Rep: OEB Doc: 12WWL Rev: 0 ONTARIO ENERGY BOARD Volume: 22 6 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 6 NOVEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel CHRIS MACKIE Board Staff NEIL YEUNG Board Staff JAMES WIGHTMAN Board Staff CRAWFORD SMITH Union Gas Limited MARCEL REGHELINI Union Gas Limited PETER THOMPSON Industrial Gas Users Association ROBERT WARREN Consumers Association of Canada DAVID BROWN Coral Energy TIBOR HAYNAL TransCanada PipeLines GEORGE VEGH CEED, OESC, Superior Energy Management, Union Energy, TransAlta BRIAN DINGWAll Energy Probe ROBERT ROWE Enbridge Gas Distribution Inc. PETER SCULLY City of Timmins, City of Sudbury, FNOM 8 TABLE OF CONTENTS 9 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [22] CROSS-EXAMINATION BY MR. BROWN: [25] CROSS-EXAMINATION BY MR. WARREN: [188] FURTHER CROSS-EXAMINATION BY MR. THOMPSON: [306] CROSS-EXAMINATION BY MR. VEGH: [354] CROSS-EXAMINATION BY MR. DINGWALL: [374] CROSS-EXAMINATION BY MR. MORAN: [411] PRELIMINARY MATTERS: [922] UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON [930] CROSS-EXAMINATION BY MR. MORAN: [933] RE-EXAMINATION BY MR. SMITH: [1061] CORAL ENERGY CANADA INC. - PANEL 1; BADEN, TODD, ZARNETT [1184] EXAMINATION BY MR. BROWN: [1188] CROSS-EXAMINATION BY MR. WARREN: [1362] 10 EXHIBITS 11 EXHIBIT NO. M.22.1: E-MAIL FROM CHRIS SHORTS TO BRUCE ROGERS, MARK ISHERWOOD AND OTHERS DATED MONDAY, DECEMBER 10TH, 2001 AT 10:00 A.M. [1106] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.22.1: WITH RESPECT TO EXHIBIT K.37, THE ELENCHUS BDR REPORT, TABLE 1, COLUMN 4, UNION WILL UNDERTAKE TO PERFORM A CALCULATION WHICH WILL SHOW FOR EACH OF THOSE 20 YEARS UNION'S REVENUE COMPUTED BASED ON CURRENT OEB-APPROVED T1 TARIFF, PHASE-OUT OF THE DCC, AND INCLUSION OF THE DCC COST [68] UNDERTAKING NO. N.22.2: TO PERFORM A CALCULATION SHOWING UNION REVENUE COMPUTED BASED ON CURRENTLY PROPOSED 2004 RATES, INCLUDING PHASE-OUT OF DCC AND ELIMINATION OF DCC COST, FOR THE YEARS 2004 TO 2023 AS REPRESENTED ON TABLE 2 OF EXHIBIT K.37 [76] UNDERTAKING NO. N.22.3: TO RECALCULATE THE PROFITABILITY INDEX FOR THE BRIGHTON BEACH GAS LATERAL PIPELINE, TAKING INTO ACCOUNT THAT THE REVENUE WILL BE CALCULATED WITHOUT ANY DCC [90] UNDERTAKING NO. N.22.4: ESTIMATE THE IMPACT ON A TYPICAL M2 CUSTOMER IN 2004 AND IN 2007 IF CORAL GETS THE RELIEF IT'S SEEKING [151] UNDERTAKING NO. N.22.5: UNION TO ADVISE ON THE DETAILS OF WHAT WOULD BE REQUIRED TO ACCOMMODATE A NEW RATE CLASS IN THE BANNER SOFTWARE [454] UNDERTAKING NO. N.22.6: TO CALCULATE WHAT THAT IMPACT ON THE RATE WOULD BE IF THEY USED A FIXED MONTHLY CHARGE OF $28.58 INSTEAD OF $14 FOR THE WHOLE OF THE M2 CLASS AND TO PROVIDE WHAT THE BILL IMPACT WOULD BE FOR AVERAGE RESIDENTIAL CUSTOMERS CONSUMING 2,600 CUBIC METRES [605] UNDERTAKING NO. N.22.7: TO CALCULATE THE IMPACT ON THE RATE STRUCTURE USING THE COST STUDY FIGURE OF $57.68 FOR THE FIXED CHARGE INSTEAD OF $14, AND THE ASSOCIATED BILL IMPACT ON A CUSTOMER CONSUMING 2,600 [631] UNDERTAKING NO. N.22.8: TO PROVIDE THE DETAILS THAT WOULD EXPLAIN THE CHANGE IN THE REVENUE DEFICIENCY BETWEEN THE WHITE-PAGE AND YELLOW-PAGE UPDATE IN EXHIBIT H.3, TAB 1, SCHEDULE 1 [975] UNDERTAKING NO. N.22.9: TO PROVIDE THE EXPLANATION FOR WHY THERE IS A REVENUE DEFICIENCY AFTER RECOVERY FOR M12 CUSTOMERS OF $3,025,000 [1012] UNDERTAKING NO. N.22.10: TO PROVIDE WHAT THE RETROACTIVE EFFECT WOULD BE FOR A MARCH 1 IMPLEMENTATION AND AN APRIL 1 IMPLEMENTATION [1055] 14 --- Upon commencing at 9:35 a.m. 15 MR. SOMMERVILLE: Thank you. Please be seated. 16 This is the continuation of the Union Gas Limited application for rates for 2004. 17 Are there any preliminary matters before we recommence the cross-examination of this panel by Coral? 18 MR. SMITH: There are not, Mr. Chairman, other than to say that Union is working on the draft accounting order for the deferral accounts and we hope to have that out soon. 19 MR. SOMMERVILLE: Thank you. 20 Mr. Brown. 21 MR. BROWN: Thank you very much, Mr. Chair. 22 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 23 M.KITCHEN; Previously Affirmed. 24 P.McMAHON; Previously Sworn. 25 CROSS-EXAMINATION BY MR. BROWN: 26 MR. BROWN: Mr. Kitchen, could I ask you to put before you the Elenchus and Barker, Dunn & Rossi report. It's K.37, I believe. 27 MR. KITCHEN: Yes. 28 MR. BROWN: And I'd like to explore in this series of questions is the impact on the gas delivery cost to Coral and thus the revenue that Union derives for the gas delivery as a result of the phase-out or elimination of the delivery commitment credit. So in that regard, could I ask you, sir, to please turn to page 8 of the Todd/Zarnett evidence. 29 At page 8 of that evidence there's a table, table 1, and you'll see it says, "Impact of decision RP-2002-0130." There are several columns, the first being they represent each of the 20 years of the carriage service contract, and then in the second column, "Union revenue computed as established by the carriage-service contract," a number of numbers have been put down for the annual revenue. 30 Would you agree with me that those numbers are accurate; that is, they accurately reflect the revenue to Union for gas delivery to Brighton Beach as computed in accordance with the terms of the carriage-service contract. 31 MR. KITCHEN: The column labeled "Union revenue as computed established at the CSC" -- 32 MR. BROWN: Yes. 33 MR. KITCHEN: -- I believe that to be correct. I haven't checked every number but I believe it to be correct. 34 MR. BROWN: Okay. We're in the same ballpark then. 35 MR. KITCHEN: The Union revenue computed based on current OEB-approved T1 tariff and phase-out of DCC, the only difference there, I don't think -- at least I don't think you referenced it in the evidence, is I don't think you reflected the elimination of the DCC cost in the analysis. And if you did, then you didn't mention it, that's fine. But as the DCC is eliminated, there's also a cost component eliminated from rates. 36 MR. BROWN: You'll have to explain that to me. 37 MR. KITCHEN: There's two components to the DCC; one is the payout and the other is the DCC cost. And under the DCC methodology that Union has been using, the DCC cost, which is equivalent to the avoided cost of facilities is allocated to rate classes based on the design-day demands off the Dawn-Trafalgar. So every rate class has a share of the DCC cost built into their rates, and that is in proportion to the -- their use of Dawn-Trafalgar facilities on design-day demand. So as the DCC is eliminated, we're not only eliminating the payout but we're also eliminating the cost portion from the rates. 38 MR. BROWN: So directionally -- well, have you actually gone back, sir, and performed your own calculations as to what Union's revenue would be computed based on the current OEB-approved T1 tariff and the phase-out of the DCC? 39 MR. KITCHEN: I've not reproduced this column, no. 40 MR. BROWN: Are you therefore able to give any indication as to whether the numbers in that column are higher or lower than they would otherwise be if that DCC cost was reflected? 41 MR. KITCHEN: The rates would be lower. 42 MR. BROWN: The rates would be lower. 43 MR. KITCHEN: As a result, the gap would be lower. 44 MR. BROWN: Do you have any sense as to whether the magnitude of change would be small or large if one backed out those DCC costs? 45 MR. KITCHEN: I have no idea what the impact would be without actually running a calculation. 46 MR. BROWN: Could I perhaps ask you to undertake, sir, just so I've clearly got what Union's position would be, could I ask you to undertake to perform a calculation which would show the Union revenue computed based on current OEB-approved T1 tariff and phase-out of DCC for years 2004 to 2023 corresponding to the rows in table 1? 47 MR. KITCHEN: So you're asking us to project the rate and eliminate the DCC cost over time? It's a fairly -- it's a fairly large exercise, I think, to do. All I was indicating is there is that one deficiency. I'm not sure if it's large or small. I don't think it changes your analysis. It's just it's a fairly large exercise for us to forecast what the rate's going to be and then also reflect the elimination of the cost over time. 48 MR. BROWN: Well, I don't think I was asking you to forecast what the rate was going to be. I think what this column shows is the revenue computed based on current OEB-approved T1 tariff, then the five-year phase-out of the DCC, and you, as I understand it, have indicated that these numbers may or may not have also include -- taken into account this DCC cost that's distributed amongst the rate classes. 49 MR. KITCHEN: We could try to provide the impact of the DCC cost in the rates and how it would change. Would that be ... 50 MR. BROWN: Well, I'm trying to get Union's evidence as to, firstly, whether you agree or disagree with the numbers that appear in that column; secondly, if you disagree, what numbers do you say should be in that column? That's all I'm getting at. 51 MR. KITCHEN: We can undertake to provide it. I'm just -- I'm just concerned about how long it will take us to do it. That's all. 52 MR. BROWN: Okay. Well, I know you've got a lot of undertakings onhand. Go to the bottom of page 7 of that evidence, K.37, the Todd/Zarnett report. You'll see at line 24, the last sentence reads: 53 "By 2008, revenues to Union resulting from application of the 2003 T1 tariff exceed the carriage-service contract levels by 85 percent and this gap remains throughout the time frame of the analysis." 54 And what I'm really driving at is, does Union agree that the revenues to Union resulting from the current tariff and the elimination of the DCC will result in revenues of the magnitude of 85 percent more than the revenues it would have derived or gained under the carriage service contract? 55 MR. KITCHEN: The revenues will be more, but the return that we'll use -- that we would get is the only margin -- the return on the assets or the margin that we're looking at here. I'm not -- the revenues are in the forecast, the volumes are in the forecast, and as a result there's no overrecovery by Union, which is -- 56 MR. BROWN: I know you've got a certain point of view. My point of view is that when you look at this from Coral's perspective on the numbers that are contained in this particular report, they suggest that by 2008, it will be costing Coral almost 85 percent more for its gas delivery costs under Union tariff with the elimination of the DCC than Coral would have been paying under the terms of the carriage service contract -- 57 MR. KITCHEN: Had the DCC been eliminated as we proposed. 58 MR. BROWN: As you proposed. That's Coral's perspective. All I want to ask from you: Does Union agree that that would be the result to Coral over the course of the contract, or are you -- is Union saying oh, no, no, you'd only be paying 5 percent more or 10 percent more. 59 MR. KITCHEN: I'm not suggesting that Coral would not be paying more. All customers will be paying more as a result of the elimination of the DCC. I'm not arguing that point. I'm only saying that we'd have to do the calculation and it will take us time. I'm not saying that we can't do it. So I guess if you're asking me to provide the impact of eliminating the cost of that column, we will try to do that. 60 MR. BROWN: Okay, thank you very much. 61 If we could have that as the next undertaking, then, please. 62 MR. MORAN: Mr. Chair, I'm not sure if I have a clear understanding of the precise nature of the undertaking. 63 MR. BROWN: Well, as I understand the undertaking, Mr. Chair, it's that with respect to Exhibit K.37, the Elenchus BDR report, table 1, column 4, Union will undertake to perform a calculation which will show for each of those 20 years Union's revenue computed based on current OEB-approved T1 tariff, phase-out of the DCC, and inclusion of the DCC cost. 64 MR. KITCHEN: Elimination. 65 MR. BROWN: The elimination of the DCC cost. 66 MR. MORAN: That will be Undertaking N.22.1. 67 MR. SOMMERVILLE: Thank you. 68 UNDERTAKING NO. N.22.1: WITH RESPECT TO EXHIBIT K.37, THE ELENCHUS BDR REPORT, TABLE 1, COLUMN 4, UNION WILL UNDERTAKE TO PERFORM A CALCULATION WHICH WILL SHOW FOR EACH OF THOSE 20 YEARS UNION'S REVENUE COMPUTED BASED ON CURRENT OEB-APPROVED T1 TARIFF, PHASE-OUT OF THE DCC, AND INCLUSION OF THE DCC COST 69 MR. BROWN: Similarly, if you could turn ahead, Mr. Kitchen, please, to page 10 of the Todd/Zarnett report, table 2, you'll see there that in the fourth column there's information regarding Union's revenue computed based on currently proposed 2004 rates, including phase-out of DCC. And I take it you would be raising the same point, that that column may or may not have properly taken into account the elimination of the DCC cost. 70 MR. KITCHEN: That's correct. 71 MR. BROWN: Could I ask you, then, for a second undertaking for Union to perform a calculation showing Union revenue computed based on currently proposed 2004 rates, including phase-out of DCC and elimination of DCC cost, for the years 2004 to 2023 as represented on table 2 of Exhibit K.37? 72 MR. KITCHEN: Yes. 73 MR. BROWN: Thank you. 74 MR. MORAN: That would be Undertaking N.22.2, Mr. Chair. 75 MR. SOMMERVILLE: Thank you. 76 UNDERTAKING NO. N.22.2: TO PERFORM A CALCULATION SHOWING UNION REVENUE COMPUTED BASED ON CURRENTLY PROPOSED 2004 RATES, INCLUDING PHASE-OUT OF DCC AND ELIMINATION OF DCC COST, FOR THE YEARS 2004 TO 2023 AS REPRESENTED ON TABLE 2 OF EXHIBIT K.37 77 MR. BROWN: Just one simple point, Mr. Kitchen, and I think it's an obvious one. As I indicated, when one looks at these tables from Coral's perspective, there is a significant increase in the cost of gas delivery services to the Brighton Beach plant, but in return for paying those increased costs, Coral would not be receiving any different level of gas-delivery service, would it? 78 MR. KITCHEN: In terms of the transportation service, no. But they would be -- being a distribution customer, they are receiving the benefits of a distribution customer. 79 MR. BROWN: Am I correct that the major driver of the increased revenue to Union as shown on tables 1 and 2 is the elimination of the delivery commitment credit? 80 MR. KITCHEN: That is the -- that is the primary factor, yes. The DCC is being eliminated in the form of the payout and the payout was factored into the original rate. 81 MR. BROWN: Now, I asked you a number of questions yesterday regarding the profitability index for the Union lateral gas pipeline to Ojibway to the Brighton Beach project; took you through the evidence indicating that the actually construction cost to Union was lower than forecast, and therefore, the resulting PI would have been higher than the 1.58 forecast. Do you recall that questioning? 82 MR. KITCHEN: Yes, I do. 83 MR. BROWN: I take it just following that logic on, having looked at tables 1 and 2 and the impact on the increase to Union's revenue from the elimination of the DCC, I would be correct in concluding that as a result of the elimination of the DCC, the profitability index for that gas lateral pipeline to Brighton Beach directionally would go up? 84 MR. KITCHEN: Yes. If the DCC never existed and we were basing all of our economics on a no-DCC payout situation, yes, it would go up. I don't know by how much, but it would go up. 85 MR. BROWN: You gave me an undertaking yesterday to calculate the profitability index taking into account the lower actual construction cost to Union. Could you give me an undertaking, please, to recalculate the profitability index for the Brighton Beach gas lateral pipeline, taking into account that the revenue will be calculated without any DCC? 86 MR. KITCHEN: Yes. 87 MR. BROWN: Thank you very much. 88 MR. MORAN: That would be Undertaking N.22.3, Mr. Chair. 89 MR. SOMMERVILLE: Thank you. 90 UNDERTAKING NO. N.22.3: TO RECALCULATE THE PROFITABILITY INDEX FOR THE BRIGHTON BEACH GAS LATERAL PIPELINE, TAKING INTO ACCOUNT THAT THE REVENUE WILL BE CALCULATED WITHOUT ANY DCC 91 MR. BROWN: Could I turn you to your evidence, please, sir, which is Exhibit H.1, tab 1. If you could go, please, to page 14 -- actually, it's H.1, tab 1 supplemental. 92 MR. SMITH: Sorry, was that page 14? 93 MR. BROWN: Yes, page 14 of 18, please. 94 Do you have that, sir? 95 MR. KITCHEN: Yes, I do. 96 MR. BROWN: Top of page 14, you refer to the Board's decision EBRO 493/494 and describe an effort by TransCanada PipeLines to amend the rate 100 to secure a better rate for some generating facilities that were located right along the TCPL pipeline in Union's northern franchise territory. 97 MR. KITCHEN: That's correct. 98 MR. BROWN: You'd agree with me that the change in rate that TransCanada was seeking in those cases was a change to an existing rate under which they took gas delivery service. 99 MR. KITCHEN: Yes, they were essentially looking for an improvement to the rate to recognize that they were in very close proximity to the pipeline and there was a very high PI as a result. 100 MR. BROWN: And the way, as I understand it, it worked out, they actually had built the plants, they were taking gas delivery service initially from Centra and then from Union, and then several years after that, went to the Board and said, Well, because effectively all we're using is a Union meter, we think the rate 100 under which we're taking service is inappropriate and we'd like you to change it. 101 That was the basic pitch, wasn't it? 102 MR. KITCHEN: It was, yes. 103 MR. BROWN: And of course, that is a different situation than what we have here with Coral, because Coral is not yet taking service under the contract, is it? 104 MR. KITCHEN: No, it's not. But I don't think it's any different in substance. The fact is that the Board found that TCPL still had to make a contribution to the overall distribution costs. 105 MR. BROWN: But as I understand those cases, TCPL had not first come to the Board asking for leave to construct its own pipeline facility. 106 MR. KITCHEN: No. 107 MR. BROWN: Then continuing on in your evidence, you refer on page 8 of Exhibit H.1, tab 1 supplemental, up towards the top of the page you refer to the Board's decision in EBRO 477. That's at line 4. 108 MR. KITCHEN: Yes. 109 MR. BROWN: That's the Cardinal power plant bypass rate application that was considered by the Board? 110 MR. KITCHEN: Yes. 111 MR. BROWN: That decision, although you don't mention it in your evidence here, that was a decision that was released back in 1993, was it not? 112 MR. KITCHEN: Yes, it was. 113 MR. BROWN: Again, that was before the establishment of the IMO-administered electricity markets in Ontario; correct? 114 MR. KITCHEN: Yes. Yes, it was. 115 MR. BROWN: I showed you -- sorry to jump around, but if you could go back to the Todd/Zarnett Exhibit K.37 report, I took you to tables 1 and 2 which showed the impact on Union's revenue of the elimination of the DCC in the case of carriage service to the Brighton Beach. Would I understand it to be correct that as a result of the elimination of the delivery commitment credit, effectively Coral would end up contributing significantly more to system costs than it would have contributed under the terms of the carriage-service contract? 116 MR. KITCHEN: No, I don't think that's the case at all, because the DCC recognizes or recognized the benefit that is provided by obligated deliveries. So if you think of it in terms of a two-step process, the overall rate would reflect the same contribution to Union's distribution system, and then the DCC is for the contribution made by obligated deliveries. There are two distinct -- it's two distinct steps. 117 MR. BROWN: And I understand that from your perspective as the rate manager for Union Gas. If I could ask you to sort of put your shoes -- put yourself in the shoes of the customer who's actually cutting the cheque for the bill at the end of every month for the gas delivery service, if we look, for example, at table 1 and just go to year 2004, the first line, column 1: "Union revenue computed as established by CSC," you see there's a certain number there. 118 MR. KITCHEN: Yes. 119 MR. BROWN: If the DCC had not been eliminated, that is the cheque that Coral would have to cut to Union every year for its gas delivery service; correct? 120 MR. KITCHEN: Correct. 121 MR. BROWN: With the elimination of the DCC, if we go over two columns to "Union revenue computed based on current OEB-approved tariff," there's a higher number for 2004; correct? 122 MR. KITCHEN: Yes. 123 MR. BROWN: So that's the cheque that Coral is now going to have to cut to Union for the gas delivery service received by the Brighton Beach facility; correct? 124 MR. KITCHEN: That's correct. 125 MR. BROWN: The incremental costs between those two, I'm going to suggest that the incremental revenue received by Union from Coral for 2004 will be used to contribute to system costs. That's, as a practical matter, what's happening here, isn't it? 126 MR. KITCHEN: Well, I think it's the same point I made, though. The DCC was there to recognize a benefit in avoided facilities. It wasn't recognizing a benefit for avoided distribution facilities, it was avoided transmission facilities and storage facilities. So my point is the rate made by Coral pre- or post-elimination of the DCC still only -- still provided the same contribution to the distribution function. What was recognized was the benefit provided to the transmission and storage functions. I'm not disagreeing that the cheque would be larger. But from my point of view, I can't agree that -- characterizing the DCC as a contribution to distribution costs is not correct. 127 MR. BROWN: When you're referring to transmission and storage costs, you're referring to system-wide transmission and storage costs; correct? 128 MR. KITCHEN: The costs that were avoided through -- that were avoided as a result of obligated deliveries are storage and Dawn-Trafalgar transmission costs, not any other sort of transmission costs. 129 MR. BROWN: I'll leave it there. The rest is argument, I think. 130 Could I ask you this: If -- Union has taken into its revenue forecast for 2004 for the T1 class the revenues that it would receive from Coral, taking into account the first year -- taking into account the elimination of the DCC and the first year of the phase-out of the DCC; correct? 131 MR. KITCHEN: The revenues reflect the posted toll, which would include a DCC cost element. The rates do not include, or the revenues do not reflect the DCC. The payout that Coral will receive -- and that's because there are two things that happen with the DCC. We build the DCC into rates based on the allocation of Dawn-Trafalgar costs, and the payout is based on the obligated delivery. The cost study and the rates do nothing with the payout because that's what the Board said we can't do. So the rates reflect only the DCC cost included in rates. 132 MR. BROWN: Fair enough. Let me come at it a different way because I anticipate that you'll be asked questions by my friends Mr. Warren and Mr. Thompson, that if the Board or Union does what Coral is asking it to do, that is, to sort of stick with the pricing terms in the carriage-service contract, a consequence of that is that Union is not going to be obtaining as much revenue from Coral for gas delivery as it would under the posted tariff; correct? 133 MR. KITCHEN: That's correct. 134 MR. BROWN: And I think Mr. Warren and Mr. Thompson will probably say, Well, how much less money will Union be receiving? And it may well be in answer to that question, you would simply point to tables 1 and 2, and you've given undertakings on that. The question I'm trying to get to is that there would be less money received by Coral -- by Union, and what would the impact on other rate classes be of that decrease in revenue to Union if, at the end of the day, Union just gets revenue in accordance with the terms of the carriage-service contract? 135 MR. KITCHEN: The majority of those costs or that shortfall would fall to infranchise distribution customers, and primarily M2, 136 MR. BROWN: Primarily M2 customers. 137 MR. KITCHEN: Yes. 138 MR. BROWN: And why would it fall primarily to M2 customers. 139 MR. KITCHEN: Simply because of the function that they are the largest group of customers within Union's franchise. 140 MR. BROWN: Would you be able to perform two estimates or calculations for me. First, what would be the impact be on a typical M2 customer in year 2004 in the event that the Board was to approve a Union revenue requirement based upon the terms of the carriage-service contract rather than the posted tolls. Could you do that for me? 141 MR. KITCHEN: It would have to be a high-level estimate, but we could do it. 142 MR. BROWN: Okay. Best estimate. And then the phase-out of the DCC, as I recall, will be finished so that in year 2008 -- 143 MR. KITCHEN: January 2007. 144 MR. BROWN: January 2007. So the 2007 year will be the first year in which there is no credit for the phase-out, so to speak. 145 MR. KITCHEN: Right. 146 MR. BROWN: Could I ask you to do the similar calculation, then, for the year 2007; that is, what would the impact be on your typical M2 customer in the event that the Board approved a Union revenue requirement based on the carriage-service contract rather than the posted tolls. 147 MR. KITCHEN: Yes. As part of the same undertaking? 148 MR. BROWN: Thank you very much, sir. 149 MR. MORAN: Mr. Chair, that would be Undertaking N.22.4, to estimate the impact on a typical M2 customer in 2004 and in 2007 if Coral gets the relief it's seeking. 150 MR. SOMMERVILLE: Thank you. 151 UNDERTAKING NO. N.22.4: ESTIMATE THE IMPACT ON A TYPICAL M2 CUSTOMER IN 2004 AND IN 2007 IF CORAL GETS THE RELIEF IT'S SEEKING 152 MR. BROWN: Coming to the final issue here, Mr. Kitchen. Sticking with Exhibit K.37, the Elenchus and BDR report, could I ask you to move ahead, please, to page 13. Section 5.2 is entitled, "The Proposal." 153 MR. KITCHEN: Yes. 154 MR. BROWN: You'll see that here the authors of the report have put forward several options which, in their opinion, are available to the Board to resolve the matter. Proposal number 1 is to simply approve the revenue requirements to Union that result from the terms and conditions of the carriage-service contract. And would you agree with me that if -- and I'm asking you some hypotheticals here, but would you agree with me that if the Board adopted proposal number 1, that proposal would provide the economic equivalents contemplated by section 5(e) of the carriage-service contract. 155 MR. KITCHEN: It would recognize the fuel elimination of the DCC, yes. 156 MR. BROWN: Would you also agree with me that it would provide Union with an annual revenue that would result in a profitability index for the lateral project of 1.58? 157 MR. KITCHEN: Yes, because that was the profitability that -- that was the assumption in revenue when that calculation was done. 158 MR. BROWN: Then if we could go down, sir, to proposal number 2, there are two variants proposed; one is labeled "rate structure 1"; the other 1 labeled "rate structure 2." Both of those rate structures, however, would provide Union with the same revenue contemplated by the terms and conditions of the carriage-service contract; correct? 159 MR. KITCHEN: Yes. They're essentially different ways of coming up with that same revenue. 160 MR. BROWN: Right. The variables there are some changes to the firm contract demand charge and changes to minimum billing levels; correct? 161 MR. KITCHEN: Correct. 162 MR. BROWN: So you're deriving the same revenue, you're just moving the pots around a bit. 163 MR. KITCHEN: Yes. Yes. It's -- it essentially ends up, I think, with the same as proposal 1. 164 MR. BROWN: Right. And so you would end up also under that proposal not only with the same revenue, but also a revenue that would allow Union to earn a profitability index of 1.58 on the Brighton Beach gas lateral pipeline; correct? 165 MR. KITCHEN: Yes, for the same reason that I gave before. 166 MR. BROWN: And I suppose the third option which is not in this material, but I think I alluded to it yesterday in my cross-examination of you, a third possible solution would be to convert the gas delivery service to the Brighton Beach from a combination of firm and interruptible to solely interruptible. 167 MR. KITCHEN: Again, if that is something that would work for Coral. I don't know if that would work for Coral, but it is possible that if that was Coral's desire, then that's something that needs to go through the commercial group, not myself. We operated based on the parameters that we had. 168 MR. BROWN: No, I appreciate that, and you made that clear yesterday. But I guess from Union's point of view, if that particular option resulted in the same revenue requirement and allowed Union to recover a profitability index of 1.58 on the gas lateral, then essentially Union would be in the same position as it would have been under the carriage service contract. 169 MR. KITCHEN: We would have. However, the demand -- or the 2004 forecast assumes the firm demands that Coral and Union agreed to. 170 MR. BROWN: Right. So there would be some change in the 2004 forecast. 171 MR. KITCHEN: Yes. 172 MR. BROWN: And do I take it that any change to that 2004 -- any rate impact flowing from that change to the 2004 forecast would primarily be on the M2 class of customer? 173 MR. KITCHEN: Yes. It will go to other classes, but primarily M2 because of their size. 174 MR. BROWN: Okay. One final question. If you could turn to your evidence, H.1, tab 1 supplemental, page 9. That's page 9 of 18. If I could ask you to look at line 22, please. 175 MR. KITCHEN: Yes. 176 MR. BROWN: Right at the bottom of the page, Union's evidence reads: "Union diligently reviewed possible rate-making alternatives," and this is in the context of section 5(e) of the clarification agreement if the Board eliminates the DCC, can an alternate rate-making solution be found. 177 MR. KITCHEN: Yes. 178 MR. BROWN: And you're right, Union diligently reviewed possible rate-making alternatives. Union was, however, somewhat reluctantly driven to the conclusion that based on the Board's decision with respect to the DCC elimination, the well-established principles of rate design approved by the Board and the design of Union rates and past regulatory precedent, there is no reasonable rate-making solution that will yield the same benefit to Coral as the benefit provided by the DCC at its pre-0130 level." 179 If you look at it from Coral's perspective, Mr. Kitchen, wouldn't you agree with me that that bottom line that Union is really advancing in this proceeding sort of sounds like this: Don't build your own pipeline; we'll build it for you. Come do a deal with us. But if something happens on the regulatory front and your gas-delivery costs double, don't complain. There's nothing the regulatory process in Ontario can do about it. That's just the way we do business in Ontario. You'd agree with me that Union's bottom line has a certain ring of that nature to it, doesn't it? 180 MR. KITCHEN: No. I think that what we're doing is stating that we are not able, given the Board's decision and given how we design rates at Union, we are not able to provide a rate-making solution that we can also provide to other customers or other electric generators that we can defend -- that we feel that we can defend before the Board. I can't accept the characterization. 181 MR. BROWN: Let me offer another one. Are you familiar with the term "gotcha"? I mean, there's a certain element of that in this, whether it's inadvertent or unintentional or just saying that's just the way the regulatory system works. Isn't the bottom line to Coral, "Gotcha"? 182 MR. KITCHEN: That was not the intent. 183 MR. SMITH: Mr. Chair, I'm not sure how Coral feels is necessarily relevant. 184 MR. BROWN: Well, thank you very much, Mr. Kitchen, those are my questions. 185 Thank you, Mr. Chair. 186 MR. SOMMERVILLE: Mr. Warren. 187 MR. WARREN: Thank you, Mr. Chair. 188 CROSS-EXAMINATION BY MR. WARREN: 189 MR. WARREN: Mr. Kitchen, I have a few questions that arise from the production of Exhibit X.21.1, which is the bundle of cross-examination materials which Mr. Brown has changed. And in particular, questions that arise from the carriage-service contract and from a clarification agreement. 190 My questions, I want to put them within the framework of regulatory chronology that weaves its way through them. 191 If you could turn, please, to tab 15 of Exhibit X.21.1, and it is the carriage-service contract. It's not paginated, but it's about -- I don't know where it is. I can't find it. 192 MR. KITCHEN: It's in the middle. 193 MR. WARREN: Okay. It's in the middle, thanks. 194 MR. KITCHEN: The April 30th -- 195 MR. WARREN: It's the April 30th, 2002 agreement. And I'd like you to turn, please, to page 3 of 7, in particular to subsection 5(d). Do you have that? 196 MR. KITCHEN: Yes. 197 MR. WARREN: Now, as I understand this provision at a high level of generality, Mr. Kitchen, what I'll call a DCC equivalent amount was to be credited to Coral; is that correct? 198 MR. KITCHEN: Correct. 199 MR. WARREN: And would I be fair in understanding from that that the amount of the DCC and its being credited to Coral was critical to the deal, at least it would appear to be that way from Coral's perspective; is that fair? 200 MR. KITCHEN: Yes. But I would suggest that the DCC was critical to a number of large customers, not just Coral. 201 MR. WARREN: I'm just dealing here in the context of this agreement with Coral. 202 MR. KITCHEN: Yes. 203 MR. WARREN: And so you and I can agree that it would appear to have been critical to Coral in entering into this deal with Union; is that fair? 204 MR. KITCHEN: Yes. 205 MR. WARREN: And that clause, that is, subsection 5(d) of the carriage-service agreement contains about halfway through it the following sentence: 206 "This process needs to be approved by the OEB and as such the demand charge of," and there's a dollar amount, "per month net of the DCC." 207 Have I read that accurately? 208 MR. KITCHEN: Yes. 209 MR. WARREN: So can you tell me, first, why was it that OEB approval was required? And let me preface the question in this way: As I understand the arrangement embodied in the carriage-service contract -- first of all, at the time the carriage-service contract was entered into, the DCC was an accepted part of the regulatory framework; is that fair? It was part of the rate-making that had been reviewed by the Board over the years; is that fair? 210 MR. KITCHEN: Yes. 211 MR. WARREN: And what the contract, this CSC, contemplated was not the payment of the DCC in the ordinary course, the crediting mechanism, but rather simply a payment to them of an equivalent -- sorry, a crediting on the monthly demand charge on the DCC equivalent; is that fair? 212 MR. KITCHEN: That's fair. I can maybe just help a little bit. In RP-1999-0017, Union proposed to eliminate the DCC. We had agreement in the ADR to do that, and in 0029, parties, because of confusion, opposed the elimination and then it eventually went to hearing in 0130. So at the time the contract carriage-service agreement was struck, Union had already indicated they were eliminating the DCC, and how. 213 MR. WARREN: I understand. But the Board itself at that time had not expressed its view on the elimination of the DCC. It was something being discussed among the intervenors and Union; is that fair? 214 MR. KITCHEN: Well, I think at this time we had already had the ADR and assumed we were eliminating it. 215 MR. WARREN: Okay, fair enough. So I get back to my original question, then. Why did Union feel that Board approval for what was contemplated by subsection 5(d) was required? 216 MR. KITCHEN: Because we also knew that there was parties opposing the elimination of the DCC in the 0029 case. So given that the Board would be ruling either on the ADR agreement or on the elimination of the DCC, we needed to be sure that -- that was the approval that we're talking about. 217 MR. WARREN: Okay. Now, would I then be fair, in understanding subsection 5(d), that there was an implicit recognition of a risk that the Board would not approve this proposal? 218 MR. KITCHEN: Yes, and that's why that clause is there. 219 MR. WARREN: If we then go to the next sentence after the one I just quoted, it reads: 220 "In the event the OEB does not approve this proposal, the customer," and customer being Coral; is that right? 221 MR. KITCHEN: That's right. 222 MR. WARREN: -- shall have the right to terminate this contract within five business days of such non-approval unless Union, within five business days after receipt of customer notice, elects to provide the rate as set forth in this section 5(a), regardless of such non-approval." 223 Let me turn just to the last portion of that. What would it mean for Union to provide the rate as set forth in section 5(a) regardless of the non-approval? What was contemplated by that? 224 MR. KITCHEN: In terms of providing the rate? We would have to -- we would give them a negotiated rate. 225 MR. WARREN: I'm trying to understand the structure. The Board wouldn't approve -- what the entire sentence seems to me to contemplate is that the Board has not given its approval to something. 226 MR. KITCHEN: Correct. 227 MR. WARREN: But regardless of that, it contemplates the possibility that in the face of the non-approval, Union would then do something that has not been approved. Have I got that right? 228 MR. KITCHEN: No. In 0017, Union was given the ability to negotiate rates without prior Board approval. 229 MR. WARREN: Now, am I fair -- would I be fair in understanding, then, this subsection 5(d), that there was a risk recognized in the form of the Board not approving the proposal and that there was protection built in by Coral for itself in the event of that non-approval. It could get out of the contract. 230 MR. KITCHEN: Yes. 231 MR. WARREN: Now, the next stage just before we get to the clarification agreement, the clarification agreement which appears two or three blue tabs further on in Exhibit X.21.1, tab 15. Could you turn that up, please. 232 MR. KITCHEN: Yes. 233 MR. WARREN: Does the Board have that, Mr. Chair? 234 This agreement is entered into in October -- sorry, the end of September of 2002; correct? 235 MR. KITCHEN: Yes. 236 MR. WARREN: And there is an intervening step, and that's the -- sorry, the intervening step between the CSC and the clarification agreement in the form of the Board's decision in RP-2002-0029; is that correct? 237 MR. KITCHEN: That's correct. 238 MR. WARREN: And would I be correct in understanding that in that decision, Union's -- let me summarize it quickly if I can, and correct me if I'm wrong, that the ADR agreement among the parties to eliminate the DCC went before the Board for its consideration, but there was some uncertainty among the parties as to the meaning of the phrase "revenue neutrality"; is that correct? 239 MR. KITCHEN: That's correct. 240 MR. WARREN: And that the Board directed Union in that case to come back with a proposal having attempted, if possible, to eliminate the ambiguity as to the meaning of "revenue neutrality"; is that fair? 241 MR. KITCHEN: That's right, yes. 242 MR. WARREN: So between the CSC and the clarification agreement there was, if I can put it this way, an expressed statement by the Board that they expected the DCC to be eliminated in the next case; is that fair? 243 MR. KITCHEN: And to bring forward a proposal, yes. 244 MR. WARREN: All right. Now, the clarification agreement, the one dated September 30th, 2002, was the primarily driver of entering into that, from as you understand it, the -- 245 MR. SOMMERVILLE: Mr. Warren -- 246 MR. WARREN: I'm sorry, sir. 247 MR. SOMMERVILLE: -- the document that we're looking at is dated October the 1st. That's the clarification agreement dated October the 1st, 2002. 248 MR. WARREN: I haven't the foggiest idea where I got the September date, sir. 249 MR. KITCHEN: I just took it that you were talking about the end of September, and close enough to October 1st. 250 MR. WARREN: It's very dangerous to ever take anything that I say as accurate. 251 You're right, Mr. Chairman, it's the October 1st, 2002 clarification agreement. 252 MR. SOMMERVILLE: Thank you. 253 MR. WARREN: Was the primary driver for entering into this clarification agreement the prospect that the DCC was going to be eliminated? 254 MR. KITCHEN: I think that -- it's hard for me to talk about the primary driver because I wasn't involved in the primary driver. 255 MR. WARREN: That's fair. 256 MR. KITCHEN: But given the Board's decision in 0029, there was, I believe -- that's what ultimately ended in the clarification agreement. I don't know what drove what, but that is the -- that was the event that happened prior to it. 257 MR. WARREN: Now, if you would turn up, please, on the first page of the agreement, section 2. 258 MR. KITCHEN: Yes. 259 MR. WARREN: And it provides that "Section 5(d) of the CSC is hereby deleted and replaced with the following." 260 A few moments ago you and I dealt with section 5(d), and in the CSC, it was the one that contemplated the risk that the Board wouldn't approve the proposal and allowed Coral the option of getting out of the agreement; correct? 261 MR. KITCHEN: That's correct. 262 MR. WARREN: And would you agree with me, when we look at the new 5(d), that there would not appear to be in that wording the option for Coral to get out of the agreement? 263 MR. KITCHEN: That's correct. 264 MR. WARREN: Correct? Now, if you then turn over to the page 2 -- sorry, page 2, we have in section 3 the following: "Section 5(e) is hereby added to the CSC." Mr. Thompson dealt with this in another part of your cross-examination and it's already in the record. But can you and I agree that there's nothing in the new section 5(e) which allows Coral to get out of the contract; is that fair? 265 MR. KITCHEN: Yes. There's no five-day window or anything that was referenced in the other. 266 MR. WARREN: It's not just a time factor -- 267 MR. KITCHEN: No, there's nothing. 268 MR. WARREN: -- there's nothing in it. So would I be correct -- first of all, if we look at 5(e), it would appear to contemplate two possible risks; one is that the OEB eliminates the DCC in a manner not consistent with Union's proposal; correct? That's one form of risk. 269 MR. KITCHEN: That's correct. 270 MR. WARREN: And the other form of risk is that the Board fails to eliminate the DCC and maintains the existing practice; correct? 271 MR. KITCHEN: Yes. 272 MR. WARREN: Specifically, it contemplates two forms of, if I can call it, regulatory risk, that is, a risk arising from a Board decision; correct? 273 MR. KITCHEN: Yes. 274 MR. WARREN: But doesn't give Coral, Coral appears, on the surface, to have abandoned its right to get out of the contract; fair? 275 MR. KITCHEN: That's fair. 276 MR. WARREN: Now, again we're turning to the text at 5(e) to parse it a little further if we can. It contemplates in the last portion of it Union using, and I'm quoting: 277 "Reasonable and prompt efforts to propose and implement promptly an alternate rate-making solution which shall provide a comparable economic benefit to customers as that provided by the DCC." 278 Have I read that accurately? 279 MR. KITCHEN: Yes. 280 MR. WARREN: And would I be wrong, Mr. Kitchen, in assuming that whatever alternate proposal came out of these words, it would also have to go to the Board for approval? 281 MR. KITCHEN: Yes. 282 MR. WARREN: So there was, if you wish, a third form and implicit further risk that the Board wouldn't approve the new proposal, whatever it was; correct? 283 MR. KITCHEN: That's correct. 284 MR. WARREN: And there's no provision here for Coral to withdraw from the contract if that third risk comes into effect; correct? 285 MR. KITCHEN: That's correct. 286 MR. WARREN: All right. Now, I just want to understand, arising out of the Board's decision, the subsequent decision directing the elimination of the DCC in the 0130 case. That was the correct case; am I right? 287 MR. KITCHEN: That's correct. 288 MR. WARREN: The Board directed that the DCC be eliminated but rejected your proposal that a DCC equivalent be paid to those customers who had received the DCC; is that correct? 289 MR. KITCHEN: Through a rate reduction, yes. 290 MR. WARREN: Okay. Now, if Union had applied to the Board for approval of what I'd call the original CSC proposal, which is the payment of a DCC equivalent -- 291 MR. KITCHEN: Mm-hm, subsequent to the Board's decision? 292 MR. WARREN: Subsequent to the Board's decision, right. 293 MR. KITCHEN: Yes. 294 MR. WARREN: What, in your view, would have been the effect of that application? 295 MR. KITCHEN: In terms of what would be the outcome or -- 296 MR. WARREN: What would have been the effect? Would it have been directly contrary, in your view, to the Board's decision in the 0130 case? 297 MR. KITCHEN: Yes. 298 MR. WARREN: Okay. Now, my final question, sir, relates to, stepping back in the chronology, to an earlier time, that Union had applied for an exemption of section 90 of the OEB Act to construct the pipeline; is that correct? 299 MR. KITCHEN: Yes. 300 MR. WARREN: Can you tell me, Mr. Kitchen -- if you know, fine, if you don't know, fine -- whether or not the terms of the CSC were presented to the Board for its review and approval in that case? 301 MR. KITCHEN: I don't know if the terms of the CSC were presented. I believe, though, in the IR, there is an IR provided in the package that discusses some of the terms, but I'm not sure whether the CSC itself was provided. 302 MR. WARREN: Thank you very much. Those are my questions, sir. 303 MR. SOMMERVILLE: Thank you, Mr. Warren. 304 Mr. Thompson. 305 MR. THOMPSON: Thank you, Mr. Chairman. I have a few questions. 306 FURTHER CROSS-EXAMINATION BY MR. THOMPSON: 307 MR. THOMPSON: Mr. Kitchen, when we were discussing this topic yesterday, I thought you told me that Coral's position under the proposed T1 rate would be better than it was under the existing T1 rate? 308 Did I understand that correctly? 309 MR. KITCHEN: Yes. 310 MR. THOMPSON: And how does that square with the numbers at pages 8 and 10 of the attachment to Exhibit K.37? These numbers suggested to me the opposite. Have I misunderstood these in some fashion? The present value under the proposed block is higher than the present value under the existing block? 311 MR. KITCHEN: I'm not sure how to square it. When I do the calculation, I get a benefit. 312 MR. THOMPSON: Okay, thanks. And I just want to follow up on the contract situation in which Coral finds itself. In the context of the relief that it's seeking, Coral is, in proposal 1, which you find at page 13 of the attachment to this exhibit, is asking the Board to approve the revenue requirements that result from the terms, conditions, and pricing in the April 30 contract; do you see that? 313 MR. KITCHEN: Yes. 314 MR. THOMPSON: Okay. And Mr. Warren has taken you through the amendments to the termination provisions of the contractual arrangements. I just want to look at the pricing. And if you would turn, then, to what is tab 15 of Exhibit X.21.1, and if you go in the original contract of April 30, 2002, the pricing set out in 5(a)(i) was an amount that was net of the DCC; correct? 315 MR. KITCHEN: That's correct. 316 MR. THOMPSON: All right. And as a result of events that occurred subsequently, that clause has been amended. If we go to the clarification agreement, the first page, the pricing provisions of the agreement calls for the demand charge under the posted T1 rate as of 1999; is that right? 317 MR. KITCHEN: That's correct. 318 MR. THOMPSON: Okay. So as of -- so that the pricing called for in the April 30, 2002 agreement as amended is this demand charge. 319 MR. KITCHEN: Yes. 320 MR. THOMPSON: And that's actually higher than the demand charge in the existing T1 rate. 321 MR. KITCHEN: Yes. 322 MR. THOMPSON: Is that right? 323 MR. KITCHEN: The proposed -- well, and existing. 324 MR. THOMPSON: And the schedule to the original agreement, one of the schedules, I think it's schedule 3 of the original agreement, on the second page has a heading "Rates for Service." 325 MR. KITCHEN: Sorry, where are you, sir? 326 MR. THOMPSON: I'm in the original CSC, schedule 3. 327 MR. KITCHEN: Yes. 328 MR. THOMPSON: Second page. 329 MR. KITCHEN: Yes. 330 MR. THOMPSON: It has "rates for service, rate T1" and then it has monthly demand charge for the firm contract demand and it specifies the amounts that's in the earlier section that I referred to. It has the words: "This proposal needs to be approved by the OEB." 331 And as a result of the amendment, that number has been changed; correct? 332 MR. KITCHEN: That's correct. 333 MR. THOMPSON: So the bottom line is the contract of April 30, 2002, calls for the payment of a demand charge that exceeds the currently posted demand charge. 334 MR. KITCHEN: Yes. 335 MR. THOMPSON: And it incorporates a schedule referring to rate T1. So when Coral asks for the simplest relief, the simplest resolution of this matter would be for the Board to approve the revenue requirements that result from the CSC dated April 30th, 2002. That's a price that's in excess of the posted demand charge; is that correct? 336 MR. KITCHEN: Well, the April 30th document has the lower... 337 MR. THOMPSON: Right. But that document has been amended by the subsequent -- 338 MR. KITCHEN: Oh, I see, I see. 339 MR. THOMPSON: So the only contractual fabric that exists today is for this higher price; am I right? 340 MR. KITCHEN: Yes, I would say so. I'm not a lawyer, but I would say so. 341 MR. THOMPSON: Well, I mean, that's the position in which Coral finds itself. And so the proposals, the rate structure 1 and the rate structure 2, in effect, I suggest, are proposals to vary the contractual fabric; is that right? 342 MR. KITCHEN: Yes, that's one way of looking at it, yes. 343 MR. THOMPSON: All right. Now, the last question I have is this: When IGUA was here trying to sustain the DCC, was Coral present? Did they appear in the case to ask that the DCC be sustained because their contract was tied to it? 344 MR. KITCHEN: I believe they were represented by CEED at the time. 345 MR. THOMPSON: By CEED, Mr. Vegh? 346 MR. KITCHEN: I believe so. 347 MR. THOMPSON: Okay, well, I don't recall a very loud fuss being made about this or this contract being presented to the Board as being something that the Board ought to be aware of. Am I mistaken? 348 MR. KITCHEN: No, that's correct. Coral may have sent a letter to the Board, but they did not ask me any questions. 349 MR. THOMPSON: Like Brier Rabbit, they chose to lay low. 350 Those are my questions. 351 MR. SOMMERVILLE: Thank you, Mr. Thompson. 352 Are there any other parties who wish to -- Mr. Vegh. 353 MR. VEGH: Thank you, if I may, just a couple of questions arising out of Mr. Warren's cross-examination for my clarification. 354 CROSS-EXAMINATION BY MR. VEGH: 355 MR. VEGH: Sir, I'm asking questions on behalf of TransAlta. 356 MR. KITCHEN: Yes. 357 MR. VEGH: I just want to ask you a couple of questions arising from Mr. Warren's questions of you about the contracts, the April 30th agreement and then the October 1st clarification agreement. 358 On the April 30th agreement in particular, Mr. Warren took you to section 5, sub D. Do you have that? 359 MR. KITCHEN: Yes. 360 MR. VEGH: And he took you in particular to the last sentence, and the portion of that sentence addressed what Union would propose if the Board did not approve of Union's DCC approval. And when Mr. Warren asked you what Union would have done, you advised that Union had authority to offer a special rate without OEB approval and that's what Union would have done to comply with its requirements of 5, sub D. Do you remember that? 361 MR. KITCHEN: We have the ability to do that, yes. But it is something that we would still anticipate having to defend. 362 MR. VEGH: But you could do it without prior OEB approval, I thought that's what you said. 363 MR. KITCHEN: Right. But we're not relieved of the need to defend that rate. 364 MR. VEGH: That's the clarification I was looking for. Because when you go to 5(e) of the clarification agreement, again there's a requirement of what Union would do if the DCC -- 365 MR. KITCHEN: I'm just slow. I'm getting there. 366 MR. VEGH: Sorry. 367 MR. SOMMERVILLE: Just for my piece of mind, Mr. Vegh, you're referring to paragraph 5(e) of the clarification agreement. I don't think there is such a section. I think you're referring to the 5(e) replacement contained in the clarification agreement. 368 MR. VEGH: Thank you for that. So I'm referring, actually, to section 3 of the clarification agreement which adds section 5(e) to the CSC agreement. And that section also talks about what Union would do if the DCC is not approved, but your answer to Mr. Warren was, in this case, this would require -- if Union were to do that, it would require them going to the Board. And my question is: Could you not have done what you contemplated doing in 5(d), which is provide this without prior Board approval? 369 MR. KITCHEN: Yes, but under the same -- I would still -- anything that we would do, I'd want to be able to defend. 370 MR. VEGH: Thank you. That's my clarification. 371 MR. SOMMERVILLE: Have you concluded, Mr. Vegh? 372 MR. VEGH: Yes, thank you. 373 MR. SOMMERVILLE: Thank you. 374 CROSS-EXAMINATION BY MR. DINGWALL: 375 MR. DINGWALL: Good morning, gentlemen, my name is Brian Dingwall, I'm here on behalf of Energy Probe. I'm kind of feeling like a philosophy major walking into an engineering party because I'm going to take us back into the 10,000 foot level for a few moments. 376 With respect to rate design and cost allocation, this particular proceeding that we're in has the potential to be the rebasing leading into a multiple year performance-based regulation model. Is it the company's intention to keep live questions of how rates are designed during that time, or is there some intention to fix particular rate groupings over the next few years? 377 MR. KITCHEN: I have a feeling that if we were to enter into a PBR, I'd be coming back every year. So no, I don't think there's any intent to fix any portions of the -- the rate design piece, I think, will always be fairly dynamic. 378 MR. DINGWALL: There are a number of new proposed costs being attributed to various rates this year including the March park cost, including the risk-management costs or benefits, and including the weather hedge. Could you point me to an exhibit that sets out how those are applied across the rate classes? 379 MR. KITCHEN: The -- 380 MR. SMITH: Sorry, just -- the premise of my friend's question is incorrect. There are no weather hedge costs included in the forecast, as I understand it. And in any event, risk management also isn't new. 381 MR. DINGWALL: I'm sorry, I couldn't hear the last part of what you said. 382 MR. SMITH: Risk management isn't new. 383 MR. KITCHEN: But in terms of the March park, I can take you to a schedule that shows the allocation. 384 MR. SOMMERVILLE: Your question, Mr. Dingwall, was directed to a schedule of some kind that captured -- 385 MR. DINGWALL: Where the costs are presented not where -- 386 MR. SOMMERVILLE: -- a range of matters. I don't think there's anything improper, necessarily, with that question, Mr. Smith, and if there is such a schedule, the witness could identify it. 387 MR. KITCHEN: I was able to find it quickly during the load balancing part of the case but ... 388 In terms of the March park, actually, if you go to H.1, tab 1, my written prefiled, and you go to page -- just a second. 389 If you go to, actually, H.1, tab 4, page 16, that shows the allocation of the March park costs. The other costs you specified were? 390 MR. DINGWALL: Risk management and -- 391 MR. KITCHEN: The risk management costs are not specifically identified in any schedule. They would be included in the -- in the O&M dollars within the cost study, likely in the general operations and engineering allocations. 392 MR. DINGWALL: So really the overhead associated with the performance of the function; is that correct? 393 MR. KITCHEN: That's correct. 394 MR. DINGWALL: Now, with respect to any prospective benefits that may be returning as a result of the implementation of these three items, can you either give me a broad overview of where those benefits will go in terms of allocation to various rate classes, or perhaps point me to where that might be reflected? And if that's another page-turning exercise, I'm happy to receive that by way of undertaking. 395 MR. KITCHEN: What are you referring to, Mr. Dingwall, in terms of benefits? The cost study allocates costs. That's what is in there. 396 MR. McMAHON: And incorporated in the overall cost for any particular area, the budgeting centres or managers would incorporate any benefits of their actions in the overall budgets that are being allocated. 397 MR. DINGWALL: So would it be fair to say, then, taking one specific example, that if the capacity associated with March park were not used for system needs and were then -- and was then transferred to the S&T group to do its wicked way with it, would those -- would any proceeds from that, then, come back through the shared savings mechanism? 398 MR. KITCHEN: I think Mr. Isherwood answered that question. If there was any way to use March park as an S&T mechanism, and I'm not sure that it is and it's not my areas, those margins would necessarily flow through the deferral accounts and be shared back with customers. 399 MR. DINGWALL: And would you agree with me that the deferral accounts are not rate-group specific in that they affect system customers as a whole but there's no particular allocation to any particular rate class? 400 MR. KITCHEN: The -- any of the margin-sharing that goes on within the allocation of deferral accounts are allocated to rate classes. That's the whole purpose of disposing of deferral accounts, is to allocate whether it's margin or cost to rate classes. 401 MR. DINGWALL: And can you point me to where the proportions are set out? 402 MR. KITCHEN: The allocation of deferral accounts by rate class appears at H.3, tab 10. 403 MR. DINGWALL: H.3, tab 10. This is going to be somewhat anti-climactic, but those are my questions. 404 MR. SOMMERVILLE: Thank you, Mr. Dingwall. 405 We'll take our break and reconvene at 10 minutes after 11:00. 406 --- Recess taken at 10:50 a.m. 407 --- On resuming at 11:10 a.m. 408 MR. SOMMERVILLE: Thank you. Please be seated. 409 Mr. Moran. 410 MR. MORAN: Thank you, Mr. Chair. 411 CROSS-EXAMINATION BY MR. MORAN: 412 MR. MORAN: Mr. Chair, a number of the interrogatories that I will be referring to are actually captured in Mr. Shepherd's Exhibit M.20.1, and I think I have one or two other references outside of that. 413 Mr. Kitchen, you were asked a few questions a day or two ago about the ability to add additional rate classes from the perspective of the Banner software; right? Do you recall those? 414 MR. KITCHEN: That's correct. 415 MR. MORAN: All right. As I understand it, the Banner software is now owned by a third party, ADS; right? 416 MR. KITCHEN: Yes, I believe so. 417 MR. MORAN: And Union has a contract with ADS for billing services. 418 MR. KITCHEN: Yes. 419 MR. MORAN: And it used to be with Enlogix; right, which was an affiliate? 420 MR. KITCHEN: Yes. That's correct. 421 MR. MORAN: All right. And in relation to the ability of Banner to accommodate additional rate classes, as it were, do you know how many rate classes Banner can actually support at the moment? 422 MR. KITCHEN: Banner bills M2, rate 01 and rate 10. 423 MR. MORAN: All right. And who does the rest of the billing? 424 MR. KITCHEN: There are other systems that do the building within Union. 425 MR. MORAN: Within Union, all right. 426 MR. KITCHEN: Not through the Banner system. 427 MR. MORAN: All right. So in the context of accommodating -- how many rate classes does Union currently have? I think it's in the order of 10 or 11. 428 MR. KITCHEN: Yeah, roughly. 429 MR. MORAN: All right. So in the context of those 10 or 11 rate classes, I think what you've just said is that Banner deals with three of them? 430 MR. KITCHEN: Banner deals with our million or so general service customers. 431 MR. MORAN: Right. So that would be the M2, the R1 -- that's the big group; right? 432 MR. KITCHEN: That's the big ones, right. 433 MR. MORAN: So that's what they deal with. How many rate classes can Banner actually accommodate? 434 MR. KITCHEN: I'm not sure that I have the answer to that question. In any event, adding a rate class is not impossible, it's just you have to add the functionalities to deal with that rate class; the rate tables, the logic, all that sort of stuff. So I guess as a -- depending on the size of the box that Banner sits in, I suppose there's no limit as long as you can keep adding that functionality somewhere. 435 MR. MORAN: Right. It may be that it's already been designed to handle more than three rate classes, it just doesn't have to at the moment. That's a possibility. You don't know the answer, though; right? 436 MR. KITCHEN: No. I would say I know at this point that the Banner system can manage the rate systems that we have. It can't manage an M1, for instance, a new rate class. 437 MR. MORAN: Sorry, you're saying it just can't manage it at this point at all? 438 MR. KITCHEN: The functionality would have to be added. 439 MR. MORAN: And what's the basis for your understanding of that? 440 MR. KITCHEN: The basis is that I know that in discussing the possibility of having rate classes with the IS group or IT group, that they would have to do work on the system to make that happen. 441 MR. MORAN: Okay. So it's -- just so I can understand what you're telling us. Some work has to be done to the system; you're not sure what that work is. 442 MR. KITCHEN: Not exactly, no. 443 MR. MORAN: All right. 444 MR. KITCHEN: I know new rate tables have to be added and new logic but... 445 MR. MORAN: It may be just a question of creating a new rate table so that can be accessed -- 446 MR. KITCHEN: I think that may be a bit simplistic. I'm sure there's more to it than that. 447 MR. MORAN: I'm just trying to figure out the best way is for the Board to be able to understand that, and perhaps the easiest thing for me to do at this point is simply to ask for an undertaking for Union to actually describe specifically what would need to be done in order to add a new rate class. 448 MR. KITCHEN: That's fine. 449 MR. MORAN: Or to be able to accommodate a new rate class. 450 MR. KITCHEN: Yes. 451 MR. MORAN: And I'm asking for a fairly detailed description of what would actually have to be done in order to accommodate a new rate class. 452 MR. KITCHEN: All right. 453 MR. MORAN: Mr. Chair, that would be Undertaking N.22.5, Union to advise on the details of what would be required to accommodate a new rate class in the Banner software. 454 UNDERTAKING NO. N.22.5: UNION TO ADVISE ON THE DETAILS OF WHAT WOULD BE REQUIRED TO ACCOMMODATE A NEW RATE CLASS IN THE BANNER SOFTWARE 455 MR. MORAN: Just getting back to the number of rate classes question. I think you agreed that there was about 10 or 11 active ones, but I understand that there are additional rate classes that may not be active because there's no customers in them? 456 MR. KITCHEN: Sorry, I couldn't hear that. 457 MR. MORAN: Because there's no customers in them. 458 MR. KITCHEN: Yes. 459 MR. MORAN: Okay. I'd like to now move on to another area. You had a discussion, I believe, with Mr. Warren with respect to the issue of whether increasing the fixed cost portion would have a negative impact on conservation. Do you recall those questions? 460 MR. KITCHEN: Yes, I recall. 461 MR. MORAN: And I think you indicated that you didn't expect it would because 80 percent of the charge is still a variable charge and so to the extent that people can conserve, it's that 80 percent that would reflect that; right? 462 MR. KITCHEN: Yes. 463 MR. MORAN: I wonder if you could turn up Exhibit M.20.1, tab 15. 464 This is Interrogatory J.26.114. 465 MR. KITCHEN: Yes. 466 MR. MORAN: And to understand the fixed cost versus the variable, if we look at this as an example, I understand it may be a hypothetical response to an undertaking, but it has some rates built in. If we look at column C -- 467 MR. KITCHEN: Yes. 468 MR. MORAN: -- in the table that's attached to the interrogatory response, the monthly charge that's set out there is $10. That's the fixed charge component; right? 469 MR. KITCHEN: That's correct. 470 MR. MORAN: And then underneath that there's a monthly delivery charge of -- and it's set up in blocks; right? 471 MR. KITCHEN: Yes. 472 MR. MORAN: And to see what those blocks actually are, you have to go down to lines 10 through 14. 473 MR. KITCHEN: That's correct. 474 MR. MORAN: Okay. So in lines 10 through 14 in column C, we see the block structure for the variable part of the charge; right? 475 MR. KITCHEN: That's correct. 476 MR. MORAN: Okay. And that's the 80 percent component that you're talking about where the opportunity to conserve exists. 477 MR. KITCHEN: Yes. Yes. I'm just - I can't remember the IR where the 80 percent was referenced and whether or not that 80 percent also incorporated a commodity piece as well. 478 MR. MORAN: I see. To understand the 80 percent, and I appreciate that that was just a ballpark estimate, but you would say that commodity is part of the bill, distribution rates are part of the bill, and those two parts of the bill are still variable and so if one conserves, they -- 479 MR. KITCHEN: They save it all, yes. 480 MR. MORAN: Okay. So focusing on the distribution rate, then, which is the portion that we see here, right; the commodity is obviously separate. 481 MR. KITCHEN: Yes. 482 MR. MORAN: The declining blocks are set out -- again, as I recall your evidence, you indicated that the declining blocks are established on the basis of a statistical analysis of usage, and this was last done, I think, back in 1980? 483 MR. KITCHEN: Yes, that's correct. An intraclass study. 484 MR. MORAN: And it's just a straight statistical crunching, as it were, of patterns of usage. You find out where the clusters are; right? 485 MR. KITCHEN: Yes. You're doing a detailed statistical analysis, yes. 486 MR. MORAN: Okay. So to look at this as an example, the first block is anybody who uses up to 1,400 cubic metres? 487 MR. KITCHEN: Yes. 488 MR. MORAN: And that's on an annual basis? 489 MR. KITCHEN: No. No. The way that would work would be 1,400 cubic metres per month. 490 MR. MORAN: On a monthly basis, all right. So your statistical crunching back in 1980 said there's quite a few people that sort of fit together in the "under 1,400 cubic metres per month" category of usage. 491 MR. KITCHEN: I'm not sure how the study broke out the volumes, whether it was on a monthly or annual basis. But it would have clustered the volumes based on how it was being used to establish the blocking, yes. 492 MR. MORAN: Right. And presumably, not surprisingly, it's largely residential; right? 493 MR. KITCHEN: That's right. 494 MR. MORAN: There's a whole group of residential users who come in under that threshold. 495 MR. KITCHEN: That's correct. 496 MR. MORAN: And as you move up the blocks, presumably the statistical study done in 1908 tells you that the next logical breakpoint is somewhere around 4,600 cubic metres? 497 MR. KITCHEN: Well, there's a declining block so everybody has to go through each block. 498 MR. MORAN: That's right. 499 MR. KITCHEN: So at that point they've consumed their 1,400 in the month and they're into the next block. 500 MR. MORAN: Right. 501 MR. KITCHEN: So, yes, I'm agreeing with you. 502 MR. MORAN: Okay. Everybody uses at least -- 503 MR. KITCHEN: Right. 504 MR. MORAN: -- everybody is covered by the 1,400, but then there's a few people that use more than 1,400, and out of those people that use more than 1,400 there's a group statically that use less than 4,600; right? 505 MR. KITCHEN: Right. 506 MR. MORAN: And then going through that to the next level, there's a few people that use -- that can be clustered in the -- under the 124,000 cubic metre level and so on; right? 507 MR. KITCHEN: That's correct. 508 MR. MORAN: Now, in terms of the impact of a declining block structure on the ability -- on the ability to achieve conservation, what consideration has been given to that? 509 MR. KITCHEN: Just in terms of the declining block structure itself? 510 MR. MORAN: Yeah. 511 MR. KITCHEN: Well, I think that the declining block structure, there's -- when you have a customer that is in the upper blocks, they're already a large customer and gas is an important part of their operating expenses. And so to the extent that you've gone through all the blocks and gas is still an important part of your -- a large part of your expenses, you still have that incentive to conserve. 512 MR. MORAN: All right. So if I understand your answer, you're saying that the total bill cost is all that provides an incentive to conserve when you're in the very high volumes. 513 MR. KITCHEN: Well, it's in their best interest to conserve because it's a direct -- it's a direct benefit to their bottom line as a large industrial or commercial benefit -- large commercial/industrial customer. 514 MR. MORAN: All right. Let's take the example of a customer who's in the 270,000 cubic metre per month block, and let's say they're closer to the 400,000 cutoff than to the 270,000 cutoff, so on the high end of that block. 515 MR. KITCHEN: Yes, a very large customer. 516 MR. MORAN: So you have a customer there who's looking at the total bill and trying to figure out what the conservation opportunities might be. On the distribution side of it, the economic return is in the order of 2.1 cents per cubic metre. For every cubic metre they can conserve, they're saving 2 cents. 517 MR. KITCHEN: Yes. 518 MR. MORAN: As compared to the 7 cents for the same cubic metre if it was a residential customer we were looking at. 519 MR. KITCHEN: Yes. 520 MR. MORAN: So in terms of economic incentive, would you agree that, at least in the context of just the declining blocks alone, leaving aside the commodity which obviously is an issue, the incentive isn't quite the same. 521 MR. KITCHEN: No, but what I guess I'm saying is that there's -- the incentive is still there within a declining block structure to conserve. You still have to go through those first blocks to get to those other blocks. 522 MR. MORAN: Right. 523 MR. KITCHEN: And so to the extent that you can reducing your gas consumption, you are still reducing your -- you're adding to your bottom line profit. 524 MR. MORAN: Right. But having gone through those first blocks, the economic benefit of conserving is at the marginal cost, the last block. 525 MR. KITCHEN: It becomes lower, but I don't think that's the way customers -- they don't look at that portion of the delivery bill and say, I'm not going to conserve. They look at their total energy cost and they look at how it benefits them and their bottom line. 526 MR. MORAN: Right. And if that last block, the marginal cost that's save through conservation was priced higher, they might have more of an incentive to conserve; right? 527 MR. KITCHEN: They might, yes. But again, you're talking about an upper block versus, again, a total gas price. And I think keep in mind, too, that to a large extent, a large industrial/commercial user will have taken steps to conserve already. 528 MR. MORAN: Okay. All right. So just to finish this area off, then, the issue of conservation just isn't a factor when it comes to declining blocks, it's purely driven by statistics 529 MR. KITCHEN: It's driven by statistics. But they're just cognizant of the fact that conservation is an important point. It's probably less so given the volatility of gas prices now compared to when the rate structures were set and gas prices were very low. I think that is a fair statement. But you still have a consideration for that. 530 MR. MORAN: All right. So having done that statistical analysis and decided that you need these five or six blocks, what's the process for actually figuring out what price ought should to be charged for distribution for each of those blocks? How do you actually come up with 7 cents for the first 1,400 and 4.6 cents for the next block, and 3.3 for the next block? How do you actually come up with those numbers? 531 MR. KITCHEN: Well, the first step is to look at the cost study and to determine -- and to look at the residential customers which all go through the first block and are typically all served in the first block, and determine whether or not a first-block rate, based purely on the cost study results, will yield a block rate that, when you calculate the other block rates, is appropriate. And what I'm talking about there is it's not necessarily -- what you have to be cognizant of is the differentials in the blocks, and that's what you're trying to maintain and that's really what you're establishing in the intraclass study. 532 So if you do the rate design and you significantly change the differentials between the blocks, then you induce an intraclass subsidy, because now you're not matching the costs that you've identified in your intraclass study with the clusters that you've established. 533 MR. MORAN: All right. So what you're trying to do is match the cost associated with serving somebody who uses up to 4,600 and reflect that in the block that would apply once you get into the 4,600 block; right? 534 MR. KITCHEN: In general, that's what you're doing, which is different from what the cost study does. 535 MR. MORAN: All right. So from a sort of conceptual level, then, even though this is one rate class, what you have, in effect, is a set of rates within the rate class that reflect allocation of costs to serve users as they use more and more. 536 MR. KITCHEN: Customers will pay different average unit prices as they change their consumption because they have to go through all the blocks. 537 MR. MORAN: Right. So if I'm in the 124,000 cubic metre block, the average unit cost to provide that service to me is lower. 538 MR. KITCHEN: Yes. 539 MR. MORAN: And that's why the block is set so much lower than the -- 540 MR. KITCHEN: Yes, because there's economies of scale in serving larger customers. 541 MR. MORAN: All right. Now, I think on another -- in response to another question earlier on when you were talking about rate-making, I think you suggested -- let's start with tab 5 from Exhibit M.20.1. This is Undertaking J.5.83. 542 MR. KITCHEN: Yes. 543 MR. MORAN: If you look at the second paragraph of the quote from the Board's 0130 decision, it states there: 544 "The Board acknowledges that, in practice, rates may be approved which do not result in revenue-to-cost ratios of 1.0 for each rate class. This may arise due to conflicting criteria considered in the rate design stage of developing a sound rate structure." 545 And then the next paragraph says: 546 "Notwithstanding the preceding, the Board believes that any proposal which results in the revenue-to-cost ratio for any class moving further away from 1.0 should be carefully scrutinized and justified before being given regulatory approval. The Board does not agree that any such further deviations from a revenue-to-cost ratio of 1.0 present merely a problem with 'optics.'" 547 You indicated that one possible justification for deviating from a revenue-to-cost ratio of 1.0 might be in response to competition from other fuels; do you recall saying that earlier? 548 MR. KITCHEN: Yes. 549 MR. MORAN: And on that basis, if you were to accommodate a customer by giving that customer lower rates because you were concerned that that customer might switch fuels, in effect, you're shifting a cost from that customer to serve them to all the other ratepayers; right? 550 MR. KITCHEN: Right, because there's a benefit of having that customer volume on the system. 551 MR. MORAN: All right -- 552 MR. KITCHEN: Otherwise that revenue wouldn't be recovered from anyone. 553 MR. MORAN: From anyone. So on that basis, then, that's what you say would be the justification for other ratepayers, in effect, subsidizing one customer or a class of customers. 554 MR. KITCHEN: Yes. But you need to keep in mind that one of the considerations is alternative fuel risk, yes. There are others. 555 MR. MORAN: And can you -- 556 MR. KITCHEN: Just before we go off of that, the other thing about interruptible rates is it is a lower quality of service. 557 MR. MORAN: I beg your pardon? 558 MR. KITCHEN: It's a lower quality of service. 559 MR. MORAN: So there's a tradeoff in a number of ways, you would suggest. 560 I wonder if you could turn up Interrogatory Response J.1.131. That's not in this book. 561 MR. KITCHEN: All right. Is that 31 or 131? 562 MR. MORAN: 131. And if you could turn up page 2, which is a table. 563 MR. KITCHEN: Yes. 564 MR. MORAN: "Summary of demand commodity and customer unit costs by rate classes." 565 Just so I can understand the information on this table, if I were to look at rate class M2, I see two entries or two lines for M2. Does that reflect a split between the 1,400 block and the rest? 566 MR. KITCHEN: No. That's the split from the cost study. 567 MR. MORAN: Okay. And the split from the cost study is based on? 568 MR. KITCHEN: The split in the cost study is essentially taking costs allocated to M2 and splitting them based largely on the number of customers or volume that's been identified as commercial/industrial through a CI indicator that's attached to the customer. 569 MR. MORAN: So based on the cost study, line 1 would reflect essentially the residential portion of M2? 570 MR. KITCHEN: Yes. 571 MR. MORAN: And line 2 would reflect the rest of M2; right? 572 MR. KITCHEN: Yes. 573 MR. MORAN: Okay. And when we look at line 1 and line 2, on line 1, the residential portion, the cost study would suggest that the fixed monthly charge should be $28.58; right? 574 MR. KITCHEN: Yes. 575 MR. MORAN: And against that you're proposing $14; right? 576 MR. KITCHEN: Yes. 577 MR. MORAN: All right. And on line 2, the cost study would suggest that the monthly fixed charge for the rest of the M2 class should be around $131.50. 578 MR. KITCHEN: That is correct. 579 MR. MORAN: And again, because you're only proposing one fixed charge for all of M2, you're proposing $14 against that. 580 MR. KITCHEN: That's correct. 581 MR. MORAN: Okay. And so there's two issues, I guess, that arise out of that; one, the proposed $14 doesn't actually recover the fixed charge for just the stand-alone residential group, does it? 582 MR. KITCHEN: No, that's correct. 583 MR. MORAN: All right. And it clearly doesn't recover it when you look at the rest of the group because it's significantly smaller. 584 MR. KITCHEN: That's correct. 585 MR. MORAN: And that's the origin of the intraclass subsidy that Mr. Shepherd, for example, was exploring with you; right? The more volume you use, the more you're subsidizing the smaller users. 586 MR. KITCHEN: To the extent that your fixed cost recovery is low, then you will end up paying a higher proportion of fixed costs through the delivery commodity rates. So as you increase the customer charge, you lower that cross-subsidization. 587 MR. MORAN: All right. Now, in order to understand the difference it would make if you actually were to recover the monthly fixed charge that recovers the fixed costs that are created by the residential group, you'd have to use the $28.58; right? 588 MR. KITCHEN: Yes. 589 MR. MORAN: Okay. So I'm wondering if you could undertake to calculate what the impact would be on the rate structure if M2 -- the monthly fixed charge for M2 was $28.58 instead of $14. 590 MR. KITCHEN: Can you just repeat that, sorry, the part on the rate structure part, please. 591 MR. MORAN: Let me just step back one step, then. 592 MR. KITCHEN: Yeah. 593 MR. MORAN: If the fixed charge goes up -- 594 MR. KITCHEN: Yes. 595 MR. MORAN: -- then what's covered on the variable part will go down. 596 MR. KITCHEN: Correct. 597 MR. MORAN: So the impact on the actual rate, each declining block will be somewhat lower than it was under your $14 proposal. 598 MR. KITCHEN: Yes, it would be. 599 MR. MORAN: So if you could -- what I'm asking is: Could you calculate what that impact actually would be if you used a fixed monthly charge of $28.58 instead of $14 -- 600 MR. KITCHEN: For the whole class. 601 MR. MORAN: -- for the whole of the M2 class, that's right. 602 MR. KITCHEN: Yes, we can do that. 603 MR. MORAN: Mr. Chair, that will become Undertaking N.22.6. 604 MR. SOMMERVILLE: Thank you, Mr. Moran. 605 UNDERTAKING NO. N.22.6: TO CALCULATE WHAT THAT IMPACT ON THE RATE WOULD BE IF THEY USED A FIXED MONTHLY CHARGE OF $28.58 INSTEAD OF $14 FOR THE WHOLE OF THE M2 CLASS AND TO PROVIDE WHAT THE BILL IMPACT WOULD BE FOR AVERAGE RESIDENTIAL CUSTOMERS CONSUMING 2,600 CUBIC METRES 606 MR. MORAN: And as part of that undertaking, could you provide what the bill impact would be for -- 607 MR. KITCHEN: For average residential customers consuming 2,600 cubic metres? 608 MR. MORAN: Yes. 609 MR. KITCHEN: Yes. 610 MR. MORAN: All right. Now, we can look at R1 and have the same discussion; right? 611 MR. KITCHEN: Yes. 612 MR. MORAN: R1 is the residential, small commercial/industrial in the north. It's the equivalent of M2 for the rest of the operation; right? 613 MR. KITCHEN: It's not quite equivalent because there's a -- you can only consume up to 50,000 in the rate class. But it's a small commercial and -- residential commercial/industrial class, yes. 614 MR. MORAN: Now, when I look at the entry for rate 1 in Exhibit J.1.131, there's only one line, so I assume that your cost study didn't break out the M1 the way it broke out M2? 615 MR. KITCHEN: No, it does not. 616 MR. MORAN: And if we look at what we see on the line for rate 1, the cost study suggests that the monthly fixed charge would be $58.68; right? 617 MR. KITCHEN: That's correct. 618 MR. MORAN: And that compares with, again, $14 in what Union's actual proposing. 619 MR. KITCHEN: Yes. I just want to make sure that we're clear on something. If you notice that note 2 says "the unit rates include storage, transportation and delivery." 620 So those are all the fixed costs. It's just not customer-related. It's all fixed. It would be a full fixed variable recovery. 621 MR. MORAN: All the fixed costs associated with serving those customers. 622 MR. KITCHEN: Yes. 623 MR. MORAN: And so what we have is cost study suggesting $57.68 against Union's proposal of $14. 624 MR. KITCHEN: Yes. 625 MR. MORAN: All right. I wonder if you could do the same thing for rate 1, calculate the impact on the rate structure if you were actually to use the cost study figure of $57.68 for the fixed charge instead of $14. 626 MR. KITCHEN: Yes. 627 MR. MORAN: And the associated bill impact. 628 MR. KITCHEN: On a customer consuming 2,600, yes. 629 MR. MORAN: Thank you. That would be Undertaking N.22.7, Mr. Chair. 630 MR. SOMMERVILLE: Thank you. 631 UNDERTAKING NO. N.22.7: TO CALCULATE THE IMPACT ON THE RATE STRUCTURE USING THE COST STUDY FIGURE OF $57.68 FOR THE FIXED CHARGE INSTEAD OF $14, AND THE ASSOCIATED BILL IMPACT ON A CUSTOMER CONSUMING 2,600 632 MR. MORAN: Looking at some of the other entries that we see in this table in Exhibit J.1.131, the line for rate class M5 interruptible, the cost study suggests that the monthly fixed charge would be $4,556.55; right? 633 MR. KITCHEN: That's correct. 634 MR. MORAN: And Union is proposing a monthly fixed charge of $500. 635 MR. KITCHEN: That's correct. 636 MR. MORAN: And as I understand it, M5 interruptible is primarily large users? 637 MR. KITCHEN: Yes. There's large users in there, but they are -- they are -- they are not necessarily the size of an M7 interruptible customer. But they are large. They are contract size, minimum of 700,000 cubic metres. 638 MR. MORAN: Now, around the middle of the table there's a column entitled "Number of Bills for Rate Design"? 639 MR. KITCHEN: Yes. 640 MR. MORAN: Does that tell me how many customers are in that rate class? 641 MR. KITCHEN: No, that's the number of bills. If you wanted to get in idea of the number of customers, you would have to divide that by 12. 642 MR. MORAN: Because it's a monthly bill? 643 MR. KITCHEN: Because in rate design, we look at the billing units and the billing units are the total number of billing units. 644 MR. MORAN: All right. So number of bills is 2,000, so 1/12th of that figure tells us approximately how many customers are in that rate class. 645 MR. KITCHEN: Yes. 646 MR. MORAN: Okay. And instead of a fixed charge of 4,556, they get a fixed charge of 500. 647 MR. KITCHEN: Yes. 648 MR. MORAN: And what would be the justification for that? 649 MR. KITCHEN: For a fixed charge of 500 versus 4,000? 650 MR. MORAN: Yes. 651 MR. KITCHEN: Well, to a large extent those are interruptible customers, so they are subject to -- they do look at alternative fuels. And to the extent that you charged a fixed -- had a fixed charge recovery that was full fixed variable, you would be -- you may encourage them not to consume. 652 MR. MORAN: If you were to increase the monthly fixed charge from 500 to 4,556, the corresponding variable rate would go down, would it not? 653 MR. KITCHEN: That's correct. The large customers would like it very much and the small customers would not. 654 MR. MORAN: And you're talking about larger versus smaller within -- 655 MR. KITCHEN: Within the class, yes. Like a university or -- that has very high consumption, I imagine, would like us to go to a higher rate, whereas a small greenhouse would not. 656 MR. MORAN: All right. And presumably that's because of the same issue of intraclass subsidy, right, where the big users are subsidizing the smaller users. 657 MR. KITCHEN: Yes, it's a bit of a balancing act. 658 MR. MORAN: All right. How do you settle on the $500 as a balance point? 659 MR. KITCHEN: $500 was established in discussions with the sales and marketing group and what they felt their customers would be able to pay and still provide a benefit to those that consume large amounts within the class. 660 MR. MORAN: So this is more on the judgmental art side of the science? 661 MR. KITCHEN: Yes. You're trying -- again, you are trying to balance the needs of customers with what the market can bear, and you also don't want to destroy a rate class in one fell swoop. 662 MR. MORAN: But that's not an issue for T3 because there's only one customer in T3 so they get the fixed charge as the cost study suggests. 663 MR. KITCHEN: Yes. 664 MR. MORAN: If I look at M16, there's no entry from the cost study for the monthly fixed charge, and what you're proposing is $366. Why is there no entry for the -- based on the cost study for M16? 665 MR. KITCHEN: M16 is a seasonal rate. It actually has no customers in it. 666 MR. MORAN: So perhaps we don't have to worry about that very much. 667 MR. KITCHEN: Well, I'm not saying you don't have to worry about it, but it is a seasonal rate. And to the -- there's likely no costs allocated to it, given that we have no customers. It may be just an anomaly in the cost study that we're picking up in this table. 668 MR. MORAN: All right. Moving down, then, to R10, what kind of rate class is R10? 669 MR. KITCHEN: R10 a large commercial/industrial. 670 MR. MORAN: And is it interruptible? 671 MR. KITCHEN: No. No. It's similar to -- similar to the higher blocks in M2. 672 MR. MORAN: I see. And the cost study suggests a monthly fixed charge of $1,191.21; right? 673 MR. KITCHEN: To recover all fixed costs, yes. 674 MR. MORAN: That's right. And the monthly fixed charge that you're proposing is $70, which is dramatically lower. 675 MR. KITCHEN: Yes. 676 MR. MORAN: And what's the justification for that? 677 MR. KITCHEN: The justification for increasing it to 70 within the class is to align it with rate 16, which is the interruptible companion class to that size of load. The other issue is that when we look at fixed charges, we primarily focus on the customer-related costs, and what we're looking at here is a comparison between R70, which we're basing our customer-related, and all fixed charges. 678 MR. MORAN: Right. 679 MR. KITCHEN: So it's a bit of an apples to orange. But all I'm saying is we're trying to align it with rate 16, so it's a rate design issue. 680 MR. MORAN: Rate 16 interruptible. 681 MR. KITCHEN: Yes. 682 MR. MORAN: And rate 10 is not. 683 MR. KITCHEN: Right. 684 MR. MORAN: You indicated that when we were talking about M5 interruptible, one of the reasons why the monthly fixed charge is lower than what the fixed -- what the cost study would suggest was because of the nature of the customer being interruptible and getting a lower cost of service; right? 685 MR. KITCHEN: Yes. 686 MR. MORAN: Now, given that these folks in R16 are not interruptible -- 687 MR. KITCHEN: No, R16 is. 688 MR. MORAN: Sorry, R10 are not interruptible, why would the same fixed monthly charge be applied to that group compared to the interruptible group in R16? 689 MR. KITCHEN: Because as I said, they are -- there's a different rate structure in the north. The north has firm -- has a small interruptible class that aligns with the small -- the small firm -- sorry, the medium size firm interruptible class. And so we're trying to align those rates. 690 MR. MORAN: Okay. The monthly fixed charge from the cost study for R10 is $1,191; right? 691 MR. KITCHEN: That's the calculation, yes. 692 MR. MORAN: And for the interruptible class, R16, it's $2,366; right? 693 MR. KITCHEN: Yes. 694 MR. MORAN: It's more than twice as much. 695 MR. KITCHEN: Yes. 696 MR. MORAN: But the proposed monthly fixed charge for both of them is $70. 697 MR. KITCHEN: That's correct. 698 MR. MORAN: Given that they're quite different in terms of memberships, one is interruptible and one is not, why is the -- why isn't the R10 higher in your proposal even if it isn't going to cover all of it? 699 MR. KITCHEN: Because, again, we don't want to take the monthly fixed charge for R10 beyond what we're doing in R16. We're not proposing any change to R16. It also goes back to the customer-related cost which is what we look at when we're recovering the monthly fixed charge, because those are costs that don't vary with the peak-day demand or volume. 700 MR. MORAN: Okay. If we look at your proposal versus the cost study for M5 interruptible, it's 500 in your proposal against 4,556 from the cost study. 701 MR. KITCHEN: Yes. 702 MR. MORAN: And then when we do the same thing for R10 and R16, there's a bigger disparity between your proposal and the cost study -- 703 MR. KITCHEN: Yes. 704 MR. MORAN: -- what's the justification for that? 705 MR. KITCHEN: The first justification is that the M5 rate class has a minimum volume requirement of 700,000 cubic metres and has a much higher -- much larger volumes within the class. The customers in the north that are larger volume interruptible are served in a combination of rate 20, rate 100, and rate 25. And we don't have a smaller -- like, we don't have that distinction in the south that you have in the north, and that's a function of history. 706 MR. MORAN: Okay. Last question on this table. Rates R77, first of all, what kind of a class is that? 707 MR. KITCHEN: It's a wholesale rate class. 708 MR. MORAN: All right. And it looks like there's only one customer in there based on the number of bills. 709 MR. KITCHEN: Yes. 710 MR. MORAN: And the cost study would suggest a monthly fixed charge of $83 against your proposal of $145. 711 MR. KITCHEN: Yes. It's not a proposal. It is what it has been. We haven't changed it. 712 MR. MORAN: Why is it larger than what the cost study would suggest? I know we're not talking about a lot of money since it's only one customer. What would be the justification? 713 MR. KITCHEN: Well, to be honest, I haven't looked at rate 77 since it's one customer and it's Enbridge and we're really looking after the fact that we're providing a wholesale service to them. I haven't looked at the demand charge to see whether it should be changed. 714 MR. MORAN: All right. So this is Enbridge's rate? 715 MR. KITCHEN: Well, it's -- I'm not sure how all this came about as a function of history. But Union provides a wholesale service to Enbridge through this. 716 MR. MORAN: Okay. All right. Thank you. 717 Moving on, then, there was a discussion about the accounting system between the north and the south. I can't remember who was dealing with that. I think it might have been you, Mr. McMahon. I think you indicated that, because of history, the accounting used for assets is different in the north than in the south; right? 718 MR. McMAHON: That's correct. 719 MR. MORAN: And are you able to indicate what impact that has with respect to rate-setting between the north and the south? 720 MR. McMAHON: The impact it has, and I believe it was in one of the Board's interrogatories, is in the development of the allocation factor to determine customer-related plant. And as Mr. Kitchen was saying, it's the distribution customer-related costs that would roll into a fixed charge for a customer. 721 MR. KITCHEN: But the accounting systems don't impact the rate design, it impacts our ability to, perhaps, break things out in different ways. 722 MR. MORAN: All right. And in the context of developing allocation factors that might be consistent, what would it take to harmonize the accounting systems between the north and the south? 723 MR. McMAHON: As far as the particular factors we were looking at as far as the distribution plant, I'm not sure that you could harmonize history, because the data in the south or the north would not have been collected in one way or another. So I think you wouldn't be able to harmonize history that way unless you were guessing. But as far as what actual changes to make to an accounting system, you can collect data in any way in an accounting system as long as the system is set up that way to track costs and track facilities in any particular manner. But my understanding is that it would be quite an effort to take a look at all of the facilities that are in place in either the north or the south and change how the assets are being tracked. 724 MR. KITCHEN: The problem you'd have would be the sheer volume of assets and each asset type in the south, and to the fact that we don't track accumulated depreciation by asset. It's tracked only on a pooled basis. So to get a rate base calculation or to get a net-plant calculation, you'd have to go back and start with the gross plant value and then work through all the years of depreciation on each asset. To do that would be a monumental task. 725 MR. MORAN: So the different accounting methods between the north and the south are something that Union is going to continue to do? 726 MR. KITCHEN: Yes. 727 MR. MORAN: All right. That brings me to the DCC issue, and I guess this has been characterized in the past as the elimination of the DCC. But as I understand what Union was proposing in the 0130 case, all Union was proposing to eliminate was the mechanism for delivering the credit and not the credit itself; it was going to be built into rates; right? 728 MR. KITCHEN: That's correct. We were replacing the payment with a credit to rates. 729 MR. MORAN: So the concept wasn't being eliminated, just the mechanism. 730 MR. KITCHEN: That's correct. Replacing one form of payment with another form of payment, as I think someone said either in argument or in the decision. 731 MR. MORAN: Right. So when that proposal was put in front of the Board, Mr. Todd came along and said, Forget about embedding it into rates, that's a bad idea, you should just get rid of the concept as well the mechanism. 732 MR. KITCHEN: Eliminate both the cost and the payout. 733 MR. MORAN: Which the Board ultimately decided to do. 734 MR. KITCHEN: Yes. 735 MR. MORAN: So in the context of the language that has been under discussion this morning about eliminating the DCC, we have to understand that discussion on the basis that what Union was proposing was to embed the DCC in rates as opposed to actually eliminate it. 736 MR. KITCHEN: Yes. It was -- what we were trying to do in the DCC proposal in 0130 was recognize the avoided facilities benefit provided by obligated deliveries and we were recognizing that in the rate, and so we were eliminating the DCC payment from the rate -- from the mechanism. 737 MR. MORAN: Right. And the basis for the Board's decision basically boiled down to, you've got direct-purchase customers and you've got system customers; there's firm deliveries needed for both of them, so to the extent that there are avoided facilities costs, both groups of customers are contributing to that, so we don't need this DCC. 738 MR. KITCHEN: I think the Board's decision said that it may have been useful at one time, but it's no longer required, yes. 739 MR. MORAN: Right. And that was part of the basis as I just described it; right? 740 MR. KITCHEN: I believe it was. I don't have the decision in front of me, but I'll accept it. 741 MR. MORAN: Well, if we go to the decision, at paragraph 266 of the decision, the Board says: 742 "In advancing the second proposition --" there was two arguments put forward -- "proponents of Union's proposal seemed to ignore the fact that the system customer of Union, while not obliged to deliver or use gas pursuant to contract, are subject to a transmission system monopoly. The existence of this captive core of users is at least as important for the optimization of the Union transmission system as any other group of users, including the DP customers." 743 MR. KITCHEN: That's correct. 744 MR. MORAN: So what the Board was saying is, you don't need to pay both group because both groups are contributing the same benefit; right? 745 MR. KITCHEN: Yes. Through DP deliveries and through Union's own deliveries. 746 MR. MORAN: Right. And then the next paragraph is the reference that I think you're referring to, that it may have been a useful tool in the past in encouraging the development of competitive aspects of the gas supply system, and that's what you were referring to; right? 747 MR. KITCHEN: Yes. 748 MR. MORAN: Which isn't needed anymore either. 749 MR. KITCHEN: Sorry? 750 MR. MORAN: Which isn't needed anymore either. 751 MR. KITCHEN: Right. 752 MR. MORAN: I wonder if you could turn up Exhibit H.1, tab 1, page 9. 753 MR. KITCHEN: That was page 9? 754 MR. MORAN: That's right. That's page 9 of 18. 755 MR. KITCHEN: Is that supplemental evidence? I have H.1, tab 1, the original evidence. 756 MR. MORAN: It's not marked as supplemental, but it would appear that it is. It's -- at the bottom it's dated October 2003. 757 MR. KITCHEN: Let me get the other H.1, tab 1. 758 MR. SOMMERVILLE: Just for the record, that element of confusion is there. The additional filing is not marked supplemental but it is, in effect, supplemental to the original H.1 filing. 759 MR. SMITH: Correct. I think it's reply. Mr. Kitchen also has supplemental evidence. 760 MR. SOMMERVILLE: Actually, thank you for that correction, Mr. Smith. So we will mark ours "Reply." 761 MR. MORAN: This is the reply to Coral evidence; right? And I'm looking at the redacted version so we don't have to worry about confidentiality. At the top of the page there's some numbers that have been struck out. 762 All right. So at line 15 we see a quote from the carriage service contract clarification agreement, and there's been some discussion of this section already, and this is the section that says that. 763 "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 the same comparable economic benefit to the customer as that provided by the DCC." 764 MR. KITCHEN: That's correct. 765 MR. MORAN: Now, I just want to understand how this would work. Starting, first, if the Board were to maintain the existing practice, the existing practice would be -- there's a T1 rate and then there's a payment, a credit back based on volumes; right? 766 MR. KITCHEN: That's correct. 767 MR. MORAN: So if the Board had chosen to keep the existing practice at the time in place, why would that need an alternative rate-making solution that would deliver the same economic impact since presumably Coral would be charged the T1 rate and would get the payment? 768 MR. KITCHEN: I always questioned that part of the clause myself since I didn't write it. I think what it would refer to is that to the extent that Union's proposal for T1 was to eliminate the DCC through reduction to the demand charge, and the DCC is paid on the basis of obligated deliveries, which is, by design, a commodity relationship, there could be a difference between what you would actually receive if you were to provide obligated deliveries as opposed to what you would receive if the -- if it was in the demand charge, because you would get that amount in the demand charge irrespective of your deliveries. 769 MR. MORAN: Right. I mean, what would flow out of that would be a rate schedule and, as I understand it, the rate schedule is part of the contract; right? 770 MR. KITCHEN: Right. 771 MR. MORAN: And when we look at the language, "eliminates the DCC in a manner not consistent with Union's proposal," that was in the context of what we discussed a minute ago. You're not actually eliminating the concept, just the mechanism. 772 MR. KITCHEN: Yes. 773 MR. MORAN: Okay. The other possibility, then, is if the Board said no to Union's proposal but decided to maintain the concept in some different fashion; right? 774 MR. KITCHEN: That's correct. 775 MR. MORAN: And to the extent that it was going to be done in some different fashion, then Union is supposed to come up with something that would deliver the same economic benefit. 776 MR. KITCHEN: Attempt to, yes. 777 MR. MORAN: All right. At the time that this was being looked at, was Union thinking about what might have happened if the Board said, Forget about eliminating mechanism; let's get rid of the concept as well? Was that part of the discussion? 778 MR. KITCHEN: I don't know if it was part of the discussion. We didn't have an understanding at that time about what the Board's decision would be. And to the extent that it was not what it was, we anticipated that there was something we could do, but we didn't know. 779 MR. MORAN: And this clarification agreement was signed on October 1, 2002; right? 780 MR. KITCHEN: Yes. 781 MR. MORAN: And as I understand it from the RP-2002-0130 decision, the intervenor evidence had to be filed, I believe, in late November. Would you take that subject to check? 782 MR. KITCHEN: Yes. 783 MR. MORAN: Okay. So neither Union nor Coral, I guess, would have had access to what was ultimately Mr. Todd's persuasive testimony because it would have been filed at the time of the clarification agreement. 784 MR. KITCHEN: Right. 785 MR. SMITH: I'm not sure that Mr. Kitchen can answer with respect to what Coral had. 786 MR. MORAN: Now, moving on to the impact. If Coral were successful in the relief it's seeking from the Board in this process, one impact, of course, is you would get less revenue from Coral; right? 787 MR. KITCHEN: Yes. 788 MR. MORAN: And rate design being what it is, if you get less in one place, you make it up somewhere else; right? 789 MR. KITCHEN: In essence, it's a zero sum game, yes. 790 MR. MORAN: Right. And what you suggested, I think, earlier is that that would have to be made up with the rest of the infranchise customers. 791 MR. KITCHEN: That's correct. 792 MR. MORAN: Would that be based on the allocation that's currently used for the DCC credit -- DCC amount? 793 MR. KITCHEN: No, I don't think that it would. The DCC cost is only built into rates, not the DCC payout. So I think what would end up happening is you'd have to remove from the cost study the revenues associated with -- remove the revenues associated with Coral along with the Coral billing units, design rates that would recover the total revenue requirement, and make an adjustment for Coral's revenue so you didn't just overrecover. So it would flow through the -- all the costs would flow through the cost study. We wouldn't take that specific revenue, necessarily, and feed it back through. 794 MR. MORAN: But the DCC cost is supposed to match the payout; right? 795 MR. KITCHEN: It matches it in total but not by rate class. 796 MR. MORAN: And then in order to recover that cost so that the payout is revenue-neutral for Union, you have an allocation method; right? 797 MR. KITCHEN: Yes. 798 MR. MORAN: And Coral has characterized its relief as giving it the same economic benefit as the DCC. 799 MR. KITCHEN: Yes. 800 MR. MORAN: So why wouldn't you treat that the same way as you treat the recovery of the DCC cost? 801 MR. KITCHEN: Because I think the appropriate way to deal with it would be to take Coral aside for a moment, allocate all the costs in the cost study without Coral's volumes in there, and then provide the -- provide for the revenue that Coral would recover and adjust after the fact. 802 MR. MORAN: Right. 803 MR. KITCHEN: The problem I have with doing it the way you've suggested is that the DCC allocation -- well, the other way of saying it is that right now the relief that Coral is seeking is not a rate class in the cost study, so I have nothing to allocate them costs of any kind. It just has to be an off-to-the-side allocation. Whereas everybody else still is in the rate study and we can design rates on that basis. I don't think it's as simple as including in the cost study an incremental cost in the DCC. 804 MR. MORAN: All right. So under the approach that you're suggesting, whatever revenue has to be made up elsewhere would be allocated to all the other customers, including the other -- 805 MR. KITCHEN: Well, the costs would be allocated, and then through the reduced level of billing units, you'd recover those costs. 806 MR. MORAN: Right. And those costs would be recovered from all the other customers, including the other T1 customers. 807 MR. KITCHEN: Yes. Yes. Yes. 808 MR. MORAN: And if Coral is part of the T1, under your approach, they would be the only one within T1 that wouldn't bear the share of that within the T1 class. 809 MR. KITCHEN: Well, right now the T1 rate schedule wouldn't provide for the rate that Coral is asking. 810 MR. MORAN: Right. 811 MR. KITCHEN: So I would suggest if they were given the special rate, there would likely be a special rate schedule that they would apply to keep the T1 rate schedule pure. 812 MR. MORAN: Mr. Brown discussed with you the issue of the profitability index. 813 MR. KITCHEN: Yes. 814 MR. MORAN: And I think you gave some undertakings to recalculate based on a change in parameters. 815 MR. KITCHEN: Yes. 816 MR. MORAN: What role does the profitability index of any project play in the context of rate-making? 817 MR. KITCHEN: The profitability index is really there to provide the justification for the project and to show there's no undue harm. Once the project is approved and built, I have -- in fact, I don't necessarily see profitability indexes for projects, because what I get and what Mr. McMahon gets are the total rate-based numbers, the total revenue requirement on which we base our rates. So to the extent that the Coral capital is in the forecast, that will be part of the return calculation -- the calculation, and we will design rates to recover that return along with any other costs. 818 MR. MORAN: All right. 819 MR. KITCHEN: There's no specific link to rates. 820 MR. MORAN: So when there's a new capital asset, it gets added to rate base; right? 821 MR. KITCHEN: You have to think of the -- the justification looks at costs, looks at the incremental costs, whereas, the rate design process and the cost allocation process is based on fully loaded, embedded costs. So they are two distinct processes. 822 MR. MORAN: Right. So when you come to set the rates you're looking at the rate base as a total with all of the assets that it contains, including the most recently added one. 823 MR. KITCHEN: Yes. 824 MR. MORAN: And then on the basis of looking at the total rate base, that's how you go about establishing what the rates ought to be in order to achieve the revenues that you need. 825 MR. KITCHEN: That's right. 826 MR. MORAN: All right. And is there any precedent for the idea that a specific project and its costs after it's added to rate base should be used in order to set a specific rate for a specific class? 827 MR. KITCHEN: Are you talking about, is there precedent for incremental tolling? 828 MR. MORAN: Yeah. 829 MR. KITCHEN: Well -- 830 MR. MORAN: In other words, instead of considering a specific asset to be part of the overall rate base and then using -- and then setting rates, you sort of notionally isolate it and say, We're going to notionally isolate it, and then use that as a mini-rate base and come up with a rate for a specific customer that's being served by that asset. 831 MR. SCULLY: I'm cautious because I'm not sure how the CIL rate was derived since I wasn't there. But in my tenure at Union Gas, I have not generated incremental rates. And I think that there have been decisions where the Board has said that incremental tolling is not appropriate. 832 MR. MORAN: Okay. I think you've alluded to this a little bit, but in effect, one way to look at what Coral is asking for is for the creation of a new rate class; right? 833 MR. KITCHEN: Yes, based on end use. 834 MR. MORAN: Right. And first of all, let's start with what the Act says. If we look at section 36 of the Act, section 36 (1) says that: 835 No gas transmitter, gas distributor or storage company shall sell gas or charge for the transmission, distribution, or storage of gas except in accordance with an order of the Board which is not bound by the terms of any contract." 836 Right? 837 MR. KITCHEN: I'll accept that. 838 MR. MORAN: So if the Board isn't bound by the terms of any contract, that means the Board is free to look at the merits of a proposal for a rate structure; right? 839 MR. KITCHEN: The Board ultimately has control over the rate design through its approvals. 840 MR. MORAN: Regardless of whether Union happened to have entered into some sort of a contract with a party who is seeking that particular rate. 841 MR. KITCHEN: I think you're getting outside of my area. 842 MR. MORAN: Fair enough. Then section 36(3) says that: 843 "In approving or fixing just and reasonable rates, the Board may adopt any method or technique that it considers appropriate." 844 Right? 845 MR. KITCHEN: That's what it says. I'm agreeing with you, of course. 846 MR. MORAN: So the Board has flexibility, it's not going to be hindered by the existence of any contract and it can adopt any method or technique that it chooses; right? 847 MR. KITCHEN: Well, again, it's a bit outside of my expertise, but the Board will approve a rate; it can approve a rate structure. 848 MR. MORAN: Okay. And to the extent that Union comes forward with its proposal, as it has in this case, and there are some competing proposals, at the end of the day, the Board may come up with something that is different from either Union's proposal or the competing proposal; right? 849 MR. KITCHEN: I would concede that that's within the right of the Board, yes. 850 MR. MORAN: In fact, the DCC issue is an example of that. The Board came up with something that was different from what other people were proposing, including Union. 851 MR. KITCHEN: Yes. 852 MR. MORAN: Right? Okay. And to the extent that the Board thinks it's appropriate to create a new rate class, the creation of a new rate class will have impacts for all of the other rates because there will have to be a rejigging; right? 853 MR. KITCHEN: Yes. 854 MR. MORAN: But at the end of the day, because of that rejigging, it will be revenue-neutral, presumably, to Union. 855 MR. KITCHEN: Yes. 856 MR. MORAN: All right. So given that it's revenue-neutral to Union, the ultimate outcome -- I would suggest that that will give you some flexibility in answering the questions that I want to put to you now. 857 If you were to look at a customer like Coral, for example, who's coming to you and saying, I have unique characteristics, or me and a group of people like me have unique characteristics that don't seem to fit with some of your rate classes, and that was presented to you on a greenfield basis and you wanted to design a rate based on that person or that group of people, how would you go about designing a rate? What would be the steps you would follow in order to evaluate that proposal and decide whether, in fact, a new rate is required, and then how you would go about designing it? 858 MR. KITCHEN: Well, I guess the first thing I would try to determine is whether or not I felt a new rate class was justified and whether or not the customer or group of customers were appropriately included in existing rate classes. 859 To the extent that they were not, in other words, if they had a different load or load factor and their characteristics were different, then the first thing we would do is try to establish if there were cost differences, if they drove costs differently. If that was then the case, we would look at a structure and whether the appropriate structure was demand, commodity, all demand, or full fixed variable. There's a number of ways to do that. But we would look at it sequentially. The one thing that I'm not sure that I would concede on is that an end use isn't necessarily an appropriate criteria for determining the rate. But I think you have to start there, if you can support it, and also support the impacts on other customers. 860 MR. MORAN: Right. Well, let's spend a moment just on that end-use issue. Again, from a greenfield perspective, you have to evaluate the customers; right? 861 MR. KITCHEN: Yes. 862 MR. MORAN: And in order to evaluate the customers, you have to look at how they're using the service; right? 863 MR. KITCHEN: You want to look at how they're using the service, but also how they're causing us to incur costs. 864 MR. MORAN: Right. So to the extent that you have to do that, in effect. You're looking at the end use; perhaps not on an individual basis. You might have a whole bunch of people who live in houses and use gas the same way, but in order to figure out whether they belong in a rate class of their own, you'd be saying, This is how this group of people use gas; right? 865 MR. KITCHEN: I guess what I'm saying is I don't need to know the end use. You could give me the set of volumes and tell me it was an electric generator, and if it had a different load and load profile, I would design a rate. But if you then said, No, I was only kidding, it's a group of steel producers, that wouldn't change my rate design. 866 MR. MORAN: When you say end use, you're actually talking about the specific purpose or process associated with the use of gas. You're not talking about the actual use of gas itself, it's what they use the gas to do. 867 MR. KITCHEN: Right. 868 MR. MORAN: Okay, I understand. To get back to this greenfield scenario, if somebody like Coral says -- forget about whether they're going to use gas to produce electricity or widgets or whatever -- if they come to you and say this is our usage pattern, we use gas this way and we need this kind of firm and this kind of interruptible, and we don't think we fit into any of the other rate classes, then you would go through the sequence of events that you just described in order to determine if, in fact, they need a new rate structure or whether they fit into an existing one; right? 869 MR. KITCHEN: That's correct, in concert with the commercial groups. 870 MR. MORAN: Right. And in the context of the specific Coral proposal, as I understand your evidence, you were focusing primarily on the firm component of their gas usage. 871 MR. KITCHEN: Yes, because that's the component of the rate that was under dispute. 872 MR. MORAN: Right. And of course, as a gas user, they also have a substantial component that's interruptible. 873 MR. KITCHEN: Yes, there's a component. 874 MR. MORAN: All right. And in terms of volume, they're high volume? 875 MR. KITCHEN: Yes. 876 MR. MORAN: And in terms of load factor, what are they? 877 MR. KITCHEN: In terms of their total load factor, they are a -- I would call them a low load factor. Not as low as a house but a low load factor. In terms of their firm load, I would consider them to be a high load factor. 878 MR. MORAN: All right. There are two components to the load factor aspect of a customer like Coral; they're high load factor for the firm part and they're low load factor for the interruptible part. 879 MR. KITCHEN: For the total. 880 MR. MORAN: The total. 881 MR. KITCHEN: The combined load factor would be low, yes. 882 MR. MORAN: And when you say they're low load factor in the combined setting, is that on the basis of sort of their average -- 883 MR. KITCHEN: You look at their total CD versus their total load. 884 MR. MORAN: Okay. 885 MR. KITCHEN: And on that basis they would be a lower load factor customer. 886 MR. MORAN: Right. And of course, if you look at their -- the way that somebody like Coral would actually use gas, it would be variable through the course of a year because presumably it's partly driven by what's happening in the electricity spot market; right? 887 MR. KITCHEN: Yes, it would vary. 888 MR. MORAN: Okay. So, in fact, in actual circumstances, they might actually be high load factor part of the time and low load factor part of the time. 889 MR. KITCHEN: I suppose. We don't look at load factor on the basis of individual days or months. But in terms of their annual load, they have a high load factor firm portion and overall a low load factor. 890 MR. MORAN: Right. And again if we were to look at it from a greenfield perspective, it might be worthwhile to look at that, given the nature of the customer. 891 MR. KITCHEN: Right. But to the extent -- and it has been looked at, not by my personally, but it has been looked at in the company in terms providing that hourly flexibility, and one of the problems when you have that hourly flexibility is you need to have assets to support it. And as soon as you have assets to support it, the cost goes up. That's part of the issue. And one of the things that you -- especially if it's on a firm basis. And interruptible rates are what allow customers to really vary their load because there's no -- there's less of an obligation to consume. 892 MR. MORAN: Right. 893 MR. KITCHEN: In some cases it depends if there's an MAV, but there could be less of an obligation. 894 MR. MORAN: Right. And given what one sees in the carriage-service contract, is it a legitimate thing to suggest that Coral is, in fact, getting two services; a firm service and an interruptible service? 895 MR. KITCHEN: Well, within the T1 rate schedule they're getting a firm service, they would get an interruptible service, and they would also get a cost-based storage service. 896 MR. MORAN: All right. So they're getting three services, then. 897 MR. KITCHEN: Yeah. That's what they've contracted for, yes. 898 MR. MORAN: Right. And I think you indicated to Mr. Brown that if it made sense for Coral to take the interruptible rate, you don't have a problem with that. 899 MR. KITCHEN: No. That's -- to me that's -- the rate schedule is there to be used by the commercial people and they use it to help serve the customer. I don't usually get involved in conversations about this customer wants all interruptible, can we do it? If it's available on the rate schedule, then they manage that. 900 MR. MORAN: Right. And at the end of the day, just looking at it on the merits of the case, if it makes sense to create a new rate class to accommodate a new class of customers that are, in effect, new in Ontario, again, you wouldn't have a philosophical objection to that because all that means is a bit more work for you afterwards to rejig all the rates; but at the end of the day, Union's revenue -- 901 MR. KITCHEN: Well, I guess the only philosophical issue I'd have is I don't believe in end-use rates. But if the Board ordered us to do that, we would do it. 902 MR. MORAN: I think we dealt with -- 903 MR. KITCHEN: I was dealing with the philosophical issue. I would do it, yes. 904 MR. MORAN: All right. So at the end of the day, what the Board really has to understand, then, is whether, in fact, there is merit to the suggestion that a merchant generator is a special category of customers different from other categories of customers. 905 MR. KITCHEN: Well, different from other categories of customers, but also perhaps different from other electrical generators. And we've talked a lot about the south, but there's also electric generators in the north and -- like TCPL or -- so, you know, it's not just a southern issue. And it also could reach into Enbridge's franchise area. 906 MR. MORAN: So for the purposes of what the Board has to do, the issue of who said what to whom in the contract doesn't matter because that's got nothing to do with rate-making; rate-making has to do with customer usage patterns and the appropriate way of charging them for the costs that are created as a result of that. 907 MR. KITCHEN: That's my view of rate-making, yes. 908 MR. MORAN: All right. There's one last area, then, I want to cover with you. 909 Mr. Chair, I don't know if you want to take a lunch break. 910 MR. SOMMERVILLE: Proceed. 911 MR. MORAN: It's the dreaded allocation factors. 912 If you could turn up H.1 -- sorry, H.3, tab 1, schedule 1. 913 MR. KITCHEN: Sorry, I missed that reference. 914 MR. MORAN: H.3, tab 1, schedule 1. I'm moving away from the DCC/Coral issue. 915 MR. SOMMERVILLE: How long do you expect this to take, Mr. Moran? 916 MR. MORAN: This would take about maybe ten minutes and then I'm done. 917 MR. SOMMERVILLE: You will have redirect. 918 MR. SMITH: I do. 919 MR. SOMMERVILLE: We'll adjourn and reconvene at 2:00. Thank you. 920 --- Luncheon recess taken at 12:30 p.m. 921 --- On resuming at 2:00 p.m. 922 PRELIMINARY MATTERS: 923 MR. SOMMERVILLE: Thank you. Please be seated. 924 Just before we begin again, this is probably the largest complement of the regular participants in this case that we'll have after today. And I just wanted to -- it's been a long case. I guess about five weeks ago is when we started. It is a remarkable testament to the professionalism and the cooperation and dedication of the people who participated as the Applicant, the witnesses, and the intervenors, that the case has been the excellent review that I think it has been. And I want to, on behalf of Mr. Birchenough, myself, thank all of the participants for that extremely high level of dedication and skill. Thank you. 925 Mr. Moran. 926 MR. MORAN: Thank you, Mr. Chair. 927 MR. SMITH: Sorry, Mr. Moran. 928 Mr. Chairman, if I could just put it on the record, we actually do have a few more undertakings, and they are N.12.6, N.15.6, N.15.7, N.19.5, and N.20.1. 929 MR. SOMMERVILLE: Thank you, Mr. Smith. 930 UNION GAS LIMITED - PANEL 15; KITCHEN, McMAHON 931 M.KITCHEN; Previously Affirmed. 932 P.McMAHON; Previously Sworn. 933 CROSS-EXAMINATION BY MR. MORAN: 934 MR. MORAN: Okay. Just before the lunch break we were about to turn to Exhibit H.3, tab 1, schedule 1. 935 MR. KITCHEN: Yes. 936 MR. MORAN: And what we see on those two pages of that schedule is, in part, the total northern delivery and the total south delivery; right? 937 MR. KITCHEN: That's correct. 938 MR. MORAN: As well as the northern transportation and storage and the exfranchise. 939 MR. KITCHEN: That's correct. 940 MR. MORAN: Okay. And if we compare the yellow pages -- the yellow update to the white, there is a change in the ratio between north and south; right? 941 MR. KITCHEN: In terms of the allocated costs or in terms of the -- 942 MR. MORAN: In terms of the total northern -- total north delivery versus total south delivery. If you go to the white page, under column C, there's a revenue excess deficiency figure, a deficiency of $15.2 million; right, for the total north delivery? 943 MR. KITCHEN: Yes. 944 MR. MORAN: And for the total south delivery, there's a revenue deficiency of $88.7 million -- 945 MR. KITCHEN: That's correct. 946 MR. MORAN: -- on the white pages. And when you go to the yellow-page update, the total north delivery changes from a deficiency of 15.2 million to a deficiency of 18.3 million. 947 MR. KITCHEN: That's correct. 948 MR. MORAN: Right? So the deficiency increases. 949 MR. KITCHEN: There's been a -- the allocated costs have changed by approximately $3 million. 950 MR. MORAN: Okay. And on the total south delivery, there's a reduction in the total revenue deficiency from 88.7 million to 78.2 million on the yellow pages. 951 MR. KITCHEN: Yes, but the allocated costs have not changed very much. They've gone from 550.9 to 550.3, and you can see that it's a revenue change that is driving the deficiency difference. 952 MR. MORAN: Right. So the explanation, then, for that adjustment is a change in the allocation of costs for the north? 953 MR. KITCHEN: No. There's -- yes. It appears as though revenue has not changed very much in the north in the yellow page, and there's been an increase in the allocated costs; whereas, in the south -- sorry, revenue has changed and costs have not. 954 MR. MORAN: Okay. So dealing with the north first, then, what is the change in the allocated costs that -- what's driving the change in the allocated costs that caused a $3 million increase in the revenue deficiency for total north delivery? 955 MR. McMAHON: One second. 956 MR. KITCHEN: I don't know specifically what's driving the $3 million change in delivery. 957 MR. MORAN: Okay. 958 MR. KITCHEN: There's a number of factors that change from white page to yellow page. There's been no change in methodology in terms of the cost allocation. It's a change in some level of cost, and I'm not sure exactly which level of cost is driving that. But it appears as though most of the $3 million is in rate 01, and that appears to be a shift in costs between rate 25 and rate 100 which is almost offsetting. 959 MR. MORAN: Right. When you look at the white pages for delivery north for rate 01 in column C, the figure changes from 13.5 million deficiency there to 16.1 million deficiency in the yellow-page update. 960 MR. KITCHEN: That's correct. 961 MR. MORAN: And rate 1, of course, is the residential component. 962 MR. KITCHEN: That's correct. 963 MR. MORAN: All right. Well, rather than try to get you to go through a whole bunch of binders to try to figure out what that is -- 964 MR. KITCHEN: Which I think is what we'd have to do. 965 MR. MORAN: -- right, I wonder if you could undertake to provide the details that explain why the total north delivery deficiency has increased the way it has. 966 MR. KITCHEN: I'll have to accept that on behalf of Mr. McMahon. 967 MR. MORAN: It's a shifting of costs. 968 MR. KITCHEN: A shifting of costs and a shifting of responsibilities. 969 MR. McMAHON: Actually, I just wanted to add something before that undertaking is carved out. One thing that you should note is that the percentage allocation of the total revenue requirement to the northern rate classes, take rate 01, for instance, that percentage allocation of the revenue requirement hasn't changed from white page to yellow. So all we'd be looking at is trying to explain what was probably explained in the phase-1 evidence on the reasons why components of the revenue requirement have gone up. 970 MR. MORAN: Right. I think Mr. Kitchen said a minute ago that the methodology hasn't changed, but obviously the numbers have and so the question is: What's the explanation for the change in the numbers? 971 MR. McMAHON: Now, there were some interrogatories responded to that explained changes in the costs allocated or -- and the rates for some of the northern rates. If I could just have a second, I could look that up for you. 972 MR. MORAN: In the interests of time, if you wanted to include in the undertaking response a reference to the interrogatories that explains some of the changes, that would be fine. I think I'm interested in getting the total explanation, in any event. So if you only have some of it, we'll still need the undertaking, so why don't we leave it at that. 973 MR. McMAHON: All right. 974 MR. MORAN: Okay. So Undertaking N.22.8, to provide the details that would explain the change in the revenue deficiency between the white-page and yellow-page update in Exhibit H.3, tab 1, schedule 1. 975 UNDERTAKING NO. N.22.8: TO PROVIDE THE DETAILS THAT WOULD EXPLAIN THE CHANGE IN THE REVENUE DEFICIENCY BETWEEN THE WHITE-PAGE AND YELLOW-PAGE UPDATE IN EXHIBIT H.3, TAB 1, SCHEDULE 1 976 MR. SMITH: Mr. Chairman, that is something we can do. The concern I have is it seems to me that there could be, in tracking down a $3 million cost difference, a lot of ins and outs -- I'm not sure about this, but a lot of changes that make up that $3 million. It may not be one or two items. And so I wonder, even if the question is relevant, I wonder about the marginal benefit of this, given that it could have been canvassed in the phase 1, and if KKD get it done before Monday. 977 MR. SOMMERVILLE: It seems to me there's some evidence from Mr. McMahon with respect to an increase in TCPL tolls that had a $5 million implication for the northern cost structure. And there was a -- I think there was a qualification that was made by Mr. Kitchen that there was an interest in perhaps tracking those numbers down with some more precision. And I wonder, in looking at that differential that Mr. Moran has identified, whether the refinement or confirmation that Mr. Kitchen referred to might not be an answer to that. 978 MR. KITCHEN: The only problem with that, sir, is that the STS toll issue appears in the gas supply transportation portion of the north and not in delivery, so that will not be the explanation of this $3 million. 979 MR. SOMMERVILLE: Okay. 980 Mr. Moran, maybe the best way of handling this is to address this offline. One of the issues that Mr. Smith raises is the question of the timing of the response and it may be that it's possible to sort of get the information in such a fashion or get an indication of what the information may be in another way rather than as -- rather than through this undertaking. Is that acceptable? 981 MR. MORAN: As I understand Mr. Smith's concern, it might be because of the tightness of the timing between now and the delivery of argument in chief. But Union does have a right of reply some four weeks from now and so maybe in that time frame, as long as it's delivered in time for intervenor argument. 982 MR. SMITH: That would be fine. The point simply is that it's unlikely to be one $3 million. It could be one million up, two million down 5 million up, 2 million down. I don't know. 983 MR. SCULLY: Mr. Chairman, I may be speaking out of turn on, and I don't know where Mr. Moran is going, but in that same category, for the transportation portion which makes up the remainder, there's a shift from 3 million to 12 million. The 3 million in the white goes up to 12. We're certainly very concerned about this area. 984 MR. SOMMERVILLE: I'm sure Mr. Moran is going to digest your information, Mr. Scully, and may have an additional undertaking that he wishes to make or to request. 985 MR. MORAN: So the undertaking then stands, as I understand it? 986 MR. SOMMERVILLE: Yes, please. 987 MR. MORAN: Moving to the delivery north to the delivery south, I think, Mr. Kitchen, you indicated that the change in the deficiency there was driven by something different than what we see in the north? Could you just repeat what that was? There's a reduction from 88.7 million to 78.1 million in the deficiency. 988 MR. KITCHEN: If you'd notice in the revenue column, in column A, the revenue between the white and the yellow has gone from 462 million in the white to 472 in the yellow without a corresponding change in the level of cost, and so that will drive a difference in the deficiency. 989 MR. MORAN: Thank you. Now, rate M12, as I understand it, is a cost-based service? 990 MR. KITCHEN: That's correct. 991 MR. MORAN: All right. And if you go to page 2 of Exhibit H.3, tab 1, schedule 1, the yellow update -- 992 MR. KITCHEN: Yes. 993 MR. MORAN: -- on line 9, "exfranchise M12," what's recorded under the revenue excess deficiency column is a deficiency of $3 million; right? 994 MR. KITCHEN: 3995, yes. Which column are you looking at, sir? Column C? 995 MR. MORAN: I was looking at column E. 996 MR. KITCHEN: Column E, okay. 997 MR. MORAN: I guess I'm looking on both of them. In the context of a cost-based service, how do these numbers arrive -- arise? 998 I guess I'm more interested in the deficiency that exists after recovery, obviously. 999 MR. KITCHEN: Yes. If you turn to Exhibit H.3, tab 1, schedule 2, page 17. 1000 MR. MORAN: I'm sorry, H? 1001 MR. KITCHEN: H.3, tab 1, schedule 2, page 17. 1002 MR. MORAN: Yeah. 1003 MR. KITCHEN: You see -- I guess it's column F on that schedule, the totals to the 3,025 of the deficiency after recovery. A portion of that relates to the fact that there is approximately $5 million of S&T margin that is built into the delivery rates and part of that is the exfranchise share of that amount. And the 2,689 showing up on line 10 I would have to get back to you on. 1004 MR. MORAN: All right. So just before we mark this as an undertaking, the effect of -- if we go back to H.3, tab 1, schedule 1, in column E, the effect of a deficiency after recovery, does that not mean that there is essentially a subsidy being paid by franchise customers for exfranchise customers? 1005 MR. KITCHEN: Not necessarily, no. 1006 MR. MORAN: All right. So you'll provide an explanation, then -- 1007 MR. KITCHEN: Yes. A portion of it is the fact that we include -- we have this $5 million -- $5.5 million that is shared 90/10, and the 90 percent is built into rates. So some of that does go exfranchise because that's the way it -- it's their share of that. But then there's the remaining amount that I'll need to explain. 1008 MR. MORAN: All right. So why don't we then leave it as an undertaking to provide the explanation for why there is a revenue deficiency after recovery for M12 customers of $3,025,000. 1009 MR. KITCHEN: Yes. 1010 MR. MORAN: That will be Undertaking N.22.9. 1011 MR. SOMMERVILLE: Thank you. 1012 UNDERTAKING NO. N.22.9: TO PROVIDE THE EXPLANATION FOR WHY THERE IS A REVENUE DEFICIENCY AFTER RECOVERY FOR M12 CUSTOMERS OF $3,025,000 1013 MR. MORAN: Now, the last issue that I had to deal with you, Mr. Kitchen, is just a question of timing. We are where we are in the rates schedule -- hearing schedule. If we were to -- well, let me start at this point. 1014 You get the Board's decision and the Board says, This is what you can recover in rates. Can you walk me through the process that you have to go through after you get the Board's decision in order to create the draft rate order, and how long that takes you to do. 1015 MR. KITCHEN: Normally we -- once we receive the Board's decision, we digest the impact of that and take those modifications, changes, what's approved, what's not approved, and prepare a decision cost study. And that decision cost study will have the approved revenue requirement in there along with the approved forecast, to the extent there are any adjustments to the forecast. 1016 The cost allocation step, depending on how complicated the changes are and how many changes there are, can take upwards of, I would say, a week, unless Mr. McMahon is concerned with that number. Once Mr. McMahon has completed the cost study, then the cost study comes to us. 1017 Now, by that point it takes us a couple of days to digest the decision, about a week to implement the cost study, we get the cost study, and then it takes us approximately two weeks to actually run it through our models and put out the rate design. 1018 Now, in there there's also the preparation of rate notices which begins at some point between the cost study being finished and when the rate design is finished. We start working on the words without having the numbers, and then eventually we land on what the words and the numbers are. 1019 So the rate design piece can take approximately two weeks. And then there's just the preparation of all the schedules required and the draft rate order, along with whatever evidence may be required to support the draft rate order. And when I say "evidence," I'm talking about just explanations of changes and how they've been flowing through and such. 1020 MR. MORAN: And is that part of that two-week period that you just referred to? 1021 MR. KITCHEN: I would say that's likely on top of that. I'm thinking back to the -- when we did the 0029 decision, I believe the decision provided 28 days to process the rate order, and I'm doing this from memory so I hope that's correct, and then following that there was a -- we provided that within the 28 days, and following that there was a time for intervenors to make submissions on the rate order, we had an opportunity to respond to those submissions, and then the Board made a decision on the rate order. 1022 MR. MORAN: All right. 1023 MR. KITCHEN: So assuming you have -- and that wasn't a very complicated decision in that we were not dealing with as many changes. We had a base level of costs because we were using a 1999 cost base. 1024 So I would say that -- and if you take a week for the cost study, two to three weeks for rate design -- yes, it was 28 days -- you're looking at anywhere from three to four weeks just to do the pure number crunching, and then probably another few days to actually get the paper together and send out the draft rate order. 1025 MR. MORAN: All right. 1026 MR. KITCHEN: Then there's the submission period which really depends on what the Board feels is required. 1027 MR. MORAN: So for the part that's under your control, the preparation of the draft order, what you're saying is you need up to about 28 days -- 1028 MR. KITCHEN: Yes. Doing the 0029 case, the 28 days was very tight; however, I must admit we did have to prepare a rate order for 2001 and 2002 and deal with the issue of retroactivity which would add some. It's just in this case we're going to have a more complicated cost allocation piece, depending on the Board's decision. Assuming they give us everything we want, we'd be ready to go in no time. 1029 MR. McMAHON: He doesn't really mean "no time," Mr. Moran. 1030 MR. KITCHEN: Yes, 28 days is, I think, a reasonable amount in a large case. 1031 MR. MORAN: All right. And then the piece that you have control over is finished, and then it has to be circulated to intervenors for comments and replied by Union. 1032 After the Board finalizes it and says, This is the rate order, go ahead and implement it, how much time is needed for Union to do that piece, the end bit? 1033 MR. KITCHEN: To do the end bit? The entire process typically takes us 60 days. So if you take the 28 days that we need and you take out the Board's -- the time for submissions and such, that would leave 10, 20, 30, approximately let's just say roughly three to four weeks to implement it within the billing system, get the notices printed and do the appropriate testing on the system to make sure that when we actually produce the bill, it is giving us the revenue that we should be giving. So it's typically a 60-day process. 1034 Retroactivity adds some time in there simply because that's probably the most complicated part of any implementation. The actual changing of rate tables is a lesser task. But again, I'm speaking for another department and I know that they always like more time, just like any one of us does. Sixty days is the rule of thumb that we use. 1035 MR. MORAN: All right. So recognizing that the argument phase takes four weeks, then clearly that 60-day period takes us into the fiscal year, so inevitably there is a retroactivity issue to deal with in this case; right? 1036 MR. KITCHEN: Yes. 1037 MR. MORAN: All right. So if we were to assume that the Board was to give you everything you're asking for and, with your 60-day period, getting you to implement rates April 1st, could you indicate to the Board what that would mean for the purposes of retroactivity? 1038 MR. KITCHEN: I'm not sure of the numbers for an April 1st implementation, but we have looked at a March implementation and there wouldn't be that much difference, I don't think. 1039 MR. MORAN: A March 1 implementation? 1040 MR. KITCHEN: A March 1st implementation versus the April 1st implementation. My recollection is that the impact on customers would be in the 20 to $30 range for an average residential customer. 1041 MR. MORAN: All right. 1042 MR. KITCHEN: Now, it could be smaller than that, obviously, depending on what's approved, but it's in that range. 1043 MR. MORAN: So on the assumption that everything gets approved, you're suggesting about a 20 to $30 retroactive impact on -- 1044 MR. KITCHEN: Yes, that's an estimate and from my memory, yes. 1045 MR. MORAN: From your memory. 1046 MR. KITCHEN: I don't think it's different than that. 1047 MR. MORAN: Maybe the easiest thing -- 1048 MR. KITCHEN: It's definitely not 120 -- 1049 MR. MORAN: 120. 1050 MR. KITCHEN: The $120. 1051 MR. MORAN: We won't talk about that. Maybe you could just undertake, then, to provide, rather than from memory, from looking at the numbers, what the retroactive effect would be for a March 1 implementation and an April 1 implementation to give the Board what a sense of what it would mean. Would you do that? 1052 MR. KITCHEN: Yes. 1053 MR. MORAN: Mr. Chair, that would be Undertaking N.22.10. 1054 MR. SOMMERVILLE: Thank you. 1055 UNDERTAKING NO. N.22.10: TO PROVIDE WHAT THE RETROACTIVE EFFECT WOULD BE FOR A MARCH 1 IMPLEMENTATION AND AN APRIL 1 IMPLEMENTATION 1056 MR. MORAN: Those are all my questions. 1057 MR. SOMMERVILLE: Mr. Moran. 1058 The Board has no questions. 1059 Redirect, Mr. Smith. 1060 MR. SMITH: Thank you, Mr. Chair. 1061 RE-EXAMINATION BY MR. SMITH: 1062 MR. SMITH: Mr. Kitchen, Mr. Brown suggested to you yesterday that Union's rates have not differentiated for high-volume, low-load factor customers; do you recall him asking you that question? 1063 MR. KITCHEN: Yes, I do. 1064 MR. SMITH: And you indicated that low-load factor customers actually tend to cause more costs; do you recall that? 1065 MR. KITCHEN: Yes. 1066 MR. SMITH: And you also indicated that such customers would benefit from commodity blocking in the T1 rate redesign, and my question is: What did you mean by that? 1067 MR. KITCHEN: In the T1 redesign, we're going to a two-block structure on the commodity side -- well, and on the demand side. So to the extent that a low-volume customer consumes -- sorry, not a low-volume customer, a low-load factor customer is able to consume into that second-block rate, there will be a benefit, an average unit-cost benefit to that consumption. 1068 MR. SMITH: Mr. Brown also asked you a number of questions about other power producers or power producing facilities, and asked you about their load factor, and I believe Mr. Moran asked you questions about this as well. Do you recall those questions? 1069 MR. KITCHEN: Yes, I do. 1070 MR. SMITH: And you responded, my recollection is, by stating that on the firm component of their load, they're very similar to Coral; do you recall that? 1071 MR. KITCHEN: Yes. 1072 MR. SMITH: And my question is: Why did you refer Mr. Brown to the firm component of their load factor and the significance of that, if any? 1073 MR. KITCHEN: The significance of the firm-load factor is the rate that is at dispute or the rate design that's at dispute is really the firm transportation rate. We're not disputing the interruptible piece of the service; we're not disputing the storage service. And I think that Coral or Elenchus, one of their evidence, actually says that they are not disputing the storage service. 1074 So the reason that we look at the firm-load factor is because when we're designing the firm rates, it's firm volumes and firm-load factors that we're concerned about. 1075 MR. SMITH: Mr. Brown also asked you a number of questions about a series of spreadsheets and the demand price reflected on those spreadsheets behind tab 15; do you recall that? 1076 MR. KITCHEN: Yes. 1077 MR. SMITH: And one of the things he suggested to you was that the price declined over time and that was a result of Coral's leave-to-construct application; do you recall that? 1078 MR. KITCHEN: I recall that. 1079 MR. SMITH: My recollection is that you disagreed with that and said that the parameters that underpinned the rate changed. 1080 MR. KITCHEN: That is correct. 1081 MR. SMITH: And my question is: What were you referring to by "the parameters"? 1082 MR. KITCHEN: The parameters that I was referring to are those that would determine load factor, so it was a -- there must have been a change in volume, firm volume, and/or firm CD that would have driven a load factor change from those two -- from the time the one rate was offered until the final rate was offered. And load factor would have gone up in order for the rate to go down. 1083 MR. SMITH: Thank you. And Mr. Brown and Mr. Moran also asked you questions about the profitability index set out in Union's leave-to-construct application, and my question is: Was the rate offered to Coral in the carriage-service contract based on Union's incremental or average embedded cost of serving Coral? 1084 MR. KITCHEN: It was based on the embedded cost. 1085 MR. SMITH: And what was the basis of the storage rate they were offered, incremental or embedded; do you know? 1086 MR. KITCHEN: It was also based on embedded costs. 1087 MR. SMITH: And infranchise storage rates, are they based on? 1088 MR. KITCHEN: Embedded costs. 1089 MR. SMITH: And what would the incremental cost of new storage for Union be. 1090 MR. KITCHEN: I don't have a figure, but it would definitely be higher than the embedded costs, probably closer to market. 1091 MR. SMITH: And what basis does Union now use to charge for storage to customers seeking storage but who do not take distribution? 1092 MR. KITCHEN: Market-based rates. 1093 MR. SMITH: Thank you. 1094 Mr. Kitchen, you indicated, in response to a question from Mr. Brown, that very early on Union indicated to Coral that Union was not prepared to offer a bypass competitive rate. 1095 MR. KITCHEN: That's correct. 1096 MR. SMITH: Do you recall that? 1097 MR. KITCHEN: That's correct. 1098 MR. SMITH: And what communication were you referring to? 1099 MR. KITCHEN: There was a communication that was provided to Coral describing the benefits of being a distribution customer. 1100 MR. SMITH: And if I may, Mr. Chairman, pass up an e-mail and ask Mr. Kitchen if this is the document he's referring to. 1101 MR. KITCHEN: Yes, it is. 1102 MR. SMITH: Is this the document that you were referring to? 1103 MR. KITCHEN: Yes, it is. 1104 MR. SMITH: Mr. Chairman, I wonder if this might be marked as an exhibit. 1105 MR. MORAN: Mr. Chair, Exhibit M.22.1, e-mail from Chris Shorts to Bruce Rogers, Mark Isherwood and others dated Monday, December 10th, 2001 at 10:00 a.m. 1106 EXHIBIT NO. M.22.1: E-MAIL FROM CHRIS SHORTS TO BRUCE ROGERS, MARK ISHERWOOD AND OTHERS DATED MONDAY, DECEMBER 10TH, 2001 AT 10:00 A.M. 1107 MR. SMITH: Mr. Kitchen, if I could draw your attention to page 2, paragraph 2, the first sentence begins: 1108 "Union does not support a bypass of the regulated distribution facilities and associated costs." 1109 Is that the indication to Coral you were referring to? 1110 MR. KITCHEN: That is. 1111 MR. SMITH: Thank you. Mr. Kitchen, did Union, to your knowledge, know at the time you entered into the clarification agreement in October 2002 that Coral's consultant in this case, Mr. Todd and his firm, were going to be filing evidence opposing Union's proposal for eliminating the DCC and recommending a resolution of the DCC that would deprive Coral of the benefit of Union's DCC proposal? 1112 MR. KITCHEN: No, I did not. 1113 MR. SMITH: And again, Mr. Kitchen, Mr. Thompson and Mr. Warren and perhaps Mr. Brown asked you questions relating to the impact of approval of Coral's proposal and what impact that would have if picked up by other independent power producers, and my recollection is that you indicated that would have a revenue impact of 3 to $4 million; do you recall that? 1114 MR. KITCHEN: That was the -- that was the number I provided to Mr. Warren, yes. 1115 MR. SMITH: And my question, first of all, is: Is that the impact over the life of the Coral agreement? 1116 MR. KITCHEN: No, it's not. 1117 MR. SMITH: And what is the time frame of that impact? 1118 MR. KITCHEN: The time frame of the impact is really from the 2004 test year until the DCC is eliminated, and the actual range of that impact is, as I said, 3 to 4 and it's actually in the -- in the 2007 year, it's closer to 5. 1119 MR. SMITH: Do you know the impact over the life of the Coral contract? 1120 MR. KITCHEN: No, I don't. 1121 MR. SMITH: And my second question is: Is that -- the range you gave, the 3 to $5 million, is that for all power producers across Ontario? 1122 MR. KITCHEN: That is for power producers, including Coral, in the southern operations area. 1123 MR. SMITH: And do you have power producers anywhere else? 1124 MR. KITCHEN: We have power producers in the northern and eastern operations area, yes. 1125 MR. SMITH: So would I be right to assume that if they were included, the number would be larger? 1126 MR. KITCHEN: That's correct. 1127 MR. SMITH: And am I also correct that that lost revenue would be recovered from Union's infranchise customers? 1128 MR. KITCHEN: That's correct. 1129 MR. SMITH: Mr. McMahon, some time ago Mr. Aiken took you through, I think he described it, a tour of the cost allocation binders and identified a number of small items which he questioned as being included in the M10 rate; do you recall that? 1130 MR. McMAHON: Yes, I do. 1131 MR. SMITH: And, Mr. Kitchen, is the M10 rate a cost-based rate? 1132 MR. KITCHEN: No, it's not. It's a rate derived using the M9 rate and it does not fully recover the allocated costs. 1133 MR. SMITH: And if the costs identified by Mr. Aiken were excluded, would that impact the M10 rate? 1134 MR. KITCHEN: No, it would not. 1135 MR. SMITH: And similarly, would those costs, if they were spread across all rate classes, impact any other rate? 1136 MR. KITCHEN: No, they would not. 1137 MR. SMITH: Mr. McMahon, Mr. Janigan, I believe it was, asked you about the allocation of distribution capacity costs; do you recall that? 1138 MR. McMAHON: Yes, I do. 1139 MR. SMITH: My question is: Are you aware of what proportion of T1 customers are served off of transmission main as opposed to distribution main? 1140 MR. McMAHON: I know that approximately 71 percent of the T1 demand is served directly off transmission lines. 1141 MR. SMITH: Thank you. 1142 And Mr. Kitchen, I believe it was Mr. Ryder who asked you about storage cost allocation; do you recall that? 1143 MR. KITCHEN: Yes. 1144 MR. SMITH: And he asked you questions about the 97.6 allocation factor; do you recall that? 1145 MR. KITCHEN: Yes. 1146 MR. SMITH: And my question, sir, is: Do you know what would happen to the aggregate excess storage allocation if Union did not apply that 97.6 percent factor and Union's customers went to an unbundled service? 1147 MR. KITCHEN: The 97.6 percent factor is -- well, it's there because we have customers in Union's franchise that are summer-peaking, and as a result of being a summer-peaking customer, they actually provide a benefit to the rate class from a storage point of view. If Union did not apply the 97.6 percent factor and all customers unbundled, they would actually allocate more storage than Union owns. 1148 MR. SMITH: Thank you. 1149 Mr. McMahon, turning to the M2 rate class as a whole, my question is: Does the cost study accurately represent the costs of serving the M2 rate class as a whole? 1150 MR. McMAHON: Yes, it does. 1151 MR. SMITH: And without the benefit of an intraclass study, do the costs in the cost study -- are they allocated properly or accurately between the residential, commercial/industrial categories of M2. 1152 MR. McMAHON: The costs are allocated accurately as per the established methodology, the cost allocation methodology. The only information we have that is split between M2 residential and M2 commercial are the volumes and customer numbers, so we use that as a proxy to split the costs that are actually allocated to the M2 rate class. 1153 MR. SMITH: And Mr. Kitchen, does the cost study and the split between residential, commercial, and industrial accurately represent the costs of serving those customers? 1154 MR. KITCHEN: The cost study provides a guide to the rate design. 1155 MR. SMITH: And would it be possible to design an M2 rate or split the M2 rate into two classes without performing an intraclass study? 1156 MR. KITCHEN: No, it would not. 1157 MR. SMITH: And why is that? 1158 MR. KITCHEN: Because the basis of the current M2 rate is based on an intraclass study that has them combined. To know the volume breakpoint for a split rate, you would need to do some study to find the appropriate breakpoint. 1159 MR. SMITH: Thank you. I'll just take a minute to look through my notes. 1160 Mr. Kitchen, I'm not certain whether this was earlier this morning or yesterday, but in response to a question from Mr. Brown about the change in payments made by Coral both before and after the decision of the Board with respect to the DCC, Mr. Brown suggested to you that the costs went up and you indicated to him yes, but they were receiving the benefits of being a distribution customer. My question to you is: What did you mean by "the benefits of being a distribution customer"? 1161 MR. KITCHEN: The benefits of being a distribution customer is access to cost-based storage. 1162 MR. SMITH: Thank you. And if I could actually draw your attention to the e-mail from Mr. Shorts that was previously marked as an exhibit, do you have that? 1163 MR. KITCHEN: Yes, I do. 1164 MR. SMITH: On page 2, would those items which are listed there under "financial and operational" and which are bulleted also represent the benefits of being a distribution customer? 1165 MR. KITCHEN: Yes, they would. 1166 MR. SMITH: Thank you. 1167 MR. MORAN: Mr. Chair, just while we're on that exhibit, I just noticed that I marked it as M.21.1. It should be M.22.1. 1168 MR. SOMMERVILLE: It just feels like 21. 1169 MR. SMITH: Thank you, Mr. Moran. 1170 Those are all of my questions. Thank you. 1171 MR. SOMMERVILLE: Mr. Smith. 1172 The panel is excused. Thank you for your assistance. 1173 [The witness panel was excused] 1174 MR. SMITH: I suppose that was fairly anti-climactic in the sense that that's the end of Union's five-week case. I gather Mr. Brown will now be calling his evidence. Mr. Penny will be taking my place, and Mr. Brown, I'll move over. 1175 MR. SOMMERVILLE: Thank you, Mr. Smith. 1176 Would it be convenient, Mr. Brown, if we took our afternoon break, ten minutes, at this stage to allow your panel to settle? 1177 MR. BROWN: Certainly. 1178 MR. SOMMERVILLE: Thank you. We'll take ten minutes. 1179 --- Recess taken at 2:45 p.m. 1180 --- On resuming at 2:55 p.m. 1181 MR. SOMMERVILLE: Thank you. Please be seated. 1182 Mr. Brown. 1183 MR. BROWN: Thank you very much, Mr. Chair. The witness panel that's being called on behalf of Coral Energy Canada Inc. consists of three individuals. The closest to the panel is Mr. Greg Baden from Coral Energy. In the middle, Mr. John Todd from Elenchus, and at this end of the panel is Ms. Paula Zarnett from Barker, Dunn, Rossi. If I could ask the witnesses be sworn in, please. 1184 CORAL ENERGY CANADA INC. - PANEL 1; BADEN, TODD, ZARNETT 1185 G.BADEN; Sworn. 1186 J.TODD; Sworn. 1187 P.ZARNETT; Sworn. 1188 EXAMINATION BY MR. BROWN: 1189 MR. BROWN: Mr. Baden, do you have in front of you the document which we've marked as Exhibit K.37 as evidence of the intervenor Coral Energy Canada Inc.? 1190 MR. BADEN: Yes, I do. 1191 MR. BROWN: If we turn to the end of that document we see there a copy of your CV. 1192 MR. BADEN: Yes. 1193 MR. BROWN: Currently, you are the vice-president power with Coral Energy Canada Inc.? 1194 MR. BADEN: Yes, I am. 1195 MR. BROWN: Coral Energy is part of the Shell group of companies? 1196 MR. BADEN: Yes, it is. 1197 MR. BROWN: And you've been with Shell, by the looks of it, since about 1977, in various capacities. 1198 MR. BADEN: Yes, I have. 1199 MR. BROWN: You're an engineer by training? 1200 MR. BADEN: I am. 1201 MR. BROWN: In terms of what you do now, would you describe yourself as more of a business guy rather than a rates guy? 1202 MR. BADEN: Yes, I would definitely describe myself as a commercial business development individual. 1203 MR. BROWN: Mr. Baden, you were involved in the preparation of the evidence which we've marked as Exhibit K.37, the evidence of the intervenor Coral Energy Canada Inc.? 1204 MR. BADEN: Yes, I was. 1205 MR. BROWN: If I could also ask you to turn to the cross-examination brief, the one that we've marked as Exhibit X.21.1. Do you have that? 1206 MR. BADEN: Yes, I do. 1207 MR. BROWN: If you could turn to tab 15 at the second page of that tab, there's a document entitle the "supplemental evidence of the intervenor Coral Energy Canada Inc." 1208 Do you see that? 1209 MR. BADEN: Yes, I do. 1210 MR. BROWN: You were also involved or assisted in the preparation of that evidence? 1211 MR. BADEN: Yes, I was. 1212 MR. BROWN: Do you adopt the evidence to which I've referred you as your own evidence for the purposes of this proceeding? 1213 MR. BADEN: I do. 1214 MR. BROWN: Mr. Todd, if I could turn to you. As part of Exhibit K.37, there's included a document entitled, "Review of the monthly demand charge for the Brighton Beach Power Station." If we could go to tab A of that document, is that a copy of your CV? 1215 MR. THOMPSON: Yes. 1216 MR. BROWN: You are currently the principal of Elenchus Consulting Services Inc.? 1217 MR. TODD: That's correct. 1218 MR. BROWN: In terms of the evidence before the Board in this hearing, the report that we've just looked at, the review of the monthly demand charge, that's evidence which you were involved in preparing? 1219 MR. TODD: That's correct. 1220 MR. BROWN: Could you indicate to the Board what portions of that evidence or that report you authored? 1221 MR. TODD: I was primarily responsible and authored sections 1, 2, and 5.1. 1222 MR. BROWN: You co-authored that report with Ms. Zarnett? 1223 MR. TODD: That's correct. 1224 MR. BROWN: If I could have you take a look at the cross-examination brief that we've marked as Exhibit X.21.1, and if you could turn, please, to tab 14. If you go into the second page, you'll see a document marked "Confidential Analysis of the Suitability of the CSC," and then behind it are about 13 pages of tables and charts. Were you involved in the preparation of that evidence? 1225 MR. TODD: Yes. I did the write-up based on a spreadsheet, and I produced the tables based on the spreadsheet provided by analysts at Coral. 1226 MR. BROWN: For the purposes of this proceeding, do you adopt the evidence to which I've referred to as your own? 1227 MR. TODD: Yes, I do. 1228 MR. BROWN: Ms. Zarnett, turning to you if I could, the Elenchus BDR report which has been marked as K.37, if we go to tab B, we find a copy of your curriculum vitae. 1229 MS. ZARNETT: Yes. 1230 MR. BROWN: Your background, as I can see from the CV, is essentially in the area of cost allocation, rate design, and load research. 1231 MS. ZARNETT: I'm the rates guy. 1232 MR. BROWN: You're the rates guy. Okay. In terms of the report that you authored with Mr. Todd, what portions of the report did you author? 1233 MS. ZARNETT: I was responsible for sections 3 and 4 and section 5.2 dealing with the illustrative rate designs. 1234 MR. BROWN: For the purposes of this proceeding, do you adopt that evidence as your own? 1235 MS. ZARNETT: I do. 1236 MR. BROWN: Mr. Baden, I'd like to ask you just a few questions in chief, given some of the questions that have been asked of Union over the last few days. 1237 Firstly, could you describe to the Board why Coral is here? Coral sought very late intervention status, was granted intervention status, and has filed evidence. What's the problem? 1238 MR. BADEN: Well, the delivery commitment credit as defined in the carriage-service contract was one of the two key factors in Coral's decision to give up its application for leave to construct its own natural gas supply line to the Brighton Beach power station. The elimination of the delivery commitment credit had resulted in essentially doubling the costs for Union Gas transportation services. 1239 The other key factor that influenced Coral's decision to accept the terms offered in the carriage service contract was the understanding that Coral would not be required to deliver the firm DCQ specified in the carriage service contract for many of the days that the Brighton Beach power station was not operating. This understanding was fundamental -- was a fundamental consideration in accepting Union's offer as Coral would otherwise have a very significant financial exposure. 1240 The carriage-service contract clarification agreement obligates Union to use all reasonable and prompt efforts to propose and implement promptly as an alternate rate-making solution -- an alternate rate-making solution which shall provide a comparable economic benefit to the customer as provided by the DCC. So far Union has not offered Coral any alternative or option to mitigate the effect of the phase-out of the delivery commitment credit and as a result, Coral has taken matters into its own hands and is participating in this rate-making forum. 1241 MR. BROWN: I'd like to ask you a few questions about the Brighton Beach facility. 1242 First of all, does Coral own the Brighton Beach facility? 1243 MR. BADEN: We do not. 1244 MR. BROWN: Who owns the Brighton Beach facility? 1245 MR. BADEN: Brighton Beach Power Limited Partnership. It is a joint venture, in effect, between ATCO Power and Ontario Power Generation Inc. 1246 MR. BROWN: How does Coral Energy fit into the scheme of things? 1247 MR. BADEN: We have an arrangement with Brighton Beach Power where we are the -- essentially reserve the capacity of the power plant to convert natural gas into electricity. That's an exclusive arrangement for a term of 20 years. 1248 MR. BROWN: Is that what is known in the industry as a tolling agreement? 1249 MR. BADEN: Typically, it would be called a tolling agreement, yes. 1250 MR. BROWN: Now, in my cross-examination yesterday of Union, it was reference to a number of different kinds of generators, electricity generators. When reference is made to a merchant generator, such as Brighton Beach, what is meant by that in the industry? 1251 MR. BADEN: Well, by calling Brighton Beach a merchant power station, I mean to say that -- we would mean to say that Coral expects to recover its fixed costs and return not from a long-term power purchase contract with a regulated monopoly buyer or a government agency, as in the case of a NUG contract, or from the sale of steam to a host such as would be typical from a co-gen, but rather from the offering and scheduling of delivery and sale of electricity to the IMO-administered electricity market in Ontario. 1252 There's no guarantee provided by any party that as a merchant power station or a merchant power offtaker using Brighton Beach that we will operate even one hour in any year, or that Coral will recover any of its fixed costs or earn a return. 1253 MR. BROWN: To your knowledge, to date, are there any independently-owned merchant generation facilities in Ontario? 1254 MR. BADEN: To my knowledge to date, there are no fully merchant power plants in Ontario. The TransAlta facility has -- and some others have portions of merchant power capacity but not a hundred percent merchant capacity. 1255 MR. BROWN: I'd like to take you to a document that really hasn't been dealt with to this point in time in the proceeding. If you could go to the cross-examination brief, Exhibit M.21.1. If you could turn to tab 14. If you go in six pages at that tab, there's a table entitled "schedule 1, simulation of daily operating hours of merchant power plant." Do you see that, sir? 1256 MR. BADEN: Yes, I do. 1257 MR. BROWN: Could you explain to the Board what we're looking at here. What does this document say, and how is it relevant to the operating characteristics of a merchant power plant? 1258 MR. BADEN: What we did was prepare a simulation of what a plant like Brighton Beach would normally operate in terms of the number of hours per day per month for each month of the year, and we used historical data. This is based on IMO -- what we refer to in Ontario as the hourly Ontario energy price derived between October 1st, 2002 and September 30th of 2003. We assumed for a gas price the average gas price during that period, and we -- using a model that we have for predicting the variable cost of Brighton Beach, determined the number of hours on each day in that period in which Brighton would have normally run, in which we would have offered a variable cost at or below what the market price cleared at for that hour. 1259 And what you'll notice is that there's very few hours in that period where we would operate for 24 hours, like a full day, and there are many hours, many days when we would not operate at all. And some days, you know, four hours is not untypical in this type of plant. This is the expected typical operating year for a power plant such as Brighton Beach. 1260 MR. BROWN: And to your knowledge, does this kind of profile of operating hours for a merchant plant differ from the profile you'd see for other type of generation plants? 1261 MR. BADEN: Well, typically a nuclear plant operates at pretty well every hour of the day or -- 1262 MR. BROWN: What about other gas-fired generation plants? 1263 MR. BADEN: A co-gen plant with a steam host has generally an obligation to provide steam on a 7 days a week, 24-hour a day basis, except for the host interruptions. So they are generating pretty well every hour of the year. So their load factor or pattern of take would be much different than a merchant plant. 1264 MR. BROWN: There has been significant evidence or questioning on whether a power plant such as Brighton Beach would be classified as a low load factor generation facility or a high load factor generation facility. How would you characterize it, and could you explain your reasons for that to the Board? 1265 MR. BADEN: Well, based on the hours that it would be expected to run, this simulation would say we would run 33 percent of the hours in the year, typically, so our load factor is 33 percent. Its gas demand is such that when it's on, it is taking its full hourly rate. I think earlier under the same tab, I think page -- the second page, it identifies the quantities that would be typical. If you look at the bottom of the page 1, as it is labeled, the second last line identifies what typical hourly gas usage would be. And when we're on, we're consuming that; when we're off, we're consuming zero. There's really no in between with a plant like this. If the price is there, you want to generate every kilowatt that you possibly can, and when the price is not there, you're off. 1266 MR. BROWN: Could I take that and try and link it to gas in two ways. When the plant is not taking any gas -- not running, it's not consuming any gas. 1267 MR. BADEN: There's an almost minuscule amount of gas being consumed just for heat in the buildings, and that's it. 1268 MR. BROWN: The Board has seen a copy of the carriage-service contract that was entered into between Union and Coral, and there were delivery-parameter numbers in that contract, one of which was an obligated DCQ, an obligated daily contract quantity. When the plant isn't running, what was your understanding of what Coral's obligation would be to deliver gas to Union's system? 1269 MR. BADEN: In days other than peak winter design days, Union would not need the gas, they would have no place to put the gas, and generally Coral would not be obligated to deliver. 1270 MR. BROWN: We also saw in the contract that there was the purchase of some storage services under the contract. Was the daily injection right that you had to inject gas into storage sufficient to put into storage all of your obligated DCQ under the contract? 1271 MR. BADEN: No. The daily injection rate was probably less -- was less than a third of what our daily obligation would be. The use of that was primarily to deal with days when we might expect to run eight hours and got interrupted by the IMO after four and we had scheduled more gas than we could use on the day. That's our intention of using that in storage. 1272 MR. BROWN: The other link I'd like to ask you about between gas and electricity relates to gas delivery costs because that's essentially what the dispute is about here. Could you explain to the Board what the relationship is between the amount of gas delivery costs you would have to pay as the entity responsible for operating or dispatching Brighton Beach and the resulting electricity prices that you'd bid into the market. What's the relationship between the two? 1273 MR. BADEN: Well, typically a plant like Brighton Beach, we would offer to the IMO a price that reflected our variable costs, which would include the cost of the gas commodity, the gas transportation cost. Any other variable costs, we do pay the operator a variable fee for each hour they operate. We would aggregate that cost. We would usually add a provision for -- try and recover some fixed costs and a profit component, and offer that price to the IMO. 1274 Now, the IMO, in their market, accumulates the offers from all generators and they look at essentially where the supply curve and demand curve cross and set the hourly price on that basis. If we were at or less that price that the IMO set, we would get a dispatch offer and could expect to run for the hour that -- that particular hour. If our price was higher, we would not get a dispatch instruction and we would not be running that hour. 1275 In looking at that mechanism, if our variable costs go up, we have to pass that through, we have to bid a higher price, which puts at risk the number of hours we would be operating. And that is where it's so key to Coral to control its variable costs, all costs in total, but gas transportation services are one of the single biggest controllable costs, at least we looked at in terms of controllable costs, that Coral has. 1276 To explain sort of further on the importance of managing gas transportation costs, we've done a little bit -- we've done an analysis looking at Brighton Beach similar to what we just went through in terms of that simulation over that period from October 1, 2002 to September 30th, 2003 -- 1277 MR. BROWN: That's the document we saw at tab 14? 1278 MR. BADEN: Yes, the same time frame, same prices. And we looked at the number of hours that Brighton Beach would be the price-setting plant, in which it would be our offer that would set the price for that particular hour. That resulted in between 3 and 6 percent of the hours, depending on, you know, how much margin we were, you know, trying to get that day and what the price was at. The average demand for those 3 to 6 percent hours of the year was around 18 to 19,000 megawatts. And when you look at that, in essence, if we had increased our variable cost by $1, all 18 to 19,000 megawatts that were purchased in that hour where we were the price-setting plant would pay that incremental hour, and for that 3 to 6 percent of the hours in a year, the total cost to consumers in Ontario would be between 5 million and $9 million, because in effect, our variable cost has just raised the total cost of electricity for that hour by $1, if you use that example. 1279 MR. BROWN: Could I move ahead and ask you to take a look at a document that was produced just this afternoon during the course of the re-examination of the rate design panel. It's been marked as Exhibit M.22.1. Do you have that? 1280 MR. BADEN: Yes, I do. 1281 MR. BROWN: It's the e-mail from Mr. Chris Shorts to Bruce Rogers, dated December 10, 2001. Attached to it was a document Entitled, "benefits of a Union Distribution Service." And I think this document arose in the context of my friend Mr. Smith asking Mr. Kitchen whether Union had communicated to Coral the benefits of a distribution rate and this document was put in. 1282 Now, this was December 10th, 2001, and I take it when Coral got this document, it looked at it. And did it conclude whether or not what was being offered here was a benefit to Coral? 1283 MR. BADEN: Yes, we definitely looked at it and understood the terms of the attachment in terms of the distribution services. In that same time frame, we had been negotiating with Union for a number of weeks and we had had a number of offers going back and forth. I think we've got some of them included in the evidence. Under tab 15, I can point out, Mr. Brown, I think there is about -- the second blue page, there is an e-mail note dated November 29th, 2001, so it would just be prior to Mr. Shorts' e-mail of December 10th -- 1284 MR. BROWN: Yes. 1285 MR. BADEN: -- from Robert Andrews of Coral to Barry Peterson of Coral, and he has attached a spreadsheet to Mr. Chan of Union. This was one analysis showing a 15-year tariff, and the delivery commitment credit is identified about the seventh or eighth line down -- 1286 MR. BROWN: I don't mean to interrupt you, but just so the reporter has a clear record of this, the particular document you're looking at right now, is it the one that's entitled "ATCO/Coral T1 Analysis"? 1287 MR. BADEN: Yes, it is. 1288 MR. BROWN: I'm sorry, what row were you referring to? 1289 MR. BADEN: I believe it would be the ninth row down, titled "delivery commitment credit." 1290 As you go along that line, it identifies a quantity first in thousands of cubic metres, and then in MCF, and then across the delivery commitment credit and then the total delivery commitment credit under that proposal. 1291 And if you compare that, I jumped ahead here, if you go back one blue sheet, there is a letter dated June 6th, 2001, five sheets including a cover sheet, and the last sheet of that package is another page or spreadsheet entitled "ATCO/Coral T1 Analysis," and again, nine lines down, a line labeled "Delivery Commitment Credit," a quantity essentially the same as the spreadsheet -- now, this was a June spreadsheet. By November -- the November spreadsheet I referred to earlier, the same quantity -- the same quantity in MCF. And in this prior spreadsheet, the delivery commitment credit in cents per cubic metre is about 3 cents lower than the subsequent spreadsheet that was sent in November. 1292 So what was happening in that period was a number of discussions and proposals going back and forth, and the pricing had come down. And, yes, the benefits of the distribution service helped to explain, but it still wasn't reaching what Coral believed its economic alternative, which was to build our own line, our own pipeline. 1293 MR. BROWN: So does that explain why, when we look at Exhibit M.22.1, which is dated December 10, 2001, come two months later, February of 2002, Coral filed its own leave-to-construct application? 1294 MR. BADEN: Pretty well explains the difference that we were -- I mean, yeah, this spreadsheet still was not attractive enough for us to give up the option to build our own pipeline. 1295 MR. BROWN: I want to take you to one more spreadsheet, but before I do, Mr. Kitchen, in the redirect this afternoon, was asked specifically about spreadsheets at tab 15, and as I understood the question put to him, it was to ask him to explain what he meant by the parameters underpinning the rates that were offered by Union, and as I've noted Mr. Kitchen's response, there was something -- I think he said something to the effect that there must have been a change in firm volume or load CD between the time of the first rate offer and the last. Could you comment on that, please. 1296 MR. BADEN: Well, between the June offer, June 5th, 2001, and the November offer, November 29th, there was really no change in the quantity in terms -- there's a slight change in the customer charge from June -- the June spreadsheet to the November spreadsheet. But what is the most significant change is the change in the delivery commitment credit for exactly the same quantity. 1297 MR. BROWN: During the course of your discussions with Union, did the size of the generation plant change? 1298 MR. BADEN: No, neither did our expected operating scenario. 1299 MR. BROWN: I'd like to take you to one final spreadsheet at tab 15, and I guess if you go into the second, third, I think it's the fourth blue sheet, there's -- the lead document is entitled "Agenda for Coral-Union Meeting March 28th, 2002." Could you find that document? 1300 MR. BADEN: Yes, I've got it here in front of me. 1301 MR. BROWN: And this document is after Coral filed its leave to construct, indeed after Union filed its leave to construct, but before you've entered into the carriage-service contract. The last page of that bundle of documents is a spreadsheet. Do you have that, sir? 1302 MR. BADEN: Yes, I do. 1303 MR. BROWN: Could you explain to the Board what information this spreadsheet displays and what role this spreadsheet played in your discussions with Union. 1304 MR. BADEN: This is a Coral spreadsheet in which we were comparing Union proposals to -- the last column there contains numbers that represent our option to build. So coming from left to right, the first column titled "Union Gas 20-year term," was at that time the most recent proposal that Union had provided us. And you'll see about eight lines down, last proposal, firm demand charge there, and there's a figure at that point, the annual fees, and it identifies a quantity of firm and interruptible on the line below it, and the total there is less than the previous quantity that I showed you on the November 29th spreadsheet. The sum of those two figures is about a third lower than the previous quantity identified. And then there's a previous proposal, so there was an interim proposal -- the second column of numbers is -- labeled "Union Gas Previous Proposal," it was an interim proposal between that November 29th spreadsheet and this March 28th spreadsheet. 1305 MR. BROWN: What about the final column, the one entitled "ATCO/OPG"? What information is reflected there? 1306 MR. BADEN: Well, it reflects our cost of constructing a pipeline and it reflects, in about the twelfth line down, it lines up with the totals for the Union proposals, what our -- 1307 MR. BROWN: You're going to have to be a bit more specific. Twelfth line down. What's the -- 1308 MR. BADEN: There's no -- there's no label on that line. It would be the line right above "Operating Fees" And the figures have a double line below them and a single line above them. 1309 MR. BROWN: Yes. 1310 MR. BADEN: And as you go across, there's a figure in for the first column and the second column and then in the third column would be, in effect, what we had estimated our costs of the pipeline -- solely the pipeline, which would be operating costs plus a recovery of the investment. 1311 MR. BROWN: So in terms of Coral's thought process in deciding whether to continue with its leave to construct or entertain Union's delivery service offer, is that the line that Coral looked at to assess whether or not Union's offer was close to the self-build option? 1312 MR. BADEN: Well, it's further down. There's a line labeled, on the left-hand side, "Net Cost"? 1313 MR. BROWN: Yes. 1314 MR. BADEN: And we had included the operating costs, Union fees and operating costs, to come to a total figure and we compared that with a total figure of the pipeline, and this last offer from Union came fairly close to what we thought the pipeline would end up ultimately costing us. 1315 MR. BROWN: Did that, then, prompt Coral's decision to enter into a contract with Union? 1316 MR. BADEN: Yes. It was only very shortly, a couple weeks after this meeting, that we executed the carriage-service contract. 1317 MR. BROWN: In terms of the firm demand charge that drove this analysis, if we go back up, am I correct that when we look at sort of the third section entitled "Total," and there's the line "Total Capital," then you go over "Firm Demand Charge," and then there's a number there, that's the firm demand that that was used for the purposes of assessing Union's proposals? 1318 MR. BADEN: Yes, it was. 1319 MR. BROWN: That's the demand charge that ultimately found its way into the April 30 carriage-service contract? 1320 MR. BADEN: Yes, it is. 1321 MR. BROWN: Could I skip ahead to the clarification agreement in October, because this morning my friend, Mr. Warren, asked a number of questions about the clarification agreement. Could you succinctly state what the purpose was of the clarification agreement? 1322 MR. BADEN: The carriage-service contract contained a provision that gave Coral the right to terminate that carriage-service contract within five days of the OEB not approving Union's proposal to credit the firm transportation contract demand rate to offset the financial impact of eliminating the DCC on a customer-specific basis. 1323 This proposal would have resulted in a demand charge of [redacted]. 1324 MR. BROWN: I'll pretend that wasn't heard. 1325 MR. BADEN: I'm struggling with -- 1326 MR. BROWN: You can tell the Board that this is the first time you've testified in a hearing. 1327 MR. BADEN: It is the first time. Hopefully it won't be repeated soon. 1328 The termination provision was very important to Coral in that it retained our right or our option to resume the pursuit of the application for leave to construct if we felt -- if this term -- if Union was not successful in getting approval for their proposal. So by September 20th, 2002, the OEB had deferred their decision. Union still believed that the proposed treatment on the delivery commitment credit would ultimately be approved, and Coral still had the position to exercise our option. We weighed a number of factors and decided to proceed with the clarification agreement that essentially removed the termination right but replaced it with the clause that Union will use all reasonable and prompt efforts -- in the event that their proposal was not approved, "Union would use all reasonable and prompt efforts to propose and implement promptly an alternate rate-making solution that would provide comparable economic benefit to the customer as provided by the DCC." 1329 So at that point, weighing all the factors, this looked like the best thing for us to do, and we so proceeded. 1330 MR. BROWN: If I could ask you one final question. You've described to the Board what the problem is. What is it that you're asking the Board to do in this proceeding? What is the solution you're asking the Board to adopt? 1331 MR. BADEN: Well, I think what Coral is asking the Ontario Energy Board to do is to confirm that the quantity of revenue provided in the initial terms of the carriage-service agreement or contract were just and reasonable. With that confirmation, it would allow Coral and Union to negotiate a solution to the problem that is represented by the phase-out of the DCC. 1332 MR. BROWN: Thank you, Mr. Baden. 1333 Mr. Todd, I've gone much longer in direct than I'd intended, so I'm really going to ask you, I think, only one question, and it's really a question more in response to evidence that Union filed in reply to the Elenchus and BDR evidence. 1334 In your report, Exhibit K.37, and I'll give you the references, page 3, line 16, and then at line 20, and then at page 4, line 6, you essentially wrote that the pricing terms in the carriage-service contract appeared to represent a bypass competitive rate. I think that was the gist of the report. 1335 Union, in its evidence in response, Exhibit H.1, tab 1 supplemental, at page 7, said: 1336 "Contrary to these assertions, Union did not derive or offer the carriage-service contract rate as a bypass-competitive rate. Union did not offer the firm transportation demand charge as an inducement for Coral to drop its bypass application." 1337 My simple question is: What is your response to Union's evidence? 1338 MR. TODD: There's a difference between the letter and the spirit. Clearly, it is not called or referred to or identified as a bypass competitive rate. I looked at the contract and, recognizing that the obligated DCQ for any other customer would be an obligation to deliver that quantity every day, and therefore, the obligated DCQ times 365 would be the quantity of gas which would normally attract a DCC. In this contract, it simply was not feasible to actually require for Coral to deliver on a daily basis - obviously that was not contemplated - and therefore putting the term-obligated DCQ in in order to get a basis for calculation of a DCC offset gave rise to the number that we can't mention. 1339 But in reality, without those quantities actually being delivered on a daily basis, this was, as I say, true to the letter of the proposal that Union had for removing the DCC, but it was contrary to the spirit which was to take the amount of DC that would be paid, and while payment is an obligated DCQ, that's based on an obligation is an obligation and you actually deliver those quantities. Since those quantities couldn't be delivered, I considered that contrary to the spirit, and therefore, the contract was structured in a way to attract, in effect, the subsidy and give rise to the number which gave the result which would be acceptable to Coral. So that's why I refer to it as a de facto bypass-competitive rate in that it appears to me, in analyzing the contract terms and conditions, that the way you get there is by starting with the end point and finding a way to use the rules to get there. 1340 I mean, which is not saying that Union did anything improper, it's just saying they used the letter of the rules in order to come up with the desired result, is my interpretation. 1341 MR. BROWN: Thank you. 1342 Ms. Zarnett, if I could ask a final set of questions and direct them to you. In your report, which is Exhibit K.37, if you go to page 8, at page 8 and page 10 you have put together two tables. I take it these are tables that you prepared? 1343 MS. ZARNETT: Yes, I did. 1344 MR. BROWN: Now, in the cross-examination of Mr. Kitchen this morning, some time was spent on these particular tables and he gave some undertakings flowing from that. I wonder if you could just take a few moments and explain to the Board what you actually did and what was the source of the information you relied upon in preparing these tables. 1345 MS. ZARNETT: For table number 1, the first column shows 20 years, the duration, and for table 2, I started out for the year 2004, by applying the rates that were in the CSC to the billing quantities. So it's purely a bill calculation based on those quantities and those rates. 1346 I then escalated that amount by an inflation factor also which was in the contract, summed those up, and then computed the present value of that stream of revenues. 1347 For column 4, I started out for the year 2004 -- 1348 MR. BROWN: Sorry, and column 4 is the one entitled "Union Revenue"? 1349 MS. ZARNETT: That's right, "Union Revenue Computed Based on the Current OEB." So these are the rates that are currently in effect. And I applied those rates to the same quantities. In both cases the storage element of the service is excluded from the computations, assuming that they would be the same in both scenarios. 1350 So I computed the bill and then subtracted from that for 2004 DCC by applying the current level of $2.55 to the commodity quantities. And that gives rise to the first number. In the second year, the rates were assumed to increase by the same escalation factor that I used in column 2, and I reduced the DCC to reflect $1.70. Same thing in the third year, reflecting 85 cents. And in 2007, reflecting zero for the DCC. That gives rise to a very significant ramp-up of revenues over the years from 2004 to 2007, and these directly reflect that ramp-down of the DCC. 1351 MR. BROWN: You were present in the hearing room this morning when Mr. Kitchen testified. 1352 MS. ZARNETT: Yes. 1353 MR. BROWN: When we went over these tables, as I understand his evidence, he was not certain whether these numbers would also have taken into account DCC costs. Did you hear that portion of his evidence? 1354 MS. ZARNETT: I did. 1355 MR. BROWN: Could you respond to that? 1356 MS. ZARNETT: My understanding is that the 2004 figure would be correct, that Union would have adjusted for that in the rates that it's proposing. For 2005 and on, it was not reflected. 1357 MR. BROWN: Thank you, panel. 1358 I think in terms of examination-in-chief, that concludes my examination. Thank you, Mr. Chair. 1359 MR. SOMMERVILLE: Mr. Brown. 1360 Mr. Warren. 1361 MR. WARREN: Thank you, sir. 1362 CROSS-EXAMINATION BY MR. WARREN: 1363 MR. WARREN: Mr. Baden, I'd like to begin with you, please, and to deal with some of the steps in the chronology which is outlined in your evidence. 1364 The first step in the chronology, as I understand it, was -- for purposes of this proceeding is Coral's own application for leave-to-construct which, as I understand it, was filed in February of 2002; is that correct? 1365 MR. BADEN: First, in terms of an application to the Ontario Energy Board, there was several months of negotiation with Union prior to that. 1366 MR. WARREN: I appreciate that, Mr. Baden. The first formal step was Coral's application for leave-to-construct which was filed in February 2002; is that correct? 1367 MR. BADEN: Yes, in terms of the first formal step. 1368 MR. WARREN: And can you tell me, was Mr. Todd involved in the preparation of that application? 1369 MR. BADEN: Mr. Todd was not involved in the preparation of that application. 1370 MR. WARREN: All right. Did he have any involvement in the leave-to-construct process at all? 1371 MR. BADEN: None at all. 1372 MR. WARREN: Was the application for a leave to construct opposed? 1373 MR. BADEN: I'm sorry? 1374 MR. WARREN: Was the application for a leave to construct opposed? 1375 MR. BADEN: It -- 1376 MR. WARREN: Were there interventions in it, more accurately? 1377 MR. BADEN: Yes, there were interventions. 1378 MR. WARREN: And can you just remind me, I take it from the record, Mr. Baden, that it never -- as a matter of fact, if you look at page 4 of Exhibit K.37, you don't need to turn it up, you can take it subject to check, it never got to the stage where written interrogatories were filed; is that fair? 1379 MR. BADEN: That's fair, yes. 1380 MR. WARREN: And I take it we can agree that it never got to a contested hearing; is that fair? 1381 MR. BADEN: It did not. 1382 MR. WARREN: Okay. Now, the next step I want to deal with, Mr. Baden, is the carriage-service contract between Coral and Union, and it appears in your counsel's cross-examination materials at Exhibit X.21.1, tab 15. It's about halfway through tab 15. Can you find that? 1383 MR. BADEN: Yes, I've found it. 1384 MR. WARREN: Now, can you tell me, sir, looking at -- turning over to the third page to numbered section 5 of the carriage service contract, I put to Mr. Kitchen the question this morning and I'll put essentially an identical question to you, Mr. Baden: As I read this contract, the DCC or a DCC-equivalent amount was a critically important factor for Coral; is that fair? 1385 MR. BADEN: Yes, it was. 1386 MR. WARREN: And if you look, sir, at subsection 5(d) which is on the bottom of page 3, it states that the proposal needed to be approved by the OEB; correct? 1387 MR. BADEN: Yes. 1388 MR. WARREN: And can you and I agree, Mr. Baden, that the need for regulatory approval carries with it the risk that you may not get that approval? 1389 MR. BADEN: It does. 1390 MR. WARREN: Is that fair? 1391 MR. BADEN: It does. 1392 MR. WARREN: And further, looking at the last sentence in subsection 5(d), you, that is Coral, reserved the right to terminate the contract within five business days if you didn't get that regulatory approval; right? 1393 MR. BADEN: That is right, yes. 1394 MR. WARREN: And I take it you and I can agree that you built that provision into the agreement in order to protect yourself in the eventuality that the risk of OEB approval turned out to be a real risk; is that fair? 1395 MR. BADEN: Yes. 1396 MR. WARREN: Okay. Can you tell me, sir, in the -- what, if any, involvement did Mr. Todd have in the creation of or the negotiation of or the drafting of the contract service -- sorry, the carriage service contract? 1397 MR. BADEN: He had no involvement at all. 1398 MR. WARREN: Okay. Was he on retainer with Coral at the time? 1399 MR. BADEN: No, he was not. 1400 MR. WARREN: Now, could I take you, then, sir, to the -- if you could turn up your prefiled evidence, Exhibit K.37, specifically at page 6. Looking at subsection 2.4 and the first sentence, and I quote: 1401 "Following the release of the Board's decision on September 30th, 2002, in Union's 2001 and 2002 rate application, RP-2002-0029." 1402 Now, just stopping at that point, what is the significance, if any, Mr. Baden, of that decision in the flow of events that are described in your evidence? 1403 MR. BADEN: My understanding, the proposal that Union made pursuant to that application was not approved in terms of -- the impact on Coral's carriage service contract was that we had neither approval nor denial of Union's proposal. We were, in effect, in a situation of neither -- neither approval nor disapproval. 1404 MR. WARREN: When you talk about approval, sir, I don't recollect that the Union-Coral agreement was before the Board in that proceeding. Is that the approval you're talking about, or are you talking about some other approval? 1405 MR. BADEN: I'm talking about the approval that would have been my understanding in that rate application that Union was seeking to modify the DCC mechanism in a way that would fit with what was described in the contract service agreement. And in that application, Union did not get approval. 1406 MR. WARREN: And I take it, sir, that you and I -- or can we agree that given the proposal to eliminate the DCC was not a risk -- sorry, was not approved, and secondly, the centrality, the importance of the DCC to the carriage service contract, that there was in that cluster of circumstances, that combination of circumstances, a risk to Coral in terms of the deal that it wanted with Union; is that fair? 1407 MR. BADEN: Yes, that's fair. 1408 MR. WARREN: What then followed, as I understand it, was that you and Union negotiated the -- what I'll call the clarification agreement; is that correct? 1409 MR. BADEN: Yes. 1410 MR. WARREN: Did you initiate the discussions leading to the carriage -- sorry, to the clarification agreement? 1411 MR. BADEN: Personally, no, I did not. 1412 MR. WARREN: Did Coral? 1413 MR. BADEN: Coral did, yeah -- well, I can't even recall at the time whether it was Coral that initiated it or Union that initiated it. I'm not sure who called who. But one party or the other would have called. There was that termination clause to deal with. 1414 MR. WARREN: Could you turn up, please, at tab 15 of Exhibit X.21.1, the clarification agreement. First of all, in the negotiation of the clarification agreement, there are some -- at a high level of generality and not risking to offend to -- not offend but not risking to drive us all in camera, I won't deal with the numbers, but there were some changes in the numbers from the carriage-service contract; is that fair? 1415 MR. BADEN: Yes. 1416 MR. WARREN: Was Mr. Todd involved for Coral, or indeed for anybody else, in the negotiation of the carriage service contract? 1417 MR. BADEN: No, he was not -- 1418 MR. WARREN: I apologize, the clarification agreement. 1419 MR. BADEN: No, he was not. I might save you some time that Mr. Todd was not engaged by Coral until the advent of this action. 1420 MR. WARREN: Now, if you could turn up, sir, the first page of the clarification agreement. Looking at section 2 of that agreement, it provides that section 5(d) of the carriage-service contract is deleted and replaced with the following. And without having to flip back the pages, would you agree with me that section 5(d) was the one that, among other things, provided for the requirement of OEB approval and, secondly, that provided for your option to terminate the contract within five days; correct? 1421 MR. BADEN: The original version of 5(d) in the carriage-service contract did provide that termination agreement, yes. 1422 MR. WARREN: Now, turning over to the second page and looking at section 3 of the clarification agreement, it reads, and I want to parse this section so I'm going to take it a bit at a time, if you wouldn't mind: 1423 "If the Ontario Energy Board eliminates the DCC in a manner not consistent with Union's proposal." 1424 Can you and I agree that that is, in effect, the recognition of a risk and that's one form of risk; namely, that the Board will eliminate the DCC but not in a manner consistent with Union's proposal. That's a risk? 1425 MR. BADEN: Yes. 1426 MR. WARREN: Then going to the second clause: 1427 "Or fails to eliminate the DCC and maintains the existing practice." 1428 Can we agree that that's a second form of risk? 1429 MR. BADEN: Yes. 1430 MR. WARREN: And finally, what the -- thirdly, what the provision contemplates is that Union will, to quote the section: "Use all reasonable and prompt efforts to propose and implement promptly an alternate rate-making solution which will provide a comparable economic benefit to customer as that provided by the DCC." 1431 Have I read it accurately? 1432 MR. BADEN: Yes, I believe you have. 1433 MR. WARREN: Mr. Kitchen testified in response to a question from me this morning that that alternate proposal would have required OEB approval; would you agree with that? 1434 MR. BADEN: Not being a regulatory expert, I'm not sure I can say I can agree with you on that. 1435 MR. WARREN: Do you have any reason to quarrel with Mr. Kitchen who is a regulatory expert on that point? 1436 MR. BADEN: No, I have no reason to quarrel with him. 1437 MR. WARREN: And if Mr. Kitchen is right that it required regulatory approval, can we agree that that, in effect, is a third form of risk for Coral contemplated by this section; correct? 1438 MR. BADEN: Yes. 1439 MR. WARREN: Now, we can also agree, and Mr. Brown took you to this point in your examination-in-chief, that you have deleted the option for Coral to get out of the contract whether within five days or otherwise; is that correct? 1440 MR. BADEN: Yes, we have. 1441 MR. WARREN: So that -- I'm sorry. 1442 MR. BADEN: Yes, we had. I guess it's the past tense. 1443 MR. WARREN: Okay. So it seems, I must say, Mr. Baden, for your comment, it strikes me as counterintuitive that in a clause which recognizes three different kinds of regulatory risk, you would, in the same clause, eliminate -- I'm going to characterize it and you're free to disagree with this -- what strikes me is a standard form of protection in a contract, which is the opportunity to get out of the contract if certain events take place. 1444 MR. BADEN: The factors we had to weigh at that time were a need to get gas to the power plant by June 1 of 2003. So we were looking at weighing -- if we terminated the contract at some date later than October 1st, 2002, we were putting at risk our ability -- the later that occurred, the riskier it was for us to pursue our leave-to-construct application and get a pipeline in the ground and operating by June 1 of 2004 -- sorry, 2003. I'm skipping years here. 1445 So at that time, I mean, this was not an easy decision, but there were a number of factors that had to be weighed. Certainly, we put a dependency on Union's understanding of the Ontario regulatory process and their ability to succeed in their actions. 1446 MR. WARREN: Now, were you present in the room this morning for the testimony of Mr. Kitchen? 1447 MR. BADEN: Yes, I was. 1448 MR. WARREN: Okay. There was a -- I'll characterize it this way just because after five weeks in a hearing room, it may be the best I can do -- a somewhat dramatic exchange between Mr. Brown and Mr. Kitchen in which Mr. Kitchen was asked about the "gotcha" proposition. Were you present for that exchange? 1449 MR. BADEN: Yes, I was. 1450 MR. WARREN: Let me see if I can understand the frame work for the "gotcha." 1451 As I understand it, please disagree with me, there is a carriage-service contract and then there's the clarification agreement which provides that Union will -- provides for three sets of risks. If any or all those risks obtain, Union will use its best efforts, my gloss on it, not the wording, to come up with an alternative. And then Union turns around and says, Sorry, because of the regulatory decision, we can't find an alternative. 1452 And your counsel, based on those three implicit building blocks, put to Mr. Kitchen, Isn't Union saying the equivalent of gotcha? Do you remember that exchange? 1453 MR. BADEN: I do. 1454 MR. WARREN: Can I put of, in light of what you chose to embody in the amended form of a contract-service agreement, can I put a different proposition to you and see if you agree with it. Isn't the real analogue in light of what you voluntarily entered into in the clarification agreement, isn't the real analogue that Coral rows a boat out to sea, lobs the oars overboard, stands up and says, gotcha, you're in the pickle you're in because you chose to agree to a clarification agreement on those terms. 1455 Isn't that fair? 1456 MR. BADEN: I don't think I would characterize it as that. 1457 MR. WARREN: Well, it's sort of tacky dramatics, Mr. Baden. 1458 MR. BADEN: Not even to take the tacky away from it, I wouldn't characterize it as that. We had many months of negotiation with Union; we had built a confidence that Union could deliver what Union indicated they could. At the time, for us to sever and terminate the contract service agreement would be, in our minds, a riskier action than to continue on the way we were going. 1459 And there was -- and it's not really, I don't think -- we had obligations to the power plant to fulfil and we had to weigh those. And in the weighing of that, the decision that is represented by the clarification agreement was, in Coral's mind, the most prudent thing to do. 1460 MR. WARREN: You've given me a rationale for why you entered into the clause. I was dealing with something slightly different, Mr. Baden. 1461 Isn't it true that the position you're in today is because you were bound by the clarification agreement; correct? Union has to use its best efforts to come up with alternate -- it can't, you have to option. But you voluntarily entered into that contract, didn't you? There's no question about that, is there, Mr. Baden? 1462 MR. BADEN: No, there's no question about that. 1463 MR. WARREN: Now, I'd like to turn to the next step in the chronology, if I can, which is the Board's decision in the RP-2002-0130 case, which was the decision of the Board issued in May of this year, May 8th, I think is the decision date, although I've been wrong in my dates today. Would you take that subject to check, that it was in May of this year? 1464 MR. BADEN: Yes. 1465 MR. WARREN: In which the Board rejected Union's proposal to eliminate the DCC and provide a DCC equivalent payment. 1466 First of all, just so that the record is clear from Coral, did Coral intervene in that case? 1467 MR. BADEN: We did not. 1468 MR. WARREN: Okay. And I take it it follows, as the night follows day, that Coral didn't lead any evidence in the case about this contract or the implications of the decision? 1469 MR. BADEN: This contract was considered confidential between Union and Coral. We relied on Union as the applicant to defend its proposal. For us to step forward into that hearing, we'd have to explain why we were there and it would ultimately lead us to disclose the terms of a confidential agreement, which we were not prepared to do. 1470 MR. WARREN: Sorry, but I'm puzzled by that response, Mr. Baden, because the very contracts you signed contemplated having to get OEB approval for those contracts; correct? 1471 MR. BADEN: Yes, but they were in the context of a much broader application for approval for a mechanism that Union was proposing to the Ontario Energy Board. 1472 MR. WARREN: Now, that decision, if I'm right, was issued in May of this year, and I take it that with that decision, all of the risks that you'd been contemplating in the agreements came to pass. The Board had rejected the DCC and the DCC equivalent; fair? 1473 MR. BADEN: Yes. 1474 MR. WARREN: And you then were in the position where you looked to Union to come up with an alternative; correct? 1475 MR. BADEN: Exactly. 1476 MR. WARREN: Okay. Now, in terms of chronology, sir, did you urge Union to appeal that decision? 1477 MR. BADEN: We didn't specifically urge them to appeal. We sent them several letters asking for a response to propose something to us, any form of action, in terms of dealing with this issue. I'm not -- we did not suggest to Union that they should appeal. 1478 MR. WARREN: When was it that it became clear to you that Union felt it could not, consistent with the Board's decision, offer you an alternative? When did that become clear? 1479 MR. BADEN: If I recall, it would have been after about, I think, our second meeting and third letter asking for something, that it simply was not going to happen and that we could not wait. 1480 MR. WARREN: I don't know the dates of your -- 1481 MR. BADEN: I would say about early September. 1482 MR. WARREN: Okay. Now, when was Mr. Todd retained to provide you with support for your intervention in this case? 1483 MR. BADEN: I would say -- just offhand, I don't remember the exact date. But the evidence that Mr. Todd prepared was filed on October 14th. It would have been about two weeks to ten days prior. 1484 MR. WARREN: And was that -- so on or around October 1st. I'm not sure anything turns on the exact date, but on or about October 1st? 1485 MR. BADEN: That would be a reasonable -- 1486 MR. BROWN: I can help you specifically, Mr. Warren. The Board granted leave to intervene to Coral on October the 3rd, 2003. Mr. Todd was retained after that, indeed on that day. 1487 MR. WARREN: October the 3rd, sorry? 1488 MR. BROWN: Yes, October the 3rd, 2003. 1489 MR. WARREN: At any time prior to October the 3rd, 2003, was Mr. Todd aware of the terms of the contract -- the carriage-service contract? 1490 MR. BADEN: He could not have been. I mean, he was not under any contract with Coral prior to that date. 1491 MR. WARREN: Had you had any dealings with Mr. Todd with respect to the carriage-service contract or the clarification agreement or your negotiations with Union at any time prior to October 3rd, 2003? 1492 MR. BADEN: No, I have not, and neither has anyone at Coral. 1493 MR. WARREN: I'm going to ask you to turn up Exhibit X -- sorry, K.37, page 2. 1494 Sorry, just before we get to that, when I asked you the question about Mr. Todd, I suppose in fairness I should say, at any time prior to October 3rd, 2003, had anyone from Mr. Todd's firm, Elenchus, or Econalysis either been consulted or retained by Coral with respect to any one or all of the original leave-to-construct application, the carriage-service contract, or the clarification agreement. 1495 MR. BADEN: Econalysis had been retained in preparation of the leave-to-construct application. Mr. Roger Higgin represented the firm and worked with us on that. 1496 MR. WARREN: Was anyone from the firm, whether Dr. Higgin or anyone else, involved in the carriage service contract or the -- by "involved" I mean negotiating it or coming up with the rate framework that is embodied in section 5 of that? 1497 MR. BADEN: No. Econalysis was retained to look at the specific economics of the bypass pipeline. The carriage-service agreement was negotiated by individuals working for Coral. 1498 MR. WARREN: And the same is true of the clarification agreement? 1499 MR. BADEN: Yes. 1500 MR. WARREN: When did you become aware that Mr. Todd had given evidence in the 2002-0130 case? 1501 MR. BADEN: It would have been sometime after October 3rd. 1502 MR. WARREN: Now, if I ask you -- sorry, I've left you standing on -- left you hanging on Exhibit K.37, page 2. 1503 You indicate in the bottom half of the page that Elenchus and BDR have been retained to prepare evidence, and then you give three bullet items. The first is: 1504 "Quantifies the impact of the elimination of the DCC (per Board decision RP-2002-0130) on Coral Energy's gas transportation costs in terms of the increase in the annual payments for transportation service under Union's T-1 rate, as compared to the annual payments expected based on the CSC with Union, dated April 30, 2002." 1505 Now, was that Mr. Todd's firm who was going to do that first bullet item or was it Ms. Zarnett's firm? 1506 MR. BADEN: Ms. Zarnett's firm prepared that. 1507 MR. WARREN: The third bullet item was: 1508 "Propose a design for a rate for the transportation of natural gas by Union to the power station over the term of the CSC." 1509 Was that Mr. Todd or Ms. Zarnett? 1510 MR. BADEN: Both Mr. Todd and Ms. Zarnett were involved in the discussions in terms of establishing those alternate rates -- 1511 MR. WARREN: Okay. 1512 MR. BADEN: -- in the proposals. 1513 MR. WARREN: And the alternate rates, I take it that one of the alternate rates that you're proposing to the Board is, in effect, the original CSC rate; is that not fair? 1514 MR. BADEN: Yes. 1515 MR. WARREN: And the original CSC rate contemplated, and this is my crude summary of it, the payment of a DCC equivalent; is that fair? 1516 MR. BADEN: By Union to Coral. 1517 MR. WARREN: By Union to Coral; is that correct? 1518 MR. BADEN: Yes. 1519 MR. WARREN: Now, would you be aware that Mr. Todd, in his evidence in the 0130 case, had, to use a word -- a modifier somebody used this morning, persuasively, that it was inappropriate for Union to pay a DCC equivalent after the elimination of the DCC? Were you aware of that? 1520 MR. BADEN: No, I was not aware of it. 1521 MR. WARREN: But can we agree that one of the things that Mr. Todd was retained by you to do was to make a recommendation to do that which he had persuasively argued that Union should not be allowed to do; is that not fair? 1522 MR. BADEN: He had been retained to, as the bullet said, propose a design or designs that were alternate, and to review the impact of the change in the DCC. 1523 MR. WARREN: Mr. Chairman, I'm moving on to a new area. I don't know what your plan is for the balance of the day, but it's going to take me beyond 4:30, I think. 1524 MR. SOMMERVILLE: In that case, I think we'll adjourn for the today, unless there are submissions to the contrary. We'll pick it up tomorrow at 9:30. It is our intention to complete this evidentiary portion tomorrow so that we may have a -- if circumstances require it, we may a longer day than usual in order to complete that tomorrow. 1525 Mr. Brown? 1526 MR. BROWN: Not good. I take it the Board is not sitting on Monday. 1527 MR. SOMMERVILLE: Monday is available, or at least a portion of Monday is available. 1528 MR. BROWN: Well, I'll canvass my friends and see what their time estimates are. 1529 MR. PENNY: Mr. Chair, my understanding of the time estimates suggests that we will finish quite comfortably tomorrow. 1530 MR. SOMMERVILLE: That was my impression, Mr. Brown. But I'll let you reconfirm that for yourself. We can deal with scheduling, if necessary, first thing tomorrow. 1531 We'll adjourn until 9:30 tomorrow morning. 1532 --- Whereupon the hearing adjourned at 4:10 p.m.