Rep: OEB Doc: 12WWK Rev: 0 ONTARIO ENERGY BOARD Volume: 21 5 NOVEMBER 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER A. BIRCHENOUGH MEMBER 1 RP-2003-0063 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF an Application by Union Gas Limited for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, storage, and transmission of gas for the period commencing January 1, 2004. 3 RP-2003-0063 4 5 NOVEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel CHRIS MACKIE Board Staff NEIL YEUNG Board Staff CRAWFORD SMITH Union Gas Limited MARCEL REGHELINI Union Gas Limited PETER SCULLY City of Timmins, City of Sudbury, FNOM PETER THOMPSON Industrial Gas Users Association ROBERT WARREN Consumers Association of Canada JOHN RATTRAY Ontario Power Generation DAVID BROWN Coral Energy MIMI SINGH CME TIBOR HAYNAL TransCanada PipeLines GEORGE VEGH CEED, OESC, Superior Energy Management, Union Energy, TransAlta 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [43] CROSS-EXAMINATION BY MR. RATTRAY: [46] CROSS-EXAMINATION BY MR. THOMPSON: [238] PRELIMINARY MATTERS: [504] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [523] CROSS-EXAMINATION BY MR. THOMPSON: [526] CROSS-EXAMINATION BY MR. HAYNAL: [953] PRELIMINARY MATTERS: [1017] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [1037] CROSS-EXAMINATION BY MR. BROWN: [1040] PRELIMINARY MATTERS: [1429] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [1439] CROSS-EXAMINATION BY MR. BROWN: [1442] 10 EXHIBITS 11 EXHIBIT NO. M.21.1: DOCUMENT FILED BY OPG ENTITLED "PROPOSED RATE CHANGES R25 INTERRUPTIBLE" [52] EXHIBIT NO. M.21.2: DOCUMENT FILED BY OPG, ENTITLED "PROPOSED RATE CHANGES M7 FIRM" [54] EXHIBIT NO. M.21.3: REDACTED CROSS-EXAMINATION BRIEF CORAL ENERGY CANADA INC. [1044] EXHIBIT NO. X.21.1: CONFIDENTIAL CROSS-EXAMINATION BRIEF OF THE INTERVENOR, CORAL ENERGY CANADA INC. [1047] 12 UNDERTAKINGS 13 Undertaking No. N.21.1: TO ADVISE WHAT PORTION OF TOTAL DELIVERY 939,189,000 IS SUBJECT TO PRICE CAP UNDER THE EXPIRING PBR MECHANISM [284] UNDERTAKING NO. N.21.2: TO PROVIDE A RECONCILIATION OF THE RESTATED TOTAL REVENUE DEFICIENCY ON PAGE 2 OF EXHIBIT H.1, TAB 1, PAGE 2 OF 5 UPDATED, AND THE REVENUE DEFICIENCY ON PAGE 3 OF THE SAME EXHIBIT, OF 98.727 MILLION [370] UNDERTAKING NO. N.21.3: TO CONFIRM, OR OTHERWISE, THAT 17.661 MILLION IS A REASONABLE ESTIMATE OF THE RATEPAYER'S SHARE OF TRANSACTIONAL SERVICES REVENUES FORECAST IN THE PROPOSED REVENUE SHOWN IN H.3, TAB 1, SCHEDULE 1 [565] UNDERTAKING NO. N.21.4: TO PROVIDE, IF IT EXISTS, A COPY OF THE STANDARD CARRIAGE-SERVICE CONTRACT USED FOR RATE T1 [677] UNDERTAKING NO. N.21.5: WHETHER IT'S UNION'S POSITION THAT THE NATURAL GAS CONSUMPTION PATTERN AND DELIVERY PROFILE FOR A DUAL-FUEL GENERATION PLANT WOULD BE THE SAME AS OR DIFFERENT FROM THAT OF A GAS-FIRED MERCHANT GENERATION FACILITY [1185] UNDERTAKING NO. N.21.6: TO ADVISE WHETHER, WHEN LOOKED AT ON AN OVERALL USAGE BASIS, FIRM AND OTHER, WHETHER THE NATURAL GAS CONSUMPTION PATTERN AND DELIVERY PROFILE FOR THE INDEPENDENT POWER PRODUCERS, REFERENCED BY UNION ON PAGE 6 OF EXHIBIT C.1, TAB 2 OF ITS EVIDENCE, ARE THE SAME AS OR DIFFERENT FROM THOSE OF A GAS-FIRED MERCHANT GENERATION FACILITY [1210] UNDERTAKING NO. N.21.7: TO ADVISE WHO THE TWO REMAINING NEW GAS-FIRE GENERATING PLANTS ARE REFERENCED IN EXHIBIT C.1, TAB 2, PAGE 7 AND INDICATE WHETHER UNION UNDERSTANDS EITHER OF THE OTHER TWO TO BE MERCHANT GENERATORS. ALSO ADVISE WHICH RATE CLASSES THE OTHER TWO, THAT IS, THE TWO APART FROM BRIGHTON BEACH, ARE TAKING DELIVERY SERVICE UNDER [1233] UNDERTAKING NO. N.21.8: TO ADVISE WHAT RATE CLASS THE EMBEDDED GAS-FIRED POWER GENERATORS TAKE SERVICE UNDER IN EXHIBIT C.1, TAB 2, PAGE 6 [1249] UNDERTAKING NO. N.21.9: TO RECALCULATE THE PI FOR BRIGHTON BEACH USING THE ACTUAL CAPITAL EXPENDITURES AS SET OUT IN EXHIBIT B.4, TAB 2, SCHEDULE 2, PAGE 3 UPDATED [1536] UNDERTAKING NO. N.21.10: WITH RESPECT TO THE OBLIGATED DCQ TO CONFIRM THE UNDERSTANDING THAT CORAL WAS NOT OBLIGATED TO PROVIDE THESE VOLUMES ON A DAILY BASIS [1561] 14 --- Upon commencing at 9:40 a.m. 15 MR. SOMMERVILLE: Thank you. Please be seated. 16 This is the continuation of the Union Gas Limited application for rates for 2004. 17 Are there any preliminary matters, Mr. Smith? 18 PRELIMINARY MATTERS: 19 MR. SMITH: There are, Mr. Chairman. 20 First, with respect to today's scheduling. I gather that Mr. Warren would like to participate in or be here for Mr. Brown's cross-examination of Messrs. Kitchen and McMahon but has an engagement this morning, and so I was hoping that if we get through everybody else this morning before our usual lunch break, that we agree to just put Coral off to the afternoon break a little bit early and then reconvene. 21 MR. SOMMERVILLE: That was sort of my expectation anyway, that we probably wouldn't reach Coral until this afternoon. 22 MR. SMITH: Yes. 23 MR. SOMMERVILLE: So that's certainly consistent with our expectation. We'll be happy to accommodate that. 24 MR. SMITH: And the only other preliminary matter, Mr. Chairman, is with respect to how we proceed with Mr. Brown's cross-examination. He's not here but I'll raise that with him perhaps at one of the breaks. But it does appear from the material he filed that perhaps part of his cross-examination might be in-camera. I'm just not certain of that. And I haven't heard from Mr. Brown with respect to confidentiality, but that's something we're going to have to put in place beforehand. 25 MR. SOMMERVILLE: As I indicated on the record the day before yesterday, I think, the inclination is if there's going to be a confidential portion to the cross-examination, I'd probably rather have the entire cross-examination be in-camera. Those counsel who wish to attend and participate in that would be subject to an undertaking with respect to the confidential material. I think my concern is with a record that is bifurcated sort of unnaturally, confidential materials and materials that are on the public record, and I think it's better and easier and safer if we segregate it fairly definitively. 26 That's my inclination on that subject, and I'll hear submissions on that, but that's certainly the tidiest way of dealing with it. You can have discussions with Mr. Brown on that score, and Mr. Moran too, and any other counsel that wishes to address that subject, I'd be happy to hear submissions on that. 27 MR. SMITH: Thank you. 28 MR. THOMPSON: Mr. Chairman, I'd just to add, I'd like to participate this afternoon as well on behalf of IGUA, so the process, as I understand it, is just to sign a confidentiality agreement? Does that get us access to the unredacted material as well from both sides? 29 MR. SMITH: Yes. 30 MR. THOMPSON: All right. Okay, thanks. 31 MR. SOMMERVILLE: In for a penny, in for a pound, as they say. 32 MR. SMITH: Yes. 33 MR. SOMMERVILLE: Mr. Moran, we'll ask you to assist parties in managing that. Parties that are not represented by counsel raise a different issue, and my inclination would be that parties that are not represented by counsel need to make some arrangement in order to bring themselves within the scope of that practice. But once again, I'm happy to hear submissions on that before we get under way. 34 Are there any submissions flowing from that? 35 MR. SMITH: Not for our part. 36 MR. SOMMERVILLE: Mr. Vegh. 37 MR. VEGH: Sir, perhaps it may be more useful to discuss this offline with other counsel first so I get a better sense of the parameters of what it is you've just proposed. So I can make submissions now or I can make submissions when I have a better understanding of the parameters around this. 38 MR. SOMMERVILLE: Let's go for option B. 39 MR. VEGH: Thanks. 40 MR. SOMMERVILLE: Without further ado, we'll have a series of discussions. 41 Mr. Rattray. 42 MR. RATTRAY: Thank you, Mr. Chairman. 43 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 44 M.KITCHEN; Previously Affirmed. 45 P.McMAHON; Previously Sworn. 46 CROSS-EXAMINATION BY MR. RATTRAY: 47 MR. RATTRAY: There are two documents I previously provided to my friends that I would ask be marked as exhibits at this time. The first document is a summary document with an attachment being extracts from the submissions of Union, and it is entitled, "Proposed Rate Changes M7 Firm." 48 The second document, Mr. Chairman, is a proposed rate changes R25 interruptible, and again it's a summary document bringing together various numbers from the submissions of Union in doing some calculations with respect to it. I'd ask they be marked as the next exhibits. 49 MR. SOMMERVILLE: And there are just the two, the M7 firm and the R25 interruptible? 50 MR. RATTRAY: That is correct, Mr. Chairman. 51 MR. MORAN: Mr. Chair, Exhibit M.21.1, a document filed by OPG entitled "Proposed Rate Changes R25 Interruptible." 52 EXHIBIT NO. M.21.1: DOCUMENT FILED BY OPG ENTITLED "PROPOSED RATE CHANGES R25 INTERRUPTIBLE" 53 MR. MORAN: And M.21.2, second document filed by OPG, entitled "Proposed Rate Changes M7 Firm." 54 EXHIBIT NO. M.21.2: DOCUMENT FILED BY OPG, ENTITLED "PROPOSED RATE CHANGES M7 FIRM" 55 MR. RATTRAY: Thank you. 56 Now, before we turn to these exhibits, Mr. Kitchen, I want to be clear on something you said yesterday in one of your discussions, that was, you were looking at the factors that were used to determine if separate rate categories or classes are required, and if I understood you correctly, you identified load as being a consideration? 57 MR. KITCHEN: That's correct. 58 MR. RATTRAY: Load factor a second consideration? 59 MR. KITCHEN: That's correct. 60 MR. RATTRAY: And the third factor was quality of service. 61 MR. KITCHEN: That's correct. Those are the primary categories that Union considers. 62 MR. RATTRAY: Now, on quality of service, again, if my understanding is correct, the main distinction is whether you're seeking firm service or interruptible? 63 MR. KITCHEN: That's correct. 64 MR. RATTRAY: And that distinction would be reflected in the two rate categories that I've summarized in these exhibits, being M7 firm and R25 interruptible. 65 MR. KITCHEN: A firm service is a higher quality of service, in that we are required to provide service up to the contracted amount, whereas interruptible service, by virtue of being interruptible, is a lower quality service. 66 MR. RATTRAY: Thank you. Now, if you'd turn to Exhibit M.25.2, being the summary of the M7 firm. Do you have that available, sir? 67 MR. KITCHEN: Yes, I do. 68 MR. RATTRAY: Okay. This was provided to you in advance. I take it in the absence of hearing from you, you don't take issue with the figures and the summary calculations? 69 MR. KITCHEN: The only issue I take, and it's not so much an issue, is that it appears as though what you have is proposed January 1, 2004 rates, which you picked up off of H.3, tab 1, schedule 2, page 13. 70 MR. RATTRAY: Yes. 71 MR. KITCHEN: Those aren't the actual rates that Union is proposing as the final rates. You have to go to page 14 to get those. There's some small changes as a result of the ADR on DSM. 72 MR. RATTRAY: All right. But subject to those minor revisions, the calculations are correct? 73 MR. KITCHEN: Yes. 74 MR. RATTRAY: And that would include the summary calculations regarding the percentage change? 75 MR. KITCHEN: Yes. 76 MR. RATTRAY: All right. If you would now turn to the R25 document, being Exhibit M.21.1. Have you gone through these numbers as well, sir? 77 MR. KITCHEN: Yes, I have. 78 MR. RATTRAY: And are you, again, in agreement with those numbers? 79 MR. KITCHEN: I'm in agreement with the numbers. I'm not sure how you plan to use them. They're all numbers that I can find, so I guess I agree with the numbers that are there because they're all mine. 80 MR. RATTRAY: Well, that's good. And we'll argue about what they mean in due course. But in terms of the percentage change in particular, I note that under R25, the proposed average, we calculated the percentage change as being 57 percent under the monthly delivery charge. 81 MR. KITCHEN: Well, the pertinent percentage is the 7 percent change, because that's the change between the current approved average rate and the proposed average rate. The 1.3413 in column 1 is the average rate that appears in the forecast. It's not the appropriate rate that we use for actually adjust -- it's not the rate that we use when we go to adjust the rate 25 rate that's in the rate schedules. 82 MR. RATTRAY: All right. But it does reflect the current average, does it not? 83 MR. KITCHEN: It reflects the current average, yes. 84 MR. RATTRAY: So in terms of the calculation, though, do you dispute that it's 57 percent, the percentage increase? 85 MR. KITCHEN: In terms of the -- in terms of the rate change, no. 86 MR. RATTRAY: Okay. In that regard, I take it that you'd agree with me, then, that if we turn over the page, which is an extract from Exhibit H.3, tab 1, schedule 2, page 7 of 18 updated, the calculation that has been performed there suggests that the rate change that you're seeking is 11.2 percent -- 87 MR. KITCHEN: I'm sorry, I seem to be missing that page. Thank you, I have it. 88 MR. RATTRAY: Do you have it? 89 MR. KITCHEN: Yeah. 90 MR. RATTRAY: Okay. I'll pull my copy back up. If you have that page in front of you, sir, it refers to the rate change as being 11.2 percent. Now, I take it that is simply a typographical error and you would agree with me that the correct rate is the 52 percent increase as set out on the summary page? 91 MR. KITCHEN: I believe it's not a typographical error. I believe the 11.2 percent would refer to the actual change in the approved toll. It is not the calculated -- it's not the change in the average rate. I don't have a calculator with me. 92 MR. RATTRAY: Okay. When I read rate change, it says J equals H minus C, and if we follow along we see that would be 2.2469 minus 1.4831 over C. 93 MR. KITCHEN: Yes. And that would yield a number of probably 50 percent. 94 MR. RATTRAY: Yes, so you wouldn't dispute that number. 95 MR. KITCHEN: No, I wouldn't dispute that calculation. I'm not whether it's 11.2. But I believe that is the change in the approved toll. 96 MR. RATTRAY: Now, looking at this chart, most of the numbers on this chart reflect estimates and forecasts; is that fair? 97 MR. KITCHEN: Are you referring to your attachment H.3 -- 98 MR. RATTRAY: No, I'm looking at your -- an extract from your evidence, H.3, tab 1, schedule 2, page 17 of 18. 99 MR. KITCHEN: Rates -- all rates within a test year rate case are estimated based on a forecast, yes. 100 MR. RATTRAY: So it's fair to say that throughout we can understand, save and except with respect to current approved revenue and current approved rates, all of the other figures represent estimates, forecasts, proposed rates, et cetera. 101 MR. KITCHEN: Yes. All the elements of the 2004 forecast are built into the proposed rate design. 102 MR. RATTRAY: All right. And to the extent that there's any variance, for example, in the usage, that would directly impact on all of the other calculations with respect to the revenue excess, deficiency, proposed rates, revenue-to-cost ratio, et cetera. 103 MR. KITCHEN: I'm not sure I follow. 104 MR. RATTRAY: Well, if you were to -- instead of -- under usage, for example, you have 171,077. Suppose the volume was double that. 105 MR. KITCHEN: Yes. 106 MR. RATTRAY: That would, of necessity, result in significant changes to the subsequent numbers in terms of deficiency or sufficiency of the revenue. 107 MR. KITCHEN: The proposed -- the rates wouldn't change, the recovery would change. But I think we need to keep in mind that the rate 25 rate is a negotiated rate and the monthly delivery charge that is presented in line 2 represents the results of those negotiations. On average, we should be hitting the approved rate which appears in the rate schedule. 108 MR. RATTRAY: All right. But it doesn't change the fact whether it's the approved average or the approved rate, as you've just referred to. But if the volume increases significantly, it's going to have an impact upon the revenues and the sufficiency or deficiency in relation to that rate class. 109 MR. KITCHEN: And by the same token, if there is a decrease in the volume, it has a decrease in the revenue and the recovery. 110 MR. RATTRAY: Are you aware, sir, that on average over the last three years, Union has underestimated the actual volume in excess of a hundred percent? 111 MR. KITCHEN: That's not part of my evidence. I can't really comment on the percentage that it's been forecast to actual. 112 MR. RATTRAY: All right. So you wouldn't be concerned, in fact, with the accuracy of the forecast usage. You take that number and you work with it. 113 MR. KITCHEN: In general, when we get the forecast, we include all those numbers in the cost allocation study and design rates based on that forecast. We don't -- we don't have the staff or the ability in our group to -- or necessarily the intent to adjust a forecast based on prior actuals. 114 MR. RATTRAY: All right. Now, I'll move along and shift my focus to an issue of cost allocation, and my concern in this regard is similar to that raised by Mr. Aiken on Monday regarding the seemingly high costs for sales promotion and merchandise allocated to a specific rate class. And my focus in particular is with respect to M7 firm. This is set out in Exhibit G.3, tab 5, schedule 1, page 19 of 24. 115 Do you have that up, Mr. McMahon? 116 MR. McMAHON: Yes, I do. 117 MR. RATTRAY: Thank you. If you direct yourself to category H, which is the sales promotion and merchandise, under the M7 firm, I note that the sales promotion supervision is 401,000, advertizing expenses are 271,000, for a total of $672,000? 118 MR. McMAHON: That's correct. 119 MR. RATTRAY: All right. And given that there are, at least to my understanding, only eight customers in that rate category, does that seem excessive to you, sir? 120 MR. McMAHON: Again, as we have explained previously in the hearing, it's an accepted allocation to ensure that all the rate classes absorb a proportionate share of these types of expenses. And I don't have any figures that would compare the costs that have been allocated to any particular rate class to the overall benefit that any particular rate class may get from any of the costs, whether it's sales promotion, advertizing, or any other related costs, to compare one to the other. So I couldn't really comment on whether that was a disproportionate share, because it is a proportionate share as far as the methodology is concerned. 121 MR. RATTRAY: All right. And as Mr. Shepherd discussed with you, there is no sanity check that's conducted at the end when you get these numbers to look at it to say does this look reasonable or not. 122 MR. McMAHON: And as we said previously, we do look at previous cost studies to make sure that we can explain or understand any changes that may be taking place in any allocation to any particular rate class. 123 MR. RATTRAY: Well, it was my understanding, again from reviewing your evidence and not being an expert in cost studies and allocations - it may be that I've just interpreted it - but it was my understanding that one half of the sales promotion and marketing costs are directly assigned customer costs. And that's under the allocation methodology and that's found at Exhibit G.3, tab 1, schedule 1, page 17. And you'll see there, sir, at line 16, under "Customer," and we're dealing with allocation, "directly assigned costs relate to distribution, sales promotion, marketing and demand-side-management costs." 124 MR. McMAHON: Could I get your reference again, please. 125 MR. RATTRAY: It's G.3, tab 1, schedule 1, page 17. 126 MR. McMAHON: Yes. 127 MR. RATTRAY: All right. I'm referring to the customer section where they discuss the methodology. 128 MR. McMAHON: Yes. 129 MR. RATTRAY: And those costs are indicated to be directly assigned in relation to sales promotion, marketing, and demand-side-management costs. 130 MR. McMAHON: There is a proportion of these costs that are directly assigned, that's correct. 131 MR. RATTRAY: What is that proportion? 132 MR. McMAHON: I'll just look that up for you. One second. 133 MR. RATTRAY: It might assist you. It's my understanding that it might be -- 50 percent is directly assigned and 50 percent is classified as commodity-related. 134 MR. McMAHON: You're looking at the distribution function and the customer classification? 135 MR. RATTRAY: Yes. 136 MR. McMAHON: So from that classification, we allocate to rate classes. So if you look up Exhibit G.3, tab 5, schedule 23, and it's page 19 of that schedule, just as an initial reference. I'm just looking at the sales promotion/supervision costs. Do you have that? 137 MR. RATTRAY: I don't have it in front of me. Perhaps I can borrow it from your materials. Thank you. Unfortunately, I don't have enough arms to carry all the volumes every day. 138 MR. SOMMERVILLE: We sympathize. 139 MR. RATTRAY: Yes. 140 MR. McMAHON: So if I can direct you -- this is the original filing, and under section H you'll see the sales promotion of merchandise costs. 141 MR. RATTRAY: Yes. 142 MR. McMAHON: And the sales promotion supervision line. You'll see a total of 5,316,000. 143 MR. RATTRAY: Yes. 144 MR. McMAHON: And the direct assignment to the M9 and T3 classes is $48,000 of that. 145 MR. RATTRAY: Okay. 146 MR. McMAHON: And then the remainder, 5,268,000, is then allocated to the rate classes based on the sales promotion allocation factor. 147 MR. RATTRAY: So if this is correct, then, it is 34,000 that is allocated to M7 firm, then? 148 MR. McMAHON: 34,000 of the sales promotion/supervision costs that have been classified to distribution customer have been allocated to the M7 firm; that's correct. 149 MR. RATTRAY: And the balance of the numbers reflected in the summary would be what, then? 150 MR. McMAHON: I'll take you back to another exhibit, and this would be G.3, tab 4. 151 MR. RATTRAY: Yes. 152 MR. McMAHON: And it would be schedule 9. 153 MR. RATTRAY: Yes. 154 MR. McMAHON: And you'll see section H again, sales promotion and merchandise, the first line, sales promotion/supervision. 155 MR. RATTRAY: What page is that, sir? 156 MR. McMAHON: Oh, I'm sorry, that's page 7. 157 MR. RATTRAY: All right. 158 MR. McMAHON: So you'll see that the sales promotion/supervision costs have been classified to demand, commodity and customer, so you would need to -- what we looked at, schedule 23, was the customer portion. If you went to Exhibit G.3, tab 5, schedule 22, you'd see the commodity portion being allocated, and G.3, tab 5, schedule 21, which would show the allocation of the demand-related/associated costs. 159 MR. RATTRAY: Thank you. Now, to ensure that I'm understanding the allocation process, I'd like to consider some specific costs and that would be the FT transportation demand, FT transportation commodity, and FT transportation fuel. The process, as I understand it, sir, is that you would functionalize this at the outset, and in this instance, if you go to G.3, tab 3, schedule 1, page 4 of 7. 160 MR. McMAHON: Yes, I have that. 161 MR. RATTRAY: It appears to me that this is functionalized to purchase production. 162 MR. McMAHON: That's correct. 163 MR. RATTRAY: All right. Then the next step would be to classify these costs; is that correct? 164 MR. McMAHON: That's correct. 165 MR. RATTRAY: And in this regard, we would go to G.3, tab 1, schedule 1, page 5 to consider the categories of cost incurrence. 166 Do you have that, sir? 167 MR. McMAHON: Yes, I do. 168 MR. RATTRAY: My understanding is in categorizing or classifying these costs, there are three main categories, which would be demand, commodity, and customer. 169 MR. McMAHON: Under "purchase production," you basically have system supply, commodity, other supply commodity, or demand-related, and you'll see that the -- 170 MR. RATTRAY: Is that reflected on page 6 of 19, sir? It's the summary of the classification of functionalized cost, purchase and production. Purchase and production costs are classified as commodity and demand-related? 171 MR. McMAHON: That's correct. 172 MR. RATTRAY: So these costs then, the FT transport demand, commodity and fuel would be allocated among those categories. 173 MR. McMAHON: That's correct. The commodity and fuel are classified as commodity-related, and the demand costs are demand-related. 174 MR. RATTRAY: Yes. And the category of demand is described on page 5 as being costs that vary directly with the size of the system facilities. They are required to meet design-day demand and fixed in the short run. 175 MR. McMAHON: That's correct. 176 MR. RATTRAY: Whereas, the commodity costs vary directly with the volume of gas purchased or delivered. 177 MR. McMAHON: That's correct. 178 MR. RATTRAY: So at this point, having classified them, we would then turn to allocation? 179 MR. McMAHON: That's right. 180 MR. RATTRAY: And in this regard, if you go to G.3, tab 1, schedule 1, which is at pages 10 and 11. There's a discussion there of allocation factors. 181 MR. McMAHON: Could I get the reference again, please. 182 MR. RATTRAY: That was the same document we were just looking at, sir, but at page 10. So it's G.3, tab 1, schedule 1, page 10. 183 MR. McMAHON: Yes. 184 MR. RATTRAY: This is your discussion of the allocation function. 185 MR. McMAHON: Yes. 186 MR. RATTRAY: All right. So under "Supply Commodity," is that what we're dealing with when we consider the FT transport fuel and commodity? 187 MR. McMAHON: No, that's the system supply. You would be looking at the second category, "Other Supply Commodity," and also on the next page, page 11, the demand. 188 MR. RATTRAY: Okay. And under "Other Supply Commodity," this is allocated to: "All delivery customers and contract carriage customers receiving transport and storage support services based on annual volume." 189 MR. McMAHON: That's correct. 190 MR. RATTRAY: All right. And demand, being on page 11, states: "Firm transportation demand costs are allocated to northern and eastern operations area rate classes using a blended allocator developed using a two-step approach. The firm transport demand base load costs are allocated to rate classes using average-day demand. The remaining firm transport costs are allocated to rate classes using excess peak-over-average annual demand." 191 MR. McMAHON: That's correct. 192 MR. RATTRAY: Now, if we flip over to appendix C of tab 1, and we go to page 8 of 13, this is the updated evidence, and these are the Union Gas allocation factor descriptions. 193 MR. McMAHON: Yes. 194 MR. RATTRAY: Then at page 8, do you see "FSTRANSDIR," and that's the allocation factor for allocating gas supply firm service transportation commodity costs. 195 MR. McMAHON: That's correct. 196 MR. RATTRAY: And that's allocated in proportion to firm sales volumes. 197 MR. McMAHON: That's right. 198 MR. RATTRAY: Okay. And beneath it is "FS fuel DIR," and that allocates gas supply firm service transportation fuel costs in proportion to firm sales volumes, excluding T service. 199 MR. McMAHON: That's correct. 200 MR. RATTRAY: Okay. And then over on page 13, there is "TRANSALLO," and that deals with the allocation of demand costs. It allocates gas supply firm service transport demand costs in proportion to average volumes as well as in proportion to excess of design-day peak and average demand. 201 MR. McMAHON: That's right. 202 MR. RATTRAY: If you would turn to G.3, tab 5, schedule 1, at page 15, is this a summary of the fully allocated costs of service? 203 MR. McMAHON: That whole schedule, Exhibit G.3, tab 5, schedule 1, the full 24 pages is a summary of the allocation of the revenue requirement to all rate classes. 204 MR. RATTRAY: All right. And if you look at page 15 of 24, under the heading "Operating Expenses: (A) Cost of Gas and Production," we see those costs that I've been trying to track through to understand, looking at FT transportation demand, FT transportation commodity, and FT transportation fuel, my interest is with respect to R25, and I note that on the demand, firm transport demand, they've been allocated $843,000. Is that correct, sir? 205 MR. McMAHON: That's correct. 206 MR. RATTRAY: They've been allocated $15,000 on transportation commodity? 207 MR. McMAHON: Yes. 208 MR. RATTRAY: And $277,000 on fuel. 209 MR. McMAHON: That's correct. 210 MR. RATTRAY: Now, my difficulty is in light of the fact that R25 is a large interruptible service, and we've gone through the allocation factors which have been defined in relation to firm transport service, why are you allocating these firm sales costs to an interruptible service? 211 MR. McMAHON: I guess you could probably get more detail from another schedule that is available at the tail-end of Exhibit G.3, tab 5 -- 212 MR. RATTRAY: Would that be schedule 25, sir? 213 MR. McMAHON: Schedule 25, that's right. 214 MR. RATTRAY: On my review of that schedule, sir, it explained to me various numbers being calculated with respect to various rate categories but it didn't deal with my underlying issue, which is why are we allocating firm transport delivery costs which have been defined in relation to firm service to an interruptible service? 215 MR. KITCHEN: The rate 25 service is interruptible. The requirement -- sorry, the acquiring of firm capacity in the north is there for the purposes of essentially meeting peak-day demands. What we do through the TRANSALLO working paper is identify a portion of the firm demand charges that would be applicable to rate 25 based only on their winter demands. In other words, in the wintertime, to the extent that we are providing rate 25 service and the rate 25 customer is not interrupted, they are using the same pipe that a firm service customer would be using, and therefore should see some portion of the costs related to the capacity. 216 Once we've determined -- and we do that based on only their winter loads and we do that by zone. 217 Once we've determined the allocation that goes to interruptible rate classes, that includes both rate 25 and rate 16, we then take the remaining capacity-related costs for upstream transport and allocate those to the remaining firm rate classes for, the first level, on delivery -- firm delivery volume and, at the second level, excess peak over average. 218 So it's really to recognize that in the wintertime the rate 25 and rate 16 customers are using the same pipe that was contracted for firm customers. 219 MR. McMAHON: So if we could just go back, then, to that definition of TRANSALLO that you read out, you'll see there that it says -- that it allocates, for instance, for this first schedule, schedule 25, page 1, that it allocates the costs of rate class in proportion to average volumes. So you'll see that calculation on page 1 of G.3, tab 5, schedule 25. 220 MR. RATTRAY: That still leaves me wondering why we're allocating a firm-service cost to an interruptible service. Of course it's going through the same pipe because the R25 rate category was intended as an interruptible service to assist the system by taking up this excess capacity. 221 MR. KITCHEN: Which is why we don't allocate any of the baseload capacity to rate 25. That's all allocated to the firm rate classes. There's a portion of it that we do assign to rate 25 and rate 16 to reflect that, on a peak day for which the pipe was purchased, there is rate 25 volume flowing. It's not always interrupted. 222 MR. RATTRAY: Well, if it was always interrupted, there would be no gas. 223 MR. KITCHEN: That's my point. The fact is it's using the same pipe, and in the wintertime, it's using -- it's using capacity that is -- it's getting a share of the capacity, essentially. 224 MR. RATTRAY: Which is subject to interruption at any time. 225 MR. KITCHEN: True. 226 MR. RATTRAY: All right. And in considering the definitions, you've referred me to transallocating gas supply firm-service-transport costs in proportion to average volumes. If we go back to the definitions for the commodity costs and fuel costs, those definitions refer exclusively to allocating the costs in proportion to firm sales volumes. So why are we seeing those costs on the R25? 227 MR. McMAHON: Again, you can look at page 2 and 3 of that Exhibit G.3, tab 5, schedule 25, and it's the same reasoning again for the winter volumes going through to reflect the peak-day use of the system. 228 MR. RATTRAY: Mr. McMahon, I understand the calculations in schedule 25. It's clear that you're allocating some of the costs to it. My concern is going back to the underlying issue, which is, why are you doing this given that it's only to be allocated in proportion to firm sales? By definition, R25 is an interruptible service. 229 MR. SMITH: I think in fairness to Mr. McMahon, he said the reasoning is precisely the same as for the previous category you mentioned. 230 MR. RATTRAY: Well, with respect, the definitions are different, Mr. Smith, so I would like an answer. 231 MR. McMAHON: Again, the allocations of the costs that are taking place in the cost allocation study is to try to allocate the cost to the customer classes that are causing the costs or contribute to the existence of facilities in place. So what this does is tries to allocate some of the costs associated with the firm service, transportation, commodity costs, or demand costs to rate 16 or rate 25 based on their winter loads. 232 MR. RATTRAY: Thank you. 233 Those are my questions. With your leave, Mr. Chair, I'll excuse myself. 234 MR. SOMMERVILLE: Thank you, Mr. Rattray. 235 Mr. Thompson. 236 MR. THOMPSON: Thank you. I'm just getting my office set up here. 237 MR. SOMMERVILLE: The rates are reasonable. 238 CROSS-EXAMINATION BY MR. THOMPSON: 239 MR. THOMPSON: Panel, I'd like to start, if I could, with the delivery-related revenue in existing rates and comparing how that changes with the deliver-related revenue deficiency that flows out of this case. And the latter item has been a bit of a moving target from the white sheets to the blue sheets to the yellow sheets, and it gets flowed through to your rate design. So I just want to go back to basics here, if I could, to find out how this is all tracked through. 240 So what I'd ask you to do, if you wouldn't mind, is to take out Exhibit N.8.5 and Exhibit H.3, tab 1, schedule 1. 241 MR. KITCHEN: Was that M or N? 242 MR. THOMPSON: N for Norman. This shows the delivery-related component of 2003 rates that's subject to the price cap. 243 MR. KITCHEN: Sorry, Mr. Thompson, I think I've been given the wrong one. It's N -- 244 MR. THOMPSON: Norman 8.5. 245 MR. KITCHEN: I was two off. Here we go. I have it. 246 MR. THOMPSON: You've got it? 247 MR. KITCHEN: I've got it now. 248 MR. THOMPSON: Okay. And you'll see over there at line 1 for 2003, it's showing the delivery revenue base for 2003 of $728,915,000. 249 MR. KITCHEN: That's correct. 250 MR. THOMPSON: Okay. And then the 2003 price cap was a negative number, as I recall it. I think that's shown at line 10; is that right? The 16.7 million? 251 MR. KITCHEN: Yes, that's the correct number. 252 MR. THOMPSON: So that am I right to start by subtracting that number from the number above it to get the amount of delivery-related revenue in existing rates that was subject to the price cap? Is it $711,041,000? 253 MR. KITCHEN: Let me make sure I understand what you're asking me. Are you asking if, to calculate a 2004 price cap amount, you would take the 727,780 down here on line -- 254 MR. THOMPSON: No, I'm just trying to find -- 255 MR. KITCHEN: Okay. 256 MR. THOMPSON: Well, let me -- go to H.3, tab 1, schedule 1, page 2, white sheets. And at line 15 on page 2, the total delivery revenue in rates at the time you filed these white sheets, this was current approved revenue, which I take to mean existing rates; is that right? 257 MR. KITCHEN: Yes. That would be rates as of 2003, January. 258 MR. THOMPSON: Yes. And that was showing $939,189,000. 259 MR. KITCHEN: That's correct. 260 MR. THOMPSON: All right. And a portion of that is subject to the price cap, like, return is excluded. 261 MR. KITCHEN: Yes, and as are pass-through items. 262 MR. THOMPSON: And pass-through items that find their way into the delivery rate. 263 MR. KITCHEN: Right. 264 MR. THOMPSON: And so I'm just trying to find out the portion of that that is subject to the price cap. 265 MR. KITCHEN: In the 939 -- 266 MR. THOMPSON: In the 939,189, and I thought I would find it on this sheet, but maybe I don't. 267 MR. KITCHEN: No. No. The amount of those pass-through items in return -- let me think about this for a second. There's two differences. I guess maybe one big difference. The difference is that what we have is the current approved revenue in H.3, tab 1, schedule 1 -- 268 MR. THOMPSON: Right. 269 MR. KITCHEN: -- is based on a 2004 forecast. 270 MR. THOMPSON: Okay. So volumes are different? 271 MR. KITCHEN: Right. 272 MR. THOMPSON: All right. 273 MR. KITCHEN: The price-cap calculation and the revenue on which the price cap was calculated since PBR -- since 2000 was based on a 1999 demand forecast. So volumes were never updated throughout the process. 274 MR. THOMPSON: Okay. 275 MR. KITCHEN: So in a way it's a bit of an apples-to-oranges comparison. 276 MR. THOMPSON: I understand. Can you undertake to tell me how much in the 939,189 would be subject to price cap as defined in the expiring PBR plan? 277 MR. KITCHEN: Yes, I could undertake to do that. 278 MR. THOMPSON: All right, thanks. In any event, it's a number that brings the number -- it's only a portion of the 939. 279 MR. KITCHEN: Right, because you'd have to deduct those items that were deducted before. 280 MR. THOMPSON: Okay, thanks. 281 MR. MORAN: Mr. Chair, Undertaking N.21.1, to advise what portion of total delivery 939,189,000 is subject to price cap. Right? 282 MR. KITCHEN: Under the expiring PBR mechanism. 283 MR. MORAN: Under the expiring PBR mechanisms. 284 Undertaking No. N.21.1: TO ADVISE WHAT PORTION OF TOTAL DELIVERY 939,189,000 IS SUBJECT TO PRICE CAP UNDER THE EXPIRING PBR MECHANISM 285 MR. SOMMERVILLE: That entry reference is. 286 MR. MORAN: Exhibit H.3, tab 1, schedule 1, page 2 of 2. White pages. 287 MR. THOMPSON: Okay. So let's move -- we go from the white to the blue in the revenue deficiency portion of this case, but we don't have a blue in the rate design or cost allocation. That was in process, as I understand it, and then you got the signal that more changes were coming so -- 288 MR. KITCHEN: We skipped blue and went right to yellow. 289 MR. THOMPSON: Okay. But if we go from white to yellow, again on this same number, the deliver-related revenue in existing rates, it goes from 939,2, roughly, to 963,3. 290 MR. KITCHEN: Yes. 291 MR. THOMPSON: Now, what is the cause of that? Is that -- well, you tell me. 292 MR. KITCHEN: Well, since it's revenue, I would have to venture the guess that it's driven by an update to the volume forecast. We take those numbers and essentially use them as provided by the forecast -- the forecast groups in phase 1. 293 MR. THOMPSON: Okay. So it's not some rate-related change or anything of that nature. 294 MR. KITCHEN: No. The delivery rates in the yellow page are also the approved 2003 delivery rates. 295 MR. THOMPSON: All right. So that's constant in both presentations, so it must be volumes, then. 296 MR. KITCHEN: It must be volumes. We restated the original white-page deficiency for approved rates. 297 MR. THOMPSON: All right, okay. So we then move forward to 2004, and somebody in the organization calculates the company's requirements and they come up with a number and then the revenue deficiency, the deliver-related revenue deficiency, as I understand it, is determined by running the existing 2003 rates; whatever they produce compared to what's needed is the deficiency; right? 298 MR. KITCHEN: The overall deficiency, yes. 299 MR. THOMPSON: Okay. So when we started out in this case, it was 110 million on the delivery side; right? 300 MR. KITCHEN: Yes, I believe so. 301 MR. THOMPSON: Well, that's the white sheets, if you can take that subject to check. And then the blue sheets, it came down to a total of 105, and then in the yellow sheets it came down to 104. Would you take that subject to check? 302 MR. KITCHEN: Yes. 303 MR. THOMPSON: And in the white sheets, when it was at 110, this now takes me to the -- some of your evidence in the rate design, you were only increasing rates to recover 106.4. 304 MR. KITCHEN: Yes. We made some adjustments to the deficiency for those items referenced. 305 MR. THOMPSON: And we asked you about those adjustments. Well, just bringing it forward to the yellow, we're at 104 in the yellow at a major deficiency, total deficiency and you're increasing rates to recover about 99; right? 306 MR. KITCHEN: Yes, approximately. Yes. 307 MR. THOMPSON: So there's a difference in there of roughly $5 million. 308 MR. KITCHEN: Yes. 309 MR. THOMPSON: And I don't understand that difference. Could you help me with that? 310 MR. KITCHEN: The deficiency/sufficiency that's filed in the phase-1 evidence does, as Mr. Thompson said, compare the revenue at some level, whether it's an approved level or a -- I guess it would be at the approved level, to the total cost of service, both delivery-related and cost of gas, and that comes to the total deficiency/sufficiency. The delivery-related deficiency in phase 1 is estimated based on the items that are considered by finance to be gas supply-related versus delivery-related. 311 When it comes to my group, we actually have all of the cost detail which is built up by component, and for the purposes of rate-making, some of those things that would be gas supply-related we consider delivery-related. So there's some shifting of dollars back and forth within the -- between phase 1 and phase 2, but there's also this issue of the fact that the original gas supply sufficiency or deficiency is estimated and then the delivery-related deficiency is determined after that. We're usually fairly close, except in the case of phase 1 where there was a difference in the revenues calculation because the difference in approved rates. We're much closer on phase -- on the phase -- sorry, in the yellow page because the rate assumptions are consistent. But there will be differences because we have a -- do a more detailed calculation through cost allocation and rate design. 312 MR. THOMPSON: Okay. But the total is the sum of a delivery-related component and a gas supply-related component. 313 MR. KITCHEN: That's right. 314 MR. THOMPSON: And you folks persist in doing this on a bundled basis, and then people like IGUA and others have to try and figure it out from a delivery and gas supply basis. If you wouldn't mind turning up J.17.45 where we ask the question: How do you reconcile the -- this was white-page based question -- reconcile the 110 to the 106.4. And then in your answer you did it on a bundled basis again. 315 MR. KITCHEN: I have it. 316 MR. THOMPSON: Okay. If we look at this page 2, we start with the delivery-related deficiency, and you say phase 1 was 110 million, that's now 104 on the yellow sheets; right? 317 MR. KITCHEN: Based on the evidence, yes. 318 MR. THOMPSON: And then you -- then you took away from it a gas supply number, which -- that would really belong in the gas supply column; right? 319 MR. KITCHEN: That would have been the -- that would have been what was also identified in the evidence as the gas supply sufficiency, to arrive at the overall deficiency. 320 MR. THOMPSON: Right. But if I just go down this presentation and ask myself, Does this get me to a $106 million delivery-related deficiency, I don't get there, because I start with 110 -- 321 MR. KITCHEN: Yes. 322 MR. THOMPSON: -- and then there's an adjustment for approval, you say, of 2003 delivery and GS transport, so I think what that was was a rate increase to cover probably upstream transportation; is that right? 323 MR. KITCHEN: No. That would have been the implementation of the 2003 rates coming out of the 2003 customer review process. 324 MR. THOMPSON: Okay. So the 110 was pre-2003 customer review. 325 MR. KITCHEN: Right. 326 MR. THOMPSON: So then you get a 19 reduction of the delivery-related deficiency; right? 327 MR. KITCHEN: Yes. 328 MR. THOMPSON: That takes me to 91 million. And then there are three items in lines 8, 9, and 10. 329 MR. KITCHEN: Correct. 330 MR. THOMPSON: Those are delivery-related? 331 MR. KITCHEN: Yes, they would be. 332 MR. THOMPSON: Okay. And so what is the reversal of provision for 2003 rate adjustment? 333 MR. KITCHEN: When the original white-page delivery -- deficiency was struck, there was a provision made in the deficiency for the implementation of 2003 rates, and that was 4.9, or the 5 million that's here. Once we updated -- in restating the deficiency, once -- or restating the revenues for approval of those rates, then that reversal needed to be backed out of the deficiency, otherwise we would be sort of correct the for the rates twice. 334 MR. THOMPSON: Anyway, that takes you the from 91 down to 85; right? 335 MR. KITCHEN: Yes. 336 MR. THOMPSON: And then you have other adjustments, delivery commitment credit, and I understand that was added in because it wasn't included as a costs in the white-sheet presentation. 337 MR. KITCHEN: Right. We assumed it was going to be eliminated as we proposed in doing the white page. 338 MR. THOMPSON: I understand. You assumed your proposal would succeed and it didn't so it came back in in this presentation. Is that delivery-related? 339 MR. KITCHEN: Yes. 340 MR. THOMPSON: Okay. And then we have March park. Again, that wasn't in your white-sheet cost presentation so you added it in here? 341 MR. KITCHEN: Right. 342 MR. THOMPSON: Delivery or gas supply? 343 MR. KITCHEN: The March park is delivery-related, delivery and gas supply transport. 344 MR. THOMPSON: Then we've got S&T transactional margin which, if I understand it right, is the extent to which you haven't made the threshold that's embedded in rates; is that -- 345 MR. KITCHEN: No, that is -- we -- when the deferral -- when the total amount of S&T transactional margin, subject to deferral, is calculated, it's based on some existing cost level that's built into existing rates and since it's a 2004 item, once we have a cost study for 2004, we make an adjustment to that amount to reflect updated costs. So it's really an adjustment to the amount that's there for sharing. 346 MR. THOMPSON: Okay. But if I add those items to the 85, I'm back up to 119 million. I don't get to 106 restated delivery-related deficiency. Can you help me with what I'm missing here? 347 MR. KITCHEN: I'll try. 348 MR. THOMPSON: I don't want to take up the time with you doing calculations on the record. 349 MR. KITCHEN: I could take that and give you -- and check it at the break or take an undertaking to -- 350 MR. THOMPSON: All right. Let's just park it for a second. 351 MR. KITCHEN: Okay. 352 MR. THOMPSON: That's undertaking park, not March park, and just go to the yellow sheets H.1, tab 1, page 2, because you have the same type of a table here. And this is your table, Mr. Kitchen? 353 MR. KITCHEN: Yes. 354 MR. THOMPSON: So you're showing in line 1 a total deficiency now of 23 and a half million, roughly. 355 MR. KITCHEN: I just need to clear a binder. 356 MR. THOMPSON: Sorry, H.1, tab 1, page 2. 357 MR. KITCHEN: Yes. 358 MR. THOMPSON: And that, I understand from Ms. Elliott's filing, consists of a delivery-related deficiency of about $104 million and a gas-supply sufficiency of about 80 million; is that -- 359 MR. KITCHEN: I believe that's correct, yes. 360 MR. THOMPSON: Okay. And so then you -- this works down to -- according to the testimony on the next page, you're going to recover in rates, line 1, 98.72 -- say $98.8 million. 361 MR. KITCHEN: Yes. 362 MR. THOMPSON: So the 104 gets down to 99, and I don't see adjustments in this table 1 that get me to 99. Is there some way you can describe those at a high level and then undertake to give those to us? What's missing here? 363 MR. KITCHEN: I'm not sure there's anything missing. I'm just not sure how to describe it. It's probably best if I do an undertaking to provide a reconciliation. 364 MR. THOMPSON: Please. It's the same kind of thing that was happening in the white sheets, going from 110 to 106, and the same -- 104 to 99 here, and I can't find the numbers that get us here. 365 MR. KITCHEN: We'll provide a reconciliation. I think that's fair. It's just easier to do with a calculator. 366 MR. THOMPSON: Thanks. 367 MR. MORAN: Mr. Chair, Undertaking N.21.2, to provide a reconciliation of the restated total revenue deficiency on page 2 of Exhibit H.1, tab 1, page 2 of 5 updated, and the revenue deficiency on page 3 of the same exhibit, of 98.727 million. 368 MR. SOMMERVILLE: Thank you, Mr. Moran. 369 MR. THOMPSON: Thanks. 370 UNDERTAKING NO. N.21.2: TO PROVIDE A RECONCILIATION OF THE RESTATED TOTAL REVENUE DEFICIENCY ON PAGE 2 OF EXHIBIT H.1, TAB 1, PAGE 2 OF 5 UPDATED, AND THE REVENUE DEFICIENCY ON PAGE 3 OF THE SAME EXHIBIT, OF 98.727 MILLION 371 MR. THOMPSON: Now, just again on this big picture, you're presenting $104 million revenue deficiency for 2004, and I don't know if you are aware of this, but in the blue sheets for 2003, the company is showing a revenue sufficiency. Are you aware of that? 372 MR. KITCHEN: I'm aware of it, but it doesn't factor into anything I do because we only work with the test year. 373 MR. THOMPSON: Right. But the same rates -- existing rates in 2003 are producing a revenue sufficiency in 2003, according to the E and F -- I guess it's the F schedules. 374 MR. KITCHEN: Yes. 375 MR. THOMPSON: Okay. And when we come to 2004, it's a $104 million deficiency. 376 MR. KITCHEN: That's correct. 377 MR. THOMPSON: Okay. But the total cost increases, if you will, that are being covered off are the 104 plus, if you will, the headroom in existing rates; right? 378 MR. KITCHEN: I'm sorry, you lost me there. By headroom, the overrecovery or -- 379 MR. THOMPSON: The extent to which you're overrecovering in 2003. Let's say, for the sake of argument, it's $20 million. 380 MR. KITCHEN: Yes. 381 MR. THOMPSON: And so that what's being recovered in these new rates is not only 104, it's 104 plus the 20. 382 MR. KITCHEN: Well, again, I think it's the same issue we had when we first started talking about different levels of demand in the forecast, as well. That's going to factor in because that's not a straight comparison. What we're looking at is what our 2004 revenue would recover compared to the costs in 2004. There's no -- we're not going back to 2003 and saying we have to make up all of that and adding the two together. 383 MR. THOMPSON: No, I appreciate that. All I'm saying is that the existing rates, the nine hundred and whatever million dollars they are, based on the 2003 volumes, are producing a sufficiency, then there is some headroom based on that calculation. 384 MR. KITCHEN: I'm not sure that I can agree or comment on that. 385 MR. THOMPSON: All right. I'll argue that. Let's move on. 386 So in any event, just to go back to H.3, tab 1, schedule 1, and we know from column 1 that the total delivery revenue based on forecast demands for 2004 under existing rates is 963.3 million, roughly, that's line 15, column A, H.3, tab 1, schedule 1, page 2; right? 387 MR. KITCHEN: Yes. 388 MR. THOMPSON: And then we have the -- line 16 is the -- sorry, that's all broken out by customer classes on pages 1 and 2. 389 MR. KITCHEN: Yes. 390 MR. THOMPSON: Okay. And that's the delivery revenue -- 391 MR. KITCHEN: And gas supply transport, yes. 392 MR. THOMPSON: -- and gas supply transport being recovered from the customer classes. And just on that point, the delivery revenue in the north is shown on page 1, am I right, in lines 1 to 8? 393 MR. KITCHEN: Yes. 394 MR. THOMPSON: And then the gas supply and storage -- gas supply transport and storage for the north is shown on page 2, lines 1 to 7. 395 MR. KITCHEN: Yes. 396 MR. THOMPSON: Whereas, in the south, it's all wrapped up in lines 9 through to 20; am I right? 397 MR. KITCHEN: That's correct. 398 MR. THOMPSON: Okay. Did you ever give any thought to putting the north on one page and the south on one page? 399 MR. KITCHEN: You're the second person that's asked that. 400 MR. THOMPSON: Okay. Another genius in our midst. 401 Now, you come up with the 99 and there's a distribution of the 99 to the various operating areas and to the various customer classes within the operating areas; right? 402 MR. KITCHEN: That's correct. 403 MR. THOMPSON: And that's driven by the cost-allocation study. 404 MR. KITCHEN: That's correct. 405 MR. THOMPSON: And it's the integrated cost-allocation study that produces that result throughout the entire system; am I right? 406 MR. KITCHEN: Yes. The proposed -- the proposed revenue requirement is from the cost study and it is the integrated cost study. 407 MR. THOMPSON: Well, I'm talking about the existing -- current approved revenue requirement gets allocated. Is that driven by the cost study or existing rates? 408 MR. KITCHEN: Are you talking about current approved revenue or revenue requirement? The revenue requirement comes from the cost study. The revenue is just a function of applying approved rates to forecast -- 409 MR. THOMPSON: Column 1 is rates? 410 MR. KITCHEN: Right. 411 MR. THOMPSON: And column D is the cost study. 412 MR. KITCHEN: Column D is the cost study. 413 MR. THOMPSON: Now, there was a -- there used to be, in the good old days when you had two systems, there was a sort of separation that was performed between north and south. We went through this exercise of totaling it up and then divided it and then allocating. That's now gone by the boards as a result of this integrated study; is that right? 414 MR. KITCHEN: In EBRO 499, we still filed two separate cost-allocation studies. We've integrated them now for the 2004 case, but the detail by rate class is within the integrated study. So yes, we don't have two studies any more, but we still have the level of rate class detail in the one study for 2004. 415 MR. THOMPSON: I understand that. But there used to be an intermediate step of separating the deficiency between north and south. Now that's all done in one process -- 416 MR. KITCHEN: Yes. I think in 499 we filed separate north/south -- separated costs and a separated deficiency. 417 MR. THOMPSON: So there was a fairly significant shift in costs allocated to the north between the white sheets and the yellow sheets, and Mr. Scully was discussing that yesterday. And I understood you to say that the cause for that was some error; do I understand that right? 418 MR. McMAHON: No, it wasn't an error. 419 MR. THOMPSON: It was a mistake or something? 420 MR. McMAHON: What we indicated to Mr. Scully was at the time of our update of the cost allocation study, we were given a new TCPL storage transportation service cost -- 421 MR. THOMPSON: Right. 422 MR. McMAHON: -- that was allocated to the north in the cost allocation study, and that -- the financial numbers that we had been given showed an increase of $5 million in that service that we allocated in the cost study to the north rate classes. 423 MR. THOMPSON: All right. Just to understand that. If I look at the white sheets, page 3, tab 1, schedule 1, page 2 of the white sheets, I see line 7, "Total North Transport and Storage," there was a -- in column C, a deficiency being allocated of 3.2 million, and if you come forward to the white sheets, it's up to 12.7 million. 424 MR. KITCHEN: Yes, that's correct. 425 MR. THOMPSON: All right. And my understanding of your discussion with Mr. Scully is that that was a cost increase. 426 MR. KITCHEN: There was an increase in the level of STS between -- of TCPL STS between white page and yellow page, and our understanding of that is that it's based on tolls. And we are still looking at -- at that increase and we've asked someone in Chatham to check it out. 427 MR. THOMPSON: The white sheet -- it's page 1 that puzzled me a bit. It went from 15.3 million, roughly, in the white sheets, this is at line 8 -- 428 MR. KITCHEN: Yes. 429 MR. THOMPSON: -- total north delivery to 18.4 million in the yellow sheets, and there's sort of a corresponding reduction in the south. And what was the cause for that shift? That was what I thought you were talking about some sort of cost-allocation driver that was discovered between the white and the yellow, but I must -- 430 MR. McMAHON: No, it wasn't so much a cost shift, it's just that some of the new costs, as we were just talking about, the STS costs, were specifically identified for the north. It wasn't a change in methodology from one cost study to the next, it was just whatever costs were identified that, for instance, STS, that was specifically identified for the north, it was specifically allocated to the north. 431 MR. THOMPSON: So is it a change in cost plus a change in allocators or just costs? 432 MR. McMAHON: The allocators would only change based on if there was updated demands and volume levels or customer account numbers from the white-page filing to our yellow-page filing. But the actual calculations wouldn't change. So it was primarily cost-driven, and any changes that were made in the load forecast. 433 MR. THOMPSON: And the reduction in the south from 80 -- we're talking about a revenue deficiency that overall didn't change that much, from 110 to 104, but in the south, line 20, it goes from 87 million roughly down to 78 million. Is that, again, some cost incurrence result, change in the allocators? Can you help me understand that one? 434 MR. KITCHEN: I think we're looking at -- we're focusing on the deficiency column and I understand that because that's the amount that essentially we're seeking to recover. But if you look at column D between the yellow page and the white page. 435 MR. THOMPSON: D as in Donald? 436 MR. KITCHEN: D. That's the revenue requirement coming from the cost study. And you'll see in the yellow page that number 196,999, so basically $197 million. Do you have that at line 8? 437 MR. THOMPSON: On the white page, where am I? 438 MR. SMITH: He's looking at line 8, I think, of the yellow pages. 439 MR. THOMPSON: Yes, 194.9 on in the white sheet; is that right? 440 MR. KITCHEN: Sorry, 193 -- 194 on the white and 197 on the yellow. 441 MR. THOMPSON: All right. 442 MR. KITCHEN: So between the yellow and white, the allocation of costs or the revenue requirement identified as delivery in the cost study changed by approximately $3 million in increase. So there hasn't been a shift in the deficiency between white to yellow. That would be driven primarily by changes in allocators that are driven by volume and number of customers and such, not changes in allocation methodology. 443 MR. THOMPSON: I gotcha. But in the south it's sort of remained almost constant -- 444 MR. KITCHEN: Correct. 445 MR. THOMPSON: Is that right? The dollar amount for the south is 20 million -- 446 MR. KITCHEN: Yes -- 447 MR. THOMPSON: And 550,925 and 553,290. 448 MR. KITCHEN: Right, and it's almost constant. 449 MR. SMITH: 550,925 and 550,329. 450 MR. THOMPSON: Okay. So that helps me with those numbers. So coming back, then, to the allocation of the 99 million that we see in column C, that number is the fallout of the cost allocation process, is it? 451 MR. KITCHEN: Essentially -- essentially once we allocate the costs by rate class, we compare that to the revenue by rate class, and it gives us a deficiency or sufficiency. But, yes, it's a fallout of the rate class. 452 MR. THOMPSON: Okay. And so where does the judge -- in terms of rate design, have you judgmentally altered the recovery of these numbers from these rate classes in another number here? 453 MR. KITCHEN: The proposed -- the proposed revenue in column F is based on the 2004 rate design. So the column F really represents how we're proposing to recover the costs that are appearing in column D. 454 MR. THOMPSON: Okay. So if I go down those lines and compare them to column D, I'll see which ones have been adjusted from the cost driver -- cost allocation -- 455 MR. KITCHEN: Yeah, in terms of the recovery. 456 MR. THOMPSON: Right. And so it's fair to conclude, then, that the cost allocation study is the driver for the allocation of the revenue deficiency to rate classes. 457 MR. KITCHEN: Yeah, it is the driver, although we're not specifically going out there with the purpose of allocating a deficiency. We allocate the cost and the deficiency is merely a calculation that falls out because you have allocated costs and you have revenue by rate class. Mr. McMahon doesn't allocate a deficiency; it is a fallout of the calculation. 458 MR. THOMPSON: Again, going back to the good old days when we weren't so focused on 1.0 bang on, what you would get, we would get a revenue deficiency and then a method would be used to allocate it to the various rate classes. Some people used a rate-based responsibility method; others used a combination of method. But there was some judgment involved. 459 MR. KITCHEN: Well, as long as I've been working on the cost study, it's always been taking an allocation of costs and comparing that to revenue. And within the cost study there is allocators based on rate base and such, but in the end you still have an allocation of costs which then is used to help drive as one of the considerations in the rate design process. 460 MR. THOMPSON: I'm not suggesting we don't use the cost study, but it's the weight that is ascribed to it. Is there more weight being put on the cost study in this case than in prior cases? 461 MR. KITCHEN: I can't really comment if there's more weight being put on in this versus prior. What we do is we always start with the cost study and then from there, to the extent that we have other issues that we need to deal with, such as the continuity between rate classes in terms of the boundary points or other considerations, that's the second step in the rate design process. But the first step is always to look at the cost study as the guide. 462 MR. THOMPSON: Okay. And that's understandable. 463 Okay, well, that then brings me to just one question on the cost study, and I'm sure you've been questioned about this by other questioners. I, unfortunately, haven't had a chance to review all the transcripts. But I do want to ask you a question about the allocator that's being used for distribution capacity in the south, and this is an issue on which IGUA and the company are on the same page. 464 I'd ask you, though, to turn up, if you wouldn't mind, the IGUA evidence. I don't have an exhibit number for that. Perhaps Mr. Moran could help me, or the company. 465 MR. McMAHON: That's K.17, I believe. 466 MR. THOMPSON: K? K.17. Thank you very much. 467 And if you would go to page 11 of our evidence, this is more in the nature of a position paper almost, we talk about this -- 468 MR. SMITH: Almost? 469 MR. THOMPSON: Almost, yeah. It's just like yours. It's just we can get it in ten pages. 470 We talked about this distribution capacity cost allocator, and I appreciate your testimony talks about the difference in plant accounts between the north and the south. But are we right that the distribution costs that are recorded in the plants in the south -- well, what's in there? Is that based on pipe size primarily? 471 MR. McMAHON: Are you asking how -- 472 MR. THOMPSON: What's classified as distribution in the south? 473 MR. McMAHON: It's -- it sounds familiar to a question we had just the other day about how the plant accounting group uses established guidelines on how to classify plant to one category or another. 474 MR. THOMPSON: Okay. 475 MR. McMAHON: We were -- at the time I think we were talking about transmission plant. And our best guess would be size and capacity of the line. 476 MR. KITCHEN: But the distribution mains -- or the distribution function includes, really, mains and such that are there to serve distribution customers. 477 MR. THOMPSON: My understanding, again this is from prior cases, is that this was done on a pipe-size basis, and that the customers who are served directly off the transmission line don't get into that lower-sized pipe. Is that the pig picture? 478 MR. KITCHEN: And that's fair. And they are also allocated other transmission costs which has that size of pipe in it. 479 MR. THOMPSON: Right. And so what we've said in this testimony, and I just want to make sure this is accurate, we say: "End-use demands served directly off transmission capacity --" well, this is more -- we say: "Should not be reflected in the distribution capacity cost allocator." 480 We say: 481 "If they are, then customer classes containing constituents served from distribution capacity will be relieved of a significant portion of the distribution capacity costs which their demands have actually caused Union to incur." 482 And the theory there is we don't -- and when I say "we," it's only some of the IGUA people, some large volumes are served directly off transmission, they don't cause the company to incur the costs of getting smaller-sized pipe; is that right? 483 MR. McMAHON: That's our proposal, yes. 484 MR. THOMPSON: Okay. And so we say if we have to pick up some of those costs, then we're saving the people who actually cause those costs to be served something, and then we identify the something by reference to Exhibit J.1.141. Is that correct, what we're saying? 485 MR. McMAHON: I'll have to bring up that Exhibit J.1.141. But it's important to repeat, again, that this was an exercise for the cost allocation study. 486 MR. THOMPSON: Yes. 487 MR. McMAHON: And this refinement of the allocation of distribution capacity-related costs is already reflected in the rate design. 488 MR. THOMPSON: No, I know we're catching up with rates, at least that's our position as well, but others would like to reverse this -- actually, keep the cost allocation study the way it is. And our concern is this is going in the wrong direction if revenue-to-cost ratios are going to drive rates. 489 But I just want to make sure I've got the number more or less right, so perhaps you should turn up Exhibit J.1.141. 490 MR. McMAHON: I'm not sure exactly what your $14.47 million amount represents. 491 MR. THOMPSON: Well, it -- 492 MR. McMAHON: I'm assuming it is a combination of the cost difference identified for rate M7 plus the cost difference identified for the T1 rate class. 493 MR. THOMPSON: That's right. I think it's the sum of lines 17, 7, and 8 in this exhibit. 494 MR. McMAHON: Okay. 495 MR. THOMPSON: And that's the shift that occurs as a result of this methodology change; am I right? 496 MR. McMAHON: That's correct. 497 MR. THOMPSON: Okay, thanks. 498 So let's move on from -- 499 MR. SOMMERVILLE: Mr. Thompson, is this a convenient time to take a break? 500 MR. THOMPSON: Yes, it would be, sir. Thanks. 501 MR. SOMMERVILLE: We'll reconvene at 20 minutes -- I beg your pardon, at the half hour. Thank you. 502 --- Recess taken at 11:10 a.m. 503 --- On resuming at 11:40 a.m. 504 PRELIMINARY MATTERS: 505 MR. SOMMERVILLE: One matter that we want to address is the schedule for argument, and we haven't heard a lot of submissions on the subject. The Board has developed, on the basis of some discussions that Mr. Moran has had, the following timetable, which would have Union's argument being delivered orally probably on the 10th, being Monday of next week. It's unlikely that we would get to that on Friday of this week. So we expect that to happen on the 10th. 506 We would anticipate intervenor's argument in the matter to follow two weeks hence, and Union's argument in reply two weeks from that filing. 507 So unless somebody has an extremely convincing argument otherwise, that's our expectation. 508 Are there any other preliminary matters that parties would like to speak to at this stage? 509 MR. VEGH: Thank you, sir. 510 I have a better understanding of the parameters that you propose we consider around the confidentiality, and I would like to address that now if I could. 511 MR. SOMMERVILLE: Sure. 512 MR. VEGH: The submission of TransAlta is that the only portions of cross-examination that should be treated as confidential are those portions that refer to the material that's been redacted in the prefiled evidence. In other words, we should not extend the confidential portion of this proceeding to extend beyond what is confidential in the evidence. 513 And as I've seen the evidence, the only material that's confidential are really the Coral-specific numbers, that is, the volumes, the load factors, and then the finances derived from that. I mean, there are policy reasons for public hearings, obviously, but from my concern, there's also a very important practical consideration, is that if I can't share the information that comes out on cross-examination with my client, then I can't get instructions from my client and I really -- you know, I can't function much as an advocate. In fact, I had not intended to participate in the confidential portion because, frankly, the Coral-specific numbers don't have an impact on my client. So the plan was I would just address what's on the -- be here for what's on the public record and not attend for the rest. 514 Now, I understand in some cases. The evidence is so intertwined that it may be difficult and cumbersome to have a break. Frankly, in this case, I don't really see that. It seems that they are discrete enough pieces of information that there could be a few ways of addressing the confidentiality. One might be people might use a blank until which get to the confidential portion, and then those blanks are presented for the con -- on the confidential record. 515 Another is to have the witnesses simply agree not to refer to the numbers in their evidence, although they'll have them in front of them. 516 So I would ask the Board, if at all possible, to consider some of those approaches as opposed to a broad-brush approach that the entire portion of the evidence is confidential. 517 MR. SOMMERVILLE: Thank you, Mr. Vegh. Obviously we need to hear from Mr. Brown on this subject. 518 My concern is that cross-examination being a dynamic -- or most of the time, a dynamic activity, that it's very easy for things to, as you say, become intermingled and cross over. I'm perfectly happy with the last suggestion that you made, which was that there -- and it's sort of the process we followed in the case of the Ontario Power Generation decontrol case, where a series of contracts were redacted; the unredacted portions were available to the witnesses; they were also available to some counsel that executed undertakings. But in terms of actual cross-examination and reference to actual numbers and parameters, that did not occur and there was a kind of code, if you like, that occurred around that. And that would be a satisfactory approach from the Board's point of view as well. 519 So we'll hear from Mr. Brown on that, but we're sympathetic to your submissions and we'll try to accommodate that if the circumstance allows. 520 MR. VEGH: Thank you, sir. 521 MR. SOMMERVILLE: Mr. Thompson. 522 MR. THOMPSON: Thanks. 523 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 524 M.KITCHEN; Previously Affirmed. 525 P.McMAHON; Previously Sworn. 526 CROSS-EXAMINATION BY MR. THOMPSON: 527 MR. THOMPSON: Mr. Kitchen, I want to go back for a second to H.3, tab 1, schedule 1. Again, you're showing here you need to recover roughly $98.8 million, as I understand it, in rates in order to generate the return that the company is seeking in this case; is that right? 528 MR. KITCHEN: That's the deficiency before recovery, yes. 529 MR. THOMPSON: Right. And so even though the phase-1 evidence, if you will, proves $104 million deficiency, for whatever reasons, we only need to increase rates to capture 99 to achieve the ROE benchmark that's proposed; is that -- do I understand that correctly? 530 MR. KITCHEN: Yes. Yes. I'm just -- I'm trying to do this reconciliation a bit in my head as I'm doing this, and it may come out to be slightly different once I'm done because I have to factor in that there's some amount subject to deferral in 2004 which we will recover. So I think it's best to wait until we get the reconciliation. It's hard for me to say. Yes, 98 is the number that's on line 17 and that's the sufficiency/deficiency for recovery. 531 MR. THOMPSON: Well, you're proposing to increase rates by $98.8 million. 532 MR. KITCHEN: Yes. 533 MR. THOMPSON: And I just want to understand something you said to Mr. Scully yesterday. He took you to line 15 in column C, which is 81 million and some odd; correct? 534 MR. KITCHEN: Yes. 535 MR. THOMPSON: And he asked you how do you get to the 98, and I thought you said you add the amount that appears at line 15 in column E. 536 MR. KITCHEN: Right. And that's 17,661, yes. 537 MR. THOMPSON: And is that -- 538 MR. KITCHEN: That's the 98,872 -- that's the number in my evidence, I believe. 539 MR. THOMPSON: All right. But is that number the ratepayer's share of deferral estimates? Is that what that number is? 540 MR. KITCHEN: That's the excess recovery in S&T margin, most of it is in line 10. 541 MR. THOMPSON: So is that number 75 percent of another number? How did you get that number? 542 MR. KITCHEN: No, it's not 75 percent, it's the -- in line 10, you can see the current approved -- or the revenue under the approved column of 58,174. That's the total C1 revenue which will include transactional revenue. 543 MR. THOMPSON: Right. 544 MR. KITCHEN: The revenue requirement related to all the services provided under C1 is $34 million, which I believe is approximately $23 million that will be -- some of that is subject to deferral. So if you -- there's no 75 percent happening in our numbers. We just take the revenue that's forecast, the costs, to arrive at the final deficiency. 545 MR. THOMPSON: Right. But what I'm getting at, my client takes the position that the -- that what's embedded in the forecasts of these transaction services revenues should be -- what's reflected in the forecasts of these transaction services revenues should be embedded in rates, and so I'm really trying to find out is that the right number that should be embedded in rates if the Board subscribes to our position, because if it then reduced the deficiency from 99 to 81 roughly. 546 MR. KITCHEN: Let me make sure I understand your position. The position is that the 75 percent -- 547 MR. THOMPSON: The ratepayer's share -- 548 MR. KITCHEN: -- should be built back into rates? 549 MR. THOMPSON: Right. 550 MR. KITCHEN: I believe that to be the case because that really is the amount. But I'd have to check to see if that's the actual number. I can include that as part of the undertaking if you'd like. 551 MR. THOMPSON: So subject to check -- 552 MR. KITCHEN: Yeah. 553 MR. THOMPSON: -- the amount that would be embedded in rates if the ratepayer's share of these forecast transactional services revenues were embedded with rates would be about $17.7 million. 554 MR. SMITH: That's fine. I do think it's probably better that we actually take a formal undertaking on that. 555 MR. THOMPSON: All right. I was trying to describe the undertaking. 556 MR. SMITH: Okay. 557 MR. THOMPSON: Subject to check. 558 MR. KITCHEN: I can either take that as a separate undertaking or add it to the other one. 559 MR. MORAN: Mr. Chair, Undertaking N.21.3, I wonder if Mr. Thompson could just restate it. 560 MR. SMITH: I apologize. 561 MR. THOMPSON: To confirm, or otherwise, that 17.661 million is a reasonable estimate of the ratepayer's share of transactional services revenues forecast in the proposed revenue shown in H.3, tab 1, schedule 1. 562 Does that capture it, Mr. Kitchen? 563 MR. KITCHEN: Yes. Yes. 564 MR. THOMPSON: Thank you. 565 UNDERTAKING NO. N.21.3: TO CONFIRM, OR OTHERWISE, THAT 17.661 MILLION IS A REASONABLE ESTIMATE OF THE RATEPAYER'S SHARE OF TRANSACTIONAL SERVICES REVENUES FORECAST IN THE PROPOSED REVENUE SHOWN IN H.3, TAB 1, SCHEDULE 1 566 MR. THOMPSON: Okay. Now, moving on, then, to rate design, you have on your presentation a revenue deficiency of 99 million that you're proposing to recover in rates. What if it's zero? Will you still be proposing some rate design changes? 567 MR. KITCHEN: Sorry, you're suggesting if we had approval of nothing but the recovery of our existing -- recovery through existing rates? 568 MR. THOMPSON: Right. 569 MR. KITCHEN: Yes, we would still propose rate design changes. We'd still have to go through a cost study, because I'd imagine -- I would assume that in the decision there would be disallowances of cost. We'd run those through the cost study and reestablish 2004 rates and still have the same rate design proposals. They would look different in magnitude, perhaps, but there still would be rate design proposals. 570 MR. THOMPSON: Okay. So that if the Board finds that your revenue deficiency for 2004 is negligible, you still wish the Board to fine-tune the charges in existing rates, such as increase in customer charges and that kind of thing? 571 MR. KITCHEN: Yes. Those -- I view those as rate design changes that we would bring forward in a customer review process, the same way as we've brought forward changes in the past. 572 MR. THOMPSON: Okay. All right. Just a point on M2. I hesitate to even go here. But there's been discussion about the difference between -- well, the classification of your M2 customer base between residential, commercial and industrial, and I'm still unclear. What distinguishes -- well, let me ask you this: If I was a lawyer operating out of my house, would I be a commercial or industrial M2, in your scheme of things or Union's scheme of things? 573 MR. KITCHEN: Well, to a large extent it may depend on how big the sign is you have on your front lawn. 574 MR. THOMPSON: It would be big. 575 MR. SMITH: Huge. 576 MR. KITCHEN: I wasn't trying to be facetious. But if when we're determining whether something is commercial/industrial versus residential, if there's nothing to indicate that there's a business there, it would likely be classified as residential if it looks like a house. If you had something to identify it, then it would likely be classified as commercial/industrial. That said, you know, it's -- you'd have a combined -- you'd have a dwelling that is essentially part house and part office. I'm not sure how we could deal with that reasonably. 577 MR. THOMPSON: Why has there been this distinction in Union's records between residentials and commercial/industrial? Is that some sort of market segmentation? 578 MR. KITCHEN: Well, the CI code that exists in Banner is primarily there for the purposes of determining who gets which notice, and also for the purposes of perhaps a marketing or DSM activities in terms of targeting those activities. But it's not something that is tracked, at least at the lower volumes, for anything owner those purposes. It's obvious that an apartment -- not an apartment building, but a hospital or a small industrial park would be classified as commercial/industrial, but at the lower levels it's difficult sometimes to determine how that classification works. 579 MR. THOMPSON: Okay. So is it then primarily an administrative distinction as opposed to a difference-in-use distinction? 580 MR. KITCHEN: That's primarily correct, yes. 581 MR. THOMPSON: Does Union have any sort of difference in rate structures for high-density-type residential users, i.e. apartment buildings or something like that? 582 MR. KITCHEN: No, they're all within the M2 rate class. 583 MR. THOMPSON: Turning to the increase in monthly charges, and we asked you a question about this. It's Exhibit J.17.48 and the point we asked was the extent to which increasing these charges mitigates weather risk, and the answer that we got was "not much," or words to that effect. But my question is: If you had 100 percent demand charges or customer charges which recovered all your fixed costs, the company would not have any weather risk; right? 584 MR. KITCHEN: Yes. If you went to a full fixed variable rate design, you would mitigate that risk. And I think that's what's provided in the subsequent attachments. 585 MR. THOMPSON: So I guess the only point we were trying to make: Any move in that direction must have some effect. 586 MR. KITCHEN: At the margin maybe, but not enough to significantly impact mitigation of weather. 587 MR. THOMPSON: So it's not a big deal as far as the company is concerned. 588 All right. Another point on rate design. Discretionary gas supply service. This is described in your testimony at H.1, tab 1, page 25. 589 MR. KITCHEN: Yes. 590 MR. THOMPSON: And this -- I just want to make sure I understand this. This links in, apparently, starting at line 11, with the load-balancing directive, and you're talking about discretionary gas supply service in the R1 schedule. The R1 rate schedule covers what, bundled direct purchases? 591 MR. KITCHEN: Yes. It's essentially supplemental services, yes. 592 MR. THOMPSON: And you say here you'll "... allow direct purchase customers who are unable to access supplies to meet their February 28 checkpoint the ability to buy a quantity of gas from Union. The direct purchase customer will pay Union's cost of buying that supply plus the gas supply administration charge in effect at the time." 593 And that sounded to me a little bit different than the proposal that somebody was talking about, when the load balancing panel was here, to the effect that if someone didn't balance, they would have to pay a the highest spot price -- there's some number that could be considerably more than Union's cost. Are there two different charges here? 594 MR. KITCHEN: Well, the discretionary gas supply service is contemplated for customers that have to go out -- have asked Union to provide a back-to-back service and to meet a supply requirement. If a customer doesn't meet the supply requirement either identified by Union or through the direct management -- or the direct -- their own management of their load balancing position, then Union will go out and buy gas on the spot market; and essentially the difference is one is a penalty rate and one is not a penalty rate. 595 In essence, though, they would both be back-to-back -- they would both be a spot service; it's just one would be deemed to be higher of the monthly spot price in the month prior or the month after. 596 MR. THOMPSON: All right. I'm just trying to understand -- make sure I understand how I avoid the penalty charge. Do I just have to ask Union, Would you buy it for me? 597 MR. KITCHEN: You would identify the volume that you would need to meet your amount, your requirement, and then we would buy that as a back to back. Whatever we would pay, we would pass through plus the gas supply admin. 598 MR. THOMPSON: Relating it back to the discussion we had with the load balancing panel, I would, as a customer learn probably in early February what I needed to come up with to meet my February 28th balance checkpoint; right? 599 MR. KITCHEN: Yes. I'm not -- I can't remember the exact date, but, yes, that is part of the -- you would be notified as to what that amount is. 600 MR. THOMPSON: Let's say for the sake of argument it's a hundred units. 601 MR. KITCHEN: Yes. 602 MR. THOMPSON: And if at that point in time I, as a customer, say, Would you get that for me please -- 603 MR. KITCHEN: Yes. 604 MR. THOMPSON: -- then I would get it under the back-to-back service and just pay what it costs you? 605 MR. KITCHEN: Yes. 606 MR. THOMPSON: Plus an admin charge. 607 MR. KITCHEN: Correct. 608 MR. THOMPSON: And if I say nothing and do nothing, then you go out and buy it; is that right? 609 MR. KITCHEN: We have to bring you back into your checkpoint at February 28th, yes. 610 MR. THOMPSON: So February 28 comes, and you haven't heard from the customer and the customer hasn't gotten his gas in. So is that when you go out and buy it, or is there going to be a lag period? 611 MR. KITCHEN: I'm not really sure if it will be the day after or -- 612 MR. THOMPSON: Shortly around the time. 613 MR. KITCHEN: But if you didn't bring in the supply by the February 28th checkpoint, then once we were sure you weren't bringing it in, and that would likely be March 1st or February 29th, we would -- at that point, we would have to bring you back in line. 614 MR. THOMPSON: Okay. And that's when I get hit with the penalty. 615 MR. KITCHEN: Correct. 616 MR. THOMPSON: So if I tell my members to keep in touch, they won't face penalties. 617 MR. KITCHEN: That's correct. Not with me, though. 618 MR. THOMPSON: Right. Stay out of the kitchen. 619 MR. KITCHEN: Yeah. 620 MR. THOMPSON: Okay. Let's then turn to T1, and again IGUA had some testimony on this. And in Exhibit K.17, paragraph 30, we express concern that you hadn't contacted all the T1s who could be adversely affected by these proposed changes. Has that concern been addressed? 621 MR. KITCHEN: There was a communication through an Enerline to all contract customers related to all the rate-design changes that we're proposing. 622 MR. THOMPSON: And when was that, approximately? 623 MR. KITCHEN: It was either shortly after or just near the end of the ADR, I believe. I don't know the exact date. 624 MR. THOMPSON: But did that communication give them enough -- give the customers on T1 enough notice to appreciate that the smaller ones and the lower load factor ones are going to be more adversely affected than higher load factor, larger customers? 625 MR. KITCHEN: I don't recall exactly what the communication said in terms of impacts. It did identify the changes we were making and why we were making the changes. I believe we've undertaken to provide the -- 626 MR. THOMPSON: Communication? 627 MR. KITCHEN: -- communication to OAPPA. 628 MR. THOMPSON: Thanks. Well, you certainly got Coral's attention. 629 Could I ask you to turn up J.17.49. This is just -- this just gives us a bit of history with respect to this rate. 630 MR. KITCHEN: 49 or 39? 631 MR. THOMPSON: 49, please. 632 And this T1 rate was first developed in 1989; is that correct? 633 MR. KITCHEN: That's correct. 634 MR. THOMPSON: And the threshold was increased to 5 million m3 in 2000? 635 MR. KITCHEN: That's correct. 636 MR. THOMPSON: And from its inception to date, it's involved a demand -- a customer charge, one demand charge and one commodity charge; is that correct? 637 MR. KITCHEN: That's correct. 638 MR. THOMPSON: That's correct. And I think in Exhibit H.1, tab 1, page 22, you have provided what would be the -- I think the situation that currently prevails is provided in lines 1 to 4; is that right? Or is the -- are lines 1 and 2 a new proposal? 639 MR. KITCHEN: Are you talking about table 6 on page 22? 640 MR. THOMPSON: Yes, table 6 on page 22. 641 MR. KITCHEN: Lines 1, 2, 3, and 4 are the current design; lines 5, 6, 7, 8, and 9 are the proposed design. 642 MR. THOMPSON: And so you're really combining a current split customer charge based on size into one size fits all? 643 MR. KITCHEN: That's right. 644 MR. THOMPSON: And then you're -- that's merging a split. And then on the other lines, monthly demand, you're creating two blocks and in commodity you're creating two blocks. 645 MR. KITCHEN: That's correct. 646 MR. THOMPSON: And so the upshot of all of that -- well, is the upshot of all of that is that smaller users will pay more on a unit basis? 647 MR. KITCHEN: Smaller customers will pay a larger share of the costs that they incur, and they'll pay more, yes. 648 MR. THOMPSON: Okay. And the large customers, large high-load-factor customers will have a lower -- a lower unit rate than the large low-load-factor customers? 649 MR. KITCHEN: Can you say that one again? The average unit rate within the class for the higher load factor, high-volume customers will be lower, yes. I think we got that right. 650 MR. THOMPSON: Okay. And I think we can see that impact, comparing small to large, in J.17.53. 651 MR. KITCHEN: Yes, that's correct. 652 MR. THOMPSON: So for a usage of 5,000 103 m3, the proposed rate will have an impact of a 23 percent increase, and then for the larger user, it's going in the opposite direction and gets a decrease. 653 MR. KITCHEN: Yes. That was the white-page numbers, yes. 654 MR. THOMPSON: Based on the white-page numbers. 655 MR. KITCHEN: Yes. 656 MR. THOMPSON: That trend continues? 657 MR. KITCHEN: Yes. In the yellow page, you have a similar set of impacts, although in the white page the overall impact of not doing anything is greater. If we don't do anything in terms of the redesign, the impact will be an increase to all customers in the class. 658 MR. THOMPSON: Okay. Now, the number of customers served on this rate are how many currently -- currently in forecast? 659 MR. KITCHEN: I'm not sure, but I think in forecast it's 72. 660 MR. THOMPSON: And then you had some data, I thought, in your H.1, tab 1, page 17. You showed numbers increasing from 36 to 64 for 2004, so the 64 number is now 72, is it, based on yellow-sheet updates? 661 MR. KITCHEN: Yeah, the 72 is the number I've seen, yes. 662 MR. THOMPSON: And you probably saw it in the answer to J.17.50. 663 MR. KITCHEN: That's right. 664 MR. THOMPSON: Thanks. 665 Now, if you just take a look at the T1 rate schedule, which is at Exhibit H.3, tab 3, and it's about a quarter of an inch from the back. 666 MR. KITCHEN: Yes. 667 MR. THOMPSON: You'll see under "Applicability," that under subparagraph B, that a condition of applicability here is the entry into of a carriage-service contract; is that right? 668 MR. KITCHEN: That's correct. 669 MR. THOMPSON: Okay. Now, does that have a standard form? 670 MR. KITCHEN: The contract? 671 MR. THOMPSON: Yes. There are a lot of contracts filed in this case which are called standard-form contracts, but I couldn't find the carriage-service contract. And what I'd like to have filed, if I could, is a copy of the standard form that's used for a carriage-service contract. 672 MR. KITCHEN: I'm not sure if it's a standard, but I can undertake to try and find that, yes. 673 MR. THOMPSON: All right. 674 MR. KITCHEN: It's really not my area. 675 MR. THOMPSON: All right. If I could have that undertaking, please. 676 MR. MORAN: Mr. Chair, Undertaking N.21.4, to provide, if it exists, a copy of the standard carriage-service contract used for rate T1. 677 UNDERTAKING NO. N.21.4: TO PROVIDE, IF IT EXISTS, A COPY OF THE STANDARD CARRIAGE-SERVICE CONTRACT USED FOR RATE T1 678 MR. THOMPSON: So everyone who's served on T1 will have a carriage-service contract? 679 MR. KITCHEN: Yes. 680 MR. THOMPSON: And the customers served on T1 are direct purchasers, are they not? It's an -- 681 MR. KITCHEN: Yes. 682 MR. THOMPSON: -- unbundled type of rate? 683 MR. KITCHEN: Semi-bundled. 684 MR. THOMPSON: Semi-unbundled or bundled. 685 MR. KITCHEN: Yes, I'm not sure which applies, but it's semi. 686 MR. THOMPSON: Okay. So Coral has one and everybody else has one. 687 MR. KITCHEN: Yes. 688 MR. THOMPSON: Now, everyone served on T1 gets the DCC until it dries up. 689 MR. KITCHEN: That's correct. 690 MR. THOMPSON: Now, is that a matter of contract or is that a matter of a Board approval of a rate measure? 691 MR. KITCHEN: I believe the contract would reference the rate schedule which has the DCC payment in it, and I think that the contract includes wording that the DCC is paid on obligated deliveries. 692 MR. THOMPSON: All right. Now, in the contract, do the T1 customers contract to take service under the T1 schedule? How does the contract -- how does the contract and the rate schedule work together? Is there a covenant to pay the charges under the T1 rate schedule? 693 MR. KITCHEN: Again, the contract is not my area. I believe that the contract references the rate schedule such that if the rate schedule changes, the new rates would apply. The rates themselves, I don't think, are embedded in the standard contract. 694 MR. THOMPSON: No, from my experience it refers to a rate schedule -- 695 MR. KITCHEN: Yeah, but again, I'm not that familiar with the contracts, sorry. 696 MR. THOMPSON: Well, I'm getting into what's on the -- in the public record here as your reply evidence with respect to the Coral proposal which does bear on the T1 service -- 697 MR. KITCHEN: Yes. 698 MR. THOMPSON: -- the contract and the rate schedule. 699 MR. KITCHEN: Yes. 700 MR. THOMPSON: So that's why I'm asking these questions. 701 Now, based on the testimony that you provided -- I think this is in the -- all I have is the redacted stuff so I have no idea what's in the other stuff yet. But the load factor of Coral under its T1 service, is that specified in your material somewhere or in theirs? For some reason I have the number 40 percent in my mind. Is that in the ballpark? 702 MR. KITCHEN: I'm not sure what was in their version as redacted or unredacted. I think we redacted the load factor in our version. 703 MR. THOMPSON: All right. Then I won't go there, then, for the time being. 704 MR. SMITH: I only have an unredacted version so I can't help you out. I'm not sure. 705 MR. KITCHEN: I have the same. 706 MR. THOMPSON: In any event, Coral in their material, and I don't know if this has been marked yet, this is the -- this is the redacted version of Mr. Todd's evidence. Does that have an exhibit? Does anybody know? I don't have it marked. 707 MR. SMITH: K.37. 708 MR. THOMPSON: K? 709 MR. SMITH: 37. 710 MR. THOMPSON: Thanks. And what was the redacted version of Coral's evidence? Is that K.36? 711 MR. SMITH: No, no, no, that -- I'm sorry. That is the -- Coral's evidence is at K.37. 712 MR. THOMPSON: Sorry, Coral's is K.37? 713 MR. SMITH: That's correct. 714 MR. THOMPSON: And so the Todd/Zarnett evidence, is that K... 715 MR. SMITH: Sorry, it's all part of the same exhibit and it's schedule -- it's actually all rolled under the same exhibit, K.37. 716 MR. THOMPSON: So it's all K.37. Thanks. 717 I took it from both pieces of this evidence, Mr. Kitchen, that the change of the tilt in rate T1 increases the charges that Coral will have to pay under T1 compared to a continuance of the existing rate; have I got that straight? 718 MR. KITCHEN: The tilt? You mean the redesign that we're proposing? 719 MR. THOMPSON: Right. 720 MR. KITCHEN: No. Actually, the redesign would not cause them to have an increase. If they were to be paying a T1 rate prior to the redesign and after the redesign, they would pay a lower rate -- a lower revenue. 721 MR. THOMPSON: They would have a lower unit cost on -- 722 MR. KITCHEN: Yes. 723 MR. THOMPSON: Okay. So they would benefit -- they are in the constituency of the T1 rate class that benefits from this proposed redesign of T1. 724 MR. KITCHEN: Right. I think it's in my evidence where I've talked about the difference between a firm load factor and an overall load factor. 725 MR. THOMPSON: Yes. 726 MR. KITCHEN: And the rate that we're designing is the firm -- redesigning is the firm rate. 727 MR. THOMPSON: Right. So the firm portion of their service will benefit from the -- 728 MR. KITCHEN: Yes. 729 MR. THOMPSON: -- from the redesign of T1 that you're proposing? 730 MR. KITCHEN: Yes. 731 MR. THOMPSON: Now -- so Coral takes service under T1, which is a firm service rate, is it not? 732 MR. KITCHEN: It's firm interruptible, yes. You can be a combined firm interruptible or firm only. 733 MR. THOMPSON: So that's all under T1. 734 MR. KITCHEN: Yes. 735 MR. THOMPSON: Now, in your testimony, this is Exhibit H.1, tab 1, reply material, and it's 18 pages, on page 1 you tell us that the firm demand charge in the Coral arrangement was equivalent to the Board-approved 1999 T1 transportation demand charge less the DCC prior to this 2002-130 case. 736 Just shopping there, the T1 transportation demand charge from 1999, am I correct that has not been changed during the course of the PBR? 737 MR. KITCHEN: It has changed, yes. 738 MR. THOMPSON: So Coral got a special demand charge? 739 MR. KITCHEN: Coral was getting a rate based on the '99 toll, and that reflected the removal of the DCC as we had proposed. 740 MR. THOMPSON: All right. But I'm a T1 rate schedule payer in 2003 -- 741 MR. KITCHEN: Yes. 742 MR. THOMPSON: -- and I'm paying a demand charge; right? 743 MR. KITCHEN: Yes. 744 MR. THOMPSON: Okay. And is that demand charge greater -- just taking the rate schedule at its face value, is the demand charge in the 1999 T1 rate schedule and the demand charge in the 2003 T1 rate schedule the same? 745 MR. KITCHEN: No, they're not. 746 MR. THOMPSON: And what's the difference, roughly? 747 MR. KITCHEN: The rate schedule, the T1 rate schedule that we were just looking at? 748 MR. THOMPSON: Yes. 749 MR. KITCHEN: Before I go there, I'll check one thing. It shows a -- there's a line through it because it's not the rate we're proposing, but it's 14.5162 cents. 750 MR. THOMPSON: Right. 751 MR. KITCHEN: The 1999 demand charge was in the 15 cent range. The rate dropped between '99 and 2003. 752 MR. THOMPSON: So the demand charge in the rate schedule that Coral agreed to was higher; is that right? 753 MR. KITCHEN: Yes. 754 MR. THOMPSON: Okay. 755 MR. KITCHEN: Well, they agreed -- what they agreed to was the -- Union's -- the rate after Union's proposal was taken into account. 756 MR. THOMPSON: Okay, let me come to that. I just want to start with the demand charge because the DCC doesn't show up in the rate schedule; right? 757 MR. KITCHEN: No. 758 MR. THOMPSON: What was that number again, 15 -- 759 MR. KITCHEN: It was approximately 15 -- 15 cents for '03 per month. I don't have the exact number with me. 760 MR. THOMPSON: So the typical T1 customer has, as of 2003, a demand charge of 14,562, and then the typical T1 customer got the DCC. 761 MR. KITCHEN: Yes. 762 MR. THOMPSON: But the typical customer got it as a credit on his bill; right? 763 MR. KITCHEN: Yes, I believe it was done as a credit. Yes. 764 MR. THOMPSON: And with Coral, what did you do? You agreed to, in effect, deduct it from this demand charge as a matter of contract? 765 MR. KITCHEN: The agreement was that they would get the T1 rate, the 1999 rate, with the DCC eliminated, as we proposed, subject to the Board's approval of that elimination. 766 MR. THOMPSON: All right. So the 15 cents minus the DCC produced a number; is that right? 767 MR. KITCHEN: Correct. 768 MR. THOMPSON: And was there any difference in substance to that deal than what other T1 customers get, which is they pay the demand charge but they've got the DCC on their bill? 769 MR. KITCHEN: If you recall, Union had proposed to do customer-specific demand charges for T1 customers -- 770 MR. THOMPSON: I'm talking about when the -- sorry. You're talking about Coral. Coral's deal was based on the company's proposal to eliminate the DCC which would involve revenue credits; is that right? 771 MR. KITCHEN: Right, through the rate. 772 MR. THOMPSON: Through the rate. 773 MR. KITCHEN: And it was driven off the 1999 rate schedule. 774 MR. THOMPSON: Was Coral taking service? Have they started taking service yet? 775 MR. SMITH: No, they have not. 776 MR. THOMPSON: Okay. All right. So Joe Typical T1 gets the 14 -- pays the 14,5 and gets a DCC credit, and had the company's proposal been approved by the Board, then that customer would have also received a reduction in that demand charge; right? 777 MR. KITCHEN: Right, based on their level of obligated deliveries. 778 MR. THOMPSON: Okay. Now, what's in the Coral contract, and if you can't answer this on the public record, don't, but is there some covenant there to tying them to the T1 rate schedule in some fashion? 779 MR. KITCHEN: I think that's probably best left for -- 780 MR. THOMPSON: Later? 781 MR. KITCHEN: -- later. 782 MR. THOMPSON: Okay. Just now on this -- on the facts with respect to Coral's situation, and you described that throughout your testimony. Let me just try and do this quickly. My recollection is that Coral applied -- first of all, I don't know if they applied, but they -- it was received as though it was an application. They wanted to interconnect with some pipeline in the middle of the St. Clair River; is that right? 783 MR. KITCHEN: Yes. 784 MR. THOMPSON: And so to do that that involved an application to the National Energy Board for some kind of approval. 785 MR. KITCHEN: Right. Because the river-crossing is an NEB-regulated pipe. 786 MR. THOMPSON: Right. And then in addition, they needed a line built from -- well, they needed a line into their plant and so they applied to this Board for leave to construct the Ontario piece of the -- of this project they had in mind that was going to connect somewhere in the middle of the river. 787 MR. KITCHEN: Correct. 788 MR. THOMPSON: And IGUA intervened, and I know Union did, and I'm now talking about the NEB process, and the NEB basically said, We'll wait to see what Ontario does. Is that your recollection? 789 MR. KITCHEN: I'm not sure about the nuances between what the NEB said and the OEB, but I'll ... 790 MR. THOMPSON: All right. Well, I'll deal with that with Coral. 791 In any event, these two applications to this Board, Coral's leave to construct as well as Union's competing leave to construct, the Coral application was opposed by IGUA and others; is that your recollection? 792 MR. KITCHEN: Yes. 793 MR. THOMPSON: And the evidence indicates that sometime in 2002, I think it's April of 2002, Coral and Union entered into this 20-year CSC arrangement. 794 MR. KITCHEN: Yes. 795 MR. THOMPSON: Okay. And the upshot of all of that was Coral withdrew its application for leave to construct; is that right? 796 MR. KITCHEN: That's correct. 797 MR. THOMPSON: And then Union's was approved? 798 MR. KITCHEN: Union's build? 799 MR. THOMPSON: Yeah, Union's -- did Union get the green light to go ahead or an exemption? 800 MR. KITCHEN: Yes, we got the approval to build. 801 MR. THOMPSON: And has it been built? 802 MR. KITCHEN: Yes, it has. 803 MR. THOMPSON: So it's ready to go? 804 MR. KITCHEN: As far as I know. 805 MR. THOMPSON: All right, okay. 806 Now, either about the same -- now, my recollection also is that in the evidence that had been filed before this Board in the Coral leave to construct, there was -- I think it was Dr. Higgin and Joyce Poon had some testimony in there supporting this bypass. 807 MR. KITCHEN: Yes, I think that they were the parties at EcoAnalysis doing the work for Coral. 808 MR. THOMPSON: And they are the same parties that represent VECC in these proceedings; right? 809 MR. KITCHEN: That's correct. 810 MR. THOMPSON: And about the same time, my recollection is the DCC was under attack in Union's rate proceedings. 811 MR. KITCHEN: Yes, that's true. 812 MR. THOMPSON: And leading the charge was VECC. 813 MR. THOMPSON: Yes. 814 MR. KITCHEN: And then there was some evidence led in one of those proceedings, I can't remember if it was your 2001-2002 case, but Mr. Todd was here testifying to knock out the DCC. 815 MR. KITCHEN: Yes, that was in the 2003 customer review process. 816 MR. THOMPSON: And he was successful -- well, on a five-year wipeout, VECC was successful in their -- 817 MR. KITCHEN: We did not get our proposal, yes. They were successful. 818 MR. THOMPSON: Now, when the deal was made by Coral, were they assisted by Mr. Todd and the other advisors? 819 MR. KITCHEN: I'm not sure I know what you mean. When Coral accepted -- 820 MR. THOMPSON: My point is did Coral -- they must have been aware that the DCC was under attack when they made the original deal. 821 MR. KITCHEN: Oh, yes, they were. 822 MR. THOMPSON: And there was nothing in the original deal about the DCC; right? That came in some subsequent amendment. 823 MR. KITCHEN: No. The original deal would have also addressed -- it required Board approval of the DCC elimination. 824 MR. THOMPSON: Yeah, but the clause in the contract that Coral hangs their hat on here now is -- I think we can find it -- somewhere in somebody's evidence, they actually quote the clause. 825 MR. KITCHEN: I'm not sure. It was redacted from mine. 826 MR. THOMPSON: All right. Well, I'll find it in -- yeah, here it is, on page 7 of K -- 827 MR. SMITH: K.37. 828 MR. THOMPSON: -- K.37. This was a clarification agreement that was entered into in October of 2002; right? 829 MR. KITCHEN: That's correct. 830 MR. THOMPSON: And am I right that by this time, the Todd attack on the DCC was a matter of public record before the Board? I mean had he testified by then? 831 MR. KITCHEN: No, because -- what was the date again, sorry? 832 MR. THOMPSON: October 1, 2002. 833 MR. KITCHEN: I'm trying to think when we were actually testifying to the DCC elimination and what time that was. I'd have to check to look at the timing. The evidence by John Todd on the DCC and Joyce Poon was filed -- or was dated December 4th, 2002. 834 MR. THOMPSON: So did Coral come to Union seeking this clarification? 835 MR. KITCHEN: I'm not sure who sought out who seeking the clarification. The original contract would have been dealing with the proposal to eliminate the DCC through the 0029 proceeding. That didn't happen so then we took it forward again in 2003, and the clarification agreement is between the Board's decision in 0029 and the actual evidence to eliminate the DCC in 2003. 836 MR. THOMPSON: All right. In any event, this clause reads: 837 "If the Ontario Energy Board eliminates the DCC in a manner not consistent with Union's proposal, or fails to eliminate the DCC and maintains the existing practice, then Union will use all reasonable and prompt efforts to propose and implement promptly an alternative rate-making solution which will provide a comparable economic benefit to customer as that provided by the DCC." 838 And the DCC was eliminated May 8th, 2003; right? 839 MR. KITCHEN: Yes. We began eliminating it at that point. 840 MR. THOMPSON: And did Union do anything in terms of coming up with a proposal? 841 MR. KITCHEN: We -- 842 MR. SMITH: Well, sorry, the -- I'll let the witness answer. The only caveat, of course, is that this is a matter of contract between Coral and Union as to what they did and not necessarily relevant at all to rate-making. And when Coral intervened, the question of the contract was specifically, my recollection is, directed -- that the Board wasn't interested in that issue. 843 MR. SOMMERVILLE: Thank you, Mr. Smith. 844 MR. THOMPSON: All right. Well, Coral has come in -- as I understand the proposal -- well, let me put it this way: Did Union consider a rate-making solution to address this best-efforts covenant that it made in this clarification agreement? 845 MR. KITCHEN: I think in my evidence I said we considered the Board's decision on the elimination of DCC and the implications of that. We looked at the characteristics of Coral relative to other customers in the class and relative to other electrical generators and determined that there was no -- nothing -- no reasonable rate-making solution that we could take forward that wouldn't be in violation of the principles of rate design or postage stamp rates. 846 MR. THOMPSON: And was that communicated to Coral at some point, that you had considered it and you could not come up with a class rate-making solution that would address their concerns? 847 MR. SMITH: Well, I'm not sure if that's relevant, but it was certainly communicated in Mr. Kitchen's evidence. 848 MR. THOMPSON: Is that the first time? 849 MR. KITCHEN: No. 850 MR. SMITH: I don't know the answer to that. 851 MR. THOMPSON: Pardon? 852 MR. SMITH: I don't know the answer to that. 853 MR. THOMPSON: Do you, Mr. Kitchen? 854 MR. KITCHEN: I know that there have been letters indicating that there was no reasonable rate-making solution. 855 MR. THOMPSON: Okay. I can finish, Mr. Chairman, if you allow me perhaps another 10 or 15 minutes. Would that be desirable? 856 MR. SOMMERVILLE: That's fine, Mr. Thompson. 857 MR. THOMPSON: Thanks. 858 So in your testimony you say that there are a number of, I think they're called gas merchant somewhere -- page 7 of 18, I believe it is. No, that's not it. Somewhere in here you -- sorry, it's page 13. You say: 859 "There are a number of independent power producers within Union's franchise area currently taking service that are subject to the rates and charges to which Coral is objecting." 860 By that you mean the rate T1? 861 MR. KITCHEN: T1 or M7. 862 MR. THOMPSON: Or M7. And how many independent power producers are served on T1? 863 MR. KITCHEN: On T1? 864 MR. THOMPSON: Right. 865 MR. KITCHEN: There's -- there are, I believe, four altogether, three on T1. 866 MR. THOMPSON: Three on T1 and one on M7? 867 MR. KITCHEN: Yes. If you could take that subject to check. That's from memory so... 868 MR. SMITH: My recollection is Mr. Rogers testified to this, and my recollection is the number is four. 869 MR. THOMPSON: All right. And the total volume forecast for 2003? 870 MR. KITCHEN: I don't know. 871 MR. THOMPSON: Could you undertake to find out? 872 MR. SMITH: There is such an undertaking already. 873 MR. THOMPSON: Thanks. And is there an undertaking already on the record about the impact of these volumes going to some lower rate of the type Coral has proposed? 874 MR. KITCHEN: No, there's not. 875 MR. THOMPSON: Well, could I have that undertaking? If Coral gets it, and presumably gets something and it's earmarked for independent power producers, presumably others will qualify. What is the dollar per 103m3 reduction from the T1 toll that Coral will obtain if it's successful, on average? 876 MR. KITCHEN: Looking at the impact on all the IPPs? 877 MR. THOMPSON: Yeah. I want to know what they'll get and then I wanted to apply that to the volume that these folks take and then say, out of whose hide is that be collected to get an impact on the other rate classes? 878 MR. SMITH: I think you're asking for revenue -- there was a question like this from Mr. Warren and Mr. Kitchen's evidence was that it was in the neighbourhood of 3 to $4 million in revenue is the difference. I think Mr. Kitchen may even -- we can provide the undertaking to be more specific. 879 MR. KITCHEN: That's the revenue that's at risk. 880 MR. THOMPSON: And how is that measured? 881 MR. KITCHEN: As a difference between what a T1 rate -- a T1 customer or bundled customer would pay in the normal course relative to if everyone got a similar -- a similar rate. 882 MR. THOMPSON: Sorry, so the benchmark is Coral's average -- 883 MR. KITCHEN: That's what we've done, yes. 884 MR. THOMPSON: -- average unit cost? 885 MR. KITCHEN: And we're currently just checking all the numbers. 886 MR. THOMPSON: All right. I just want to understand the volumes that you're using. So you -- 887 MR. KITCHEN: This is largely a demand charge issue, so we would use a similar demand charge that was provided to Coral. 888 MR. THOMPSON: All right. So it's a lower demand charge than what's in the posted rates; right? 889 MR. KITCHEN: Because we reflected the DCC elimination in that demand charge. 890 MR. THOMPSON: Fine. And then you're saying that the volumes -- you're applying that demand charge to the volumes of other independent power producers or all other T1 customers? 891 MR. KITCHEN: Just independent power producers. 892 MR. THOMPSON: And that number, you think, is 4 million, subject to check? 893 MR. KITCHEN: 3 to 4. Probably closer to 3. 894 MR. THOMPSON: 3 to 4, subject to check. And if it was applied to all T1s, it would be considerably more; correct? 895 MR. KITCHEN: Yes. 896 MR. THOMPSON: All right. But whose hide is it coming out of if Coral gets its way? Has Union considered that? 897 MR. KITCHEN: We'd seek to recover it from infranchise customers. A large portion of it, I think, would end up hitting distribution customers. I don't have the exact breakdown of how it would all play out in the rate design. Essentially we'd have to remove the billing units of Coral from the forecasts along with the revenues, and the costs would remain at predominantly the same level. So it would be distributed. 898 MR. THOMPSON: All right. So you would allocate it to all distribution customers if Coral gets its way? That would be your proposal? 899 MR. KITCHEN: Well, that's -- that's functionally what would happen. We wouldn't target a particular group of customers. We'd actually just remove those billing units from the cost study and the cost allocation and then the same level of allocated costs would essentially be recovered from the base, excluding Coral, and then adjusted for whatever Coral's revenue was. 900 MR. THOMPSON: All right. 901 Now, in terms of the DCC that other customers are giving up in 2004, my recollection is that the DCC is being phased out over five years. 902 MR. KITCHEN: Yes, 2007, January, it's zero. 903 MR. THOMPSON: And somewhere in the evidence you show what the -- it was reduced -- the first reduction went into place in 2003; is that right? 904 MR. KITCHEN: That's correct. 905 MR. THOMPSON: And so we're now into the second tranche of reductions in 2004? 906 MR. KITCHEN: That's correct. 907 MR. THOMPSON: And somewhere you show that as a unit cost per metre. 908 MR. KITCHEN: It's D.1, tab 1, of the white-page evidence at page 11. 909 MR. THOMPSON: Sorry, what? 910 MR. KITCHEN: Sorry, H.1, I said D. H.1, tab 1, page 11 of the white-page prefiled. 911 MR. THOMPSON: Okay. So the full -- the full DCC, at least what Coral is trying to get, I think it's four and a quarter? 912 MR. KITCHEN: Yes, it would be the pre -- the pre 0130 amount. 913 MR. THOMPSON: So you went from four and a quarter, that's full recovery, and then in July 2003 we're down to 340. 914 MR. KITCHEN: That's correct. 915 MR. THOMPSON: And then for all of January 2004 we're down to 255; is that right? 916 MR. KITCHEN: That's correct. 917 MR. THOMPSON: Okay. And so in terms of the amount of money that T1 customers are not receiving -- well, sorry, the amount of money that all direct purchasers are not receiving, 2003 compared to 2004, that would be the difference between 255 and 340 times the direct purchase volumes; right? 918 MR. KITCHEN: Times their obligated volumes. 919 MR. THOMPSON: Yeah, okay, obligated volumes. 920 MR. KITCHEN: Yeah. 921 MR. THOMPSON: What is that number, approximately? 922 MR. KITCHEN: I don't know right now. I'd have to do the math. 923 MR. THOMPSON: Could I have you undertake to produce that? 924 MR. KITCHEN: Just a second, actually. Mr. McMahon just pointed something out to me. The obligated deliveries in 2004 are in the evidence, actually, on line 15. 925 MR. THOMPSON: Line 15 of what? 926 MR. KITCHEN: Line 15 of H.1, tab 1, page 11. 927 MR. SMITH: Same page. 928 MR. KITCHEN: Same page. 929 MR. THOMPSON: Okay. 930 MR. KITCHEN: So if you take the difference between the 255 and the 340 times that number, that would give you the decline in the payout. 931 MR. THOMPSON: So it's something, what, in the order of $8 million -- 7 to $8 million. I haven't done the math. 932 MR. KITCHEN: Yeah. 933 MR. THOMPSON: We're not dealing with quite a dollar here; 85 cents; right? 934 MR. KITCHEN: Right. So it would be approximately 7, $8 million. 935 MR. THOMPSON: Okay. Now, this lastly, then, in terms of this point, and I'll probably have some questions in the confidential section of this afternoon, but Coral's proposal, which you'll find at page 13, I guess, of the schedule to K.37, the first proposal reads as follows: 936 "The simplest resolution of this matter would be for the Board to approve the revenue requirement to Union that results from the terms, conditions, and pricing contained in the CSC dated April 30, 2002." 937 That's purely a contract matter, is it? 938 MR. KITCHEN: That would be taking what the -- 939 MR. THOMPSON: Well, this first proposal is -- they seem to think they've got a right to keep getting the price under this contract. That's not a rate schedule issue. 940 MR. KITCHEN: That's right. 941 MR. THOMPSON: Then down below they've got rate structures, rate 1 and rate 2, but they're all blank. So I take it that these aren't class rate structures, they're just proposal-specific to Coral. 942 MR. KITCHEN: Yes. 943 MR. THOMPSON: The last topic, then, and I'll move on to deferral accounts. This is in H.1, tab 1 of your -- sorry, tab 2 of your testimony. Is there some document somewhere that shows how much of all these accounts are getting allocated to the various rate classes? And I'm particularly interested in the large volume and more particularly interested in large volume direct purchasers. Is that in the record somewhere? Some sort of spreadsheet. 944 MR. KITCHEN: At H.3, tab 10, schedule 1. 945 MR. THOMPSON: H.3, okay. I can say I can see that, but I can't see it. So does that help me with how much is getting allocated to direct purchasers? 946 MR. KITCHEN: It does it by rate class, and the contract rate classes are virtually all direct purchases. 947 MR. THOMPSON: Okay. All right. Thanks very much, panel. Subject to any questions that come up in the confidential piece, I'm finished with my examination. 948 MR. SOMMERVILLE: Thank you, Mr. Thompson. 949 Mr. Haynal, do you have questions for this panel? 950 MR. HAYNAL: Yes, Mr. Chairman, just a few questions. I would like to find out the impact of the proposed changes to the monthly delivery charge to the -- or under interruptible rate 25 customers. 951 MR. SOMMERVILLE: I'm going to regard that question as having been directed to the panel and we'll proceed with your cross-examination now, Mr. Haynal. 952 MR. HAYNAL: Thank you, Mr. Chairman. 953 CROSS-EXAMINATION BY MR. HAYNAL: 954 MR. HAYNAL: Mr. Kitchen, would you please turn up Exhibit M.21.1. It was filed this morning. 955 MR. KITCHEN: I have it. 956 MR. HAYNAL: Please look at the second page in that document, and particularly line two, monthly delivery charge. 957 MR. KITCHEN: Yes. 958 MR. HAYNAL: On column C, line 2, the current approved rate is 1.3413 cents per cubic metre. Do you see that? 959 MR. KITCHEN: That's the average unit rate of the volumes -- the average unit rate based on the revenue forecast and the volumes in 2004. The approved rate is a range rate so there's no -- it's not a specific approved rate. 960 MR. HAYNAL: Okay. So the rates are between a minimum and a maximum proposed rates; is that correct? 961 MR. KITCHEN: I believe the way the rate schedule is worded, it says that the rates will average an approved amount. 962 MR. HAYNAL: So what you have under column C is the current average monthly delivery charge? 963 MR. KITCHEN: Based on the forecast, yes. 964 MR. HAYNAL: And under column H, the proposed rate is 2.1051 cents per cubic metre? 965 MR. KITCHEN: No, actually, the way we do the rate 25 rate design is we look at the difference between what the rate -- the proposed rate -- sorry, let me just step back a second. 966 The 2.0151 will be the rate that appears in the rate schedule as the average. That's measured against the approved rate which now appears in the rate schedule and that appears on page 1 of M.21.1, where it says "Monthly Delivery Charge," the 2.693 versus the -- sorry, versus the 2.87. 967 MR. HAYNAL: Are you referring to the third page of this exhibit? Line 2 on the third page shows this maximum delivery charge rate? 968 MR. KITCHEN: That's right of 2.8734. 969 MR. HAYNAL: Okay. So what I want to know: What is the impact of the proposed rates for a rate 25 customer? If you were a rate 25 customer, what would you put it in your budget? How much will the rate 25 go up in 2004 compared to 2003 in percentage? Would it be 57 percent or 7 percent, or anywhere between? 970 MR. KITCHEN: I think probably the simplest thing to do would be to go back to page 1 of M.21.1 and add to the current rate the value of .1771 and then multiply that out and compare that to the volumes at your current rate. The change in the approved rate is 0.1771. So assuming that rate is applied to all your volumes, that would be the impact. 971 MR. HAYNAL: The customers always pay the maximum rate? 972 MR. KITCHEN: No, it's not the maximum rate. I'm looking at the change in the rate. 973 MR. HAYNAL: Okay. But that change, what you referred to, the 0.1771, is for the maximum approved rate, or the difference between the maximum approved rate in 2003 and 2004; am I right? 974 MR. KITCHEN: That's correct. What I'm suggesting is a guide for an impact would be to take the rate you're paying now, add the same amount that we're proposing to increase the maximum by, and that should give you an idea of the impact. 975 MR. HAYNAL: I understand if I always have to pay the maximum rate. But the question is: Do I have to pay the maximum rate, or is it possible that rate 25 customer can get a lower than maximum rate? 976 MR. KITCHEN: Yes. So if you're paying less than the maximum, you would still add the .1771 to it and that would give you an idea of what you could expect to see your negotiated rate go to. All I'm saying is that the impact on the maximum, you should be able to extrapolate that down and use that to determine the impact on your current rate, if that's what you're trying to get at. 977 MR. HAYNAL: Yeah, I don't follow you. If I can get service sometimes at the lower monthly delivery charge than the maximum, then the increase is more than the 0.1771, it could be as high as 0.7638. 978 MR. KITCHEN: I think now you've lost me. Just give me a second and I'll try to show you. 979 If you take a look at H.3, tab 2, schedule 2 updated. 980 MR. HAYNAL: One moment, please. 981 MR. SMITH: Is that H.3, tab 2, schedule 2 updated? 982 MR. KITCHEN: Yes. 983 MR. HAYNAL: What page? 984 MR. KITCHEN: It's one page. 985 MR. SOMMERVILLE: Do you have that, Mr. Haynal? 986 MR. HAYNAL: We are looking at it. 987 Please proceed, Mr. Kitchen. I do not have it. 988 MR. KITCHEN: That shows in that schedule on lines 5, 6, 7 and 8, the average commodity rate increases that rate 25 will see. And that average increase is equivalent to the .1771 that appears in M.21.1. So what I'm suggesting is if you wanted to understand the impact on the customer, you would take the .1771 times the volume that you're flowing and that will be the impact. It's nothing to do with the fact that the maximum is moving, it's really that's just an adjustment that we're making to the maximum. But it reflects the difference between the 2.1051 as the proposed rate and what the current approved rate is. 989 MR. HAYNAL: Thank you. Then I have another question. 990 As I understand the rate 25, it covers a portion of the demand cost for the firm transportation service; is that correct? 991 MR. McMAHON: That's correct. 992 MR. KITCHEN: Well, those demand costs are allocated to that rate class, yes. 993 MR. HAYNAL: Yes. So my question is: Does Union have other interruptible rates like rate 25? I'm thinking of rate 16 and C1. 994 MR. KITCHEN: Well, C1 is an exfranchise service. 995 MR. HAYNAL: That's correct. 996 MR. KITCHEN: Rate 16 is a low volume interruptible service in the north. We also have rate 25 -- sorry, rate 5 in the south. And then you have combined firm interruptible rate classes M7 and T1 in the south. 997 MR. HAYNAL: Okay, then let's be specific. Does the C1 rate recover any portion of the firm transportation demand charge? 998 MR. KITCHEN: C1 recover any portion of the firm transportation demand charge? 999 MR. HAYNAL: Yes, similarly to rate 25. 1000 MR. KITCHEN: No, there's -- the C1 interruptible rate doesn't recover firm demand charges. I think we're missing each other. 1001 MR. SMITH: Are the costs allocated to C1, is his question. 1002 MR. McMAHON: I'll take you to the cost allocation study, which would be G.3 -- Exhibit G.3, tab 5, schedule 1. And starting on page 13, in section A you have the cost of gas and there are three lines there that talk about the transportation demand commodity and fuel costs, and you'll see, if you follow along through the pages, that those costs are only allocated to the northern rate classes. 1003 MR. HAYNAL: I'm sorry, I didn't hear the last few words. 1004 MR. McMAHON: They're only allocated to the northern rate classes so C1 wouldn't be allocated any of those costs. 1005 MR. HAYNAL: Thank you very much. Thank you, Mr. Chairman. 1006 MR. SOMMERVILLE: We do have those pages if you would like to look at them now, or if you want to patron until later, that's fine too. 1007 MR. HAYNAL: Well, Mr. McMahon answered that C1 does not include any, so I'm satisfied with the answer. 1008 MR. SOMMERVILLE: Thank you, Mr. Haynal. 1009 We'll adjourn now. Mr. Brown, I note your presence in the room. There were some discussions earlier today with respect to the treatment of the confidential material that will form part of your cross-examination and evidence. It would be appropriate for you to discuss that with Mr. Moran over the break and any other parties who are available. 1010 Let me say that, as I indicated to you yesterday, or was it the day before, that I prefer sort of airtight compartments for confidential materials. Mr. Vegh made some submissions today, with which I have some sympathy, that may influence how we want to approach that subject and hence it would be worthwhile to discuss that with Mr. Moran and see if there's some other method that we can use. 1011 In light of the need to sort of sort some of that out, I'm going to suggest that we reconvene at 2:15 rather than our usual 2:00 and allow the parties to sort out, as effectively as possible, these subject matters. 1012 We'll reconvene at 2:15. Thank you. 1013 --- Luncheon recess taken at 1:00 p.m. 1014 --- On resuming at 2:20 p.m. 1015 MR. SOMMERVILLE: Thank you. Please be seated. 1016 Mr. Brown. 1017 PRELIMINARY MATTERS: 1018 MR. BROWN: Thank you very much, Mr. Chair. 1019 Over the course of the lunchtime, I was informed by various people about the Board's preference in terms of proceeding with confidential information, and I'm certainly prepared to try it that way and I think actually it will work, having looked at my notes. 1020 I had brought a few copies of the redacted cross-examination brief with me. Those have been gobbled up and we're currently waiting for, I think, another ten or so to be copied, and they aren't here quite yet. So I'm in your hands. I can certainly start and hopefully we'll have -- okay, perhaps if I'm the next one, I could certainly begin my cross-examination. 1021 MR. SOMMERVILLE: Are there any further submissions, any other preliminary matters that we need to concern ourselves with? 1022 Mr. Moran, perhaps you could just indicate the process or procedure that we'll be following with respect to confidential material. 1023 MR. MORAN: Yes, Mr. Chair. There are two versions of the evidence that Mr. Brown wants to rely on for the purposes of cross-examination; one is redacted and one is not. The proposal is to mark the redacted version as a public record exhibit and the unredacted version as a confidential exhibit. The rules of engagement will be to use the redacted version as much as possible, and any cross-examiner who has signed an undertaking and has question about the confidential stuff, we'll do it on the basis of bringing people to the confidential document and we'll refer the witness to the portion of the document that he wants to question him about, but we'll not read any of the specific numbers from the document. I think there's a general consensus that people understand directionally the shape of the problem that Coral is here for by virtue of their very presence and it's the size of the problem that's confidential, and so those are the number that won't be cited on the record. 1024 For the purposes of the undertaking, the portion of the hearing that would be in-camera will be the part that the Board is reading instead of being read to. So the specific numbers, if there's questions about the numbers, that's the part that's in-camera, but we don't actually have to go in-camera to do that because the panel is simply reading the number and understanding the question in that way. 1025 MR. SOMMERVILLE: In effect, there is no in-camera proceedings. 1026 MR. MORAN: That's correct. 1027 MR. BROWN: That's correct. And just on Mr. Moran's point, Mr. Thompson has assigned the standard form declaration and undertaking to the Board with respect to confidentiality. That document refers to confidentiality as regards to the hearing held in the absence of the public. I was wondering, Mr. Chair, whether for the purposes of this proceeding and the undertaking that's given by Mr. Thompson and anyone else, that the reference to "hearing held in the absence of public" could be taken to include the unredacted evidence filed by Coral and Union regarding the Coral issue, which would include Exhibit H.1, tab 1 supplemental, Exhibit K.37, and then the unredacted version of the cross-examination brief that would be filed. And if the undertaking could be understood on that basis, then certainly I'm content with that. 1028 MR. SOMMERVILLE: Mr. Thompson. 1029 MR. THOMPSON: Yes, that's the way I understood it. 1030 MR. SOMMERVILLE: Mr. Warren. 1031 MR. WARREN: Yes, sir, I give Mr. Brown authority to amend my undertaking. 1032 MR. MORAN: I think that was the point I was trying to make, Mr. Chair. The part of the hearing that isn't open to the public is the stuff that's in the documents that are unredacted. 1033 MR. SOMMERVILLE: Now I understand your reference. 1034 MR. SMITH: And just for the record, although people haven't been beating down the door for it, anybody who signs one of the undertakings will, of course, be provided with Union's unredacted evidence as well. 1035 MR. SOMMERVILLE: Mr. Brown. 1036 MR. BROWN: I thought, Mr. Chair, in light of the proposal for proceeding I might take a few moments with members of the panel, and I suspect Mr. Kitchen it will be largely with you, to perhaps define a few terms so that I can draw the Board's attention to particular numbers in the confidential evidence, sort of define the term, and thereafter just refer to the term and we'll all know what is being referred to. 1037 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 1038 M.KITCHEN; Previously Affirmed. 1039 P.McMAHON; Previously Sworn. 1040 CROSS-EXAMINATION BY MR. BROWN: 1041 MR. BROWN: In that regard, Mr. Kitchen, could I ask you to turn to the cross-examination brief of the intervenor, Coral Energy Canada Inc., and perhaps we could sign an exhibit number to that document. 1042 MR. MORAN: Mr. Chair, the redacted version of that document would be Exhibit M.21.3. 1043 MR. SOMMERVILLE: Thank you. 1044 EXHIBIT NO. M.21.3: REDACTED CROSS-EXAMINATION BRIEF CORAL ENERGY CANADA INC. 1045 MR. MORAN: And the confidential version will become Exhibit X.21.1. 1046 MR. BROWN: X.21.1? 1047 EXHIBIT NO. X.21.1: CONFIDENTIAL CROSS-EXAMINATION BRIEF OF THE INTERVENOR, CORAL ENERGY CANADA INC. 1048 MR. BROWN: So if I could ask you, then, Mr. Kitchen to turn you to Exhibit X.21.1, which is the confidential version. If you could turn to tab 15, please, sir, there are attached there a number of documents. If you turn halfway through, the largest document is a copy of the carriage-service contract dated April 30, 2002. If you could locate that document. 1049 MR. KITCHEN: Yes, I have it. 1050 MR. BROWN: Could I ask you, sir, to turn in three pages to clause 5A. Clause 5 is services and charges. Do you see that? 1051 MR. KITCHEN: Yes, I have it. 1052 MR. BROWN: You'll see in clause 5A subitem (i) there's a reference to a monthly demand charge for the firm daily contract demand, and the monthly demand charge is then expressed as a number of cents per m3 per month. Do you see that number, sir? 1053 MR. KITCHEN: Yes. 1054 MR. BROWN: For the purposes of my cross-examination, then, when I refer to the CSC, or the contract monthly demand charge, that cents per m3 per month will be the number I'm referring to, okay? 1055 MR. KITCHEN: Okay. 1056 MR. BROWN: If you could move ahead in the contract, please, to the next page, you'll see that item 7 deals with delivery parameters. You'll see it's broken into two parts. A is the commissioning period, I'm not really concerned about that, but B is during the commercial operation period. Do you see that portion? 1057 MR. KITCHEN: Yes, I do. 1058 MR. BROWN: The first line under the item B, during the commercial operation period, reads: "Obligated DCQ at Dawn" is a certain number of gJs per day. Do you see that number? 1059 MR. KITCHEN: Yes, I do. 1060 MR. BROWN: From now on in I'll refer to that number as the obligated DCQ, okay? 1061 Then if you go to the bottom of that same page, sir, of the contract, item 8 is estimated quantity, and you'll see that that's an annual number. And when one reads it, there's an annual number of a certain million number of gJ during the commercial operation period. I'm going to refer to that annual quantity as the estimated annual quantity for the purposes of my cross-examination. 1062 If you could then turn to the next page of the contract, please, sir, you'll see that section 9 deals with storage space parameters and there's an annual firm storage space expressed as a number of gJs, do you see that? 1063 MR. KITCHEN: Yes. 1064 MR. BROWN: I'll just call that the annual storage space. And then immediately below that in section 10 there's a section called injection parameters and a section 11, "Withdrawal Parameters" and you'll see that the per diem or the daily injection and withdrawal numbers is the same quantity of gJs; correct? 1065 MR. KITCHEN: Yes. 1066 MR. BROWN: I'll just refer to those as the injection rights and the withdrawal rights during the course of my cross-examination. 1067 And for those who prefer to work in 103m3s, could I ask you to move further on through the contract. It reproduces some standard conditions, then it reproduces part of the T1 tariff as of 1999, and then you come to a schedule 3. Do you see that, sir? 1068 MR. KITCHEN: Yes. 1069 MR. BROWN: You'll see in schedule 3 there's a heading "Daily contracted transportation demand or contracted demand." During the commercial period, there are quantities in m3s expressed per day for both firm daily contract demand and interruptible transportation demand. 1070 MR. KITCHEN: Yes. 1071 MR. BROWN: Well, with that by way of background, then, hopefully that will make the cross-examination go smoother. You'd agree with me, Mr. Kitchen, that under the Ontario Energy Board Act, Union is obligated to charge rates of transmission of gas which are just and reasonable. 1072 MR. KITCHEN: Yes. 1073 MR. BROWN: If you could turn with me in the cross-examination brief, Exhibit M.21.3 or X.21.1, to tab 1, I've reproduced there a few pages from James Bonbright's book, "Principle of Public Utility Rates." And you certainly recognize Bonbright's book as an authoritative text in the area? 1074 MR. KITCHEN: Yes. 1075 MR. BROWN: If you go in those extracts to page 383, you'll see Bonbright sets out ten attributes of a sound rate structure, and you'd agree with me that those ten attributes are attributes which Union Gas does take into account when designing its rates. 1076 MR. KITCHEN: I would say in general, yes. 1077 MR. BROWN: Union has also articulated some specific principles of rate design in this proceeding, and to that end, could I ask you to move to tab 13 of the cross-examination brief. I've reproduced there an IR response by Union, Exhibit J.5.84 was an interrogatory posed by the City of Kitchener. Do you see that? 1078 MR. KITCHEN: Yes, I have it. 1079 MR. BROWN: And in the answer, in the second paragraph of the answer, Union responds that: "Union does not regard either T1 or T3 as solely cost-based services," and then you have articulated six different considerations that go into your development or design of any particular rate; correct? 1080 MR. KITCHEN: Considerations that we had when we're designing rates, yes. 1081 MR. BROWN: Right. And you will take some or all of those into account whenever you're designing a particular rate; correct? 1082 MR. KITCHEN: Yes, either directly or indirectly. 1083 MR. BROWN: Right. And the process of rate design is more art than science; wouldn't you agree with that? 1084 MR. KITCHEN: I've heard it called that, yes. 1085 MR. BROWN: And therefore when you're balancing these different factors, you'll give a bit more weight to one in one circumstance than you might in another; correct? 1086 MR. KITCHEN: Yes, with the overall goal to have a rate design that is reasonable. 1087 MR. BROWN: Just and reasonable as required by the Act. 1088 MR. KITCHEN: Yes. 1089 MR. BROWN: All right. If you take a look at this list you've put in Exhibit J.5.84, item number 6 is -- states that one of the factors that you consider when designing rates is equivalency of comparable service options. Do you see that? 1090 MR. KITCHEN: Yes. 1091 MR. BROWN: I take it you mean other rate options that might be available to a particular customer? 1092 MR. KITCHEN: Yes. Yes. And also, you know, in terms of alternative fuels or other options -- any other options that are available to customers. 1093 MR. BROWN: Right. And one of the other options that might be available to some customers, although they may not be large in number, is the ability to actually construct their own gas transmission or distribution lines to their facilities; correct? 1094 MR. KITCHEN: That is -- that is an option to customers, yes. 1095 MR. BROWN: Right. And so that option is one of the comparable service options that Union would take into account in ascertaining whether its rates are equivalent to comparable service options; correct? 1096 MR. KITCHEN: That is -- it's not explicitly taken into account, but it is a consideration if it's necessary to consider it, yes. 1097 MR. BROWN: Could I move you back in the cross-examination brief to tab 2. There's an extract there from a book by Leonard Goodman entitled, "The Process of Rate-making." It's put out by the Public Utilities Reports. You're familiar with that outfit? 1098 MR. KITCHEN: No. 1099 MR. BROWN: You don't read "Public Utilities Fortnightly"? 1100 MR. KITCHEN: I do, but I didn't realize this was a document that they put out. 1101 MR. BROWN: Oh, okay. If I could ask you to turn to the second page of that tab, you'll see there's a heading "Interclass Relationships"? 1102 MR. KITCHEN: Yes. 1103 MR. BROWN: The next page, which is page 1,017 of the text, the author writes: 1104 "Rate differentials are unlawful only when 'unjust' or 'undue' or 'unreasonable'. Thus, if the difference in rates is based on a reasonable and fair difference in conditions which equitably and logically justify a different rate, it is not an unjust discrimination." 1105 Would you agree with that statement? 1106 MR. KITCHEN: Yes, I would. 1107 MR. BROWN: It's fair to say, is it not, that the proposal that Union has put forth in this proceeding to amend the structure of the T1 rate, in part, is driven by the very principle that Goodman has articulated there, is it not? 1108 MR. KITCHEN: It's to better align costs within the rate and to appropriately apportion those costs to customers within the rate, yes. 1109 MR. BROWN: Exactly. And I'm sure others have probably cross-examined you on this so there's only one point in Union's evidence that I'd like to take you to, and that's if you could turn tab 12, which is Union's evidence in this proceeding, Exhibit H.1, tab 1, and I would like to, at tab 12, turn to page 18 of your evidence, the proposed T1 design. 1110 MR. KITCHEN: I have it. 1111 MR. BROWN: And you'll see down at line 16, sir, Union writes: 1112 "To better align cost incurrence and cost recovery and to reduce intraclass cross-subsidization, Union is proposing the introduction of a two-demand, two-commodity block rate structure for T1 firm transportation charges." 1113 So from a rate design principle perspective, that was the rationale for Union advancing the two-block T1 rate design in this proceeding; correct? 1114 MR. KITCHEN: Yes. 1115 MR. BROWN: And the reason you're doing that is because, to the extent -- to the extent that a rate results in more class -- intraclass cross-subsidization, you want to try to mitigate or minimize that impact, don't you? 1116 MR. KITCHEN: That is the goal of this exercise, yes, and in general it's something that we're striving to do. 1117 MR. BROWN: Specifically in the case of T1, the concern that Union had is that the high-volume, high-load factor T1 customers might be unduly subsidizing the low-volume, low-load factor T1 customers; right? 1118 MR. KITCHEN: Yes. Because it increased diversity with the class that's happened over the years. 1119 MR. BROWN: So the proposal that Union has put forward in this proceeding is essentially to set up a demand charge structure which differentiates between your low-volume, low-load factor T1 customers and your high volume, high-load factor T1 customers; correct? 1120 MR. KITCHEN: That's correct. 1121 MR. BROWN: You wanted to get to treating apples and apples and oranges and oranges as best as possible; is that right? 1122 MR. KITCHEN: Cost to recovery. 1123 MR. BROWN: Right. What your T1 proposal in this proceeding doesn't address, however, is where a high-volume low-load factor T1 customer falls into place; correct? You haven't specifically differentiated that kind of customer, have you? 1124 MR. KITCHEN: No. The proposal is to address the high-volume, high-load factor customer, although a high-volume, low-load factor customer would benefit from the commodity blocking. 1125 MR. BROWN: But that's not a specific target of your proposal in this proceeding. 1126 MR. KITCHEN: No. 1127 MR. BROWN: Nor is it a specific target of your proposal in this proceeding to address the issue of where you have a high volume T1 customer that demonstrates an uncertain load factor, a highly variable load factor. 1128 MR. KITCHEN: No. And to the extent that you have a high-volume, high-load -- high-volume, low-load factor customer or a customer that has a varying load factor, those customers tend to cause you to incur more costs in general so they should actually be paying -- that's a lower quality of service that they should be paying -- that they're getting, or paying for, I guess. 1129 MR. BROWN: So something, like, for example, an interruptible would be a better way for that kind of customer to go? 1130 MR. KITCHEN: I would suggest, yes. 1131 MR. BROWN: And I take it that Union doesn't have a particularly high number of, I would call them, pure interruptible customers on its system? Most of your customers are a combination of firm transportation and interruptible transportation? 1132 MR. KITCHEN: I would say within the M7 and T1 class, that's likely true. At the M5 level, there are a number of customers that are purely interruptible. 1133 MR. BROWN: Now, could I ask you, sir, to turn to Coral's evidence, which is part of Exhibit K.37, and I think Coral's evidence was not redacted, so everyone should have the same evidence in front of them. 1134 MR. KITCHEN: This is Coral's original evidence? 1135 MR. BROWN: It's the evidence of the intervenor Coral Energy. As I understand it, Exhibit K.37 contains really two pieces of evidence; one is evidence prepared by Coral Energy and the other is evidence prepared by Elenchus and Barker, Dunn & Rossi. But they're under the same exhibit number. 1136 MR. KITCHEN: Okay. 1137 MR. BROWN: So it's the Coral Energy part of that evidence that I'd ask you to turn to, sir. 1138 Could you go with me to page 10 of that evidence. You'll see under heading (iii) in that paragraph, middle of the paragraph, the following is written: 1139 "Current large volume rates of Ontario's LDCs, including Union, contemplate that large volume users will display high-load factor characteristics. While this might be true for some generation plants, such as co-generators that provide a base-load supply of steam to their host load, it is not true of gas-fired merchant generators." 1140 Would you agree with that statement, sir? 1141 MR. KITCHEN: The statement that starts with the word "current"? 1142 MR. BROWN: And ends with the word "generators." The two sentences, would you agree with those two sentences, Mr. Kitchen? 1143 MR. KITCHEN: No. 1144 MR. BROWN: Would you agree with the first sentence? 1145 MR. KITCHEN: No. 1146 MR. BROWN: Would you agree with the second sentence? 1147 MR. KITCHEN: I can only agree with it since it's here. I'm not really sure if merchant generators have a different load profile than non-merchant generators. From my point of view, what I see is an electric generator that has a similar load factor on the firm portion of their load compared to any other electric generator in Union's southern franchise area. 1148 MR. BROWN: With respect to the firm portion -- 1149 MR. KITCHEN: With respect to the firm portion of their load, which is the part that we're here really to talk about in terms of the rate. 1150 MR. BROWN: I'm going to get a bit to the operational characteristics of the plant and the contract, but that's a rather key component to Union's position vis-a-vis Coral, is it not, that you were focusing on the firm load factor, not what one would call the entire load factor of the plant when one takes into account both the firm and interruptible deliveries to the plant; correct? 1151 MR. KITCHEN: Correct. And when determining a firm rate, generally what we do is look at the firm loads. 1152 MR. BROWN: I'd like to go back. You disagreed with the first sentence. The first sentence reads: "Current large volume rates of Ontario's LDCs, including Union, contemplate that large volume users will display high-load factor characteristics." 1153 In what respect, sir, do you disagree with that statement? 1154 MR. KITCHEN: Because we do have large volume users that are not necessarily high-load factor, and those customers, especially those customers in T1 where we do have some large low-load factor customers, are paying a proportionate higher share of their costs. It is not appropriate for a low-load factor customer to pay a low rate. That's inconsistent with how costs are incurred. 1155 MR. BROWN: Do I take it from your answer that the customers you just referred to take their service under firm delivery? 1156 MR. KITCHEN: I would say that the majority would, yes. If they have a high-load factor then their ability to take interruptible services -- sorry, a low-load factor, their ability to take interruptible service is maybe diminished. But in the same vein, they could have interruptible loads for peaking purposes. 1157 MR. BROWN: Could I ask you in the cross-examination brief, sir, please, to turn to tab 11. I've reproduced at tab 11 portions of Union's evidence in this proceeding. It's Exhibit C.1, tab 2. Do you have that tab, sir? 1158 MR. KITCHEN: Yes. 1159 MR. BROWN: Could you go with me, please, to -- well, page 4, you'll see there's a section starting "Power Market," and starting at line 9, Union's evidence reads: "The demand forecast for the power sector is comprised of demand estimates for one large dual fuel --" 1160 MR. KITCHEN: Sorry, just a second. 1161 MR. BROWN: I'm at tab 11, sir, which should be Exhibit C.1, tab 2 of Union's evidence. 1162 MR. KITCHEN: I go 3 to 8, so I'm going to switch versions. My redacted version starts at page 3 and then jumps to page 8. I wasn't following. 1163 MR. BROWN: Okay. If you go to the -- 1164 MR. KITCHEN: Okay, I have it now. 1165 MR. BROWN: You've got it now? 1166 MR. KITCHEN: Yeah. I just had to switch packages, that's all. 1167 MR. BROWN: Very good. I was directing your attention to page 4. 1168 MR. KITCHEN: Yes, I have it. 1169 MR. BROWN: Line 9, the evidence reads: "The demand forecast for the power sector is comprised of demand estimates for one large dual-fuelled (natural gas and oil) peaking facility, 11 existing independent power plants, or IPPs, three new large gas-fired power plants, and embedded gas-fired power generation at various industrial and commercial facilities." 1170 Just dealing with each of those, the dual-fuelled peaking facility that you're referencing there is the Lennox plant, isn't it? 1171 MR. KITCHEN: This is not my evidence. This was the evidence of Mr. Rogers, and it's difficult for me to talk about who he's referring to. 1172 MR. BROWN: Well, perhaps I could suggest to you that the customer's evidence -- and if you could give me an undertaking if in fact that's incorrect, you'll let me know? 1173 MR. KITCHEN: Yes. 1174 MR. BROWN: But the simple point here is that Union's referring to a customer that uses two different fuel sources to fire its plant; correct? 1175 MR. KITCHEN: Correct. 1176 MR. BROWN: And are you in a position, sir, personally to agree or disagree that the natural gas consumption pattern and delivery profile that would be associated with such a dual-fuel generation plant would differ from that of a gas-fired merchant generation facility? 1177 MR. KITCHEN: I'm not really in a position to comment on that, no. 1178 MR. BROWN: Well, could I ask you, then, by way of undertaking whether it's Union's position that the natural gas consumption pattern and delivery profile for a dual-fuel generation plant would be the same as or different from that of a gas-fired merchant generation facility? 1179 MR. SMITH: Mr. Chairman, the concern I have with that is although Coral is now cross-examining and has elected to only cross-examine Mr. Kitchen, it would seem from a review of the cross-examination materials, which include a number of materials that Mr. Rogers prepared and testified to and other witnesses, that if these were facts that were relevant to my friend's case, he had every opportunity, like every other intervenor who participated, to put these facts on the record. And I think to come along now and burden Mr. Kitchen on the last day of Union's case with a series of undertakings that simply could have been asked of Mr. Rogers strikes me as a little unreasonable. 1180 MR. SOMMERVILLE: Mr. Brown. 1181 MR. BROWN: I'm not asking to burden Mr. Kitchen, I'm asking to burden Union, so the evidence is -- well, first, the information is within Union's knowledge. But secondly, in defence of the timing of the cross-examination, the issue that Coral has asked to place before the Board is one dealing with rate design. I hope my cross-examination to this point has indicated that a principle of rate design is that you treat like the same and you treat different customers differently. 1182 At issue here is a potential customer which is a generation plant. My cross-examination is designed to see whether other generation plants which Union suggests in its evidence are the same as Coral's for rate-making purposes, in fact, display the same characteristics. It's directly relevant, in my submission, to rate design. If Mr. Kitchen doesn't have personal knowledge, in my submission, an undertaking would be appropriate. 1183 MR. SOMMERVILLE: Mr. Smith, I find Mr. Brown's characterization of the question and bringing it within the scope of this panel persuasive, in that there are few matters that sort of genuinely fall outside of the scope of the cost allocation/rate design group. That's the nature of it. And I think that the question is an appropriate one and I would ask that Union take the undertaking. 1184 MR. MORAN: That would become Undertaking N.21.5, Mr. Chair. 1185 UNDERTAKING NO. N.21.5: WHETHER IT'S UNION'S POSITION THAT THE NATURAL GAS CONSUMPTION PATTERN AND DELIVERY PROFILE FOR A DUAL-FUEL GENERATION PLANT WOULD BE THE SAME AS OR DIFFERENT FROM THAT OF A GAS-FIRED MERCHANT GENERATION FACILITY 1186 MR. BROWN: Perhaps, to shorten things, Mr. Kitchen, would I be correct in assuming that you don't have any personal knowledge of the gas consumption or delivery profile of any of the other generation plants that Union has referenced in Exhibit C.1, tab 2 of its evidence? 1187 MR. KITCHEN: We did review the load profile of other T1 generators that are taking -- also taking similar firm services, so that -- but based on the forecast. The underlying reasons behind how those forecasts were derived, or what determines that load profile, I have no knowledge of that. 1188 MR. BROWN: Well, then let me go through the other categories that are outlined in the evidence, and if you come to a point where you don't have personal knowledge, then I'll ask for an undertaking. 1189 Page 5 of Exhibit C.1, tab 1, that was the dual-fuel facility, you've given an undertaking on that. If you can move ahead, sir, to page 6 of that Exhibit C.1, tab 2, there's a reference to existing independent power producers. Would you agree with me, sir, that most of the generators that Union's referring to in that portion of its evidence, in fact, are what we call non-utility generators, or NUGs, that have power-purchase agreements with the Ontario Electricity Finance Corporation? 1190 MR. KITCHEN: I'm familiar with the term NUGs, and I believe these would fall into that category, yes. 1191 MR. BROWN: Right. And are you familiar that most of them are self-dispatched and tend to run almost on a base-load kind of basis? 1192 MR. KITCHEN: I understand that they have purchase agreements, if that's what you're referring to. But in terms of their loads that they take, they're taking a similar type of load as what has been included in the forecast for Coral, similar load and load profile and load factor, irrespective of whether or not they have -- I think they're called power purchase agreements; is that correct? 1193 MR. BROWN: Correct. 1194 MR. KITCHEN: Irrespective of whether they have power purchase agreements or not. 1195 MR. BROWN: For the purposes of this group of generators, the independent power producers, what load profile is Union using? 1196 MR. KITCHEN: It's approximately an 85 percent load factor on the firm loads. 1197 MR. BROWN: Are you able to indicate whether or not you or in Union's view, the natural gas consumption pattern and delivery profile of these independent power producers are the same as or different than that of a gas-fired merchant generation facility? 1198 MR. KITCHEN: As I say, on the firm -- on the firm loads, which is what I'm looking at in terms of the rate issue, we do not see any significant difference in the load profile. 1199 MR. BROWN: In terms of overall usage, do you see any difference in the load profile? 1200 MR. KITCHEN: I didn't look at the overall usage. 1201 MR. BROWN: Could you then give an undertaking -- an undertaking in the form that I asked directed to responding to the overall usage of the plants? 1202 MR. KITCHEN: Yes. 1203 MR. BROWN: Thank you. Then if we move ahead in Union's evidence, still on page 6 -- 1204 MR. SOMMERVILLE: We'll just give that a number, Mr. Brown. 1205 MR. BROWN: Thank you very much, Mr. Chair. 1206 MR. MORAN: Mr. Chair, should this be added N.21.6? 1207 MR. BROWN: Perhaps it could be a separate one. 1208 MR. MORAN: N.21.6. I wonder if Mr. Brown could restate it for the assistance of the court reporter. 1209 MR. BROWN: The undertaking I'm asking for for Union is whether, when looked at on an overall usage basis, firm and other, whether the natural gas consumption pattern and delivery profile for the independent power producers, referenced by Union on page 6 of Exhibit C.1, tab 2 of its evidence, are the same as or different from those of a gas-fired merchant generation facility. 1210 UNDERTAKING NO. N.21.6: TO ADVISE WHETHER, WHEN LOOKED AT ON AN OVERALL USAGE BASIS, FIRM AND OTHER, WHETHER THE NATURAL GAS CONSUMPTION PATTERN AND DELIVERY PROFILE FOR THE INDEPENDENT POWER PRODUCERS, REFERENCED BY UNION ON PAGE 6 OF EXHIBIT C.1, TAB 2 OF ITS EVIDENCE, ARE THE SAME AS OR DIFFERENT FROM THOSE OF A GAS-FIRED MERCHANT GENERATION FACILITY 1211 MR. BROWN: Mr. Kitchen, if you could then move with me to the bottom of page 6, Union's identified another kind of generator. These they've termed embedded gas-fired power generation. And you, that is Union, in lines 17 to 19, effectively are describing these as cogeneration facilities; that is, they are facilities that generate both electricity and some other byproduct, typically steam; correct? 1212 MR. KITCHEN: Yes. 1213 MR. BROWN: And you'd agree with me that because these generators also produce a byproduct, such as steam, which they sell to usually a neighbouring industrial facility, that their gas consumption patterns and delivery profiles are different from those that would be demonstrated by a gas-fired merchant generation facility; correct? 1214 MR. KITCHEN: I think you're asking me to, again, agree to the -- that they are different from the total load of a merchant gas-fired generator, but on the firm component, they are the same, or very close to being the same. 1215 MR. BROWN: Or they're treated by Union as being the same. 1216 MR. KITCHEN: For the firm portion. 1217 MR. BROWN: For the firm portion. On the overall portion, I think you would agree with me that the gas consumption patterns and delivery profiles manifested by these cogeneration plants are quite different from that that would be manifested by a gas-fired merchant generation facility; correct? 1218 MR. KITCHEN: That's correct. 1219 MR. BROWN: Because with the NUGs, the NUGs not only generate electricity, they have to generate steam and usually their host loads need that steam on continuous basis; correct? 1220 MR. KITCHEN: I would assume that that's correct, right. 1221 MR. BROWN: So they would have to be consuming gas on a more continuous basis than a gas-fired merchant generator; correct? 1222 MR. KITCHEN: Yes. It would require less. They would -- there would be a higher load factor and would require less interruptible loads. 1223 MR. BROWN: Then finally, sir, if you could turn to page 7 of Exhibit C.1, tab 2, the final category of generator that Union identifies is described as new gas-fired power generation. Union refers to three plants. I take it one of those plants is the ATCO/OPGI plant for which Coral is responsible for gas service; correct? 1224 MR. KITCHEN: Yes. 1225 MR. BROWN: That's the Brighton Beach facility. 1226 MR. KITCHEN: Yes. 1227 MR. BROWN: Can you identify the other two facilities. 1228 MR. KITCHEN: Not off the top of my head. 1229 MR. BROWN: Could you undertake to identify them. 1230 MR. KITCHEN: Yes. 1231 MR. BROWN: Do you know -- 1232 MR. MORAN: Mr. Chair, Undertaking N.21.7, to advise who the two remaining new gas-fire generating plants are referenced in Exhibit C.1, tab 2, page 7. 1233 UNDERTAKING NO. N.21.7: TO ADVISE WHO THE TWO REMAINING NEW GAS-FIRE GENERATING PLANTS ARE REFERENCED IN EXHIBIT C.1, TAB 2, PAGE 7 AND INDICATE WHETHER UNION UNDERSTANDS EITHER OF THE OTHER TWO TO BE MERCHANT GENERATORS. ALSO ADVISE WHICH RATE CLASSES THE OTHER TWO, THAT IS, THE TWO APART FROM BRIGHTON BEACH, ARE TAKING DELIVERY SERVICE UNDER 1234 MR. BROWN: Mr. Kitchen, do you know off the top of your head, sir, whether either of the other two new gas-fired power generation plants referenced there are what one would describe as merchant generators? 1235 MR. KITCHEN: No. 1236 MR. BROWN: Could you perhaps, as part of your undertaking answer, indicate whether Union understands either of the other two to be merchant generators? 1237 MR. KITCHEN: Yes. 1238 MR. BROWN: Thank you very much. 1239 Just finally on this point, with respect to the rate class under which the various generators take gas delivery service, if we could start with the last category first, the new gas-fired power generators, do you know what rate classes the other two, that is, the two apart from Brighton Beach, are taking delivery service under? 1240 MR. KITCHEN: No, not off the top of my head. 1241 MR. BROWN: Could you undertake to provide that information, please? 1242 MR. KITCHEN: Yes. 1243 MR. BROWN: Going back -- 1244 MR. MORAN: Mr. Chair, Undertaking N.21.7 already deals with those two, so maybe we can add the rate class to that they take service under to that undertaking. 1245 MR. BROWN: Going back to page 6 of the evidence, the category embedded gas-fired power generation, are you able to advise, sir, of what -- under what category those customers take gas delivery service? And if not, if you could give an undertaking. 1246 MR. KITCHEN: No. I know where some of them are but not all of them. 1247 MR. BROWN: Could you give that as the next undertaking, please. 1248 MR. MORAN: N.21.8, to advise what rate class the embedded gas-fired power generators take service under in Exhibit C.1, tab 2, page 6. 1249 UNDERTAKING NO. N.21.8: TO ADVISE WHAT RATE CLASS THE EMBEDDED GAS-FIRED POWER GENERATORS TAKE SERVICE UNDER IN EXHIBIT C.1, TAB 2, PAGE 6 1250 MR. BROWN: Going back, the next category is the existing independent power producers. Same question: Do you know what rate class or category those customers take gas-delivery service under? 1251 MR. KITCHEN: I believe that most of them are in T1 and there is one in M7, I believe. 1252 MR. BROWN: And then finally on page 5, the large-peaking merchant power plant, do you know under what category that facility takes gas-delivery service, sir? 1253 MR. KITCHEN: I think it says at line 4, rate 25. 1254 MR. BROWN: Oh, it does. Thank you very much. 1255 As a matter of general principle, sir, would you agree with the proposition that if different generators display different gas consumption patterns by virtue of the differences in the manner in which they are dispatched, those differences equitably and logically justify a different delivery rate? 1256 MR. KITCHEN: To the extent that there are load and load profile characteristics, I think I've said many times that's how we determine whether or not rate classes are required. To the extent that a customer fits into an existing rate class and has a comparable load and load factor, then there is no justification for a different rate treatment. Whether you're dispatched -- whether you have a purchase power agreement or you're dispatching in another way, it has no relevance to the determination of a rate class. 1257 MR. BROWN: Could I put another proposition to you and ask whether you would agree with it or not. Would you agree that another difference in the conditions which would equitably and logically justify a different delivery rate is whether the customer meets the criteria for a bypass competitive rate? 1258 MR. KITCHEN: And the criteria for a bypass competitive rate assumes that they're are a credible bypass, that the rate is just and reasonable and that's in the public interest. 1259 MR. BROWN: It assumes that the proponent of the rate would be a credible bypass candidate and that the rate would be in the public interest; correct? 1260 MR. KITCHEN: Yes. 1261 MR. BROWN: And you certainly acknowledge, and by "you" I mean Union, that if a customer meets those criteria, then it would be just and reasonable to set a bypass competitive rate for that customer. 1262 MR. KITCHEN: Right. But it's necessary to prove that it's in the public interest and that it's a credible bypass. 1263 MR. BROWN: Well, that's one of the reasons we're here. 1264 On that particular issue, could I ask you, in the cross-examination brief, please, to turn to tab 3. So this is Exhibit X.21.1, tab 3. I've reproduced there the CIL decision issued by this Board back in 1989. Do you have that, sir? 1265 MR. KITCHEN: Yes, I do. 1266 MR. BROWN: Could you turn with me to section 2.7, which is on page 12 of that decision. 1267 MR. KITCHEN: I have it. 1268 MR. BROWN: Good. And you'll see in that paragraph partway down, the Board writes: 1269 "However, the Board agrees with Mr. Ryder and reiterates that there is a heavy onus on an applicant for a competitive bypass rate to satisfy the Board, firstly, that the applicant is a credible bypass customer, in that, bypass if applied for, would likely have been approved." 1270 And you've already referred to that. And secondly, that: "The proposed bypass rate is truly reflective of all avoided costs to serve that customer." 1271 And is that your understanding, sir, of the principles that the Board has applied in past decision with respect to determining whether a proposed bypass competitive rate is in the public interest? 1272 MR. KITCHEN: There's a number of considerations that the Board has made in terms of public interest, and we've provided a number of those references in our own materials in the appendix. This is merely one excerpt of one decision on bypass competitive rates. 1273 MR. BROWN: Could I ask you to move ahead in that decision to page 18, sir, which is section 4: "Is the rate proposal acceptable." You'll see in paragraph 4.2, the decision reads: 1274 "The rate which Union and CIL have finally agreed upon for a package of services is made up of the following components: (A) for transportation service," a certain number "which is equivalent to Union's estimated annual cost of owning and operating a 2.7 km bypass pipeline." 1275 Then if you move over to B, there's a charge for primary and secondary storage space, and then if you go down to C, the Board refers to an annual premium, which is the greater of $200,000 or 15 percent of the sum of the cost to CIL of constructing and operating the pipeline plus the TCPL demand charges. 1276 You'd agree with me that in that particular case, the rate that the Board has found to be just in the public interest was one which allowed the utility to recover its costs of building and operating the pipeline, its costs of storage, and then some system premium, if I can call it that; correct? 1277 MR. KITCHEN: That is the -- the Board did approve this rate and that's what the rate essentially does, yes. 1278 MR. BROWN: So that's one kind of bypass competitive rate that could be considered in the public interest; right? 1279 MR. KITCHEN: It was a rate that was considered in the public interest. But the onus is to prove that a rate is in the public interest now. Just because it was approved for CIL in some prior case doesn't mean it's in the public interest at this point. 1280 MR. BROWN: Exactly, because things do change over time, do they not ? 1281 MR. KITCHEN: That's correct. 1282 MR. BROWN: Indeed, if I could take you to Union's reply evidence, your Exhibit H.1, tab 1 supplemental, if you could turn to that evidence, please, sir, and go with me to page 17. 1283 MR. KITCHEN: I have it. 1284 MR. BROWN: At line 11 Union writes: 1285 "If the Board were to approve the rate relief sought by Coral, they would be favouring one power producer over another thereby creating a discriminatory rate. Also, even if the Coral and Elenchus/BDR claim that the provision of the rate relief will result in an overall reduction of the cost of electricity, it is not a reasonable principle of rate-making to visit the costs of that benefit on Union's infranchise gas customers." 1286 Do you see that part of the evidence? 1287 MR. KITCHEN: Yes, I do. 1288 MR. BROWN: Is it Union's position, sir, in this proceeding, that the public interest must prefer the interests of Union's infranchise gas customers over the interests of electricity users throughout Ontario? 1289 MR. KITCHEN: No. I think what I'm saying is that if there is a benefit that is provided to all rate -- all people in Ontario because there is a reduction in electricity costs, and I'm not sure that there is, then it is not appropriate to expect the customers of Union Gas to pay for that benefit. I don't believe that that is in the public interest. It's not in the interest of Union Gas's customers. 1290 MR. BROWN: I referred you to the CIL case, and that was decided in 1989; correct? 1291 MR. KITCHEN: Yes. 1292 MR. BROWN: You'd agree with me that something very significant in this province occurred on May 1st, 2002; correct? 1293 MR. KITCHEN: And that would be? 1294 MR. BROWN: That would be the opening of the IMO-administered electricity markets; correct? 1295 MR. KITCHEN: Yes, it was an event, yes. 1296 MR. BROWN: A rather significant change in the way electricity prices were calculated as between 1989 and 2002; correct? 1297 MR. KITCHEN: Yes, that's correct. It was a change in the market, and it was a very big change, yes. 1298 MR. BROWN: And one of the elements of that change is that the spot price that is set on an hourly basis in the IMO-administered markets results from the matching up of bids and offers of energy into that market; correct? 1299 MR. KITCHEN: I don't understand all the workings of the market, but I'll accept that, yes. 1300 MR. BROWN: Sure. It's marginal costing -- 1301 MR. KITCHEN: That's correct, marginal costing. 1302 MR. BROWN: To the extent that it's more costly to produce power, then it's more likely that the marginal cost, the clearing price for electricity is going to be higher; correct? 1303 MR. KITCHEN: Correct. 1304 MR. BROWN: So what I'm suggesting to you, sir, is that one of the significant differences between 1989 and now is that when one considers the implications of the cost of gas delivery, when one's dealing with a generating plant, one necessarily has to take into account how changes in gas cost are potentially going to affect the level of electricity prices; correct? 1305 MR. KITCHEN: In terms of your own determination of how that affects it or in terms of Union's customers? 1306 MR. BROWN: No, in terms of the broad public interest that this Board is charged with taking into account under the Ontario Electricity Act. The Board, in balancing costs and benefits, now must balance both gas costs and their effect on electricity cost, isn't it? That's the new paradigm, is it not? 1307 MR. KITCHEN: I haven't seen that in the Board's mandate in the terms of regulating gas utilities or the pricing of gas utilities. To ensure that electricity pricing is -- that electricity prices are lower than they -- lower than they would be otherwise. 1308 MR. BROWN: Well, perhaps I could focus, then, just on Union's policy. When Union is considering the gas delivery price that it will offer to a potential generator, is one of the factors that Union takes into account in determining where they can go with the price the balancing of gas costs and electricity costs? 1309 MR. KITCHEN: That's something that someone may take into account in terms of negotiation, it's not something that I take into account in terms of rate design. 1310 MR. BROWN: If I could turn a bit more specifically, then, to the Brighton Beach plant and the carriage-service contract, CSC contract, that Union entered into with Coral. Could you turn with me, please, in the cross-examination brief to tab 8. Hopefully you've got in tab 8 of your brief procedural order number in RP-2002-0103? 1311 MR. KITCHEN: Yes, I do. 1312 MR. BROWN: That is the leave to construct application that was brought by an affiliate of Coral Energy, a company called Coral Cibola, before this Board. I'm referring to it just to sort of set the time frame, if we possibly could. You'll see on the first page of the order that Coral filed its leave-to-construct application on February the 12th, 2002; correct? 1313 MR. KITCHEN: Correct. 1314 MR. BROWN: And as you understand it, and I think as you described a bit in response to my friend Mr. Thompson's questions, Union owns a pipeline called Ojibway that flows under the St. Clair river? 1315 MR. KITCHEN: Yes. 1316 MR. BROWN: And it interconnects with Panhandle on the Michigan side. 1317 MR. KITCHEN: Yes. 1318 MR. BROWN: And when it emerges out from under the water, so to speak, on the Ontario side, there's a short stub of only a few kilometres of Ojibway that then interconnects with Union's larger system; correct? 1319 MR. KITCHEN: That's correct. 1320 MR. BROWN: And as you understood Coral's proposal, they were coming before this Board to seek leave to construct a pipeline that would run from the Brighton Beach facility into the Ontario portion of your Ojibway line; correct? 1321 MR. KITCHEN: Yes. I don't know exactly where the interconnect was, but that's my understanding, yes. 1322 MR. BROWN: Okay. You do understand that prior to Coral making that application, that Coral had lengthy discussions with Union as to the price upon which Union could deliver service to the Brighton Beach plant? 1323 MR. KITCHEN: I don't know the timing of the discussions, but I know there were discussions, yes. 1324 MR. BROWN: In any event, Coral filed on February the 12th, 2002, and if you could turn with me to page 2 of the procedural order, which is at tab 8 of the cross-examination brief, you'll see that in paragraph number 1, the Board ordered that interrogatories be filed with Coral no later than April 26th, 2002; correct? 1325 MR. KITCHEN: Yes. 1326 MR. BROWN: Then on April the 12th, 2002, your company, Union Gas, filed its own leave-to-construct application to construct a pipeline from Ojibway to the Brighton Beach facility; correct? 1327 MR. KITCHEN: I don't know the date, but yes, we did file an application -- leave to construct -- 1328 MR. BROWN: We can check. It's in section 2.3 of Coral's evidence of this proceeding. So that was April the 12th, and then IRs were due on April the 26th. And if you could turn with me in Exhibit X.21.1, which is the confidential version of the cross-examination brief, and I apologize, I should have tabbed these, if you go in -- 1329 MR. KITCHEN: Sorry, which tab are we in? 1330 MR. BROWN: Tab 15. If you go to the fifth blue page, you should be looking at a document entitled "Facsimile Transmittal to Robert Andrews." 1331 MR. KITCHEN: Yes. 1332 MR. BROWN: You'll see the fax transmittal date up there is April 17th of 2002. 1333 MR. KITCHEN: Yes. 1334 MR. BROWN: This is a fax from the desk of Mr. Chris Shorts, who's a Union Gas employee? 1335 MR. KITCHEN: Yes. 1336 MR. BROWN: Indeed, he was the main customer contact between Union and Coral, is he not? 1337 MR. KITCHEN: Yes, I believe he is. 1338 MR. BROWN: If you turn to the next page, you'll see that there's a letter there dated April 16th, 2002. It's entitled "Letter of Intent" and it's signed by both Union Gas and Coral, is it not? 1339 MR. KITCHEN: Yes, it is. 1340 MR. BROWN: If you go with me to page 6 of that document, page 6 of 6, there's a clause U. Do you see that, sir? 1341 MR. KITCHEN: Yes. 1342 MR. BROWN: And since there are no numbers in this clause, I'll just read it for sake of comprehensiveness. It says: 1343 "Upon execution and delivery of the TSA," and the TSA is defined as the transportation service agreement, "Coral and/or Coral's affiliates will withdraw and not pursue any existing/competing applications before the National Energy Board or Ontario Energy Board relating to the proposed transaction. Such withdrawal shall be in the form of letters to the NEB and OEB with copies to Union." 1344 So by April the 16th, the letter of intent was, enter into a transportation service agreement and Coral, abandon your leave-to-construct application; correct? 1345 MR. KITCHEN: Yes. 1346 MR. BROWN: And indeed I took you earlier to the carriage-service contract which is behind the next blue page, and that was dated April the 30th, 2002; correct? 1347 MR. KITCHEN: Correct. 1348 MR. BROWN: And in the result, Coral did notify the Ontario Energy Board that it was abandoning its leave-to-construct application, did it not? 1349 MR. KITCHEN: It did, yes. 1350 MR. BROWN: And I'm going to suggest to you that the sequence of events was very clear, and that in return for Coral abandoning its leave-to-construct application, Union offered to provide gas delivery service to the Brighton Beach plant on the terms and continues set out in the carriage-service contract. 1351 MR. KITCHEN: The application was withdrawn because Union and Coral reached an agreement on a price, and that price was driven based on an existing rate schedule and the elimination -- that incorporated the elimination of the DCC. The rate was never offered as a bypass competitive rate or acknowledged as a bypass competitive rate. 1352 MR. BROWN: Well, they, they being Coral and Union, negotiated prior to Coral filing its leave-to-construct application, did they not? 1353 MR. KITCHEN: Prior to? 1354 MR. BROWN: Prior to February 12th, 2002. 1355 MR. KITCHEN: I -- 1356 MR. BROWN: Just so you're not guessing, sir, let me help you out. At tab 15 of the cross-examination brief, Exhibit X.21.1, if you go to the first blue page, behind the first blue page, there's a fax transmittal, June 6th, 2001, from Mr. Shorts of Union to Mr. Andrews of Coral; do you see that? 1357 MR. KITCHEN: Sorry, I'm not there yet. 1358 MR. BROWN: I'm at tab 15 of the brief, sir. 1359 MR. KITCHEN: Which page? 1360 MR. BROWN: Go to the first blue page. 1361 MR. KITCHEN: Yes. 1362 MR. BROWN: After that there's the fax transmittal. If you flip through that particular document, there's a letter, but also the last page of that document is something called "ATCO/Coral Analysis," and there's an analysis there of the net cost of delivering gas to the Brighton Beach plant, is there not? If you go under the columns 15-year and 20-year, at the line "Net Cost," there are certain numbers that are referenced there; correct? 1363 MR. KITCHEN: Yes, there are. 1364 MR. BROWN: Then if you go to the -- and you see what those numbers are on the 15-year and the 20-year basis on the line "Net Cost"? 1365 MR. KITCHEN: Yes. 1366 MR. BROWN: If you go to the next blue page which is immediately following, there's a message here from Richard Chan at Union Gas to Robert Andrews dated October 19, 2001, and if you refer to the second page, there's the same kind of spreadsheet, this ATCO/Coral T1 Analysis. And you'll see there's net cost under 15-year and there's a number? 1367 MR. KITCHEN: Yes. 1368 MR. BROWN: Which is a lower number than what we saw on the previous spreadsheet? 1369 MR. KITCHEN: Yes. 1370 MR. BROWN: Then if you go to the next blue sheet, behind it there's a letter dated December 21, 2001. This one is from Mr. Shorts again to Mr. Andrews. Do you see that, sir? 1371 MR. KITCHEN: Yes. 1372 MR. BROWN: If you can go to the second page of that letter, the second to last paragraph, the one that starts, "Under proposed changes to the way the DCC will be allocated..." 1373 MR. KITCHEN: Yes, I have it. 1374 MR. BROWN: The last sentence of that paragraph reads: "This is the calculation that yields a net demand charge of approximately," and then there's a number there, a number communicated prior. And you'd agree with me that the number we see there is higher than the net demand delivery charge that I took you to right at the beginning of my cross-examination in the carriage-service contract; right? 1375 MR. KITCHEN: Yes, it is. 1376 MR. BROWN: Right. And I guess all I'm suggesting to you is that even though you weren't part of the negotiations, you'd agree with me that, looking at Union's correspondence, what was happening through 2001 is that there were negotiations between the parties under which the net cost of delivery of gas to the plant was coming down, in December of 2001 there's a proposal for a net demand charge, which is higher than the one ultimately agreed upon, and then come February the 12th, 2002, Coral files its leave-to-construct application which sort of suggests to you, does it not, sir, that the pricing offered by Union prior to that time wasn't satisfactory to Coral. They thought they could get a better cost if they built it themselves. 1377 MR. KITCHEN: I assume that they filed their application because of that, yes. 1378 MR. BROWN: Right. And so when I took you to the sequence of events in April and the letter of intent in April 16th and then the carriage-service contract on April the 30th where we see the lower demand charge number, the logic of that is that after Coral filed its leave to construct, Union came to the table and they were able to agree upon a lower demand price and as a result Coral was then prepared to withdraw its leave to construct; correct? 1379 MR. KITCHEN: I don't know that you can draw that conclusion. The conclusion I draw is that the parameters that underpin the rate changed from the time the one rate was offered until the next rate was offered, and that that rate worked for Coral. 1380 MR. BROWN: Well, I'm going to suggest to you, sir, and by "you" I mean not only you by Union collectively, that that sequence of events leads to only one conclusion, and that is that the price struck by Union and Coral in the April 30 contract was a price designed by Union to avoid the bypass threat that Coral posed with its leave-to-construct application. Isn't that a fair way of characterizing those events? 1381 MR. KITCHEN: I don't think that we provided a price that would avoid a bypass. What we did is we provided a price based on the parameters that were agreed to that could be met with existing rate schedules and the proposal to eliminate the DCC. We were prepared to argue the bypass, and we would have. It's not -- we actually have also communicated to Coral very early in the process that Union would fight a bypass and was not prepared to offer a bypass competitive rate. 1382 MR. BROWN: Well, another way of looking at it, though, wouldn't you agree, is that Coral files its bypass, Union then files its competing application, then you strike a deal at a lower demand charge than had been previously referenced in the discussion, and that indicates Union was treating Coral's bypass application as a very credible bypass threat, was it not? 1383 MR. KITCHEN: The issue of whether or not Union was treating it as credible does not change the fact that we would have disputed it and disputed on the grounds that it may not have been credible. By putting in a competing application does not suggest that we found it credible. It merely means that Union was doing what it would do to any customer that we didn't feel -- where the bypass rate was appropriate or physical bypass was appropriate. I just don't see the connection. 1384 MR. BROWN: Just while I'm at tab 15 of the cross-examination brief, perhaps I could take you to a few more documents before we hit 3:30. I had taken you to the carriage- service contract, which was sort of halfway through that brief. If you could go to the next document, the next blue page after the carriage-service contract, the next document is entitled "carriage-service contract clarification agreement dated as of October 1, 2002." 1385 Do you see that? 1386 MR. KITCHEN: Yes. 1387 MR. BROWN: And if one looks at this, it references in the second "whereas" the fact that the Ontario Energy Board issued a decision on September 20th, 2002; correct? 1388 MR. KITCHEN: Yes. 1389 MR. BROWN: Effectively that's the decision where the Board said to Union, Look, you've got to come back with another proposal regarding the delivery commitment credit; right? 1390 MR. KITCHEN: They didn't accept our original proposal and we came back with another one. 1391 MR. BROWN: Then if you look further down at the contract, paragraph number 1 amends the monthly demand charge, and we see that the number has gone up significantly, indeed it goes up to the posted tariff number of about 15 cents per m3 per month; correct? 1392 MR. BROWN: Correct. 1393 MR. KITCHEN: And then paragraph 2 amends another part of the contract which, in essence, says Union will provide the customer with the DCC. 1394 MR. SMITH: Sorry. Where are you looking? 1395 MR. BROWN: I'm in the first page of the clarification agreement, paragraph number 2, which amends section 5D of the CSC. 1396 MR. SMITH: Okay. 1397 MR. BROWN: So on the one hand monthly demand charge goes up to the tariff, but the amendment to 5D says, Well, look, you're going to get the DCC. 1398 MR. KITCHEN: The same as any other T1 customer paying the toll. 1399 MR. BROWN: Indeed, you indicate that in that clause, that if the OEB amends or eliminates the DCC, the customer will receive the same rate adjustment treatment as approved by the OEB; correct? 1400 MR. KITCHEN: Correct. 1401 MR. BROWN: Indeed, that was the nature of the proposal that you were putting before the Board; that the DCC would be eliminated but there would be a rate reduction embedded in rates, if I can describe it that way. 1402 MR. KITCHEN: The point of eliminating the DCC for T1 we would reduce the demand charges on an individual basis for T1 customers. 1403 MR. BROWN: Then if you could turn to the next page of this clarification agreement, clause numbered 3 adds a new section, section 5E to the CSC, and I think Mr. Thompson read it this morning, this is the one that reads that: 1404 "If the Ontario Energy Board eliminates the DCC in a manner not consistent with Union's proposal or fails to eliminate the DCC and maintains the existing practice, then Union will use all reasonable and prompt efforts to propose and implement promptly an alternate rate-making solution which shall provide a comparable economic benefit to customer as that provided by the DCC." 1405 I take it you would agree with me that it's quite clear from these documents that the economic benefit to Coral of the DCC was a very important component of the pricing of gas transmission service under the CSC. 1406 MR. KITCHEN: Yes, it's referenced a number of times, and I can agree with that. It's a very important thing for a lot of customers when it was eliminated. 1407 MR. BROWN: But not many other customers had filed a bypass or leave-to-construct application not many other customers had filed a leave-to-construct application and withdrew it after signing a contract with Union, had they? 1408 MR. KITCHEN: No. 1409 MR. BROWN: If I could finish up -- just here, if we could go to the last document at tab 15, you'll see there an e-mail from Mr. Shorts of Union to Mr. Peterson of Coral dated October 25, 2002, to which he attaches a spreadsheet. Just two points on this. 1410 On the second page you'll see the same kind of ATCO/Coral T1 analysis spreadsheet. Do you have that in front of you, sir? 1411 MR. KITCHEN: Yes, I do. 1412 MR. BROWN: If you go down a few lines under the item column, there's a line "Delivery Demand"? 1413 MR. KITCHEN: Yes. 1414 MR. BROWN: And you'll see under rate, we're looking at the same number that was in the CSC, the April 30th agreement. 1415 MR. KITCHEN: That's the clarification agreement? 1416 MR. BROWN: No, the first one, carriage-service contract. 1417 MR. KITCHEN: Right, sorry. Wrong column. 1418 MR. BROWN: And then there's a final column which says "DCC paid separate," and in that line you reference the tariff level; right? 1419 MR. KITCHEN: Yes. 1420 MR. BROWN: And then there are two line items, "Subtotal if Dawn," "Subtotal if Ojibway," and one sees under the cost column the dollars that result from that; correct? 1421 MR. KITCHEN: That's correct. 1422 MR. BROWN: And those dollars are based on the delivery demand at the cents per m3 that we have seen back in the April 30th contract; correct? 1423 MR. KITCHEN: Correct. 1424 MR. BROWN: Mr. Chair, I'm going to move to another area. 1425 MR. SOMMERVILLE: Thank you, Mr. Brown. We'll take -- this room is kind of in its own time zone. According to my watch, it's now 25 minutes after the hour. We'll reconvene at 20 minutes to the hour. 1426 --- Recess taken at 3:25 p.m. 1427 --- On resuming at 3:40 p.m. 1428 MR. SOMMERVILLE: Thank you. Please be seated. 1429 PRELIMINARY MATTERS: 1430 MR. SMITH: Mr. Chairman, I'm advised by Mr. Brown that he might be into tomorrow, I'm not worried about him taking his time too much, but there are a number of undertakings that have been answered now by Union, if I can just read those into the record. 1431 MR. SOMMERVILLE: Thank you. 1432 MR. SMITH: N.12.8, N.13.2, 14.1, 15.1, 15.9, 15.11, 16.4, 16.8, 18.2, 19.1, 19.2, 19.4, 19.6, 19.8, and 19.12. 1433 MR. SOMMERVILLE: Thank you, Mr. Smith. 1434 Mr. Brown, it's our expectation, I think, that you will not finish your cross-examination of this panel today probably and will carry over until tomorrow? 1435 MR. BROWN: I think that's a fair expectation, Mr. Chair. 1436 MR. SOMMERVILLE: In which case we'll look to, if you want to find an appropriate time to stop sometime between 4 and 4:30, that would be satisfactory. 1437 MR. BROWN: Very good, sir. 1438 MR. SOMMERVILLE: Thank you. 1439 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 1440 M.KITCHEN; Previously Affirmed. 1441 P.McMAHON; Previously Sworn. 1442 CROSS-EXAMINATION BY MR. BROWN: 1443 MR. BROWN: Mr. Kitchen, before I continue, could I just circle back and ask for clarification on a set of answers that you gave to my questions about the other kinds of generation plants. Throughout your answers you were talking about the firm load factors of those plants. Could you simply explain the formula that Union uses to calculate the load factor for a power plant. What's in the numerator? What goes into the denominator? 1444 MR. KITCHEN: The determination of load factor is a comparison between contract demand and volume, so if you take contract demand times 365 -- firm contract demand times 365 divided by -- sorry, that gives you your denominator, and then you have your numerator, which would be the forecast load. I think I've got that right. 1445 MR. BROWN: Thank you very much, sir. 1446 Could I take you to Union's reply evidence, Exhibit H.1, tab 1 supplemental, page 18. 1447 MR. KITCHEN: Yes. 1448 MR. BROWN: Towards the top of the page, starting at line 2, the evidence reads: 1449 "Union does not know if Coral posed a credible bypass risk or whether the Board would have found Coral's application to be in the public interest because Coral withdrew its application. Union does know that the purpose of Coral's application was to exploit close proximity to Union's National Energy Board-regulated river crossing to avoid having to pay a share of Union's distribution costs, something the Board has not found to be determinative of a credible bypass situation in the past." 1450 Could I ask you to turn in the cross-examination brief to tab 6. Tab 6 reproduces part of the evidence that Coral filed on its leave-to-construct application, this being article 2. And in particular, if you could turn to the page numbered 9 in that evidence, right down at the bottom of the page, the paragraph beginning, "The power station." 1451 It says: "Power station will strengthen the electric system in the Windsor area. Strategically located on the Ontario transmission system, it will be situated adjacent to the existing Keith transmission station operated by HydroOne Networks. It is also in proximity to significant electric load." 1452 If you could flip to the next tab in the cross-examination brief, which is tab 7, you will find a map which formed schedule 2.1.2 of Coral's prefiled evidence in its leave-to-construct application, and you'll see from the map there's a little square which says "proposed Brighton Beach power station site"; do you see that, sir? 1453 MR. KITCHEN: Yes. 1454 MR. BROWN: And beside that there's the HydroOne transmission station. 1455 MR. KITCHEN: Yes. 1456 MR. BROWN: Union is aware, is it not, that Coral does not own this plant. Union's aware that the owners of the Brighton Beach power station are ATCO and OPGI in a joint venture. 1457 MR. KITCHEN: Yes, and Coral is the manager of the gas supply function -- 1458 MR. BROWN: Sorry to interrupt you. Coral has a tolling arrangement under which it's obliged to get gas to the plant, and then it takes off the electricity generated by the plant. 1459 MR. KITCHEN: Yes. 1460 MR. BROWN: Were you aware that the decision to site in plant where it is was a decision of ATCO and OPGI and not Coral? 1461 MR. KITCHEN: I wasn't aware of that, no. 1462 MR. BROWN: I guess what I'm driving at: Are you aware that the reason that the plant was sited where it was was not because it wasn't near an NEB-regulated pipeline, as suggested in Union's evidence, but because Ontario Hydro used to have a plant on this site which they took down but they still had this transmission yard right beside it which made it real convenient to put a power plant up there. 1463 MR. KITCHEN: I don't think that we're suggesting that the reason for locating the plant was driven by a desire to exploit the proximity to Union's NEB-regulated river crossing. I think we're saying the application to bypass was an opportunity to get supply from a different source and use that river crossing. 1464 MR. BROWN: Right, because that was the nearest source of supply. 1465 MR. KITCHEN: The nearest source of supply, yes. 1466 MR. BROWN: So the shortest distance between two points is usually a straight line, and putting an interconnect into Ojibway was the shortest distance by way to supply gas to the plant; correct? 1467 MR. KITCHEN: Correct. But it was also able to use an existing river crossing that was there to meet the demands. 1468 MR. BROWN: Correct. I'd like to turn to a slightly different subject, and that is Union's application to build the pipeline, which is now in the ground. In that regard, could I ask you, Mr. Kitchen, please, to turn to tab 5 of the cross-examination brief, and you'll see there a Union Gas response to Interrogatory No. 11 that was posed by Board Staff in the leave-to-construct application by Union Gas for the lateral to the Brighton Beach plant. That was the RP-2002-0111 proceeding. And you'll agree with me that Union went to this Board to get approval -- I guess to get an exemption to construct the plant on the basis that the profitability index for the proposed project would be 1.58; correct? That's what it says in the first line. 1469 MR. KITCHEN: That is the profitability index, yes. 1470 MR. BROWN: Right. And that's what one would describe as a healthy PI for the plant; correct? 1471 MR. KITCHEN: Yes. Any PI greater than 1 is always a good thing when you are trying to get facilities approved for building, yes. 1472 MR. BROWN: When one is getting up to the 1.58 range, one is moving into a very healthy range from Union's point of view; correct? 1473 MR. KITCHEN: On the basis of an incremental cost, yes. 1474 MR. BROWN: All right. The 1.58 is essentially a comparison of the present value of the revenue stream that would be derived from the gas service provided over that pipeline over a certain time horizon as compared against the costs for that project over the same time horizon; correct? 1475 MR. KITCHEN: On an incremental basis. 1476 MR. BROWN: On an incremental basis. So I take it that when Union entered into the contract -- sorry, the carriage-service contract with Coral in April of 2002, it had concluded that the revenue that would be derived from the pricing mechanism in that contract would result in a profitability index of 1.58. 1477 MR. KITCHEN: Yes. The revenue would recover the incremental costs, and that's really -- in terms of any application for approval of facilities, what we compare is a revenue stream to the incremental cost. 1478 MR. BROWN: And it went to the Board on the basis that if this project was going to demonstrate a PI of 1.58 based upon the revenue derived from the pricing mechanism in the contract, it would be in the public interest to approve Union going ahead and constructing this project. 1479 MR. KITCHEN: That's correct. Based on that, there would be no undue harm to any other customer. 1480 MR. BROWN: Right. And you'll note with me that the date of this interrogatory response which I took you to on tab 5 is October 23, 2002; correct? 1481 MR. KITCHEN: Yes. 1482 MR. BROWN: So that's after the carriage-service contract was entered into on April 30, 2002, and after it was amended by the clarification agreement on October 1, 2002; correct? 1483 MR. KITCHEN: Yes. 1484 MR. BROWN: So Union was representing to the Board three weeks after the clarification agreement was reached, that the revenue to be derived under that contract would result in a PI sufficiently high to be in the public interest to approve this pipeline. 1485 MR. KITCHEN: Yes, although I'm not sure of the relevance of the timing, because -- 1486 MR. BROWN: I'll leave that for final argument. 1487 MR. KITCHEN: I guess all I want to make the point is whether you use the rate that was provided in the original agreement or the clarification agreement, both analysis of economics would have excluded the DCC payment, one through a rate reduction and demand charge, and the other through a payment. 1488 MR. BROWN: I'm sorry, could you repeat that? 1489 MR. KITCHEN: Both would have taken into account the fact that there was a DCC payment either through a rate reduction or an out and out payment, a credit on the bill. So in terms of the economics between those two points, they would be similar. 1490 MR. BROWN: Right. They were predicated on there being -- 1491 MR. KITCHEN: A DCC paid in the rate or a DCC paid directly through a credit on the bill. 1492 MR. BROWN: Which would result in a PI of 1.58. 1493 MR. KITCHEN: Yes. 1494 MR. BROWN: Right. Thank you. 1495 Now I'd like to turn to some of Union's evidence in this proceeding as to the actual costs of building the pipeline. Could you turn, please, with me, sir, to tab 10 of the cross-examination brief. I've reproduced part of Exhibit B.1, tab 2, that Union has filed in this proceeding. 1496 MR. KITCHEN: Yes, I have it. 1497 MR. BROWN: Okay. Could you turn to page 2, please. You'll see right at the top of the page under "item 2, transmission," it reads: 1498 "The 2003 transmission capital budget has decreased by approximately 1.3 million to 17.3 million and is due principally to cost savings as a result of lower labour and material costs in the Brighton Beach power plant." 1499 Do you see that? 1500 MR. KITCHEN: Yes, I see that. 1501 MR. BROWN: And to get some more specific numbers, could I ask you to turn first to two pages on. It will be Exhibit B.4, tab 2, schedule 2, page 1 of 6. 1502 MR. KITCHEN: I have it. 1503 MR. BROWN: Do you see that? And under "Transmission," the details of the capital expenditures for 2003 for transmission are $18,595,000? 1504 MR. KITCHEN: Yes. 1505 MR. BROWN: And if you flip back to the previous page, which is Exhibit B.4, tab 2, schedule 2, page 1 of 6 updated, the revised number is now less, 17,269,000; correct? 1506 MR. KITCHEN: That's correct. 1507 MR. BROWN: And then dealing specifically with the Brighton Beach power plant, could I ask you to go a few pages forward to Exhibit B.4, tab 2, schedule 2, page 3 of 6. 1508 MR. KITCHEN: B.4, tab 2, schedule 2? 1509 MR. BROWN: Page 3 of 6, the original filing. 1510 MR. KITCHEN: Yes, I have it. 1511 MR. BROWN: Line item 5, this is "details of capital expenditures for transmission," line item 5 records for Brighton Beach power plant $3,439,000; correct? 1512 MR. KITCHEN: Correct. 1513 MR. BROWN: And just if you could hold your finger there and flip back with me to tab 4 of the cross-examination brief, but don't lose your place, please. If you go to tab 4, I've reproduced part of the evidence that Union filed on its leave to construct, the RP-2002-0111, and if you look at paragraph 3 on the first page, under "Project Summary," it says, "total project costs including pipeline, station, and interest during construction is estimated to be $3.5 million"; correct? 1514 MR. KITCHEN: Correct. 1515 MR. BROWN: Very close to the 3.439 that we saw back at tab 10; correct? 1516 MR. KITCHEN: Correct. 1517 MR. BROWN: If I could ask you to flip back to tab 10 of the cross-examination brief, we were looking at B.4, tab 2, schedule 2, page 3 of 6, flip back a page, you have the same exhibit but this time it's updated. Do you see that? 1518 MR. KITCHEN: Yes. 1519 MR. BROWN: And you'll see at line 5 for the Brighton Beach power plant the updated capital expenditures for that plant are now reduced to $2,247,000; correct? 1520 MR. KITCHEN: That's correct. 1521 MR. BROWN: You'd agree with me that the overall cost to Union to construct the Brighton Beach lateral ended up being $1,192,000 less than forecast, the difference between the 3.439 million and 2.247 million. 1522 MR. KITCHEN: Yes, that's what the update would reflect. 1523 MR. BROWN: That's about 34 percent less than forecast, then, subject to check. If you could take that, that's what I figure, 34 percent less -- 1524 MR. KITCHEN: I'll take it subject to check, yes. 1525 MR. BROWN: And I take it that since the costs to Union of constructing that pipeline went down, in fact, there would be a corresponding increase in the profitability index for that project as a result; correct? 1526 MR. KITCHEN: Well, had the -- I guess it's reasonable to assume that had the revised amount been known at the time the application was filed and the economics was done, yes, the PI would have been higher. 1527 MR. BROWN: Yeah. And I'm going to suggest to you that it would have been significantly higher. It would be higher. 1528 Perhaps you could undertake to advise the Board as to the PI that would be derived from a calculation using the actual construction costs of $2.247 million for the Brighton Beach lateral. 1529 MR. KITCHEN: With exactly the same parameters that underpinned the 1.58 PI? 1530 MR. BROWN: Yeah, because presumably -- 1531 MR. KITCHEN: Just only change the capital. 1532 MR. BROWN: Only change the capital. 1533 MR. KITCHEN: I'll have to ask someone to do that. My group doesn't do that so I'd have to undertake it for someone else at Union, but yes. 1534 MR. BROWN: Thank you, sir. 1535 MR. MORAN: Undertaking N.21.9, to recalculate the PI for Brighton Beach using the actual capital expenditures as set out in Exhibit B.4, tab 2, schedule 2, page 3 updated. 1536 UNDERTAKING NO. N.21.9: TO RECALCULATE THE PI FOR BRIGHTON BEACH USING THE ACTUAL CAPITAL EXPENDITURES AS SET OUT IN EXHIBIT B.4, TAB 2, SCHEDULE 2, PAGE 3 UPDATED 1537 MR. BROWN: If I could come back to the pricing mechanism to the CSC contract, sir, would you agree with me that in the April 30th contract, it was the DCC mechanism that was the means by which the parties could keep the monthly demand charge for firm transportation service low? 1538 MR. KITCHEN: The DCC was removed from the rate, from the demand charge, and that's what resulted in the rate in the CSC. 1539 MR. BROWN: Right. So instead of the 15 cents per m3, the demand charge number that we saw in the CSC, which was significantly less, resulted from the DCC, the application of the DCC. 1540 MR. KITCHEN: The application of the DCC and the respective agreed-upon parameters in terms of load and load factor. 1541 MR. BROWN: Well, just in terms of those parameters, I took you to the contract right at the beginning and pointed out to you a number which was the -- let me get the terminology right -- the obligated DCQ at Dawn. And perhaps if you want to refer to it, if you go to tab 15 of the contract -- of the cross-examination brief, if you go sort of halfway into where the April 30th contract is and turn to page 4 of 7 of the contract, item 7 is delivery parameters and item 7B deals with the operational period, and I pointed out in the first line, obligated DCQ was a certain number of gJs per day? 1542 MR. KITCHEN: Yes. 1543 MR. BROWN: I'm going to suggest to you, and if you can't tell me you can give me an undertaking, but I'm going to suggest to you that the agreement between Union and Coral was that notwithstanding that the obligated DCQ at Dawn was as specified in this contract, it was understood that Coral would not be obligated to deliver those quantities of gas to Union on a daily basis. 1544 MR. KITCHEN: I have no knowledge of that. 1545 MR. BROWN: Well, could I ask you to give me an undertaking on behalf of Union to advise whether Union agrees that it was understood between Coral and Union that, although the obligated DCQ was as specified in the contract, Coral would not be obliged to deliver those quantities on a daily basis. 1546 MR. KITCHEN: I can check on that. 1547 MR. MORAN: That will be Undertaking -- 1548 MR. SMITH: Sorry, just one minute. I'm just thinking for a second about whether or not in the context of a written agreement, someone's subjective understanding -- let me put it this way: Coral's subjective understanding of what there was an agreement to is, in my submission, irrelevant. We'll provide the undertaking to see if there was another agreement between the parties. 1549 MR. BROWN: Well, perhaps, Mr. Chair, if I could assist my friend on that specific point. 1550 MR. SOMMERVILLE: Mr. Brown. 1551 MR. BROWN: At tab 15 of the cross-examination brief, if we could turn back to the previous document, this is the letter of intent dated April 16th, 2002, if we could turn to page 5 of 6 of the document, right down at the bottom, clause Q, at page 5 of 6. 1552 MR. SMITH: Yes, I have it. 1553 MR. BROWN: Clause Q, it reads: "During the commercial operation period A, subject to the consumption of gas at the plant, Coral shall have an obligation to deliver up to a maximum of" certain number of 103m3s per day "to Union's system at Dawn unless authorized by Union in accordance with Union's policies regarding assignments and diversions." 1554 The point in drawing my friend's attention to that is that there's a basis in the documentation between the parties as to how that clause was going to be interpreted and therefore the undertaking that I've requested from Union. 1555 MR. SMITH: I don't disagree. My point is simply I'm not sure whether this clause is in the final agreement. If it's not, then it wouldn't form part of their agreement. But if there's a separate agreement that I'm not aware of or understanding, quite apart from Coral's own view of what the contract means, that's perfectly fine and we'll provide that undertaking. 1556 MR. SOMMERVILLE: As I understand the undertaking, it would have no value if it was not qualified according to Union's understanding of what the nature of the arrangement was. Both parties would be able to argue at the end of the day the appropriate construction to be made of the contract in light of all of the contractual documents and the circumstances surrounding them. 1557 If there is no qualification that Union will make, wants to make, with respect to that undertaking, then that will speak for itself. 1558 MR. BROWN: And just in fairness to my friend, to give a head's up as to where I'm going, and it's apparent I can't go there with Mr. Kitchen because of the knowledge he has and his areas of responsibility, it will be the evidence that will be led from the Coral panel that there was certainly that understanding, and indeed the first document at tab 15 speaks to that; and there's further evidence that if Coral were to be held to the obligated DCQ on a daily basis, you'd have people swimming in a sea of gas at Dawn because the plant wouldn't be consuming it at that level on a daily basis. And so that's sort of where I'm going and that's the reason for the undertaking request. 1559 MR. SOMMERVILLE: And I understand that, Mr. Brown, and I don't think there's any impediment to where you're going here. I'm not sure that the undertaking per se is the lynchpin of that argument, and I think Mr. Smith's point is appropriate to the effect that if Union wants to refer to a contractual understanding that it had that may differ from what your client says, that that's an appropriate qualification in managing the undertaking. 1560 MR. MORAN: So, Mr. Chair, Undertaking N.21.10 with respect to the obligated DCQ to confirm the understanding that Coral was not obligated to provide these volumes on a daily basis. 1561 UNDERTAKING NO. N.21.10: WITH RESPECT TO THE OBLIGATED DCQ TO CONFIRM THE UNDERSTANDING THAT CORAL WAS NOT OBLIGATED TO PROVIDE THESE VOLUMES ON A DAILY BASIS 1562 MR. BROWN: Just as a follow-up to that, and this may or may not be within your sphere of personal knowledge, Mr. Kitchen, was it also -- was it your understanding that the DCC -- that the understanding between the parties, Coral and Union, was that the deliver commitment credit under the contract would be calculated on the basis of the obligated DCQ as set out in the contract, irrespective of the actual amount delivered each day. Firstly, do you know that one way or the other? 1563 MR. KITCHEN: I know we pay the DCC on obligated deliveries. I don't know if there were any other thoughts in anyone else's minds. 1564 MR. BROWN: So the DCC is calculated on the obligated DCC number. 1565 MR. KITCHEN: That's how the DCC is paid, and that's how we planned to eliminate it when we were eliminating it. 1566 MR. BROWN: Thank you for that. 1567 Now, could I ask you, please, sir, to turn to Union's reply evidence. This is your Exhibit H.1, tab 1, if you could go to page 6. 1568 MR. KITCHEN: Yes. 1569 MR. BROWN: And I'm going to ask you to look at line 18. And at line 18, Union writes: 1570 "Coral's attempt to seek a special rate that is equivalent to the rate that they would have received had the Board approved Union's proposal amounts to requesting the Board to vary its decision on the DCC for Coral and Coral alone." 1571 Just with that thought in mind, if you can move ahead a few pages to page 9 of Exhibit H.1, tab 1, under "alternate rate-making solutions," you've reproduced in the evidence section 5E to the clarification agreement that we've read previously, but the gist of that is: 1572 "If the Board eliminates the DCC, then Union will use all reasonable and prompt efforts to propose and implement promptly an alternate rate-making solution which shall provide the same comparable economic benefit to the customer as that provided by the DCC." 1573 Given that that's what Union agreed to in October of 2002, did Union suggest to Coral at that time that if this Board eliminated the DCC in a manner not consistent with Union's proposal, then at the end of the day, there was going to be nothing Union could do. There would be no alternate rate-making solution that could possibly be put in place. Was that told to Coral? 1574 MR. SMITH: Mr. Chairman, if I might, I just would like to raise again the issue of the relevance of this subject matter. What happened back in terms of these negotiations is, in my respect, not relevant to whether or not there is a just and reasonable rate for Coral, and I would simply indicate that there may be potential civil consequences to whatever flows out of these proceedings. And simply, I'd be cautious of the relevance of any questions along this line or contract negotiation line. 1575 MR. BROWN: Well, I certainly don't want to raise the spectre of a lawsuit. Coral is here to try to get this problem solved before the plant starts running. But certainly it will be a submission of Coral that when applying the Board's criteria for considering a bypass competitive rate, one of the factors that has to be looked at is the credibility of the bypass candidate, and it will be my submission that on the specific facts of this case, one element of that will be the extent to which Coral may have relied on the availability of the DCC or an economic equivalent in withdrawing its leave to construct. And so therefore, that is, I think, the basis for the relevance of the question, and my question simply is, as is Union's proceeding in this proceeding, if Union never thought there was an alternate rate-making solution available, why is the clause there? 1576 MR. SMITH: Well, with respect, I don't think my friend's explanation goes to advancing his position at all as to why he needs to put this question to this witness. As to what discussions Union had doesn't make his bypass competitive rate any more or less credible, in my submission. 1577 MR. SOMMERVILLE: The difficulty I have is simply the elimination of the DCC put this context into a completely different light, this negotiation, this contractual arrangement into a completely different light. And I think it is an appropriate question to the rate design person to address that subject, how that DCC elimination would operate in the context of this context. 1578 That's how I see this question playing. Not so much with respect to the bypass relevance or, indeed, from the standpoint of civil consequences, but rather, as a rate design question that is being put to Mr. Kitchen. 1579 MR. BROWN: Perhaps, then, I could rephrase the question slightly differently, which is, given this language in the clarification agreement, what kinds of alternate rate-making solutions did Union contemplate, back in October of 2002, might be available in the event the Board eliminated the DCC in a manner not consistent with Union's proposal? 1580 MR. KITCHEN: I think at the time the clarification agreement was entered into and the time this particular clause was included, Union had no knowledge of how the Board would eliminate the DCC if they did not find for Union's proposal. To the extent that the decision was different from what it actually worked out to be, there may have been options available to provide rate-making solutions. At the time when we entered into this, I did not have an alternate rate-making solution because I didn't know what the Board's decision was going to be. Until I knew that, it's difficult for me to say that this is what we can or can't do. 1581 Upon having the Board's decision and considering Coral in the context of the Board's decision and the clarity of the decision and also the fact that -- in terms of the firm transportation rate that was provided Coral and their relationship to other customers within the T1 class and other IPPs, I could not find an alternative rate-making solution that was reasonable or that I could defend. 1582 MR. BROWN: Is it fair to say, Mr. Kitchen, then, that your focus, after the Board's decision was released in May of this year, was on trying to come up with some sort of firm delivery alternate rate-making solution? 1583 MR. KITCHEN: My focus after the Board's decision was released was to implement that decision. I'm not trying to be facetious, but it's -- I have to provide -- if I'm going to provide a rate-making solution that equates to the elimination of the DCC, it is my view that I have to be able to provide that and justify that for all customers who would have paid -- who've been paid the DCC in the past. I can't provide that solution given the Board's decision. 1584 MR. BROWN: And I guess what I was simply trying to explore: Am I correct in hearing what you're saying, that your rate-making solution framework was focused on an alternate rate-making solution for firm delivery. That's the area in which you were trying to see whether anything else might work. 1585 MR. KITCHEN: And that's the area that we're talking about, is the firm demand charges and the DCC is paid on firm obligated deliveries. It was all around providing a... 1586 MR. BROWN: Well, Coral also has an interruptible component to its gas delivery under the contract, does it not? 1587 MR. KITCHEN: There is a component of their demand that is interruptible, yes. 1588 MR. BROWN: And as part of your thought process after the Board came out with its decision in May of 2003, did you give any consideration as to whether perhaps a fully interruptible kind of gas delivery service to the Brighton Beach plant might be a kind of alternate rate-making solution that would be available to the parties? Did you think about that? 1589 MR. KITCHEN: In terms of a fully-interruptible service? 1590 MR. BROWN: Yes, that would, you know, get you the same amount of revenue that you had projected to get under the carriage-service contract. 1591 MR. KITCHEN: Coral, looking for an interruptible service, is not a rate design consideration, it's a contracting issue. What I have to work with are the parameters that I have, and at that time I have Coral as a firm and interruptible customer with the majority of their volume being firm. 1592 MR. BROWN: So I guess what you're saying is that you, as part of your thought process, considering the implications of the Board's decision, you didn't think about an option under which the delivery under this contract would be changed to a fully interruptible -- 1593 MR. KITCHEN: I work with the parameters that I have available to me, and what was available to me was a combined, firm interruptible load. I don't know -- from the rate design point of view, I don't know if an interruptible load, totally interruptible, would meet the needs of the Coral. 1594 MR. BROWN: But you didn't ask them, I guess is the point I'm making, because you didn't think about it. 1595 MR. KITCHEN: From a rate design point of view, I don't ask. I have what I have. 1596 MR. BROWN: Perhaps, Mr. Chair, this would be an appropriate time to break. 1597 MR. SOMMERVILLE: Thank you, Mr. Brown. 1598 We will reconvene tomorrow morning at 9:30. I think our expectation at this point is that you'll conclude cross-examination. I believe Mr. Thompson and Mr. Warren have questions of this panel with respect to the confidential materials. And Mr. Vegh, perhaps, may have some questions. 1599 MR. VEGH: Perhaps. 1600 MR. SOMMERVILLE: Mr. Moran will have some questions. We would then look to the Coral panel in chief to begin tomorrow afternoon and probably continue to Friday. 1601 MR. BROWN: So for scheduling purposes, then, the Coral panel sort of stand down until 2:00 tomorrow? 1602 MR. SOMMERVILLE: I think that's a safe measure, yes. 1603 MR. BROWN: Thank you, Mr. Chair. 1604 --- Whereupon the hearing was adjourned at 4:26 p.m.