Rep: OEB Doc: 12WVV Rev: 0 ONTARIO ENERGY BOARD Volume: 1 6 OCTOBER 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER A. BIRCHENOUGH MEMBER 1 RP-2003-0063 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF an Application by Union Gas Limited for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, storage, and transmission of gas for the period commencing January 1, 2004. 3 RP-2003-0063 4 6 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel MARTIN DAVIES Board Staff JAMES WIGHTMAN Board Staff MICHAEL PENNY Union Gas Limited TOM BRETT Ontario Association of School Business Officials MICHAEL JANIGAN Vulnerable Energy Consumers' Coalition ROBERT WARREN Consumers Association of Canada ALICK RYDER City of Kitchener GEORGE VEGH CEED, OESC, Superior Energy Management, Union Energy JAY SHEPHERD Ontario Public School Boards Association MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group SCOTT STOLL Northern Cross Energy TIBOR HAYNAL TransCanada PipeLines ROBERT ROWE Enbridge Gas Distribution Inc. PETER THOMPSON Industrial Gas Users Association BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association DERECK FRANCIS Energy Objective VALERIE YOUNG Ontario Association of Physical Plant Administrators PETER SCULLY City of Timmins, City of Sudbury, FNOM JOHN RATTRAY Ontario Power Generation 8 TABLE OF CONTENTS 9 APPEARANCES: [19] PRELIMINARY MATTERS: [58] OPENING STATEMENT BY MR. PENNY: [100] UNION GAS LIMITED - PANEL 1; SNELL, DENT [108] EXAMINATION BY MR. PENNY: [111] CROSS-EXAMINATION BY MR. WARREN: [201] CROSS-EXAMINATION BY MR. JANIGAN: [253] CROSS-EXAMINATION BY MR. VEGH: [522] CROSS-EXAMINATION BY MR. THOMPSON: [637] CROSS-EXAMINATION BY MR. DINGWALL: [684] CROSS-EXAMINATION BY MS. SINGH: [931] CROSS-EXAMINATION BY MR. MORAN: [990] PROCEDURAL MATTERS: [1081] 10 EXHIBITS 11 EXHIBIT NO. M.1.1: DOCUMENT ENTITLED "USE OF HEDGING BY LOCAL GAS DISTRIBUTION COMPANIES, BASIC CONSIDERATIONS AND REGULATORY ISSUES, BY COSTELLO AND CITA," DATED MAY 2001 [264] EXHIBIT NO. M.1.2: BUNDLE OF ATTACHMENTS AND INTERROGATORIES FILED IN THE RP-2001-0208 CASE [268] EXHIBIT NO. M.1.3: ENERGY PROBE'S CROSS-EXAMINATION MATERIAL FOR THE UNION GAS RISK-MANAGEMENT PANEL [811] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.1.1: TO PROVIDE COPY OF UNION'S RISK-MANAGEMENT POLICIES AND PROCEDURES [466] UNDERTAKING NO. N.1.2: TO TAKE UNION AVERAGE PRICE VERSUS THE MARKET PRICE, WHICH IS 14 CENTS, MULTIPLY IT BY THE VOLUME OF GAS THAT UNION PURCHASED IN 1998, 1999, 2000, 2001, 2002, AND GIVE A GROSS NUMBER OF WHAT .14 TIMES THAT VOLUME IS [975] UNDERTAKING NO. N.1.3: TO ADVISE IF ANY OF THE DIRECTORS, OFFICERS, VICE-PRESIDENTS OR DIRECTORS OF THE AFFILIATE DUKE ENERGY GAS TRANSMISSION, ARE DIRECTORS, OFFICERS, VICE-PRESIDENTS OR DIRECTORS OF ANY UNION AFFILIATE THAT'S IN THE GAS MARKETING BUSINESS [1072] 14 --- Upon commencing at 9:35 a.m. 15 MR. SOMMERVILLE: Good morning. Please be seated. Thank you. 16 The Board has convened this morning in the matter of an application for just and reasonable rates made by Union Gas Limited bearing Board file numbers RP-2003-0063 and EB-2003-0097. 17 My name is Paul Sommerville, and sitting with me is Arthur Birchenough. We have convened this morning to commence the evidentiary portion of this application. 18 First, we'll have appearances and then we'll deal with any preliminary matters. And I think that there are one or two. Could I have appearances, please? 19 APPEARANCES: 20 MR. PENNY: Yes, Mr. Chairman. My name is Michael Penny and I appear as counsel for the applicant, Union Gas. 21 MR. SOMMERVILLE: Mr. Penny. 22 MR. BRETT: Mr. Chairman, my name is Tom Brett. I appear as counsel for the Ontario Association of School Business Officials. Good morning. 23 MR. SOMMERVILLE: Mr. Brett. 24 MR. JANIGAN: Good morning, Mr. Chairman. My name is Michael Janigan. I appear on behalf of the Vulnerable Energy Consumers' Coalition. 25 MR. WARREN: Robert Warren for the Consumers Association of Canada. 26 MR. RYDER: Alick Ryder for the City of Kitchener, and Mr. Quinn will join me later. 27 MR. SOMMERVILLE: Mr. Ryder. 28 MR. VEGH: Good morning, sir. George Vegh on behalf of the Coalition for Efficient Energy Distribution or CEED. I'm also here on behalf of Ontario Energy Savings Corp., Superior Energy Management and Union Energy. 29 MR. SOMMERVILLE: Thank you. 30 MR. SHEPHERD: Mr. Chairman, Jay Shepherd on behalf of the Ontario Public School Boards' Association. 31 MR. SOMMERVILLE: Mr. Shepherd. 32 MS. SINGH: Good morning, Mr. Chairman. Mimi Singh on behalf of Canadian Manufacturers & Exporters. 33 MR. SOMMERVILLE: Ms. Singh. 34 MR. AIKEN: Randy Aiken on behalf of the London Property Management Association and the Wholesale Gas Service Purchasers Group. 35 MR. SOMMERVILLE: Mr. Aiken. 36 MR. STOLL: Scott Stoll, Northern Cross Energy. 37 MR. SOMMERVILLE: Mr. Stoll, how do you spell that? 38 MR. STOLL: S-t-o-l-l. 39 MR. SOMMERVILLE: Thank you. 40 MR. HAYNAL: Tibor Haynal for TransCanada PipeLines. 41 MR. ROWE: Robert Rowe for Enbridge Gas Distribution. 42 MR. THOMPSON: Peter Thompson for the Industrial Gas Users Association. 43 MR. SOMMERVILLE: Mr. Thompson. 44 MR. DINGWALL: Brian Dingwall appearing on behalf of Energy Probe. I'm also here on behalf of the HVAC Coalition, the Distributed Energy Association and MxEnergy. MxEnergy has not participated in the ADR and will not be active in the hearing. The HVAC Coalition has settled its issues in the ADR, which is reflected in the settlement agreement, and will therefore have no involvement in the hearing as well, as has the Distributed Energy Association. 45 MR. SOMMERVILLE: Thank you. 46 MR. FRANCIS: Mr. Chairman, Dereck Francis representing Energy Objective. 47 MR. SOMMERVILLE: Thank you. 48 MS. YOUNG: Good morning, Valerie Young for the Ontario Association of Physical Plant Administrators. 49 MR. SCULLY: Peter Scully for the City of Timmins. I've also been retained by the City of Sudbury and FNOM, the Federation of Northern Ontario Municipalities and I'll be submitting shortly an application for late intervention, notice of motion of the same. 50 MR. SOMMERVILLE: You'll be doing that as a preliminary matter, Mr. Scully? 51 MR. SCULLY: Yes. 52 MR. SOMMERVILLE: Thank you. 53 Are there any other appearances? 54 MR. RATTRAY: John Rattray on behalf of Ontario Power Generation. 55 MR. MORAN: Pat Moran, Board counsel. 56 MR. SOMMERVILLE: Mr. Moran. 57 I suppose it's most appropriate, Mr. Scully, to deal with your application for late intervenor status first. Have you filed any papers with the applicant? 58 PRELIMINARY MATTERS: 59 MR. SCULLY: No, I haven't, Mr. Chairman. I intend to do so within the next few days. I apologize that it isn't here for the opening gun this morning. 60 MR. SOMMERVILLE: Perhaps you could indicate exactly who it is that you're -- 61 MR. SCULLY: Seeking to represent? 62 MR. SOMMERVILLE: -- pursuing a ruling on behalf of. 63 MR. SCULLY: It's the City of Sudbury and the Federation of Northern Ontario Municipalities which is an association of municipalities in northern Ontario. I should say that they'll accept the record as it is and do not seek to introduce any additional evidence. So I don't anticipate this should delay or extend the hearing in any way. 64 MR. SOMMERVILLE: Thank you, Mr. Scully. 65 Mr. Penny, do you have any comment? 66 MR. PENNY: Mr. Chairman, the Board procedural rules do, of course, contemplate notice of motion and Board acceptance. At this stage, given the qualification that Mr. Scully has given, I wouldn't actually anticipate that Union would have objection to the intervention. But it does seem to me appropriate that there be the required notice of motion, et cetera, so that the Board can make its own assessment as to whether the intervention is appropriate. 67 MR. SOMMERVILLE: I think that's appropriate. 68 Mr. Scully, we'll hold your request in abeyance. You may wish to, in the interim, discuss the matter with Mr. Penny and also perfect, if I can use that word, your notice of motion. And we'll deal with it when those things have occurred. 69 MR. SCULLY: Thank you, Mr. Chairman. 70 MR. SOMMERVILLE: Thank you, Mr. Scully. 71 Mr. Penny, are there any preliminary matters arising with the applicant? 72 MR. PENNY: The only preliminary issue is that we made available to the Board and to the parties a packet of information that contains the CVs of most of the witnesses that are contemplated to be testifying in the course of the hearing. There may be a few still yet to come, but certainly that will deal with today and get us started. 73 MR. SOMMERVILLE: We have that, Mr. Penny. 74 Are there any other preliminary matters? 75 MR. JANIGAN: Mr. Chairman, I don't know whether this is an appropriate time to deal with the question of scheduling. I raised in correspondence last week the possibility of, during the course of the proceeding, that the Panel give conversation to scheduling a break, where appropriate, to enable parties to catch their breath, as it were, to be able to be sufficiently prepared as the panels go forward. 76 The reason I make this request is that in looking at the list of panels, we have been faced with at least 15 company panels, with accompanying evidence. Unfortunately, we weren't able to settle as many issues at the ADR as might have been hoped. This proceeding has come on the heels of some other major proceedings, at least two other major proceedings and a number of other minor proceedings, at least one of which is still ongoing. 77 We are, however, cognizant of the fact -- and we are desirous of having 2004 rates put in place in an appropriate time for Union and of the scheduling difficulties that are inherent in that, we believe that those are significant problems but not necessarily oppressive ones at this juncture. 78 I'm grateful to Union for advising me of their position in advance in correspondence sent to me on October the 3rd, and Union raises the points that, in fact, they have delivered a fairly substantial number of interrogatories and evidence in what they believe to be a timely fashion, and they believe sufficient time has been available to intervenors to prepare for this proceeding; in particular, that this matter was put to an ADR earlier in September. 79 The fact of the matter is there are significant investments of time that are necessary by most intervenors and counsel following an ADR, simply to become enough acquainted and enough on top of an issue to be able to cross-examine a panel effectively. I believe that the preparation that's associated with cross-examination shortens the time of the hearing itself and that while it is significant that Union has done their best efforts to get the evidence to us in time, it still is a significant body of evidence of panels that are before us. 80 Now, having said that, it may well be that there will be breaks in this proceeding where witness panels are not available, and they may arise simply out of the passage of time. As well, it may well be that the length of time that intervenors take with cross-examining a panel may be such that the preparation time for the succeeding panel does not become an issue. 81 I'm raising this at this stage to allow the Panel to consider this as a principle of the idea that there may be a couple of breaks in this proceeding to allow parties to catch their breath, as it were. I'm not saying at this point in time that we should look at the schedule and mandate a day off, for example, or whatever might be appropriate. But I'm attempting to bring to the Panel's attention that our resources are significantly limited, particularly when compared with the company's. And a proceeding of this length, in order to at least attempt to level the playing field, as it were, it would be opportune to have a particular break to be able to ensure that we are sufficiently prepared for a particular panel. 82 MR. SOMMERVILLE: Mr. Penny, I do have -- I have read the correspondence on this subject from Mr. Janigan and Mr. Smith's reply. 83 MR. PENNY: Yes. 84 MR. SOMMERVILLE: And do you have anything that you'd like to comment on? 85 MR. PENNY: Well, I should have perhaps, when I made appearances, indicated to you, and I apologize for not doing that, that Mr. Smith is a colleague of mine and he will actually be appearing from time to time before you during the course of this case. I won't repeat anything we've said in the letter; I think that speaks for itself. I actually -- as I now understand Mr. Janigan's request, it isn't to specifically schedule anything at this time but to leave the matter open. So in a sense, maybe it's premature. We don't yet know what the Board's schedule over the next chunk of time is, there are times when the Board is not available, in any event, and the whole issue may go away. 86 I simply reiterate that we're all -- we're all busy, we can all use more time. Work does tend to expand to fill the time available. This issue of cross-examination preparation shortening cross-examination, I'm not sure we've seen evidence of that in the past. And the company having more resources than the intervenors, I actually don't think that's so. So I've got to work on argument for the ROE just like the intervenors do and so on. 87 So my position is that there ought not to be breaks of that kind scheduled, but in any event it sounds premature so maybe we can just leave that for the time being. 88 MR. SOMMERVILLE: The Board has given this -- does anyone else want to make any submissions on this subject? The Board has given this topic some considerable thought prior to receipt of Mr. Janigan's correspondence, and it seemed to us that it would be appropriate, given the length of this proceeding as it is currently structured, to schedule some time within the course of the hearing that would be, in fact, down days; the thought being that that does enable the parties to coordinate their activity, and I'm speaking especially about intervenors and their cross-examination activities, to coordinate them as acutely as possible. And also it is our hope, as we stated in the proceeding on Friday, to develop as detailed a schedule as possible, understanding the normal vicissitudes and uncertainties that we have to deal with in these things, but to try to develop as detailed a schedule as possible going forward, and that we could use these off days as opportunities to sort of check our progress, to some extent, in meeting that schedule, and that those down days would cease to be down days if we found ourselves lagging in the proceeding. 89 We've indicated to Staff that there are a couple of days that we think may be most appropriate to fall into that category. We're also mindful of the fact that lawyers have busy practices and sometimes need to touch base on those matters, and that's something that's not unimportant as well. 90 The only firm indication from a scheduling point of view that I want to indicate at this time is that on the 29th of October, we will not convene until 11:00. There's a Board meeting that runs before 11:00 on that date, so we won't start until 11:00 on that date. But I have instructed staff to meet with intervenors and the applicant in an attempt to try and develop, over the course of today and tomorrow, as detailed a schedule as possible, which may well include a couple of down days, not for the purposes specifically of preparing cross-examination or anything else but to hopefully improve the coordination of activities as we go forward. 91 Meeting the schedule and meeting the rather daunting list of areas that we need to cover in this application will require careful coordination and cooperation on the part of all parties. Frankly, we expect that to happen. Without that, I think we -- this process won't be as well -- as well served as it could be. 92 So on that score, that's a response, Mr. Janigan, to your inquiry, and hopefully over the course of today we'll find ourselves with something a little more detailed that we can deal with, Mr. Penny, and you can -- if you have any difficulties arising out of any of that, feel free to raise them at any time. It is my expectation that in the course of this proceeding, we'll start at 9:30 in the morning, unless there is, as I've already indicated on the 29th, we won't be starting until 11, but typically we'll start at 9:30, we'll run until 12:30, we'll reconvene typically at 2, and we'll adjourn for the day sometime following 4:00. We'll look for the most appropriate time in that -- in the afternoon session to adjourn for the day. 93 Are there any comments about that schedule? 94 MR. MORAN: Mr. Chair, in light of that, I would propose then that perhaps I could meet with the parties during the lunch break, 1:30 and use that half hour prior to resuming at 2:00 to see if we can come up with a schedule for you. 95 MR. SOMMERVILLE: Any difficulties with that? 96 MR. PENNY: That's fair, Mr. Chairman. 97 MR. SOMMERVILLE: Are there any other preliminary matters that any party wants us to address at this point? 98 Mr. Penny, if you would like to begin. 99 MR. PENNY: Yes, thank you, Mr. Chairman. 100 OPENING STATEMENT BY MR. PENNY: 101 MR. PENNY: This is the first comprehensive cost of service examination for Union since the 1999 test year, and we've, in the recent past, frequently had cases with a particular focus which lent themselves to an opening statement or roadmap or description of the issue, but you know from the evidence and the witness list that there are many issues here and I therefore won't attempt to outline all of these or we'd be here for a day or two. 102 I would say that in addition to the usual presentation of the forecast rate base revenue requirement and rate design issues, there are several other major areas of focus in this hearing which would fall outside the usual bundle, and I just wanted to highlight those for your assistance. I think there are probably basically six. 103 There's, first of all, a presentation of Union's risk-management program which we're going to do today. Union does have a proposed new method for weather normalization which we hope to start tomorrow. There's a review of depreciation rates which was done. There is a detailed presentation on affiliate relationships. There's been, since 1999, a number of restructurings and also a change in ownership, as the Board knows, so this is an occasion to review that in detail. 104 Then Union has now come forward with both barrels, so to speak, of the Board's load-balancing and flexibility directive, some of it came up in the QRAM earlier this year but that now is a complete package and so that will be reviewed. And finally, there is a response to the Board's directive on the lines of business. I should have noted that the third item I mentioned, the review of depreciation rates, that in fact was a settled issue. 105 So just with that quick overview, we propose to proceed with Union's first panel. I should say that the weather normalization panel involves experts from out of town who had certain constraints on their schedule and so we were not able to schedule them until tomorrow. We therefore, thought we'd start with the risk management panel in the expectation that they'd be less than a full day. We do have Mr. Andrews available to deal with GDAR costs if, in fact, we have time remaining in the course of the day. 106 MR. SOMMERVILLE: Mr. Smith outlined that on Friday. Thank you, Mr. Penny. 107 MR. PENNY: So could Mr. Dent and our expert please come forward to be sworn. 108 UNION GAS LIMITED - PANEL 1; SNELL, DENT 109 J.SNELL; Sworn. 110 D.DENT; Sworn. 111 EXAMINATION BY MR. PENNY: 112 MR. PENNY: Mr. Snell, I understand you have a bachelor of science from the University of Illinois? 113 MR. SNELL: Yes, I do. 114 MR. PENNY: Then you obtained a masters of science from Georgia Tech. University? 115 MR. SNELL: That's correct. 116 MR. PENNY: You spent four years with Merrill Lynch as a commodities analyst? 117 MR. SNELL: That's correct. 118 MR. PENNY: And then in 1988, you formed Risk Management Incorporated? 119 MR. SNELL: That's correct. 120 MR. PENNY: I understand you started MRI with the objective of facilitating hedge programs within corporate entities? 121 MR. SNELL: That's correct. 122 MR. PENNY: And then in 1990, when energy commodity futures became available on the NYMEX, your risk management expanded to include energy products? 123 MR. SNELL: Yes. 124 MR. PENNY: And since then, you and your firm have focused your efforts on the energy industry? 125 MR. SNELL: That's correct. 126 MR. PENNY: And you currently act as risk management consultants to over 50 corporations and utilities in the energy sector? 127 MR. SNELL: Yes. 128 MR. PENNY: And I understand that you have specifically designed hedging programs for over 30 utilities? 129 MR. SNELL: Yes. 130 MR. PENNY: And those, not to mention them all, but include Ameren. 131 MR. SNELL: Yes. 132 MR. PENNY: Mississippi Valley Gas. 133 MR. SNELL: Yes. 134 MR. PENNY: The Municipal Gas Authority of Georgia. 135 MR. SNELL: Yes. 136 MR. PENNY: NYCOR. 137 MR. SNELL: Yes. 138 MR. PENNY: And the Wisconsin Gas Company. 139 MR. SNELL: Yes. 140 MR. PENNY: In addition, I understand that in the last five years RMI principals have presented over 125 educational workshops and seminars on the subject of risk management? 141 MR. SNELL: That's correct. 142 MR. PENNY: And you and your colleagues have frequently been invited to be guest speakers for energy associations throughout the country? 143 MR. SNELL: Yes. 144 MR. PENNY: And as I understand it, you personally have been accepted as an expert in energy risk management matters and have testified on risk management issues before state regulatory commissions in Illinois? 145 MR. SNELL: Yes. 146 MR. PENNY: And there you represented the Central Illinois Light Company? 147 MR. SNELL: That's correct. 148 MR. PENNY: In Kansas, representing Western Resources? 149 MR. SNELL: Yes. 150 MR. PENNY: And Missouri on behalf of Laclede Gas Company. 151 MR. SNELL: That's correct. 152 MR. PENNY: Also Rhode Island representing Providence Gas Company. 153 MR. SNELL: Yes. 154 MR. PENNY: And in South Carolina representing the Piedmont Natural Gas Company. 155 MR. SNELL: Yes. 156 MR. PENNY: You have also provided staff representations to state commissions in Massachusetts, Michigan, Missouri, and Wisconsin -- 157 MR. SNELL: Yes. 158 MR. PENNY: -- on risk management issues? 159 MR. SNELL: Yes. 160 MR. PENNY: And I understand you also have municipality utility clients? 161 MR. SNELL: That's correct. 162 MR. PENNY: And you've presented energy risk management issues, seminars, et cetera, to city councils and committees in Florida, Texas, Tennessee, Mississippi, Kentucky, and Indiana? 163 MR. SNELL: Yes. 164 MR. PENNY: And as well, I gather that the seminars we mentioned earlier include risk management educational programs for energy associations, such as the American Gas Association, American Power Conference, American Public Gas Association, and the California Municipal Utility Association? 165 MR. SNELL: That's correct. 166 MR. PENNY: And you periodically appear as a guest lecturer at the University of Illinois School of Business on risk management issues? 167 MR. SNELL: Yes. 168 MR. PENNY: Now, your April 2000 program review of the Union Gas risk-management program, which is in the evidence in this case at Exhibit D.2, tab 1, that was prepared by you or under your supervision? 169 MR. SNELL: Under my supervision. 170 MR. PENNY: And any answers to interrogatories that were provided by RMI were similarly either prepared by you or under your supervision? 171 MR. SNELL: That's correct. 172 MR. PENNY: And do you adopt your report and the interrogatory answers for the purposes of your testimony here today? 173 MR. SNELL: That's correct. 174 MR. PENNY: Thank you, sir. 175 Now, Mr. Dent, you are currently the manager of gas supply for Union Gas? 176 MR. DENT: Yes, I am. 177 MR. PENNY: And in that capacity your responsibility is for the procurement of Union's gas supply, and that includes oversight and implementation of Union's risk-management program? 178 MR. DENT: That's correct. 179 MR. PENNY: You have a masters of business administration from the University of Western Ontario? 180 MR. DENT: Yes, I do. 181 MR. PENNY: You've been with Union Gas since 1993, I understand? 182 MR. DENT: That's correct. 183 MR. PENNY: And you've held positions as the manager of long-term gas supply, the coordinator of risk management, and the supervisor of credit and collections. 184 MR. DENT: That is correct. 185 MR. PENNY: And you have appeared before this Board on gas supply and risk management issues in three cases? 186 MR. DENT: That's correct. 187 MR. PENNY: At three previous cases, I should say. 188 Now, your evidence is at Exhibit D.1, tab 2. Can you confirm that that evidence was prepared by you or under your supervision, sir? 189 MR. DENT: Yes, it was prepared under my supervision. 190 MR. PENNY: And to the extent that you or your group responded to interrogatories on risk management matters, those were also prepared by you or under your supervision? 191 MR. DENT: That is correct. 192 MR. PENNY: And do you adopt that evidence for the purposes of your testimony today? 193 MR. DENT: Yes, I do. 194 MR. PENNY: All right. Thank you. 195 Mr. Chairman, being that there were some materials that were provided to us over the last day or two, one late yesterday afternoon by the intervenors, but rather than anticipate questions, I think we'll just wait and let the intervenors pose their questions. And there being no outstanding matters or updates or anything with respect to this panel, I'll make them available for examination. 196 MR. SOMMERVILLE: Thank you, Mr. Penny. 197 Mr. Brett. 198 MR. BRETT: Mr. Chairman, Mr. Birchenough, I have no questions for this panel. 199 MR. SOMMERVILLE: Mr. Janigan. 200 MR. JANIGAN: Mr. Warren has asked to precede me. 201 CROSS-EXAMINATION BY MR. WARREN: 202 MR. WARREN: Panel, my name is Robert Warren. I represent the Consumers Association of Canada. The constituency of my client are residential customers of natural gas, some of whom are on system gas and some of whom are on direct purchase. I have just a few questions for you, panel. 203 First of all, Mr. Dent, may I assume that what you are seeking from the Board by way of relief is approval for the new risk management policy which is set out in your evidence; is that right? 204 MR. DENT: No, that's not correct. We haven't, in this hearing, we haven't presented a new policy. What we've done is we've responded to the recommendations that were submitted to us by Risk Management Incorporated and we will be incorporating those responses into a revised risk management and procurement policy. 205 MR. WARREN: Having started on the wrong foot then, Mr. Dent, let me try desperately to scramble back onto the right one. What relief are you seeking then, sir? Are you seeking relief from the modified risk management policy? 206 MR. DENT: Well, we're seeking agreement for our responses to the RMI recommendations, so indeed, as we proceed to revise our risk management policy, we can be assured that as we incorporate these into the revised policy, that there will be general acceptance for that, and then we can proceed to build our diversified portfolio using that revised policy, incorporating those recommendations. 207 MR. WARREN: I'm not sure I understand what your answer is, and I'd hoped, Mr. Dent, that this was a fairly straightforward matter. Perhaps your counsel can assist you on this. What is the nature of the relief which is being sought with respect to the revised policy? 208 MR. PENNY: Well, I think Mr. Warren is aware, we're actually responding to an agreement that was made in the ADR of our last case. The agreement, in general terms, was that the intervenors accepted the deferral accounts, the gas supply deferral accounts, including the effect of risk management activities but -- and didn't have any specific problem with that, but wanted the assurance that Union's risk-management program, going forward, had been subject to third-party review and was regarded as reasonable. And so it was pursuant to that agreement that RMI was retained and the third-party review was conducted. 209 So I think in that sense, I think Mr. Dent is correct that we're bringing that forward. We're hoping that parties see that it is a reasonable approach and that the recommendations -- or the implementation of the various recommendations is reasonable. But other than that we're not really specifically seeking approval of anything. This is just how Union plans to go forward. 210 MR. WARREN: All right. Thank you for that, Mr. Penny. 211 Panel, could I ask you to turn up, please, your prefiled evidence, Mr. Dent, as Exhibit D.1, tab 2, page 4 of 12. This is under the heading "Union Response to RMI Recommendations". The first recommendation is, and I quote: "Redefine the objective, 'achieve a market-responsive price' to 'provide reasonable value through a diversified portfolio.'" 212 Can you explain to me and members of the Panel what is the significance of the change? What does it mean? 213 MR. SNELL: Is that for Mr. Dent or can I answer that? 214 MR. WARREN: For anybody who wants to answer that, sir. 215 MR. SNELL: The slight shift in focus really, I think, was recommended to more directly -- directly define the program in general. Reasonable value is maybe better put as historic value, I think would be a good definition; that is, natural gas markets are mean-reverging commodity. When prices go high, or unreasonably high, some might say, the powers to be, the supply and demand forces are at work to increase production and reduce demand, bringing prices back to more reasonable levels. Likewise, when prices get unreasonably low, maybe $2 or something like this, you have a tendency to reduce production and increase demand in a macro sense in the North American gas market. 216 Reasonableness, you might suggest, would come from an historic mean or median value over a three, four, five-year period. And the program or the suggestions we've made to Union have been to kind of statistically identify that reasonableness in the form of a mean or median value over time, and when prices get to that equilibrium value or, in fact, go lower, the program is designed to use proper tools and increase the coverage of Union Gas's portfolio to take advantage of historically cheaper values. 217 MR. WARREN: Perhaps I can put it this way, panel, so that you can understand my perspective: From the perspective of a residential consumer who's on system gas, who looks at the difference between market-responsive price and provide reasonable value, what would that residential consumer assume that Union was going to do for it as a result of this change? I want to translate it from the terms of macroeconomics and a lot of stuff that I frankly don't understand down to the perspective of the residential consumer looking at your risk-management program. What does the change mean for him or her? 218 MR. SNELL: I think it better reflects the fact that the program is designed to address two major issues to that residential consumer. One is price stability, and the second issue is trying to, should I say, buy as low as humanly possible. Those two goals are somewhat in conflict with one another, but certainly the residential ratepayer, I think, wants both issues addressed. And I think that the objective more directly defines that point. 219 MR. WARREN: And is it your evidence, panel, that the revised risk management policy will achieve a reasonable balance between those two potentially competing objectives of price stability and, as you put it, "buy as low as humanly possible"? 220 MR. SNELL: I think it does. 221 MR. WARREN: Mr. Dent, did you want to add something to that? 222 MR. DENT: No. That's correct. 223 MR. WARREN: Could I then turn, panel, to a second recommendation that I wanted to explore, and that is if you turn up Exhibit D.1, tab 2, at page 9 and following, and this is letter G of the recommendations. Quoting from the top of page 9 of 12 of Exhibit D about the 1, tab 2, it says, and I quote: 224 "Allow for a longer term hedge perspective by redefining the acceptable 'hedgible volumes' as a certain approved percentage of forecasted expected future demand and determine the acceptable longer term horizon and associated authorized percentages," a sentences, which I confess, I haven't the foggiest idea what it means but we'll get to that in a moment. 225 Then about two-thirds of the following paragraph I read the following sentence: 226 "Specifically, RMI recommends that the hedge committee should consider setting an authorized percentage of forecasted loads up to a five-year time horizon. Union agrees that a longer term horizon will enhance the program by allowing hedgers to take advantage of longer term opportunities as they arise, subject to the requirements outlined above." 227 Now, trying to disguise the hint of desperation in my question, panel, can you tell me what all of that means, again, from the perspective of a residential consumer on system gas? 228 MR. SNELL: The long-term perspective really gets back to our history of dealing with corporate accounts and the concept that, as prices do get, as I mentioned before, unreasonably low, that is, at levels where you can't expect that the price will stay there for a long period of time, your residential customer has needs not only for this year but the following year, the year after, et cetera; and when prices do get to be unreasonably low, the program is designed to allow Union Gas to systematically expand their coverage at a more fixed pricing position at what is historically a reasonable value. And that basically is going to have to be predicated on forecasted volumes, and in the out-years that's a little more difficult to do, so the way we'll be approaching this is the percentages in the out-years will actually be less than, certainly, a hundred per cent, but at much less levels because forecasted volumes can be more difficult to project. But nevertheless the quantities or the fact that the lower the price goes, the more coverage we'll get for longer periods of time is, simply put, what this statement is attempting too achieve. 229 MR. WARREN: Let me see if I can articulate my concern in that sort of Dick and Jane language that I understand. Do I understand that as a result of this policy change, Union may be entering into hedge arrangements or whatever kind of arrangements -- risk management arrangements, I suppose, generically, that would have the effect of securing a supply of gas at a fixed price over a five-year term; is that a fair understanding of what this may lead to? 230 MR. DENT: That's correct. 231 MR. WARREN: And as a result of doing that, sir, is there any risk that residential consumers might lose the benefit of a drop in natural gas prices over the course of a five-year period? 232 MR. SNELL: The funny thing about the program is that as the price goes down, this program is a rolling five years, so if the price, in fact, goes lower, the program will be designed to continue to keep that coverage and take advantage of lower prices further out. One thing that nobody in this room certainly wants to -- wants to hope for is higher prices. We all want prices to go lower. And it's a good thing that we're providing price stability on a stair-step basis as prices go lower, and if they stay low or at that level, we continue to maintain long-term coverage on a rolling basis. 233 MR. WARREN: I take it the answer to my question is there is a risk that residential consumers may lose the benefit of a decline of prices, the answer to that question is no. 234 MR. SNELL: They will be taking advantage of that lower price because they will be buying more gas further out on an ongoing basis. 235 MR. WARREN: My last couple of questions, sir, are with respect, if you wish, to the other side of the coin. 236 May I presume, Mr. Snell in particular, that companies who were engaged in the business of selling gas, natural gas at a retail level, that they are engaged in risk management as well? 237 MR. SNELL: You're speaking specifically of marketers who would market to your constituents? 238 MR. WARREN: Right. 239 MR. SNELL: Yes. They would back up their purchases or sales with some type of risk management. 240 MR. WARREN: And would Union's engaging in this program of risk management, which is designed, I take it, Mr. Dent, by and large, to protect the interests of system customers; is that fair? 241 MR. DENT: The program is run for the benefit of the sales service customers, that's correct. 242 MR. WARREN: Okay. Is there any adverse effect, any downside to direct purchase customers engaging in this program of risk management, whether modified or otherwise? 243 MR. DENT: No, for two reasons. First of all, again, we are managing that portfolio for the sales service customers, so the portfolio's developed for them. And then in the second place, with respect to the issue of volumes, again, when we go out three, four, five years and look at those volumes, we'll need to be sure that we leave enough room in the portfolio that, as direct purchase displacement occurs, that we will not be in a position of having so much direct purchase displacement that we'll run into a three, four, five-year hedge. So that would make the volumes we hedge a little bit longer term, will be relatively lower to the first and second year because of the need to forecast what direct purchase activity will be. 244 MR. WARREN: My final question to you, Mr. Dent, and I apologize if I hinted that was the final one, I've got one more. I want to imagine a circumstance where Union does not engage in a risk-management program, as may be suggested to you by one or more intervenors. I don't know that; I'm only guessing that at this stage. 245 But let's assume a universe in which Union were not engaged in risk management, can you describe for the Board the nature and extent of the risk that would be suffered by system customers if Union did not engage in this kind of risk management? 246 MR. SNELL: If you don't mind, I'll field that question. 247 The concept of not hedging is potentially the most risky position that one might take because you are assuming the total risk of the market in anticipation of trying to get the lowest possible price. And there is, again, a risk reward to the marketplace that makes that extremely risky. You have no price stability, you have no hedge against volatility, and it is, statistically speaking, a very risky to do nothing. 248 MR. WARREN: Thank you, Mr. Chair. Those are my questions. 249 MR. SOMMERVILLE: Mr. Warren. 250 MR. RYDER: I have no questions. Sorry. 251 MR. SOMMERVILLE: Mr. Janigan. 252 MR. JANIGAN: Thanks very much. 253 CROSS-EXAMINATION BY MR. JANIGAN: 254 MR. JANIGAN: Panel, my name is Michael Janigan. I am counsel for the Vulnerable Energy Consumers' Coalition, whose constituents are, in the main, probably close to completely system sales customers. I have some questions associated with the proposed changes to the risk management system of Union. 255 In order to explore that, I'd like to deal with a couple of different exhibits, one being a study of the Natural Regulatory Research Institute called: "Use of Hedging by Local Gas Distribution Companies, Basic Considerations and Regulatory Issues." 256 I believe a copy of that is being given to the panel. 257 MR. PENNY: Mr. Chairman, this is the one I indicated we got late yesterday afternoon. 258 MR. SOMMERVILLE: Thank you, Mr. Penny. 259 MR. VEGH: Are there copies for the other parties, Mr. Janigan? 260 MR. JANIGAN: Yes, there are. 261 And the other is an interrogatory from RP-2000-0040, the Enbridge case, interrogatory of the Consumers' Association of Canada, No. 7. Unfortunately, my copies of this are limited. It sets out the risk management policy of Enbridge. 262 I apologize for the lateness of my submission to Union of that initial study. I was under the impression that it had been filed in the EBRO proceedings, and I've, for the last month or so, been scouring my binders to find it. And yesterday I happened upon it in my library by happenstance. 263 MR. MORAN: Mr. Chair, the first document will become Exhibit M, as in Michael, 1.1, entitled: "Use of Hedging by Local Gas Distribution Companies, Basic Considerations and Regulatory Issues, by Costello and Cita, dated May 2001." 264 EXHIBIT NO. M.1.1: DOCUMENT ENTITLED "USE OF HEDGING BY LOCAL GAS DISTRIBUTION COMPANIES, BASIC CONSIDERATIONS AND REGULATORY ISSUES, BY COSTELLO AND CITA," DATED MAY 2001 265 MR. MORAN: The second document will become Exhibit M.1.2, entitled "Exhibit I, tab 3, schedule 7, Consumers' Association of Canada Interrogatory No. 7, filed in the RP-2001-0208 --" 266 MR. PENNY: I think it's a bundle of interrogatories and attachments that were filed in that case. 267 MR. MORAN: I'm sorry. Yes, that's correct, Mr. Chair. 268 EXHIBIT NO. M.1.2: BUNDLE OF ATTACHMENTS AND INTERROGATORIES FILED IN THE RP-2001-0208 CASE 269 MR. JANIGAN: Thank you. 270 Panel, I wonder if you could turn up Exhibit M.1.1. This is the article entitled "The Use of Hedging..." 271 You're familiar with the National Regulatory Research Institute? 272 MR. SNELL: I am not directly familiar with their work. 273 MR. JANIGAN: Are you aware they are essentially an institute set up at Ohio State through the aegis of the National Association of Regulatory Utility -- 274 MR. SNELL: Yes. Subsequent to receiving this, I had read where they had originated and I am now familiar with it. 275 MR. JANIGAN: And they are an independent research institute, as I understand it; is that correct? 276 MR. SNELL: Yes. 277 MR. JANIGAN: Okay. And I was interested in first dealing with some of the issues that they identified on page 5, Roman numeral V of the document. What I would like to do is look through these issues and see how Union deals with those issues in the context of its -- I guess it's either its existing or modified risk management strategy. 278 It's indicated about halfway down the page that: "State PUCs face several issues when it comes to a gas utility hedging with financial derivatives." 279 And it sets it out. And I would like to go through those issues one by one. 280 The first is how hedging fits in with the utility's more traditional gas management strategy which involves the purchase of both physical gas and storage, with the ladder functioning as a risk management tool affecting both price and operating risk. 281 I wonder if you could touch upon that and particularly dealing with the issue of storage. 282 MR. DENT: Union has storage, as everyone here is aware, and we do buy gas in the summer, put it into storage, and then pull it out of the storage in the winter. That becomes part of how we service the sales service customers as a whole. Again, there's no necessary guarantee that what you buy in the summer is cheaper in the winter. If you have a warmer-than-normal winter, actually prices in the winter can be lower than the summer. But as far as buying and smoothing out the yearly price, we certainly buy in the summer, store, and pull out for the wintertime. 283 MR. JANIGAN: Now, will the risk management strategy impact upon your standard use of storage in any fashion? 284 MR. DENT: No. We tend to purchase gas in firm, even dailies, and so in the summertime we're buying firm, even dailies. That's going into storage. In the wintertime we continue to buy firm, even dailies. If it's warm, some of that might go into storage or it might be used right away by sales service customers. So you're not getting a -- we're not playing spreads necessarily within the summer months, we're really buying firm, even dailies, filling storage, and then pulling it out in the wintertime. 285 MR. JANIGAN: So there will be no change in strategy associated with the use of storage -- with the adoption of these changes of risk management? 286 MR. DENT: That's correct. We might hedge summer versus winter differently because of some operational issues. But we are hedging both our summer supply and our winter supply because both can be subject to significant price volatility. 287 MR. JANIGAN: Looking at the second issue, "establishing the prudently-sized budget for risk-management programs," I must confess that when I reviewed the evidence, I had difficulty in isolating a particular budget for all the risk-management activities that are undertaken by Union. Is it possible that I had missed that and it is somewhere in the evidence? 288 MR. SNELL: That's an interesting issue because I would confess that I'm not exactly sure what they would include in a risk-management budget, if you will, or what might be involved in there. The transactional fees associated with any fixed price or options contracts are relatively small, or can be relatively small. And certainly I confess I'm not sure exactly what he had in mind with this. 289 MR. JANIGAN: I guess what I'm attempting to do is to get a handle on what -- what we're currently spending on risk management for Union and what these changes mean in terms of additional amounts to the budget. 290 MR. DENT: Well, I think the answer to that, quite frankly, is it depends. It really depends on the pricing environment that we're in in any given point in time. If we're in a relatively high pricing environment, as we've been in the last 12 to 18 months or so, we tend to be spending more on options because that gives us the -- it caps our exposure but still allows us some opportunity to participate with lower prices. 291 If we're in a relatively lower price environment, we might be doing a little bit more fixed price buying which may not have the same premium cost as what an option would. So again it would vary from season to season, and vary a little bit depending on whether you're in a higher or a lower price environment. 292 MR. JANIGAN: Okay. I guess what I'm attempting to deal, first of all, as a base line is what -- if Union's, for example, strategy was simply to go out and buy gas on an index somewhere, and as a consequence did not have a risk-management strategy, what -- in particular for their costs, what costs would be avoided by the pursuit of that strategy, leaving aside what effect it might have on the price of gas in the longer term. 293 MR. DENT: Well, essentially for Union, as we filed in one of our IRs, that cost is in the ballpark of 85, $87,000 which represents what our risk -- what a portion of -- what risk management costs are included in our gas supply admin charge. So assuming Union didn't have any -- we just bought the index, we probably would loss a little bit of O&M cost, but relatively small. 294 MR. JANIGAN: And with the modifications to your plan, I guess to some extent it depends on what you're doing in the plan, but is it possible to give some sort of an estimate of what we're talking about? 295 MR. DENT: Can you clarify what -- again, what cost you're looking at here? 296 MR. JANIGAN: The cost for the modifications that have been -- that have been proposed and accepted by Union. 297 MR. DENT: What's been proposed and really what Union has accepted in my evidence really represents a fine-tuning to what we already do. The risk-management policy that we've had, in its current form, has been tweaked several years ago, but it really is the same program that we've had since inception in the mid-'90s. It is a diversified portfolio approach to risk management. What we've seen in the report that Risk Management Incorporated has brought to us is one of not a major overhaul but of fine-tuning, and that fine-tuning could be incorporated within the cost structure of the program as it's currently constituted. 298 MR. JANIGAN: The next issue that's dealt with is, "Identifying among the infinite number of alternatives a specific risk-management strategy or set of strategies that are reasonable for a particular LDC." 299 I take it that the evidence you've set out and the evidence of RMI addresses that concern. 300 MR. SNELL: Yes. I think too that there are a number of alternatives out there. However, from our position -- our position is that these alternatives offer flexibility in addressing current market conditions as well as the needs and wants of the Union Gas ratepayers. You want to pick a particular tool that is most appropriate given the circumstances in the marketplace. 301 MR. JANIGAN: Dealing with initial number 4, "Establishing regulatory incentives for utility hedging and recovery provisions relating to hedging program costs." Dealing with the first part of that, "Regulatory incentives for utility hedging," what are the incentives for Union, at this time, to have an effective utility hedging program? 302 MR. SNELL: The incentives come down to developing of a prudent buying plan. Again, there is no monetary reward for them outside of the fact that it is a prudency issue. And of course there has to be -- what we hopefully have brought is a more quantitative and diversified hedge plan that provides prudency. 303 MR. JANIGAN: So in effect, the incentive is that if they act in an imprudent fashion, their costs will be disallowed by the Board. 304 MR. SNELL: That's always a possibility. 305 MR. JANIGAN: I'm curious, and I know you've replied to an interrogatory on this subject from us, why the issue of specific incentives for the utility to pursue effective gas hedging was not pursued. I put this in the context of developments in utility regulation in this province over the last few years where we've seen quite a number of different areas of utility operations exposed to incentives, and utility incentive to perform in a way in which they would keep a portion of the efficiencies that -- or benefits that they gleaned. Can you reply to that? 306 MR. SNELL: We've actually done quite a bit of work in this area, and the -- to incentivize [sic] a passive hedging program is extremely difficult. Once again, to have an appropriate benchmark or a plan whose objective is to provide price stability and, should I say, reasonable value is not the same as some of the other incentive plans that are geared toward maybe storage or off-system sales or capacity release, where there's a finite attempt to have a cost savings that that is exact. 307 With regard to hedging, for instance, in this particular year of 2003, Union Gas has a significant financial gain because, unfortunately, prices have rallied. But they put into place a strategy, predominantly calls, that, in fact, help to mitigate the adverse price movement to the residential ratepayer. Now, that was good that the program was in place, but nobody in this room, including myself, would have wished that to happen because the reality is we've got more gas to buy for those ratepayers and the prices remain high. 308 So measuring this effectiveness, well, was it effective in mitigating price risk? Yes, they've got $50 million plus in financial gains so far this year because of higher prices. Again, the bad news is we don't want to root for higher prices, and the best thing that could have happened to the ratepayer is that, in fact, prices fell and the risk-management program did its job, it protected against higher prices. But if the prices had fallen, the ratepayer would have, in fact, been better off. They had the program in place, it did its job but, again, it's hard to incentivize [sic] for something that is -- whose effect is, in fact, to stabilize price, not to profit from financial gains. 309 MR. JANIGAN: I know I've seen in a number of states, they seem to use the index as a measure or a benchmark against which the incentive is applied. Can you comment on the use of that? 310 MR. SNELL: Yes. The traditional incentive plan does not necessarily -- does not address price stability. What it really is is fact -- it's focused in on the issues I spoke of; the management of storage, the capacity release, for instance. And surrounding a benchmark number, index number, if you will, how they manage to that number on those issues really is where the incentive lies. 311 Now, I'll give you an example. In the state of Wisconsin, Wisconsin Energy, Wisconsin Gas, a subsidiary of Wisconsin Energy, has an incentive plan based on the factors I spoke of. At the same time, they have a separate passive hedging plan to address price volatility for the residential consumer, and that is a pass-through. And even though the commission and the company have looked at ways to incentivize [sic] this passive program, I come back to, the benchmark doesn't meet the criteria of the objectives that you're establishing, that is, price stability. 312 MR. JANIGAN: Just coming back to the Wisconsin example. So in effect, there's an incentive associated with the index, but at the same time there is a mechanism put in place to ensure price stability. 313 MR. SNELL: Exactly. It's a financial program so they can segregate the financial gains and losses from the passive hedging program separate from that index number, and they do that specifically so they can determine whether an incentive is involved and then... 314 MR. JANIGAN: Does the incentive work in that circumstance? 315 MR. SNELL: I would suggest yes. Again, it works in looking at trying to reduce costs in the areas of storage, capacity release. 316 MR. JANIGAN: I wonder if I could continue on. 317 "Specifying the operating features of the program which can include specific safeguards or limits in reporting requirements." 318 And I take it that those have been detailed in both the evidence of the company and the evidence of RMI? 319 MR. SNELL: Yes. 320 MR. JANIGAN: And 7, "Developing prudent standards by which to evaluate the utility's hedging practice." 321 I don't believe your evidence speaks to this, at least directly. I wonder, could you comment on that, what might be an applicable prudent standard? 322 MR. SNELL: I would be glad to submit that in many of these instances that we've been involved in, the program we have laid out and one of the areas in which we feel very strongly about, is to more quantify the program -- the program's objectives as well as the execution of the program. So to look at Union's program before the fact and look at the methodology behind it in buying value, this has, in many states, been accepted as a prudent way in which to go about purchasing gas. 323 MR. JANIGAN: And I believe the measuring stick, if I've got this right from reading the evidence, seems to be the measurement of standard deviation from the mean in terms of gas price; have I got that right? In terms of looking at -- 324 MR. SNELL: No. The standard -- in the proceeding, I believe the wording was such that it suggested that many times people would look at standard deviations around a price to determine whether it was a reasonable value. 325 MR. JANIGAN: Yeah. 326 MR. SNELL: The trouble with standard deviation is, of course, it can very widely, as the market volatility increases or decreases, and it too is a difficult benchmark, although once again, I think it has failed as a fail-save or, hey, you're good if you're in this range. 327 I come back to, as prices fall, and they continue to fall, the program as it is laid out here is designed to allow ratepayers to continue to benefit from falling prices. 328 MR. JANIGAN: What I'm getting at is, when can we tell that the program is not doing its job, I guess is the key question. And would I be correct in saying the first flag might be whether or not the price is within one standard deviation of the mean? Maybe not the only flag, but the first flag? 329 MR. SNELL: I would suggest that it would depend on which side of the standard deviation it fell outside of, and the conditions of the market at the time. One standard deviation around a mean can be a very limiting benchmark. 330 MR. JANIGAN: What would you suggest as an appropriate benchmark? As intervenors, we at some point in time, and the Board of course, will have to evaluate the prudency of this program. What are the standards by which we're expected to evaluate it? 331 MR. SNELL: Well, again, once of the issues is the volatility measure, which is important. Your customer base is -- I think overwhelming the evidence is that customers do want some price stability in their rates, and the volatility measures which are in evidence show that has been drastically reduced. That certainly is a valid benchmark. 332 MR. JANIGAN: And if they were exceeding those rates that historically they achieved in the future -- in the past, if they were exceeding those rates in the future, that would be an indication that the risk-management program is going off track? 333 MR. SNELL: Exceeding the rates or exceeding the volatility? 334 MR. JANIGAN: Exceeding the volatility that had been historically achieved by Union. Let's say -- 335 MR. SNELL: Well, yes and no, because the volatility -- as Union beats the volatility in the market, that's an appropriate measure. As Union looks -- as historically you look back and see what the volatility of Union's rates are, that may be a little misleading, good and bad, because as the market's volatility decreases, you would likely expect that Union's volatility will also decrease. It's the differential between the market volatility and Union's rates. 336 MR. JANIGAN: So if the differential between the market and Union's rates changes in some fashion, and in particular if the volatility of Union's rates approaches those of the market, that would be one indice to show that Union's risk-management program is not doing the job it should? 337 MR. SNELL: It would be something to look at, but it would not necessarily suggest that Union is not doing something right. You would have to look at their portfolio, as is described here, and look at the types of tools they're using. Certainly, it would be, as you mentioned, a flag to review why this happened. But there could be an explanation given the market conditions and the tools that are being utilized at the time. 338 MR. JANIGAN: Are there any other flags that we can look to in the future to evaluate Union's program? 339 MR. SNELL: Once again, one of the primary suggestions we had was to further quantify Union's program so that everyone has a better understanding of the direction and scope of what they're doing and when they're doing it. And a significant deviation from that program, I would suggest, would obviously not be a positive thing. 340 MR. JANIGAN: I wanted -- there's a lot of material in this particular study, and some of which I wanted to touch upon, but I don't want to be repetitive here. I'd like to refer you to the following page, on Roman numeral VI. The study's authors indicate: "This report makes several observations about --" a third of the way down the page: 341 "This report makes several observations about the use of financial derivatives by hedging from LDCs. One is that it is not clear cut that gas utilities should hedge. Whether they should importantly depends upon the preferences of customers for price stability and the utility's ability to maintain adequate internal cash funds given gas price volatility and the time lag between gas costs being incurred and ultimately recovered. Hedging is more justified when consumers exhibit risk adverse behaviour expressed in their willingness to pay for stable prices." 342 Could you touch upon the issue of customer preference for price stability? What do we know about it in general terms and what do we know about it specifically with respect to customers of Enbridge? 343 MR. SNELL: This is an interesting point because I think that from the very beginning of the deregulation of the gas market, utilities have focused and commissions have focused on this issue, what does the customer want? And I don't have a survey to show you that says, Oh, we know exactly what customers want or need. But there is a -- I believe in my filing or document, there is a map that shows that over 80 per cent of the regulatory commissions in the United States have addressed hedging issues, and in fact, have at least cursorily adopted the use of financial instruments by utilities. And I think their desire to do so, you could arguably say, stems from the calls and complaints that are received when the price goes to $10. And again, in a time of high prices, I think we've all now experienced after 15 years in the gas market, that there is certainly an understanding that price stability has a place in a regulated utility's portfolio. 344 MR. JANIGAN: I take it there's nothing specific in the evidence from Union's customer group on this particular issue in an empirical or maybe even an anecdotal evidence. 345 MR. DENT: The anecdotal evidence we submitted at the May QRAM, some of the intervenors might recall, as well as Board members, that we submitted a number of exhibits which showed the customers' reaction to the relatively high retroactive charge. There is a bit of anecdotal evidence that way. I'm not aware of any research that Union has specifically done on the per-customer sensitivity, though. 346 MR. JANIGAN: Just before I leave this page, they continue on: 347 "The second observation is that LDC should refrain from speculating. Speculation is an activity where the utility takes on more risk with the expectation of earning a profit, and while we suggest that LDCs should refrain from speculating, it is generally recognized that the line between hedging and speculating can be quite thin. Hence for regulators, that find hedging --" I'm sorry, I don't have the word. It's a little bit problematic on mine. 348 MR. PENNY: "... hence for regulators that find hedging in the public interest." 349 MR. JANIGAN: Thank you, Mr. Penny. "... they face the challenge of brightening the line between hedging and speculating." 350 Can you comment on that? 351 MR. SNELL: One of the -- I come back to one of the suggestions that we have for Union Gas is to more quantify their proposal around reasonable value to avoid any pretense of speculation. This is a very, very critical issue and is near and dear to our heart. The concept of going in and buying or selling commodities for profit, or looking specifically at the financial gains or losses -- I mentioned Union Gas's significant gains this year - and the fortunate part is we had a risk-management program that mitigated some of the cost. The unfortunate part is prices rallied and, longer term, that's not good for the customer. 352 So the concept of trading for profit isn't really what we're here for, and it isn't a good benchmark. And so that speculative element needs to be washed from any -- the concept of speculation needs to be washed from any hedge program. 353 MR. JANIGAN: And they go on at the bottom of the page: 354 "Hedging also should not be expected to reduce the average price of gas purchases over time. Hedging, in its purest form, does not provide a means to reduce the expected price of gas for a utility." 355 So as I understand it, when you talk about providing reasonable value, as I read the evidence, that means that the -- you would anticipate that the volatility of Union's prices would be within -- within one standard deviation of the mean of prices on the market; am I correct on that? 356 MR. SNELL: I'm sorry, you mentioned the standard deviation. Prior to that -- 357 MR. JANIGAN: Perhaps I got into a second question. Perhaps I'll allow you, first of all, to respond to the quote and then ask you question about reasonable value. 358 MR. SNELL: The hedging -- as you look at the influence of hedging on an ultimate price, it frankly depends on what point in time you look at the hedging results. I mentioned at the end of 2002 in Union's case, relative to the history of their hedging program, I think they had a small loss to the market over that time period. As we sit here today, after the high prices of the last six months, they show a hedging gain over that same time period because of the -- we're looking at this after very high prices so therefore the financial contributions of the hedging program are more reticent because we've just -- we've just come off of very high numbers. 359 So when you look at the hedging results -- we've always asked the question, at the end of five years, at the end of seven years, do you end up equal or higher or lower? It could be argued that you would be about the same. But it would really depend on exactly what time in point -- point in time you examined the seven years. Are you coming off of very high numbers or very low numbers, and it could tilt as a positive or a negative. 360 MR. JANIGAN: My second question was developed over the use of the term "reasonable value." As I recall, in some of the evidence that was looked at in terms of whether or not the end result was within one standard deviation of the mean, and then in another part, it was defined as historical value. Were these one and the same? 361 MR. SNELL: The comments around standard deviation mention that there have been utilities that have -- entities that have looked at the concept within one standard deviation were in a reasonable level. We go on to say in that same issue -- in that same statement that we aren't a proponent of that, and I think there can be, at times, circumstances where you might fall outside that one standard deviation in value. More to the point, our feeling has been very strong, and of course our philosophy is that certainly reasonable value can be maybe better phrased as historic value. 362 MR. JANIGAN: I'd like to -- before I leave this study, I'd like to look at some of the guidelines that they have proposed for utilities that are facing hedging programs, and that -- this discussion commences on page 48. 363 The first item that they offer in terms of guidelines, halfway through the page, is "establish the need." 364 It says, "Because risk management is a costly activity, having evidence that customers are willing and able to pay for that service may provide both the LDC and regulators with a picture of how large the hedging program should be in terms of the budget and the kind of protection customers may prefer." 365 I take it this is the same question that we visited early about the wishes of customers, that, in general, we have anecdotal evidence that indicates that customers get upset with large variations in gas prices, at least when gas prices go up. I'm sure they don't get upset when gas prices go down. Is that correct? 366 MR. SNELL: That's correct. 367 MR. JANIGAN: And the second point they make is: 368 "To begin with, keep hedging programs as simple as possible. We know here that it's feasible to keep gas repairment decisions separate from hedging program decisions. When hedging decisions," further on in the paragraph, "When hedging decisions are comingled with gas purchase decisions as in the case of fixed price gas contracts, it is more difficult to assess the prudence of that bundled decision." 369 Now, as I understand it, pursuant to the recommendations that Union is going in an opposite direction from this particular guideline, can you explain why? 370 MR. SNELL: One of the issues that Union has -- Union has a history of fixing price on physical contracts, which is normal course of business for many utilities and others in the business. It is simply another way in which to mitigate price risk. But because they are using risk management strategies within the physical contracts, that is, fixing the contracts themselves at a set price out into the futures, we felt that the gas procurement and risk management should be more closely aligned. 371 There are, as I mentioned in Wisconsin, there are other areas -- I'll beg to differ with this finding in that I think either way it can be -- is appropriate. I don't think there's a right and a wrong way. I mentioned Wisconsin where they had an incentive program and it was very necessary for them to keep the financials separate from the physicals. 372 There are others -- other customers of ours who simply use all physical contracts to -- for the purposes of risk management, be it a fixed price or a cap or a collar. They'll embed those in the physical contracts, and that's okay too. It really depends on what they're most comfortable, what the regulators are more comfortable with. And realistically there's not a right or wrong answer here. So my difference with them here isn't that one is better than the other. 373 MR. JANIGAN: What about their comment that it is more difficult to assess the prudence of a bundled decision when you have gas procurement in with the risk management? 374 MR. SNELL: The reason being is that if you have a financial contract out here, it just sticks right out here as a plus or a minus. In a physical contract, if it's flowing through with the rest of the physical gas, it might not be readily apparent that they mixed the price on a contract. 375 Now, again, with our suggestion with Union Gas, and their utilization of some fixed price contracts within physical markets, and they've accepted this suggestion, they've wanted to bring that pricing into their risk-management program to alleviate any problem with looking at these bundled decisions. 376 MR. JANIGAN: Third guideline is "Articulate and specify the objectives of a hedging program." I think you've identified those objectives in both the evidence of the company and RMI's evidence. 377 MR. SNELL: Yes. 378 MR. JANIGAN: Four, "Identify all hedging program costs." 379 And I think this is directly related to your recommendation, the RMI recommendation, am I correct, in terms of quantification? 380 MR. SNELL: Yes. Yes. 381 MR. JANIGAN: And this is perhaps more particular to the U.S. circumstances: 382 "Recovery provisions should be clearly articulated. Customers must understand that risk management provisions are costly and the customer should also understand the expenditures on risk management do not always produce a benefit." 383 I take it they mean by "benefit" a price reduction? 384 MR. SNELL: That's correct. 385 MR. JANIGAN: 5, "Identify the LDC's risk management expertise." 386 I take it from my understanding of the evidence, RMI will be assisting Union in the context of -- 387 MR. SNELL: Yes. 388 MR. JANIGAN: Six, "Establish reporting requirements. Every hedging program should require a reporting of all risk management activities so that regulators are fully informed of program development." 389 Can you clarify how the risk-management program of Union, as modified, will meet this guideline? 390 MR. DENT: We haven't discussed specific reporting requirements. Currently we are reporting risk management impacts through the ERO report itself. And certainly through the last customer review process, we were asked to prevent a variety of reports on our risk management activity and that was done. Included in that was not just the impacts of financial risk management, but the impacts of physical risk management as well. 391 And so when we've been asked for information, we've provided that. Certainly in the last two customer review processes and certainly in the ERO report, the impacts of risk management is included in those monthly reports. 392 MR. JANIGAN: I'm going to come back to one of the recommendations of RMI concerning a review of the program. This specifically deals with the reporting arrangements with the regulator, I assume. 393 MR. SNELL: This question? 394 MR. JANIGAN: Yes. 395 MR. SNELL: I would assume so, yes. 396 MR. JANIGAN: Okay. Seven is: 397 "Consider upfront approval of hedging program proposals. The prudence of a purchasing a call option should not hinge upon whether the option was exercised. Reasonableness of a hedging program should be evaluated before a program is actually implemented." 398 I take it, if I understand your discussion with Mr. Warren, essentially Union is coming forward with their existing risk-management program as modified by the RMI and asking the Board to take a look at it? 399 MR. SNELL: That's correct. 400 MR. JANIGAN: And the understanding is that if the Board does not change it following this hearing, this is the program that will be implemented? 401 MR. SNELL: Yes. 402 MR. JANIGAN: Okay. 403 Mr. Chairman, I have another sort of range of questions I'd like to go into. It might be an appropriate time for a break. 404 MR. SOMMERVILLE: Very well. We'll break until 11:15. Thank you. 405 --- Recess taken at 11:15 a.m. 406 --- On resuming at 11:22 a.m. 407 MR. SOMMERVILLE: Thank you. Please be seated. 408 Mr. Janigan. 409 MR. JANIGAN: Thank you, Mr. Chair. 410 I wonder if you could turn up page 12 of the RMI report and look at the table on page 12. I believe it indicates that from 1998 to 2002, for this period, Union's average price was $4.17 a GJ, while the market average price was less than $4.03 a GJ? Have I got that correct? 411 MR. DENT: That's correct. That was information provided by Union, and it really summarizes our Empress buys through that period. 412 MR. JANIGAN: And there was also a reduction in price volatility achieved for this higher market price; in effect, Union Gas decreased volatility by 59 per cent. 413 MR. DENT: That's correct. 414 MR. JANIGAN: So we can sort of look at the cost. Would it be fair to say that the cost associated with the reduced volatility would be the difference between $4.17 and $4.03? 415 MR. DENT: That's correct. Over that time period, if I can draw your attention to Exhibit J.24-18, where again, we've had a little bit more experience, we've added on since this report was done, and if you look at those numbers, again, the volatility reduction is about the same, but the overall cost is slightly below the overall market. 416 Now, that's virtually the market, because on a five year, five and a half year portfolio of three and a half or so billion dollars, it's virtually flat. 417 MR. JANIGAN: I take it particularly in the 2000, 2001, 2002 period, we were seeing a fair amount of change in the volatility of the natural gas market in general. 418 MR. DENT: As measured by standard deviation, and certainly as experienced through the price uplifts and downlifts, that period has been really significantly more volatile than earlier times. 419 MR. JANIGAN: Now, the table at page 12, the market price range we are looking at here is the monthly variation associated with natural gas prices; is that correct? 420 MR. DENT: Which column are you referring to? 421 MR. JANIGAN: I'm dealing with the difference between Union and the market. 422 MR. DENT: That's correct. The market price we've used was the monthly Empress settle. 423 MR. JANIGAN: Okay. Now, customers on their bill don't actually experience the monthly commodity price variation, I understand. The commodity price of a customer's bill is one that's reflective of a 12-month average forecast? 424 MR. DENT: That's correct. The reference price sales rate are based on that one-year forward consensus currently. 425 MR. JANIGAN: How, in that circumstance, can we factor in, then, customers' expectations associated with this table? 426 MR. DENT: Could you rephrase that question? I'm not sure I understood it. 427 MR. JANIGAN: Well, we're looking at, in effect, variations based on monthly data. If the monthly data is not reflective in the customers' bill, how can we sort of revisit the question of customer expectations based on that data? 428 MR. DENT: This data was not prepared with that type of customer expectation in mind. This data was really prepared to show what Union's achieved price was versus what the market price was. So I wouldn't draw any customer expectation from this particular data. 429 MR. JANIGAN: I guess, put it another way: How will customers see reduced monthly price volatility in their bill, given the way it's constructed? 430 MR. DENT: Well, in the current sales rate environment, those variances go into the deferral account and the deferral account has been disposed at year end. But going forward with respect to Union's QRAM proposal, we will be prospectively clearing deferral account balances quarterly, and so the customer certainly in that sales rate going forward, assuming the Board adopts Union's proposal, they will definitely see that impact, maybe not monthly but certainly on a rolling, quarterly basis. 431 MR. JANIGAN: So, in effect, the impact will eventually wend its way to the customer's bill, notwithstanding the fact that it won't be monthly price variation? 432 MR. DENT: That's correct. The timing might not be monthly but the customer will be impacted by it. And again, with Union's new QRAM proposal, the impact will be experienced within the period, not at a year-end type of adjustment. 433 MR. JANIGAN: Now, I take it that an alternative to hedging is the purchase of some of the gas supply requirements under a fixed price and some under an index price? 434 MR. DENT: Well, in my view, that really is a hedging program itself, and that, to some extent, reflects Union's portfolio construction where our policy today points out that we are neither a hundred per cent fixed or a hundred per cent floating, and that we do use diversified tools, some of which are fixed physical or financial fixed price swaps and the caps and collars that are constructed through option variations. 435 MR. JANIGAN: What's the benefit of carrying out hedging as opposed to a program that consists of purchase of fixed quantity and one which purchases on an index. 436 MR. PENNY: Well, sorry, Mr. Chairman, the witness has just indicated that he does not distinguish between a hedging program and the kind of thing that Mr. Janigan just indicated. 437 MR. JANIGAN: Well, let's put it this way, is there any -- I take it you would agree that there is a benefit of adding hedging to a program that consists of purchasing fixed quantities and one that purchases gas upon an index. 438 MR. DENT: Purchasing fixed quantities or fixed -- gas at a fixed price is a physical hedge but it is a hedging nonetheless. 439 MR. JANIGAN: And you would agree that a fixed gas supply contract is also an available market supply option? 440 MR. DENT: That's correct and Union does -- even today will purchase gas on a fixed-price basis. 441 MR. JANIGAN: Okay. I'd like to have you turn up Exhibit D.1, tab 2, page 7. This deals with the review, the program review. It's noted here that: 442 "Union supports a review of its commodity risk-management program when it deems it necessary rather than on an annual basis. A review of the program will be completed on a periodic basis which will likely not occur on an annual basis but rather as required to ensure the program is consistent with industry standards, and to reflect any market condition changes." 443 Now, on page 15 of the RMI report, the bottom of that page, it's noted that: 444 "As an additional responsibility, RMI recommends that Union Gas conduct periodic reviews of the policy to ensure all aspects of the program are current with any recent changes seen in the industry. Typically an annual review was stated as the minimum requirement with the potential to make updates on an as-needed basis." 445 Now, when I'm comparing those two sections, it would seem that RMI would consider an annual review to be a minimum requirement whereas Union does not support that. 446 MR. DENT: That's correct. Union does not support an annual review. In one of the IRs we supported a periodic review of three to five years. Our rationale for not supporting an annual review include, first of all, even this -- even this review, when we did the groundwork starting kind of in the period of May -- of May 2002 and we really wrapped up the review in April of 2003, if we were doing an annual review, we would just be going through a revolving door, it would be a continuous type of review. That seemed like, from a timing point of view, annual was a little much. And of course there are some costs associated with that. We certainly don't mind paying some consultant fees, but we want to be somewhat reasonable about the frequency of the expenditures of those fees. 447 And then thirdly we kind of looked at the market as a whole, and the statistical analysis that we use, even today, looks at a four-year cycle. Assuming that gas prices have a bit of a four-year cycle involved with them, so we said, Well, maybe a three to five-year time horizon to review the program, based on that four-year cycle of gas, probably has some resonance, because if you're going to see some change in volatility, change in market circumstances, chances are it will be identified within that three- to five-year period. 448 MR. JANIGAN: Well, if I can ask Mr. Snell, on page 15 you've indicated that this is -- is typically stated as a minimum requirement, and at page 27 in your evidence, in the second paragraph, it's indicated that "Additionally, to ensure the Commodity risk-management program remains current, RMI recommends that the Hedge Committee list of responsibilities include at least an annual review of the program for any needed updates." 449 What's your comment on Union's position? 450 MR. SNELL: Obviously, when we look at the review process, it is important that we conform obviously with industry standards. But most importantly is the market conditions and the industry conditions at the time that you review the program. If things are fairly static, it's not going to present any significant problems, having review on a three-to five-year time horizon. It's really as the market and industry conditions dictate. 451 I would also suggest that in our testimony we pointed out that the risk-management committee should review this policy and procedure on an annual basis and have a -- make sure that, in fact, it's not time to revamp some of these sections of the policy and procedure. A full-blown, outside consultant coming in and reviewing the policies and procedures as we have done here may not necessitate this annual review that we discussed. 452 MR. JANIGAN: So when you say that it is dependent upon conditions of the market, presumably if volatility -- if there are changes in volatility in the market, this would be one condition which would potentially prompt the necessity for a review. 453 MR. SNELL: That's correct. 454 MR. JANIGAN: In interrogatory number J.24.17, you were asked about any risk management hedges that Union currently has or may be planning in conjunction with an affiliated third party. And I believe the answer was that there was no hedges and none planned. 455 MR. DENT: That's correct. 456 MR. JANIGAN: What would occur if you were intending to carry out a hedge with an affiliated third party? 457 MR. DENT: If we were doing a hedge with an affiliated third party, we'd be required to establish an instant master agreement with that affiliate. The instant master agreement is really a contract outlining the terms and conditions of how the commodity swap or co-option would be transacted, and that's part of our policy. It would be standard whether we're dealing with an affiliate company or with TD or CIBC or any one of the other financial houses. So that would be the first thing that would have to be in place. 458 And then secondly, if that affiliate was qualified -- prequalified in that way, there would be an issue of going out to tender. We get three quotes for that business and so we would need -- we would still follow our policy as far as getting three dealers on the phone and getting three not quite simultaneous but fairly close in time quotes. And again, we would be subject to the RFP process where that -- the company would get the -- who would get the business would be the one offering the lowest price. 459 MR. JANIGAN: Are there any formal guidelines in writing with respect to the purchase of hedges? 460 MR. DENT: Within our risk policy program itself, it lays out the process of the documentation and the three-bid process that I just referred to a minute ago. 461 MR. JANIGAN: Is there one document that you may be able to produce that contains all that? 462 MR. DENT: That is outlined in our risk management policies and procedures. I believe we filed that document as part of the 2001 customer review process, and I'm sure we can make that available to anyone who desired to see it. 463 MR. JANIGAN: Can I get an undertaking on that. 464 MR. MORAN: Yes, Mr. Chair, that would become Undertaking N.1.1. Just for the record, I wonder if the witness could give us the name of that document. 465 MR. DENT: The document would be Union's risk-management policies and procedures. 466 UNDERTAKING NO. N.1.1: TO PROVIDE COPY OF UNION'S RISK-MANAGEMENT POLICIES AND PROCEDURES 467 MR. JANIGAN: Now, in appendix 3 of the RMI report, there's an example set out of a hedge program methodology, I believe, in table 2. Is this, in fact, the methodology that Union will use? 468 MR. DENT: Yes, Union will be adopting this methodology. You will note, though, that in the table it's noted as an example, and what we need to do internally is to make sure that the matrix matches some of the volume considerations that is we talked about before the break with respect to direct purchase activity, and also to make sure that the time triggers as well match the volume numbers. So there may be some tweaking as internally we review this ourselves, but this is the type of thing that we've agreed to adopt, this type of matrix overlaying both a price and a time trigger. 469 This, by the way, in answer to an earlier question with respect to speculative hedging, this is what keeps the utility away from being a speculator, because the time parameters force you to transact at a certain point in time, you're not waiting, waiting, waiting for prices to get weak without any kind of a time trigger. The time trigger forces you to hedge regardless of whether you have a view that the market will continue to get lower. So the matrix helps us to also identify one of the issues that we earlier discussed before the break. 470 MR. JANIGAN: Can you just briefly walk through an example of how this matrix works? I must admit, I found it a little bit difficult to follow. 471 MR. SNELL: It might be appropriate to go to table 1 first to get the deciles. Table 1 is a breakdown with several sides. It's a breakdown of daily NYMEX prices over the last four years, adjusted for inflation, with the highest price being in what we called hundredth decile, to the lowest price over that four-year period broken down into 10 per cent of the highest samples, 20 per cent, 30 per cent, et cetera. 472 Once again, in my previous testimony I made a comment that as prices do rally and get very high and get into the 90th or 100th decile relative to the last four years, supply and demand conditions in the market go to work and adjust themselves where we see more production and less demand pushing prices back to a mean or median value. Subsequently, as they get lower than the mean or median value, the opposite occurs where you see less supply on the market and of course, demand tends to pick up in a freely traded price -- mean reversion commodity like gas, you revert back up to the mean. 473 Again, reasonable values, you look at this, when you -- we break this down, by the way, into the winter and the summer seasons which is a typical -- the injection season and withdrawal season and storage, the typical time parameters. It may have particular characteristics as far as pricing is concerned. So we'll look at this mean and median value. 474 As you turn to the next page and you look at when we might buy what, you'll see that, first and foremost, as we try to identify reasonable value as being a median value for gas over the last four years, when you start moving below that median value, that means that obviously half the trade over the last four years has been above that and half has been below. As it goes lower and lower into these deciles, as you'll see here, Union starts to purchase more and more gas. 475 As this example lays out, it shows current winter volumes and how you would categorically start to buy and buy more as the price goes down, and then one year out you're not going to buy as large a quantity, but you're going to buy, once again, concurrently, as the price falls, you're going to buy more volume further out, such that as prices get extremely cheap, down to what I mentioned earlier as being unreasonably low levels, and we know that sooner or later we won't encourage production and demand will increase, prior to prices hopefully rallying, we'll we in a position where we can expand our coverage and secure more of that good value. 476 MR. JANIGAN: And following along, table 3 is what happens if the price is higher than the mean. 477 MR. SNELL: That's correct, in that one of our goals of course is to provide price stability to the customer. If prices are higher than this reasonable value, we still want some stability because, of course, prices can go higher yet, at least momentarily. So we do have time triggers in here that if the historic value hasn't been seen, we still want to buy something. I'll also point out, though, as table 4 would indicate, the tools that you would use to secure pricing might change depending on where the historic value is relative to the current price, and at the higher numbers, we rely more on caps or collars, which are more -- give you the latitude to obviously put a cap in of some sort, but at the same time if the markets do come back to reasonable levels, you have opportunities to participate in the price drop. 478 MR. JANIGAN: Now, these targets which are established in the model for price, volume and time, how would these targets be changed by Union? 479 MR. DENT: Any changes that we would make to any aspect of our policy does go through the commodity risk committee, and ultimately we've filed -- we'll file changes with the Board as well. So both the policy changes and, I would envision, any significant changes to this type of -- once we establish our starting point, if we determine that we needed to change those, for whatever reason, maybe DT activity was higher or lower than what we thought, then again, we would both approve it through our commodity risk committee and file an updated policy with the Board as well. 480 MR. JANIGAN: Now, I note on page 31 of the RMI study there's a list of RMI energy utility service clients. I note that Enbridge is not a client of RMI. 481 MR. SNELL: No, they are not. 482 MR. JANIGAN: And as part of the study, did you look at Enbridge Consumer Gas risk-management program? 483 MR. SNELL: The only part of that study that I have seen was only recently, as of yesterday, or any semblance of their program. 484 MR. JANIGAN: Okay. 485 MR. SNELL: I have a general understanding of it. 486 MR. JANIGAN: I wonder if I could have you turn up that exhibit, which is an interrogatory with attachments, marked K.1.2, I believe. 487 MR. MORAN: M. 488 MR. JANIGAN: M, sorry. And on page 6 of the exhibit, the company, Enbridge, outlines its objective as part of its risk management approach, that the company's objective for the gas supply risk-management program is to find an appropriate balance between two conflicting goals: 489 "Maintain a gas supply portfolio that contains a sufficient portion of floating price supply to provide an opportunity for customers to obtain actual gas costs below forecast and limit the gas supply portfolio price volatility to avoid unacceptable increases of actual gas costs from forecasts." 490 And if we contrast that with the objective that RMI is proposing and Union is agreeing to on Exhibit D.1, tab 2, at page 5, it is "to achieve a market-responsive price to provide reasonable value through a diversified portfolio." 491 Now, in your view, are these two objectives similar or are there some important differences? 492 MR. SNELL: I think that they're relatively the same. First of all, I think in both instances the comment -- the idea of mitigating price volatility is the same, and when you read the first bullet, it is constructed differently, but they're looking at a sufficient amount of floating price supply or market gas, if you will. Now, I did not phrase it this way, but the reasonable value for gas is a similar instinct in that as we look at -- indexed gas is a part of the Union Gas portfolio now and will be in the future as we don't necessarily go to a hundred per cent of usage no matter how low the price goes. So the concept of price stability along with reasonable value may state this slightly differently, but I think they're very similar. 493 MR. JANIGAN: Okay. In particular, would you state that the opportunity for customers to obtain an actual gas cost below forecast is similar to the reasonable value projected? 494 MR. SNELL: In just reading this and not knowing what was behind it, it sounds similar. Now, if this were to articulate that what they're attempting to do is get spot values for gas, I don't know that I would agree with that objective. 495 MR. JANIGAN: Okay. Union's methodology requires that to carry out a cones of confidence test, the company would normally hedge about 10 percent of its remaining volumes. 496 MR. DENT: Union would not use a cones of confidence -- 497 MR. JANIGAN: Sorry, did I say Union? I meant to say Enbridge. Enbridge is required to carry out a cones of confidence test, and the company will normally hedge about 10 percent of the remaining volumes. This differs from the Union ... 498 MR. DENT: Yes, that's correct. The way I read the policy, and again, I've just read it yesterday, is that Enbridge, once they hit the $35 per customer impact, that will trigger some hedging, presumably to the volume that has been referenced. Our philosophy and our practice has been slightly different. We've taken maybe a bit of a higher view where we're looking to develop a portfolio over time, and we will layer in hedges over time. We're not making one big transaction at one period of time, but over a number of weeks and months, we'll hedge -- we'll layer in our transactions to give us an overall portfolio. And we believe that that does give us protection. 499 For example, the March '03 situation, prices for the winter kind of balanced between five and six U.S. for most of the winter, and just kind of the third week in February through to the expiration of the March NYMEX contract, the price of gas went from about $6 to $10. Well, those three or four days wouldn't have given us enough opportunity to react. But because we layered in hedges over time, then that produced a dampening effect of that price increase and it's as a result of not reacting necessarily to what a short-term PGVA impact would be in our case, but it's a result of layering in our hedges over a longer period of time. 500 MR. JANIGAN: Would it be correct to say that Union's program requires more judgment in the making of hedging decisions than Enbridge? Enbridge seems to operate on the basis of rather objective standards. 501 MR. SNELL: I would say no. I think that, again, the -- many of the suggestions that we had for Union were to better quantify the diversified portfolio that they operate. And although there will be some slight judgment within fairly strict parameters, I would suggest it would be very similar to -- and again not knowing the specific of the execution piece of Enbridge, very similar to the objectivity of Enbridge. 502 MR. DENT: Yeah. We certainly have a rule of thumb where, prior to entering winter, we will be 40 to 70 per cent hedged, and prior to entering the summer we'll be slightly less, 25 to 50 percent hedged, less in summer because there's some operational concerns we may have to deal with coming out a warmer-than-normal winter. But prior to entering either the winter or summer season, in our current construction of the program, there's some rigors, as far as layering in those hedges. So although you may have some discretion as far as you use an option or a fixed price, the overall hedge percentage, we're going to be that 40 to 70 percent mark prior to entering the winter season. The program just -- the way we operate it, it just requires us to make those decisions. 503 MR. JANIGAN: On page 16 of Exhibit M.1.2, Enbridge sets out its procedure for approval for risk management transactions. Is there a significant difference in the procedure laid out for Enbridge than the one set out for Union? 504 MR. SOMMERVILLE: Just so we're clear, Mr. Janigan, I'm looking at the top of page 16 of 30. 505 MR. JANIGAN: That's correct. 506 MR. SOMMERVILLE: Thank you. 507 MR. JANIGAN: And under the paragraph 6.9. 508 MR. DENT: 6.9. And the two bullet points, "Approval of the exposure by the treasury department --" 509 MR. JANIGAN: Yes. 510 MR. DENT: -- and -- first of all, we don't receive specific approval from our treasury department, although we do have our director of finance as part of the commodity risk committee, so that group is represented. And, again, the approval, we're not looking for two of the corporate officers to approve. Again, we have a commodity risk committee who review the recommendations that the gas supply department make, and without their explicit approval, we do not transact the financial activities. 511 So I think there's a slightly different approval process, but what is the same is that there is an approval process outside the gas supply group to give a broader review of the portfolio and a broad review of the transactions themselves. 512 MR. JANIGAN: Now, did I understand you to say earlier that Union has a gas supply risk management policies and procedures manual? 513 MR. DENT: We have a risk management policies and procedures document. 514 MR. JANIGAN: And subsequent to this hearing, when the Board makes rulings on the modifications that have been proposed, will you make changes to that manual reflects those modifications? 515 MR. DENT: Well, we're in the process now of updating our policies and procedures both for risk management as well as for procurement to put them into one overall document, and certainly any decision that the Board would give, or any direction, we would certainly include that in our -- in the update to our policies and procedures document. 516 MR. JANIGAN: And would you undertake in future proceedings to file that manual with the revisions? Would you be -- sorry, let me rephrase that question. Would you be able to file that manual with the revisions noted in subsequent Union proceedings? 517 MR. DENT: Yes. When we're complete with that review, we would -- we would file that with the Board. I think that there's some history for us doing that in the past, and that would be consistent with that. 518 MR. JANIGAN: Thank you, panel. Those are all my questions. 519 MR. SOMMERVILLE: Thank you, Mr. Janigan. 520 Mr. Vegh. 521 MR. VEGH: Thank you, sir. 522 CROSS-EXAMINATION BY MR. VEGH: 523 MR. VEGH: Good morning, panel. My name is George Vegh. I'll be asking you questions on behalf of a group of retail energy marketers who are participating in this case, and that's Ontario Energy Savings Corporation, Superior Energy Management, and Union Energy. 524 Mr. Snell, my questions really come out of your report, so I think most of the questions will be directed to you, though, of course, Mr. Dent, feel free to interject. 525 Before asking you some questions about the proposed changes to the policy, I'd like to first ask some questions about the current objectives of the policy and then performance under the policy. 526 So first, in terms of the objectives of the policy, Mr. Snell, the current policy, I take it that your understanding is that Union's current policy contains the goals for risk management are to achieve a market-responsive price and some price stability. 527 MR. SNELL: If you don't mind, I'd like to get it in front of me. 528 MR. VEGH: Sure. I'm actually looking at your report, where you described this at page 4. 529 MR. SNELL: I'm sorry, go ahead. 530 MR. VEGH: Okay. I'm summarising what is really the first full paragraph at page 4 of your report, and I just wanted to know whether you agreed that Union's current policy -- current goals for risk management are to achieve market-responsive price and price stability. 531 MR. SNELL: That's correct. 532 MR. VEGH: And you appreciate that these objectives have to be balanced against each other. 533 MR. SNELL: That's correct. 534 MR. VEGH: And I also take it that, according to your review, attempting to achieve a balance between a market responsive price and price stability is in line with industry standards. 535 MR. SNELL: That's correct. 536 MR. VEGH: Now, I'd like to take a second to look at each side of that balance, that is, market-responsive pricing, on the one hand, and price stability on the other hand. So if we just look at the goal of achieving a market price, I take it that you would agree that one way to achieve a market price would be to simply have a pass-through of the wholesale price, however it's recorded at any time. 537 MR. SNELL: If that's your goal, yes. 538 MR. VEGH: And there may be some parties who would prefer that type of approach, but if that approach was taken, then I guess some other parties would have a concern that there's too much volatility in the gas price; would -- 539 MR. SNELL: That's correct. 540 MR. VEGH: And if you look at the other side of the equation, again, between market prices on the one hand and price stability on the other hand, you could take the approach of removing volatility altogether, couldn't you? 541 MR. SNELL: That's correct. 542 MR. VEGH: And one way to do that would be to purchase an entire load at a single fixed price? 543 MR. SNELL: That's correct. 544 MR. VEGH: But again, under this approach, you'd lose the balance between the two competing and at times, conflicting goals? 545 MR. SNELL: Exactly. 546 MR. VEGH: Now, I suppose that the reason why customers may want stability is pretty obvious, but your report does not address anywhere the justification for the competing goal of reflecting market prices, does it? Or have I missed that somewhere? 547 MR. SNELL: Well, the market-sensitive price that we spoke of, we really chose to change that objective obviously as part of our report in an attempt to provide reasonable value as defined by historic prices. So I would argue that I would not believe in one of the goals being, as I stated about Enbridge as well, one of the goals being specifically I want to get a market price for my gas. Market price is simply a price of gas on a given day some days, so that, to me, is not a good way to put the objective of trying to achieve reasonable value. I guess that's why I suggested changing it. 548 MR. VEGH: Right. So you personally don't believe in that goal? 549 MR. SNELL: Not to achieve a market price on a given day. 550 MR. VEGH: Right. Well, let me suggest to you why it is that reflecting market price may be an appropriate goal, and then I'll follow this suggestion with a question. 551 As you may or may not be aware, one of the goals of this Board is to facilitate competition in the sale of gas; are you aware of that goal? 552 MR. SNELL: I'm aware of that. 553 MR. VEGH: Now, when a retail marketer provides a competitive gas service, the value proposition to the customer, or one of the value propositions to the customer is to provide the opportunity to fix their costs; would you agree with that? 554 MR. SNELL: That's correct. 555 MR. VEGH: And so in a competitive market, or if you want to facilitate a competitive market for gas sales, and if the customer wants to avoid price volatility at all costs, they can go into the market and purchase protection from that volatility; right? 556 MR. SNELL: Yes. 557 MR. VEGH: And so one of the functions of utility gas service that could be provided in such a context is to provide a comparator for a customer who wants to consider a competitive supply option; would you agree? 558 MR. SNELL: That's correct. 559 MR. VEGH: And to that extent, if the utility price does reflect the market price, then it provides some information to the customer about what the market price is; would you agree with that? 560 MR. SNELL: Yes. 561 MR. VEGH: Okay. 562 MR. DENT: Just to interject though, Mr. Vegh, it's important to note that in Union's QRAM process, we're recommending the use of a 21-day strip which is reflective of the market, and so through the reference price itself as constructed through that 21-day strip, there will be a market reflection in Union's construction. 563 MR. VEGH: That's right. Well, the QRAM hopefully and the risk management policies will work -- will be well aligned together; would you agree that that should be done? 564 MR. DENT: They definitely should be aligned together. They should be complementary, absolutely. 565 MR. VEGH: They should be complementary. So to the extent that there's a value in reflecting a market price for the QRAM, that is also consistent with reflecting a market price, at least as part of the balance in the gas supply purchases; no? 566 MR. DENT: In individual gas supply purchases, are you suggesting? 567 MR. VEGH: Well, in the actual -- well, under your current policy. Your current policy is to have a balance between reflecting market price and some price stability; right? 568 MR. DENT: That's correct. With our portfolio approach, we're neither a hundred per cent fixed or a hundred per cent floating so we are dampening the market movement both up and down, so both those things can be reflected in the portfolio. 569 MR. VEGH: Right. So that's under your current approach? 570 MR. DENT: That's correct. 571 MR. VEGH: Okay. Now, I want to ask you some questions now about performance under your current approach. 572 Mr. Snell, in referring to your report at page 13 -- I'm sorry, I can't find the exact reference, but my notes say -- perhaps you can tell me if you agree with this. Your evidence is: Union has successfully experienced a reduction in volatility. Ratepayers followed the market trend of natural gas prices while shaving off the peaks of prices seen over the last three years. Is that fair? 573 MR. SNELL: Yeah. 574 MR. VEGH: And so the current policy has been successful, then, in meeting the competing goals of reflecting market price and protecting from too much volatility? 575 MR. SNELL: Yes. 576 MR. VEGH: And this conclusion, in particular, relates to the last three years, and I guess that you would agree that over the last three years there has been exceptional volatility in the market? 577 MR. SNELL: That's correct. 578 MR. VEGH: And in fact, there's been more volatility in the gas market over the last three years than in any other market. 579 MR. SNELL: That's correct. 580 MR. VEGH: So, then, the current objectives have been working, and using those objectives has not led to excess volatility. 581 MR. SNELL: No. 582 MR. VEGH: And I don't read anywhere in your report that you say balancing these objectives has not been effective; right? So you would agree that this has been effective. 583 MR. SNELL: No. And again the change in the objectives to a reasonable value only reflects the point that first of the month index or a nearby spot price of gas is simply a price on a given day, and I would suggest that that objective of being at that price serves really no strong benefit to the ratepayer. It comes back to, though, if the price is low, obviously you'd like to be lower, or you'd like to be participating in lower values. If prices are high, of course, the conflicting view is that you want stability in your price and you'd prefer not to pay that high number. In other words, market responsive prices are very good if prices are falling and are not necessarily good if prices are rallying for the residential ratepayer. 584 So in that respect it was probably not reflective of the fact that you want market responsiveness when prices reach lower numbers, hence the change in the objective to reasonable value versus market sensitivity. I don't think anyone in this room would suggest that the residential ratepayer would want to be responsive to $10 prices. 585 I recognize and understand that in this province where you have retail access, that that may hurt a marketer's ability to compete with the exception that marketers have the ability to use and utilize all the tools we're speaking of, and do utilize all the tools we're speaking of here today. 586 MR. VEGH: Okay, thank you, because I guess what was missing from this report was this critique that you provided just now on market-sensitive prices. I don't see your critique anywhere in this report. Have I missed something? 587 MR. SNELL: I apologize if that wasn't clear. I hope I cleared that up today. 588 MR. VEGH: In fact, as I go to page 14, where you lay out your recommendation, in the paragraph starting "after reviewing Union Gas's stated policy." 589 "After reviewing Union Gas' stated policy in comparison with two other related utility goals described above, it is RMI's opinion that the dual goals of market sensitivity and price stability have been in line with industry standards." 590 And then you go on to recommend that part of that dual goal be removed and replaced with this idea of providing reasonable value through a diversified portfolio. 591 So as I read this paragraph in particular, you seem to be saying that the current balanced approach has worked, it's consistent with industry practice, but the balance should change. And you give no reason in this report for that balance changing. 592 MR. SNELL: I would suggest that -- and I apologize if this came across in this manner, but of course as I just stated, what I would add to this RMI opinion that the dual goals of market sensitivity and price stability have been in line with industry standards, I would suggest that the market sensitivity is important as the markets fall. But, once again, from a customer's perspective, nobody in this room would suggest that we want market sensitivity when prices rally. And therefore I would apologize in saying that I would add to that the dual goals of market sensitivity as prices decline and price stability. 593 MR. VEGH: And I believe you said earlier this morning in response to Mr. Warren that the objective here is to buy as low as humanly possible. 594 MR. SNELL: That's correct. 595 MR. VEGH: So is it your evidence that the objective -- or that your proposal should lead to an overall lower gas price? 596 MR. SNELL: No, that's not correct, and that's why I added the very important point of "humanly possible," because I am the first one to sit here and say there is no way anyone in this room or anywhere can buy the low of the gas market on a consistent basis. "Humanly possible" means that -- well, let's take an example. Let's look at Union's position this March. Gas prices went to $11 and, through their price mitigation, they mitigated a significant amount of that risk for the ratepayer; $30 million or $40 million maybe, I don't know the exact number, but it was significant. 597 Once again, as I stated before, we should not sit up and get too excited about that because, of course, higher prices aren't good for the ratepayer. And despite the fact we've mitigated some of that cost, gas prices remain high and that's not good. 598 However, from a pricing perspective, a lot of that money was made in the form of calls, which is like price insurance. It's the right but not the obligation to buy gas at a fixed price. And if the catastrophic event occurs as it did in March, you exercise your right and you collect on this "insurance policy" or call option. 599 However, as I mentioned before and will mention again, the best thing that could have happened to the ratepayer is that the prices break. And had the prices broken, and I don't recall what the premiums were, but you would have lost your premium and you would have incurred a financial loss. 600 But for the sake of argument, if we'd had a warm winter and the prices had fallen to $2 and you'd lost your 20-cent premium that you paid for those calls, you'd have ended up owning $2.20 gas in a $2 market. There is not a better example of the concept of price stability along with buying as humanly -- low as humanly possible as what they did in March. They protected the ratepayer to give them some price insurance in the case of catastrophic rallying price, but yet using the proper tool, if the market subsequently falls, the ratepayer is protected but he, too, can benefit from lower values. Had he done nothing and the prices fell to $2, he would have gotten $2 instead of the $2 plus the 20-cent premium. But I submit to you he would have accepted the entire market risk of prices going up or down, which is, in most cases, unconscionable. 601 MR. VEGH: I appreciate the qualification of "as low as humanly possible." And I guess that we're all humans in the room -- 602 MR. SNELL: It's a very important one. 603 MR. VEGH: Let's look at it another way. Relatively speaking, then, is it your evidence that by following your proposal, the result should be lower prices than if the -- than if your proposal is not followed and the current methodology is maintained. 604 MR. SNELL: No, it is not. A price risk-management program's objective is not to beat the market. To provide stable prices at a reasonable value is our objective. 605 MR. VEGH: So you're saying that this proposal would not lead to lower prices than by following the current objectives. 606 MR. SNELL: I didn't say it would or wouldn't. I don't know. The program is intended to provide stable prices and to identify and protect reasonable value for the ratepayer on an ongoing basis. 607 And I refer to the appendices in my -- in my testimony at the back. When you look at the appendix 3 and you look at the prices, from a rational point of view, $10 is high. And because statistically gas is a mean reversion commodity, as are all freely traded commodities, the intent here is to buy as little of that gas -- high-priced gas as necessary; and when prices get cheaper or, so to speak, go on sale, buy more of that gas, and do this on an ongoing basis for the benefit of the ratepayer. 608 MR. VEGH: And is your evidence that that is not being carried out under the current policy? 609 MR. SNELL: On the contrary. I think that the suggestions that we made further quantify the direction and scope of the Union program as it exists today. 610 MR. DENT: One of the key differences to my mind is that currently our policy talks about hedging season to season, so we've really been hedging kind of 12 months, maybe 15 months out as we look toward -- we pretty much finish this winter's hedging, we'll be looking at next summer's hedging and maybe into next winter, so we've been typically looking 12 to 15 months, season to season, out. 611 One of the significant recommendations that we think have come from RMI is that prospect of hedging two, three, four, five years out, again with some reasonable care that we don't overhedge due to direct purchase activity forecast levels. But to have a longer term hedge perspective is important. And when you do the longer term hedge perspective, that's when you really needed the added statistical discipline in order to, say, buying two-, three-, four-year gas is being purchased at values that are below the median. So again, it protects you against the individual transactor sort of feeling in his gut of what's the value. We're really comparing current prices with historic values to give us the benchmark for what value is all about. 612 MR. VEGH: So by using the -- if I understand what you're saying, by using the new objectives as opposed to the old objectives, you're able to capture more favourable pricing opportunities? 613 MR. DENT: No, I think we're trying to marry two things here. If you just look at the objective on its own and the change in objective and Union continues to hedge season to season, then there's a limited opportunity to capture a five-, 12-month value. But being restricted to season-to-season hedging reduces the opportunity to capture that longer term reasonable value, so you need to look at the reasonable value recommendation in the context of Union hedging out the second, third, and fourth year. It's really marrying the two, to my mind, that together makes -- it really contributes to the fine-tuning of Union's current program. 614 MR. VEGH: Okay. Well, Mr. Dent, maybe you can shed some light on this, then. You've talked, and I believe your evidence refers to fine-tuning the program. Do you agree with the evidence of Mr. Snell that there really is no value in reflecting the market prices? 615 MR. DENT: Our objective of market-sensitive pricing had a different definition than what RMI brought to us. When we thought about market-sensitive pricing, we looked upon the pricing curve in that as prices increased, that we would tend to follow that curve, but at a slower right; and when prices decrease, we follow that curve as well but at a somewhat slower rate. We saw that we were following the market trend through our program, and part of that, though, is the fact that we're layering in transactions over time, some at index but some at fixed. But even at fixed prices you layer in over time. In April it might be $4, and in May it might be $3.50, and up to $5.70 in June. So even the fixed price month to month, as well as the index, have some sensitivity in the market. So we view the market -- the market responsive as being that kind of a curve. 616 When we talk to RMI, RMI read the objective of market sensitivity as being, well, that's a more appropriate objective for utility than just buying index, whether it's day or month, but they just have total market sensitivity because they're buying more index-priced gas. So when we reviewed the portfolio that we're developing which has a combination of floating, fixed price and options, we really were developing the portfolio, and so adopting the objective that RMI have suggested as far as providing reasonable value, we thought that really of that as being reflective of the portfolio that we're developing over time. 617 As I said previously, the enhancement to that is that now we're looking at hedging not just season to season but adding in the 24- and 36-month aspect to it. 618 MR. VEGH: Okay. So RMI's understanding of what market sensitivity was was perhaps different than what Union's understanding of what market sensitivity was, for the reasons you just gave? 619 MR. DENT: I think there was a definitional difference between what RMI brought and certainly my interpretation of what Union's market-sensitive pricing brought to the objective. 620 MR. VEGH: So then the goals of, again, just an example, capturing a long-term pricing opportunity, that would be available under your current objectives or the new objectives? As long as you had a longer term time frame you're looking at. 621 MR. DENT: That's true, with the exception that if you're just hedging season to season and you capture a seven-month favourable value, you know that at the end of the summer, that fixed price is gone and so you're back up. If the market has moved a couple bucks higher, then you're back into that $2 higher level. So, again, part of that is achieved, but with a short-term hedging horizon, it was just a -- just really a short-term impact on the portfolio. 622 MR. VEGH: Right. But you could keep a longer term hedging horizon without necessarily changing the objectives? 623 MR. DENT: In the way that I interpret the objective or the market responsive objective, I probably could accept both. 624 MR. VEGH: Thank you. Those are my questions. 625 MR. SOMMERVILLE: Thank you, Mr. Vegh. 626 Mr. Shepherd. 627 MR. SHEPHERD: Mr. Chair, I wonder if I could go after Mr. Dingwall. 628 MR. SOMMERVILLE: Ms. Singh. 629 MS. SINGH: Mr. Chair, I don't have any questions at this time, but I may have questions after Mr. Dingwall has -- or after Mr. Shepherd. 630 MR. PENNY: Sorry, Mr. Chairman, we're getting into a game of "after you, Alphonse" here, and at this rate, I guess, we could be here all day. The normal practice is you go in your order, you ask your questions, and then move on. I see no reason for diverging from that practice in this hearing. 631 MR. SOMMERVILLE: One of the things for subsequent panels that we'll be looking for is the intervenors working out a specific order so that we don't discover in the course of this canvass. 632 Mr. Dingwall, all eyes seem to be on you, and we'll hear from you now, please. 633 MR. DINGWALL: Thank you, sir. In looking at the time, I can safely say I don't anticipate completing before the lunch break, so I'll leave it to your discretion as to whether we continue briefly then with an interruption and I'd leave it to you to make the interruption if necessary. 634 MR. SOMMERVILLE: Is there any intervenor who wants to cross-examine this panel who thinks they could finish in 10 or 15 minutes, without hearing Mr. Dingwall's questions. 635 MR. THOMPSON: I think I could, Mr. Chairman. 636 MR. SOMMERVILLE: Thank you, Mr. Thompson. 637 CROSS-EXAMINATION BY MR. THOMPSON: 638 MR. THOMPSON: I'd like, if I could, panel - I represent the Industrial Gas Users Association - just to get a high-level overview of what falls within the ambit of Union's commodity risk-management program. Could you describe that for me, please, Mr. Dent. 639 MR. DENT: The commodity risk program that we operate under is focused on the gas that we purchase for sales service customers, and then in the circumstances of a colder-than-normal winter, we'd also be involved in purchasing balancing gas as well. But our focus primarily is for the sales service market. 640 MR. THOMPSON: I understand that it's administered by a hedge committee; is that correct? 641 MR. DENT: We have a hedge committee that gives oversight to the program from both a high-level policy point of view as well as from a transactional point of view. My group, our hedging analyst will chair a monthly meeting with the commodity risk committee. She will outline the recommendations that we want, or the transactions that we would like to make over the next month, and the commodity risk committee needs to give absolute authorization before we transact. 642 MR. THOMPSON: So is that one committee or two committees? 643 MR. DENT: It's one committee. 644 MR. THOMPSON: Okay. Can you just give me the membership of it? Are they all utility personnel? 645 MR. DENT: Let me refer you to an IR where we answered that, and I'll just try to find which one it is. 646 MR. DINGWALL: I think that's Board Staff 172. 647 MR. DENT: 172? Thank you to whoever gave that help. 648 That IR outlines the roles of the people that are members of our commodity risk committee. 649 MR. THOMPSON: Okay. Now, the question I have, Mr. Dent, is does the weather hedge activities fall within the ambit of the commodity risk-management program at Union? 650 MR. DENT: No, the weather hedge isn't part of the commodity risk program. The commodity risk program covers commodity risk, not weather risk. 651 MR. THOMPSON: Okay. And so who looks after the weather hedge aspect of risk management? Is that another agency? 652 MR. DENT: I believe that the finance group, under Pat Elliot, would be able to answer questions with respect to the weather hedge. 653 MR. THOMPSON: Does that mean you can't? 654 MR. DENT: That's correct. 655 MR. THOMPSON: Okay. Now, Mr. Snell, did your firm provide any advice to Union with respect to the weather hedge aspect of its risk-management program? 656 MR. SNELL: No, we did not. 657 MR. THOMPSON: I see. Are you familiar with weather hedges? 658 MR. SNELL: Vaguely, and probably not enough to comment. 659 MR. THOMPSON: So all of this experience that you've had that Mr. Penny was describing, you've never run into a weather hedge before? 660 MR. SNELL: I know weather hedges to -- again, we don't execute weather hedges. We have -- a few of our utilities will utilize weather hedges to stabilize earnings. But once again, it gets out of my immediate arena of price risk-management. 661 MR. THOMPSON: Okay. Well, you know what they are, do you? 662 MR. SNELL: Yes. 663 MR. THOMPSON: And would you agree with me, they stabilize earnings, and that's a shareholder concern; would you agree with that? 664 MR. SNELL: Normally, they have been used in that capacity, yes. 665 MR. THOMPSON: Okay. 666 MR. SNELL: Now, again, I can't profess to know every use of weather hedges. 667 MR. THOMPSON: Okay. Well, in your report, you talked about an AGA survey of state commission hedging policies, and this I find at appendix 2, I guess it is, page 32 of your report. 668 This map refers to some questions that were asked in the AGA survey. Are you familiar with that survey, sir? 669 MR. SNELL: Yes. 670 MR. THOMPSON: And would I be safe to conclude that that survey did not encompass weather hedges? 671 MR. SNELL: I'm not positive about that, but I would say it would be a pretty good assumption they did not include weather hedges. 672 MR. THOMPSON: Right. And so when the question was asked, Has your commission addressed the issue of hedging and/or other risk -- sorry, I'm looking at the third question: Are the costs associated with hedging and risk management, including gains and losses, fully recoverable? 673 It's safe to assume that did not address the question of -- 674 MR. SNELL: I can't say it's safe to assume that. I frankly just don't know. 675 MR. THOMPSON: You don't know the answer to that. All right. Those are my questions. Thank you. 676 MR. SOMMERVILLE: Mr. Thompson. 677 We'll adjourn until 2:00. Thank you very much. 678 --- Luncheon recess taken at 12:28 p.m. 679 --- On resuming at 2:15 p.m. 680 MR. SOMMERVILLE: Please be seated. Thank you. 681 I understand that there have been some detailed discussions about scheduling that hopefully will take shape over the course of the next day or so, and I'll leave that in Mr. Moran's capable hands. 682 Mr. Dingwall, I think the time has come. 683 MR. DINGWALL: Thank you, sir. 684 CROSS-EXAMINATION BY MR. DINGWALL: 685 MR. DINGWALL: Gentlemen, my name is Brian Dingwall, I'm counsel for Energy Probe, a national consumer organization and environmental organization focused on achieving efficiencies for utilities and value for consumers in a conservationists and general fashion. And I'd like to start my questions, if I could, with you, Mr. Snell. 686 In preparing your report, did you gain the opportunity to learn about how the Ontario natural gas market works behind the Union Gas franchise? 687 MR. SNELL: Specifically what part of that process are you speaking of? 688 MR. DINGWALL: Are you aware that Union Gas allocates transportation to entities servicing end-use customers that choose direct purchase? 689 MR. SNELL: Yes. 690 MR. DINGWALL: Are you aware that there's been discussion back and forth over the years about whether or not Union Gas or Enbridge or both or either may unbundle storage at some point and make it a competitive function? 691 MR. SNELL: In general terms, yes. 692 MR. DINGWALL: Are you aware of the degree of regulatory reporting required with respect to utility competitive storage and transportation sales? 693 MR. SNELL: In general, yes. 694 MR. DINGWALL: And are you aware of the reporting structure between Union Gas and its various affiliates and related companies? 695 MR. SNELL: Minimally. 696 MR. DINGWALL: Minimally. Thank you, sir. 697 Now, your resume indicates that you've given evidence and been accepted as an expert in a number of other jurisdictions, mostly in the United States, from what I understand; is that correct? 698 MR. SNELL: That's correct. 699 MR. DINGWALL: And would it be fair to categorize these jurisdictions as not being ones where there is significant retail or industrial competition? 700 MR. SNELL: Retail competition in natural gas has been really slow to develop in the United States as a whole. If you look at the utilities we speak of, Michigan, for instance, has open access and we're involved with that process. Pilots in Illinois certainly are there to the residential customer. I personally, in Illinois, can buy my gas from whoever I please, or the utility. The Municipal Gas Authority in Georgia operates in the state of Georgia which is fully deregulated in gas. So on the contrary, I think the client list you see here is a pretty good cross-section of the different phases of deregulation that have taken place within the United States. 701 MR. DINGWALL: Well, for example, Consumers Energy, I think you mentioned Michigan, they don't actually have a program that assigns transportation to marketers, do they? 702 MR. SNELL: Not that I'm aware of, no. 703 MR. DINGWALL: And the Illinois programs, do they assign transportation to -- 704 MR. SNELL: I'm not aware -- I couldn't answer that positively or negatively. Again, when you're speaking of assigning transportation contracts, that's something that's out of the realm of what I do. I'm involved in price-risk management and price-risk -- for hedge plans, if you will, more directly than the issues you're speaking of. 705 MR. DINGWALL: Following up on that, then, would it be fair to say that your background has not really involved making suggestions as to what appropriate reporting and visibility requirements there might be to regulators for these programs? 706 MR. SNELL: That's incorrect when it relates to ^ price-risk management. We are actively involved in helping companies develop policies and procedures to make sure that there are proper internal controls both within the company and also, too, obviously, as those reports relate to the regulators. 707 MR. DINGWALL: Would these be solely with respect to commodity arrangements, or have you also given advice with respect to how storage and transportation mix in with the hedging programs? 708 MR. SNELL: As storage mixes in with the overall price risk-management program, we obviously are involved. But when it gets down to the transportation aspects, the leasing or ownership of storage, these issues are certainly outside what our focus is. 709 MR. DINGWALL: Thank you, sir. Moving on to some of the terms which have been bandied about this morning, I noticed in your report that there's one term market opportunity, that relates to some of your recommendation that Union Gas have some increased flexibilities to take advantage of market opportunity. Could you give me some more background on what you mean by that, sir? 710 MR. SNELL: Well, market opportunities avail themselves when -- as we discussed through our process, as price gets below what we deem to be historic value, that's a market opportunity for our customers to step in, and for those that are looking at reasonable value, they have an opportunity to identify reasonable value and lock in reasonable value for longer periods of time. 711 MR. DINGWALL: Now, would the identification of a market opportunity also involve capitalising on that opportunity to take a profit? 712 MR. SNELL: No. What we would -- do not certainly condone is any speculative activity within the portfolio. If one is using this gas, it is acting as a true hedger, there are purposes to minimize or avoid adverse price movement, and they're securing this value for that purpose. The purpose is not, and never will be to profit from the purchase or sale of future -- of a derivative. 713 MR. DINGWALL: Did you come to any conclusions about what the financial size of risk that might lead to certain triggers should be for a company the size of Union Gas? 714 MR. SNELL: I don't know exactly what you mean. The size of risk? 715 MR. DINGWALL: In managing a risk-management program with the ups and downs of the marketplace, I presume that the hedge committee or the hedging risk management specialist or whatever the title of the front-line individual might be, each of these groups would have certain spending approval parameters in terms of the maximum they could approve without seeking the guidance or the authority of a superior. And given Union's balance sheet, did you come to any conclusions about what these thresholds should be for -- 716 MR. DENT: Let me clarify that any transaction that we do financially has the approval of the commodity risk committee. The hedging analysts will make recommendations, but we're approving those transactions through the commodity risk committee. All those limits are approved that way, so there's no independent discretion that the transactors would have, and I'm one of the transactor, and I'm included in that. We have no independent authorization apart from the commodity risk committee. 717 MR. DINGWALL: Let me ask another question to Mr. Snell. I'll move on to what you've just described, Mr. Dent, in a few moments, if you don't mind. 718 MR. PENNY: Well, that was an answer to your question so. 719 MR. DINGWALL: Mr. Snell, with relation to the notion of corporate governance, did you have any opinion or did you give any feedback as to whether or not financial thresholds should be set for the -- 720 MR. SNELL: With respect to a financial limit on what you may lose, is that what you're getting at -- 721 MR. DINGWALL: Yes. 722 MR. SNELL: -- on a financial position? The establishment of a fixed-price position, a swap or an option, in fact, actually reduces the overall exposure of Union Gas's portfolio. When you act as a hedger, you're attempting to reduce risk, not bring upon risk to the ratepayer. So when you establish a position in the marketplace, you are actually eliminating risk. Now, there could be a financial loss, but that aside, you're eliminating the opportunity for the price -- if you buy gas at $4 today, for instance, for December delivery, if the price goes to $10, you've eliminated the risk for your ratepayer to pay 10, he's going to pay 4. 723 Hence, when you purchase that gas contract or derivative in a proper and structured manner as we discussed here, you're actually eliminating risk, not taking on risk. 724 MR. DINGWALL: Are you finished your sentence? 725 MR. SNELL: I'm finished. 726 MR. DINGWALL: When you're entering into contracts like that, do you not though have occasion when you might be called upon to shore up those contracts financially if they are out of the money? 727 MR. SNELL: Are you speaking of margining, if you will? 728 MR. DINGWALL: As an example, perhaps, yes. 729 MR. SNELL: Yes. Now, Mr. Dent can speak to the specifics of their derivative activity, but in general, if margin is called upon, obviously if a position goes against you, you have a marked to market financial loss. However, at the same time, the physical product that you ultimately are buying is going down in lock-step with that commodity. Hence, you are kind of losing money out of the right pocket but it's getting back in the left pocket because the physical gas that you're purchasing at a later date is going down as well. 730 So there is a cash flow disconnect to some degree, but for the most part, you're eliminating upside risk by establishing the position, and of course accepting that price and value that you locked in as a reasonable value is part of that overall hedge plan. 731 MR. DENT: When Union puts on a hedge, we don't unwind that hedge. If we put a position, either an option or a fixed price, we let that go to expiry. We're naturally short so we're always acquiring more supply, and if the prices do come down, again, we take advantage of it. We do another layer of hedge and proceed, through a portfolio approach, to our acquisition activity. 732 MR. DINGWALL: One of your recommendations, Mr. Snell, was for Union to include as a policy of its risk-management program the addressment -- or the enhancement of counterparty risk. Are there any specific enhancements to Union's policy that you would recommend beyond having this as an additional category? 733 MR. SNELL: Actually, you phrased it fairly correct in saying that what we suggested to them was to put in another objective to be obviously diligent in the area of credit risk management. The purpose of that is, and in today's environment, the post-Enron environment, if you will, there is a strong degree of scrutiny throughout the energy industry over one's credit and the counterparties that they deal with, and it's an important issue to put as an objective when you're transacting business in today's gas or power market. Therefore, we recommended that this become an objective within the policies and procedures of -- the revisions of the policies and procedures of Union Gas. 734 This focus has changed dramatically, as I said, over the course of the last three or four years because of all the problems that have been incurred in the gas marketing business. As far as the procedures that Union Gas has followed in the past and is following today, they were very much within industry guidelines and I would commend them for the attention to detail that they do take to look at the credit worthiness of both physical and financial partners. And they do have a set of -- prior to this, have a set of guidelines that, in fact, lay out who they can deal with, what type of credit conditions they have, and a review process with that credit. 735 MR. DINGWALL: So would you say that you're fairly comfortable with their existing policies, sir? 736 MR. SNELL: Yes. 737 MR. DINGWALL: Now, I believe that Mr. Dent's evidence states that -- it's either in his evidence or you're report -- that their policy is to deal with parties of an A-level credit rating or seek some form of security. Is that the case? 738 MR. DENT: That's correct. For our financial counterparties, we require an A-rated credit rating or some equivalent letter of credit or other type of security. 739 MR. DINGWALL: Now, you said, sir, that this level would be for your financial counterparties. How about your physical counterparties? 740 MR. DENT: Our physical counterparties are looked upon on a case-by-case basis, so again, you would have different credit limits depending on the size and financial strength of those counterparties as evaluated by our finance department. 741 MR. DINGWALL: And are these policies similar from Union's operation of system supply to the operation of the storage and transportation business? 742 MR. DENT: We receive from the finance department the credit limits that we need to live within for our sales service supply of gas. So our finance department looks upon the umbrella credit availability and gives us a portion of that credit availability. 743 MR. DINGWALL: To give me more of an understanding of your example, does that mean that both business units, being system supply and storage and transportation, are dealing with a third party -- your finance department establishes the third party's credit and then apportions that between the two units? 744 MR. DENT: Yes. The finance department would give an overall credit exposure and would allocate me a portion that I would live within. So we mark to market all of our exposures to both our physical and financial counterparties and live within the portion that we're allotted from our finance group. 745 MR. DINGWALL: Is this set in some form of policy? 746 MR. DENT: Perhaps the finance group is a better group to discuss that with. We receive that from them and we live within the credit limit that they give to us. 747 MR. DINGWALL: Do you know how they apportion -- 748 MR. DENT: No, I don't. 749 MR. DINGWALL: And they're coming up in a couple of days, aren't they? 750 MR. DENT: Yes. 751 MR. DINGWALL: So asking for an undertaking might not be useful at this point. 752 MR. DENT: My area of expertise is commodity risk, not necessarily the credit, although we do live within the strict credit guidelines that we're given by our finance department. 753 MR. DINGWALL: Okay. 754 MR. SOMMERVILLE: Just a small clarification, Mr. Dent. If you require security from a counterparty, does that use up some of your allocation or is that outside of the allocation? 755 MR. DENT: If I require a letter of credit, for example? 756 MR. SOMMERVILLE: Indeed. 757 MR. DENT: No. The letter of credit would encompass the exposure that our finance department thinks would be -- that the third party would be exposed to us. So they would ask for the umbrella, but they would probably only apportion me a part of that. 758 MR. SOMMERVILLE: Okay. My question really was, you have this allocation of credit in your group as compared to other segments of the company. If you are able to secure the position with one of your counterparties, does that -- does that eat into your allocation or is that somehow dealt with differently? 759 MR. DENT: Well, I report our positions with all our counterparties to finance and then finance makes -- finance does the umbrella and they aggregate all the information and net out the exposures. 760 MR. SOMMERVILLE: Thank you. 761 MR. DINGWALL: Does that help, sir? 762 MR. SOMMERVILLE: Yes, thank you. 763 MR. DINGWALL: Okay, I'll move on. 764 Mr. Snell, as part of your report, in appendix 2 there's an American Gas Association state public utility survey. 765 MR. SNELL: Yes. 766 MR. DINGWALL: That's essentially the map page with a number of different colour-coded boxes. 767 MR. SNELL: Yes. 768 MR. DINGWALL: Do you know the extent to which the boxes that are marked in black actually participate in risk-management activities? 769 MR. SNELL: I can go through the states that I'm familiar with almost utility by utility, and I would suggest that in the United States right now, it is rare that a utility leaves their gas purchasing at index and does no hedging. The vast majority of LDCs in the United States do hedge, which, I will add, is a significant change from three or four years ago. 770 MR. DINGWALL: Now, do these utilities hedge financially only or do they hedge financially and physically as well? 771 MR. SNELL: I would say there is not a clear-cut rule of thumb. From our perspective, I think it's the same thing, more or less. There are some pluses and minuses to both. Our recommendations typically lean towards, you'd like to have as many of these tools available to you, financial, physical, swap, exchange, as many of these tools available to you as possible. Each one has a different plus or minus at a different time. As far as each state and how they operate and which tools they use, though, it will vary not only state by state but utility by utility. 772 MR. DINGWALL: Now, given that there's a significant variance in the types or levels of hedging, what would be on the low end of the scale in terms of what a commission might require, or might allow, for that matter? 773 MR. SNELL: As a percentage of gas usage, how much might be hedged? 774 MR. DINGWALL: As a percentage of gas usage, is it based on commodities or is it simply based around long-range forecasts for planning purposes? 775 MR. SNELL: Well, first of all, I can't think of another example where the volumetric numbers are a forecasted load numbers. What we normally -- given normal weather, what we normally might purchase on a given year. And looking forward, obviously, as our plan dictates, it gets a little more fuzzy as to pinning down your volume so you want to be cautious about hedging out into the front months -- front years, and we have, as a consequence, scaled down the volumes out there. But normally the load forecast is the -- what you go off of, and as far as a percentaged hedged prior to a season, be it winter or summer, I would suggest that on the low side, 25 percent would be a low number. On the high side, if you want that answer as well, it would obviously be -- it's not normal that people go over 80 percent simply due to volume variances that might occur, and that's a little bit on the high side. 776 MR. DINGWALL: And are these seasonal hedges mostly? 777 MR. SNELL: Because of the nature and history of the gas market, it's usually common, but not exclusively, that we focus on these seasons; that is, Winter is November through March and the summer injection season is April through October. So prior to those specific seasons, that's really what the hedge plans are generally built around. 778 MR. DINGWALL: And would you agree with me that most utilities that are noted in the black section pass through their rates on a quarterly basis? 779 MR. SNELL: That is also highly variable, and I don't get overly involved in that, again, piece of the business. That gets to be a little more of a regulatory issue rather than simply the hedge plan development itself. 780 MR. DINGWALL: Okay. Moving back to your report, one of the recommendations was that the duties of gas transaction function and risk manager be separated or segregated by retitling outside of gas supply. 781 MR. DENT: Can you give us a page or reference on that, please. 782 MR. DINGWALL: At page 7 of your report, Mr. Dent, you make note of this recommendation at line 13. And my friend is just looking for the specific cite from Mr. Snell's, if you need it. I'm wondering if that's sufficient for us to begin. 783 MR. DENT: Yes, it is, thanks. 784 MR. DINGWALL: What was your purpose, Mr. Snell, in making that recommendation? 785 MR. SNELL: In most instances, without trying to create necessarily a new position, and of course the scope of this position would depend on the size and activity -- risk-management activity of the individual entity involved, but the reasoning behind having a separate position as a risk manager is that you have an oversight person besides the person actually transacting so that one has a check and balance on making sure that there is a front-line defence arguably against a deviation from the plan that's laid out here. 786 MR. DINGWALL: So would it be your view that if the risk management function were seconded within gas supply, that there would be an inherent or potential conflict of interest? 787 MR. SNELL: Once again, we run into the issue of depending on the size and scope of the entity involved, you want to have it being a separate person, there's no question about it. Whether or not it is feasible to take it outside the gas supply department is -- it gets back to the size and scope of the risk management practices. 788 When you go to a company like what used to be Enron or a large gas marketing company of British Petroleum, they are going to have a separate risk management department because the size and scope of their activity in the day-to-day market is significant enough that they -- of course, monetarily, it's a necessity; and secondly, to get their hands around the various positions that they may have out there in different divisions corporate-wide, it's imperative that they have a separate department. 789 I think that the level at which Union Gas is operating and the positions they have on, I would not necessarily require that this person be a separate department, but certainly the oversights -- the key to this thing is to make sure that you're comfortable with the oversight function that the risk manager does do. 790 MR. DENT: And our view on the recommendation is that we use the terms "risk manager" and "risk specialist" as being gas supply people, and we looked upon them in terms of it's the gas supply's responsibility to look at our portfolio, to make recommendations to the commodity risk committee as far as changes to that portfolio over time, what tools to use, that type of activity. When we discussed with RMI what their industry standard definition of risk manager was, that would be the middle office or the policeman function to make sure that what the transactors are doing is -- there's no opportunity, or limited opportunity for fraud, that type of thing, in the program. 791 So we have an individual in finance who really does the cross-checking for the activity and transactions that we do. So, for example, if I do a transaction, an options transaction, I will fill out a ticket and outline the details of that transaction, but the -- and then that transaction sheet will go down to the finance department. The finance department then will receive via fax from the bank or from the financial counterparty the details of that transaction. He will check off what I've said the deal is against what the contract or the confirmation contract said the deal was. Therefore, if there is any discrepancy, he can identify it and rectify any problem. 792 If that confirmation contract came back to me and I was in cahoots with the banker, we could potentially defraud the company. So RMI has suggested that in the transacting group, we get away from using terms that are more policeman terms and make sure we designated, in the revised policy, the fact that it is the finance department and their designate that have the risk manager or the policeman function oversight of the program. 793 MR. DINGWALL: Thank you, gentlemen. 794 Mr. Snell, in the context of your advocacy that Union Gas consider and adopt longer term hedging programs, were you focused solely on the financial or were you advocating or recommending that they consider physical hedges as well? 795 MR. SNELL: Our position is, and always has been, the more tools available to you, the better off you are. However, when you fix a price in the physical market, or fix the price in an over-the-counter transaction or fix the price in an exchange credit futures contract, they all provide the same level of protection. They're virtually the same thing. So really this comes back to the comfort level of the company and the nuances of their physical contracts and what seems to fit best for the company, because the end result of any of those fixed-price contracts, be it OTC, physical or exchange-traded, is the same. 796 MR. DINGWALL: Now, Mr. Snell, I recall earlier on in the day there was some discussion that the effective goal of a hedging program, of a risk-management program, is to eliminate volatility for low-volume customers, and I believe you agreed with that earlier on. Is that -- 797 MR. SNELL: It's one of them. 798 MR. DINGWALL: One of them. 799 MR. SNELL: Yes. 800 MR. DINGWALL: Are you aware that one of the other goals established in Ontario established by the legislation is conservation of energy? 801 MR. SNELL: No, I was not. 802 MR. DINGWALL: Do you believe that an absence of price signals to end-use customers would necessarily lead to or lead away from conservation? 803 MR. SNELL: The natural gas market is an extremely large market. And if you look at the province of Ontario relative to the North American gas market, Union Gas probably buys a hundred BcF of gas in a total demand market that tops 25,000 or 26,000 BcF of gas. So relatively speaking, if you are to maintain certain $10 gas, if the province of Ontario was fortunate enough to protect their ratepayers against such a price spike, the market ramifications would be minimal as far as giving off a price signal. When prices do rally to $10, there are many, many market participants in the gas market, both on the production side and the consumption side, many with different goals and aspirations when it comes to gas pricing. When you put the price higher, the producer is going to produce. We're going to see more rig counts, we're going to see more exploration, we're going to see more projects out there looking for more gas. It's a simple fact. When the price goes higher as well, those that were less fortunate to have hedged, they're going to cut back. 804 In some industries or entities, you know, it's interesting, gas, as a subset, has a lot of different uses. Obviously, the residential heating demand is a big one. But there's also gas for electric generation. There's also a large contingent is the industrial concerns. Fertilizer plants and petrochemical plants which are huge consumers of gas, they unfortunately have a tough situation in hedging in the same way we are recommending here because their end price goes up and down with gas, so they're forced to be at risk with the markets. And when their prices go high, they have competitive concerns overseas and ultimately their demand goes down as well. 805 Fertilizers are a great example in the sense they virtually can't hedge in the way I'm discussing here today, and as a consequence, when prices go to $10 -- I was at a conference recently in New Orleans, a gas conference, they were discussing the fact that two years ago there were 11 ammonia plants in the State of Louisiana, and today there are three because of the high gas costs. The signal is out, and those consumers that are highly sensitive to gas prices will be the ones that we'll see the demand charges come off quickly. 806 Again, I will point out, it's a very large market, and your 100 BcF respectfully is not going to necessarily -- your demand structure is not going to change the overall complexion of the gas market. I'm not a macroeconomist either, and I would suggest that I've seen freely traded commodities trade now for 27 years and I have had this question asked of me for 27 years and I have never seen hedging programs of any concerted group alter the supply-demand complexion or price of that commodity. 807 MR. DINGWALL: Are you familiar very much with individual consumer behaviour at the small-volume level and how prices affect that? 808 MR. SNELL: Yes, I have. Not in, I would suggest, a scientific manner. But if you look at this list, we deal with a lot of distribution companies, and of course their concerns are that small residential consumer, and their demand patterns I'm very familiar with. Not very. I'm familiar with them. 809 MR. DINGWALL: Okay. As part of Energy Probe's cross-examination materials, there's an excerpt from a decision of the Manitoba -- which was I believe produced on Friday. I don't know if there's an exhibit number attached to that, Mr. Moran. 810 MR. MORAN: Mr. Chair, this hasn't been entered as an exhibit yet. This would be the time to do that. It is a document entitled "Energy Probe's Cross-examination Material for the Union Gas Risk-Management Panel," and that would become Exhibit M.1.3. 811 EXHIBIT NO. M.1.3: ENERGY PROBE'S CROSS-EXAMINATION MATERIAL FOR THE UNION GAS RISK-MANAGEMENT PANEL 812 MR. DINGWALL: Are you familiar, Mr. Snell, with the Manitoba Public Utilities Board decision that's -- 813 MR. SNELL: I received this document yesterday and I have briefly been able to examine it. 814 MR. DINGWALL: Now, in this case there were two interesting situations, the first of which was a risk-management program that arguably didn't work and the second of which was a regulator trying to figure out how on earth to staple Jell-o to the wall and figure out what the right number of accountability for that failure was. Have you had the chance to review this decision to gain a sufficient level of familiarity to comment on why the risk management didn't work in this case? 815 MR. SNELL: Well, first of all, again, I apologize, I don't have a tremendous knowledge of this case, but from what I have read, the two things that would certainly jump out at me is the internal controls were not followed and certainly were not tight enough. The internal controls within the company, I would suggest, allowed the trader to go well beyond the bounds of what they intended the program to be to begin with. 816 The second issue that I think is important is, as I can see this, what they call, I believe, the dynamic part of this, bordered, in my opinion, on maybe a bit of speculation. And certainly, when you enter into a program where you are crossing that line into speculating or predicting price and trying to profit from financial gains, you are certainly not executing a program that would be a part of what we advise or what we have proposed to Union Gas. 817 MR. DINGWALL: At page 27 of the materials, which is page 100 of the decision, in the bottom paragraph which is boxed -- actually, it's boxed on mine, it's not boxed on yours -- there are comments which ostensibly provide a definition of hedging versus trading. Would you agree with how those two terms are categorized? 818 MR. SNELL: Bear with me a second. 819 MR. DENT: That paragraph starts "The Board agrees with the comments of Professor Herbert"? 820 MR. DINGWALL: That's correct. 821 MR. SNELL: I would generally agree with that statement, yes. 822 MR. DINGWALL: What improvements do you think the system of risk management that you've recommended to Union Gas has over the system of risk management that was used and identified in this case? 823 MR. SNELL: Well, I can say right off the bat, the concept of speculation and trading for profit was directly or indirectly a part of this program, which is prohibited under what Union Gas does. Union Gas very definitely follows the definition of hedging as is put out here. In fact, they're fixing a price for future consumption. In fact, I find little in common between the two programs. 824 Also, too, the internal controls at Union Gas are, I would suggest, more stringent and certainly, from my observation, they're followed. If you write a document in a company, as these people did, and you don't follow it, I don't know whose fault that is, but certainly, there's problems. And of course, these documents and these plans are made to be followed, and in the case of Union Gas, they do have proper checks and balances to make sure that traders don't go beyond their authorization; and secondly, they have a price plan that is based around price stability and reasonable value and is not dependent on financial gains or losses, which is speculative. 825 MR. DINGWALL: Is the plan that is recommended to be put in place with Union one which would generate a sufficient audit trail to come up with a firm number in the event the plan was not followed? 826 MR. SNELL: I would suggest that absolutely. And of course, the records, I think, that they keep have a strong paper trail and -- yes. 827 MR. DINGWALL: How would one identify a point of departure? 828 MR. SNELL: Well, as we have suggested, if the plan -- the hedging plan which is approved by the risk-management committee and is followed, you're going to be able to notice a deviation. And in fact, the checks and balances that were put in here, be it the risk manager as a first line of defence and then the risk-management committee as a second line of defence, it will be caught. 829 MR. DENT: Let me be clear. I said earlier that when we transact, any transaction has to be approved by the commodity risk committee and then after the fact we report what was actually done. So it's not just that our committee is approving transactions and then it disappears into thin air. We're actually coming back to the committee and outlining what specific deals were executed as a result of the authorizations that the commodity risk committee gave. 830 And then secondarily, again, as I said earlier, we do not do any kind of dynamic hedging. We're passive hedgers. Our program has been that way since it was designed. There was never any dynamic hedging included in our program. When we put a hedge on, it remains on until expiry. 831 MR. DINGWALL: Mr. Dent, so I understand, is it the proposal of the company that they put forward their risk management plan each year to be reviewed in detail by the regulator, for the previous year? 832 MR. DENT: Can you repeat the question, because I think I went a different direction than you're going. 833 MR. DINGWALL: We've just heard a lot of very helpful comments about how there are a lot of checks and balances within these processes, and that there are interreporting requirements between committees and business units. In order that the effectiveness of the risk-management program and adherence to it be understood going forward, is it Union's intention to file with either its quarterly or annual filings, full details of the activities and compliance, either to the energy returns officer or as part of its quarterly or annual filings? 834 MR. DENT: Well, internally, we haven't come to a conclusion yet as to what that might be. But certainly we report on a monthly basis to the energy returns office, and we would certainly be amenable to whatever the Board thought was a reasonable reporting requirement to assure them that we are following the plan. When I look at what RMI have given to us, for example, in Exhibit 2, it would be very easy for us to do an almost month-by-month description of prices were in the 10th decile that called for limited hedging; we transacted a relatively small amount. I mean, there are different ways that we can -- that we could do that, but we certainly haven't come to a conclusion internally as to what would be the best way to do that. 835 MR. DINGWALL: Mr. Snell, and this, I think, this is my last question for you. Are you aware of any other instances, apart from this Manitoba decision, where risk-management programs have been unsuccessful to the detriment of the utility shareholder? 836 MR. SNELL: This one was a fairly obvious case and it was well known in the States as well. It's at the top of the list, I would suggest. And off the top of my head, I can't think of another incident that parallels this particular case. 837 I would say that this tendency to have a more, for lack of a better word, dynamic program or a more speculative financial program was more of a tendency or an inclination seven, eight, nine, ten years ago when gas first became deregulated. As time has moved forward and processes have paralleled other corporate processes as far as policies and procedures, and in hedge plans, again, that has changed the complexion of hedge plan development dramatically. And to my knowledge, I'm sure there have been, but off the top of my head, I haven't heard of another. 838 MR. DINGWALL: Thank you, Mr. Snell. 839 Mr. Dent -- 840 MR. DENT: Yes, sir. 841 MR. DINGWALL: -- I'd like you to move on to Board Staff interrogatory 72 which, I believe, depicts the individuals on the hedge committee. Can you give me an indication of who those individuals are from a title point of view, and what corporate entity they're with, and who their next line of reporting would be to? 842 MR. DENT: I probably know a few of them. Vice-president of gas supply would be Mr. Baker, and he reports to a Mr. Wellard. The director of accounting is Pat Elliot, and she reports to, I believe, Mr. Bush. Director of acquisition is Mark Isherwood, and he reports to Mr. Baker. The director of capacity management is Steve Poredos, and he also reports to Mr. Baker. Director of channel management is Mr. Sherville, Paul Sherville, and I believe he reports to Mr. Birmingham. The director of regulatory affairs is Mr. Reghelini, and I believe he also reports to Mr. Birmingham. And the vice-president of strategic development and risk management is Pat Gibson, and I'm not sure who he reports to. 843 MR. DINGWALL: Which company is Mr. Gibson with? 844 MR. DENT: He's with Duke Energy Gas Transmission. 845 MR. DINGWALL: Where does that company sit in terms of the global affiliate picture to Union Gas? 846 MR. DENT: It would be an affiliate of Union Gas. 847 MR. DINGWALL: Now, who does Mr. Baker report to? 848 MR. DENT: He reports to Mr. Wellard, the president of Union Gas. 849 MR. DINGWALL: And Mr. Birmingham? 850 MR. DENT: He also reports to Mr. Wellard. 851 MR. DINGWALL: Now, going through these individuals, can you tell me which specific function they're supposed to take on this committee, what the reason that they are there for is. 852 MR. DENT: In our policy itself, it describes the risk -- the commodity risk committee, the hedge committee, as being a committee of senior people who can give some wise perspective to the overall program. So each one of these individuals represents a different segment of some of our activity and so they are able to comment on the things that we're recommending based on the experience that they have within the gas industry itself. 853 MR. DINGWALL: Who would be for senior, Mr. Gibson or Mr. Wellard? 854 MR. DENT: Well, I believe it's Mr. Wellard, but -- that's what I believe at this point anyway. 855 MR. DINGWALL: Do you know if they report to a common individual? 856 MR. DENT: I don't know. I don't know who Mr. Gibson reports to so I'm at a bit of a loss here. 857 MR. DINGWALL: Mr. Birmingham reports to Mr. Wellard as well; does he not? 858 MR. DENT: That's correct. 859 MR. DINGWALL: As does Mr. Bush? 860 MR. DENT: I'm not sure. Mr. Bush is relatively new and I'm not sure what the reporting relationship is. 861 MR. DINGWALL: Can you tell me where, in the process of risk management, gas supply, et cetera, forecasts are plugged in and assets are allocated? 862 MR. DENT: Can you repeat that question, please. 863 MR. DINGWALL: At what point in the whole process, whether it be pre-risk management or post-risk management, does the utility's weather forecast enter into the equation? 864 MR. DENT: We had an IR that addressed that, and let me see if I can reference that for you. Exhibit J.12.9 might be helpful here. That interrogatory says: 865 "Union's risk management function occurs at the end of the planning process. Union first develops its gas supply plan using weather assumptions and demand forecasts. The plan will provide information as to the assets Union requires to balance its gas supply plan. Union then acquires commodity to fill the transport assets. Union then layers in various risk management tools, such as fixed price, hedging the purchase of caps and collars to reduce the commodity price volatility." 866 MR. DINGWALL: And where in the process are assets allocated to specific rate classes, such as transportation or storage? 867 MR. DENT: Well, again, the assets that I deal with, that come to me, are the assets that we use to supply commodity for sales service customers. Within the planning process itself, there certainly are some rate class implications as far as who is using what assets. But the ones that come directly to me and the commodity that's managed in this program are allocated to us for sales service customers. 868 MR. DINGWALL: And when they come to you, I presume you're attributed a certain cost and a certain obligation to manage those assets; is that correct? 869 MR. DENT: There is a cost forecast currently based on the consensus methodology, but that cost will vary depending on the updated quarterly rate adjustment mechanism process. So there is a starting point with any gas supply plan, but it really is impacted by the volatility in the market and whether prices are going up or going down. So it's a bit of a moving target. 870 MR. DINGWALL: Do you then have the ability to release excess capacity to either the S&T group or to the marketplace? 871 MR. DENT: No, that's not the function that our group does. If there are excess -- if there are excess assets, there is a process to maximize those and there is an incentive mechanism with that. There's a sharing of any incremental revenues, similar to the incentive program that Mr. Snell talked to earlier, where if there are assets that can be released, there is a sharing of those assets. But my group itself are really charged with using the assets to service sales service customers, and if there is any incremental asset because, say, of a warmer- than-normal winter, et cetera, then there is some opportunity to maximize it. But my group is not involved in the release of those assets per se. 872 MR. DINGWALL: Which group, under whose direction are those assets released? 873 MR. DENT: That would be under the direction of Mr. Poredos. 874 MR. DINGWALL: What's the name of the group, sir? 875 MR. DENT: It would be the capacity management group. 876 MR. DINGWALL: And Mr. Poredos is part of the risk-management committee? 877 MR. DINGWALL: Yes, Mr. Poredos sits on the risk-management committee. 878 MR. DINGWALL: Now, how does that work, does the risk-management committee have any visibility into when there are excess assets or is that all determined by capacity management? 879 MR. DENT: The commodity risk committee deals with the commodity risk. Our group will bring recommendations to that committee to transact either fixed price, swaps, caps, collars, et cetera, that commodity risk committee is not involved in any way with respect to release of any assets. That comes separately through the capacity management group. 880 MR. DINGWALL: Do the commodity risk group deal with long-term physical contracts, or short-term physical contracts? 881 MR. DENT: The commodity risk group itself doesn't approve the physical transactions that we undertake. The governance for the physical transactions moves up through the director and vice-president of gas supply. So before my buyer transacts any physical activity, myself, the director of acquisitions and the vice-president of gas supply signs off on the individual buys that we will do. But where we do have a link with a commodity risk committee is in the reporting function, so although the commodity risk committee might not approve the specific physical transaction, those transactions are incorporated into the change of the portfolio so the commodity risk committee sees how the portfolio is being impacted by certain physical transactions. 882 Primarily, in this high-price environment our physical transactions, fixed physical transactions have been primarily 30- and 60-day in length. More or less, the last buys we do at the end of the month as we try to balance the buys for direct-purchase activity. 883 MR. DINGWALL: Which business unit determines the availability of diversions? 884 MR. DENT: I believe that's the capacity management group. But again my group is not involved in that activity. 885 MR. DINGWALL: Now, you have -- when I say "you" I'm referring to you in, of course, your role with respect to the hedge committee -- you do have some visibility into capacity management. Does that lead to any decisions being made on how to change the bands or tolerances of the recommendations you'd give to the risk management specialist? 886 MR. PENNY: Sorry, Mr. Chair, I believe it was pretty clear that Mr. Dent said that his group has nothing to do with capacity management. 887 MR. SOMMERVILLE: I think that's right, Mr. Dingwall. I think Mr. Dent indicated that that was a function that was apart from his role on the risk committee. 888 MR. DINGWALL: I'm sorry, sir, did you say that that was apart from his role? 889 MR. SOMMERVILLE: It was no part of his role in the risk committee related to capacity management. I think he made that distinction rightly, I think. 890 MR. DENT: That's correct, sir. 891 MR. DINGWALL: Now, there's somebody on the risk committee who has a functional role in capacity management; correct? 892 MR. DENT: That is correct. 893 MR. DINGWALL: What's their feed in? What information do they provide to this committee? 894 MR. DENT: Well, they're one of seven people who respond to the recommendations that either myself or the hedge analyst brings to that committee. 895 MR. DINGWALL: What kind of responses would they provide from that position? 896 MR. DENT: Well, they'd provide the same input as anyone else. They would comment on whether the recommendation that we're making seems reasonable, whether we should lower or raise the target given what we see in the market and what we've presented to the committee. So they're really focused on making sure that the recommendations that we do transact have the consensus support of the entire committee. 897 MR. DINGWALL: Do they give you any feedback as to the feasibility or lack of feasibility based on the physical requirements or the capacity requirements? 898 MR. DENT: No, absolutely not. That, again, is a completely separate function. 899 What I can say about what we try to build into our program is, again, this difference between how much we might presumably hedge entering into a summer season versus a winter season. And in the summer, our rule of thumb says we'll be 20 to 50 per cent hedged, whereas the winter we're 40 to 70 per cent as a rule of thumb. The reason summer is a little bit lower is that if we have a warmer-than-normal winter, we know we're going to come out of the winter with excess supply, we'll carry gas into the summer, and we'll know at some point capacity management will have to do something with that. But chances are we may not have all the gas to buy that next summer that we thought we had so we arrange our percentages to accept the fact that some winters are going to be warm, and therefore, there may be less that we can hedge as a result of that. 900 MR. DINGWALL: Now, I believe that in response to someone else's question before the lunch break, there was some discussion related to the QRAM. How would the implications of risk management intersect or interact with the quarterly rate-approval mechanism? 901 MR. DENT: In our recommendation, as we outlined in our evidence, our QRAM mechanism, the rate adjustment mechanism will be impacted by the 21-day strip, the Empress basis, foreign exchange that is applied to that, plus a forecast of risk management activities. In the case of being in a high-price environment, we might forecast a higher level of options activity and that would be incorporated into the risk management plan. If we're in a relatively low price environment where we thought we might do more fixed as opposed to options buying, then, again, that risk management forecast would be adjusted accordingly. 902 MR. DINGWALL: If you enter into multiyear hedge contracts, or other forms of risk management contracts, how would you clear that in a quarterly QRAM? 903 MR. DENT: The multiyear would be done the same way we do a short-term fixed deal today. Again, as I said earlier, we haven't done much in the way of physical purchases beyond 30 days because of the high price environment. But in the past we've certainly done five- and seven- and 12-month strip. If we transact at $5 and the consensus price is, say, 5.25, then we'll put that 25-cent credit into the QRAM mechanism. 904 And we would do the same thing for, say, a three-year hedge of gas, except that we would only mark in the QRAM the applicable one-year impact. So if the hedge was from January '04 to December '07 and we're doing the QRAM January '04 to December '04, then we would mark that period January '04 to December '04 and put that into the monthly impact, just as we do with any type of five- or seven-month physical gas that we would buy and incorporate into the QRAM process. 905 MR. DINGWALL: Doesn't that lead to the potential that there will be a significant deviation between what the QRAM price will be versus a real market signal? 906 MR. DENT: Well, it really depends on what you mean by "market signal," because if I'm looking for a price today, and maybe that price for November gas is $4.50, I'm almost certain that tomorrow at 10:00, it's not going to be $4.50. So within the market itself, there's a natural volatility. When you look at the standard deviation, it gives us a sense as to what that movement might be. But to say you've got the one absolute price that's the actual market signal, I think, is a little bit misleading. 907 The impacts of risk management, whether it's a plus or minus, certainly in the magnitude that we've seen, and I think that we've seen anything from pennies up to 25 or 30 cents, I mean that 30 cents over the course of a year, that's well within the one standard deviation. So even with that relatively -- with that arguably relatively large impact, you're still getting a market signal that is within that one standard deviation of where the market can move up and down as we monitor and as we measure the market. 908 MR. DINGWALL: Is the use of multiyear instruments going to influence how you contract in the future for storage and transportation on behalf of system customers? 909 MR. DENT: No, absolutely not. Those forecasts would be based on volume that we believe we would need to serve sales customers, and we would be hedging, as we normally do, on a firm, even daily basis because we're really filling pipe to meet their need. It's not that we're putting gas in storage and then hedging it. We're hedging the gas that comes to Union from either the Gulf of Mexico or Alberta confirming the dailies on the variety of transport routes that we have. 910 MR. DINGWALL: Doesn't the notion of delivering value for your customers put you in the position where you're in competition with the retailer serving your market? 911 MR. DENT: Well, I look upon my activity as serving the sales service customers, and I want to provide them with a program that is industry standard, that is the -- that gives our sales service customers value. And so we're looking at implementing the program for these customers and we're not -- we're not trying to be negative toward the direct purchase market. We're just saying, What is the best process to serve our sales service customers? 912 MR. DINGWALL: How can ratepayers assess whether or not you've been prudent in doing so? 913 MR. DENT: Well, I think there are several ways, and I think the first way is, is Union following the program? We've designed a program that's a passive hedging program, and as we follow the program, we believe that that produces value for ratepayers. And as long as we're not deviating that, going to a dynamic hedging process or doing something that we said we wouldn't, then I think that that's reasonable. 914 When I look at our interrogatory 24.18, and again -- when I go to Exhibit J.24-18, I look at the dampening of the volatility, I think that that certainly provides value for the customers. 915 Understand what Mr. Snell said about standard deviation maybe not being a measure that is all the time reliable. But certainly in the cases that we've outlined, it shows that we've clearly reduced the volatility. And again, although we don't have a beat-the-market philosophy, when you look at the five and a half years results there which cover over several cycles, it shows that we're right at the market. I mean, those things together seem to indicate to me that what we're doing is reasonable, what we're doing is protecting customers from the big spikes that we've seen. At the same time, there is a cost to that. 916 But I think on balance, our record and our commitment to following the program has produced value for customers. 917 MR. DINGWALL: Sir, that's a depiction of one possible comparable. At page 4 of the Energy Probe cross-examination materials is paragraph 6.6.2 of the EBRO-493/494 decision in which a similar proposition was reviewed by the Board. In this case, one of the other comparables that was suggested be reviewed to determine value was what would happen under a situation where the utilities did nothing to mitigate risk. Do you think that would be an appropriate comparable for us to review this, going forward? 918 MR. DENT: Well, that's essentially what you have in J.24-18. If we had a do-nothing approach, we would have spent approximately $6.9 million more. But again, the concept is not, Gee, we did a good job because we beat the market by $7 million. The concept is that we built a reasonable portfolio over time. It just so happened that over this five-and-a-half-year period, we were a little bit over the market. Maybe if we looked at another five-and-a-half-year period we would be somewhat over the market. Again, the results are really dependent on what the market itself does. 919 But in fairness, when you look at the overview, it does seem to provide some comfort. 920 MR. DINGWALL: If one of the principal goals of risk management is to smooth the effect on end-users, does it provide any substantial benefit over an equal billing plan? 921 MR. DENT: Well, if you're on an equal billing plan and prices go to $10 and you have no hedges, then that unhedged piece, be it, in our case, approximately $50 million in March, that has to be paid at the end of the equal billing time. So somebody got a bit smoothed out but then he got whacked over the head at the end of the summer with an incremental charge, and that seems to me is not really what the equal billing process or program is all about either. 922 MR. DINGWALL: Have there ever been, though, significant recharges to the equal billing plan of that size? 923 MR. DENT: Well, again, we went through the May QRAM, and a lot of the feedback there was the large retroactive charge. That certainly was experienced. But, I mean, whenever we have a colder-than-normal winter, you're going to have two kinds of things on your equal billing impact; you're going to have a volume variance and you're going to have a price variance. So beyond the year-end deferral true-up, the equal billing customers get a double whammy, they get the equal billing true-up, then they get the year-end deferral whack. So they're kind of getting two for the price of one which, again, we don't think is appropriate for our sales service customers. 924 MR. DINGWALL: Thank you very much, gentlemen. Those are my questions. 925 MR. SOMMERVILLE: Thank you, Mr. Dingwall. 926 Mr. Aiken. 927 MR. AIKEN: Mr. Chairman, I have no questions for this panel. 928 MR. SOMMERVILLE: Thank you. 929 Ms. Singh. 930 MS. SINGH: I just have one question for this panel, actually broken down into three. 931 CROSS-EXAMINATION BY MS. SINGH: 932 MS. SINGH: Am I correct in my understanding that over time the cost of gas to customers without hedging is about the same as the cost with hedging without factoring in the cost of hedging itself? 933 MR. DENT: No, I wouldn't say that. What you're seeing in Exhibit J.24-18 is what our experience was over that five-and-a-half-year period. I think what you would normally expect to see is, over a period of time, you would expect to see some cost above what the actual market price was, because there tends to be some costs implicit in buying options and in transacting over a bid offer spread. 934 So I would say that maybe our results are a little bit better than what you might normally expect to see, even over a four- or five-year period. 935 MS. SINGH: What, then, is the cost of hedging that should be added or that must be added to the cost of gas incurred to reduce price volatility? 936 MR. SNELL: Well, if you look for a cost benchmark, it is extremely difficult, because when you look at a benchmark, I think first you have to look at the objectives of a risk-management program. And as has been stated time and time again, it isn't for profit. There are two general goals in this program: price stability, and the second issue is reasonable value. When it comes down to comparing that to another strategy called floating with the market and taking the risk associated with being at the whim of the day-to-day fluctuations in gas costs, we're talking about two different strategies. 937 Now, getting back to the benchmark, to quantify a benchmark is difficult -- a dollar benchmark or cost is very difficult, because if you look at the dollar amounts, even from the end of the year going back four-and-a-half years, whatever it is, Union Gas is a little bit worse off to the market. If you look at that particular exhibit, which brings us through July of this year, they're a little better off to the market over that period of time. At the same time, there's drastically reduced price volatilities to the customer, which, again, is the objective of the program. If you go back and look at the objectives and if the objectives seem like they have been addressed and are being met, I think you have a successful program. But to quantify that in a dollar term on any given moment in time is a difficult proposition. 938 MS. SINGH: So if I understand you, then, Mr. Snell, looking at page 12 of the report that you supervised, how does that 15-cent differential fit into what you just told us? 939 MR. SNELL: As I just said, this is as of the end of 2002 and it shows that Union Gas is a little higher than what would have been their price had they floated with the market and you looked at the first-of-the-month index all those years. However, if you look at the exhibit that Dave just referenced that brings this chart, adds to the last six months of this chart, those numbers flip-flop. In fact, Union Gas's cost would be lower than the market over this same period, including the last six months. 940 Unfortunately, when the market goes up as it has in the last six months, the financial results of a risk-management program are going to look good because it's done its job, it's mitigated price risk and returned dollars. But for the ratepayer, of course, what you want is lower value. So the program has worked because it has mitigated high gas costs which have happened over the last six months, not because it happens to show a big financial profit. I mean, it's done its job. 941 In a case of, potentially, the call options I spoke of in March, frankly, when you put those on, you're doing that to provide price stability to the customer, and at the same time, recognizing that it's an historically high value, you choose to use a cap instead of a fixed price so that as the market price floats down, you can benefit from those lower costs, because the only thing you're at risk for is the premium you've paid to provide price stability during this volatile time period. 942 MS. SINGH: I'm just wondering, carrying on from there, if that price differential includes the insurance cost, or is that in addition? 943 MR. SNELL: That is in there, the insurance premium is in there. 944 MS. SINGH: Is part of that. 945 MR. SNELL: Yes. 946 MS. SINGH: Would it be possible to get an undertaking from Union to calculate the cost of hedging over the period between '98 to 2002 based on that differential between your average price of 4.17 versus the market average price of $4.03? 947 MR. SNELL: What would you consider a cost of hedging, transaction costs or the premiums we spoke of? 948 MS. SINGH: Whatever the differential is. 949 MR. PENNY: The differential is the differential. In this case it's 14 cents. 950 MS. SINGH: So what did it cost over the five-year period? 951 MR. PENNY: 14 cents per gJ. 952 MR. DENT: The cost is 14 cents per gJ. 953 MS. SINGH: So is your total cost, then, that times the gJs? Is that the total cost? 954 MR. DENT: Well, if you're looking at just a mechanical -- 955 MS. SINGH: Just a mechanical -- 956 MR. DENT: -- calculation, you've got the 14-cent difference times the volume during those -- during that period of time, and you'd compare that against the five-and-a-half-year period referenced in J.24-18 where the cost is a negative $6.9 million. 957 MS. SINGH: And so what would that have been during that five-year period, just doing that calculation? 958 MR. PENNY: Is the question now in reference to the shorter table at page 12 of the report? 959 MS. SINGH: Yes. The shorter one at page 12. 960 MR. DENT: Well, I'd have to go back and sort through the volumes for that. We've done that with the J.24-18 so we could, if it's really necessary, give that. 961 MR. PENNY: Given that it has been done for the more updated numbers available for the longer term, I can't imagine what the value of knowing what an old, now superseded table value would be. I guess I'm asking through you, Mr. Chairman, what the relevance of this is, having regard to the fact that we have J.24-18, which is more updated information? 962 MR. SOMMERVILLE: Is what you're looking for, Ms. Singh, the transactional premium rather than the actual cost spread over this period? Is what you're looking for really what it costs to execute the risk-management program? Is that the essence of your question? 963 MS. SINGH: No. It's not -- it's not the cost to execute the risk-management program. I think we did hear some evidence about that earlier in the day. The question is more related to the cost of the hedging, the aggregate cost of hedging over the five-year period, looking at the numbers in Exhibit J.24-18. And just adding up those numbers, what is the actual cost that Union incurred as a result of this hedging program? If they could just calculate that for us, based on those numbers. 964 MR. DENT: We can calculate that. I would just say that the representation of a cost is a bit of a misnomer. It's really what the Union portfolio, with all the risk management activity involved, was priced at versus what the average market was priced at. We can do that for the five-year period. But, quite frankly, J.24-18 gives you that number, $6.9 million for the period of 1998 through to the middle of 2003. So you've got that number right in J.24-18, as up to date as we had it at the interrogatory period. 965 MS. SINGH: Okay. If you wouldn't mind, I'd be grateful for that undertaking. 966 MR. SOMMERVILLE: And that would simply be that number multiplied by the number of gigaJoules over that period. 967 MR. DENT: That's correct. 968 MR. SOMMERVILLE: That's satisfactory to the Board. 969 MS. SINGH: Thank you very much. Those are my questions. 970 MR. MORAN: Mr. Chair, I guess that would become Undertaking N.1.2. I wonder, maybe the easiest way to record is for the witness to state for the record what he thinks he undertook to do. 971 MR. DENT: I think what I undertook to do is to take Union average price versus the market price, which is 14 cents, multiply it by the volume of gas that Union purchased in 1998, 1999, 2000, 2001, 2002, and give a gross number of what .14 times that volume is. 972 MR. SOMMERVILLE: Does that include any portion of 2003, Mr. Dent? 973 MR. DENT: It would not, because we have the portion of 2003 already in J.24-18. 974 MR. MORAN: Thank you. 975 UNDERTAKING NO. N.1.2: TO TAKE UNION AVERAGE PRICE VERSUS THE MARKET PRICE, WHICH IS 14 CENTS, MULTIPLY IT BY THE VOLUME OF GAS THAT UNION PURCHASED IN 1998, 1999, 2000, 2001, 2002, AND GIVE A GROSS NUMBER OF WHAT .14 TIMES THAT VOLUME IS 976 MR. SOMMERVILLE: Do we have a number of that undertaking? 977 MR. MORAN: I think I indicated it was N.1.2, Mr. Chair. 978 MR. SOMMERVILLE: Thank you. 979 MR. PENNY: I guess Mr. Shepherd has decided he's not cross-examining. 980 MR. SOMMERVILLE: I take that from his absence. 981 Mr. Rowe. 982 MR. ROWE: No questions. 983 MR. SOMMERVILLE: Mr. Stoll, I think, has departed. 984 Mr. Scully. 985 MR. SCULLY: No questions. 986 MR. SOMMERVILLE: Thank you. 987 I think that exhausts the attendees at this point. 988 Mr. Moran. 989 MR. MORAN: It's my turn to exhaust them, perhaps. 990 CROSS-EXAMINATION BY MR. MORAN: 991 MR. MORAN: Let me start, witnesses, by getting you to turn to two exhibits together, Exhibit D.2, tab 1, at page 27, which is your report, Mr. Snell, and D.1, tab 2, page 9, which would be your report, Mr. Dent. 992 I'm getting to look at these so I can understand how this process is going to work. I think, in general terms, you indicated that there were recommendations to make changes to your current policy and then you have a process for making those changes and then, I guess, in some fashion or other you'll report back to the Board as changes are made to the policy. 993 Starting with you, Mr. Snell, if we look at page 27, under "Hedge Methodology," you made two recommendations; one was with respect to the definition of hedgible volumes, and the other was with respect to the extent of the authorized time horizon; right? 994 MR. SNELL: Yes. 995 MR. MORAN: And, Mr. Dent, when we look at Union's reaction to those two recommendations, that's what we see on page 9, right, of your report? 996 MR. DENT: That's correct. 997 MR. MORAN: Under item G. What I don't see, Mr. Dent, on page 9 of your report is anything as specific, I guess, as what Mr. Snell is recommending in terms of the actual percentage of forecasted load-approved for hedging. Could you just walk us through how that's going to happen. 998 MR. DENT: We certainly adopted the concept of doing a bit of a long-term hedging and long term by going out beyond the season-to-season that we're currently hedging in. What we need to be very careful of, though, is as we set those volumes going out, especially going out, maybe two years is not so bad, three years, more difficult, four years more difficult still, and if we go to five years, that could be very challenging as to what kind of forecast of direct-purchase activity might we have. So we're currently undertaking some work to take a look at what those percentages might likely be and trying to be somewhat conservative in our estimate, but we haven't reached a conclusion yet as to what those percentages might likely be. 999 One thing we can say for sure, though, is as we go from one-year to five-year, the confidence we have in the volumes that we might be able to hedge going further out in time decreases. And so it's very likely that we'll have a relatively low volume on year four and five, gradually increasing as we move up to the present time. And we would expect to have that work done sometime -- sometime during the balance of the fall, early winter, to be able to incorporate that into a revised policy sometime late this year or probably more likely early next year. 1000 MR. MORAN: Now, Mr. Snell, in your report on page 27, you did indicate that it would be contingent on the confidence that the utility has in its forecasts staying firm, and we've heard Mr. Dent talk about that issue. And then you go on to say that a current industry standard range is 80 percent to 100 percent of forecasted load projections. Is that in the context of the five-year horizon that you're also recommending, or is that -- 1001 MR. SNELL: That large of a number, that really comes down to the confidence that you have in your forecast itself. It's obviously very important that you're relatively close on that number, and certain utilities are going to be much more certain of their load factors going out several years, although nobody's perfect. We want to err to the side of not overbuying gas, obviously, and that not only includes this year but the following year. 1002 MR. MORAN: When you indicated that a current industry standard range is 80 percent to 100 percent of forecasted load projections, was that in relation to the shorter term or to that longer five-year -- 1003 MR. SNELL: The shorter term. 1004 MR. MORAN: What would you say the industry standard range is going out past two years? 1005 MR. SNELL: Once again, when you get past two years, it will taper off to 10 to 40 percent would be a number or a range, if you will, off the top of my head, that it would become. 1006 MR. MORAN: All right, thank you. 1007 Now, with respect to the authorized time horizon, Mr. Dent, what's the current time horizon that you use? 1008 MR. DENT: Our hedging right now is essentially season to season, so we're pretty much finished our winter hedging. We're starting to look at summer. And probably before this winter is through, we'll begin to look at next winter. So we're very much within the 9 to 15 months' time horizon when you overlap certain of the seasons. 1009 MR. MORAN: All right. So in the context, then, of the changes to the policy that you've agreed, I guess, in principle, I think you've indicated how that's going to work on these issues. What kind of time frame are you looking at in coming up with the actual changes to the policy in relation, for example, to these two issues? 1010 MR. DENT: We're looking at a similar time frame. As I referenced earlier, trying to complete this work through the fall and having a revised framework prepared for early in the new year. 1011 What I would say as well, though, is as we looked at this initially, there is a fair bit of overlap and alignment with the current rule of thumb we use as far as 20 to 50 percent summer season, 40 to 70, winter season, so it's a matter of linking that with some of the longer term issues. Again, we think that through the balance of this year, we'll be able to finalize that work. 1012 MR. MORAN: All right. And again, roughly speaking, not trying to pin you down in any particular way, what would be the rough time frame for delivering the amended policy or guideline? 1013 MR. DENT: Again, without sticking a stake too deeply in the ground, we really, for sake of internal sanity, as much as anything else, would like this completed certainly early in the new year. 1014 MR. MORAN: All right. I think there was some reference, perhaps it was you, Mr. Snell, who made it, to increasing reliance on gas for generating electricity. I wonder if you're in a position to indicate how that has impacted on the overall risk, you know, from season to season and going forward. 1015 MR. SNELL: Well, certainly, gas-fired generation has almost created two seasons for gas, two volatile time periods of the year. That is likely to continue. However, it's important to note that this last summer or the summer before last, we did recognize that we have, in North America, pretty much overbuilt, this is a general statement, we have somewhat overbuilt electric generation, and particularly natural gas-fired generation, and of course, if a plant doesn't use the gas, it's not consumed and it's not demand. 1016 So the amount of gas-fired generation capacity we have in this country that has grown substantially and promises to grow for at least another year, that is going to be a significant piece of the landscape, moving forward, when we look at the supply-demand balance for natural gas. And it will create a circumstance where, in the summertime, we can get volatile price movement off of gas competing between going into storage for winter needs and gas being used for electricity generation. Currently, gas for electricity generation can be anywhere from 8 to 15 per cent of the total natural gas demand, and that is growing. 1017 MR. SOMMERVILLE: Is that an American figure? 1018 MR. SNELL: That's an American figure, I'm sorry. 1019 MR. MORAN: I take it you're not referring to Ontario when you're talking about overbuilt capacity? 1020 MR. SNELL: That's correct. 1021 MR. MORAN: On the electricity side. 1022 All right. In that context, then, does this create any difficulties for risk management or any special challenges for a risk-management program like Union's? 1023 MR. SNELL: One of the factors that has certainly changed over the course of the last five or six years has been that gas utilities, when they first started hedging programs, they focused on the winter alone, and now it is commonplace for utilities to have a hedge program year-round because of this two-tiered market, so to speak, or two-seasoned market. And the gas-fired generation, although be it that the last two summers have been relatively mild for gas pricing, gas-fired generation will continue to create volatility in the summer months, and the response by the gas utilities has been that their hedging programs have become a 12-month operation. 1024 MR. MORAN: Mr. Dent, did you want to add any observations based on experience in relation to this issue? 1025 MR. DENT: Well, we certainly, as we come into 2000, 2001, 2002, certainly the gas volatility has increased, but we've also seen the periods of June, July, August as being slightly more danger months than what they've been when I first started in gas supply in 1997 and 1998. So it does, again, tend to focus the mind towards some of those months where we might do slightly more hedging into the summer months just because there seems to be a bit more of a probability or prospect that the price could pop up as a result of that. But, again, that's kind of a season-to-season decision driven not so much by whether electricity may be increasing demand for gas, but again, more within the context of layering in our hedging over time. 1026 MR. MORAN: Thank you. 1027 Mr. Snell, I think earlier in your evidence you referred to this notion that the marketers are using the same hedging tools as the utility is; do you recall that? 1028 MR. SNELL: Yes. 1029 MR. MORAN: All right. And I guess with your suggestion that the utility include a longer time horizon of five years, does that bring us into sort of a more even playing field when we look at the fixed-price contracts that marketers typically offer up to a five-year term? 1030 MR. SNELL: I don't see it drastically changing the concept that, frankly, when prices break in utility customers will be faced with looking at your price which will typically be a little bit higher than a marketer's price, they're going to tend to switch to the independent marketer. When prices are high, whether Union Gas adopts all these situations or not, their price is still going to be mitigated and they're going to gravitate more towards the Union Gas system with this program as well. 1031 MR. MORAN: All right. Given that both the marketers and the utility are engaging in hedging, then, and looking at it from a customer-choice perspective, what we're probably looking at, then, is customers accessing two different types of hedging programs; one is to sign up with a retailer who is doing the hedging and taking on the risk for volatility; is that correct? 1032 MR. SNELL: Yes. 1033 MR. MORAN: And the other is to go with some volatility but rely on the utility's hedging process to smooth that out a bit. 1034 MR. SNELL: That's correct. 1035 MR. MORAN: All right. And so in terms of measuring the success of the utility program, is there a way to measure the utility program against the direct purchase program in order to get an understanding of whether it's working satisfactorily? 1036 MR. SNELL: The direct purchase programs that are typical, where the price that is set or the fixed-price contract or the cap contract that is offered by a marketer is going to be at the prevailing market price. You all, your risk-management program as a utility is an ongoing process. So it would be difficult to compare at any given moment what a marketer might offer relative to your price because you're continuously buying gas. 1037 If I were to go to a marketer today, he would look at what the price of gas is today, delivered over the next year, and come up with a market value. And as we sit here today, that price could be a little higher or a little lower than your price. If prices continue to fall and we sit here in December with the forward curve for 2004 being, you know, two and a half dollars, and I were to go to a marketer and ask for a fixed price, he would give me two and a half dollars. Your price would likely be higher because you have, prior to the winter, hedged a significant amount of gas in the prices in the fall. 1038 MR. MORAN: All right. Rather than looking at it at any particular point in time, is there a way over time to compare the relative performance of the DP program versus the system program? 1039 MR. SNELL: I think it would be difficult because, again, each individual customer on any day is going to look at a different price for -- the marketer is not going to lock in that value until he gets a firm commitment from his customers. 1040 MR. MORAN: All right. And if you could turn up Exhibit M.1.3, I think that was the Energy Probe cross-examination materials, just at page 4. This is part of an excerpt from a previous Board decision. You were already brought to this particular paragraph, 6.6.2. 1041 The Board is repeating a number of factors that could be relied on in order to try to judge the prudence, and it lists some of these in that paragraph. The performance of other eastern Canadian utilities, the prices available under fixed-price contracts at the time supply contracts were negotiated, and the price that would have resulted from total reliance on index prices, the do-nothing option. And I think you commented on the do-nothing option. 1042 How would you look at the fixed price contracts or the prices available under fixed price contracts at the time in order to try to get some measure of prudence? 1043 MR. SNELL: At the time that -- I don't quite -- I've read this paragraph and I don't quite understand when they say "at the time" meaning when? 1044 MR. MORAN: At the time the supply contracts were negotiated, I think is the intention there. 1045 MR. SNELL: Well, one of the issues about Union Gas is we don't look at locking in the price or doing our risk management in concert when they might negotiate a supply contract. One of our recommendations, of course, was to not use that as a focus for their forecasted load, or to look at hedgible lines, if you will. So we don't or Union Gas won't be looking at the supply contract initially as a fixed-price or index, it will have to be in conjunction with risk management decisions on their own merit. 1046 With regard to performances of other utilities, the general -- many states we're involved in where utility plans aren't exactly the same, and this is always an issue. I think that sometimes the utilities might be slightly different in their load profile or in their volume variability. There may be many issues that could come up that would alter how they might purchase gas. And some may be more aggressive to fixed pricing than others, their tools may limit how they operate. 1047 In the State of Illinois, for instance, every single utility has a hedge plan, and frankly, it's along the same lines as we're suggesting today for Union Gas, each one of them. But they're all slightly different. One utility uses only physical tools; one utility uses only fixed pricing and indexes and a combination thereof. 1048 So the pricing, the muting of the volatility in each case can be a little bit different, and every utility is going to have a different price, if you will, but they all come back to those objectives I spoke of; they mitigate price volatility and at the same time, they're all geared towards some type of dollar-cost averaging and a reasonable value concept, which is really what the regulators in Illinois, which is part of my testimony, in one of the prudency review for Peoples, the regulators in Illinois looked at their program and looked at their diversified portfolio and said that that is the type of gas portfolio that we want here in Illinois. 1049 MR. MORAN: All right. You've made your recommendations and Union's responded to your recommendations and seems prepared to accept them in the most part, with some minor variations. And let's assume we have a new policy that incorporates these recommendations sometime early next year, as Mr. Dent, without putting a stake in the ground, suggests that he might be able to do, and then they implement it and it comes back before the Board when the actual costs become known. 1050 What are the key factors that you would say to the Board that the Board should use in order to evaluate the prudence of the actual decisions made? 1051 MR. SNELL: Well, first and foremost, they follow their plan. Without getting too much in detail, the plan, again, should -- you should look at the volatility, the muting of the volatility; and secondly, the concept of buying value not only now for this year, but buying it well into the future and increasing your volumes as the prices become more reasonable. If one looks at this, and I think you can conceptualize that as prices get low and stay low and you continue to expand coverage and have low prices and stable prices for longer periods of time, that ends up being a successful plan. 1052 I wish I could quantify the benchmark in a dollar-cost term. But at the end of the day, I still suggest benchmarks -- what are we benchmarking here? We're benchmarking that we meet our objectives, and our two objectives are price stability and buying to reasonable value. And when you come back and look at the exhibit as an example of the price matrix, and high prices and low prices over the last three or four years, you get a good sense of what is high and what is low, and we can quantify that and we can buy to that proposition. 1053 I was in a meeting -- our program is pretty simple, and maybe sometimes simple is better. I was in a meeting several months ago with the utility in Illinois and they were having a -- in Chicago, and they were having a community meeting amongst various organizations, and their leaders came in and, of course, we were discussing the high gas costs and looking forward to the next winter. 1054 One of the ladies who represented one of the community groups, who knew nothing of gas pricing, stood up and made a simple comment that I thought was so valuable. She stood up and said, You know, when I go into the grocery store and I buy milk, I go in and kind of know what the price of milk is. When it's on sale, I buy three or four gallons of it and I stick the other gallons I'm not going to use in the freezer. And she turns to the utility people and says: Why don't you do that with your gas? 1055 And the reality is, if you look at this program, when price gets to be below value, we want to stick more of that gas in our refrigerator, or buy more of that gas for longer periods of time, just like that lady said. 1056 Think about it for a minute. Does she really care about whether she buys the lowest possible price for that gas? No. In her mind, she's buying value, not shopping around for what is -- and comparing herself to the absolute low of the market. But what fits her pocketbook and what fits what she perceives as value which she derives from historic pricing for milk, just like we are proposing here. 1057 Sometimes programs can be explained in a simple terms such as this. These are the same constituents in which we are obviously serving here today. 1058 MR. MORAN: And your milk buyer will be ahead as long as there's no blackout; right? 1059 One last question. That has to do with J.1.72. This will be for you, Mr. Dent. This is the exhibit that sets out the list of voting members on the commodity risk committee. 1060 MR. DENT: I've misplaced my copy. Yes, thanks. 1061 MR. MORAN: Are there any affiliates of Union who are marketing gas in Ontario that you know of? 1062 MR. DENT: Currently there are no affiliates of Union marketing gas. We've purchased no gas from affiliates during 2003. That's not to say that might not change in the future. But certainly currently there's no affiliates of Union who are gas marketers. 1063 MR. MORAN: You indicated earlier that you weren't sure who Pat Gibson referred to, and he's the vice-president from Duke Energy Gas Transmission that's on this committee. 1064 MR. PENNY: It was reported to, he said he wasn't sure who he reported to. 1065 MR. MORAN: Right. 1066 MR. PENNY: You said referred to. 1067 MR. MORAN: Sorry, reported. Do you know -- I guess you probably won't know this. If there's a way for you to find out if you don't know if anybody in Duke Energy Gas Transmission, president, officer, vice-president, director, is also a director, officer, vice-president, director, of any other affiliates that are marketing gas? 1068 MR. DENT: I don't have any knowledge of that. 1069 MR. MORAN: Okay. Would you be able to undertake to find out? 1070 MR. DENT: I could -- sure, I could take a shot at that. I'm sure I could dig it up somewhere. 1071 MR. MORAN: Mr. Chair, that would be Undertaking N.1.3, an undertaking to advise if any of the directors, officers, vice-presidents or directors of the affiliate Duke Energy Gas Transmission, are directors, officers, vice-presidents or directors of any Union affiliate that's in the gas marketing business. 1072 UNDERTAKING NO. N.1.3: TO ADVISE IF ANY OF THE DIRECTORS, OFFICERS, VICE-PRESIDENTS OR DIRECTORS OF THE AFFILIATE DUKE ENERGY GAS TRANSMISSION, ARE DIRECTORS, OFFICERS, VICE-PRESIDENTS OR DIRECTORS OF ANY UNION AFFILIATE THAT'S IN THE GAS MARKETING BUSINESS 1073 MR. MORAN: Those are all my questions. 1074 MR. SOMMERVILLE: Thank you. 1075 Mr. Penny, redirect? 1076 MR. PENNY: Thank you, Mr. Chairman. I have no questions in re-examination. 1077 MR. SOMMERVILLE: Thank you. 1078 Mr. Snell and Mr. Dent, I have no questions. My colleague has no questions. Accordingly, you are excused. Thank you very much for your very able and cordial testimony. Thank you. 1079 MR. SNELL: Thank you. 1080 [The witness panel was excused] 1081 PROCEDURAL MATTERS: 1082 MR. MORAN: Mr. Chair, it's about 4:00 now, and based on the time estimates for the next panel, which would be the GDAR/ABC panel, the total time estimate I got added up to approximately two hours. So we're in your hands if you want to start that panel now, after a break, or start it in the morning, I guess. 1083 MR. PENNY: Mr. Chairman, the reason -- normally, the GDAR would have been further down the list, and the reason we wanted Mr. Andrews available today was because we thought it would be a relatively short witness, as they say, and that we could usefully use the time. We're happy to proceed with him, although, to some extent, the point of doing so may have been overcome by the fact that we've now come up to 4:00. I'm similarly in your hands. If I can just have your indulgence for a second. 1084 MR. MORAN: While Mr. Penny is conferring, I would suggest if you don't want to start the GDAR/ABC panel today, it may be simply to start with the weather normalization panel first thing when we resume in the morning. 1085 MR. PENNY: I'm inclined to think that's the right way to go, only because I know that the -- well, we don't want to inconvenience Mr. Andrews more than necessary. I know that the weather witnesses have some timing constraints and we want to make sure that we get done with them in a couple of days. 1086 MR. SOMMERVILLE: That seems very sensible. Let me indicate, too, I think there's an indication that the Board couldn't sit until 10:00 tomorrow. We can sit at 9:30 tomorrow. That adds a half-hour to our time. Board Staff could ensure that counsel are informed. 1087 MR. MORAN: Yes, Mr. Chair. Just on that issue, we can advise now, through the transcript, what the line number is so people can get updates. That number is 416-440-7608. 1088 MR. SOMMERVILLE: Thank you, Mr. Moran. We'll commence tomorrow morning at 9:30 with the weather normalization matter, and stand adjourned now. Thank you. 1089 MR. PENNY: Thank you, sir. 1090 --- Whereupon the hearing adjourned at 4:05 p.m.