving to an unbundled service if they choose. 1170 MR. PENNY: All right. Thank you. And to your knowledge, are any marketers proposing to move to the Union's unbundled service? 1171 MS. VANDERPAELT: Yes, we have one marketer who is proposing to move there in the spring. 1172 MR. PENNY: And then with respect, this is my final question with respect to the diversion question, and Mr. Vegh put a series of questions to you about the flexibility to do diversions. My question is under your load-balancing proposal, how likely is it that diversions would not be able to be accommodated in a winter that is warmer-than-normal and where direct purchase general service customers are underconsuming? 1173 MS. VANDERPAELT: The likelihood of those not being available is minimal. 1174 MR. PENNY: And why is that? 1175 MS. VANDERPAELT: If it is warmer than normal, we have plenty of gas on the system. The only reason we would have an issue with diversion in the winter is if on the given days that they've requested, we are unable to accommodate it so we can't receive it, we can't get it off the system at that point, or we have a worry about getting that much gas on a given day. 1176 With a proposal that we have here, we are planning to put in some rules and policy, if you will, around how they will manage it so they will have very clear guidelines that will help them so they recognize they are more available to them now than today. 1177 MR. PENNY: Thank you very much. 1178 Thank you, Mr. Chairman. Those are my questions. 1179 MR. SOMMERVILLE: Thank you, Mr. Penny. The panel is excused. Thank you very much for your assistance and have a safe trip back to Chatham. 1180 We'll reconvene on Monday morning at 9:30 for the cost-allocation/rate-design panel. Mr. Kitchen, you'll be rejoining us then, I think. I hope everyone has a nice, safe weekend and we'll see most of you back on Monday. 1181 MR. PENNY: Thank you, Mr. Chairman. 1182 --- Whereupon the hearing adjourned at 3:22 p.m.