Rep: OEB Doc: 12WWH Rev: 0 ONTARIO ENERGY BOARD Volume: 19 3 NOVEMBER 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 3 NOVEMBER 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 15; KITCHEN, McMAHON [25] EXAMINATION BY MR. SMITH: [28] CROSS-EXAMINATION BY MR. WARREN: [68] CROSS-EXAMINATION BY MR. JANIGAN: [233] CROSS-EXAMINATION BY MS. YOUNG: [631] CROSS-EXAMINATION BY MR. RYDER: [652] PRELIMINARY MATTERS: [846] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [882] CROSS-EXAMINATION BY MR. RYDER: [885] CROSS-EXAMINATION BY MR. AIKEN: [1188] 10 EXHIBITS 11 EXHIBIT NO. M.19.1: "MATERIAL FOR CROSS-EXAMINATION ON COST ALLOCATION AND RATE DESIGN PANEL" FILED BY VECC [239] EXHIBIT NO. M.19.2: "ENBRIDGE CONSUMERS GAS PERCENTAGE OF CUSTOMER RELATED COSTS RECOVERED BY WAY OF MONTHLY CUSTOMER CHARGE" ALSO FILED BY VECC [240] EXHIBIT NO. M.19.3: CROSS-EXAMINATION MATERIALS FOR PANEL 15 FILED BY KITCHENER [733] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.19.1: TO PROVIDE AN UPDATED TABLE 3 AS SET OUT IN EXHIBIT H.1, TAB 1, AT PAGE 14 OF 30 [124] UNDERTAKING NO. N.19.2: TO ADVISE WHAT THE FIXED CHARGE WOULD BE IF ALL CUSTOMER COSTS FOR THE RESIDENTIAL CLASS WERE RECOVERED IN THE FIXED CHARGE [140] UNDERTAKING NO. N.19.3: COMPLEMENT INTERROGATORY IR J.34.154, TO PROVIDE A TABLE WITH THE COST RECOVERED BY EACH CLASS FOR STORAGE-INTEGRITY COSTS AND THE PRINCIPLES ASSOCIATED WITH THE ALLOCATION TO EACH RATE CLASS [330] UNDERTAKING NO. N.19.4: TO STATE WHAT PERCENTAGE OF THE TOTAL AMOUNT OF THE FLEXIBILITY-RELATED DEFERRAL ACCOUNT BALANCE OF 55.526 MILLION WAS INCURRED IN THE PERIOD BETWEEN JANUARY 1ST TO APRIL 30TH, 2003 [601] UNDERTAKING NO. N.19.5: TO PRODUCE DOCUMENTATION COMMUNICATING WITH INDUSTRIAL CUSTOMERS AND ANY FEEDBACK [647] UNDERTAKING NO. N.19.6: TO ADVISE ON THE ORIGIN OF BOARD APPROVAL FOR THE ALLOCATION OF STORAGE DELIVERABILITY [700] UNDERTAKING NO. N.19.7: TO RECALCULATE THE STORAGE-DEMAND ALLOCATOR USED TO ALLOCATE DELIVERABILITY-RELATED COSTS FOR THE T3 RATE CLASS AS IF THE T3 CUSTOMER WAS PART OF THE M9 RATE CLASS BASED ON PARAMETERS WITHIN THE COST STUDY; AND THEN, FROM THAT CALCULATION, TO REDO THE CALCULATION OF RATIO OF STORAGE DEMAND TO SPACE ALLOCATION FOR THE T3 RATE CLASS AS SHOWN AT THE BOTTOM OF EXHIBIT J.5.87 [881] UNDERTAKING NO. N.19.8: AN UNDERTAKING TO ADVISE IF THE 296,501 FIGURE IN EXHIBIT M.4.1, PAGE 2, LINE 1, WAS UPDATED IN THE COURSE OF THAT PROCEEDING [1011] UNDERTAKING NO. N.19.9: TO PROVIDE INFORMATION, IF AVAILABLE, SHOWING THE BREAKDOWN OF ADMINISTRATIVE COSTS AND INTERVENOR COSTS INCLUDED IN ADMINISTRATIVE COSTS FOR THE T3 CLASS [1108] UNDERTAKING NO. N.19.10: TO PROVIDE THE COMPARISON BETWEEN APPROVED RECOVERY AND ACTUAL RECOVERY IN A COLDER-THAN-NORMAL WINTER AS COMPARED TO INCREMENTAL COST; AND TO EXPLAIN WHY THIS IS NOT NECESSARILY TRUE FOR THE RATE T3 CLASS; AND TO VERIFY IF THE VARIABLE CHARGE REVENUE WILL OUTSTRIP THE COSTS [1164] UNDERTAKING NO. N.19.11: TO EXPLAIN LINES 2 AND 3 IN EXHIBIT G.3, TAB 5, SCHEDULE 26, PAGE 1 OF 9 UPDATED FOR RATE M10 [1243] UNDERTAKING NO. N.19.12: TO EXPLAIN THE INCLUSION OF M10 IN EXHIBIT G.3, TAB 5, SCHEDULE 26, PAGE 7 OF 9 UPDATED [1251] UNDERTAKING NO. N.19.13: TO PROVIDE AN ESTIMATE OF THE IMPACT OF THE COST ALLOCATED TO THE RATE M9 CLASS OF ADOPTING THE EVIDENCE AT K.35 [1280] UNDERTAKING NO. N.19.14: TO PROVIDE AN EXPLANATION FOR THAT WHOLE DIRECT ASSIGNMENT AND A BREAKDOWN BETWEEN GDAR AND THE GAS SUPPLY MARKETING COSTS [1371] UNDERTAKING NO. N.19.15: TO PROVIDE AN EXPLANATION FOR THAT WHOLE DIRECT ASSIGNMENT AND A BREAKDOWN BETWEEN GDAR AND THE GAS SUPPLY MARKETING COSTS FOR THE PREVIOUS ALLOCATOR, HOW THE $20,000 IS ARRIVED AT BASED ON THE CUSTOMER NUMBERS [1396] 14 --- Upon commencing at 9:35 a.m. 15 MR. SOMMERVILLE: Thank you. Please be seated. 16 This is the continuation of the Union Gas Limited application for rates for 2004. 17 Are there any preliminary matters that we need to deal with before we proceed? 18 MR. SMITH: Not from Union's perspective. 19 PRELIMINARY MATTERS: 20 MR. SOMMERVILLE: Mr. Shepherd. 21 MR. SHEPHERD: Mr. Chairman, on Friday morning School Boards filed a book of cross-examination materials. Included in that was tab 22, which was a series of spreadsheets that were sent to Union two weeks ago, roughly. On Friday afternoon, Union provided us with some new numbers for those spreadsheets, some breakdowns of numbers that weren't on the record before, and we're still trying to actually figure those out. We will, hopefully later today, file a replacement for tab 22, and unfortunately, I'm going to have to take my leave and do my cross-examination tomorrow because of that. My apologies. 22 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 23 There being no other preliminary matters, Mr. Smith. 24 MR. SMITH: Thank you, Mr. Chairman. Mr. Kitchen, having been previously sworn, I just ask that Mr. McMahon be sworn. 25 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 26 M.KITCHEN; Previously Affirmed. 27 P.McMAHON; Sworn. 28 EXAMINATION BY MR. SMITH: 29 MR. SMITH: Mr. McMahon, I understand that you are the manager, product and services costing for Union Gas Limited? 30 MR. McMAHON: That's correct. 31 MR. SMITH: And that you've healed that position since 2002? 32 MR. McMAHON: That's correct. 33 MR. SMITH: And that you smarted with Union Gas in 2001? 34 MR. McMAHON: That's correct. And prior to that I understand that you worked for the government of Yukon TransMountain Pipeline Limited, the Northwest Territories Power Corporation, Ontario Hydro and North York Hydro, all in the emergency business, as it were? 35 MR. McMAHON: That's correct. 36 MR. SMITH: And I understand that you have a Bachelor of Arts, Economics and Mathematics from Lakehead University? 37 MR. McMAHON: That's correct. 38 MR. SMITH: And you obtained that in 1981? 39 MR. McMAHON: That's correct. 40 MR. SMITH: And I understand that you have not testified before this Board before, but that you did file evidence in RP-2002-0130? 41 MR. McMAHON: That's correct. 42 MR. SMITH: But as the matter settled, you were not afforded the privilege of testifying here today. 43 MR. McMAHON: That's right. 44 MR. SMITH: I welcome you. I do understand that you have testified before the Yukon Board of Utilities before and the NEB in the Northwest Territories. 45 MR. McMAHON: That's correct. 46 MR. SMITH: Were you responsible for the preparation of the evidence at Volumes G.1 and G.2 relating to cost allocation? 47 MR. McMAHON: Yes, I was. 48 MR. SMITH: And can you please confirm that you adopt that evidence and interrogatories that you answered in response to that evidence? 49 MR. McMAHON: I adopt them. 50 MR. SMITH: Thank you. 51 Mr. Kitchen, you've previously been sworn, but if you could please confirm for the record that you were responsible directly or supervised those responsible for the preparation of the rate design evidence found at Volume 8 of the evidence in chief? 52 MR. KITCHEN: I am responsible for that, but it's H binder. 53 MR. SMITH: Sorry, I wasn't clear, H. And that you prepared interrogatories in response to that evidence. 54 MR. KITCHEN: Yes, I did. 55 MR. SMITH: And can you please confirm that you adopt that evidence for the purposes of this proceed? 56 MR. KITCHEN: I do. 57 MR. SMITH: Thank you. 58 Mr. Kitchen, there was one matter I did want to raise with you in examination-in-chief. A number of parties have raised, either through their evidence or in interrogatories, the suggestion that rates should be designed around end use. Are you aware of that? 59 MR. KITCHEN: Yes, I am. 60 MR. SMITH: And I understand that Union does not design its rates around customer end use? 61 MR. KITCHEN: Union's rates are not designed around the end use. In fact, they rely on differences in load, load factor, or quality of service in determining the rate classes on which rates are based. 62 The customers that have requested or have indicated that end-use rates are appropriate, including Coral, potentially NCE and Schools, have not provided us with -- have really ignored the fact that Union's rates are based on class-rate-making principles and postage stamp rates, and that our rates reflect the design criteria that I just mentioned. 63 MR. SMITH: Thank you, Mr. Kitchen. 64 Mr. Chairman, there being no other matters for examination-in-chief, I tender the cost allocation and rate design panel, our final panel, for cross-examination. 65 MR. SOMMERVILLE: Thank you, Mr. Smith. 66 Mr. Warren. 67 MR. WARREN: Thank you, Mr. Chairman. 68 CROSS-EXAMINATION BY MR. WARREN: 69 MR. WARREN: Mr. Kitchen, can I just stay for a moment with the last exchange you had with your counsel, and that is the distinction between an end-use criterion for setting of rates as opposed to the criteria that Union uses. 70 MR. KITCHEN: Yes. 71 MR. WARREN: Sorry, that was my thematic overview, Mr. Kitchen. My first question is: What do you understand by the concept of an end-use criterion for the design of rates? 72 MR. KITCHEN: An end-use criteria would be a criteria that sets a rate based on a particular sector or industry as opposed to the load or load profile of a rate class. In other words, if you set a rate, for instance, for a particular industry, such as a mine -- mining or some other industry, you're not -- you're basing a rate design potentially on a cost allocation that would discriminate between one industry and another or one location and another. 73 MR. WARREN: What do you understand to be the argument that is advanced in favour of end use? Now, it was raised by your counsel, I believe, in the context of the Coral proposal, which is an electricity-generation, if I can call it that, concept. Is it your understanding, Mr. Kitchen, or is it Union's understanding, that an end-use criterion would, for example, say that there is a societal or environmental benefit associated with increasing the generation of electricity, and therefore, there ought to be a rate design for that particular end use? Is that what the concept covers? 74 MR. KITCHEN: I believe that's what Coral would be suggesting, yes, that there is a benefit provided by having an end-use rate specific to electric generators. We would argue that electric generators, given that they have the same load profile as other customers, face the same level of cost as other customers in the same class, and therefore, shouldn't be afforded any special rate. 75 MR. WARREN: Let's assume for the sake of discussion this morning, Mr. Kitchen, that this end-use concept were adopted. Would the concept, as you understand it, be sufficiently elastic, for example, to say that there ought to be a special rate design, for example, for low income residential consumers? 76 MR. KITCHEN: Are you suggesting -- let me play that back for you and you can tell me if I've interpreted your question correctly. Are you asking, if we were to move towards end-use rates for one market, would that imply that we should move to end-routes rates for another market; namely, industrial versus low income? 77 MR. WARREN: Let me preface my question, Mr. Kitchen, to say I'm not suggesting that Union is in favour of this proposal. I'm simply trying to understand what Union understands by the scope of this concept. So my question is: Do you understand the concept sufficiently elastic that you could, for example, design a rate that reflected residential use but factored into that, for example, income levels? 78 MR. KITCHEN: I guess I'd preface my answer with the following, and that is that were the Board to determine that it was in the public interest to set rates based on income, Union would, of course, do that. I don't think, however, that -- and I don't think it's Union's view, that end-use rates or rates that reflect necessarily all societal impacts are appropriate. I think those type of adjustments need to be dealt with in public policy and governments as opposed to Union. 79 MR. WARREN: And would I be correct, Mr. Kitchen, just my final question on this issue, would I be correct in understanding that if the Board were to adopt the concept of an end-use rate, that one of the concerns would be cross-subsidy between different uses or different rate classes? 80 MR. KITCHEN: Different uses and different rate classes, but I also believe that there would be potential for cross-subsidy within rate classes. 81 MR. WARREN: Thanks for that, Mr. Kitchen. 82 I want to turn to the one issue that I want to deal with you this morning and it's for you, Mr. Kitchen, because it's a rate-design issue, and that is the proposal by Union to increase for the M2 rate class the monthly charge. 83 Now, as I understand the prefiled evidence, Mr. Kitchen, the proposal is to increase the monthly charge for the M2 rate class from $10 per month to $14 per month; is that correct? 84 MR. KITCHEN: That's correct. 85 MR. WARREN: And could you just describe for me briefly, Mr. Kitchen, if you can, generically what the monthly charge is and what it's intended to encompass? 86 MR. KITCHEN: The monthly charge is intended to recover costs that do not vary with volume or peak-day demand. So to the extent that you have costs that don't vary with those items, it's appropriate to recover those costs through a fixed monthly fee because those are costs that don't vary and they are costs that are related to the billing system, related to the costs of really -- that arise out of adding additional customers or out of having customers at all. 87 MR. WARREN: Do I understand it, Mr. Kitchen, that the monthly charge will vary with the number of customers? 88 MR. KITCHEN: No. The recovery would vary with the number of customers but the allocated cost could vary with the number of customers. 89 MR. WARREN: Now, if you could turn to your prefiled evidence on this issue, Mr. Kitchen, which appears as Exhibit H.1, tab 1, beginning at page 12 of that evidence. 90 MR. KITCHEN: I have it. 91 MR. WARREN: If you turn over to page 13 of the prefiled evidence, beginning at line 7, the following statement appears: 92 "Under Union's proposal, volumetric charges in rate M2 and rate 01 will be reduced such that the combined revenue derived from the monthly charge and the first block commodity charge is maintained." 93 First of all, what is the concept of the first block commodity charge? What does that mean? 94 MR. KITCHEN: The M2 rate has a -- has a fixed monthly charge and that also has a declining block rate structure. What the proposal would do is, to the extent that we increase the monthly customer charge by the $4, that recovery would then be reduced, would then go to reduce the commodity recovery in the first block. 95 I would like to point out, though, that subsequent to the evidence being filed, and we did talk about putting it into the first block, we had to make a change and put it into the first three blocks and that's partly because of the fact that we now have some residential volume showing up in the first block which, prior to the update, we didn't have. The concept is the same, in concept it's the same thing. 96 MR. WARREN: Sorry, this change you've referred to, is it in prefiled evidence which is on the record? 97 MR. KITCHEN: No, actually, I just mentioned it now. 98 MR. WARREN: Okay. Then let's stay with this change for a moment. To what extent does the proposal that's in the prefiled evidence change as a result of what you've just described? 99 MR. KITCHEN: Nothing changes about the proposal. It's just that the volumetric reduction happens over the first three blocks rather than the first block. 100 MR. WARREN: Well, let me try to get at that more slowly and do it in baby-steps. Returning to the passage which I just quoted from your prefiled evidence, what puzzles me, and I'm confident that I'm the only one in the room that's puzzled by this, is the relationship between the fixed charge and the volume consumed. As I understand the concept of a monthly charge, it is not related to volumes consumed. 101 MR. KITCHEN: That's correct. 102 MR. WARREN: Why, then, is there an offset for the increase in the monthly charge based on the volume consumed? What's the relationship between those two phenomena? 103 MR. KITCHEN: The current level of the monthly fixed charge and the proposed level of the monthly fixed charge don't recover all of the customer-related costs. Do the extent they don't, any underrecovery of customer-related costs are recovered volumetrically through the subsequent blocking. So what we're really doing is we're shifting costs that are currently recovered -- customer-related costs that are currently recovered volumetrically back into the monthly fixed -- the monthly customer charge, and that correspondingly leads to the reduction in the volumetric charge. 104 MR. WARREN: Why is it, as a matter of rate design, Mr. Kitchen, that all of the customer-related charges are not caught in the monthly charge? 105 MR. KITCHEN: Historically, there's actually many of Union's rates that do not recover all of the customer-related costs in the customer charge, and it's, more than anything, a function of history and also a function of prior Board decisions that have said that it's not necessarily appropriate to have a full fixed variable cost recovery in the M2 rate class. 106 MR. WARREN: Could you turn up, then, turn to page 14 of your prefiled evidence, H.1, tab 1, page 14. 107 Now, this table 3 -- the table 3 which appears on the top of page 14 sets out the residential delivery impacts of Union's proposal, and let me first see if I understand this correctly. 108 For those residential customers who consume less than 2,300 cubic meters of gas actually, and that's an annual consumption figure? 109 MR. KITCHEN: Yes, it is. 110 MR. WARREN: They will have an increase in their monthly charge of $8.60; is that correct? 111 MR. KITCHEN: That's correct. 112 MR. WARREN: For those -- and does that number change as a result of the change you spoke to me about a moment ago? 113 MR. KITCHEN: In terms of volume? As the volume drops, the increase -- 114 MR. WARREN: I'm sorry, you said that there had been a change in the way this had been designed, that it now goes through three blocks. As a result of that, does this change? 115 MR. KITCHEN: The rate impact? 116 MR. WARREN: Yes. 117 MR. KITCHEN: There would be a change in the rate impact, also because of the fact that we have updated for yellow page cost allocation. I don't have those numbers. 118 MR. WARREN: Is it more than 8.60. 119 MR. KITCHEN: I don't know. 120 MR. WARREN: Can you undertake to provide me with an update of what the number is? 121 MR. KITCHEN: Yes, I can. 122 MR. MORAN: Mr. Chair, that's Undertaking N.19.1, to provide an updated table 3 as set out in Exhibit H.1, tab 1, at page 14 of 30. 123 MR. SOMMERVILLE: Thank you. 124 UNDERTAKING NO. N.19.1: TO PROVIDE AN UPDATED TABLE 3 AS SET OUT IN EXHIBIT H.1, TAB 1, AT PAGE 14 OF 30 125 MR. WARREN: Now, let's just assume for a moment, Mr. Kitchen, for the sake of our exchange, that these numbers are the accurate numbers, appreciating that they may change. 126 Now, according to table 3, if I'm consuming -- if I'm a residential consumer and I'm consuming 2,600 cubic meters, the rate impact is only $3.40 a month, or approximately a 1 percent increase; is that correct? 127 MR. KITCHEN: That's correct. 128 MR. WARREN: And if I'm consuming 2,900 cubic meters annually, in fact, there's going to be a decline of .4 percent; is that correct? 129 MR. KITCHEN: That's correct. 130 MR. WARREN: Now, I again come back to the question, Mr. Kitchen, of why a fixed charge which does not vary with the volume consumed, why there should be a variation in the impact which is directly tied to the volume consumed. I don't understand the sense of that. 131 MR. KITCHEN: Okay. It goes back to my original answer where I indicated that, to the extent that there is an underrecovery of customer-related costs through the commodity -- through the customer monthly charge, that underrecovery appears in the volumetric -- recovery through the volumetric rates. So when the -- at larger volumes, then, what is happening is essentially the larger-volume customer is providing a subsidy to the smaller-volume customer because they're paying more of the customer-related costs through their volumetric rate in relation to the lower volume customer. So when you make the shift from the commodity rate -- commodity portion of the rate back to the fixed charge, there's a better alignment between the actual cost incurred and the recovery and so those costs that formerly were recovered by larger volume customers in the form of that subsidy to lower volume customers, is reversed. 132 MR. WARREN: Would it be possible, Mr. Kitchen, for you to determine what the fixed charges are for a residential consumer; and the second part of it would be to determine what the charge would be to the residential consumer if it didn't vary with volume, in other words, if every residential consumer just bore his or her proportion of the fixed charges? Is it possible to determine that? 133 MR. KITCHEN: Are you asking what the customer charge would be if all the customer-related costs were recovered in the fixed charge? 134 MR. WARREN: Yes. Can you determine that? 135 MR. KITCHEN: I think we may have already provided that in an interrogatory, if you'd just give me a second. 136 MR. WARREN: Sure, Mr. Kitchen, if you can find it. 137 MR. KITCHEN: The interrogatory I was thinking of doesn't actually have it, so I would have to undertake to provide that information. 138 MR. WARREN: Could you undertake to provide that information to me, please. 139 MR. MORAN: Mr. Chair, Undertaking N.19.2, to advise what the fixed charge would be if all customer costs for the residential class were recovered in the fixed charge. 140 UNDERTAKING NO. N.19.2: TO ADVISE WHAT THE FIXED CHARGE WOULD BE IF ALL CUSTOMER COSTS FOR THE RESIDENTIAL CLASS WERE RECOVERED IN THE FIXED CHARGE 141 MR. WARREN: Could I then ask you -- 142 MR. SOMMERVILLE: This would be M2, presumably. 143 MR. MORAN: Rate class M2? 144 MR. WARREN: Yes, I'm sorry, sir. 145 Now, Mr. Kitchen, could you turn up Exhibit J.34.134. 146 MR. KITCHEN: Sorry, I missed the last part of that. 147 MR. WARREN: J.34.134. 148 MR. KITCHEN: I have it. 149 MR. WARREN: First of all, just by way of overview, you were asked a number of questions and one of the questions was the number of customers in each of the three categories, that is, 2,300 cubic metres, 2,600 cubic metres and over, going back to the table 3 on H.1, tab 1, page 14. And your answer, which appears at letter B at the top of page 2 is that Union's billing system does not have the ability to identify how many customers have consumption at different levels; correct? 150 MR. KITCHEN: Sorry, I thought you said 134. You said J.34.34? 151 MR. WARREN: Sorry, J.34.134, apologize. 152 MR. KITCHEN: Which part are you referring to? 153 MR. WARREN: Top of page 2, answer B. 154 MR. KITCHEN: Okay, I have it. 155 MR. WARREN: Just as a point of reference, in your prefiled evidence, the table 3 that you and I were just talking about, you talked about the residential delivery bill impact in three categories: 2,300 m3, 2,600 m3, and 2,900 m3. And the answer which appears at B is that your billing system does not have the ability to identify how many customers have consumption at different levels; is that correct? 156 MR. KITCHEN: That's correct. 157 MR. WARREN: Now, can I conclude from that that you cannot tell the Board how many residential M2 customers will be facing the increase of some $8.60 a month in their monthly charge? 158 MR. KITCHEN: The billing system doesn't have the ability to count the number of customers at various volume rates, so I can't definitively say how many customers will have that particular impact. 159 MR. SMITH: Sorry, Mr. Chairman, Mr. Warren referred to an $8.60 per month impact. Mr. Warren is mistaken. That's an annual impact, set out in table 3. 160 MR. WARREN: You can't tell us how many will face the annual impact of $8.60; is that correct? 161 MR. KITCHEN: No, I can't. 162 MR. WARREN: Now, on that same page as that interrogatory response, looking at the response under letter I, in the second sentence -- sorry, in the first sentence: 163 "Since the increase in the customer charge is largely offset by delivery commodity charge decreases, the residential customer bill impact is minimal for most customers having a furnace, water heater, and one other gas appliance." 164 Correct? 165 MR. KITCHEN: That's correct. 166 MR. WARREN: And, again, we don't know how many customers fall into that category? 167 MR. KITCHEN: That's correct. But given that the average is 2,600 cubic meters, we know that the majority of our customers are around that amount. I don't know the exact amount. 168 MR. WARREN: Would I be correct in interpreting that proposition though, Mr. Kitchen, that from the perspective, however narrow it is, of the impact of the fixed monthly charge, that a customer is better off, A, with more appliances and, B, higher usage? 169 MR. KITCHEN: And I think that's what's demonstrated in table 3. A customer that has a higher use will receive the benefit. But that also means right now that a customer with higher use is paying more than they should be. 170 MR. WARREN: Okay, I understand that argument. 171 If you'd turn up Exhibit J.22.9. 172 MR. KITCHEN: I have it. 173 MR. WARREN: As I understand your response in J.22.9, you are listing the matters or the factors that Union considers in deciding whether or not to change a monthly customer charge; is that correct? 174 MR. KITCHEN: That's correct. 175 MR. WARREN: Now, can I take you, first, to bullet item 4, which is conservation incentives, and you say, and I quote: 176 "Review the resulting customer bill impacts to determine if the ratio of fixed/variable recovery maintains a strong incentive to conserve." 177 Now, in the last exchange that we had a moment ago, I put to you the proposition that, from the point of view of a residential consumer, they're better off with more appliances, consuming more gas; and entirely at an intuitive level, that seems to be contrary to the notion of promoting conservation. Would you agree with that proposition? 178 MR. KITCHEN: I would agree. However, I would add to that. The change to the monthly-fixed charge at higher levels should not be a deterrent to a customer's conserving. In fact, the largest portion of the customer's bill is their commodity and that drives conservation to a larger extent, than any delivery bill change. 179 MR. WARREN: If you could just explain for me on this point, and if you could turn up an interrogatory delivered by my client, which is Exhibit J.7.67. 180 MR. KITCHEN: I have it. 181 MR. WARREN: There's a rough parallel between the answers given in J.22.9 and J.7.67 in that both of them list the matters that were considered in deciding whether to change a customer charge. 182 In looking at the final bullet item under the heading "Conservation Focus" you indicate that: 183 "The proposed customer charge level represents about 12 to 14 percent of total sales customers' annual bill, maintaining an 80-plus percent of the total residential bill that varies with volume. This ratio of fixed variable recovery maintains a strong incentive to conserve while meeting the objectives above." 184 How is that ratio determined, and what is its relationship to the incentive to conserve? 185 MR. KITCHEN: The ratio is determined by looking at the components of the bill and taking, really, the fixed cost recovery, the recovery through the customer charge, compared to the total bill. The statement really means that if you still have 80 percent of your bill variable, that provides a strong incentive to conserve. 186 MR. WARREN: Returning to J.22.9, the first bullet item in the factors that you consider in deciding whether to increase the customer charge, it says: 187 "The allocated customer-related costs that do not vary with consumption." 188 What does that mean? 189 MR. KITCHEN: What we're referring to is we look at the level of allocated customer-related costs coming out of the cost study and compare that to the recovery at the existing -- at the existing level of the monthly fixed charge and really try to determine at that point whether or not we think that it's appropriate or whether or not there is a cross-subsidy that's occurring that we should try to correct through increasing the monthly fixed charge. 190 MR. WARREN: The final point -- sorry, the second last point is the final bullet on that page, in J.22.9, which is minimal impact. 191 "Assess the net impact on customer bills if corresponding delivery commodity rate reductions offset monthly charge increases." 192 Now, may I assume that Union has made an assessment that the $8.60 increase for customers using 2,300 cubic meters or less is a minimal bill impact; is that fair? 193 MR. KITCHEN: I would say that we believe that that's an impact that is not prohibitive and it does better align the costs with the recovery, which is really the goal here. 194 MR. WARREN: Now, has Union given any impact -- sorry, has Union given any consideration to phasing that increase in? 195 MR. KITCHEN: We have not in our proposal. Our proposal would be to increase the microfixed charge effective January 1st, 2004, and the rationale for doing that is it's our view that customers react to a one-time change in something like a customer charge rather than a phased-in approach. Of course, we would have to communicate the reasons behind that, but it's essentially our view that that is the better way to manage the customer reaction. 196 MR. WARREN: In the second last bullet point on J.22.9, you refer to consultation with marketing groups and various business segments within the affected rate classes. Can you tell me what consultation you had with residential groups, residential consumers, sorry? 197 MR. KITCHEN: In terms of increasing the monthly fixed charge for M2, we did not have a consult with residential customers. This IR was actually answered more in reference to the changes in the M5A monthly charge which we did have consult with our marketing people and our customer reps, customer representatives. 198 MR. WARREN: So in terms of assessing the potential reaction of residential consumers who consume fewer than 2,300 cubic meters per year, that's based on your past experience; is that right? 199 MR. KITCHEN: We have increased the monthly fixed charge from 7.50 to $10 as part of the harmonization of the north and the south, and so we have an understanding of what the customer reaction will be. 200 MR. WARREN: Just in that context, if you look at, again, in J.34.134, there's a history of the changes to the fixed monthly customer charge and for rate M2 -- sorry, Mr. Kitchen, do you have that in front of you? 201 MR. KITCHEN: One problem with rate design and cost allocation is the number of binders. 202 MR. WARREN: Sorry, you're telling me that, sir? 203 MR. KITCHEN: That's why Mr. McMahon and I have to sit so far apart. 204 I have it. 205 MR. WARREN: If you look at page 3 of 3 in that interrogatory response, there's a history of the fixed monthly charges, and taking the most recent history, there was an increase on January 1 of 2002 from 7.50 to 8.75; is that correct? 206 MR. KITCHEN: That's correct. 207 MR. WARREN: And then on January 1st, 2003, an increase from 8.75 to $10; is that correct? 208 MR. KITCHEN: Yes. 209 MR. WARREN: Can we agree that for rate M2, the proposed $4 increase is significantly larger than any one-time increase in the past; fair? 210 MR. KITCHEN: It is larger, yes. But it is still with the principle that we're trying to get better alignment between the costs and the actual recovery of those costs. 211 MR. WARREN: My question was not with respect to the underlying principle but in terms of the reaction of residential consumers facing the largest of these increases. My question really is, given the relatively smaller size of the increases in the past, is that a legitimate guide of what the likely reaction of residential consumers is in this case? 212 MR. KITCHEN: I think that one of the things that we found in increasing the monthly fixed charge by smaller amounts is that we tended to get the same reaction, just double -- double the amount of times. I'm not sure that the level of the reaction would be any different if you were to increase it by $2 versus the $4. 213 MR. WARREN: Mr. Kitchen, as I understand it, you're the person who is going to deal with the Coral evidence; is that correct? 214 MR. KITCHEN: That's correct. 215 MR. WARREN: Okay. Could I just begin at a very high level of generality, sir, and get you to, as it were, join issue with Coral and explain to me and to the Board what Union's -- first of all, what is Union's understanding of what Coral is asking for; and secondly, what is Union's response to what they're asking for? 216 MR. KITCHEN: I believe that it's clear in my evidence, I think that Coral -- Union believes that Coral is essentially asking for the Board to bury its decision on the elimination of the DCC and for the Board to approve a rate that would effectively allow them to have the DCC implemented for them on the basis of the formula that was proposed by Union. 217 We are actually -- we are opposing their request and we're opposing it because we think that the Board's decision was clear and that the Board provided for the elimination of the DCC and the impact on customers by phasing it in over a five-year period. 218 MR. WARREN: Have you assessed -- has Union assessed the impact of giving all T1 customers the type of rate relief which is being requested by Coral? 219 MR. KITCHEN: Have we assessed the impact of giving all T1 customers that rate relief? 220 MR. WARREN: Right. 221 MR. KITCHEN: I don't think we needed to assess it. We would know that impact based on the DCC evidence that we have filed, or have a rough idea of it. I don't have it with me, but it is something that we can generate. 222 MR. WARREN: Let me phrase the question this way, then: If Coral were successful in obtaining the relief that they want, would Union effectively have to give the same kind of rate to all of the T1 customers? 223 MR. KITCHEN: I think that would depend, in large part, on the Board's decision. If the Board found that the rate relief requested by Coral was in the public interest and should be approved for Coral and Coral alone, then we wouldn't. If the Board found that we should provide the rate relief to all T1 customers, and I wouldn't limit it to T1 customers because there's also M7 customers, we would do that. 224 Now, that would not be our position. We do think that the Board's decision was clear on the DCC elimination and we are eliminating it as was prescribed. The impact will be, though, if the Board does provide for the rate relief that Coral has requested, is that there will be an increase to the rates of other customers because essentially it's a shifting in costs between rate classes. 225 MR. WARREN: If the Board were to accept the notion of an end-use criterion based on electricity generation, for example, has Union assessed the impact on, I suppose, on others it is serving if independent power producers -- if electricity power producers were to receive an end-use rate of the kind that Coral is getting? 226 MR. KITCHEN: Yes, we have. 227 MR. WARREN: Okay. And what will that impact be? 228 MR. KITCHEN: It would be somewhere in the neighbourhood of 3 to $4 million. And that's strictly the south, that's not the north. Only the south. Because the DCC did not apply to the north so we haven't done the analysis there. 229 MR. WARREN: Those are my questions for this panel. Thank you very much. 230 MR. SOMMERVILLE: Mr. Warren. 231 Mr. Janigan. 232 MR. JANIGAN: Yes, thank you, Mr. Chairman. 233 CROSS-EXAMINATION BY MR. JANIGAN: 234 MR. JANIGAN: We have some exhibits that we're going to be referring to. 235 MR. WARREN: Mr. Chairman, I wonder if I might be excused. We have an argument tomorrow on the ROE matter. Mr. Thompson and I need to talk about that. 236 MR. SOMMERVILLE: Yes, Mr. Warren. 237 MR. JANIGAN: There are copies in the back, as I understand it, for the intervenors. 238 MR. MORAN: Mr. Chair, you have two documents. The first one is entitled "Material for Cross-examination on Cost Allocation and Rate Design Panel" filed by VECC, and that becomes Exhibit M.19.1. And the second document is a similar page entitled "Enbridge Consumers Gas Percentage of Customer Related Costs Recovered by way of Monthly Customer Charge" also filed by VECC, and that would become M.19.2. 239 EXHIBIT NO. M.19.1: "MATERIAL FOR CROSS-EXAMINATION ON COST ALLOCATION AND RATE DESIGN PANEL" FILED BY VECC 240 EXHIBIT NO. M.19.2: "ENBRIDGE CONSUMERS GAS PERCENTAGE OF CUSTOMER RELATED COSTS RECOVERED BY WAY OF MONTHLY CUSTOMER CHARGE" ALSO FILED BY VECC 241 MR. SOMMERVILLE: Thank you. 242 MR. JANIGAN: Thank you, panel. I think I'll start with issues of cost allocation first, and I believe that's you, Mr. McMahon. 243 I'd like to turn to your evidence at Exhibit G.1, tab 1, page 4, and as well the interrogatory at J.1.138. And if you have it there, it's noted at J.138, that the Board-approved cost-allocation methodology resulted in the vast majority of general plan being functionalized using a 50/50 rate base and O&M approach. So it was decided that this would best reflect the use of general plan. 244 Now, when you indicate a board-approved cost-allocation methodology, what are you referring to there? 245 MR. McMAHON: I'm referring to the cost-allocation methods that came out of the last EBRO 499 case. 246 MR. JANIGAN: And is this the approach that's used by Enbridge for general plan? 247 MR. McMAHON: I don't know. 248 MR. JANIGAN: Okay. And do you know whether or not this is the approach used by NRG for general plan? 249 MR. McMAHON: No, I don't. 250 MR. JANIGAN: And at Exhibit G.1, once again, at tab 1, at page 5, the general operating and engineering expenses, it's noted in the evidence that: 251 "The approved cost-allocation method used for the northern and eastern operations area to functionalize general operating and engineering O&M was based on various historic functionalization factors. In the southern operations area, the approved method of functionalizing general operating and engineering O&M was based on activity forecasts by function provided by budget center managers." 252 As I understand it, in preparing the 2004 integrated cost-allocation study, Union has used the method approved for the southern operational area; am I correct on that? 253 MR. McMAHON: That's correct. 254 MR. JANIGAN: Okay. Now, wouldn't you agree with me that the approach of using activity forecasts by function provided by budget center managers is a rather subjective approach to determining the functionalization approach of the general operating and engineering expenses? 255 MR. McMAHON: I don't think so. The whole premise behind functionalizing the costs is to take the costs that have been budgeted for any particular area. And if the cost budgeted for any particular year are based on what they're going to be doing during the year, then it seems more relevant to use the basis for that budget. 256 MR. JANIGAN: If you could turn up Exhibit J.1.139, Union provides a summary of the functionalization of general operating and engineering costs forecast for 2004. That's in the attachment. 257 MR. McMAHON: Yes, I have it. 258 MR. JANIGAN: And if we look at column I, there seems to be a substantial difference in what was functionalized as distribution costs of 50 percent compared to what it was in EBRO 499. Is that the historic year, 1998, that's recorded here? 259 MR. McMAHON: Yes, it is. 260 MR. JANIGAN: Okay. And there seems to be a rather large difference between what was functionalized for the distribution category as to what is now proposed for 2004. Would you not agree? 261 MR. McMAHON: Yes. 262 MR. JANIGAN: And is there any evidence that supports this shift? 263 MR. McMAHON: I think most of the shift is caused by the increase in O&M costs that are functionalized to the distribution function and so that will drag with it a lot of costs that are functionalized to distribution. 264 MR. JANIGAN: And these increases in O&M costs are incurring in what areas? 265 MR. McMAHON: Well, in all areas, actually. 266 MR. JANIGAN: And the reason why that activity is now functionalized to reflect an increase in the distribution area is what? 267 MR. McMAHON: Well -- 268 MR. JANIGAN: Let me rephrase that. Why do increases in O&M impact distribution in a differential fashion as we've seen here? 269 MR. McMAHON: It's just that the activities that are associated with the O&M costs that are going up are primarily going to the distribution function. 270 MR. JANIGAN: And once again, this flows from the forecasts provided by the budget centre managers? 271 MR. McMAHON: That's correct. 272 MR. JANIGAN: Now, will there be a tracking for 2001, 2002, and 2003 years, based on the functionalization? 273 MR. McMAHON: The accounting records don't -- or at least our accounting systems don't track costs. We have functionalized them in the cost study. 274 MR. JANIGAN: So you don't have this information then, do you, for those years? 275 MR. McMAHON: We don't have the actual numbers for those years, not developed as per the cost allocation. 276 MR. JANIGAN: I wonder if you could turn up J.1.136, attachment 4, where you set -- 277 MR. McMAHON: You mean page 4 of 4? 278 MR. JANIGAN: That's correct. 279 MR. McMAHON: I have that. 280 MR. JANIGAN: And is this table -- perhaps you can indicate what this table is telling me, I guess, rather than attempting to describe what I think it's telling me. 281 MR. McMAHON: Okay. What it's showing is what impact the change or the -- we'll call it a slight change in the methodology would have in how general operating engineering costs are functionalized. Basically what it's showing is that in the existing Board-approved methodology, the majority of costs were already functionalized at distribution. There was a small amount of cost functionalized to storage in the north, but all other costs were functionalized to distribution. So all we're doing now is taking that small portion of costs that was functionalized to storage and putting it into distribution. So the overall impact is $25,000 in the north and south, at least the shift from north to south. 282 MR. JANIGAN: So effectively it's diminimus. 283 MR. McMAHON: That's correct. What we're trying to do is come up with a single allocator or functionalization factor to put all these costs into a particular function. 284 MR. JANIGAN: Okay. Now I'd like to deal with pipeline-integrity cost and that's set out at H.1, tab 2, page 13. 285 MR. McMAHON: I have it. 286 MR. JANIGAN: And Union, as I understand it, proposes to allocate the 2003 balance in the proposed pipeline integrity deferral account, 179-104, to rate classes in proportion to the 1999 total other transmission demand-related costs in the southern operations area and in proportion to the 1999 total distribution-related costs in the northern and eastern operations area as was approved in the 2002 balancing of the account. 287 MR. KITCHEN: That's correct. 288 MR. JANIGAN: Now, when costs are allocated based on the demand-related costs for the south, can you explain what the variable that is used to measure that demand? 289 MR. KITCHEN: In terms of transmission, it would be design-day demand. 290 MR. JANIGAN: And that effectively is peak? 291 MR. KITCHEN: Yes. 292 MR. JANIGAN: And the northern and eastern operations area will allocate the 2002 balance based upon total distribution-related costs. Now, distribution-related costs are either demand or commodity-related or customer-related. 293 MR. KITCHEN: That's correct. 294 MR. JANIGAN: And what is the allocator for northern and eastern distribution-related costs for pipeline integrity? Is it demand, commodity, or customer-related? 295 MR. KITCHEN: What we're talking about here is the allocation of the deferral account. And in terms of where the pipeline-integrity costs were recovered in 1999 rates, it was recovered in all three of those components, which is why we used the total distribution-related costs. I don't know the breakout, but that is the -- that was the rationale. 296 We're trying to -- remember, when we're allocating these, we're trying to replicate what the recovery is in rates, so when we allocate the deferral account, it's as if it was in rates. 297 MR. JANIGAN: How is the determination made whether or not something is demand-, commodity-, or customer-related? 298 MR. KITCHEN: If it's demand-related, those should be costs that vary with peak-day demand. If it's customer-related, there are costs that vary with the number of customers, and if it's commodity-related, it's costs that vary with the volume. 299 MR. JANIGAN: In terms of pipeline integrity, when a leak occurs in a pipeline, I take it it impacts all customers. 300 MR. KITCHEN: I'm not sure I understand. 301 MR. JANIGAN: Well, in looking at pipeline integrity and where costs should be allocated, presumably the purpose of maintaining pipeline integrity is to prevent leaks from occurring, and then if leaks occur, presumably it impacts customers, all customers to some extent. 302 MR. KITCHEN: Yes, I'm not familiar with all the purposes of pipeline integrity, but I imagine some of that would be leaks, explosions, failures, a number of factors. But it would impact people and customers, yes. 303 MR. JANIGAN: Okay. Wouldn't those costs be better accounted for on a volumetric basis rather than on a demand- or customer-related basis? 304 MR. KITCHEN: I think the point I was trying to make earlier is that we're allocating a defferal-account balance on how those costs would have been recovered in rates had they been included in the original rate design, and this is an approved methodology that was brought forward in the context of disposing of the 2002 deferral account balances. To do something different now would be to deviate from what we'd already had approved in the last disposition and also from how it would be recovered in rates. 305 MR. JANIGAN: How is the lost and unaccounted for gas allocated, cost of that? 306 MR. McMAHON: Could you repeat that question, Mr. Janigan. 307 MR. JANIGAN: How do you account for the costs of lost and unaccounted for gas across rate classes, what kind of allocators do you use? 308 MR. KITCHEN: It's volume. I think, though, the distinction between unaccounted for and pipeline integrity, is that the pipeline integrity costs are costs related to capital and such and are not necessarily cost that is would vary with volume. 309 MR. McMAHON: And these pipeline integrity costs, they are -- they fall into that previous category you were talking about, the general operating and engineering expenses, and it's these program costs that are being recovered in the cost study. 310 MR. JANIGAN: But presumably the pipeline integrity program prevents volume losses. 311 MR. KITCHEN: Right, but the costs related to the pipeline integrity program are not -- are not unaccounted-for losses. They are costs related to having that program beings and some of those costs are capital and some of them are O&M. 312 MR. JANIGAN: No, I agree. Let's move on to storage space integrity allocation. 313 I understand that Union holds about 9.1 Bcf of system integrity storage requirements. Am I correct on that? 314 MR. McMAHON: That's correct. 315 MR. JANIGAN: And in our interrogatory, VECC interrogatory 34.154. 316 MR. McMAHON: Yes, I have that. 317 MR. JANIGAN: We asked how the cost of that storage integrity was recovered by rate class and I believe the response indicates that Union recovers the costs in the delivery rate of both southern and northern and eastern operational areas. Is that correct? 318 MR. McMAHON: Actually, it reads: 319 "Storage space based on deliverability-related costs are recovered in delivery rates in the south and gas supply transportation rates in the north." 320 MR. JANIGAN: Okay. More specifically, how do you do that in the south? 321 MR. KITCHEN: I'm not sure I understand the question. 322 MR. JANIGAN: Well, what, in effect, we were seeking in this particular interrogatory was a table with the costs recovered by each rate class for storage-integrity costs and what the principles were for the allocation to each rate class. Is it possible, rather than ask a lot of questions on this, that you could undertake to provide that to us? 323 MR. KITCHEN: If I could just have a second. 324 MR. McMAHON: If you'll just give us a second, I'll look it up. I thought there was an interrogatory on that question already. 325 MR. McMAHON: We'll look that up for you. If we haven't already provided it, we'll provide it to you. 326 MR. JANIGAN: Thank you. Could I have an undertaking number on that? 327 MR. MORAN: Mr. Chair, I wonder if Mr. Janigan could restate the undertaking request. 328 MR. JANIGAN: To complement -- I'm trying to think of the right word, complement interrogatory IR J.34.154, to provide a table with the cost recovered by each class for storage-integrity costs and the principles associated with the allocation to each rate class. 329 MR. MORAN: That would be Undertaking N.19.3, Mr. Chair. 330 UNDERTAKING NO. N.19.3: COMPLEMENT INTERROGATORY IR J.34.154, TO PROVIDE A TABLE WITH THE COST RECOVERED BY EACH CLASS FOR STORAGE-INTEGRITY COSTS AND THE PRINCIPLES ASSOCIATED WITH THE ALLOCATION TO EACH RATE CLASS 331 MR. JANIGAN: Now, as I understand it, of the amount held back for storage integrity, 9.1 Bcf, a portion of those costs, 3.3 Bcf, are allocated to general service customers; is that correct? 332 MR. McMAHON: That's correct. 333 MR. JANIGAN: And the 3.3 Bcf cost isn't allocated to all customers based on a basic storage usage allocator; am I correct on that? 334 MR. McMAHON: That's correct. 335 MR. JANIGAN: Now, I would like to look at allocation of distribution capacity-related costs, and those are at G.1, tab 1, page 9. And Union is proposing to change the allocation of capacity-related distribution costs in the southern operations area from an allocation to rate classes based on the peak demand of all customers, including those customers who were served directly from transmission facilities to an allocation to rate classes in proportion to the demands of only those customers served using distribution facilities. 336 Am I correct on that? 337 MR. McMAHON: That's correct. 338 MR. JANIGAN: And Union proposed this change in the EBRO 499 proceeding; is that correct? 339 MR. McMAHON: That's correct. 340 MR. JANIGAN: And it was denied at that time, as I understand it? 341 MR. KITCHEN: That's correct. 342 MR. JANIGAN: And this identical proposal also appeared in the EBRO 493/494 decision? 343 MR. KITCHEN: That's correct. 344 MR. JANIGAN: And in the EBRO 493/494 decision, as I understand it, the Board rejected the proposal on the grounds that, to the extent that a rate class is predominantly served through transmission capacity, the proposed costs could result in an inappropriate level of avoidance of distribution capacity costs. Does that essentially summarize the Board's opinion? 345 MR. KITCHEN: I believe so. I don't have the decision in front of me. But there was also the reference to postage stamp rates, I believe. And we brought forward evidence in 499 to dispute that, and in 499, the decision actually said to bring forward the proposal in the context of harmonizing the cost studies, which is what we've done in this case. 346 MR. JANIGAN: Now, I'm confused about what happened after that. I take it this allocation was taken out of your cost-allocation process, but the amount was left in rates; am I correct on that? 347 MR. KITCHEN: That's correct. The Board's 493/494 decision did not approve the cost-allocation change. But I believe what the decision said was that it was approved for rate design, and the reason it said that is it said to remove the proposed change from the cost study and bury the revenue to cost ratios, if you bury the revenue to cost ratios, it implies that you will have a disconnect between the cost study and the rates and as such the rates were left as they were approved and the cost study was changed and the variance was reflected in the revenue-to-cost ratios. Had we removed it both from rates and costs, the revenue-to-cost ratios would have moved virtually lock step and wouldn't have taken the variance and cost -- revenue-to-cost ratios. 348 MR. JANIGAN: And that was the 493/499 decision; right? 349 MR. KITCHEN: That's correct. 350 MR. JANIGAN: In 499, however, they indicated they did want it -- you were asked to take it out and it should be reflected in revenue-to-cost ratios. Was it not? 351 MR. KITCHEN: I don't have the 499 decision in front of me. 352 MR. JANIGAN: Let me see if I can find the reference. 353 MR. McMAHON: There is one reference in the decision where the Board says: 354 "The Board therefore declines to approve any change in the allocation of southern operations area distribution and capacity costs for 1999, and directs the company to better justify any change in the allocation of distribution capacity costs as part of the overall harmonization of cost allocation and rate design for its service areas." 355 That's paragraph 3.1.31. 356 MR. JANIGAN: .31? Do you see paragraph 3.1.31, at the bottom of that decision? I'm sorry, I've forgotten, Mr. Chair, in this colloquy between the panel and ourselves, do you have a copy of that decision? 357 MR. SOMMERVILLE: What I do have is a copy of paragraph 3.1.31. 358 MR. JANIGAN: Okay. And it's the last sentence there that troubles me in looking at what Union did. I understand what Union did after the 493/494 decision. I think we visited that extensively in this 499 decision. The last sentence here I think addressed that particular kerfuffle that arose where the allocation wasn't approved but it was left in the rate design, that: 359 "The Board expects that the 1999 revenue-to-cost ratios for general-service customer classes will recognize the reversal of this cost-allocation change." 360 So in my view, that would appear to indicate that in fact the revenue to cost ratios should have recognized this change, but apparently they did not. 361 MR. KITCHEN: See, I interpret that differently. I interpret it that the revenue-to-cost ratios -- I interpret it the same way as I interpret the 493/494 decision, that the Board expects the 1999 revenue-to-cost ratios for the general-service customer classes to recognize the reversal, in other words, that the revenue-to-cost ratio will take the swing and the costs will be eliminated from the cost study. 362 MR. JANIGAN: Okay. I think we'll leave it in a general way for argument. But just so that the record is clear, essentially Union did the same thing after the 499 decision that it did after the 493/494 decision? 363 MR. KITCHEN: That's correct, because the revenue-to-cost ratios would not change if we removed it from both cost and revenue, or would change a very small amount. 364 MR. JANIGAN: And in your current proposal, you're proposing to treat the southern operations area in the same manner as the northern and eastern operations area; am I correct on that? 365 MR. McMAHON: At least directionally consistent, that's right. 366 MR. JANIGAN: Okay. And would you agree that Union's southern operations area pipeline is more of an integrated system than the northern and eastern operations area? 367 MR. McMAHON: Yes. 368 MR. JANIGAN: And in the northern and eastern operations area, I understand the pipeline is primarily served through laterals off the TCPL system. 369 MR. McMAHON: That's correct. 370 MR. JANIGAN: And the ability to track the gross plant and accumulated depreciation of these individual customers is made possible. 371 MR. McMAHON: I wouldn't say that we track costs by individual customers. Again, it's by rate classes that we are determining the costs for the northern region. 372 MR. JANIGAN: Okay. But you have the ability by way of the structure in the northern and eastern operations to do so. 373 MR. McMAHON: In the north, given the system design, we know that we're able to -- we can track the costs related to customers served directly off transmission rate or sole-use customers, and those customers' demands are excluded from the allocator. The difference in the system is it has fostered a different set of plant accounting records over time and it would be a lot of work, and I'm not sure how we would even do it, to try to change the plant accounting from one way to another. I'm just trying to make the point that it's the configuration of the system in the north has really driven how costs are tracked in the company. 374 MR. JANIGAN: Now, would you agree that the Board had difficulty in reconciling a similar treatment of infrastructure in the north and the south in the previous decision? 375 MR. KITCHEN: I think that the Board, in the previous decision, didn't -- found that Union didn't provide enough evidence to justify what its -- again, I don't have the decision, I can get it again, but I can't remember if the Board decision specifically referenced what you just put to me in your question. 376 MR. JANIGAN: And would you agree that the Board was satisfied that the separation and transmission of distribution services was identical for the two service areas; in other words, the treatment of transmission and distribution was different in the south than it was in the north? 377 MR. McMAHON: Well, there's no transmission in the north, it's just a distribution system in the north. 378 MR. JANIGAN: Okay. Now, in your harmonized cost-allocation study that was filed in this proceeding, Union did not functionalize the southern operations pipe costs as either grid, joint, or sole-use main; is that correct? 379 MR. McMAHON: That's correct. 380 MR. JANIGAN: And as well you did not refunctionalize the northern and eastern operations area by physical attributes, such as pipe size and pressure, to be consistent with the southern operations area. 381 MR. McMAHON: That's correct. 382 MR. JANIGAN: And at H.1, tab 2, page 13, is the pipeline integrity deferral account. 383 MR. SOMMERVILLE: This is tab 2, Mr. Janigan? 384 MR. JANIGAN: Yeah, H.1, tab 2, page 3. This is something we visited previously. Union proposes to allocate the 2003 balance in the proposed pipeline integrity deferral account to rate classes in proportion to the 1999 total other transmission demand-related costs in the southern area, and in proportion to the 1999 distribution-related costs in the northern and eastern operations area as was approved for the 2002 balance in this account. 385 It seems to me Union has recognized this difference in treatment, in the treatment of its. 386 MR. KITCHEN: What we recognized is where those costs would have been recovered if they had been built into rates. 387 MR. JANIGAN: And following that, presumably, in the north and eastern areas, those costs would be recovered in the distribution, whereas in the south, it would be recovered in the transmission. 388 MR. KITCHEN: That's correct, yes. 389 MR. JANIGAN: Because essentially there is no transmission in the north. 390 MR. KITCHEN: There is nothing classified as other transmission. Again, that's a function of how the system is. As you described, you have a system which is essentially takeoffs from TransCanada, whereas Union has other transmission, has tracked the costs that way, and so puts costs into that bucket. 391 MR. JANIGAN: Well, it sounds as if they are clearly different systems and they are functionalized in a different fashion, and this allocation seems to prove it. 392 MR. KITCHEN: And I don't think that we're disputing that there's a treatment -- in fact, that's the support for having two different methodologies for the elimination of -- for the proposal, is that they are two different systems, and as a result of being two different systems, we need to -- it's appropriate to have two separate methodologies, north and south, and that we can't harmonize them without changing everything about how we account for either the north or the south. 393 MR. JANIGAN: Now, in Exhibit J.1.141, would you agree that the costs -- perhaps I'll give you some time to turn that up. 394 MR. KITCHEN: That was J.1.141? 395 MR. JANIGAN: Yes. Now, am I correct that there is a cost-allocation shift associated with Union's proposal for changing the southern allocation methodology for capacity-related distribution costs, and this will result in a shift of $11.47 million which is looking at the M2 costs set out in column F? 396 MR. McMAHON: Yes. The M2 shift is actually 12.8 million. 397 MR. JANIGAN: 12.898? Yeah. And the total shift is 11.47 and the M2 shift is 12.898 million. 398 MR. McMAHON: That's correct. 399 MR. JANIGAN: Okay. And the beneficiary of this will be the T1 class, as I understand it, and that is reflected down on lines 12 and 13 and it will show that 11.478 million will not be allocated to this class. Am I correct on that? 400 MR. McMAHON: That is correct. 401 MR. JANIGAN: Now, customers that elect to be T1 customers as opposed to operating under a bundled rate, they are not required to be a customer which is served directly off a transmission line, are they? 402 MR. KITCHEN: Are you asking is a T1 customer required to be a customer served directly off a transmission main? 403 MR. JANIGAN: Yes. 404 MR. KITCHEN: No. All we're doing is recognizing the fact that within a rate class, there are customers who are served directly off transmission main and therefore are not, in themselves, cause us to incur distribution costs. At the class level, however, we are recovering a level of distribution demand-related costs, or a portion of those costs from the class. 405 MR. JANIGAN: Well, in effect, those T1 customers that are not served directly off a transmission line will get a winfall. 406 MR. KITCHEN: There's no winfall. It's class rate-making, and to the extent that the class is not causing us to incur those costs, then the class benefits, all customers in the class benefit from that. By the same token, customers that are served directly off transmission main pay a portion of the distribution costs because we are not giving them a customer-specific rate or an end-use rate that provides them without -- that recognizes that they aren't incurring any -- or we aren't incurring any distribution costs on their behalf. 407 MR. JANIGAN: But in this particular case, the rate-making principle that is applied is a principle that assumes that the class is served by a direct transmission line. 408 MR. KITCHEN: The class is not served by the direct transmission line, no. What is happening is that the class is receiving a lower allocation of distribution capacity-related costs, but they still are receiving an allocation of distribution capacity-related costs. 409 MR. McMAHON: And you will see that in the derivation of that demand factor, if you reference the note 1, you'll see those allocation units are identified at that schedule and you'll see that it's not all the demand for T1. We're just taking off the demand served off the transmission line. 410 MR. JANIGAN: Obviously, they will get some demand, but this change will reduce that distribution cost that we have to pay. 411 MR. KITCHEN: It will reduce the distribution cost that they have to pay, and the customers served directly off of transmission do pay. 412 MR. JANIGAN: How do you determine what's a transmission line? Is it pipe size? 413 MR. KITCHEN: I believe there's a number of criteria and I'm not -- I know that on is pressure and one is pipe size. I'm not sure on what the actual -- what operating pressure makes a transmission main versus a distribution main. But it is based on pressure and size. 414 MR. JANIGAN: We have an interrogatory, 34.1.28, about what is done at Enbridge, and we have some difficulty in determining what this response means. 415 MR. KITCHEN: That was 34.1.28? 416 MR. JANIGAN: Yes, please. We essentially wanted to get a parallel with Enbridge, and in your answer A you set out what your understanding is of what Enbridge does. Can you contrast that to what you do, or what you're proposing to do, sorry? 417 MR. McMAHON: We were just discussing how the capacity-related distribution costs would be allocated based on demand, excluding those served off the transmission lines. This interrogatory, we actually contacted Enbridge to get some sort of explanation or a brief explanation on how their system operates. I won't profess to be an expert on how their system operates and it would be best put to Enbridge themselves. 418 MR. JANIGAN: And effectively, what does this answer indicate? I guess we're having some difficulty in understanding what your answer indicates. 419 MR. McMAHON: I think there's some commonality between the two approaches on allocation in that there is some exclusion in who is going to be paying demand-related costs. It's just how they treat their costs or how they identify their costs and their demand levels is different from how we do it in our cost-allocation study. 420 MR. JANIGAN: Do all rate classes get an allocation of transmission expense? 421 MR. KITCHEN: Are you referring to other transmission? Sorry, the distinction I want to make is just between other transmission and Dawn-Trafalgar transmission. 422 MR. JANIGAN: Let me start at another level. Let me start with distribution. Do all rate classes get an allocation of distribution class on Enbridge? 423 MR. McMAHON: In Enbridge? 424 MR. KITCHEN: In Enbridge? 425 MR. JANIGAN: In Enbridge, yes. I'm back to the interrogatory, Mr. Kitchen. 426 MR. McMAHON: I don't know. 427 MR. JANIGAN: Okay. 428 MR. KITCHEN: If I can just offer up something that might try to make -- sort of a contrast to what Union does. Enbridge tracks main costs based on transmission pressure, high pressure, low pressure, and customer-related. I don't know exactly how they determine their breaks. But in terms of what Union does in the north and how it tracks its costs through the plant accounting records, it's similar in that we track sole-use main grid and joint-use main, sole use and joint, and to the extent that in the north we have customers served off of transmission mains, we exclude those demands from the allocation of grid-related costs in the same way that Enbridge would exclude from its peak-day calculation, as it says in the answer: 429 "...would exclude from its peak-day calculation the allocation of high-pressure and low-pressure distribution mains." So in a sense, I think the north is similar to Enbridge. The difference we have in the south is we have not tracked costs in this way, we have not tracked them based on these sorts of parameters. 430 MR. JANIGAN: Can you tell me what is new, or what is the new evidence that you're bringing forward in relation to this proposal that's been turned down twice by the Board? Is there something that you can identify? 431 MR. McMAHON: If we could have one second. I guess we are responding to the Board's directive that as we are bringing forward and integrated cost study and we are trying to harmonize the north and south, we took a look at the north and tried to be directionally consistent based on the accounting data that we have available and this was the best approach as far as trying to harmonize north and south. 432 MR. JANIGAN: But there's no new information or evidence that the Board -- that you didn't leave out before the Board in 493/499 or 499 that's being lead before the Board in this case, is there? Apart from the fact that you've taken another look at it. 433 MR. KITCHEN: I think the new evidence is that it's the difference in the treatment from a plant accounting point of view and how the systems are designed that we're looking at to provide the justification for treating the north and the south in a similar manner. 434 MR. JANIGAN: But those similar considerations, as I recall, Mr. Kitchen, were before the Board in those two cases? 435 MR. KITCHEN: I don't think in the last two cases we talked about the fact that -- we weren't integrating the cost study and we did not talk, I don't believe, about the differences in the systems. What we tried to do was to compare and contrast the two methodologies and base the appropriateness on that comparison, and also to try to provide assurances that this was not a violation of postage stamp rate-making. 436 MR. JANIGAN: Thank you. 437 Those are all my questions on the cost-allocation area. I'm moving on to rate design and I wonder if it might be the appropriate time for a break. 438 MR. SOMMERVILLE: We'll take a break and reconvene at 20 minutes after the hour. Thank you. 439 --- Recess taken at 11:05 a.m. 440 --- On resuming at 11:30 a.m. 441 MR. SOMMERVILLE: Just before we begin, Mr. Janigan, the Board does have an interest in finishing today's proceedings somewhere around 4:15 or in that range, just so that the parties can keep that in mind. Thank you. 442 Mr. Janigan. 443 MR. JANIGAN: Thank you, Mr. Chair. 444 I'd like to deal with the issue of the monthly customer charge applicable to M2 and rate 01, the increase in the customer charges that Union is proposing. And as I understand it, the proposal will shift about 59 million from commodity charge to the fixed charge. 445 MR. KITCHEN: Approximately. I'll take that subject to check. 446 MR. JANIGAN: Okay. And would you agree with me that if a change in recovery of revenues is made from a volumetric charge to fixed charges, that change, in fact, reduces the utility's business risk. 447 MR. KITCHEN: No, in fact, I would not agree. And I believe the Board has found on that in a prior Enbridge proceeding, saying that the changes to the monthly fixed charge do not impact business risk. 448 MR. JANIGAN: Actually, if we could turn that up, if I look at Exhibit M.19.1, on page 4 of that package, paragraph 7.2.12, you indicated that: 449 "On the matter of the impact of higher revenue recovery on the rate of return on common equity, while directionally and theoretically were correct, the Board does not consider the prescribed levels of increases in the monthly fixed charges to be of significant magnitude as to materially alter the company's business risk." 450 Two things. One, yes, that's correct from a theoretical and directional level, but the level that was proposed in this particular case wasn't sufficient to alter the company's business risk. Would that be a correct summary of that paragraph? 451 MR. KITCHEN: It's fair in that it is specific to Enbridge's case, yes. 452 MR. JANIGAN: And I believe the amounts that were proposed in that case, if I'm not mistaken, were -- or approved were $1 for rate 1 and $2 for rate 6, those increases -- those were the increases that were approved. 453 MR. KITCHEN: I'll accept that. 454 MR. JANIGAN: Okay. Now, from your discussion with Mr. Warren, I understand that Union has a limited ability to determine how many customers are specifically impacted by the change. 455 MR. KITCHEN: In -- yes. The billing system is not the best at running queries on that sort of thing. There's some limited information that may be able to be gotten, but it's ... 456 MR. JANIGAN: Just as a matter of clarification. When we are talking about a customer consuming 2,600 cubic metres, is that the median customer or the average customer? 457 MR. KITCHEN: I believe that's the average customer. 458 MR. JANIGAN: And in many circumstances, as I understand it, in utilities, the average is driven upwards by having customers in that rate class that consume substantial quantities of the particular service that the utility offers and so the average may be quite a bit different than the median. 459 MR. KITCHEN: I've never seen the median so I would -- I can't really comment. 460 MR. JANIGAN: Okay. Now, there was no customer study, as I understand it, that was carried out in conjunction with this proposal. 461 MR. KITCHEN: If you're referring to focus groups or the like -- 462 MR. JANIGAN: Yes. 463 MR. KITCHEN: -- no. 464 MR. JANIGAN: And I wonder if we could take a look at a monthly customer charge study conducted by Consumers Gas in December of 1996, and that appears in Exhibit M.19.1, commencing on -- after page 7. This was a study that was filed, as I understand it, in EBRO 495 and has the exhibit tab and schedule number accordingly. Are you aware of this study? 465 MR. KITCHEN: I received it on the weekend and have looked at it, yes. 466 MR. JANIGAN: If we could look at page 5 of this study, it indicated that the objectives of the study were to gauge the current understanding of the fixed monthly charge, to determine reaction to the increase in the fixed monthly charge, given that distribution charges will decrease commensurately; thirdly, to explore options for recovery of the fixed monthly charge and to establish the effect of -- to establish the effect increasing the fixed monthly charge will have on the incentive to conserve energy. 467 Now, as I understand it directionally, the Enbridge proposal that triggered this study is similar to Union's insofar as you're proposing an increase to the monthly charge at the same time you'll be decreasing the volumetric charges in rates. 468 MR. KITCHEN: Yes, that is our proposal. And I want to -- excuse me for a moment. 469 MR. JANIGAN: Now, I just want to review some of the findings of the study that's before the Board. 470 On page 2 of the study, it indicated that the impact of the proposed changes on both low-volume and high-volume customers was perceived negatively by customers. I take it that would be no surprise. 471 MR. KITCHEN: That is what the study found, yes. 472 MR. JANIGAN: And it goes on to say: 473 "Regardless of whether they were a residential or small commercial/industrial customer, low-volume customers were more likely to disapprove of the proposed change due to the increase they would incur regardless of the relatively small magnitude of the increase. Generally, participants regarded that both overall bill decrease for high-volume customers and the overall bill increase for low-volume customers as unfair." 474 So it seems to me that there was a response from customers both with respect to the fact of the increase and they didn't seem to be mollified by the idea that this would be passed on volumetrically. 475 MR. KITCHEN: The passage, I think, is clear on what customers would -- may perceive. Union's position is, though, that the level of customer-related costs and moving to a monthly fixed charge of $14 better represents costs -- better aligns the recovery of those costs with the rates. So although customers may perceive it to be unfair, I disagree that it is unfair. 476 MR. JANIGAN: Okay. But would you disagree that if you -- if a similar study was conducted of Union's customer, that a similar response might be obtained. 477 MR. KITCHEN: That's possible. Without doing a study, I can't really say. 478 MR. JANIGAN: How does the Union proposal fit with the current review of DSM programs for both electricity and gas that's being undertaken by the Board? 479 MR. KITCHEN: I'm not sure I understand your question. I don't think we've considered the DSM review in our consideration of the monthly fixed charge. 480 MR. JANIGAN: But effectively, this means that there is a smaller portion of the bill that is being affected by decreases in consumption. 481 MR. KITCHEN: There's a smaller proportion, yes, but it's still in the order of 80 percent. 482 MR. JANIGAN: So Union's position would be that the magnitude of this change is not so significant as to trigger a Board worry about whether this is encouraging consumption? 483 MR. KITCHEN: It's our view that this change will not materially impact any conservation activity by customers, because there still is 80 percent of the bill that varies with volume. 484 MR. JANIGAN: Once again, Union hasn't done a study of actual customers in relation to this. 485 MR. KITCHEN: No. As I said, Union has not performed a study. 486 MR. JANIGAN: Now, according to this study that was done for Consumers Gas on page 2, one of the findings appeared to be that: 487 "Many customers said that they were less likely to practice energy conservation or monitor their consumption of natural gas under the proposed changes." 488 And I think the detailed response is that: 489 "Many residential customers believed that they would be much less concerned about controlling the amount of natural gas that they consumed. Some participants indirectly indicated that they might turn up the heat intentionally since the proposed changes offer no incentive to conserve but also encouraged some to indulge. This was particularly true for a borderline average high-volume user where they perceived that consciously using more gas would definitely convert them into a high-volume status and would, in turn, garner them a discount or bill decrease." 490 Now, given that customers have this kind of perception, what are you going to be doing -- if you're getting approval over this monthly customer charge, what are you going to be doing to counteract this section? 491 MR. SMITH: Sorry, Mr. Chairman, I don't have a problem with my friend putting the study to the witness. I would note, though, that we don't appear to have, or at least I can't see the questions, so I would ask if the questions are included in the study, maybe my friend can at least start there because it is a large document that's just been presented to the witness over the weekend. And I think in fairness, we obviously didn't conduct this study, my friend can make use of it however he wants in cross-examination, but I think he has to put the questions to the witness fairly. And of course, our position, I think as we said at the very outset, is these documents we'll mark for exhibits aren't evidence of anything. 492 MR. JANIGAN: Perhaps I can rephrase the question here. 493 MR. SOMMERVILLE: Thank you, Mr. Janigan. 494 MR. JANIGAN: If this perception that I've indicated that this increase encourages consumption by consumers, if consumers of Union Gas have that perception, how is Union going to meet that if their customer charge is approved? 495 MR. KITCHEN: I guess the first, the first point, and I keep going back to this, is that it is our view that this will not impact conservation. We would not change, in any way, I don't think, our current communications or research done through DSM or anything else, as a result of this proposal. The fact is there is still a large proportion of the bill that is variable and that's really what drives a customer's decision to conserve. 496 If a customer chooses to burn more gas because we've increased the fixed charge, I think that may be a reaction that is rare, if it occurs at all. I think that a customer would see a benefit by conserving. They still look at their total bill; they still look at the money they pay each month to a utility, whether it's for electricity or for gas, and would seek to conserve if they felt there was a benefit to conserving. 497 MR. JANIGAN: Mr. Kitchen, if this result that is suggested by this study obtains in Union's customer group, clearly we have a problem. 498 MR. KITCHEN: I think I've answered it that I don't think we do have a problem. 499 MR. JANIGAN: All right. 500 I wonder if you could turn up Interrogatory J.34.135. Part C of that IR, VECC requested that Union provide a table that identifies the customer-related costs for each rate class and the percentage recovery of this cost by way of the fixed monthly rate, and the response is on page 2 of that interrogatory. 501 MR. KITCHEN: Yes. 502 MR. JANIGAN: And when we look at that response, that the current recovery of fixed costs from rate 1, which is the residential class, based on the current design, is designed to recover 64 percent of the fixed costs from the monthly charge; is that correct? 503 MR. KITCHEN: Yes. That's in column C? 504 MR. JANIGAN: Yes. 505 MR. KITCHEN: Yes. 506 MR. JANIGAN: And the 64 percent recovery of the fixed costs under rate 1 appears to be higher than the percentage recovery that is set out for rate 16 or rate 25; am I correct on that? 507 MR. KITCHEN: Yes, they are higher. That's what the numbers show, yes. 508 MR. JANIGAN: And, in fact, the percentage that is recovered of the customer-related costs by way of the fixed charge is different for all rate classes when we look at column C. 509 MR. KITCHEN: Yes, it is different by rate class. 510 MR. JANIGAN: And if the Board were to approve all of Union's proposed rate design changes with regard to increasing the recovery of fixed costs by way of a higher fixed charge, there would still be a situation in which some rate classes recovered a higher percentage of their costs by way of a fixed cost versus other rate classes. 511 MR. KITCHEN: That's correct. Rate design across rate class varies and we don't target a single recovery across all rate classes. It's the same. 512 MR. JANIGAN: So there's no formulaic or magical percentage number that's associated with how much of a customer charge should be recovered by way of a fixed customer charge, is there? 513 MR. KITCHEN: It's not formulaic, no. And I think if I could describe in terms of what we did in determining the monthly fixed charge level, it might be helpful. 514 The monthly fixed charge level of $14 was really set with two things in mind; first, we wanted to ensure that we maintained harmonization between the northern monthly customer charge and the southern monthly customer charge; at the same time, we did not want to, in any way, distort the rate relationships between blocks within each rate class. With those two principles in mind, we landed on a $14 amount. So the fact that we have 90 percent recovery of fixed costs in the north is really a function of keeping the harmony in between the rate classes but still providing for the benefit in the south where you have a combined industrial and residential rate class. 515 MR. JANIGAN: And in doing so, in applying the factors that you've indicated, it's obviously a matter of judgment where you're going to land. 516 MR. KITCHEN: There is always judgment in rate design. 517 MR. JANIGAN: And if I could take you back to Exhibit M.19.1, in looking at the Board findings on page 3 of that exhibit, and the paragraph of the judgment is paragraph 7.2.10, the Board indicated that: 518 "Clearly there is no easy answer to this issue. It is largely a judgmental exercise of balancing economic efficiency considerations, perceived fairness, and customer acceptance." 519 Would you agree that that is essentially the task that the Board has before it in this case? 520 MR. KITCHEN: I believe it's up to the Board to rule on this issue, and to the extent that they use it -- use their prior decisions to help them in that, I think they will determine what the criteria is. 521 MR. JANIGAN: Now, in our interrogatory J.34.135A, VECC asked if Union knew the percentage of customer-related costs recovered by Enbridge through a monthly customer charge, and the response was that you weren't aware of that percentage. 522 MR. KITCHEN: That's correct. 523 MR. JANIGAN: Now, I wonder if we could turn to Exhibit M.19.2, which is a calculation based upon the Enbridge final rate order from RP-2002-0133. I can assure you that I had nothing to do with the mathematics, if I can give you some additional confidence. But I wonder if you could, subject to check, confirm whether this appears to be correct. 524 MR. KITCHEN: I have not -- I have not checked the actual numbers, but I believe the formulaic calculation is correct. 525 MR. JANIGAN: And so Enbridge, as a result of this rate order, recovers approximately 53 percent of its fixed customer costs in its monthly customer charge. 526 MR. KITCHEN: Yes. 527 MR. JANIGAN: And that customer charge, as I understand it, is $10 for their rate 1 customer, residential customer. 528 MR. KITCHEN: Yes. 529 MR. JANIGAN: Okay. And rate -- Union's rate 1 services, both the residential and small commercial customers that take annual volumes less than 50,000 cubic metres? 530 MR. KITCHEN: Yes. 531 MR. JANIGAN: And would a residential dwelling unit of 6 units fall -- that occurs -- that is resident in Union's northern operations area be served under rate 1? 532 MR. KITCHEN: If they met the volume criteria. Union doesn't distinguish between the end use, whether it's residential or commercial. If the total volume was within the criteria, it would fall within rate 01. 533 MR. JANIGAN: Okay. So Union's rate 1, it's promptly residential customers. 534 MR. KITCHEN: I would say that the majority are, yes. 535 MR. JANIGAN: And in Union's southern delivery area, residential customers are serviced under rate M2. 536 MR. KITCHEN: Yes. 537 MR. JANIGAN: But rate M2 isn't a rate class that only services residential customers and very small commercial customers, is it? 538 MR. KITCHEN: It services residential, commercial and industrial. 539 MR. JANIGAN: Okay. And when you're proposing to increase the customer charge for M2 to $10 to $14, all the industrial and commercial customers that consume more volumes than an average residential customer will, in effect, see a rate decline. 540 MR. KITCHEN: To the extent that it's a declining block rate - all the customers go through the first block - so they will see a decline. 541 MR. JANIGAN: I wonder if I could take you back to Exhibit J.34.134. 542 MR. KITCHEN: I'm sorry, Mr. Janigan, I missed that. 543 MR. JANIGAN: Sorry, it's J.34.134 that Mr. Warren had you look at this morning. 544 MR. KITCHEN: Yes. 545 MR. JANIGAN: And he went through with you the increases on page 3 in response to M, the history of the changes to the mix -- to the fixed monthly customer charge. On page 3. 546 MR. KITCHEN: Yes, I have it. 547 MR. JANIGAN: All right. And we have had a 16.66 percent increase as of January 1st, 2002, and about a 14.3 percent increase on January 1st, 2003 of the fixed monthly customer charge. 548 MR. KITCHEN: With also corresponding decreases in the commodity charge. 549 MR. JANIGAN: Okay. Now, would you agree with me that low-income customers are overwhelming low-volume customers? 550 MR. KITCHEN: I don't have any information that would suggest that. To the extent that you have a new house or a high-efficiency furnace, whatever, there may be a large house with a low average use. 551 MR. JANIGAN: I'm not suggesting that low-income customers are the only one that is are low-volume customers. But looking at low-income customers as a customer class, ordinarily, and let's assume that the overwhelming majority of the low-income customers are low-volume users. 552 MR. KITCHEN: I guess, first of all, Union doesn't look at income as a criteria for a class. And to the extent that there are low-volume customers, their income is -- is not recorded by us or known. But I accept that, to the extent there is a low-volume customer, there may also be a low-income customer in that class -- in that group. 553 MR. JANIGAN: Okay. Well, I don't want to belabour this point. Union is not bereft of concern as to the impact of its rates on low-income customers, presumably. 554 MR. KITCHEN: Sorry, I'm not ... 555 MR. JANIGAN: Union is concerned -- 556 MR. KITCHEN: I think I go back to the original -- the evidence that we don't -- that this impact is minimal and it really reflects a better matching of costs to the recovery. Customers that are large-volume customers are subsidizing low-volume customers, and whether that means that that's also low-income, I don't know, that wasn't part of our analysis. 557 MR. JANIGAN: But to the extent that a customer is a low-volume customer, they're going to see an increase; and to the extent that a customer is a higher-volume customer, they are going to see a decline. 558 MR. KITCHEN: That's correct, as the costs would suggest they should. 559 MR. JANIGAN: And that occurred both in 2002 and 2003. 560 MR. KITCHEN: Yes. 561 MR. JANIGAN: Now, if we could look at that same interrogatory that I referenced in part G, 31.134, VECC asked for the rate impacts for general service customers if all the changes Union is seeking are approved. 562 MR. KITCHEN: Yes. 563 MR. JANIGAN: And looking at that impact for rate M2, we have in the first three categories of 1,800 cubic metres, 2,000 cubic metres, and 2,300 cubic metres, we have impacts of 22.6 percent, 21.8 percent, and 20.7 percent. 564 MR. KITCHEN: Yes, that's correct. 565 MR. JANIGAN: Don't you think that these kind of increases for delivery bills are excessive? 566 MR. KITCHEN: In recovering the company's revenue requirement, there is a fact out there that there's a hundred million dollar deficiency, approximately, that needs to be recovered. Do I think that the increases are high? Yes, they're high and I'll be paying them as well. But the costs have been allocated and these are the results of the rate design and the rate design proposal. 567 MR. JANIGAN: But the hundred million dollar deficiency is not going to be reduced by your rate design proposal. 568 MR. KITCHEN: No. There is a portion of this increase that is as a result of the rate design. But again, it goes back to a better apportionment of costs. 569 MR. JANIGAN: And, in fact, we don't know this to be definitely the case, but in fact, the highest increase may fall upon those that are least able to pay? 570 MR. KITCHEN: I don't know that that's the case. But there is -- if there is a low-income person and they have a low volume, they will see a higher increase than an average customer. But they are also seeing -- they are also paying their fair share of the cost. 571 MR. JANIGAN: There will be a higher percentage of this increase that cannot be avoided by the rate M2 and R1 customers who are low-volume users, I assume? 572 MR. KITCHEN: They will bear their fair share of the cost. 573 MR. JANIGAN: But they can't conserve, for example, to lower the impact of the monthly customer charge increases. 574 MR. KITCHEN: Again, I'm not sure that -- the overriding consideration is a fair allocation of costs. We don't consider in the cost allocation and rate design necessarily the income of customers across the entire spectrum of rates. All we're trying to do is to ensure that there is less of an interclass subsidy based on volume. 575 MR. JANIGAN: The monthly customer charge is supposedly to pick up sort of the fixed costs that are necessary for all of the rest of the services to be provided. 576 MR. KITCHEN: They are costs that don't vary by customer, yes. 577 MR. JANIGAN: But unless those costs were paid for and incurred, you couldn't deliver the rest of those services that are provided through things like meters and regulators, whatever. 578 MR. KITCHEN: Sorry, I'm not quite following you. 579 MR. JANIGAN: Well, some of the examples of the customer-related costs that are covered by your attempt to pick up fixed costs are things like meters, regulators, almost fixed costs that don't vary by volume. 580 MR. KITCHEN: Right, costs that are there because you have a customer. 581 MR. JANIGAN: But you have to have those things in place in order to deliver the rest of the services. 582 MR. KITCHEN: Yes. You have to have a meter to have the gas flow through. You have to have a billing system in order to bill. 583 MR. JANIGAN: So what is so unfair about picking up some of those costs in the delivery-related charge? 584 MR. KITCHEN: And we will continue to pick up some of those costs in the delivery-related charge. We are not moving to a full fixed variable cost recovery. There will continue to be some of those costs recovered based on volume. 585 MR. JANIGAN: But what seems so unfair at the current time if -- in the current percentage of costs that are picked up in the deliver-related charge versus your customer charge? 586 MR. KITCHEN: It's our view that increasing the fixed charge and providing for a more appropriate alignment to cost is an appropriate thing to do, and the timing of doing that is now in this proceeding. 587 MR. JANIGAN: I guess the question is: How do we know what the appropriate percentage is that a customer charge should pick up a fixed cost, and why is it inappropriate for the delivery rate to pick up the percentage that it is now, given the fact that all of these expenses have to be there for the services to be provided? 588 MR. KITCHEN: I guess in response to that, some may argue that all of the customer-related costs should be picked up through a fixed charge. What we're trying to do is to find an amount that recovers an amount that we think is appropriate. We've chosen the amount for two reasons; trying to harmonize the north and the south and also because -- or trying to maintain the harmonization in the north and the south, and because we need to be cognizant of the delivery rate block rates and how we can impact those. There's only -- you know, there's -- there are constraints on what we can do and we've tried to live within those constraints. 589 MR. JANIGAN: I wonder if I could deal with the allocation of the deferral account balances, first of all, in the flexibility-related deferral account. And I'm looking at Exhibit H.1, tab 2, page 8. Union is proposing to dispose of the 2003 flexibility related deferral account balances over general service volumes for the January 1st to April 30th period? 590 MR. KITCHEN: Yes, that's correct. 591 MR. JANIGAN: And as I understand it, the rationale is that the majority of the flexibility-related costs were incurred by Union during the 2003 winter? 592 MR. KITCHEN: That's correct. 593 MR. JANIGAN: And of the total 55.525 million incurred costs for flexibility that's shown at H.1, tab 2, page 3, what percentage of the total amount was incurred in that period, January to April 30th? 594 MR. KITCHEN: I would suggest that a hundred percent of it is, but I would have to take that and actually get back to you on that one. 595 MR. JANIGAN: Okay. 596 Could I have an undertaking on that? 597 MR. MORAN: Mr. Chair, I wonder if Mr. Janigan could restate the undertaking, please. 598 MR. JANIGAN: The undertaking would be to state what percentage of the total amount of the flexibility-related deferral account balance of 55.526 million was incurred in the period between January 1st to April 30th, 2003. 599 MR. MORAN: Undertaking N.19.4, Mr. Chair. 600 MR. SOMMERVILLE: Thank you. 601 UNDERTAKING NO. N.19.4: TO STATE WHAT PERCENTAGE OF THE TOTAL AMOUNT OF THE FLEXIBILITY-RELATED DEFERRAL ACCOUNT BALANCE OF 55.526 MILLION WAS INCURRED IN THE PERIOD BETWEEN JANUARY 1ST TO APRIL 30TH, 2003 602 MR. JANIGAN: And later in that same exhibit, at page 10, that's H.1, tab 2, page 10, there are a number of allocation proposals with regard to the 2003 storage and transportation-related deferral accounts. 603 MR. KITCHEN: Yes. 604 MR. JANIGAN: And the list of them are the transportation and exchange services deferral account, the balancing services deferral account, the short-term storage service deferral account, the long-term peak storage services deferral account, and other S&T services deferral account, and other direct purchase services deferral account. 605 Is the allocation methodology that Union is proposing for all of the 2003 S&T-related deferral accounts the same allocation methodology that Union used in its last customer review proceeding? 606 MR. KITCHEN: Yes, it is. 607 MR. JANIGAN: Okay. And I want to look at one of my favourite accounts, the deferral customer rate base charges deferral account, which I had so much fun with last week. 608 According to the evidence, which is set out at H.1, tab 2, page 12, Union proposes to allocate the deferral account debit balance of $4 million to rate classes in proportion to the 1999 Board-approved number of general services customers in the northern and southern operations area? 609 MR. KITCHEN: That's correct. 610 MR. JANIGAN: And this will mean that a small residential customer will be responsible for the same amount of the debit balance as a large commercial customer, will it not? 611 MR. KITCHEN: The allocation to the rate class -- allocation will be on the basis of customer. The disposition will be on the basis of volume. 612 MR. JANIGAN: So each individual customer will pay the same amount? 613 MR. KITCHEN: No, each individual customer will pay an amount based on the volume that they consumed. 614 MR. JANIGAN: Okay. 615 MR. KITCHEN: So to the extent you've consumed amount, you'll be taking that average in the price times that amount. 616 MR. JANIGAN: Okay, that's fine. Thank you for clearing that up. 617 I think I just have some questions on the Coral matter remaining, and they are pretty high-level questions. 618 First of all, is it Union's position from the evidence that it's filed and its reply that basically Coral signed a T1 service contract with Union? 619 MR. KITCHEN: They signed a T1 contract, yes. They signed an agreement that was attached to that a T1 rate schedule. 620 MR. JANIGAN: And Union did not provide Coral with a negotiated deal. 621 MR. KITCHEN: The -- I look to my counsel just for a second in terms of confidentiality. 622 MR. SMITH: I'm just thinking of two things, Mr. Chairman. 623 First, the confidentiality of the agreement; second, the agreement itself is not in the evidence, and in granting leave to Coral to intervene in this proceeding and file evidence, the Board specifically directed that it wasn't interested in contractual questions so I suppose I'm not particular -- I'm not sure where my friend intends to go with his question, but I can say that that contract isn't in the record and it certainly wasn't our intention to discuss the particulars of that contract or the negotiations in any respect. 624 MR. JANIGAN: I'm not going too far. All I want to do is contrast that this is not -- essentially it's either a T1 arrangement or a negotiated deal. 625 MR. KITCHEN: The rate that was provided, and I think we say that in the evidence, did nothing more but take the T1 rate at the time and apply the formula that we would have applied had the DCC removal been approved. So because at the time we were litigating the DCC, that wasn't reasonable -- a reasonable rate to put into the contract and reference. So it was by formula that we calculated it. 626 MR. JANIGAN: Okay. 627 Thank you, Mr. Chair, those are all my questions for this panel. 628 MR. SOMMERVILLE: Thank you, Mr. Janigan. 629 MR. QUINN: Excuse me, Mr. Chair. Mr. Ryder just exited for a moment. 630 MS. YOUNG: I'm happy to go ahead but I'll only be a couple of minutes. 631 CROSS-EXAMINATION BY MS. YOUNG: 632 MS. YOUNG: Mr. Kitchen, I just have two or three questions with respect to the introduction of a monthly customer charge for rate M5. 633 MR. KITCHEN: Yes. 634 MS. YOUNG: Were any of the M5 customers consulted prior to putting together your proposal to introduce that customer charge? 635 MR. KITCHEN: We consulted with our sales reps. I'm not sure if they consulted with individual customers. I know we talked it over with sales in terms of what would be appropriate in terms of the magnitude of the rate and such. 636 MS. YOUNG: Okay. And subsequent to putting the proposal together and filing it with the Board, has there been any communication to M5 customers that there is potentially a change? 637 MR. KITCHEN: There was an Enerline or Facts Line, I'm not sure which, sent out, I'm not sure which, just after the ADR, I think shortly after that. We committed to do that for Mr. Thompson. And that went out and those customers would see that, I believe. 638 MS. YOUNG: Is that something that could be filed? 639 MR. KITCHEN: Yes. 640 MS. YOUNG: Okay. And would you know if, as a result of that communication, if you've had any feedback from customers on what their reaction is to the proposal? 641 MR. KITCHEN: I have not heard of any feedback, no. 642 MR. SOMMERVILLE: Ms. Young, I take it you'd like an undertaking to the effect that the document be produced, and is the feedback part of that undertaking as well? 643 MS. YOUNG: That would be helpful, yes. 644 MR. MORAN: Mr. Chair, undertaking to produce communication with a -- 645 MR. KITCHEN: It would be the communication with industrial customers. You can call it, produce the Facts Line or Enerline. 646 MR. MORAN: Undertaking N.19.5 to produce documentation communicating with industrial customers and any feedback. 647 UNDERTAKING NO. N.19.5: TO PRODUCE DOCUMENTATION COMMUNICATING WITH INDUSTRIAL CUSTOMERS AND ANY FEEDBACK 648 MS. YOUNG: Thank you very much. Those are all my questions. 649 MR. SOMMERVILLE: Thank you, Ms. Young. 650 MR. RYDER: Thank you, sir. 651 MR. SOMMERVILLE: Mr. Ryder. 652 CROSS-EXAMINATION BY MR. RYDER: 653 MR. RYDER: Mr. Quinn delivered some cross-examination materials in October, October 31st. While Mr. Quinn is delivering those, Mr. Kitchen and Mr. McMahon, I wonder if you could like up J.5.87. 654 MR. SOMMERVILLE: Sorry, Mr. Ryder, that reference? 655 MR. RYDER: J.5.87. 656 And I see that both of you have signed off on this interrogatory response. And it shows on page 1 the deliverability percentage given to each of -- given to a number of rate classes. Do you have that? 657 MR. McMAHON: The chart at the bottom of the page, you're referring to? 658 MR. RYDER: Yes. 659 MR. McMAHON: Level of deliverability? 660 MR. RYDER: Yes. 661 MR. McMAHON: Which is basically a ratio of storage demand to space allocation. 662 MR. KITCHEN: I just want -- we want to be clear that it's not -- it's not storage deliverability given to a customer specifically, it is the allocated deliverability to the class based on Board-approved methodology. 663 MR. RYDER: And to the T3 class, that would be to the City of Kitchener? 664 MR. KITCHEN: Yes. 665 MR. RYDER: And how is the -- the level of disability is defined by reference to a percentage of space? 666 MR. KITCHEN: In terms of the T3 contract? 667 MR. RYDER: In terms of deliverability levels shown -- forgetting T3 for the moment, I'll come back to that, but for the M2, M4, M9, M7 deliverability levels, they're all -- well, and the T3, they're all expressed as a percentage. 668 MR. McMAHON: Those are percentages, yes. 669 MR. RYDER: Yes. And it's percentages in reference to the total allocated space. Percentage of what, then? 670 MR. McMAHON: Right. It's the storage demand as a ratio of the space allocation. 671 MR. RYDER: All right. 672 MR. KITCHEN: Allocated storage demand, just to be clear. 673 MR. RYDER: So how are these percentages derived? 674 MR. KITCHEN: You can take that one. 675 MR. McMAHON: As I said, we take the storage demand as a ratio of the space allocation. 676 MR. KITCHEN: Storage demand is allocated essentially based on peak capacity for that rate class. 677 MR. RYDER: On a heat capacity? 678 MR. KITCHEN: Peak. 679 MR. RYDER: On peak. Now, I understood from other panels that the deliverability level depended on the heat-sensitive level of the customer class. Was I wrong in taking that understanding? 680 MR. KITCHEN: Well, they may have been talking about it from a planning point of view. From a cost-allocation and rate design point of view, we receive a total infranchise deliverability which we then allocate to rate classes based on their peak day. So to the extent that a rate class is more or less weather-sensitive, they would receive more or less an allocation of deliverability-related costs, because that's the goal of all that we're doing, is to come up with the deliverability-related costs. It's not to provide deliverability to a rate class. 681 MR. McMAHON: I think it's important to distinguish between the information that Mr. Fay would have been testifying to earlier where he plans on a system-wide basis what the deliverability amount would be. And what we do at our end is we take the related costs of that system deliverability and allocate those costs to the rate classes. 682 MR. RYDER: Well, who decides what level of deliverability a customer class should receive? 683 MR. McMAHON: I don't think that we allocate a level of deliverability to a rate class. We take the demand levels and allocate the associated costs to rate classes. 684 MR. RYDER: Well, who came up -- who decided that the M2 should have 2.18 percent and the M9 should have 1.71 percent in this case? 685 MR. KITCHEN: I don't think you're interpreting the interrogatory correctly. What we're trying to do is to say, for infranchise rate classes, all we have to do to calculate what the notional deliverability is in terms of the allocated costs is to take the allocated deliverability divided by the allocated costs. Customers within the rate class may use more or less deliverability. That's an average. It's not deliverability related to a particular customer or to a customer if they were going to unbundle or go to T1. 686 MR. RYDER: Well, who derives, for the purpose of a rate hearing, the allocated deliverability that a class receives? Who determines that at Union? 687 MR. McMAHON: One second. 688 Basically, what we do is we take the deliverability-related costs and we allocate them based on the net demand from storage and that's the approved methodology that we've been operating under, at least it was the last Board-approved methodology to use. 689 MR. RYDER: Okay. Do you have a reference for that approval? 690 MR. KITCHEN: It's been used, as far as I know, since -- I don't want to say the dawn of time, but it's been used for a long time. I would suggest that it probably goes back as far as 380. We can have someone see if there's specific approval. There may not be because, in those early cases, not every rate-design principle was approved. But through approval of the cost study, they were approved. 691 MR. RYDER: Well, can you, as an undertaking, investigate the Board approval that you rely on for the method of -- 692 MR. KITCHEN: We can check to see if there's a specific Board approval, but I imagine we would go back to at least 380, in which case there may not be a specific Board approval. 693 MR. RYDER: Well, we'll see what the undertaking brings up. 694 MR. MORAN: Mr. Chair, Undertaking N.19.6, to advise on the origin of board approval for the allocation of -- 695 MR. KITCHEN: Storage deliverability. 696 MR. MORAN: -- of storage deliverability. 697 MR. KITCHEN: Is that correct, Mr. Ryder? 698 MR. RYDER: Yes, that's correct. 699 MR. SOMMERVILLE: Thank you. 700 UNDERTAKING NO. N.19.6: TO ADVISE ON THE ORIGIN OF BOARD APPROVAL FOR THE ALLOCATION OF STORAGE DELIVERABILITY 701 MR. RYDER: Can you explain why the M7 has gone from 0.8 percent in 494 and is now proposed at 2.52 percent? 702 MR. McMAHON: One second. 703 MR. KITCHEN: Given that the goal of the cost study is to allocate the costs of deliverability, what we do to allocate deliverability-related costs is look at the design-day demand by rate class. There's been significant changes in M7 since 499, largely higher load factor customers migrating to T1, which has reduced the overall load factor to M7, so you would expect to see somewhat higher deliverability. The issue you have in a cost study, though, is you're also impacted by rate-switching that happens throughout the year, so you never have a cost study or a demand forecast that has a clean year with no switching in it. And so some of the impacts that you have within a cost study in terms of the allocated costs may be related to rate-switching. 704 MR. RYDER: Well, I understand that deliverability equates to consumption minus the gas delivered to Union by the customer, do you accept that formula? 705 MR. KITCHEN: I believe Mr. Fay accepted that. I won't argue with him. He's the storage planner. 706 MR. RYDER: And so the lower the amount of deliverability means that the customer must -- the class must increase the gas delivered to the class to meet peak demand. 707 MR. McMAHON: Logically that sounds right. Again, Mr. Fay would be the best one to speak about that. 708 MR. RYDER: All right. But you're the ones that we've been told, by a number of panels, to be the masters of the deliverability percentages. 709 MR. SMITH: No. It's the allocation of the deliverability costs, not the development of the deliverability that these witnesses are here to testify to, and that's what's addressed in J.5.87. 710 MR. RYDER: I don't want to get into this debate again, but we've been looking for some time for somebody to take responsibility for these deliverability percentages. 711 MR. SMITH: And Mr. Kitchen and Mr. McMahon are prepared to testify to that. 712 MR. RYDER: Thank you. 713 Deliverability is a requirement that is especially important for heat-sensitive customers. 714 MR. SMITH: Well, that question was asked specifically of the previous panels. 715 MR. RYDER: Well, let's get this conversation moving a little bit. We can agree with that? That's a pretty basic proposition. 716 MR. KITCHEN: All customers that have a load factor of less than a hundred percent would require some deliverability. 717 MR. RYDER: Yes. And the more you come down from a hundred percent, the greater the deliverability. 718 MR. KITCHEN: Notionally that's correct, although you also have to look at the individual requirements of a particular customer or a class. 719 MR. RYDER: All right. But generally it's so; right? 720 MR. KITCHEN: Generally, more heat-sensitive customers have more deliverability. 721 MR. RYDER: And the M7 load factor is considerably higher than the load factor for the heat-sensitive customers? 722 MR. KITCHEN: Yes. 723 MR. RYDER: And the heat-sensitive customers are M2, M9, and T3? 724 MR. KITCHEN: M2 is heat-sensitive. I believe that it's already been put on the record that M9 and T3 are heat-sensitive, yes. 725 MR. RYDER: Yes. And yet on J.5.87, page 1, the M7 has the highest level of deliverability proposed. 726 MR. KITCHEN: That doesn't mean that an M7 customer or the class gets that deliverability. What it means is that when you look at the allocation of deliverability demand compared to the storage, which is how the deliverability percentages are calculated, there is a high -- there is a higher percentage. And it's high because of the reasons I gave; the fact that you have a reduction in the load factor in M7 and that you have customer switching that happens throughout the year. But this is all driving towards an allocation of costs to a rate class, and it's the costs that we seek to recover through rates. We're not assigning deliverability to a customer. If an M7 customer went T1, they would be -- their allocation of storage would be based on aggregate excess and 1.2 percent deliverability as the starting point. 727 MR. RYDER: And where does the 1.2 percent come from? 728 MR. KITCHEN: The 1.2 percent deliverability, I believe that Mr. Fay has testified to, that is the deliverability that underpins the operation of our storage pools. 729 MR. RYDER: Well, look at the calculation that Mr. Quinn provided in the cross-examination materials, the final page. 730 MR. MORAN: Mr. Chair, this hasn't been marked as an exhibit yet. 731 MR. SOMMERVILLE: Thank you, Mr. Moran. 732 MR. MORAN: This would become Exhibit M.19.3, cross-examination materials for panel 15 filed by Kitchener. 733 EXHIBIT NO. M.19.3: CROSS-EXAMINATION MATERIALS FOR PANEL 15 FILED BY KITCHENER 734 MR. RYDER: And going back to the equation deliverability equates to peak demand minus DCQ, peak demand, we've learned from a prior panel, is 2,557, all right? Do you accept that for the purposes of this discussion? 735 MR. KITCHEN: Yes. 736 MR. RYDER: And the DCQ is the forecasted demand divided by 365? Isn't that what the DCQ is? 737 MR. KITCHEN: That's what the DCQ is, yes. 738 MR. RYDER: Thank you. And that's 785? 739 MR. KITCHEN: Sorry, I missed that last part. 740 MR. RYDER: The forecasted volume for the City of Kitchener and the T3 class divided by 365 comes out to 785. 741 MR. KITCHEN: Yes, I'll accept that. 742 MR. RYDER: All right. So -- 743 MR. SMITH: Sorry -- I'm sorry to stop Mr. Ryder, but I just had a quick question about his chart. The 286,671, is that Kitchener's contracted DCQ? I'm just trying to follow along. 744 MR. RYDER: Is the volume forecast in this case. 745 MR. SMITH: It's not your contracted DCQ, okay. 746 MR. RYDER: The reference is provided. 747 Now, plugging those numbers into the formula, Mr. Kitchen, doesn't that mean that delivery equates to 2,557 minus 785 or 1,772? 748 MR. McMAHON: One second. 749 The difficulty we're having with this part of the exhibit is this is more of a contract negotiation piece of evidence. For the cost-allocation study and then rate design, we use the contracted deliverability for our calculations, and as far as I know, I don't think the contract ends within 2004 so I'm not really sure how this would impact our calculations for a cost allocation. 750 MR. RYDER: I'm not suggesting that they do, but I'm just trying to show you how deliverability is derived. 751 MR. KITCHEN: Well, I guess I can accept the math because I can punch it out on a calculator. I'm just not sure that we can do anything other than accept the math. 752 MR. RYDER: All right. But based on the formula of deliverability equating to peak demand minus DCQ, that results in a deliverability level of 1,772 103m3. 753 MR. KITCHEN: Again, I can accept the math. 754 MR. RYDER: So that would be the actual deliverability needed to meet peak demand conditions under Kitchener's current peak and under Union's current forecast. 755 MR. SMITH: I think Mr. Kitchen has testified he doesn't know whether that's true or not. He's just accepting your math. 756 MR. McMAHON: It doesn't that we use to allocate the cost. 757 MR. RYDER: And that's 1.5 percent; right? 758 MR. McMAHON: That's right. 759 MR. RYDER: And that's under the contract. 760 MR. McMAHON: That's right. 761 MR. RYDER: All right. I'm just trying to see whether your deliverability numbers bear any sense -- make sense to me. 762 MR. KITCHEN: This is -- this is a calculation that you've done, and as I said, I can accept the math. But as Mr. McMahon has said, we allocate costs based on your contracted deliverability. This -- what we've been presented with here doesn't -- has no bearing on what we do in the cost-allocation study. 763 MR. RYDER: No, but you've taken responsibility for the deliverability numbers; right? I'm just probing. 764 MR. KITCHEN: We've taken responsibility for the allocation of deliverability-related costs. We don't determine the deliverability for the company or for -- sorry, for design day, and all we do is allocate the costs. I'm not trying to minimize what we do, but that is what we do. 765 MR. RYDER: Well, there was an allocation of deliverability in 0017 to the U2 of 10 percent. Do you recall that? 766 MR. KITCHEN: The peaking service -- the storage-peaking service deliverability for a U2 is approved at 10 percent, yes. 767 MR. RYDER: All right. So the level of deliverability is a determination -- for rate class, rather, is a determination that Union makes. 768 MR. KITCHEN: We determine the deliverability for the unbundled service as a service, not -- not in terms of any other rate class. I guess I'm not following the point. 769 MR. RYDER: Well, you've determined the deliverability level for the rate classes shown on J.5.87, page 1; right? Now, are these all unbundled? These are all bundled? 770 MR. KITCHEN: That is the allocated deliverability implicit in the allocation factor divided by space. That's all it is. It doesn't mean anything in terms of a customer bundled, unbundling, how much deliverability a customer may use on a specific day. It's a method for allocating costs and that's all. 771 MR. RYDER: So the level of deliverability that you've shown in J.5.87 does not mean actual deliverability that a customer can draw upon. 772 MR. KITCHEN: No. What it is, it's the -- it's an implied calculation. 773 MR. RYDER: And what's the difference? What can a customer draw from? How does he know what he can draw from? 774 MR. KITCHEN: In a bundled service, for example, a bundled M7 customer would provide their DCQ and would be served if they have a firm service because that's Union's commitment to them. 775 MR. RYDER: To serve peak-day demand. 776 MR. KITCHEN: To serve demand up to their firm demand. 777 MR. RYDER: But that's not peak-day demand. 778 MR. KITCHEN: The M7 bundled service is essentially a no-notice service. If they're providing us with their DCQ, which they're obligated to do, we will provide them service on their peak day. 779 MR. RYDER: And for the M2, do they need 2.18 percent on a peak day? 780 MR. KITCHEN: Again, it's a no-notice service. So to the extent that the M2 customer, whether they're direct purchase or sales service is delivering, I guess direct purchase delivering our DCQ and Union providing deliveries, we would serve that demand. And if it takes 1.2 percent or if it takes 1.2 percent and more, we would meet the demand. That's the way we allocate costs and that's the way Mr. Fay and Mr. Hyatt planned the system. 781 MR. RYDER: Does that mean that costs vary depending on the deliverability percentage? 782 MR. KITCHEN: The costs vary by rate class because they are allocated to rate classes. 783 MR. RYDER: Well, is the cost of 2.52 percent that the M7 gets, is that greater than the cost of the lower deliverability percentage that the other customers get? 784 MR. KITCHEN: Costs are allocated on the basis of rate class. So to the extent that there's a deliverability requirement identified by rate class, we would allocate total deliverability costs to the rate class in that manner. So we don't price out deliverability, is the better way of saying it, we don't price out deliverability based on rate class. Those would be included in the delivery rate for M7 and for any customer that takes the bundled service. 785 MR. RYDER: Well, is the M7 deliverability cost the same as the M2's on a billing-unit basis? 786 MR. KITCHEN: What's your billing unit? 787 MR. RYDER: Well, you tell me. I mean, does 2.18 percent, is that costed to the same amount as the 2.52 percent? 788 MR. KITCHEN: I think mathematically, if you were to look at costs allocated to a rate class, assuming that the billing determinate is -- a hundred percent of the costs are allocated and the billing determinate is consistent across the rate class, you would get the same unit cost per unit of deliverability. It's a function of cost divided by billing units, and although they're not units we bill -- and I think I've confused everything there, but -- 789 MR. RYDER: Let me try that question again. Does deliverability at, say, 1 percent cost the same as -- is it costed the same as deliverability as 10 percent? 790 MR. KITCHEN: Are we getting into the standard storage service versus the peaking service? 791 MR. RYDER: I'm just saying, does -- no, and you know we're not. 792 MR. KITCHEN: I'm trying to understand. I'm sorry? 793 MR. RYDER: What I want to know is if you reduced the deliverability percentage to any of these classes, would that reduce the allocated costs to these classes? 794 MR. KITCHEN: That would be the implication, because if you reduce the level of deliverability allocated to the rate class, you would reduce the allocated cost; and by the fact that it's a simple division of two numbers, you would reduce that deliverability number as well. 795 MR. RYDER: Do you see the calculation that Mr. Quinn has provided on the last page of Exhibit M.19.3? Can you, as an undertaking, provide me with a calculation of what it would be of the allocation of deliverability using these parameters of DCQ and peak demand on the basis that Kitchener was a bundled customer? 796 MR. KITCHEN: I'm not sure -- 797 MR. SMITH: I'm not sure I'm following along. Do you want to know the costs that would be allocated to the T3? 798 MR. RYDER: No, I want to know the deliverability that would be allocated. 799 MR. SMITH: Well, they are not allocating deliverability, they are allocating costs. 800 MR. RYDER: Well -- but deliverability is allocated and -- 801 MR. KITCHEN: Only by the -- it's implicitly allocated because we have allocation factors that allocate deliverability and allocate storage. It's not our goal to come up with a deliverability percent for a rate class and say, That's what they have. The goal is to have costs allocated to a rate class. 802 MR. RYDER: Will your undertaking show the implicit allocation then? You say it's implicitly done, so just provide us with a calculation that shows how it's done. 803 MR. KITCHEN: I'm not sure how to do what you've asked. 804 MR. RYDER: Well, come up with the appropriate deliverability for the City of Kitchener using the parameters shown in Exhibit 19.3. 805 MR. KITCHEN: We don't determine deliverability for a class. You're asking me to come up with an appropriate level of deliverability and I'm not sure that I can do that. You're a T3 customer; you negotiate your deliverability. 806 MR. RYDER: Well, that was done. 807 MR. KITCHEN: And you negotiated 1.5 percent and negotiations will be coming up again for the next tranche or the next contract. 808 MR. RYDER: I need to get an understanding as to how you come -- I know how you the got the T3 deliverability; that was negotiated. But for the life of me, I'm in the dark about how you came up with the other deliverability percentages. Because I know the Kitchener parameters, I'm asking you to do one, to show the calculation that would allocate the cost and the deliverability by implicitly using the parameters based in the exhibit. 809 MR. KITCHEN: Are you requesting that we try to put T3 back into the M9 rate class and then provide an undertaking that would show what M9 would look like if T3 was a -- 810 MR. RYDER: No, assuming T3 was not covered by any contract, which will be the case shortly. 811 MR. SMITH: In 2005 -- or 6, sorry. 812 MR. RYDER: In that way, I think I can understand -- I hope to be able to understand how you've arrived at the deliverability percentages to the others, because for the life of me, they make no sense. They make no sense, Mr. Kitchen, to be clear, because the high-load factor customers get higher deliverability than the low-load factor customers. So that's intuitively perverse. 813 MR. KITCHEN: I've provided the answer I think. 814 MR. RYDER: Well, provide the calculation to make it clear to me, please. 815 MR. KITCHEN: I'm not even sure how to word an undertaking. 816 MR. RYDER: Do you want me to try it again? 817 MR. KITCHEN: Please do. 818 MR. RYDER: Using the parameters shown on the final page of Exhibit M.19.3, calculate the deliverability cost and show how the deliverability percentage implicitly results from the deliverability. 819 MR. McMAHON: So you're asking us to change the deliverability factor we use to allocate costs in the cost study to correspond to the calculation that you have made for deliverability? Because that's not the calculation we use to allocate the deliverability of allocating costs. 820 MR. RYDER: All right. Give me your calculation. 821 MR. McMAHON: Well, our calculations are in the cost study. 822 MR. RYDER: Well, your calculation is based on the contractual level of 1.5 percent. 823 MR. McMAHON: That's right. 824 MR. RYDER: I'm asking you to do one on the assumption that there is no contractual provision. 825 MR. KITCHEN: I think we'll undertake to try to provide you something. I'm not sure what. 826 MR. SOMMERVILLE: The difficulty, as I see it, and I think I'm concerned that we're going to end up with a gulf here, that we're going to have an undertaking that isn't going to satisfy anything. I think what the witnesses are suggesting is that the way they conduct this calculation is on the basis of the contractual demand. That's the basis upon which they make this calculation. 827 Is that correct, Mr. McMahon? 828 MR. McMAHON: That's correct for the T3 customer. 829 MR. SOMMERVILLE: And what you're suggesting, Mr. Ryder, is that they should use some other factor other than the contractual demand, and that's the difficulty that we seem to be bumping into again and again. How do we produce an undertaking that is going to be informative and not simply exacerbate this misunderstanding? 830 MR. RYDER: Well, if you assume that Kitchener or T3 was completely bundled, would that assist you? 831 MR. SOMMERVILLE: Just from the standpoint of your ability to argue, Mr. Ryder, which is, I think, presumably what you're doing, I think you've put this calculation to the previous panels as well, that is, the calculation of the disparity between the deliverability result and what you see as the actual requirement. And I think that's what you want to be able to argue at the end of the day. Have I got that right? 832 MR. RYDER: Yes, in part. I think we also want to be able to argue that the deliverability percentages don't make sense. 833 MR. SOMMERVILLE: Okay. 834 MR. MORAN: Mr. Chair, I'm wondering, in looking at Exhibit J.5.87, is what Mr. Ryder trying to get at is an explanation of how the other percentages are calculated, leaving aside the Kitchener assignment when you look at the answer A2? 835 MR. SOMMERVILLE: I think that's right, but I think the difficulty is that they're all based on contract demand and that's precisely what is different here. You'd almost have to take, in order to do -- and, Mr. Ryder, correct me if I'm wrong or misunderstanding, but you'd almost have to take a hypothetical other customer with the same parameters that had built into their contract the contract demands that are equivalent to Kitchener's contract demand, and then conduct the calculation accordingly. Is that how you'd do it? 836 MR. RYDER: Well, perhaps a lunch break might clarify the issue. 837 MR. SOMMERVILLE: Let's see if -- 838 MR. RYDER: There is something I was getting from Mr. Kitchen and that was that he was considering whether the production of the calculation based on a bundled customer with these parameters, whether that -- he hasn't told us whether he could do that. 839 MR. KITCHEN: I think that's what I'm not sure if I can do or not, Mr. Ryder. I think it goes back to the same issue. 840 MR. SOMMERVILLE: Let's see if over the lunch break we can simplify this. I'm reluctant to have an undertaking that is just going to be the source of problems. Let's be clear about what's going to happen here. 841 Let's take the lunch break and we'll come back to this immediately following. We'll come back at 2:00. Thank you. 842 --- Luncheon recess taken at 12:50 p.m. 843 --- On resuming at 2:03 p.m. 844 MR. SOMMERVILLE: Thank you very much, please be seated. 845 Are there any preliminary matters? 846 PRELIMINARY MATTERS: 847 MR. BROWN: Thank you very much, Mr. Chair. 848 I just wanted to perhaps give the Board and Union and the others a bit of a head's up as to the intentions of Coral Energy with respect to this particular panel. I've already chatted with Board counsel and also to Union's counsel. With respect to the cross-examination of this particular panel, it's my intention to file a cross-examination brief and I hope to be able to have that in people's hands if not by the end of today, certainly by tomorrow morning, since I understand our cross-examination of Union might take place then. 849 The one thing I wish to raise in that regard is the issue of confidentiality. Coral did file evidence and Union has filed reply evidence. Coral asked for confidentiality of certain terms. 850 It's my expectation that Coral will be asking that the Board treat that information in confidence, so with respect to our cross-examination of the Union panel, some of it is not confidential but some of it would make use of confidential information, and I wanted to raise that with the Board in order to start a discussion as to how to handle that. Simply going in camera might be the cleanest and simplest way of doing it. 851 The second point I want to raise, Mr. Chair, is that I understand that Coral's panel may be testifying on Wednesday or Thursday, depending on the length of cross-examination of this panel. As a result of reading Union's reply evidence, Coral may wish to supplement its evidence that it had previously filed. It's my intention to try and get that supplement to people at the same time as our cross-examination brief so that in fairness to Union's panel, they will have that supplement before my cross-examination of them. 852 So those are the two administrative matters that I wanted to raise with you, Mr. Chair. 853 MR. SOMMERVILLE: Thank you, Mr. Brown. 854 Just let me comment first on the filing of the cross-examination materials. It is our practice that those materials should be filed typically 24 hours prior to the cross-examination to which they pertain, so if you can make that time -- keep that in mind as you're organizing your filing. 855 Mr. Smith, do you have any comment arising from Mr. Brown's submission? 856 MR. SMITH: Mr. Chairman, not with respect to the cross-examination materials. I'm sure that Mr. Brown will try to get those to me as soon as he can. 857 I do have a concern about the supplementary evidence that my friend intends to adduce, and it's a timing concern and potentially a serious one. Mr. Kitchen, of course, is already on the stand. In the normal course, he would have had an opportunity to respond to reply evidence potentially in examination-in-chief, or if it was appropriate, in response to either Mr. Brown's questions or anybody else's questions. My concern, of course, is that the evidence not be adduced following Mr. Kitchen's cross-examination. He hasn't had an opportunity to respond to it; Union has not then had an opportunity to comment on it. We would have, no pun intended, a Brown and Dunn problem, as it were. 858 But provided that the evidence is adduced by Mr. Brown sufficiently in advance, and if necessary, Union is afforded an opportunity to have Mr. Kitchen and Mr. McMahon respond to questions from me on that evidence, I think that should be satisfactory, if necessary. I don't know, because I haven't seen Mr. Brown's evidence, whether that will be necessary or not. 859 MR. SOMMERVILLE: Mr. Brown. 860 MR. BROWN: I am very sensitive to the Brown and Dunn implications which is why I do want to try and get the information to my friend at the same time as the cross-examination brief. That's information should be information that's already within the possession of Union inasmuch as it relates to the contract. But my friend has raised a legitimate point, which I will certainly try to satisfy. 861 MR. SOMMERVILLE: Thank you. 862 Mr. Smith, I have some sympathy for the point of view you've expressed, and if there are some adjustments that you may want to seek as we go forward, we'll entertain them as they arise. 863 Is that satisfactory? Mr. Brown, with respect to the confidentiality aspect, it's my preference that if we're going to have confidential material, that we segregate that material as effectively as possible, and that usually means that the cross-examination, and probably all of the cross-examination if it's going to involve shifting from confidential matters to non-confidential matters, should all happen in camera, and that we would try to keep that entire piece protected as a confidential section of the proceeding rather than have a kind of switching in and switching out kind of approach. So the parties may want to think about how to organized that. It just seems to me that that's just, by far, the easiest, cleanest and simplest way to manage that. 864 The other thing that is part of our practice is that where other parties have an interest in the subject matter, that they may be permitted to remain for the confidential material so long as their counsel is -- their counsel may be able to remain so long as counsel is prepared to execute an undertaking with respect to the confidential material. 865 So that's how I would see that happening. Subject to -- I'm prepared to hear submissions on some other way of going about it. But I think dealing with the entire cross-examination in an in-camera basis is probably the best way of handling it. And if counsel for other parties want to participate, they should expect to have to execute an undertaking with respect to the confidential material and you can work out with Mr. Smith the details of that undertaking and we can go from there. There are precedents around and -- 866 MR. BROWN: I understand a week and a half ago or so there was a panel whose testimony was held in camera, so if there was a confidentiality undertaking given in there, perhaps I could see the form of that and probably form a good basis for it. 867 MR. SOMMERVILLE: I'm sure Mr. Moran can be of assistance in that. 868 Is there anything further? Is that satisfactory? 869 MR. BROWN: Yes, thank you, Mr. Chair. 870 MR. SMITH: Yes, Mr. Chairman. There are a number of undertakings that Union has provided. I'll just put those on the record. They are Undertakings N.6.5, 12.9, 14.4, 14.5, 16.1, 16.14, 17.3, 17.4, and 17.5. 871 MR. SOMMERVILLE: Thank you. 872 MR. SMITH: Copies of those have been made available, and with your indulgence, over the lunch break we attempted to resolve this issue relating to Interrogatory J.5.87 and whether or not we could come up with an appropriate undertaking. Mr. Reghelini has spoken to Mr. Quinn and I think if I can just put it through Mr. McMahon, I think we can put that undertaking on the record. 873 Mr. McMahon, without further ado, can you advise us as to what you're able to do? 874 MR. McMAHON: Our understanding of the request from Mr. Ryder would be to recalculate the storage-demand allocator used to allocate deliverability-related costs for the T3 rate class as if the T3 customer was part of the M9 rate class based on parameters within the cost study. And then from that calculation, we can redo the calculation of ratio of storage demand to space allocation for the T3 rate class that's shown at the bottom of Exhibit J.5.87. 875 The one caveat, the one thing that we wouldn't be able to do is change the overall design-day allocation of storage because we won't be able to rerun Union's storage planning forecast at this stage. So we'll be using the parameters that are existing in the cost study. 876 MR. SMITH: Thank you, Mr. McMahon. 877 MR. MORAN: Mr. Chair, that would become Undertaking N.19.7. 878 MR. SOMMERVILLE: : Mr. Ryder, is that satisfactory? 879 MR. RYDER: Yes, it is. 880 MR. SOMMERVILLE: Thank you. 881 UNDERTAKING NO. N.19.7: TO RECALCULATE THE STORAGE-DEMAND ALLOCATOR USED TO ALLOCATE DELIVERABILITY-RELATED COSTS FOR THE T3 RATE CLASS AS IF THE T3 CUSTOMER WAS PART OF THE M9 RATE CLASS BASED ON PARAMETERS WITHIN THE COST STUDY; AND THEN, FROM THAT CALCULATION, TO REDO THE CALCULATION OF RATIO OF STORAGE DEMAND TO SPACE ALLOCATION FOR THE T3 RATE CLASS AS SHOWN AT THE BOTTOM OF EXHIBIT J.5.87 882 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 883 M.KITCHEN; Previously Affirmed. 884 P.McMAHON; Previously Sworn. 885 CROSS-EXAMINATION BY MR. RYDER: 886 MR. RYDER: Just while we're on the topic, the caveat you mentioned, can you just run that by me again? 887 MR. McMAHON: About the -- we won't be re-doing the storage planning forecast? 888 MR. RYDER: Well, that gives a total for all infranchise needs? 889 MR. KITCHEN: Mr. Ryder, the caveat really means that if, in actual fact, the T3 rate class was treated as a bundled class, there may be, and I'm not sure what the impact would be, but there may be a difference in the outcome of the Dawn peaks model, which is run by Mr. Faye, to determine the total amount of deliverability required. We're not going to ask Mr. Faye to run the Dawn peaks model. 890 MR. SOMMERVILLE: So I take it the undertaking is satisfactory? 891 MR. RYDER: It is. 892 MR. SOMMERVILLE: Thanks very much, Mr. McMahon. 893 MR. RYDER: Can I ask you on the same subject to turn to Exhibit G.3, tab 5, schedule 26, page 2. Schedule 26, page 2. 894 MR. SMITH: It's binder G.2? 895 MR. McMAHON: Volume 2 of -- 896 MR. RYDER: G.3, tab 5, schedule 26, page 2. Do you have that, panel? 897 MR. McMAHON: Yes, I do. 898 MR. RYDER: And line one is design-day demand; right? 899 MR. McMAHON: Yes. 900 MR. RYDER: And the next step in the process is to deduct design-day deliveries; right? 901 MR. McMAHON: That's correct. 902 MR. RYDER: And that nets out, and then the third line is net from storage? 903 MR. McMAHON: Correct. 904 MR. RYDER: And if you divide -- and that number is 1,340 103m3. 905 MR. McMAHON: Per day, yes. 906 MR. RYDER: Per day. And if you divide -- and as a percentage, rather, of the total storage at the bottom of the page of 89,300, you get the percentage of 1.5. 907 MR. McMAHON: That's correct. 908 MR. RYDER: Now, what's the difference between design-day deliveries and DCQ? 909 MR. McMAHON: Well, the design-day deliveries that are shown there are the deliveries we expect on the design day. 910 MR. RYDER: So the deliveries you expect for the class to arrange. 911 MR. McMAHON: From each of the classes, right. 912 MR. RYDER: And isn't that the definition of DCQ? 103m3. 913 MR. McMAHON: I'm not entirely sure what all is incorporated into the DCQ. 914 MR. RYDER: Well, I understand that the DCQ is a contractual number; am I right on that? 915 MR. McMAHON: Yes. 916 MR. RYDER: And that the contractual DCQ for the T3 class is -- T3 customer is 900? 917 MR. McMAHON: I'll have to take your word for that, but I'm sure. 918 MR. RYDER: All right. So it seems that the design-day deliveries are about -- are considerably higher than the DCQ. 919 MR. McMAHON: Well, the design-day deliveries we're showing in this schedule is actually the difference between the design-day demand and the net from store number, the 1.5 percent, so it's a calculated number within this allocation. 920 MR. RYDER: So it's a sort of a plug. 921 MR. McMAHON: It's not a plug per se. It's that we know two out of the three numbers and we're just calculating the third. 922 MR. RYDER: Now, is there -- but as a design-day delivery number, if that was increased, per se, then the net from storage would be reduced. 923 MR. McMAHON: That's correct. 924 MR. RYDER: And if it was reduced, then the net from storage would be increased. 925 MR. McMAHON: That's right. 926 MR. RYDER: And is the design-day amount, is there a discretion that goes into determining the design-day amount? I mean, I can see on -- for the T3 class that it's derived from the contractual numbers of 89,300 for the storage space and the contractual 1.5 percent for deliverability, so that gives you the bottom line and the third line, and because you have the peak, you then can determine what the design-day deliveries are. So the design-day deliveries for the T3 class flow from the contractual numbers. But where do they flow absent the contract for the other classes? 927 MR. McMAHON: Well, again, we are given the design-day demand amounts and the net-from-storage amounts. The calculation is the same for each rate class, whether it's a contracted amount or not. 928 MR. SMITH: No, whether it's contractual or not. 929 MR. RYDER: And do you have any information to provide with respect to the derivation of the design-day deliveries for the non-contractual? 930 MR. KITCHEN: I think the way you look at that line is to the extent that you have a peak-day demand that's determined by Mr. Hyatt tell by rate class and you have a design-day deliveries in total for infranchise markets determined by the storage planning group, if you have a difference between that design day, those deliveries -- sorry, the difference between that and what is coming out of the ground, that amount has to arrive either on -- either in the form of an obligated DCQ or in the form of some other incremental supply. So whatever the deliveries are required to meet the design-day requirement in total. So what that shows you is if you take the amount coming out of the ground plus the amount arriving and whether that's through obligated supplies or some other method, that's the total supply required to meet the design-day deliveries. 931 MR. RYDER: Well, for the T3 class, it dependent upon what comes of the out ground; right? 932 MR. KITCHEN: Well, if their contracted DCQ is 1.3 106 per day, and your contracted -- and your design-day demand, as we've modelled it, is a higher number, then the combination of your DCQ and incremental deliveries, that's what we required. Now, that could be spot at Parkway, that could be spot at Dawn. It's deliveries that you would have to make on top of your DCQ to make your design-day demand, based on the parameters that you have in your contract. 933 MR. RYDER: Absent a contract, how is it derived? 934 MR. KITCHEN: Well, we have an allocation -- we have an allocation by rate class of the design-day demand, we have an allocation of the net-from-store based on design-day demand, so the difference has to come from deliveries on design day, and that's either through DCQ or deliveries made by Union and spot. 935 MR. RYDER: I think my point is, though, that absent a contractual basis for the net from storage, the design-day delivery amount is subject to Union's discretion. I mean, you can increase the amount that a customer has to bring in from storage or you can reduce it, simply by altering the design-day requirement -- sorry, the design-day delivery. 936 MR. McMAHON: Are you talking operationally or from a planning perspective? 937 MR. RYDER: I'm talking about planning. 938 MR. McMAHON: I don't think it's at our discretion in that when the planning groups provide us with the demand and the storage forecast, that's what we're using to develop this allocation factor. 939 MR. RYDER: So in any event, if the design-day deliveries are set at a number that -- the design-day deliveries, insofar as they are above the DCQ, have to be made up other supplies, such as spot gas. 940 MR. McMAHON: That's true. 941 MR. RYDER: And the design-day deliveries set out for T3 is 1,218, and I take it that's a number peculiar to T3s that just flows out from this calculation? 942 MR. McMAHON: That's correct. 943 MR. RYDER: Now, does your storage rate recover a hundred percent of your storage costs to the T3 class? 944 MR. KITCHEN: Storage rate for T3 is the same as the storage rate for T1 and it's based on the total cost base -- the total costs allocated to storage divided by, essentially, the total units of storage. I'm not -- I don't actually have in front of me anything that I can tell you whether it recovers all of it. It recovers most of it, I'm sure. I can undertake to provide that, though. 945 MR. RYDER: Can you? 946 MR. KITCHEN: Yes. 947 MR. MORAN: Sorry, Mr. Chair, could we have the undertaking restated again, please. 948 MR. KITCHEN: Undertake to provide the recovery of storage costs through the T3 storage rate. 949 MR. MORAN: That will be Undertaking N.19.8, Mr. Chair. 950 MR. SOMMERVILLE: Thank you. 951 MR. RYDER: And if there's a deficiency in the sense that the rate doesn't recover a hundred percent of the storage cost, where is the deficiency covered? 952 MR. KITCHEN: Just one moment, please. 953 At J.5.68 we provided a response to an interrogatory indicating that, to the extent that there are any charges remaining or any underrecovery, that those would be covered through the transportation demand charges. That's on page 2. 954 MR. RYDER: And your Undertaking N.19.2 -- the one you just gave? 955 MR. MORAN: 19.8. 956 MR. RYDER: Sorry, 19.8. That will tell us the amount of the deficiency that is recovered in the transportation charge? 957 MR. KITCHEN: It would appear -- actually, if I could ask you to turn up Exhibit H.3, tab 1, schedule 2, page 15. 958 MR. SOMMERVILLE: Could you give us that citation again, Mr. Kitchen? 959 MR. KITCHEN: That was H.3, tab 1, schedule 2, page 15 of 18. 960 MR. SOMMERVILLE: Thank you. 961 MR. RYDER: We have it. 962 MR. KITCHEN: At the bottom of the schedule you can see the T3 rate by component. 963 MR. RYDER: Yes. 964 MR. KITCHEN: And in column E -- sorry, in column F it shows the revenue excess of deficiency after rate design. 965 MR. RYDER: Yes. 966 MR. KITCHEN: And you can see in that column that there's approximately $16,000 of overrecovery of storage costs, so an excess, and the remaining rates are not adjusted. 967 MR. RYDER: Thank you. 968 MR. KITCHEN: Does that provide you with the answer to the undertaking as well? 969 MR. RYDER: Yes, it does. 970 MR. KITCHEN: I'll just, in terms of the undertaking, attach the schedule. 971 MR. SOMMERVILLE: That's fine. We could just back up and delete it. 972 MR. MORAN: Or note it's been answered. 973 MR. SMITH: That might be preferable. 974 MR. RYDER: Now, the allocation of space received from the schedule at G.3, tab 5, schedule 26, page 2, that the space allocation is 89,300, and I take it that costs are allocated on the basis of that allocation? 975 MR. KITCHEN: Yes. 976 MR. RYDER: And if the space allocation to the rate class is reduced after the rates have been set but before the next rate case, that would result in a reduction in the cost to serve the T3 class? 977 MR. McMAHON: I guess it depends on what happens to space overall and what percentage the new number, if it's not 89,300, would have as a percentage. 978 MR. KITCHEN: There would be also a corresponding reduction in the amount of revenue recovered since the rate that is applied to the T3 rate schedule is a system average of all of Union's storage costs. 979 MR. RYDER: Now I'd like to turn to another subject which is Exhibit M.4.1. 980 MR. KITCHEN: We have it. 981 MR. RYDER: Now, can you turn to page 2, please. 982 MR. SOMMERVILLE: Mr. Ryder, you just made reference to the figure 89,300. 983 MR. RYDER: Yes. 984 MR. SOMMERVILLE: Could you clarify for the record precisely what that number is exactly? 985 MR. RYDER: Yes. It was 89,300 103m3 which is the storage space to the T3 class shown in Exhibit G.31, tab 5, schedule 26. 986 MR. SOMMERVILLE: 89,300. 987 MR. RYDER: Yes. 988 MR. SOMMERVILLE: Thank you. 989 MR. RYDER: Mr. Kitchen, you were one of the authors of this interrogatory response? 990 MR. KITCHEN: Yes. I don't remember it specifically, but, yes. 991 MR. RYDER: Well, I don't blame you. It was in 1998. 992 On page 2, it shows customer A, which, I take it, is Kitchener. 993 MR. KITCHEN: Yes. 994 MR. RYDER: And it shows a forecast for calendar '99 of 296,501. 995 MR. KITCHEN: Yes 996 MR. RYDER: So is that what it was for -- can you confirm that that was the volume forecast for the City of Kitchener for calendar 1999? 997 MR. McMAHON: I believe this interrogatory was responded to based on white-page filings and doesn't necessarily correspond to any numbers that were in the final decision but would have gone into 1999 rates. 998 MR. RYDER: We see that Union has a practice of not normalizing the M9 volumes, so it wouldn't change, would it, from white page to blue page to yellow page? 999 MR. KITCHEN: It could change through updates to the forecast. 1000 MR. RYDER: Well, can you confirm whether this is the number that was presented to the Board for that rates case? 1001 MR. SMITH: Mr. Chairman, I mean I suppose it was clearly presented -- whatever it is, it was part of an interrogatory that would have been filed with the Board, so the answer to that is clearly yes. My concern I have with this is Mr. Quinn cross-examined Mr. Newbury at some length with respect to this interrogatory, so I suppose I'd urge my friend to link his questions to cost allocation and rate design questions because this was a subject that was canvassed at some length with Mr. Newbury. 1002 MR. RYDER: Well, he said that it wasn't his number and he couldn't speak to it and advised us to refer to Mr. Kitchen, so that's what I'm doing. 1003 All I ask is that for Mr. Kitchen and Mr. McMahon to undertake to tell me if that number was updated, and if it was updated in that case, what the number was. 1004 MR. KITCHEN: I can take that on. 1005 MR. RYDER: Thank you. 1006 MR. MORAN: Mr. Chair, Undertaking N.19.9. 1007 MR. SOMMERVILLE: I think we deleted point 8. 1008 MR. MORAN: Did we delete it or just mark it answered? I can't remember. 1009 MR. SMITH: Sorry, I thought we had deleted it. 1010 MR. MORAN: All right. I'll note it deleted 19.8, undertaking to advise if the 296,501 figure in Exhibit J.31 -- in Exhibit M.4.1, page 2, line 1, was updated in the course of that proceeding. 1011 UNDERTAKING NO. N.19.8: AN UNDERTAKING TO ADVISE IF THE 296,501 FIGURE IN EXHIBIT M.4.1, PAGE 2, LINE 1, WAS UPDATED IN THE COURSE OF THAT PROCEEDING 1012 MR. SOMMERVILLE: I'm assuming you don't have that information, Mr. Ryder. 1013 MR. SMITH: That is -- if it's publicly filed, then that information -- 1014 MR. RYDER: I can't answer that without getting back to my office. 1015 MR. SOMMERVILLE: Fair enough. 1016 Mr. Kitchen has indicated that he can answer it and we'll proceed. Thank you. 1017 MR. RYDER: The allocation of transmission-demand cost, we've learned that they're based on peak demand but the billing units for the rates are based on CD; am I right, Mr. Kitchen? 1018 MR. KITCHEN: I'm just trying to clear some space. 1019 Sorry, Mr. Ryder? 1020 MR. RYDER: The billing unit for transportation-demand costs are based on CD. 1021 MR. KITCHEN: Yes. 1022 MR. RYDER: And so if the CD is increased after the rate case, then the revenue Union will receive under the rate will increase. 1023 MR. KITCHEN: If the CD is increased without a corresponding decline in the rate, yes, there would be a ... 1024 MR. RYDER: And generally speaking, an increase in the CD will -- the resulting revenue will outstrip the resulting increase in costs? 1025 MR. KITCHEN: Yes, I would say that I believe it would, yes. 1026 MR. RYDER: So it's important to get the class -- for a customer class, it's important to get the class CD correct before the rates case. 1027 MR. KITCHEN: It's important -- well, from my point of view, the CD is the only method of which we have to recover to bill on, so I have to use what I have to calculate the rate. So I'm not sure I can do anything else other than calculate a rate based on a contracted CD, because Union wouldn't bill for that CD and would underrecover until such time as the rate changed. 1028 MR. RYDER: Now, peak demand, the calculations for peak demand for the T1 class, is that the sum of the CDs or is that determined by -- of all the customers? How is the peak demand determined? 1029 MR. KITCHEN: The peak demand for T1? 1030 MR. RYDER: Yes. 1031 MR. KITCHEN: It's a better question for -- it's not really a question that I can answer. I believe it's the sum of the CDs, and there may be some other factors in there as well. I'm not sure if Mr. Hyatt does an adjustment to those CDs or not. 1032 MR. RYDER: Now, we've seen that, in anticipation of the unbundling initiative in 0017, that the storage allocation was reduced by 2.4 percent. 1033 MR. KITCHEN: You mean that the space was reduced by 2.4 percent? 1034 MR. RYDER: Yes, the space allocated to the customer classes -- 1035 MR. KITCHEN: You're talking about the 96 -- 1036 MR. RYDER: 97.6 percent. 1037 MR. KITCHEN: Yes. 1038 MR. RYDER: So so what's -- is that space costed and allocated to customers currently? 1039 MR. KITCHEN: The determination of the 97.6 percent as part of the unbundling hearing was meant to provide an adjustment for customers that are summer-peaking because they actually provide a -- they have a net-zero storage, and it was to ensure that customers get their proper allocation. In terms of the cost study, the total space is included in the allocation. 1040 MR. RYDER: So what's happened to the space? 1041 MR. KITCHEN: Nothing has happened to the space. The space is there. It's just that that factor adjusts for diversity within the -- within the total space when allocating it for the purposes of unbundling. Space doesn't go anywhere. 1042 MR. RYDER: Well, it's not used for -- in terms of the notion that costs should be incurred by the classes, that space isn't incurred -- isn't used by the classes. 1043 MR. KITCHEN: And it's factored into the -- it's factored into the demand forecast and it's factored into the total allocation of the space that's allocated to each bundled rate class. 1044 MR. RYDER: Well, it's reserved for the anticipation of unbundling, isn't it? 1045 MR. KITCHEN: It's not reserved for anybody, no, sir. 1046 MR. RYDER: But, it has -- 1047 MR. KITCHEN: It hasn't been reserved. It's a factor that is used to adjust an aggregate excess calculation to make sure the customer gets the appropriate allocation of space when they unbundle. It's not like system integrity where there's a space set aside to manage anything. 1048 MR. RYDER: Well, does that space get any use absent unbundling? 1049 MR. KITCHEN: Overall, it's factored into the calculation in the allocation of costs. It's not something that's set aside; it's not something that's used. It's implicit in the demand forecast and in the calculation of rates -- in the calculation of storage space, sorry. 1050 MR. RYDER: So we pay for a hundred units of storage and we receive 97.6 units of storage. 1051 MR. KITCHEN: How do you figure that? 1052 MR. RYDER: Because we don't receive -- well, you tell me. Are we allocated the cost of a hundred units and is 2.4 of those units reserved for unbundling? 1053 MR. KITCHEN: No, there's not. There's no recognition within the cost-allocation study for the 97.6 percent adjustment. That's only an adjustment that's recognized if a customer unbundles. It's implicit in the calculation of storage because those summer demands are in the demand forecast. We don't strip those demands out, in other words, before we do the calculation of aggregate excess that appears as Exhibit G.3, tab 5, schedule 26. 1054 MR. RYDER: So it's not taken into account when you allocate costs. 1055 MR. KITCHEN: No, what I'm saying is it's implicit in the calculation of aggregate excess. It's only there when a customer unbundles, and it's really there to recognize the fact that there is diversity within the storage and there are pools as a result of summer-peaking. 1056 I think that you're confusing apples and oranges here. The bundled or the calculation of aggregate excess is based on demand forecast, and in the demand forecast we have all demands, not just the demands of customers that use storage per se or summer-peakers. 1057 MR. RYDER: I want you to turn to the second last -- the last page of J.5.87, for the purposes of just showing you what the excess-over-aggregate formula looks like. 1058 It's the last attachment so it's the last page of the exhibit. Do you see that, Mr. Kitchen? 1059 MR. KITCHEN: Yes, I have it. 1060 MR. RYDER: And so for cost purposes, customer A, whoever that is, it's probably Kitchener, gets allocated the cost of 75.922 units. 1061 MR. KITCHEN: If -- no. No. Because if Kitchener was to take the U9 service or, actually, in terms of their T3 allocation, they would take the aggregate excess calculation times the factor. Then in terms of the allocation of costs, what was in your contract would go into the cost study. 1062 MR. RYDER: Well, let's take customer B, just to get us away from Kitchener. Does customer B, under today's proposal, assuming that customer B's forecast for 2004 was 22,848 103m3, would customer B get allocated the cost of line 5 or line 6? 1063 MR. KITCHEN: It's not about allocating costs. If they were to unbundle, they would receive the 47,676 in space. 1064 MR. RYDER: Yes, that's what they get. But what costs are they allocated, the cost of 4776? 1065 MR. KITCHEN: The rate that they pay -- 1066 MR. RYDER: Sorry, or 4894. 1067 MR. KITCHEN: The rate that they would pay -- actually, let's go back. If this was not the City of Kitchener and City of Kitchener was still an M9 customer and this was the allocation for another unnamed wholesale customer, then what would appear in the cost study would be 4776. 1068 MR. RYDER: And so what happens to the -- how is that 2.4 percent dealt with in terms of costs? Who has to pay for that? 1069 MR. KITCHEN: In the cost study, the total costs of space are allocated, so to the extent that there is a difference, any difference flows to any other rate class. It's really recognizing that when you unbundle, that's the storage allocation that you get. 1070 MR. RYDER: I see. Can I ask you to turn up 9 -- sorry, N.9.11. 1071 MR. SMITH: I'm sorry, I missed that, Mr. Ryder. 1072 MR. RYDER: N.9.11. Now, you may or may not be able to speak to this, Mr. Kitchen and Mr. McMahon, so just tell me. But I'd ask for your comments, if you're able to comment on it. I'm really dealing with paragraph 4. Are you able to tell me, first of all, if the starting point was a year 2000 estimated consumption of 299,000, 103m3, is that what is meant by paragraph 4A? 1073 MR. KITCHEN: It says the year 2000 estimated consumption equals 299 106m3. 1074 MR. RYDER: So that would be 299,000 103m3. 1075 MR. KITCHEN: Yes. 1076 MR. RYDER: And when I add 2 percent every year, I get a five-year average of 311,202 103m3. Would you take that subject to check? 1077 MR. KITCHEN: I can take it subject to check. 1078 MR. RYDER: All right. And in Exhibit M.19.3 -- 1079 MR. KITCHEN: Sorry, which was that? 1080 MR. RYDER: M.19.3 which was a part of the cross-examination materials that Mr. Quinn sent to you in October. 1081 MR. KITCHEN: Last October? 1082 MR. RYDER: Yes, October last. And you'll see paragraph 4, he disputes -- he sort of rebuts Mr. Simpson's method of calculating -- arriving at the 89,300 103m3 allocation of storage and gives his own explanation. Do you have any comment that you wish to make on that? 1083 MR. KITCHEN: I can't really comment, no. 1084 MR. RYDER: All right, thank you. 1085 Can I turn to another topic, intervenor costs, and that's addressed in Exhibit J.5.69. 1086 MR. McMAHON: We have it. 1087 MR. RYDER: And in your schedule attached at the second page, you've shown the allocation of administrative costs and I understand that intervenor costs are a component of administrative costs; am I right? 1088 MR. McMAHON: That's right. 1089 MR. RYDER: How much of the 379,000 of administrative costs is made up of intervenor costs? 1090 MR. McMAHON: I don't know. 1091 MR. RYDER: Can you undertake to provide me with that? 1092 MR. McMAHON: I'm not sure that we can break down the costs, because basically this is on a planned basis, and included in there would be an overall cost for a rate hearing proceeding. And I'm not sure that the budget would have gone down that fine that we would be able to identify the intervenor-related costs. 1093 MR. RYDER: Could you do so for the last rates case? Could you give us the administrative costs for the last rates case and the amount that was made up of intervenor costs for the T3 class so we can get an idea of the magnitude? 1094 MR. McMAHON: The last rates case being which case? 1095 MR. RYDER: 0017. 1096 MR. SMITH: That was the unbundling case, wasn't it? 1097 MR. RYDER: Unbundling and PBR, and this was the study of base rates for the year 2000. 1098 MR. McMAHON: We can undertake to see if those costs -- that cost breakdown is available. 1099 MR. RYDER: Do you know the total of intervenor costs? 1100 MR. McMAHON: In 2004? 1101 MR. RYDER: Yes. 1102 MR. McMAHON: No. 1103 MR. RYDER: You haven't even got a planned amount for that category? 1104 MR. McMAHON: From a cost-allocation perspective, we don't need to know the minute detail that goes into the budgeting for each department. 1105 MR. RYDER: All right. So let's return to your undertaking, and that is to provide the breakdown of administrative costs and intervenor costs included in administrative costs for the T3 class. 1106 MR. SMITH: No, the undertaking was to look at Union's records and to determine whether or not that information is available, and I suspect, because we can't do it now, that we're going to come back to the answer that it wasn't available back then either. But we'll certainly take a look to see if we can determine that. 1107 MR. MORAN: Undertaking M.19.9. 1108 UNDERTAKING NO. N.19.9: TO PROVIDE INFORMATION, IF AVAILABLE, SHOWING THE BREAKDOWN OF ADMINISTRATIVE COSTS AND INTERVENOR COSTS INCLUDED IN ADMINISTRATIVE COSTS FOR THE T3 CLASS 1109 MR. SMITH: And that was for the 1999-0017 case. 1110 MR. RYDER: Well, tell me, Mr. McMahon, you're the expert, how would I approach a determination of the amount of intervenor costs that the T3 class is bearing? Surely it's a readily identifiable sum, the total amount of intervenor costs. 1111 MR. McMAHON: Again, without knowing the breakdown of what the budget components would be for the cost of a rate proceeding, I would have no idea how you would guess. 1112 MR. RYDER: Well, just to be clear, is your Undertaking M.19.8 -- is it .9? 1113 MR. SMITH: I think we're at .9. 1114 MR. RYDER: Would that give me an idea of the amount of intervenor costs you're asking us to pay in this case? 1115 MR. McMAHON: Again, I'm not sure that it would because the costs of the proceeding and the inherent intervenor costs in that number may not be comparable. 1116 MR. RYDER: Well, do you know the ratio of intervenor cost to administrative costs in past cases, generally speaking? 1117 MR. McMAHON: No, I don't. 1118 MR. RYDER: And is that not ascertainable? 1119 MR. McMAHON: I suspect that there is some tracking of the intervenor costs paid, at least in total. But until we take a look at the records, I'm not sure how much detail is available within the accounts. 1120 MR. RYDER: Okay. Now, do you understand that in M.19.9, that you're going to do your best to tell me -- provide me with an estimate of the amount of intervenor costs allocated to the T3 class in 0017? 1121 MR. McMAHON: It will be easier to try to identify the intervenor costs in that proceeding as opposed to what may have been incorporated in rates for a T3 rate class -- or any rate class. 1122 MR. RYDER: But you're going to try to do that, though? 1123 MR. McMAHON: Yes. 1124 MR. RYDER: You're going to try to tell me how much was incorporated in the rates? 1125 MR. McMAHON: Yes. 1126 MR. RYDER: Thank you. 1127 Advertising costs. We don't get much of those but we get some. And Enbridge doesn't get any, I take it? Is that what's shown on J.5.69? 1128 MR. McMAHON: J.5.69. Right. There are no advertising costs allocated to the M12 class. 1129 MR. RYDER: And that would include Enbridge and all the other local distribution companies? 1130 MR. McMAHON: That would be all exfranchise. 1131 MR. RYDER: And you regard us as infranchise? 1132 MR. McMAHON: That's correct. 1133 MR. RYDER: All right. Now, J.5.74, can you turn that up, please. This is my last area. 1134 MR. McMAHON: Yes, I have that. 1135 MR. RYDER: And it shows that if you increased the through-put volume to Kitchener to the amount that Kitchener is claiming it -- to be its forecast, you'd increase the allocated cost by 73,000. 1136 MR. McMAHON: That's right. 1137 MR. RYDER: And then J.5.85 supplemental shows that an increase in volume would only increase revenues by 15,000. Have I read that interrogatory response correctly? Based on proposed rates. 1138 MR. KITCHEN: Where are you getting the 15,000 from, Mr. Ryder? 1139 MR. RYDER: Column F minus column C. 1140 MR. KITCHEN: Assuming that we determined the costs allocated based on the forecast that we have and then applied the new revenues, yes, we'd see -- or those rates to those volumes, then $15,000 is the impact. 1141 MR. RYDER: Now, is it not your experience that when volumes are increased beyond forecasted volumes following a rates case, for example, during a colder-than-normal winter, the increase in revenues outstrip the increase in costs? 1142 MR. KITCHEN: Not necessarily, no. 1143 MR. RYDER: Doesn't it happen in every case that the chances of you reaching or exceeding your ROE is increased if you increase your volumes -- 1144 MR. KITCHEN: I think that depends largely on how we're recovering those costs. If volume increases without a corresponding increase in demand and rates are based -- recovery is based on demand, then we don't see necessarily an increase. To the extent that there's volume increases and those -- and the rates essentially recover a variable cost component, like fuel and UFG or something, then we wouldn't expect to see a huge increase as a result of that. 1145 MR. RYDER: Can you identify any colder-than-normal winter, going back as far as you like, where your increased revenues did not exceed your incremental costs? 1146 MR. KITCHEN: I think what -- 1147 MR. RYDER: Can you identify a -- 1148 MR. SMITH: Sorry, Mr. Ryder, just let the witness finish. 1149 MR. RYDER: Mr. Chairman, we've been through this. It's a simple question. I asked him to identify a winter of colder-than-normal weather that he can identify, going back as far as he likes, where an increase in revenues did not outstrip the increase in cost. 1150 MR. SOMMERVILLE: Mr. Kitchen, you can answer that question. 1151 MR. KITCHEN: To the extent that it is colder than normal, then we would see incremental revenues that would outstrip cost. But I was going to answer it in the context of this IR that would indicate that, for the T3 rate class, a recovery is not necessarily impacted by much more than the variable component. 1152 MR. RYDER: So your answer to my question that whenever there's an increase in volumes due to colder-than-normal weather, whether that always produces incremental revenues which exceed incremental costs, your answer is that they always do; am I right? 1153 MR. KITCHEN: I believe that they do, and I would like to check that out. But, yes, I believe that they would -- 1154 MR. RYDER: Would you like an undertaking to provide me with -- 1155 MR. KITCHEN: I think that would make me feel more comfortable, yes. 1156 MR. RYDER: Okay, sir. 1157 MR. MORAN: Mr. Chair, how would they like to describe the undertaking? 1158 MR. KITCHEN: Something that makes me -- undertake to provide a comparison between -- is it -- you're looking for the recovery in a colder-than-normal winter versus the approved recovery? 1159 MR. RYDER: Yes. 1160 MR. KITCHEN: I'll try it again. Provide the comparison between approved recovery and actual recovery in a colder-than-normal winter. 1161 MR. MORAN: That will be Undertaking N.19.10. 1162 MR. SOMMERVILLE: As compared to incremental cost I think was the other part of the picture. 1163 MR. SMITH: That's correct. Just simple confirmation that recover more than it costs. 1164 UNDERTAKING NO. N.19.10: TO PROVIDE THE COMPARISON BETWEEN APPROVED RECOVERY AND ACTUAL RECOVERY IN A COLDER-THAN-NORMAL WINTER AS COMPARED TO INCREMENTAL COST; AND TO EXPLAIN WHY THIS IS NOT NECESSARILY TRUE FOR THE RATE T3 CLASS; AND TO VERIFY IF THE VARIABLE CHARGE REVENUE WILL OUTSTRIP THE COSTS 1165 MR. RYDER: Now, I just want to get my head around why that won't necessarily be so for the T3 class. 1166 MR. KITCHEN: The majority of the costs of T3 are recovered through demand-type rates. So to the extent that there's a variable, if there's an increase in volume as a result of weather and you don't necessarily -- you're still going to pay us the same demand charges irrespective of the weather, the only components that will change will be those that vary -- that are commodity-related. So you would provide for fuel, you would provide for UFG, and the variable components would also go up. 1167 MR. RYDER: But won't the revenue from the variable charge, which is this commodity, won't those revenues generally, invariably outstrip the costs? 1168 MR. KITCHEN: I would have to check. 1169 MR. RYDER: Is that another undertaking? 1170 MR. KITCHEN: It's the same undertaking, I think. 1171 MR. RYDER: Well, no, this is just T3. 1172 MR. KITCHEN: Can we add it to the -- 1173 MR. RYDER: Yes. We'll add it to the original undertaking. If T3 is different from all the other rate classes, doesn't that suggest that there's something fundamentally wrong with the T3 rate structure? That we should be the only one where incremental costs outstrip incremental revenues? 1174 MR. KITCHEN: I'm not sure that you are different. I'm not suggesting that you are. 1175 MR. RYDER: Is there any other class where it's possible that incremental costs would outstrip incremental revenues? 1176 MR. KITCHEN: I don't know offhand, no. 1177 MR. RYDER: Well, if you do know of any, you can put that in your undertaking response? 1178 MR. KITCHEN: Certainly. 1179 MR. RYDER: Thank you, sir. Thank you, panel. 1180 MR. SOMMERVILLE: Thank you, Mr. Ryder. 1181 We'll take 15 minutes and reconvene at 20 minutes after 3:00. Thank you. 1182 --- Recess taken at 3:10 p.m. 1183 --- On resuming at 3:25 p.m. 1184 MR. SOMMERVILLE: Thank you. Please be seated. 1185 You're the last man standing, Mr. Aiken. With all due, respect, of those who I expect will actually be asking questions. Although... Mr. Scully? 1186 MR. SCULLY: Well, I think Mr. Aiken is set to go ahead of me. I really didn't think I'd be called today, but if I have to, I can go ahead. 1187 MR. SOMMERVILLE: Why don't we start with Mr. Aiken and go from there. Thank you. 1188 CROSS-EXAMINATION BY MR. AIKEN: 1189 MR. AIKEN: Panel, Mr. McMahon, Mr. Kitchen, I want to start with Exhibit H.1, tab 1, and this is the H.1, tab 1, dated October 2003 as the reply evidence to Coral Energy. And I'm going to just be referring to appendix B to that evidence. 1190 MR. KITCHEN: Yes. 1191 MR. AIKEN: Am I correct that the first page of the schedule at appendix B shows the average rate increase for an M7 customer of eliminating the delivery-commitment credit to be 34 percent? 1192 MR. KITCHEN: Yes, I believe that was the number. 1193 MR. AIKEN: And that 34 percent is on the delivery component of rates only? 1194 MR. KITCHEN: Yes. 1195 MR. AIKEN: And then the second page shows a similar number of 36 percent for a T1 customer? 1196 MR. KITCHEN: Yes. 1197 MR. AIKEN: And do you agree that the Board phased in the elimination of the DCC over five years because of the significant impact if the increase were to take place in one year? Is that your understanding? 1198 MR. KITCHEN: That's what the Board's decision said, yes. 1199 MR. AIKEN: Would you take it, subject to check, that in EBRO 499, in Exhibit H.3, tab 1, schedule 2, and I believe it was a yellow page ADR schedule, that the total allocated cost to the M10 rate class was approximately $57,000? 1200 MR. KITCHEN: I'll take that subject to check, yes. 1201 MR. AIKEN: And in the current filing, at H.3, tab 1, schedule 1 updated, the cost allocated to the M10 rate class is approximately $60,000. 1202 MR. KITCHEN: I'll take that, yes. 1203 MR. AIKEN: In EBRO 499, would you also take it, subject to check, that the M10 volumes as a result of the ADR were approximately 12,031 103m3? 1204 MR. KITCHEN: Yes. 1205 MR. AIKEN: And that in the current forecast, those volumes are approximately 550 103m3? 1206 MR. KITCHEN: Yes. 1207 MR. AIKEN: Can you explain to me why there's an increase in allocated costs to the M10 rates despite the fact that their volumes are less than half of what they were between those two rate cases? 1208 MR. McMAHON: Mr. Aiken, I don't have the details behind which costs have gone up, other than there's been a significant increase overall in costs between 499 and 2000 and a corresponding allocation. 1209 MR. AIKEN: If I could have you turn to H.3, tab 1, schedule 1 updated, this is the yellow-page update from October. 1210 MR. KITCHEN: Sorry, that was H.3, tab 1? 1211 MR. AIKEN: Schedule 1, page 1. And I'm going to be comparing the yellow page to the original evidence on the white page. 1212 MR. KITCHEN: Sorry, I have it. 1213 MR. AIKEN: Okay. If you look at column D, line 20, which is a total south delivery cost, the revenue requirement has dropped from 550,925 to 550,329, but when you look at lines 17, the cost allocated to the M10s has risen from 54 to 60 and the cost allocated to the M9 rate class at line 16 has increased from 678 to 747. 1214 Two part question. The first part is: Is part of this increase, despite the overall decrease in the cost to the southern delivery area, related to the change in the -- I believe there was a change in the allocation for some interruptible customers in the yellow-page update. I vaguely remember reading something about a correction. 1215 MR. McMAHON: There was a correction to one of the demand allocation factors to eliminate the interruptible customers. I believe it was the OSC demand factor. 1216 MR. AIKEN: Does that explain, if you look at line 15, M7 interruptible, for example, the decrease from 2,310 to 375, which is a substantial decrease. 1217 MR. McMAHON: Yes. That would be part of the explanation there. 1218 MR. AIKEN: All right. Is part of the explanation for the increase related to the change in the gas costs that are reflected in the yellow page? 1219 MR. McMAHON: Yes. There's been quite an increase in gas costs. 1220 MR. AIKEN: And has the yellow page been based on the July QRAM or the October QRAM gas costs? 1221 MR. KITCHEN: The -- in terms of what the gas costs that's built into delivery rates in terms of inventory and UFG? 1222 MR. AIKEN: Yes. 1223 MR. KITCHEN: I believe that is the July QRAM. Through rate design, we changed the -- we did update for the October QRAM but we don't update the delivery rate portion of that. 1224 MR. AIKEN: But that portion would be updated if the Board were to determine that Union's overall revenue requirement should be based on the October QRAM. That would be reflected in the rates -- 1225 MR. KITCHEN: Or the January QRAM for that matter. I think in 499 we updated just prior to rates being approved for the latest QRAM. 1226 MR. AIKEN: I'm turning now to Exhibit G.3, tab 5, schedule 26, which we've looked at with the Kitchener cross. 1227 MR. SOMMERVILLE: Can you give us that citation again, Mr. Aiken, please. 1228 MR. AIKEN: Yes. G.3, tab 5, schedule 26, the yellow update. 1229 To start with, on page 1, I'm a little confused about how the net-from-storage number is calculated. My understanding, through your exchange with Mr. Ryder, is that it is not design-day demand less design-day deliveries; that the net-from-storage number comes from some place else that you back into the design-day deliveries; is that correct? 1230 MR. McMAHON: That's correct. It comes from the storage planning group. 1231 MR. AIKEN: I know this isn't your area, but do you know how the storage planning group determines what amount from storage is required for each rate class? 1232 MR. McMAHON: The overall net-from-store number is basically what we start out with for cost allocation, and then we do an allocation, I believe it's based on design-day demand, for the rate classes. 1233 MR. AIKEN: Okay. If you look at the M10 column, can you explain to me why the net-from-storage for M10 is equal to their design-day demand, whereas for other rate classes it's 50 percent or less for the design-day demand? 1234 MR. McMAHON: We'd have to undertake to explain the 11 to you. 1235 MR. KITCHEN: It's actually the zero you're looking for the explanation on. 1236 MR. AIKEN: Actually, yes. Actually, both the zero and the 11, yeah. If you could undertake to do that. 1237 MR. McMAHON: Okay. 1238 MR. MORAN: Mr. Chair, Undertaking N.19.11, to explain lines 1 and 2 and 3 in Exhibit G.3, tab 5, schedule 26, page 1 of 9 updated. 1239 MR. McMAHON: For rate M10. 1240 MR. MORAN: For rate M10. 1241 MR. AIKEN: And I think it would only be lines 2 and 3. 1242 MR. MORAN: Lines 2 and 3. 1243 UNDERTAKING NO. N.19.11: TO EXPLAIN LINES 2 AND 3 IN EXHIBIT G.3, TAB 5, SCHEDULE 26, PAGE 1 OF 9 UPDATED FOR RATE M10 1244 MR. AIKEN: Then on page 7 of the same schedule, another question that's ultimately related to the M10, but first of all can you explain to me what the Ojibway-St. Clair demand allocator is? 1245 MR. McMAHON: What the allocator is or what it's used for? 1246 MR. AIKEN: I guess basically what I'm looking for is why is the M10 included in the Ojibway-St. Clair allocator. Are all rate classes included in that; and if not, why not? Ojibway-St. Clair. 1247 MR. McMAHON: I'd have to go back to find out why M10 is included in T3 is not. I'd have to undertake to find that out. 1248 MR. AIKEN: Yes. That's, I guess, precisely what I'm looking for. I notice that the M9 and T3 are not included whereas the M10 is, and I'd be looking for that explanation. 1249 MR. McMAHON: Okay. 1250 MR. MORAN: Mr. Chair, Undertaking N.19.12, to explain the inclusion of M10 in Exhibit G.3, tab 5, schedule 26, page 7 of 9 updated. 1251 UNDERTAKING NO. N.19.12: TO EXPLAIN THE INCLUSION OF M10 IN EXHIBIT G.3, TAB 5, SCHEDULE 26, PAGE 7 OF 9 UPDATED 1252 MR. AIKEN: I'm going back to page 1 now and I'm going to concentrate on the M9 rate class. It's my understanding that the design-day demand figure of 232 shown there on line 1 of the M9 column is the figure you received from Mr. Hyatt, from his department; is that correct? 1253 MR. McMAHON: Yes. 1254 MR. AIKEN: And if I look at Exhibit H.3, tab 1, schedule 2, compared to the original evidence, H.3, tab 1, schedule 2, for the M9 rate class, it would appear that no adjustment has been made in the volumes or the peak-day design-demand levels. 1255 MR. KITCHEN: Which schedule was the second one? 1256 MR. AIKEN: H.3, tab 1, schedule 2. 1257 MR. KITCHEN: Page 14? 1258 MR. AIKEN: Page 13. I believe the actual volume is unchanged from the white page. Actually, the white page is on page 7, 26,577 103m3. 1259 MR. KITCHEN: Yes, the volumes are unchanged. 1260 MR. AIKEN: Now, are you aware of the Wholesale Gas Services Purchasers Group evidence at Exhibit K.35? 1261 MR. KITCHEN: Yes. 1262 MR. AIKEN: And it's my understanding that Union has accepted that evidence? 1263 MR. KITCHEN: Yes, we have. 1264 MR. AIKEN: Now, Mr. Penny had indicated that the blue-page evidence that you were going to be preparing would reflect that change. I haven't seen a blue-page update so I'm assuming that's the yellow page that we have? 1265 MR. KITCHEN: The rates group skipped right to yellow. That was the demand forecast in that forecast. The evidence at Exhibit K, I don't know the reference, I don't believe has been reflected in the blue page or our yellow page and we would do that as part of the rate order, the draft rate order. 1266 MR. AIKEN: I hate to do this, but could I have you undertake to provide an estimate of the impact of the cost allocated to the rate M9 class of adopting the evidence at K.35? It's probably long and involved to do that. 1267 MR. McMAHON: It will take some time. 1268 MR. KITCHEN: You're looking for the revenue requirement impact in total? 1269 MR. AIKEN: Yes, it would be the revenue requirement impact for the M9 based on the annual volume change, the peak-day design change, the contract-demand change, and it's all part of that evidence. 1270 MR. McMAHON: We can undertake to do that. 1271 MR. AIKEN: Would it be easier -- 1272 MR. SMITH: Perhaps we can find out how long this is going to take. 1273 MR. AIKEN: I was going to suggest that rather than as part of an undertaking, in this process, if you would undertake to provide a specific schedule when the rate order is done as part of your working papers, to show the impact of that change? 1274 MR. KITCHEN: That could be accommodated. 1275 MR. AIKEN: Would that be easier to do? 1276 MR. KITCHEN: That would be easier. It would give us the time to do that. I think it would take us, not a tonne of time, but it would take us some time to complete that, and we can provide a schedule. 1277 MR. AIKEN: That would be acceptable. 1278 MR. SOMMERVILLE: Let's make that an undertaking, then. 1279 MR. MORAN: N.19.13. 1280 UNDERTAKING NO. N.19.13: TO PROVIDE AN ESTIMATE OF THE IMPACT OF THE COST ALLOCATED TO THE RATE M9 CLASS OF ADOPTING THE EVIDENCE AT K.35 1281 MR. AIKEN: My next series of questions revolve around Exhibit J.35.30. It's actually J.35.30 supplemental. And on page 2 of that supplemental response, the table shown in the response to part B, I want to confirm that if I added a yellow-page column there, that these would be the numbers. Now, the first line would be 15,674, same as blue page; then it would be 7,205, 438, 0, and 913, for a total of 24,229. And I believe I took those from Exhibit G.3, tab 3, schedule 1. 1282 MR. McMAHON: G.3, tab 3? 1283 MR. AIKEN: Yes, G.3, tab 3, schedule 1, page 6. 1284 MR. McMAHON: So the numbers would be 15,674 for sales promotion/supervision; 7,205 for advertising; 438 for displays, dealer service and other; and 913 for the other category. 1285 MR. AIKEN: Yes. And the total is 24,229. 1286 MR. McMAHON: That's correct. 1287 MR. AIKEN: Now, that increase from the yellow page compared to the 499 decision is approximately 20 percent; correct? 1288 MR. McMAHON: I'll accept your math. 1289 MR. AIKEN: Now, if you turn to page 3 of J.35.30 supplemental, in the response to D and E, there's another table and I just want to confirm that under the EBRO 499 decision, the M9 was for both the M9 and the current T3 customer who was an M9 at that time; is that correct? 1290 MR. McMAHON: That's correct. 1291 MR. AIKEN: Okay. And under the blue page, we have the M9, the M10, and if we added the T3, the total sales promotion and merchandise under the T3 column would be 165,000; is that correct? That's from the blue-page evidence. 1292 MR. McMAHON: I'll accept that subject to check. 1293 MR. AIKEN: And again, if we update for the yellow page, and looking only at line 6, the total costs, the M9 would continue to be 17,000; the M10 would be 9,000; and the T3 would be 160,000, and that's from G.3, tab 2, schedule 2, of the yellow-page evidence. I believe I picked off the right numbers. 1294 MR. SMITH: Perhaps, Mr. Chairman, if I could just ask Mr. Aiken so I can follow along when people are saying subject to check, the 165 T3 number you're getting from -- that's from G.3? 1295 MR. AIKEN: That's from the original evidence, yes. 1296 MR. SMITH: Okay. 1297 MR. AIKEN: Yes. 1298 MR. SMITH: All right, thank you. 1299 MR. AIKEN: So subject to check, based on the yellow page, the total sales, promotion and merchandise costs allocated to M9, M10, and T3 and aggregate is $186,000. 1300 MR. McMAHON: I'll accept that number. 1301 MR. AIKEN: And that's an increase from the 66,000 in the 499 decision. So my question is: Why is there such a huge increase for these three rate classes of -- it's roughly, I think, 180 percent when the total costs have risen by 20 percent? Has there been a change in the cost-allocation methodology, or is it a change in the accounts that the methodology is applied to? 1302 MR. McMAHON: It's not a change in the methodology other than there are some directly-assigned costs incorporated in there to M9 and T3. I believe it's about -- 1303 MR. AIKEN: Something in the neighbourhood of 48,000. 1304 MR. McMAHON: -- 48,000. 1305 MR. AIKEN: Yes. And that's not a significant change from 499, I don't believe. 1306 MR. McMAHON: And other than that, we maintain the same methodology, and I can only guess that it is just general increase in costs in these particular categories. There was some reallocation of the costs on the budgeting end between categories, but -- 1307 MR. AIKEN: Is that what you're getting to in part F of the response at J.35.30? 1308 MR. McMAHON: Yes. 1309 MR. AIKEN: I'm now going to take us on a road trip through these cost allocation binders and I hope I don't get anybody lost. 1310 If we start at Exhibit G.3, tab 2, schedule 4. 1311 MR. SOMMERVILLE: Should we be turning these up, Mr. Aiken, or is there a theme that we should be looking for? 1312 MR. AIKEN: I think you might want to turn up the first set. When I go through this a second time, you probably won't want to. 1313 MR. SMITH: I'm sorry, a second time? 1314 MR. AIKEN: Yes, a second time. And you'll be happy to note that I eliminated the third time. 1315 MR. SMITH: Great. 1316 MR. McMAHON: Could I get your reference again? 1317 MR. AIKEN: Yes. G.3, tab 2, schedule 4, yellow-page update, and I'm looking at page 1 of 3. This is "purchase production - other". 1318 And I'm looking at the sales promotion and merchandise line and the M10 column where there's a figure of 2, that's the $2,000 that's allocated to the M10. 1319 MR. McMAHON: Yes. 1320 MR. AIKEN: Do you see that? Okay. And if I look at G.3, tab 5, schedule 3, and this is a white page -- 1321 MR. SMITH: G.3, tab 5, schedule? 1322 MR. AIKEN: 3. And I'm looking at page -- I think it's 19 of 24. This is a more detailed schedule on the "purchase production - other" allocation. 1323 MR. McMAHON: Yes. 1324 MR. AIKEN: And on the section that's labeled H, sales promotion and merchandise, we see the 2024, which was the white-page equivalent to the number of 1,974 in the yellow-page update. The direct assignment factor there is GS marketing direct/GDAR. Do you see that? 1325 MR. McMAHON: Yes. 1326 MR. AIKEN: Now, does that direct assignment factor allocate that $2 million in costs across all those rate classes? 1327 MR. McMAHON: Actually, to see which rate classes are affected, you'd have to go to G.3, tab 5, schedule 24. And if you want to look at the white page -- 1328 MR. AIKEN: Actually, I'd prefer to look at the yellow page, because I was going to go there later. 1329 MR. McMAHON: All right. And you're... 1330 MR. AIKEN: Page 10, I believe. 1331 MR. McMAHON: Yes, page 10, about the middle of page 10, you'll see which rate classes. 1332 MR. AIKEN: Okay. If you keep that schedule reference in place and go also to Exhibit G.3, tab 1, appendix C, page 2 of the yellow update, there's a description of that allocation factor there. That was G.3, tab 1, appendix C, page 2. 1333 MR. McMAHON: Yes. 1334 MR. AIKEN: And about halfway down we have the description of the GS marketing direct/GDAR allocator. And it says: 1335 "Directly allocates GDAR-related and gas supply marketing costs to customer rate classes in proportion to the average number of direct-purchse customers incurring these costs." 1336 Now, my question is, first of all, I believe in an interrogatory response, you indicated that there were no GDAR costs allocated to rates M9, M10, and T3; is that correct? 1337 MR. McMAHON: That's correct. 1338 MR. AIKEN: Now, how many M10 customers are there? I can maybe help. I'm looking at Exhibit C.3, tab 2, schedule 3, which would be Mr. Gardiner's/Mr. Rogers' evidence, I believe. That was C.3, tab 2, schedule 3 updated. 1339 MR. McMAHON: C.3, tab 2, schedule 3? 1340 MR. AIKEN: Yes. 1341 MR. McMAHON: Okay. 1342 MR. AIKEN: And it shows that there are four M10 customers in total? 1343 MR. McMAHON: Yes, I see that. 1344 MR. AIKEN: And that in fact none of them are direct purchase? 1345 MR. McMAHON: I see that. The one -- one thing -- I don't want to leave you confused. When you see an allocation factor that has a slash, that means there are two amounts being allocated. It's just on the line in the allocation study, we only have room for one factor. So if we're going to be allocating an amount like gas supply marketing costs, we'll allocate that based on a factor. And GDAR-related costs that are allocated to other customer classes, it would be allocated using that same factor. So we just roll up the allocation on that factor. That's what you're seeing. It's not that GDAR costs being allocated to M10, for instance. It just happens to be rolled up in that factor. In this case it would be the gas supply marketing cost that would be rolled up and allocated to M10. 1346 MR. AIKEN: And based on that description, these gas supply marketing costs are done in proportion to the average number of direct-purchase customers by rate class; is that correct? 1347 MR. McMAHON: That's not entirely correct. It's the GDAR costs that are done that way, and the gas supply marketing costs would be done just on the average number of customers. So that description should be split into two sentences saying how GDAR-related costs are allocated and how the gas supply marketing costs are allocated. 1348 MR. AIKEN: Then if we go back to G.3, tab 5, schedule 24, the one you referred me to. 1349 MR. McMAHON: Yes. 1350 MR. AIKEN: We see a total for that allocation factor of 1,973. 1351 MR. SOMMERVILLE: Which page, Mr. Aiken? 1352 MR. AIKEN: Sorry, page 10. 1353 MR. SOMMERVILLE: Thank you. 1354 MR. AIKEN: We see a total there of that allocation factor of 1,973. What is that 1,973? Is that the weighted -- sorry, not the weighted but the average number of customers? 1355 MR. McMAHON: No. I'd have to check. It could be an average weighting of the number of customers or it could be a proportion of the costs that we're trying to allocate. I think the overall costs were something around the $2 million mark. 1356 MR. AIKEN: That is correct. 1357 MR. McMAHON: And so this may have been an earlier version of that dollar amount before it was finalized at 2 million and 24. 1358 MR. AIKEN: So that perhaps is a dollar figure, not the actual allocator. 1359 MR. McMAHON: Right. 1360 MR. AIKEN: Okay. So how are the percentages shown, then, under the each of the individual rate classes they're calculated? 1361 MR. McMAHON: It should be the first line, for instance, looking at page 10 of Exhibit G.3, tab 5, schedule 24, it should be the ratio for M2 residential, 741 to the total 1,973. I don't have a calculator. 1362 MR. AIKEN: Yes, actually that's correct. So then my question becomes: How is the $741,000 calculated? What allocation factor is applied to the 1,973 to arrive at that number? It that a customer number some place? 1363 MR. McMAHON: It's a roll-up. The 741 would be whatever GDAR-related costs would have been allocated to M2, or at least a proration to the M2 residential, plus whatever gas supply marketing costs would have been budgeted to that rate class. So it's more than likely we started out with the detail and rolled it up to the aggregate number for allocation. And so in the allocation study, we end up using the percentages to allocate the directly-assignable costs. 1364 MR. AIKEN: Okay. Let me get to the ultimate end question in this regard. In the M10 category, I see I guess a total of $2,000 allocated to the M10 rate class. I'm having a problem figuring out how they get 2,000 out of the 2 million when they are four customers out of 1,220,000. 1365 MR. McMAHON: Well, 2,000 would be a prorata share of the gas supply marketing costs, and I don't have that breakdown with me as to what the split is between the GDAR-related costs and the gas supply marketing costs that are caught in that direct assignment. 1366 MR. AIKEN: Could you undertake to provide that breakdown and show how the $2,000 is allocated to the M10 rate class based on their number of customers? 1367 MR. McMAHON: Maybe we could just provide an explanation for that whole direct assignment and a breakdown between GDAR and the gas supply marketing costs? Would that help? 1368 MR. AIKEN: Yes, that would help. 1369 MR. MORAN: That would be Undertaking N.19.14. 1370 MR. SOMMERVILLE: Thank you. 1371 UNDERTAKING NO. N.19.14: TO PROVIDE AN EXPLANATION FOR THAT WHOLE DIRECT ASSIGNMENT AND A BREAKDOWN BETWEEN GDAR AND THE GAS SUPPLY MARKETING COSTS 1372 MR. AIKEN: Now, just on this same issue, I want to come back to J.35.30 supplemental, page 2. And this $2 million we've been talking about shows up -- shows as part of the answer to part C on the first line, as you read across there, this is the "purchase production other". The last column labeled "allocated based on" says it's based on infranchise delivery volumes. Should that be based on infranchise customers, I mean, part on customers part on the -- the GDAR part is on the direct-purchase customers? 1373 MR. McMAHON: One second. 1374 You're looking at "purchase production other"? 1375 MR. AIKEN: Yes. 1376 MR. McMAHON: I'm looking at the white page which is Exhibit G.3, tab 5, schedule 3, which is the detailed allocation of the costs, and I don't see any sales promotion/supervision costs being allocated that aren't directly assigned. 1377 MR. AIKEN: Yes, I guess I was confused by the -- by this infranchise delivery volume used as an allocation basis, when everything was directly assigned in that category. 1378 MR. McMAHON: Right. 1379 MR. AIKEN: Okay. 1380 I'm now taking us on road trip number 2, and again, if you go to G.3, tab 2, schedule 24, this time page 16. 1381 MR. SOMMERVILLE: Is that tab 2, Mr. Aiken? 1382 MR. AIKEN: I think it was. 1383 MR. McMAHON: G.3, tab 2, schedule 24, did you say? 1384 MR. AIKEN: Yes. 1385 MR. McMAHON: There's only three pages. 1386 MR. AIKEN: Yes, page 1. And here again under the sales, promotion and merchandise, under the rate M10, we see a figure of $6,000 allocated to that rate class. 1387 MR. McMAHON: Yes. 1388 MR. AIKEN: And I don't think you need to turn this up, but on G.3, tab 5, schedule 23, on page 16 -- no, sorry, I've got the wrong place. G.3, tab 5, schedule 23, the allocation is based on an allocation factor labeled "DCUSTSALEPRO." Now, I just want to take you to the definition of that allocator, which is back on G.3, tab 1, appendix C, on page 6. And the description there reads: 1389 "Allocates costs of Distribution Customers Sales-Marketing sales promotion in proportion to average number of customers." 1390 Then when I turn to Exhibit G.3, tab 5, schedule 24, page 16, I see a figure of 20.237 under the M10 category. Again, I'm assuming that this would be a dollar figure as part of the total 15.674 million? 1391 MR. McMAHON: I would assume so. A little large for a customer account. 1392 MR. AIKEN: Yes, exactly. So I wonder if I could have you undertake to provide the same explanation here as you did in the previous undertaking for the previous allocator, how the $20,000 is arrived at based on the customer numbers? 1393 MR. McMAHON: Okay. So details for the DCUSTSALEPRO allocation factor. 1394 MR. AIKEN: Yes. 1395 MR. MORAN: Undertaking N.19.15. 1396 UNDERTAKING NO. N.19.15: TO PROVIDE AN EXPLANATION FOR THAT WHOLE DIRECT ASSIGNMENT AND A BREAKDOWN BETWEEN GDAR AND THE GAS SUPPLY MARKETING COSTS FOR THE PREVIOUS ALLOCATOR, HOW THE $20,000 IS ARRIVED AT BASED ON THE CUSTOMER NUMBERS 1397 MR. AIKEN: And maybe just a follow-up. In this case, if this is a dollar figure, why doesn't this $20,000 figure show up in that previous schedule where it says it's 6,000? In the previous case, I think the numbers were the same; they were two in both cases. Here we have two different numbers. 1398 MR. McMAHON: Yeah, what we're using on the allocation is we're trying to determine a percentage allocation, and I'd have to find out details of the information we get from the sales group to determine what these numbers are that we use to determine what the percentage allocation is. We get information from the sales group that's broken down so we use their numbers, whatever their numbers happen to be, whether it's total costs or activity-based or what have you, to come up with this, where the M10 happens to be 0.13 percent. So you'll see what makes up that 20,000 number when we respond to that undertaking. 1399 MR. AIKEN: Okay. 1400 Those are all my questions. Thank you. 1401 MR. SOMMERVILLE: Thank you, Mr. Aiken. 1402 We'll conclude for the day and reconvene tomorrow morning at 9:30 with the continuation of the cross-examination of this panel. Thank you. 1403 --- Whereupon the hearing was adjourned at 4:10 p.m.